The former chief financial officer of failed investment firm First Leaside Securities Inc. has been banned for three years from being a CFO and fined $50,000, following a review by the Ontario Securities Commission.
Brian Sutton was initially fined $25,000 in 2017 by a hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) when he was found to have failed to ensure that proprietary fund products offered by First Leaside were properly priced on client account statements.
Mr. Sutton held the position of CFO at First Leaside from March, 2003, until July, 2012. One of his responsibilities involved pricing certain unlisted securities issued by three limited partnerships.
In July, 2017, the IIROC hearing panel (which is independent from the regulatory organization) found Mr. Sutton acted contrary to regulatory rules.
IIROC, which formally initiated the investigation into Mr. Sutton’s conduct in May, 2013, had initially asked the hearing panel to consider a $100,000 fine, plus costs, and a permanent prohibition against Mr. Sutton’s registration as a CFO with any IIROC-member investment firm.
The hearing panel declined IIROC staff’s request. Instead the panel imposed a reprimand and a $25,000 fine, describing Mr. Sutton’s error as an “honest mistake."
Following the hearing panel’s decision, Mr. Sutton asked the OSC for a review of the liability decision, arguing that the IIROC panel erred in a number of ways, including “making findings of fact that were unsupported by the evidence.”
At the same time, IIROC also applied to the OSC for a review of the hearing panel’s decision, saying that “the sanctions ought to be more severe," and that Mr. Sutton ought to be ordered to pay costs. (According to IIROC rules, in Ontario, appeals of IIROC decisions are heard by the OSC.)
IIROC staff said the hearing panel erred by failing to consider Mr. Sutton’s role as a gatekeeper, disregarding the importance to investors of accurate information, concluding that Mr. Sutton’s breach did not harm investors, improperly treating Mr. Sutton’s history and seniority in the securities industry as a mitigating factor and concluding that because Mr. Sutton’s error was “an honest mistake," it would not be appropriate to impose a CFO prohibition.
After reviewing the hearing panel’s decision, the OSC concluded that the IIROC panel did err in its conduct of the liability hearing and that these flaws constituted an error of law that warranted the OSC to impose its own decision for that of the IIROC panel.
As a result, the OSC found that Mr. Sutton violated IIROC rules. In addition to a three-year ban from acting as a CFO and a $50,000 fine, it applied a requirement to pay costs in the amount of $50,000 to IIROC.
“This OSC decision confirms that individuals in senior roles must clearly understand the responsibility that they have accepted and that they will be held accountable for wrongdoings, with serious consequences,” an IIROC spokesperson said in an e-mail to The Globe and Mail.
While the OSC doubled the initial fine found by the hearing panel, it was still only half of the amount requested by IIROC staff.
“We conclude that a meaningful fine is warranted, but we consider $100,000 to be excessive, especially in light of the three-year prohibition we have decided to impose,” said the OSC in the review.
“We observe that in enforcement cases before the commission, administrative penalties of approximately $100,000 are sometimes imposed where a respondent has engaged in deliberate misconduct, including fraud. While the conduct here is serious, it lacks that character. In our view, a $50,000 fine is appropriate and is proportionate to the conduct at issue.”
In 2015, the Ontario Securities Commission ordered $18-million in penalties to two other executives involved in the bankrupted firm. First Leaside founder David Phillips and senior salesman John Wilson were ordered to pay $18-million in total penalties and costs, after clients invested almost $19-million in the company’s funds in 2011 without being told that consulting firm Grant Thornton Ltd. had issued a report containing warnings about First Leaside’s viability.
The OSC ordered the company to stop raising money in November, 2011, and the firm was shut down in 2012 when it filed for bankruptcy protection, affecting more than 1,000 investors.