Mount Real charges mount

Owners of those notes have lost $130 million after Quebec’s Autorité des marchés financiers (AMF) seized the company, in part for stopping redemptions. Marston sold $16 million of the notes, which paid interest of up to 10.5%. Ironically, he appears to have owned $500,000 of the notes himself, since he’s listed as a creditor of Mount Real.

The charges against Marston are part of a broader effort, both by IIROC and the AMF.

The AMF charged 24 individuals with 619 breaches of securities regulations in January 2007, including acting without being registered as an advisor, distributing unregistered securities and providing misleading information to clients. Marston was one of those accused.

To date, five of the individuals have been found guilty and have been fined $802,000, while one has been found not guilty.

Among those charged is Yves Méchaka, branch manager at iForum Securities, which began as Norshield Fund Management in 1996. He, too, was to face an IIROC hearing in December, but it has been postponed once again. Méchaka owned 25% of iForum’s shares.

Marston, formerly with iForum Securities, has been charged by IIROC with off-book transactions of securities of Mount Real affiliates, as well as other off-book transactions; sales of unregistered promissory notes issued by Mount Real affiliates; making false and misleading consolidated portfolio statements; failing to disclose a conflict of interest, since Mount Real was a shareholder in iForum; giving unsuitable recommendations; failing to provided complete and accurate information to clients about the state of their investments; and making unauthorized disclosure of client information.

A fellow iForum advisor, Éric Couture, has also been charged by IIROC with holding securities off book and failing to disclose a conflict of interest. Couture has also been charged by the AMF.

For his part, Méchaka is charged by IIROC with, among other things, selling unregistered promissory notes; failing to supervise five registered representatives selling unregistered promissory notes using off-book accounts; making off-book transactions; failing to supervise 12 registered representatives with off-book accounts; failing to supervise two mutual fund representatives who traded in securities; failing to supervise their off-book activity; failing to supervise the account statements they delivered to clients; failing to know clients’ objectives; failing to disclose a conflict of interest; failing to correct sales compliance deficiencies; failing to set up an adequate supervisory system; failing to update information on positions held with two other financial services companies; and failing to co-operate with IIROC.

For Marston, this isn’t his first brush with the regulatory authorities. In 1997, he was handed a three-month suspension for transferring client accounts without their authorisation, making non-authorised transactions, acting as a financial planner without having any certification, acting as a registered representative for two firms at once, and offering investments without a prospectus, according to IIROC.

IIROC outlines current allegations against Marston in a bare-bones English notice. The particulars of the charges against Marston are more detailed in the French version.

Marston sold 64 clients 72 unregistered promissory notes issued by Mount Real affiliates, amounting to $5.3 million. He also renewed 55 notes. In addition, he sold 106 clients 42 different securities, including Mount Real-related notes worth $10.7 million that were held off-book at B2B Trust. B2B’s relationship with iForum was never disclosed to IIROC. In some client statements, IIROC alleges, he assigned a higher value to the notes than they actually possessed. Apart from not disclosing a conflict of interest, given that Mount Real held shares in iForum, IIROC alleges that Marston sold inappropriate investments to seniors, failed to inform them of Mount Real’s perilous financial state in the days before it was seized by the securities regulators, and gave out information about a client in a doomed effort to prevent Mount Real from being liquidated.

On the conflict of interest charge, IIROC notes that the majority shareholder of iForum was owned by Mount Real. The president and COO of Mount Real, Joseph Pettinicchio, was in turn president of iForum.

Marston is also accused of selling the promissory notes to a client, then aged 81, whose objectives were reported as 10% income, 60% mid-term growth and 30% long-term growth. The client had an annual income of $40,000 and assets of $1 million. The client received a note of $101.8 thousand. Just days before Mount Real failed, Marston sold the client another note for $100,000.

Finally, IIROC has accused Marston of providing information to another party so that a client could be solicited over the nomination of a trustee in bankruptcy for Mount Real.

There are other judicial actions in progress in the convoluted Mount Real file. In September, the AMF laid 682 charges against five of the directors of Mount Real, calling for prison terms and heavy fines.

The AMF charges that the directors engaged in an elaborate ruse of fictive transactions to dress up the balance sheet and mislead the public. In IIROC’s notice against Marston, La Presse is given credit for first alerting the regulators to Mount Real’s shaky finances. The AMF further charges that Mount Real subsidiaries issued illegal promissory notes to shore up their finances, since revenues from telemarketing consisted largely in overdue accounts receivable.

In particular, the AMF has made 308 charges against Lino Matteo, Mount Real’s chairman and CEO, and is seeking a $204-million fine and a prison term of five years. Among those charged with him are Pettinicchio and Mount Real controller Paul D’Andrea. The AMF is calling for a five-year sentence and a fine of $63.5 million for Pettinicchio, and a $137.5 fine and a five-year sentence for D’Andrea.

Between the most recent filing and the January charges, the AMF is seeking a total of $555.7 million in fines.

But that’s not the end. Quebec courts have sanctioned a class action suit against Matteo, Mount Real controller Paul D’Andrea, Mount Real’s accountants, and B2B Trust and Penson Canada. The class action suit charges that investors were victims of “a vast fraud perpetrated by unscrupulous individuals, made possible by the negligence of financial services professionals and businesses,” and characterizes Mount Real as a Ponzi scheme. Despite glowing financial statements, the accounts receivable constituted roughly half the revenues of Mount Real from 1998 forward, so that over eight years, Mount Real racked up $172 million in subscription revenue, but $99 million of that was in accounts receivable.

(11/28/08)