Settlement Agreement: In the Matter of Dax Sukhraj
R.S.O. 1990, CHAPTER S.5, AS AMENDED
AND
IN THE MATTER OF
DAX SUKHRAJ
SETTLEMENT AGREEMENT
I INTRODUCTION
1. By Notice of Hearing dated March 8, 1999, (the "Notice of Hearing"), the OntarioSecurities Commission (the "Commission") announced that it proposed to hold a hearing toconsider whether, pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5, asamended (the "Act"), in the opinion of the Commission it is in the public interest for theCommission:
(a) to make an order that Dax Sukhraj ("Sukhraj") be reprimanded; and/or
(b) 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 the proceedingsinitiated in respect of Sukhraj by the Notice of Hearing in accordance with the terms andconditions set out hereinafter. Sukhraj agrees to the settlement on the basis of the factsagreed to as hereinafter provided and consents to the making of an Order against him in theform attached as Schedule "A" on the basis of the facts set out below.
3. This settlement agreement, including the attached Schedule "A", will be released to the publiconly if and when the settlement is approved by the Commission.
III STATEMENT OF FACTS
(i)Acknowledgement
4. Staff and Sukhraj agree with the facts set out in Part III.
(ii) Introduction
5. 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").
6. 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.
7. Keybase Securities is and was at all material times registered as a securities dealer pursuantto the Act.
8. Sukhraj is also the President, a director and majority owner of Joykus Capital Inc. ("Joykus"), a holding company.
(iii) Background
9. 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 was registeredas a mutual fund dealer and limited market dealer until the Commission accepted theapplication of PFSI to voluntarily surrender its registration on December 16, 1997. PIC wasregistered as an investment counsel/portfolio manager pursuant to the Act until August 28,1998. Proceedings were initiated against Andrus in March, 1998 as outlined below.
10. 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.
11. 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 any actionaffecting the registration of PIC to allow for the transition of control of the operations toKeybase Financial Group, and eventually, as contemplated, to Joykus.
12. During the December 1 Meeting, Commission staff and Sukhraj further discussed the fact thatthere were potential unauthorized losses incurred by six account holders of PFSI and/or PICand that the amount of the losses was unknown at the time. The list of six account holdersof PIC and PFSI included one elderly client and one elderly couple representing two of thesix account holders (the "Three Elderly Clients"). Sukhraj represented to Commission staffat the December 1 Meeting that Keybase Investments agreed to indemnify the six identifiedaccount holders of PFSI and/or PIC for losses incurred prior to December 3, 1997 whichwere not duly authorized, even though the amount of the losses incurred by the six accountholders was unknown to Commission staff and Sukhraj as at the December 1 Meeting.Sukhraj further represented to Commission Staff at the December 1 Meeting that he agreedto this term even though he had not completed a due diligence review with respect to PFSIand PIC.
13. The following day, Sukhraj, on behalf of Keybase Investments, Joykus and Keybase FinancialGroup acknowledged and confirmed in a letter dated December 2, 1997 (the "December 2Letter") certain representations made to Commission staff, including the representation thatKeybase Investments would indemnify the Three Elderly Clients for any losses incurred priorto December 3, 1997 which were not duly authorized. As confirmed in the December 2Letter, in reliance on the representations made by Sukhraj, Commission staff agreed towithdraw the Application for the Temporary Order and to facilitate the bulk transfer of theregistrations of existing PFSI registered representatives to Keybase.
14. 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.
15. 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.
16. 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 of theAndrus Hearing released on July 23, 1998, the Commission concluded that the allegations ofCommission staff as to the conduct of Andrus were fully supported by the evidence.
17. 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.
18. 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. In particular,Commission staff requested in writing on March 25, 1998 that Sukhraj inform Commissionstaff whether he intended to honour the representations made to Commission staff, and inparticular, the representation that Keybase Investments would indemnify the Three ElderlyClients for any losses which they may have incurred prior to December 3, 1997 which werenot duly authorized.
19. 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."
(iv) The Andrus Hearing
20. 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 indemnified theThree Elderly Clients in accordance with the representation made to Commission staff at theDecember 1 Meeting.
(v) Matters Following the Andrus Hearing
21. 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.
(vi) Conduct Contrary to the Public Interest
22. 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.
IV POSITION OF DAX SUKHRAJ
23. Sukhraj regrets taking the postion that he would not fulfil his representation that KeybaseInvestments would indemnify the Three Elderly Clients. With the benefit of advice and onreflection, Mr. Sukhraj caused Keybase to voluntarily enter into an indemnity agreement withthe Three Elderly Client and submits that this is a mitigating factor in respect of the ordersought against him.
V POSITION OF COMMISSION STAFF
24. Commission staff view the fact that Keybase Investments has entered into an indemnityagreement with the Three Elderly Clients as a mitigating factor in respect of the Order soughtagainst Sukhraj in this proceeding.
VI TERMS OF SETTLEMENT
25. Sukhraj agrees to the following terms of settlement:
(a) pursuant to clause 6 of subsection 127(1) of the Act, Sukhraj will be reprimanded bythe Commission.
VII STAFF COMMITMENT
26. 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 any orderin respect of any conduct or alleged conduct of Sukhraj in relation to the facts set out in PartIII of this Settlement Agreement.
VIII PROCEDURE FOR APPROVAL OF SETTLEMENT
27. The approval of the settlement as set out in the Settlement Agreement shall be sought at apublic hearing before the Commission scheduled for such date as is agreed to by Staff andSukhraj, in accordance with the procedures described herein and such further procedures asmay be agreed upon by Staff and Sukhraj.
28. If this Settlement Agreement is approved by the Commission, it will constitute the entiretyof the evidence to be submitted respecting Sukhraj in this matter and Sukhraj agrees to waivehis right to a full hearing and appeal of this matter under the Act.
29. 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 this SettlementAgreement.
30. 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 and Sukhraj will be entitled to proceed to a hearing of the allegations inthe Notice of Hearing and related Statement of Allegations unaffected by theSettlement Agreement or the settlement negotiations;
(b) the terms of the Settlement Agreement will not be raised in any other proceedings ordisclosed to any person except with the written consent of Staff and Sukhraj or asmay be otherwise required by law; and
(c) Sukhraj further agrees that he will not raise in any proceeding the SettlementAgreement or the negotiation or process of approval thereof as a basis for any attackon the Commissions's jurisdiction, alleged bias, appearance of bias, alleged unfairnessor any other challenge that may otherwise be available, provided that a member of theCommission who participates in the aforementioned hearing shall not participate inany further proceeding based on or arising out of the facts contained in Part III.
31. If, prior to the approval of this Settlement Agreement by the Commission, there are new factsor issues of substantial concern, in the view of Staff, regarding the facts set out in Part III ofthis Settlement Agreement, Staff will be at liberty to withdraw from this SettlementAgreement. Notice of such intention will be provided to Sukhraj in writing. In the event ofsuch notice being given, the provisions of paragraph 30 in this part will apply as if thisSettlement Agreement had not been approved in accordance with the procedures set outherein.
IX DISCLOSURE OF SETTLEMENT AGREEMENT
32. 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.
33. Any obligation as to confidentiality shall terminate upon the approval of this SettlementAgreement by the Commission.
X EXECUTION OF SETTLEMENT AGREEMENT
34. This Settlement Agreement may be signed in one or more counterparts which shall constitutea binding agreement and a facsimile copy of any signature shall be as effective as an originalsignature.
DATED at Toronto, this 8th day of March, 1999.
SIGNED IN THE PRESENCE OF:
"DAX SUKHRAJ"
"CHARLIE MACFARLANE"