Statement of Allegations: In the Matter of David G.C. Andrus
R.S.O. 1990 c. S. 5, AS AMENDED
AND
IN THE MATTER OF
DAVID G.C. ANDRUS
STATEMENT OF ALLEGATIONS OF STAFF
OF THE ONTARIO SECURITIES COMMISSION
Staff of the Ontario Securities Commission (the "Commission") make the following allegations:
Background
1. Provident Financial Services Inc. ("PFSI") was at all material times registered as a mutual fund dealer and limited market dealer pursuant to the Securities Act,R.S.O. 1990, c. S.5, as amended (the"Act"). On December 16,1997, the Commission accepted the application of PFSI to voluntarily surrender its registration.
2. Provident Investment Counsel ("PIC") is and was at all material times registered as an investment counsel/portfolio manager pursuant to the Act.
3. At the request of staff of the Commission ("Staff"), on November 12, 1998 an independent monitor (the "Monitor") was appointed by the PFSI and PIC tooversee their operations, including the approval of all deposits and withdrawals in the accounts of PIC and PFSI. On December 3, 1997 the monitor'sengagement was terminated and the operation of PIC and PFSI came under the control of Keybase Financial Group and Keybase Investment Inc., a registrantunder the Act.
4. David Andrus ("Andrus") was the president, compliance officer, and majority shareholder of PFSI and PIC. As of December 11, 1997 Andrus entered into anagreement to become a minority shareholder of PIC and vice-president. Andrus is and was at all material times registered as an investment counsel/portfoliomanager pursuant to the Act.
5. Mrs. G. L. is a client of PIC whose account was managed by Andrus. She is an 85 year old widow who is not competent to manage her financial affairs.During the material time, Andrus had trading authority over her accounts as well as a power of attorney.
6. Mr. N. S. and Mrs. E.S. are clients of PIC whose accounts were managed by Andrus. N.S. is 97 years of age. E.S. is 86 years of age. During the materialtime, Andrus had trading authority over their accounts as well as a power of attorney.
7. As at November 30, 1997 the reconciled bank balances of the trust and operating accounts of PFSI and PIC were as follows:
PFSI trust account: $ 8,579.42
PFSI operating account: $ 3,002.71
PIC trust account: $ .95
PIC operating account: $ 1,728.38
Overview
8. In the period June 1, 1996 to September 30, 1997 Andrus repeatedly withdrew funds from the trust accounts of PFSI and PIC for his own direct or indirectpersonal benefit. The source of the client funds which were deposited to the PFSI or PIC trust accounts, came from client bank or trading accounts over whichAndrus had discretion as portfolio manager and/or power of attorney.
9. During the relevant period, approximately $809,150.43 was withdrawn by Andrus from the bank or trading accounts of G.L., N.S. and E.S. and deposited tothe PIC or PFSI trust accounts ($489,618.44 from accounts of G.L. and $319,531.99 from the accounts of N.S. and E.S.). In defiance of his duties as aregistrant and in breach of the trust reposed in him, Andrus failed to use these funds for the benefit of his clients.
10. During the relevant period Andrus withdrew from the PIC and PFSI trust accounts approximately $798,027.15 for his own direct or indirect personal benefit.The transactions respecting the diversion of the trust funds and the source of those funds are summarized as follows.
Diversion of Trust Funds
11. On June 28, 1996 Andrus withdrew $500,000 from the PIC trust account for the benefit of Five Mildenhall Road Inc. ("FMR"), a company for which he wasthe sole officer, director and shareholder.
12. On July 15, 1996, Andrus electronically transferred $40,000 from the PIC trust account into his personal bank account.
13. On August 2, 1996, Andrus transferred $50,000 from the PIC trust account to the PIC operating account which funds covered the operating account'soverdraft position.
14. On November 14, 1996, a $20,000 cheque was issued made payable to a bank from the PFSI trust account and allocated as a payment to a client. In fact, ofthese funds, $7,500 were used to pay Andrus's outstanding personal VISA account nd the remaining $12,500 remains unaccounted for.
15. In a series of eight transactions between February 21, 1997 and July 25, 1997, Andrus electronically transferred to his personal bank account a total of$140,835.56 of client funds held in the trust account of PFSI. Each transaction was misrepresented in the books and records of PFSI as being a transfer for thebenefit of a client.
16. On June 26, 1997, Andrus electronically transferred $9,691.59 of client funds held in the trust account of PFSI into the account of a Toronto law firm tosettle the accounts of Andrus for legal services rendered unrelated to the affairs of either PFSI or PIC. This transaction was misrepresented in the books andrecords of PFSI as being a transfer for the benefit of a client.
17. On September 11, 1997, Andrus electronically transferred to his personal bank account $25,000 of client funds held in the trust account of PIC. Thistransaction was misrepresented in the books and records of PIC as being a transfer for the benefit of a client.
