Settlement Agreement: In the Matter of David Singh et al.
I INTRODUCTION
1. By Notice of Hearing dated January 12, 1999, (the "Notice of Hearing"), the OntarioSecurities Commission (the "Commission") announced that it proposed to hold a hearingto consider whether, pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5,as amended, (the "Act"), in the opinion of the Commission it is in the public interest forthe Commission:
(a) to make an order that the registration of one or more of the Respondents beterminated or suspended or restricted for such period as the Commission may orderor that terms and conditions be imposed on their registration;
(b) to make an order that that the exemptions contained in Ontario securities law do notapply to the Respondents, David Singh and/or Jeffrey Lipton, permanently or forsuch time as the Commission may direct;
(c) to make an order that one or both of the Respondents, Infinity Investment CounselLtd. and Fortune Financial Corporation, submit to a review of their practices andprocedures and institute such changes as may be ordered by the Commission;
(d) to make an order that one or more of the Respondents be reprimanded; and/or
(e) to make such other order as the Commission may deem appropriate;
II JOINT SETTLEMENT RECOMMENDATION
2. The Staff of the Commission ("Staff") agree to recommend the settlement of theproceedings initiated in respect of David Singh ("Singh"), Jeffrey Lipton ("Lipton"),Infinity Investment Counsel Ltd. ("Infinity Investment Counsel") and Fortune FinancialCorporation ("Fortune") by the Notice of Hearing in accordance with the terms andconditions set out hereinafter. Singh, Lipton, Infinity Investment Counsel and Fortuneagree to the settlement on the basis of the facts agreed to as hereinafter provided andconsent to the making of an order against them in the form attached as Schedule "A" onthe basis of the facts set out below.
3. This settlement agreement, including the attached Schedule "A", will be released to thepublic only if and when the settlement is approved by the Commission.
III STATEMENT OF FACTS
(i) Acknowledgement
4. Staff, Singh, Lipton, Infinity Investment Counsel and Fortune agree with the facts set out in this Part III.
(ii) Factual Background
5. Infinity Investment Counsel is a corporation organized pursuant to the laws of Canada.At all material times, Infinity Investment Counsel was the portfolio manager of InfinityCanadian Fund and Infinity Income and Growth Fund (the "Infinity Funds") and wasregistered with the Commission pursuant to the Act, as investment counsel and portfoliomanager.
6. Fortune is a corporation organized pursuant to the laws of Canada. At all material times,Fortune was registered with the Commission pursuant to the Act as a securities dealer.
7. Singh is an individual who resides in the Province of Ontario. At all material times, Singhwas an indirect controlling shareholder and a director of Infinity Investment Counsel andFortune. During the relevant period, Singh was also registered with the Commissionpursuant to the Act to sell securities and as the supervisory procedures officer of Fortune.
8. As Singh was a director of Fortune and had an indirect interest in more than 10 percent ofInfinity Investment Counsel, Infinity Investment Counsel was a dealer manager and theInfinity Funds were dealer managed mutual funds as defined in National Policy 39.
9. Lipton is an individual who resides in the Province of Ontario. At all material times,Lipton was a director, the president and chief executive officer of Infinity InvestmentCounsel and was registered with the Commission pursuant to the Act as a portfoliomanager and investment counsel.
10. As a director of Infinity Investment Counsel (a dealer manager), Singh was also a dealermanager.
11. Infinity Income Trust (the "Trust") was established by its settlor, Infinity Income TrustManagement Inc. ("Infinity Income Trust Management") by a Trust Indenture datedFebruary 5, 1998 (the "Trust Indenture"). The Trust was established to finance a debtobligation incurred for the payment of sales commissions paid on the sales of securities ofthe Infinity Funds sold on a deferred sales charge basis which had accrued since August1, 1997.
12. The Trust Indenture appointed General Trust of Canada ("General Trust") as the trusteeof the Trust with absolute and exclusive power, control and authority over andmanagement of the property and affairs of the Trust. Subsequently, the Trust by itstrustee, General Trust, appointed Infinity Income Trust Management as its manager withfull authority and responsibility to manage and administer the Trust.
13. At all material times, Singh was an indirect controlling shareholder and a director ofInfinity Income Trust Management and Lipton was a director and the president, chiefexecutive officer and secretary of Infinity Income Trust Management.
