B.C. Securities Commission’s fight to collect penalties from fraudsters
Ex-mutual fund salesman was ordered to pay $17.5 million in fines. He hasn’t paid a cent.
On May 1, 2014, a B.C. Securities Commission tribunal wrapped up hearings in the case against David Michaels, a former Victoria mutual fund salesman who faced substantial fines for fraud. The day before those hearings concluded, he and his wife transferred their million-dollar Hawaiian condo into wife Joanne’s name alone for $10.
It’s a common move by those who are trying to put assets beyond the reach of the courts to avoid paying penalties or debts.
According to court documents, Michaels and his wife claimed the property transfer had nothing to do with the securities commission hearings, where Michaels was accused of fraudulently advising hundreds of clients to purchase $65 million in securities, most of which had become worthless.
During a B.C. Supreme Court examination — a legal mechanism creditors use to determine a debtor’s ability to pay — Michaels said he transferred the condo to his wife because if he went into business again, it would reduce liability if he were sued.
“Just trying to separate myself from inflicting a liability on another family member,” said Michaels, according to transcripts filed in court.
During the examination, which took place in 2015 and 2017, William L. Roberts, the lawyer representing the securities commission, called Michaels’s assertion “absurd.”
Six months after the Hawaiian condo transfer, a B.C. Securities Commission panel banned Michaels from B.C.’s investment markets, slapped him with a $17.5-million fine and ordered him to repay $5.8 million in commissions.
The panel ruled he had obtained the commissions as a result of illegally and fraudulently advising 484 clients to purchase the $65 million in securities between June 2007 and December 2010.
These were so-called exempt securities, or private-placement securities, to be sold to investors only if they understood the risks. The investments included participation in companies that did not trade on a stock market — including an oil and gas start-up and a land development firm — and as a result were very difficult to resell.
The average age of Michaels’s clients was 72.
Michaels attracted many clients through a weekly promotional radio program on CFAX 1070 (he paid for the air time) where he proclaimed: “I love helping seniors make money.”
More than three years after the securities commission levied the penalties, Michaels has yet to pay a single cent.
He is among more than 80 fraudsters who have harmed thousands of investors in the past decade — in B.C., other parts of Canada, the United States and as far away as Switzerland — yet have escaped paying large penalties issued by the B.C. Securities Commission.
Between the 2007-08 and 2016-17 fiscal years, the commission collected less than two per cent of the $510 million it levied in fines and in orders to pay back the proceeds of fraudulent activities, according to commission records.
Hundreds of pages of court documents in British Columbia and Hawaii in the Michaels case — outlining the B.C. Securities Commission’s effort to enforce partial payment — provide rare insight into one fraudster’s fight to hold onto assets.
$875,000 US paid for condo
According to the court records, the Michaelses paid cash — $875,000 US in 2009 — for the Hawaiian condo. Most of the money for the purchase came from Michaels’s business, Michaels Wealth Management Group. The 1,400-square-foot, twostorey, three-bedroom, two-bathroom condo is at the tip of the island of Hawaii, on lush grounds adjacent to a golf course and the ocean.
When the B.C. Securities Commission launched court action in Hawaii to ensure the condo was not sold and would be available to help pay penalties, Michaels tried but failed to have it dismissed.
Michaels’s lawyer, Sean K. Boyle, declined comment.
“Unfortunately, I am unable to provide assistance with this matter,” Boyle said in an email.
Doug Muir, director of enforcement for the B.C. Securities Commission, said the court actions remain in the discovery stage. “In general, what we are looking for is whether or not there are assets that Mr. Michaels legally owns that we can get, in order to satisfy our judgments,” Muir said.
The commission launched its court action in March 2015 — 33 months ago. Muir said he does not know who long it will take to conclude the case; $67,000 has already been spent on outside legal costs.
The securities commission’s court action also seeks to include the Michaelses’ Vancouver Island home, held solely in wife Joanne’s name, as fair game to pay off the penalties, as money earned by husband David may have also helped support the household.
