Statement of Allegations: In the Matter of Dax Sukhraj

Statement of Allegations

IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, CHAPTER S.5, AS AMENDED
and
IN THE MATTER OF DAX SUKHRAJ
STATEMENT OF ALLEGATIONS OF STAFF OF
THE ONTARIO SECURITIES COMMISSION

 

Staff of the Ontario Securities Commission (the "Commission") make the followingallegations:

Introduction

     

  1. Dax Sukhraj ("Sukhraj") is and was at all material times an officer and a director of KeybaseInvestments Inc. ("Keybase Investments"), Keybase Securities Inc. ("Keybase Securities")and Keybase Insurance Agency Ltd. ("Keybase Insurance") (which collectively operate underthe business style name "Keybase Financial Group"). Sukhraj is the majority owner of eachof the three companies. Sukhraj is also registered as a trading officer of Keybase Securitiespursuant to the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act").

     

  2. Keybase Investments is and was at all material times registered as a mutual fund dealer,limited market dealer and scholarship plan dealer pursuant to the Act.

     

  3. Keybase Securities is and was at all material times registered as a securities dealer pursuantto the Act.

     

  1. Sukhraj is also the President, a director and majority owner of Joykus Capital Inc. ("Joykus"),a holding company.

Background

     

  1. In or about November 1997, staff of the Ontario Securities Commission (the "Commission")commenced an investigation to review the activities of Provident Financial Services Inc.("PFSI"), Provident Investment Counsel Inc. ("PIC") and David Andrus ("Andrus"), then thePresident, compliance officer and majority shareholder of PFSI and PIC. PFSI wasregistered as a mutual fund dealer and limited market dealer until the Commission acceptedthe application of PFSI to voluntarily surrender its registration on December 16, 1997. PICwas registered as an investment counsel/portfolio manager pursuant to the Act until August28, 1998. Proceedings were initiated against Andrus in March, 1998 as outlined below.

     

  2. On or about November 28, 1997, Commission staff applied to the Commission for atemporary order (the "Temporary Order") in connection with the registration of PFSI, PICand Andrus. The Commission reserved its decision.

     

  3. At the request of Sukhraj, then the Chair of the Investment Funds Institute of Canada("IFIC"), Commission staff and Sukhraj met on December 1, 1997 (the "December 1Meeting") to review the situation concerning PFSI and PIC. Counsel for PFSI, PIC andAndrus was also in attendance. Sukhraj advised that Keybase Investments wished to offera contract to existing PFSI registered representatives and that he sought Commission staff'sassistance in facilitating the bulk transfer of the registrations to Keybase Investments. It wasalso proposed by Sukhraj that Keybase Financial Group be responsible for the administrationof PIC and the handling of all client funds. Sukhraj also advised that it was intended thatJoykus would purchase a 50% interest in PIC (with Andrus and another party each owninga 25% interest in PIC). Sukhraj requested that Commission staff forebear in taking anyaction affecting the registration of PIC to allow for the transition of control of the operationsto Keybase Financial Group, and eventually, as contemplated, to Joykus.

     

  4. During the December 1 Meeting, Commission staff and Sukhraj further discussed the factthat there were potential unauthorized losses incurred by six account holders of PFSI and/orPIC and that the amount of the losses was unknown at the time. The list of six accountholders of PIC and PFSI included one elderly client and one elderly couple representing twoof the six account holders (the "Three Elderly Clients"). Sukhraj represented to Commissionstaff at the December 1 Meeting that Keybase Investments agreed to indemnify the sixidentified account holders of PFSI and/or PIC for losses incurred prior to December 3, 1997which were not duly authorized, even though the amount of the losses incurred by the sixaccount holders was unknown to Commission staff and Sukhraj as at the December 1Meeting. Sukhraj further represented to Commission Staff at the December 1 Meeting thathe agreed to this term even though he had not completed a due diligence review with respectto PFSI and PIC.

     

  5. The following day, Sukhraj, on behalf of Keybase Investments, Joykus and KeybaseFinancial Group acknowledged and confirmed in a letter dated December 2, 1997 (the"December 2 Letter") certain representations made to Commission staff, including therepresentation that Keybase Investments would indemnify the Three Elderly Clients for anylosses incurred prior to December 3, 1997 which were not duly authorized. As confirmedin the December 2 Letter, in reliance on the representations made by Sukhraj, Commissionstaff agreed to withdraw the Application for the Temporary Order and to facilitate the bulktransfer of the registrations of existing PFSI registered representatives to Keybase.