14. Pursuant to a prospectus receipted by the Commission on February 5, 1998, the terms ofthe offering of units of the Trust were as follows:
a. trust units were to be sold for $20.00 per unit;
b. the maximum aggregate amount of the offering was $30 million;
c. the minimum aggregate amount of the offering was $15 million; and
d. the offering was to close on February 27, 1998.
15. An amended prospectus was filed on March 19, 1998 pursuant to which the closing dateof the offering was extended to April 17, 1998. The amount of the offering remained thesame but the offering price per unit was decreased to $10.00, thereby doubling the numberof units offered.
16. An agreement dated February 5, 1998 among Infinity Income Trust, Infinity Income TrustManagement, Infinity Investment Counsel, Deacon Capital Corporation ("Deacon") andPorthmeor Securities Inc. ("Porthmeor")(the "Agency Agreement") was entered into toprovide for the formation and management of a selling group to offer units of the Trust forsale. By the terms of the agreement, Deacon and Porthmeor were to act as underwritersfor the Trust on an agency basis and were to receive an agency fee of 7% of grossproceeds of the offering to be divided as follows:
a. 5/7 (or 5% of gross proceeds) was a selling commission to be paid to each sellinggroup member responsible for a sale of units of the Trust;
b. 1/7 (or 1% of gross proceeds) was to be divided between Deacon (as to 90%) andPorthmeor (as to 10%); and
c. the remaining 1/7 (or 1% of gross proceeds) was to be divided among Deacon,Porthmeor and Fortune in proportion to their respective sales of units of the Trust.
17. An agreement entered on February 13, 1998 as among Deacon, Porthmeor and Fortune(the "Fortune Selling Group Agreement") provided that in addition to the receipt of 1%of gross proceeds in proportion to its sales of units of the Trust, Fortune was to receive 5%of gross proceeds as a selling commission.
18. Fortune sold 83.4% of the Trust units and received a fee of approximately $750,000 inconnection with the sale of units of the Trust.
19. On April 15, 1998, subscriptions for less than $9 million worth of units of the Trust hadbeen received. The offering had a minimum closing threshold of $15 million.
20. On or about April 15, 1998, Infinity Investment Counsel sought to purchase for the InfinityFunds 250,000 units of the Trust for a total purchase price of $2.5 million. This order wasnot processed. Following discussions among the selling group, Infinity InvestmentCounsel and their advisors, the Infinity Funds decided to purchase 150,000 units of theTrust for a total purchase price of $1.5 million.
21. No commissions on the sale to the Infinity Funds were paid to any person or company.
22. The Trust offering closed on April 17, 1998 with a total subscription of 1,517,057 unitsfor total gross proceeds of $15,170,570.
23. If the purchase of units of the Trust had not been made by the Infinity Funds, the offeringcould not have closed on April 17, 1998. In that event, Infinity Investment Counsel wouldhave been obligated to find alternative financing to satisfy the debt obligation incurred topay sales commissions which had accrued since August 1, 1997 and to secure additionalcredit facilities.
24. Infinity Investment Counsel stood to benefit from the Trust offering closing as the proceedswould be used to pay down debt incurred to pay sales commissions which would allowInfinity Investment Counsel to secure additional credit facilities. That interest of InfinityInvestment Counsel put it in a position of conflict which potentially compromised its abilityto act in the best interests of the Infinity Funds in purchasing units of the Trust.
25. As the portfolio manager, Lipton made the investment decisions on behalf of the InfinityFunds and caused the purchase of units of the Trust by the Infinity Funds.
26. As a director and an indirect controlling shareholder of Infinity Investment Counsel, Singhwas consulted about the purchase of units of the Trust by the Infinity Funds and permittedthat purchase to proceed.
27. By receiving a commission of 6% when some members of the selling group received only5%, Fortune, unbeknown to it, came within the definition of underwriter under the Act inconnection with the distribution of units of the Trust. In this role, the conduct of Fortunein selling 83.4% of the units of the Trust (which was managed by an entity that had oneor more directors in common with Fortune), was contrary to the public interest.
IV STAFF'S POSITION
28. By virtue of the relationships among Singh, Lipton, Infinity Investment Counsel, InfinityIncome Trust Management, the Trust and Fortune, the purchase of units of the Trust bythe Infinity Funds violated investment restrictions and conflict of interest rules in Ontariosecurities law as more particularly set out below.
