In an unusual turn of events, the Ontario Securities Commission (OSC) has weighed in on a Mutual Fund Dealers Association of Canada (MFDA) hearing panel decision, after the MFDA applied to the OSC saying its own hearing panel erred in law, proceeded on incorrect principles and adopted an approach inconsistent with the public interest when it imposed a penalty that did not require the respondent in question to disgorge money he misappropriated from a client.
According to the MFDA’s application to the OSC asking the commission to vary its earlier decision and impose a monetary fine or return the matter to the MFDA for a penalty hearing, Omar Enrique Rojas Diaz, a former Royal Mutual Funds Inc. dealing representative misappropriated $39,270 from a client’s line of credit and used the money for his own personal benefit.
The MFDA states that the client, MC, was advised by Diaz that she had been preapproved for a line of credit with Royal’s bank affiliate. The client was not interested in opening a line of credit, but Diaz reportedly continued encouraging the client to do so. After almost two months, MC agreed to open a line of credit with the bank. Nearly seven months later, Diaz changed the contact details on MC’s client profile to fictitious details, enabling him to conceal subsequent activity where he processed approximately 30 increases to MC’s credit limit, 30 withdrawals from MC’s line of credit, and 15 deposits to pay monthly interest charges so the line of credit would not go into default.
The MFDA’s initial decision against Diaz included a permanent prohibition from conducting securities related business while employed by any MFDA member firm and costs in the amount of $2,500.
“The hearing panel rejected the MFDA’s request for a fine and thereby allowed the respondent to retain the benefit of monies he misappropriated,” the MFDA states in its application for the OSC to review the case. In its decision, the OSC agreed that that the hearing panel proceeded on an incorrect principle and erred in law, imposing an additional penalty of $52,270.
“I find that the MFDA panel erred in law and proceeded on an incorrect principle by overemphasizing the respondent’s inability to pay a financial penalty given the seriousness of his misconduct and concluding that an order requiring disgorgement of the misappropriated funds would be punitive,” the OSC decision states. “While I have some sympathy for the financial circumstances the respondent finds himself in, previous MFDA decisions have emphasized that an inability to pay takes on less significance when determining a penalty in instances where a respondent engages in egregious misconduct that harms a client.”
Similarly, the OSC rejected that Diaz’s actions were related to banking products, as opposed to mutual funds. “The fact that in this case the respondent misappropriated funds from a client’s line of credit, as opposed to their invested funds, does not change the analysis regarding the appropriateness of the penalty. Accordingly, the MFDA erred when it declined to order disgorgement on the basis that it would constitute improper punishment.”