     

  6. The December 2 Letter also confirmed, among other things, that PFSI would voluntarilysurrender its license as a mutual fund dealer; that Keybase Investments would offer a contractto all existing PFSI registered representatives; that Joykus would provide sufficient capital,up to a maximum of $84,000, to meet PIC's minimum free capital requirements as prescribedby law; that Keybase Financial Group would be responsible for the administration of PIC andthe handling of all client funds effective immediately; that Joykus would purchase a 50%interest in PIC with Andrus and another party each owning 25%; and that the accountants forPIC would provide a reconciliation of various accounts of PFSI and PIC for the periodJanuary 1, 1997 to November 30, 1997 as specified in the December 2 Letter.

     

  7. On or about February 3, 1998, Keybase Financial Group received funds from Andrus in theamount of $198,944.67 (the "Funds") representing repayment of a portion of the lossesincurred by the Three Elderly Clients identified in the December 2 Letter. The Funds wereinvested in a treasury bill. A year later, on February 3, 1999, the amount of $205,867(representing the Funds and accrued interest) was released to counsel for the Three ElderlyClients.

     

  8. On March 5, 1998, a proceeding against Andrus was commenced by Notice of Hearing toconsider whether the Commission should make certain orders under section 127 of the Act(the "Andrus Hearing"). The Statement of Allegations stated, among other things, that duringthe relevant period approximately $809,150.43 was withdrawn by Andrus from the bank ortrading accounts of the Three Elderly Clients and deposited to the PIC or PFSI trust accounts($489,618.44 from the account of one elderly client and $319,531.99 from the accounts oftwo elderly clients.). The Statement of Allegations further alleged that Andrus, in defianceof his duties as a registrant and in breach of the trust reposed in him, failed to use these fundsfor the benefit of his clients. In the Decision and Reasons of the Commission in respect ofthe Andrus Hearing released on July 23, 1998, the Commission concluded that theallegations of Commission staff as to the conduct of Andrus were fully supported by theevidence.

     

  9. Prior to the commencement of the proceeding against Andrus, it was reported to Commissionstaff that the problems with respect to the accounts of the other four account holders hadbeen resolved.

     

  10. In March, 1998, counsel for two of the Three Elderly Clients and Commission staff eachrequested in an exchange of correspondence that Sukhraj honour the representation made toCommission staff that Keybase Investments indemnify the Three Elderly Clients for lossesincurred prior to December 3, 1997 which were not duly authorized. Commission staffrequested in writing on March 25, 1998 that Sukhraj inform Commission staff whether heintended to honour the representations made to Commission staff, and in particular, therepresentation that Keybase Investments would indemnify the Three Elderly Clients for anylosses which they may have incurred prior to December 3, 1997 which were not dulyauthorized.

     

  11. On March 31, 1998, Sukhraj responded, stating, among other things, as follows:

"...The letter was signed based on the materiality of the information existing at thattime. The company's books and records were incomplete and the auditors did notsign off on the final financial statements.... As a result of the material discrepancies,we found in the due diligence process, we are unable to proceed further.... Ourposition regarding Provident Investment Counsel, related companies and DavidAndrus will depend on the findings of the hearing and the outcome of theinvestigation."

The Andrus Hearing

     

  1. In the proceeding against Andrus before the Commission held on June 9, 10 and 19, 1998,Sukhraj gave evidence that he did not intend to honour the representation to indemnify theThree Elderly Clients. As of the date of the Andrus hearing, Sukhraj had not indemnifiedthe Three Elderly Clients.

Matters Following the Andrus Hearing

     

  1. Commission staff have been advised that on February 22, 1999, Keybase Investments agreedto the terms of an indemnity agreement with the Three Elderly Clients. Commission Staffhave been advised further that the indemnity agreement, when performed, will be asatisfactory resolution of this matter for the Three Elderly Clients.

Conduct Contrary to the Public Interest

     

  1. By reason of the foregoing, the conduct of Sukhraj has been contrary to the public interest,in that Sukhraj failed to honour his representation made to Commission staff on December1, 1997, and confirmed in the December 2 Letter, and that Sukhraj was aware thatCommission staff relied on his representation.

     

  2. Such further and other allegations as counsel may advise and the Commission may permit.