29. As directors of Infinity Income Trust Management, the entity which managed the Trust,Singh and Lipton were acting, at all material times, in a capacity similar to that of directorsand trustees of the Trust.
30. The conduct of Singh, Lipton and Infinity Investment Counsel was contrary to the publicinterest in that they caused and permitted the Infinity Funds to purchase units of the Trustwhich purchase violated the following provisions of Ontario securities law:
a. paragraph 118(2)(a) of the Act which prohibits a mutual fund from investing inissuers in which persons responsible for the management of the mutual fund areofficers or directors, unless the "clients" (unitholders) of the mutual fund haveprovided their consent to the investment;
b. paragraph 118(2)(b) of the Act which prohibits a mutual fund from purchasing thesecurities of an issuer from the account of those responsible for the managementof the mutual fund and their related entities;
c. paragraph 4.02(a) of National Policy 39 which prohibits a mutual fund fromacquiring securities which the dealer manager of the mutual fund or its relatedentities have underwritten until 60 days following the conclusion of thedistribution;
d. paragraph 4.02(b) of National Policy 39 which prohibits a dealer managed mutualfund from investing in securities of an issuer, an officer or director of which is alsoa director or officer of a company which is a dealer manager of the mutual fund oran associate or affiliate of the dealer manager;
e. subsection 2.05(11) of National Policy 39 which prohibits, without approval of thesecurities authorities, contracts between a mutual fund and certain related partiesas principals in making purchases or sales of portfolio securities; and
f. subsection 116(1) of the Act which imposes upon every person or companyresponsible for the management of a mutual fund a duty to act honestly, in goodfaith and in the best interests of the mutual fund in respect of the exercise of itspowers and the discharge of its duties.
31. The conduct of Fortune as underwriter of the distribution by the Trust was contrary to thepublic interest as it violated section 224 of the Regulation under the Act which prohibitsregistrants from acting as underwriters in connection with the distribution of securities ofa related or connected issuer unless the registrant underwrites a portion of the deal that isless than the portion underwritten by a registrant unrelated to the issuer.
V POSITION OF THE RESPONDENTS
32. The purpose of the sale of units of the Trust, as described in the prospectus, was to allowInfinity Investment Counsel to repay a loan used to finance the payment of deferred salescharges from the period August 1, 1997 to February 26, 1998. The repayment of that loanwould allow Infinity Investment Counsel to arrange additional financing to pay deferredsales charges on the continuing sale of units of the Infinity Funds. The proceeds of theoffering were used to pay off the loan and enabled Infinity Investment Counsel to obtaina new line of credit in a greater amount.
33. Lipton believed that the purchase of the units by the Infinity Funds would be in theinterests of the Infinity Funds because the units were a safe and secure investment whichwould produce a higher yield than other similar available investments. Lipton derived nopersonal financial benefit from the investment.
34. On April 9, 1998, Lipton asked counsel for Infinity Investment Counsel and the InfinityFunds whether an investment by the Infinity Funds in units of the Trust was permissible.
35. Lipton also consulted with Singh, and both sought and received legal advice fromcompetent securities counsel. The respondents relied in good faith on advice that theproposed investment did not contravene any specific provisions of the Act, Regulations orNational Policy 39. Singh was further advised that although the investment was notcontrary to any specific provisions of the Act, Regulations or National Policy 39, the Staffof the Commission might have some concerns about the investment from a policyperspective.
36. The respondents also relied in good faith upon advice from the underwriters and theircounsel that a purchase of $1.5 million by the Infinity Funds that enabled the offering toclose on April 17, 1998, was not material and did not need to be disclosed in theprospectus.
37. The purchase of the units of the Trust by the Infinity Funds was made on the basis of thisadvice. The respondents would not have proceeded with that purchase had this advice notbeen received.
38. At the time of the investment, the respondents believed that Fortune was not anunderwriter of the units of the Trust and neither it nor Infinity Investment Counsel wasrelated to the Trust. Under the terms of the Agency Agreement, Deacon and Porthmeorwere the underwriters of the units being distributed on an agency basis. Fortune's role asa member of the selling group and its relationship to Infinity Investment Counsel weredisclosed in the prospectus.
