In the Matter of Staff’s Recommendation
for the Suspension of Registration of Dhiren Desai
Opportunity to be Heard by the Director under
Section 31 of the Securities Act
- For the reasons outlined below, my decision is to suspend the registration of Dhiren Desai (Desai) for a period of three months from the date of this opportunity to be heard (OTBH) decision. In addition, Desai must successfully complete the Conduct and Practices Handbook Course (CPH) prior to reapplying for registration. Lastly, if Desai is approved for registration after the three month suspension period, his registration will be subject to terms and conditions from the date he is registered for a period of one year.
- On March 16, 2015, staff of the Compliance and Registrant Regulation branch (CRR) of the Ontario Securities Commission (Commission) (Staff) recommended to the Director that the registration of Desai under the Securities Act (Ontario) (Act) in the category of mutual fund dealing representative be suspended for a period of six months. Under section 31 of the Act, Desai is entitled to an OTBH before a decision is made by me, as Director.
- My decision is based on:
- the verbal arguments of Victoria Paris (Legal Counsel, CRR) on behalf of Staff,
- the verbal arguments of Greg Temelini of Wright Temelini LLP on behalf of Desai, and
- the evidence of Jennie Alley of Wright Temelini LLP, Tom Vowell of Investors Group Financial Services Inc. (this entity, together with all affiliated entities, referred to in this decision as IG), Lisa Piebalgs (Accountant, CRR), Andrew Mackenzie, Regional Director of IG (Mackenzie), and Desai.
Suitability for registration generally
- Subsection 25(1) of the Act requires any person that trades in securities to be registered in accordance with Ontario securities law as a dealing representative of a registered dealer. As set out in numerous prior decisions, a registrant is in a position to perform valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to individual investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the work undertaken by the Commission.
- Section 28 of the Act provides that the Director may suspend registration if it appears to the Director that the person is not suitable for registration, has failed to comply with Ontario securities law or if their registration is otherwise objectionable. Staff submits that Desai lacks both integrity and proficiency and therefore that he is not suitable for ongoing registration, that he failed to comply with Ontario securities law, and that his ongoing registration would be objectionable.
- Desai has been registered as a mutual fund dealing representative with IG since 2006.
- All of the issues discussed at the OTBH related, at least in part, to an identity theft and fraudulent loan transaction described briefly as follows:
- On or about March 14, 2013, an RSP loan of $22,000 was obtained and deposited into an RSP account with IG in the name of “HK” (the Client). Desai acknowledged that “SR” acted as an intermediary between Desai and the Client. The proceeds were invested in IG mutual funds. On May 6, 2013, the Client requested a redemption in the amount of $10,000 (collectively, the Transaction).
- On May 3, 2013, an individual named “HK” (the Complainant) contacted IG and stated that she had no knowledge of the loan and that she had never met with Desai or anyone at IG. The $10,000 redemption was reversed.
- Following an investigation, IG concluded that the Complainant’s identity was stolen and was used to conduct the Transaction.
- The RSP loan was collapsed and Desai was required to pay interest costs and to return the commission earned. IG issued a warning letter to Desai.
- In May 2014, following an investigation, the Mutual Fund Dealers Association of Canada (MFDA) issued a warning letter to Desai regarding his involvement in the Transaction. The warning letter identified the following issues:
- [Desai] opened an RSP account and processed an RSP loan application for an individual presenting herself as [the Client]. [Desai] subsequently allowed a third party to act as an intermediary between [Desai] and the account holder, enabling the individuals to conduct fraud,
- [Desai] falsified client meeting notes, and
- [Desai] admitted that [he] routinely [held] trades to ensure all of the requirements are in place before processing trades.
- The MFDA warning letter also stated that they found sufficient evidence to support a finding of a breach of MFDA Rules 2.2.1(a) and 2.2.1(b) and National Instrument 81-102 Investment Funds.
- Given the seriousness of the alleged conduct, Staff conducted a further investigation.
Issues discussed during the OTBH
- The three issues discussed were: a falsified document, misleading statements to Staff, and pre-signed forms. Each of these issues will be discussed separately below.
- This issue relates to a document entitled “Client Communication”. It is intended to be a log outlining communications and meetings between Desai and the Client. Staff submits that this document was falsified to appear to be a contemporaneous account of the meetings between Desai and the Client. Staff submits that this misconduct should attract the same sanction as a number of previous decisions related to falsified documents (i.e. a minimum six month suspension).
- The MFDA warning letter is clear that their investigation found that Desai falsified client meeting notes. The IG warning letter is also clear on this point in that it includes the following statements: “During the course of our review we also noted you conceded you do not maintain a contact log. After submitting what appeared to be a contact log, you indicated that the “log” was merely your recollection of events”, and “You did not originally disclose the fact that your log was merely your recollection of events”.
- Desai acknowledged to Staff that the Client Communication document was not a contemporaneous account of the meetings between himself and the Client. Mackenzie testified that he asked Desai to note down everything he could remember with respect to his interactions with the Client, to the best of his recollection. Desai did this by completing the Client Communication document, which was reviewed by Mackenzie.
- Desai also testified that he normally kept notes of client meetings, although he was unable to explain why he did not take notes during the meetings with the Client.
