Rep fined $500,000 over leveraged investments

On December 22, 2011, the MFDA issued a notice of hearing commencing a disciplinary proceeding against Thomas G. Arseneau. It alleged the following:

Allegation #1: In about May 2007, he failed to observe high standards of ethics and conduct in the transaction of business, and wasn’t of such character and business repute as is consistent with the standards prescribed by MFDA Rule 2.1.1 when he falsely reported on a loan application. He submitted to a lender that client K.A. owned a cottage property she didn’t in fact own in order to increase the likelihood that the lender would provide an investment loan to the client.

Allegation #2: Between 2004 and 2007, he misrepresented, or failed to fully and adequately explain, the risks and benefits of leveraged investment recommendations that he made to at least 20 clients. He thereby failed to ensure the leveraged investment recommendations were suitable and appropriate for clients and in keeping with the investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Read: Beware leveraged loans

Allegation #3: Between 2004 and 2007, he failed to ensure his leveraged investment recommendations were suitable and appropriate for the clients and in keeping with their investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1, when he made leveraged investment recommendations to:

a) at least 14 clients, who were not suitable and appropriate having regard to the relevant “Know Your Client” factors including, but not limited to, the clients’ ability to afford the costs associated with the investment loans; and

b) at least 12 clients, who were not suitable and appropriate having regard to the requirements regarding the use of leveraging set out in Investia’s policies and procedures.

Allegation #4: Between 2004 and 2008, he relied upon the lender’s decision to approve the investment loans for 155 clients as the determination that the leveraging recommendations were suitable for those clients, without performing his own assessment of the suitability of the leveraging recommendations that he made to the clients, contrary to MFDA Rules 2.2.1, 2.5.1 and 2.1.1.

Read: Talking to clients: Leveraged investing

The MFDA says the first appearance was conducted by teleconference and held on February 17, 2012. Taking part were the panel and Charles Toth, MFDA counsel. Arseneau wasn’t in attendance.

At the teleconference, the MFDA says the panel was advised by Toth that despite several attempts to serve the first appearance notice on Arseneau, he wasn’t served and couldn’t located. And on March 9, 2012, the adjourned first appearance resumed again by teleconference.

Three days before the scheduled appearance, however, the MFDA says Arseneau sent a letter to MFDA staff confirming he’d received the notice of hearing. The decisions and reasons document says he wrote:

“I strongly believe that another meeting with you people is not going to change anything; therefore, I am not interested in discussing this matter any further, as your statements and allegations are incorrect and do not reflect what I told you.”

The hearing commenced on June 26 in Fredericton, New Brunswick. The MFDA was represented by its counsel, Charles A. Toth and Rohit Kumar. The MFDA says Arseneau was not in attendance, nor did counsel represent him.

At the hearing’s conclusion, the MFDA says, “The Panel is quite satisfied and so finds that each of the four Allegations have been proved and the Respondent has failed to properly perform all that the Allegations allege.”

The panel imposed a permanent prohibition on Arseneau to conduct securities-related business with an MFDA member. It also imposed a “significant fine of $500,000 […] based on the number of claimants, the amounts borrowed, the amount of their losses, and the amount of commissions received as a result of his misconduct with these complainants.”

It also stressed the need to “deter others from this type of conduct, so outrageously outside the bounds of the conduct required when promoting borrowing for leveraged investments, [as well as] the very basic requirements to KYC and determinations of suitability.”

The Panel also assessed and awarded costs to the MFDA in the amount of $20,000.

Read the full decisions and reasons document.

Also read:

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4 things to consider when borrowing to invest

Face-off: Is leverage worth the risk?