39. No commissions on the sale to the Infinity Funds were paid to any person or company.
40. No investor in the Infinity Funds or in the Trust has complained to Staff about theinvestment.
41. The Infinity and Fortune groups of corporations are in the process of restructuring.Commission Staff have been advised of this restructuring and have informed counsel forInfinity and Fortune that the Director of Capital Markets, in considering the criteria set outin section 104 of the Regulation to the Act, does not object to the restructuring.
42. When the restructuring is complete, Singh will not be an officer or director of InfinityInvestment Counsel or Fortune. Singh derived no direct personal financial benefit fromthe investment by the Infinity Funds.
43. Infinity Investment Counsel is the process of reconstituting its board of directors, amajority of whom will be independent. The board of directors will appoint a conflictscommittee, consisting exclusively of independent directors, to develop a comprehensiveconflicts policy for Infinity Investment Counsel and to monitor transactions for potentialconflicts.
VI TERMS OF SETTLEMENT
44. Singh agrees to the following terms of settlement:
a. pursuant to clause 3 of subsection 127(1) of the Act, none of the exemptionscontained in Ontario securities law will apply to Singh for a period of 18 monthscommencing from the date of the Order of the Commission;
b. Singh will provide an undertaking to the Commission as set out in Schedule "B";
c. pursuant to clause 6 of subsection 127(1) of the Act, Singh will be reprimanded;and
d. Singh will, within sixty days of the date of the Order of the Commission, make apayment of $50,000 to be applied to a cause benefitting investor education to bedetermined by the Commission.
45. Lipton agrees to the following term of settlement:
a. pursuant to clause 1 of subsection 127(1) of the Act, the registration granted toLipton under Ontario securities law will be suspended for a period of 3 monthscommencing on April 1, 1999.
46. Infinity Investment Counsel agrees to the following terms of settlement:
a. pursuant to clause 6 of subsection 127(1) of the Act, Infinity Investment Counselwill be reprimanded by the Commission;
b. the board of directors of Infinity Investment Counsel will, within 30 days of theOrder of the Commission, be comprised of a majority of directors who areindependent from and unrelated to Infinity Investment Counsel, Fortune and theirrelated entities; and
c. Infinity Investment Counsel will devise and implement a policy regarding conflictsof interest as follows:
(i) the independent directors of Infinity Investment Counsel will form acommittee to devise a policy regarding conflicts of interest such policy tobe prepared on or before April 1, 1999;
(ii) an independent adviser will be retained by and on behalf of the Commissionat the expense of Infinity Investment Counsel to review the conflicts ofinterest policy devised by the committee of independent directors of InfinityInvestment Counsel; and
(iii) Infinity Investment Counsel will implement the conflicts of interest policydevised as set out above once its terms are acceptable to Staff of theCommission.
47. Fortune agrees to the following term of settlement:
a. pursuant to clause 6 of subsection 127(1) of the Act, Fortune will be reprimandedby the Commission.
VII STAFF COMMITMENT
48. If this Settlement Agreement is approved by the Commission, Staff will not initiate anycomplaint to the Commission or request the Commission to hold a hearing or issue anyorder in respect of any conduct or alleged conduct of Singh, Lipton, Infinity InvestmentCounsel or Fortune in relation to the facts set out in Part III of this Settlement Agreement.
VIII PROCEDURE FOR APPROVAL OF SETTLEMENT
49. The approval of the settlement as set out in the Settlement Agreement shall be sought ata public hearing before the Commission scheduled for such date as is agreed to by Staff,Singh, Lipton, Infinity Investment Counsel and Fortune, in accordance with the proceduresdescribed herein and such further procedures as may be agreed upon among Singh, Lipton,Infinity Investment Counsel, Fortune and Staff.
50. If this Settlement Agreement is approved by the Commission, it will constitute the entiretyof the evidence to be submitted respecting Singh, Lipton, Infinity Investment Counsel andFortune in this matter and Singh, Lipton, Infinity Investment Counsel and Fortune agreeto waive their right to a full hearing and appeal of this matter under the Act.
51. If this Settlement Agreement is approved by the Commission, none of the parties to thisSettlement Agreement will make any public statement that is inconsistent with thisSettlement Agreement.
