Registered Advisor Sentenced to Jail Time

23 October 2018

By Uri Snir

On September 26, 2018, the Ontario Superior Court of Justice sentenced Daniel Tiffin to six months in jail for violations of the Securities Act (the “Act”). Tiffin and his company, Tiffin Financial Corporation (“TFC”) (collectively, the “Respondents”), were convicted of:

  1. Trading in securities without registration, in breach of s. 25(1) of the Act;
  2. Distributing securities without filing a prospectus, in breach of s. 53(1) of the Act; and
  3. Trading in securities while prohibited from doing so by an order of the Ontario Securities Commission (“OSC”).

The Respondents were initially acquitted of all charges in 2016. Earlier this year, the Court overturned the acquittals and substituted the above convictions.

Background: Tiffin was licensed to sell insurance-based investments. In 2014, the Respondents were disciplined by the OSC for trading in securities without a license. The OSC ordered severe sanctions against Tiffin and his company.

Soon after receiving these sanctions, Tiffin began soliciting funds by issuing promissory notes to his clients. He issued 14 promissory notes to six clients, worth a total of $700,000 (the “TFC Notes”). The interest on the TFC Notes ranged from 10% to 25%.

Staff of the OSC brought proceedings against the Respondents, charging them with three securities offences. The Respondents admitted that they were not registered to trade in securities, did not file a prospectus in relation to the TFC Notes, and were prohibited from trading in securities by order of the OSC at the time they were soliciting the funds represented by the TFC Notes. The only issue at trial was whether the TFC Notes were “securities” as defined by the Act. 

The Trial Decision: To determine whether the TFC Notes were securities, and therefore subject to the Act, the trial judge relied on the U.S. Supreme Court’s “Family Resemblance” test. According to that test, a promissory note is presumed to be a security, unless it bears a strong resemblance to one of a judicially crafted list of categories of instruments that are not securities. To determine whether a promissory note more closely resembles a security or an exempt instrument, a court evaluates the following four factors:

  1. Whether the borrower’s motivation is to raise money for general business use and whether the lender’s motivation is to make a profit.
  2. Whether the borrower’s plan of distribution resembles “common trading for speculation or investment”.
  3. Whether the investing public reasonably expects that the instrument is a security.
  4. Whether there is a regulatory scheme that protects the investor, other than securities laws.

The trial judge determined that the TFC Notes were similar to notes secured by a lien on a small business or its assets, being one of the “family” of non-security notes recognized by the U.S. Supreme Court. Since the TFC Notes did not meet the overall statutory definition of a security, the judge acquitted the Respondents of all charges.

The Appeal and Sentencing: The Court found that the trial judge erred in importing a U.S. test into Ontario securities law. The word “security” is defined in the Act, and prior to this case, no Ontario court had ever found that an instrument that meets the statutory definition of “security” should be exempted from the Act by the application of extra-statutory judicially crafted criteria.

The Court determined that the TFC Notes were “notes or other evidence of indebtedness” and therefore fit subsection (e) of the definition of “security” in s. 1 of the Act. They did not fall under any of the exemptions in the Act.

As the remaining facts were not in dispute, the Court allowed the appeal and ordered convictions against the Respondents.

At the penalty hearing, the Court reviewed the aggravating and mitigating factors against Tiffin and determined that restitution, on its own, was not sufficient. The Court also sentenced Tiffin to six months in jail, and 24 months’ probation.

The Court concluded that although Tiffin did not intend to defraud his clients, his offences were particularly egregious because he was a repeat offender. Despite the fact that Tiffin’s clients did not complain (in fact most of them vouched for him), the Court held that Tiffin was in a position of trust and took advantage of that position.

The Takeaway: Although some commercial notes are exempted from provisions of the Act, many are not. If individuals intend to raise money by issuing notes, it is important that they consult a securities lawyer to advise them on potential registration and prospectus requirements. Registered advisors must be particularly careful because they are considered to be in a position of trust. As this case shows, regardless of whether one acted in bad faith or intended to defraud, a violation of certain securities laws could result in jail time.

Update: For the second time in less than a month, a registered advisor in Ontario has been sentenced to jail. On October 17, 2018, the Ontario Court of Justice in Kitchener sentenced Michelle Dunk to two years less a day in jail after she was found guilty of fraud and three other violations of the Act, in connection with the sale of promissory notes. Dunk was also ordered to pay $158,435 in restitution.

Dunk’s conviction is more serious than Tiffin’s, as the Court found the sale of promissory notes in this case to be fraudulent. In her decision, Justice Melanie Sopinka wrote, “Ms. Dunk’s actions were motivated solely by financial gain without regard for the path of destruction she caused to the financial stability of the individuals she solicited.”

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