In the Matter of Staff’s Recommendation
for the Suspension of Registration
of Jitendra Dalpat Mistry
Opportunity to be Heard by the Director
Section 31 of the Securities Act
1. For the reasons outlined below, my decision is to suspend the registration of Jitendra Dalpat Mistry (Mistry).
2. On February 4, 2011, Staff recommended that Mistry’s registration as a dealing representative in the category of exempt market dealer with “GCap” (GCap) be suspended. Pursuant to section 31 of the Securities Act (Ontario) (Act), Mistry is entitled to an opportunity to be heard before a decision is made by me, as Director. My decision is based on the written submissions of Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch for Staff, and Mistry (on his own behalf).
3. In the recent case of Re Ittihad Securities Inc. (2010) 33 O.S.C.B. 10458, I, as Director, stated that:
“Section 28 of the Act provides that the Director may suspend the registration of a company at any time during the period of its registration if it appears to the Director that (i) the company is not suitable for registration or has failed to comply with Ontario securities law, or (ii) the registration is otherwise objectionable.
A registrant is in a position to provide valuable services to the public. A registrant also has a corresponding capacity to do material harm to investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the OSC’s public interest mandate. As well, as noted in numerous prior decisions, registration is a privilege, not a right.
The OSC has, over time, articulated three fundamental criteria for determining suitability for registration – integrity (which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law), proficiency, and solvency. These three fundamental criteria have been codified in subsection 27(2) of the Act, which provides that in determining whether a person is suitable for registration, the Director shall consider whether the person has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant.
The determination of whether an applicant’s registration may be otherwise objectionable goes beyond the three suitability criteria above. Prior OSC decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the person or company to be registered. For example, see Mithras Management Ltd., Re (1990), 13 O.S.C.B. 1600.”
Arguments relating to Staff’s recommendation of suspension of Mistry’s registration
Summary of Staff’s arguments
4. Staff argues that Mistry’s registration should be suspended because he is not suitable for registration, he failed to comply with Ontario securities law, and his continued registration would be objectionable. In particular, Mistry:
- Did not use capital raised by the Alterra Preferred Equity Real Estate Limited Partnership (APERE LP) and the Alterra Preferred Equity Fund Real Estate Limited Partnership (APEFRE LP) (Alterra Funds), two issuers of which he was a principal, in a manner that was consistent with their offering memoranda, or he knew or ought to have known that his business partner and the other principal of the Alterra Funds, Sandeep Vohora (Vohora), was making improper use of investor proceeds,
- Failed to act fairly, honestly, and in good faith with an investor in the APERE LP, in his capacity as principal of that issuer, and
- Made false statements to Staff relating to his knowledge of the financial and operational problems at the Alterra Funds.
5. Staff also argues that Mistry has demonstrated more than a capacity to do material harm, he has in fact caused material harm to investors in the Alterra Funds [emphasis added by Staff]. As a result, Staff recommends that the registration of Mistry as a dealing representative in the category of exempt market dealer be suspended.
6. From November 2005 to January 15, 2010, Mistry was registered as a Designated Compliance Officer, Officer, Director, and shareholder with Alterra Capital Inc., a limited market dealer. From November 2006 to January 18, 2010, Mistry was also registered as an Officer, Director, and shareholder with another limited market dealer, which is also an investment counsel and portfolio manager. Since March 8, 2010, Mistry has been registered as a dealing representative in the category of exempt market dealer with GCap.
7. APERE LP was established in November 2005. The general partner was Alterra Preferred Equity Real Estate 2005 Inc. Mistry and Vohora were the sole officers and directors of the general partner, with Mistry as President and CEO and Vohora as Secretary and Director. The offering memorandum for APERE LP advertised a 10 to 14% return with a 24 to 36 month commitment.
8. APEFRE LP was established in August 2006. The general partner was Alterra Preferred Equity Real Estate Inc. Mistry and Vohora were the sole officers and directors of the general partner, with Mistry as President and CEO and Vohora as Secretary and Director. The offering memorandum for the APEFRE LP advertised a 14% rate of return.