B.C. Assessment pegged the value of the house at $707,000 in 2017.
On a sunny, cool afternoon this past week, Michaels was at the house in Mill Bay. A well-kept, silver Mercedes S550 was parked in front of the 3,700-square-foot house. According to court documents, the vehicle was purchased through numbered company 509802 B.C. Ltd., the legal entity for the Michaels Wealth Management Group, from which he sold the securities to the 484 clients.
Also parked on the property was a sporty convertible, a Mitsubishi Eclipse.
Asked when he answered the door if he would discuss his B.C. Securities Commission case with Postmedia, a look of surprise, then annoyance, flashed across Michaels’s face. “No,” he said, shutting the door.
Later that night, an email to Postmedia from a David Michaels stated that Michaels followed every B.C. Securities Commission rule and procedure for selling exempt securities.
“If you want to know the truth, let me know,” said the email.
Postmedia responded, noting the securities commission had ruled against Michaels on these issues and asking if he intended to pay the penalties. There was no response.
Court records provide some insight into Michaels’s state of mind over the penalties and whether he believes he should have to use his assets to pay the large fines.
Asked during the examination whether, if at some point the Hawaiian condo were sold, he would use the money to pay off debts, Michaels said he was not sure. (In June 2015, the Michaelses transferred the condo back into both their names on recommendation of their lawyer, the couple said during the court examinations.)
“You might keep the money?” Michaels was asked by William Roberts, the commission’s lawyer.
“Possibly, I don’t know,” he answered.
Told he was legally obligated to pay the penalties, Michaels responded: “I don’t know if I’m legally responsible to pay off these debts.”
How credit lines were used
According to the court records, the value of the couple’s assets — the $707,000 Mill Bay home and the $1.4-million Hawaiian condo — has been reduced by lines of credit totalling more than $550,000. The credit has been used to pay for living expenses and lawyers fees.
An approximately $320,000 line of credit on the Mill Bay home had been maxed out by 2014, but was paid off that year when Michaels received a $400,000 US settlement related to one of the companies that his clients had invested in and lost money, Pepper Creek.
According to court documents, Michaels used the remainder of the $400,000 to help pay for his three children’s education, which cost $50,000 to $60,000 a year. That included tuition for university and Brentwood College, a private school minutes from the family’s Mill Bay home.
There is also a family trust, but Michaels in his examination said he didn’t know if he was a trustee, whether the trust existed or what it did. “It is a complete mystery to you?” he was asked. “Yes,” he responded. Michaels appears to still have aspirations to work in the financial industry.
He applied for a job selling securities in the Caribbean island of Turks and Caicos, but was rejected by Temple Financial because of “an allegation of fraud,” according to court documents.
In 2016, he travelled to Mexico to train to sell timeshares in condos and worked there for a short period before returning to B.C.
Victoria resident Alan Margison lost more than $1 million in investments he placed through Michaels.
Margison said the losses have had a significant effect on his and his wife’s lives even though they managed to keep their house.
“[Michaels’s] favourite phrase was: ‘How can it go wrong? It’s a no-brainer,’ ” Margison recalled.
The losses have been heartbreaking, he said.
“I do feel that [Michaels] should feel the pinch as much as the rest of us. If he still has a house and a condo in Hawaii at his disposal — the government should grab it.”
In its latest court action this summer, the securities commission sought a B.C. Supreme Court order asking that all past, current and future rents and income from the Michaelses’ Hawaiian property be paid into a trust while the case is being decided.
That action was adjourned a month later.
Muir said he could not speak specifically about why, but noted adjournments are not unusual and the securities commission has not given up on the application.
Muir defended the securities commission’s efforts to collect penalties from fraudsters in the past decade, noting that it has carried out other examinations to determine if there are assets held by fraudsters, and also uses writs of seizure and sale carried out by bailiffs.
However, asked for a list of these actions in the past decade, and their outcomes, the commission declined. Spokeswoman Alison Walker said they do not “formally” track examinations and seizures.