ALBERTA SECURITIES COMMISSION

DECISION

Citation: Kustom Design Financial Services Inc., Re, 2010 ABASC 179 Date: 20100422

Kustom Design Financial Services Inc., Kustom Design Group Inc.,

Hightide Management Inc., Synergy Group (2000) Inc.,

Michael Edward Lepitre, Mark Adrian Jones and Leonard Jonathan Zielke

Panel: Glenda A. Campbell, QC

Beverley A. Brennan, FCA

Kenneth B. Potter, QC

Appearing: Tom McCartney

for Commission Staff

Michael Edward Lepitre and Mark Adrian Jones

for Kustom Design Financial Services Inc.,

Kustom Design Group Inc., Hightide

Management Inc. and themselves

Alistair Crawley and Anna K. Markiewicz

for Synergy Group (2000) Inc.

Dates of Hearing: 5-8 and 19 October 2009; and 5 January 2010

Date of Decision: 22 April 2010

#3499897 v1

I. INTRODUCTION

[1] In an amended amended notice of hearing dated 1 October 2009 (the "Notice of

Hearing"), staff ("Staff") of the Alberta Securities Commission (the "Commission") allege that

seven respondents (the "Respondents") – Kustom Design Financial Services Inc. ("Kustom

Financial"), Kustom Design Group Inc. ("Kustom Group"), Hightide Management Inc.

("Hightide"), Synergy Group (2000) Inc. ("Synergy"), Michael Edward Lepitre ("Lepitre"), Mark

Adrian Jones ("Jones") and Leonard Jonathan Zielke ("Zielke") – contravened Alberta securities

laws and engaged in conduct contrary to the public interest by trading and distributing securities

without registration and a prospectus and, also, in the case of Kustom Financial, Lepitre and

Jones, by acting as advisors without registration.

[2] Earlier, on 28 June 2007, the Commission issued an interim order against Kustom

Financial, Kustom Group and Hightide (collectively, the "Kustom Companies") and Lepitre,

directing that all trading in securities of the Kustom Companies cease, that they cease trading in

all securities and that all exemptions contained in Alberta securities laws do not apply to them.

The Commission subsequently extended that order, as modified, until the hearing in the matter is

concluded and a decision rendered, or until otherwise ordered.

[3] The hearing into the merits of the allegations (the "Merits Hearing") began on 5 October

2009. All Respondents but Zielke participated in the Merits Hearing; Lepitre and Jones

participated for themselves and apparently for the Kustom Companies, and Synergy was

represented by counsel. We received documentary evidence and heard testimony from two Staff

investigators, nine Alberta investors or purchasers (for privacy reasons, we identify investor and

purchaser witnesses by their initials) and an officer of Synergy. Neither Lepitre nor Jones

testified or called witnesses, and no one testified on behalf of or for the Kustom Companies. We

received written submissions from Staff on 2 November 2009 and from all Respondents but

Zielke on 30 November 2009, and we received written reply submissions from Staff on

7 December 2009. We heard oral submissions from Staff, Synergy and Lepitre on 5 January

2010.

[4] Our decision and reasons on the merits of the allegations against the Respondents follow.

Stated briefly, we find that:

contrary to sections 75(1)(a) and 110(1) of the Securities Act, R.S.A. 2000, c. S-4

(the "Act"):

Kustom Financial, Lepitre and Jones illegally traded in and distributed

securities of the Kustom Companies;

Kustom Group illegally traded in and distributed securities of Kustom

Group;

Hightide illegally traded in and distributed securities of Hightide; and

Synergy, Kustom Financial, Lepitre, Jones and Zielke illegally traded in

and distributed securities issued in conjunction with Synergy's

"Alternative Tax Strategy Program";

contrary to section 75(1)(b), Kustom Financial and Lepitre acted as advisors

without being registered to do so; and

in so doing, the Respondents engaged in conduct contrary to the public interest.

II. PRELIMINARY MATTER

A. Evidentiary Standard

[5] The appropriate standard of proof in Commission enforcement proceedings is the balance

of probabilities civil standard. That standard of proof was recently clarified by the Supreme

Court of Canada in F.H. v. McDougall, 2008 SCC 53 (at paras. 40, 45-46):

. . . I think it is time to say, once and for all in Canada, that there is only one civil standard of proof

at common law and that is proof on a balance of probabilities. Of course, context is all important

and a judge should not be unmindful, where appropriate, of inherent probabilities or

improbabilities or the seriousness of the allegations or consequences. . . .

. . .

To suggest that depending upon the seriousness, the evidence in the civil case must be scrutinized

with greater care implies that in less serious cases the evidence need not be scrutinized with such

care. I think it is inappropriate to say that there are legally recognized different levels of scrutiny

of the evidence depending upon the seriousness of the case. There is only one legal rule and that

is that in all cases, evidence must be scrutinized with care by the trial judge.

