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The Ontario Securities Commission says it will allow a banned mutual fund rep to continue to serve as a director of real estate investments so that he can generate enough income to try to repay more than $1 million to harmed investors.

An OSC settlement agreement, released in June, found that the former mutual fund advisor, Nixon Lau, and his related companies had misled investors between 2007 and 2012. Lau and the companies were ordered to repay the investors more than $1 million in disgorgements, plus a $70,000 fine and $5,000 in costs.

“[T]here are two novel features to the terms of settlement put before us today for approval,” says the subsequent OSC settlement approval, dated June 26 and released today. “The first is the fact that the settlement agreement contemplates a limited ability for Mr. Lau to continue to act as a director and officer and retain assets in order for the respondents to use the real estate holdings to generate income for repayment to harmed investors.”

The second novel aspect, the OSC says, is that commission staff may not be done investigating Lau because “the respondents’ books and records were not complete.” As Lau repays the investors, the OSC is leaving the door open to prosecute on the basis of new information “[i]n the event that additional harmed investors come to the attention of the Commission.”

In a statement to the OSC, Lau “expressed remorse for his conduct,” the commission says, and says he’s committed to repay what’s owed.

The backstory

Lau had been the “directing mind” of the Income Strategix funds, the OSC says, as well as the sole signing authority on the bank accounts for the funds and the person responsible for all trading decisions.

After the Income Strategix funds were marketed through seminars in the Greater Toronto Area, and in small meetings and online, investors were invited to join a limited partnership agreement called “The Club Charter.” Investors were told they could redeem investments at the net asset value per unit if the funds were left in place for at least four months. Their principal, OSC says Lau told investors, was guaranteed.

More than 70 individuals or family investors put money into the funds between July 2007 and September 2012, the OSC says, collectively amounting to about $5.4 million.

But, in 2010, following the 2008 downturn, Lau and Income Strategix failed to disclose to investors that the funds were not producing returns — and in fact losing money. Despite the book losses, Lau and Income Strategix paid and reported distributions to investors as though the funds were earning returns, the OSC says.

“By at least 2012, Mr. Lau and Income Strategix knew they were using funds raised from new investors to make distributions to earlier investors,” the commission decision says. “Depending on the nature of their investment, investors were provided monthly distributions or statements showing an increase in the value of their units when, in fact, the Income Strategix funds were incurring a loss.”

At one point, Lau explained a cease trade order – made by the OSC – by indicating that an investor had requested a withdrawal. Some investors chose to not redeem investments based on misrepresentations made by Lau and Income Strategix, the OSC says. It adds: “Others invested their money based on these misrepresentations.”

At least 22 people did not get a return on their principal, the OSC says. By the time the OSC issued its notice of hearing this year, the principal owing to investors “was at least $1,048,803.93,” the OSC says.

Originally published on Advisor.ca
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