18. On September 29, 1997, a $25,000 cheque was issued from the PFSI trust account purportedly for the purchase of a money market instrument for a client.The $25,000 was actually made payable and deposited into Andrus's personal bank account.
Source of Diverted Funds
19. On June 28, 1996 Andrus caused $200,000 to be withdrawn from the trading account of N.S. and E.S. and deposited to the PIC trust account which fundswere "loaned" to FMR, a company for which Andrus was the sole officer, director and shareholder. The only security for the loan was a promissory note and thepersonal guarantee of Andrus. An interest payment of $40,000, which according to the promissory note was due on June 28, 1996, was never paid and theprincipal remains outstanding. No independent advice was provided to the clients prior to entering into the transaction. A direction purportedly signed by N.S.is dated "this twenty-eighth day of June, 1968".
20. On June 28, 1996 Andrus caused $300,000 to be withdrawn from G.L.'s trading account and deposited to the PIC trust account which funds were "loaned"to FMR. The only security for the loan was a promissory note and the personal guarantee of Andrus. An interest payment of $60,000, which according to thenote was due on June 28, 1996, was never paid and the principal remains outstanding. No independent advice was provided to the client prior to entering intothe transaction. A direction purportedly signed by G.L. is dated "this twenty-eighth day of June, 1968".
21. On July 12, 1996 Andrus withdrew $60,000 from the trading account of G.L. and deposited the funds to the PIC trust account. The funds were not used forthe benefit of G.L.
22. On July 12, 1996 Andrus withdrew $30,000 from the trading account of N.S. and deposited the funds to the PIC trust account. The funds were not used forthe benefit of the N.S.
23. On December 30, 1996 Andrus withdrew $22,000 from the bank account of E.S. and deposited the funds to the PFSI trust account. The funds were notused for the benefit of E.S.
24. On January 30, 1997 Andrus withdrew $42,531.99 from the Trading account of E.S. and deposited the funds to the PFSI trust account. The funds were notused for the benefit of E.S.
25. On March 14, 1997, Andrus withdrew $50,665.37 from the trading account of G.L. and deposited the funds to the PFSI trust account. With the exceptionof $11,623.60 used to pay the monthly rent at the nursing home at which G.L. resided, the remaining $39,041.77 was not used for the benefit of G.L.
26. On September 9, 1997 Andrus withdrew $25,000 from the bank account of N.S. and deposited the funds to the PIC trust account. The funds were not usedfor the benefit of N.S.
27. On September 25,1997 Andrus withdrew $90,576.67 from the trading account of G.L. and deposited the funds to the PFSI trust account. When the Monitorquestioned this transaction Andrus provided a direction dated September 22, 1997 purportedly signed by G.L. authorizing the withdrawl. As at September 22,1997 (and for sometime previous) G.L. had been diagnosed by her physician as not competent. The funds withdrawn were not used for the benefit of G.L.
PIC and PFSI's Business Practices
28. An examination of the books and records of PFSI and PIC by staff of the Commission and the monitor disclosed numerous deficiencies, including thefollowing:
i) the failure to reconcile the PFSI and PIC operating and trust accounts on a monthly basis;
ii) the failure to maintain proper subledgers accounting for client trust funds;
iii) the failure to require and\or maintain adequate supporting documentation for disbursements made from the trust accounts;
iv) the failure to maintain individual client files.
Conduct Contrary to the Public Interest
29. In his capacity as an investment counsel\portfolio manager Andrus failed to deal fairly, honestly and in good faith and abused his power of attorney in respectof his clients, specifically:
i) Andrus abused his authority and breached the trust reposed in him by withdrawing $809,150.43 from client bank and trading accounts in trust and proceedingto use $798,027.15 of those funds for his own direct or indirect personal benefit.
ii) Andrus caused his clients to enter into transactions which directly or indirectly advantaged Andrus without ensuring that the clients received independentadvice.
30. Andrus used his position as the president of PIC and president and compliance officer of PFSI to over-ride the established system of internal controls andspecifically:
i) Andrus failed to maintain documents required to be maintained to properly record the business transactions and financial affairs of PIC and PFSI; and
ii) Andrus altered documents to disguise the nature of the transaction and that he was the recipient of funds which were to be held in trust for the benefit ofclients.
31. By reason of the foregoing, Andrus engaged in conduct which was contrary to the public interest including, among other things, using client funds held intrust for his own benefit, placing client funds at risk, misleading clients as to the use of their funds and the status of their accounts, and entering into transactionswith clients which were to the clients disadvantage.
32. Such further and other allegations as counsel may advise and the Commission may permit.
DATED at Toronto, this 5th day of March, 1998.