52. If, for any reason whatsoever, this settlement is not approved by the Commission, or theorder set forth in Schedule "A" is not made by the Commission:
a. each of Staff, Singh, Lipton, Infinity Investment Counsel and Fortune will beentitled to proceed to a hearing of the allegations in the Notice of Hearing andrelated Statement of Allegations unaffected by the Settlement Agreement or thesettlement negotiations;
b. the terms of the Settlement Agreement will not be raised in any other proceedingor disclosed to any person except with the written consent of Singh, Lipton,Infinity Investment Counsel, Fortune and Staff or as may be otherwise required bylaw; and
c. Singh, Lipton, Infinity Investment Counsel and Fortune further agree that they willnot raise in any proceeding the Settlement Agreement or the negotiation or processof approval thereof as a basis for any attack on the Commission's jurisdiction,alleged bias, appearance of bias, alleged unfairness or any other challenge that mayotherwise be available, provided that a member of the Commission who participatesin the aforementioned hearing shall not participate in any further proceeding basedon or arising out of the facts contained in Part III.
53. If, prior to the approval of this Settlement Agreement by the Commission, there are newfacts or issues of substantial concern, in the view of Staff, regarding the facts set out inPart III of this Settlement Agreement, Staff will be at liberty to withdraw from thisSettlement Agreement. Notice of such intention will be provided to Singh, Lipton, InfinityInvestment Counsel and Fortune in writing. In the event of such notice being given, theprovisions of paragraph 52 in this part will apply as if this Settlement Agreement had notbeen approved in accordance with the procedures set out herein.
IX DISCLOSURE OF SETTLEMENT AGREEMENT
54. The terms of the Settlement Agreement will be treated as confidential by all parties heretountil approved by the Commission and forever if for any reason whatsoever, the SettlementAgreement is not approved by the Commission.
55. Any obligation as to confidentiality shall terminate upon the approval of this SettlementAgreement by the Commission.
X EXECUTION OF SETTLEMENT AGREEMENT
56. This Settlement Agreement may be signed in one or more counterparts which shallconstitute a binding agreement and a facsimile copy of any signature shall be as effectiveas an original signature.
DATED this 12th day of January, 1999.
SIGNED IN THE PRESENCE OF:
__________________________________
David Singh
__________________________________
Jeffrey Lipton
__________________________________
Infinity Investment Counsel Ltd.
Per:
I have authority to bind the corporation
__________________________________
Fortune Financial Corporation
Per:
I have authority to bind the corporation
____________________________________
Charlie Macfarlane
Acting Director of Enforcement on Behalf
of Staff of the Ontario Securities Commission
R.S.O. 1990, c. S.5, AS AMENDED
- and -
IN THE MATTER OF DAVID SINGH, JEFFREY LIPTON, INFINITY INVESTMENTCOUNSEL LTD. AND FORTUNE FINANCIAL CORPORATION
UNDERTAKING TO THEONTARIO SECURITIES COMMISSION
WHEREAS Staff of the Ontario Securities Commission ("Staff") issued a Notice of Hearing andStatement of Allegations dated January 12, 1999 which named David Singh ("Singh") as arespondent;
AND WHEREAS Singh has agreed to provide this Undertaking pursuant to a SettlementAgreement dated January 12, 1999;
SINGH HEREBY UNDERTAKES to the Ontario Securities Commission (the "Commission")that he will not, from the date of this Undertaking, engage in any of the following activities onbehalf of any respondent to this proceeding, any registrant related to a respondent to thisproceeding or any registrant in which Singh has an interest:
1. compliance or supervision functions;
2. underwriting functions; and
3. the formulation or implementation of investment decisions made on behalf of the mutualfunds managed by Infinity Investment Counsel Ltd. or any other portfolio managementactivities.
SINGH FURTHER UNDERTAKES to the Commission that, commencing 30 days from thedate of this Undertaking, he will not, on behalf of any respondent to this proceeding, anyregistrant related to a respondent to this proceeding or any registrant in which Singh has aninterest, engage in direct client contact for the purpose of the purchase or disposition of a specificsecurity;
SINGH FURTHER UNDERTAKES to the Commission that he will file a certificate with theDirector of Enforcement of the Commission every three months commencing on April 1, 1999 tocertify that he has complied in full with this Undertaking for the preceding quarter;
SINGH AGREES that this Undertaking has the same force and effect as a decision of theCommission and will remain in effect until the Commission varies or revokes it under section144(1) of the Securities Act, R.S.O. 1990, c.S.5, as amended.
DATED at Toronto this day of January, 1999.
SIGNED IN THE PRESENCE OF:
"David Singh"