9. Each of the Alterra Funds was to invest in an underlying fund – Tidewater Partners Fund, LP (Tidewater), a Florida-based limited partnership.
10. Between 2005 and 2006, the Alterra Funds raised approximately $1.7 million from Ontario investors to invest in Tidewater which would invest in real estate development projects in Florida and Arizona. However, only $250,000 of these funds were invested in Tidewater. The remainder of the investor proceeds are unaccounted for. The Alterra Funds collapsed and most investors lost all of their investments.
11. The majority of the units of the Alterra Funds were distributed by The Investment House of Canada (IHOC), a mutual fund dealer whose membership in the Mutual Fund Dealers Association was terminated in April 2010. As well, in a decision dated January 25, 2011, as Director, I held that the principals of IHOC, Messrs. Sanjiv Sawh and Vlad Trkulja, were each unsuitable for registration and denied their application to be registered as dealing representatives in the category of mutual fund dealer.
Staff interview of Mistry
12. On November 18, 2010, Staff interviewed Mistry. Mistry generally disclaimed any in depth knowledge of the affairs of the Alterra Funds, despite being President and CEO of the general partners of the funds. Mistry represented to Staff that he had been unaware that the Alterra Funds had experienced any operational problems or any problems redeeming investor units in the partnerships. However, Staff subsequently obtained evidence that Mistry:
- knew or ought to have known that only $250,000 of the $1.7 million raised by the Alterra Funds was actually invested,
- received correspondence from and met with at least one investor in APERE LP, HK, in regards to his complaint that he had not received an interest payment or a return of his principal following the maturity of his investment,
- failed to deliver documentation related to the status of APERE LP despite repeated requests from HK, and
- attempted to sell other prospectus-exempt products to HK during a time when HK was seeking information concerning his investment in APERE LP and when Mistry knew, or ought to have known, that HK’s investment was gone.
Inappropriate use of investors’ proceeds
13. There is no direct evidence that Mistry knew that capital raised by the Alterra Funds was not being invested in Tidewater. However, Staff alleges that Mistry, as President and CEO for the general partners of both of the Alterra Funds, had a duty to ensure that the capital raised by the funds was invested according to their offering memoranda – i.e. invested in Tidewater. As well, Staff alleges that there is strong circumstantial evidence that Mistry must have been aware that investor proceeds were being misused. Mistry and Vohora were the only two officers and directors of the general partners of the Alterra Funds. In Staff’s interview of Mistry, he gave evidence that the Alterra operation was made up of only himself and Vohora and that the two men spoke “fairly regularly” while the Alterra operation was a going concern.
14. I agree with Staff’s assertions that Mistry’s failure to ensure that the investor proceeds in the Alterra Funds were invested according to their offering memoranda constitutes a complete dereliction of his duties as President and CEO of the general partners. Even if, as Staff argues, he was unaware that the funds were misused by Vohora, then Mistry was at best negligent in failing to discharge his corporate duties. As a result, I concur with Staff’s conclusion that the misuse of investor funds demonstrates that Mistry lacks the integrity required for registration under the Act.
Failure to deal with investors fairly, honestly, and in good faith
15. Subsection 2.1(2) of OSC Rule 31-505 Conditions of Registration states that a registered representative of a registered dealer shall deal fairly, honestly and in good faith with his or her clients. Staff argues that while Mistry dealt with investors in the Alterra Funds not as a registrant but as a principal of those two issuers, his conduct in this regard is still relevant.
16. Staff also argues that previous Directors’ decisions have held that the Director must, of necessity, look to past conduct as a guide to what a person’s future conduct might reasonably be expected to be.
17. Staff provided examples to support their argument that Mistry failed to act fairly, honestly, and in good faith with investors and that as a result he lacks the integrity required of a registrant. In one example, Mistry, as President and CEO of the general partner of APERE LP, allowed the “Alterra Investor Update” to be issued to investors in the summer of 2006 which announced that, “Alterra is pleased to report that Series J [of the APERE LP] is on schedule. Several milestones have been reached in the past 6 months”. Staff argues that this document was released at a time when Mistry knew, or ought to have known, that the document was false, since the capital that had been raised by the Alterra Funds had not generally been invested in Tidewater. I agree. Given Mistry’s role with the general partner of APERE LP, it is reasonable to expect that he knew what was going on at the partnership at the time and that he released the Alterra Investor Update knowing that it was false.
