Founder of Crystal Wealth banned, penalized for misappropriating funds

The Ontario Securities Commission has permanently banned former registrant Clayton Smith from trading in securities, acting as a director or officer of any issuer and becoming a registrant, according to a settlement agreement that was approved on June 14.

Smith “engaged in fraud” between April 2012 and April 2017, says the OSC, which has ordered him to pay an administrative penalty of $250,000 and costs of $50,000.

Over the five-year period, Smith was OSC-registered; was “an experienced market participant”; and was sole officer and director, ultimate designated person (UDP) and chief compliance officer (CCO) of former investment fund manager Crystal Wealth, the commission says in the agreement.

Smith founded the company in 1998, and the firm created and managed the Crystal Wealth Funds, “which were structured as open-ended mutual fund trusts and distributed on a prospectus-exempt basis,” OSC says.

As of April 20, 2017, the firm recorded a value for the funds’ assets under management of about $193 million, the commission says.

Smith, his firm and his holding companies “engaged in fraud” involving two funds—a mortgage fund and a media fund—from which about $11.8 million was misappropriated, says the OSC’s oral reasons for approval document.

Smith “caused monies to be advanced” from the funds, OSC says in the agreement, and “certain of the monies were transferred directly to Smith’s holding company […].”

Further, the agreement says, “Smith also arranged to personally receive payments from an entity that sold investments to the media fund, creating a material conflict of interest that Crystal Wealth neither responded to nor disclosed.”

Crystal Wealth “breached its obligation to discharge its duties honestly, in good faith and in the best interests of the […] funds,” the agreement says. And both Smith and the firm “failed to deal fairly, honestly and in good faith with clients.”

Further, Smith failed to fulfil his UDP and CCO obligations, and he “misled [OSC] staff during his examination under oath about his relationship to one of the corporate entities involved in the fraud,” the agreement says.

In April 2017, Grant Thornton Limited was appointed by OSC as “receiver and manager of the assets of Smith, personally, and the assets of Crystal Wealth, the Crystal Wealth Funds, CLJ Everest, 115 Limited and receiver of a bank account owned by Chrysalis,” the agreement says.

And, as of May, almost $31 million had been returned to investors, OSC says in the agreement.

The commission’s oral reasons for approval document notes why no disgorgement has been ordered: “Smith has no remaining assets.” It adds that Grant Thornton Limited’s appointment “is thus equivalent to a disgorgement order […].”

Read the settlement agreement and the oral reasons for approval.

Staff

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