- In my view, Desai falsified the Client Communication document. I am not convinced by his explanation of why different writing instruments were used to create the Client Communication document. In my view, the use of different writing instruments and the use of exact times and dates of the meetings (which turned out to be incorrect) is sufficient evidence for me to reasonably conclude that the document was falsified. Although I acknowledge that Mackenzie asked Desai to note down what happened with respect to the Transaction, to the best of his recollection, this “instruction” cannot be used as a defence for creating what, in my view, is clearly a falsified document.
Misleading statements to Staff
- Staff submits that Desai misled them by making vague and inconsistent statements about the number of times he met with the Client and SR, when the meetings took place, where the meetings took place, the duration of the meetings, what was discussed at the meetings, and which client documents or portions of documents he reviewed, when he received them, and whether he saw originals of the documents. Staff also submits that Desai made statements to Staff that were contradictory to those made to the MFDA and IG during the course of their investigations. Staff further submits that the falsification of the Client Communication document, together with these vague, inconsistent, and contradictory statements were an attempt by Desai to conceal his activities from Staff, and that Desai therefore lacks integrity. Lastly, Staff submits that Desai is reckless or lackadaisical as to his compliance with Ontario securities law.
- It is clear to me from the evidence provided during the OTBH that, at best, Desai provided vague and inconsistent statements to Staff regarding his involvement in the Transaction. In my view, these vague and inconsistent statements, together with my finding that Desai falsified the Client Communication document, are sufficient evidence for me to reasonably conclude that Desai was attempting to conceal his activities with respect to the Transaction from Staff and that he therefore lacks integrity. Despite the fact that I do not believe, based on the information provided to me, that Desai was complicit in the Transaction, I believe that if Desai had been more compliance focused (by, for example, carefully checking the Client’s identification documents, ensuring that the signature on the Client identification documents was consistent with the signature on various other documents used to facilitate the Transaction, ensuring the information on the loan documentation was consistent with other information provided, and by not allowing the use of pre-signed or blank forms), the Transaction would likely not have occurred.
- Staff submits that Desai had the Client sign blank forms to effectuate the Transaction (including the account opening form and the redemption form) and that Desai admitted to using blank forms with other clients. In my view, Staff provided sufficient evidence for me to reasonably conclude that Desai used blank or pre-signed forms in carrying out his activities.
- For the reasons set out elsewhere in this decision, my decision is to suspend the registration of Desai for a period of three months from the date of this OTBH decision. In addition, Desai must successfully complete the CPH prior to reapplying for registration. Lastly, if Desai is approved for registration after the three month suspension period, his registration will be subject to terms and conditions from the date he is registered for a period of one year. The terms and conditions will provide that (i) Desai be placed under strict supervision by his sponsoring firm, (ii) any document submitted by Desai to his sponsoring firm that bears a client’s signature or initials must be the original document, and (iii) Desai may not use a limited trading authorization for any of his clients.
- In determining whether a three month suspension was the appropriate sanction for the misconduct described in this decision, I reviewed a number of previously issued Commission and Director decisions related to falsified documents and misrepresentations to Staff including: Re Sterling Grace & Co. (2014), 37 OSCB 8298, Re Jain (2013), 36 OSCB 8555, Re Obasi (2011), 34 OSCB 3012, Re DiPronio (2011), 34 OSCB 6345, and Re Pyasetsky (2013), 36 OSCB 3897.
- Ultimately I decided that a shorter suspension period than the period recommended by Staff – or the minimum period which would be consistent with the precedent decisions referred to above – is appropriate in these circumstances. My decision is based on two factors. First, I believe Desai was, to use Mackenzie’s word at least somewhat “duped” by the individuals involved in the Transaction. However, as I noted above, in my view, if Desai had been more compliance focussed, he likely would not have been duped. Second, I was impressed by the testimony of Mackenzie who said in part that:
… because most people in my position run for the hills. And I can understand why some may run for the hills, if you’ve got an unethical, cheater, liar sitting across the table from you, I wouldn’t be sitting here either… Dhiren is an ethical person. He’s a person of integrity. He’s a person of quality of character… I’m here because it’s the right thing to do. Because we’ve got somebody here who I believe to be a person of character, a person who got duped, a person who had lessons to learn, and has learned them. And I’m not saying he’s finished learning, right, but I believe that anybody who has their ethics and their integrity pointed in the right direction, it’s a coaching issue, not any other issue.
- I was also referred by Desai’s counsel to the Director’s decision in Re Pino (2011), 34 OSCB 6353. In that case, Pino acted on the instructions of two different individuals posing as two different clients of IG to improperly redeem approximately $182,000 from the actual clients’ accounts. The Director ordered a one year period of close supervision. Desai’s counsel argued that this case was a closer precedent to Desai’s circumstances than the ones referred to by Staff above. While I agree that the circumstances are somewhat similar, in this case, Desai also falsified a document, made misrepresentations to Staff, and had pre-signed forms in his client files. As a result, I am unable to conclude that a period of close supervision is appropriate in this case.
- Lastly, for clarity, my view is that if Staff is asked to consider a subsequent application for registration from Desai (after the three month suspension period), and assuming Desai has successfully completed the CPH, Staff should only consider matters or issues that arise subsequent to the date of this OTBH in assessing Desai’s application.
“Marrianne Bridge”, FCPA, FCA
Deputy Director, Compliance, Strategy and Risk
Compliance and Registrant Regulation
Ontario Securities Commission
November 11, 2015