False or misleading statements to Staff
18. Mistry left the Alterra operation (other than the Alterra limited market dealer) in late summer of 2008. During his November 2010 interview with Staff, Mistry represented that at the time of his departure he was not aware of any problems with redemptions in APERE LP, nor was he aware of any operational problems at APERE LP. He also represented that he was not aware there was anything amiss with the Alterra operation, nor was aware of any issues with redemptions.
19. Staff argues that these representations are patently untrue. Mistry personally met with HK in May 2008 and September 2008 and at these meetings HK told him that he had not yet been repaid the capital that he had invested in APERE LP. Thus, at a minimum, Staff argues that Mistry had to have known that there were issues with redemptions in 2008. Staff also argues that since Mistry knew or ought to have known that the vast majority of the investor funds were not invested in Tidewater, it follows that Mistry must also have been aware that the Alterra funds were in distress, that they were experiencing operational problems, and that there was something amiss with the Alterra operation.
20. Staff argues that the statements made by Mistry to Staff can therefore be considered as Mistry providing false or misleading statements to Staff, a violation of section 122(1) of the Act. Staff also argues that making misrepresentations to Staff demonstrates a lack of integrity. I agree. Providing false or misleading statements to Staff is a serious matter and I believe that Mistry knew or ought to have known that he was providing false or misleading statements to Staff.
Registration is objectionable
21. The Director may suspend a registration if continued registration would be objectionable. An individual’s registration is objectionable if it would be contrary to the public interest to permit the individual to remain as a registrant. One of the purposes of the Act (as set out in section 1.1) is to prevent unfair, improper or fraudulent practices in the capital markets. The consideration of whether registration would be objectionable is thus focused on broad public interest grounds, with the result that a registration may be objectionable regardless of the determination as to suitability.
22. Staff submits that all of Mistry’s conduct was clearly improper and unfair to investors in the Alterra Funds and that the sum total of his conduct leads to the inescapable conclusion that his continued registration would be objectionable. I concur.
23. Mistry argued that he understood and respected the requirement to implement a strong compliance and governance structure for Alterra. However, his focus during his time at Alterra was on building Alterra’s business which resulted “in poor oversight on my part as the chief compliance officer. I have been in the investments (sic) industry for more than 20 years with a clear record working with major firms.”
24. He also acknowledged that he personally had conversations with HK and met with HK and Vohora on a few occasions and that HK “had requested information regarding the status of the LP.” He blames Vohora for not responding to HK’s requests for information. He also states that “I am somewhat aware of the investor update” but that “I do not recall or have specifics with respects (sic) to how and who issued the update in 2006.” He also states that:
“[my] responses during the [November 18] interview were less than stellar. To put it plainly, Alterra consisted primarily of two individuals, Sandeep Vohora and myself. Through we were in the same premises, we were divergent in our focus and activities with myself being focused on the areas discussed [earlier in his letter]… I accept mistakes were made with respect to my role in providing adequate oversight largely driven by my focus on other business related activities with Alterra. However, I, in no way, feel that I deserve a forced suspension”.
25. Mistry also states that since he has no intention of using his registration with GCap, that he would be willing to voluntarily withdraw his registration or to voluntarily cancel his registration and that he would like to enter into a settlement with Staff on that basis. Staff’s response to Mistry’s proposal is that, due to Mistry’s egregious misconduct, it will not entertain any offers to settle this matter.
26. For the reasons set out herein, my decision is to suspend the registration of Mistry. In my view, it is not credible that Mistry did not know what was going on at the Alterra Funds. Mistry was the President and Chief Executive Officer of the general partners of the Alterra Funds and thus had a duty to the Alterra Funds. In not carrying out those duties in any sort of reasonable manner, I find that he displayed a lack of integrity that can not be tolerated by registrants and thus he is not suitable for registration and his ongoing registration is objectionable.
“Marrianne Bridge”, FCA
Deputy Director, Compliance
Ontario Securities Commission
April 14, 2011