. . . evidence must always be sufficiently clear, convincing and cogent to satisfy the balance of

probabilities test. . . .

[6] Thus, we are to determine whether Staff proved, on a balance of probabilities, the

allegations made against the Respondents in the Notice of Hearing.

B. Evidentiary Basis for Findings

[7] In making our findings, we rely on the testimony given before us and on the documents

admitted into evidence. The latter included documents relating to investments or purchases

(entered into evidence through either a Staff investigator or investor or purchaser witnesses),

corporate registry records and excerpts from transcripts of four interviews of Lepitre, Jones,

Gary Akins ("Akins") and Enrique (also known as Chico) Toscano ("Toscano") conducted under

oath or affirmation by Staff investigators. Thus, while Staff, in their written submissions,

referred us to portions of these transcripts not admitted into evidence, we do not consider or rely

on any such portions in making our findings.

[8] We find the evidence to be sufficiently clear, convincing and cogent to support our

findings and conclusions as discussed below.

III. FACTUAL BACKGROUND

[9] We summarize the factual background relevant to our decision, derived from the

testimony heard and the documentary evidence received.

A. Respondents and Other Entities

[10] Lepitre and Jones are residents of Calgary, Alberta. Neither Lepitre nor Jones has ever

been registered to trade in securities, and neither is registered to act as an advisor, in Alberta.

Zielke, a British Columbia resident during the relevant period, has never been registered to trade

in securities in Alberta.

[11] According to Alberta Corporate Registration System ("CORES") records, Kustom

Financial was incorporated in Alberta as 1136974 Alberta Ltd. on 9 November 2004 and

renamed "Kustom Design Financial Services Inc." on 20 January 2006. Also according to

CORES records, Jones and Lepitre were Kustom Financial's directors at incorporation and as of

1 January 2007, and each owned 50% of its shares. Kustom Financial held educational –

financial and tax planning – seminars and offered and sold investments in the Kustom

Companies (which then re-invested the invested money in other ventures) and "units in small to

medium sized, privately owned businesses" through Synergy's "Alternative Tax Strategy

Program" (the "Synergy Tax Program").

[12] Kustom Financial has never been a reporting issuer, and is not registered to act as an

advisor, in Alberta. We also infer from the evidence relating to the investments in the Kustom

Companies, with emphasis on that relating to the Kustom Companies' purported reliance on the

"family, friends and business associates" exemption, that Kustom Financial is not registered to

trade in securities in Alberta. Kustom Financial has never filed a prospectus with the

Commission or received a receipt therefor.

[13] According to Nevada corporate registry records, Kustom Group was incorporated in

Nevada on 2 June 2006 (which status was revoked on 1 July 2008), Lepitre was its president and

director and Jones was its secretary and treasurer. Through undertakings, Lepitre informed that

Kustom Group is owned by a Belize company of the same name. It appears that Kustom Group's

business activity was limited to the sale of investments in itself and the re-investment of the

invested money in other ventures.

[14] Kustom Group has never been a reporting issuer in Alberta. We infer from the evidence

relating to the investments in the Kustom Companies, with emphasis on that relating to the

Kustom Companies' purported reliance on the "family, friends and business associates"

exemption, that Kustom Group is not registered to trade in securities in Alberta. Kustom Group

has never filed a prospectus with the Commission or received a receipt therefor.

[15] According to CORES records, Hightide was incorporated in Alberta on 27 October 2006,

Jones and Lepitre were its directors at incorporation and as of 22 July 2008, and each owned

50% of its shares. It appears that Hightide's business activity was limited to the sale of

investments in itself and the re-investment of the invested money in other ventures.

[16] Hightide has never been a reporting issuer in Alberta. We infer from the evidence

relating to the investments in the Kustom Companies, with emphasis on that relating to the

Kustom Companies' purported reliance on the "family, friends and business associates"

exemption, that Hightide is not registered to trade in securities in Alberta. Hightide has never

filed a prospectus with the Commission or received a receipt therefor.

[17] Kustom Design Professional Services Corp. ("Kustom Professional") provided tax and

accounting services. It, according to CORES records, was incorporated in Alberta on 1 June

2004, Jones and Lepitre were its directors at incorporation and as of 1 June 2006, and each

owned 50% of its shares. We refer to the Kustom Companies and Kustom Professional together

as the "KD Group".

[18] According to Ontario corporate registry records, Synergy was incorporated in Ontario on

15 June 2004. Zielke was its western regional manager (regional manager for British Columbia,

Alberta and Saskatchewan). Synergy described itself as specializing in "effective tax

'compression' combined with efficient wealth development" and offered alternative tax

strategies. Units in the Synergy Tax Program were sold in Alberta by Kustom Financial pursuant

to an "Agent Agreement" between Synergy and Kustom Financial (the "Agent Agreement").

[19] Synergy has never been a reporting issuer, and is not registered to trade in securities, in

Alberta. It has never filed a prospectus with the Commission or received a receipt therefor.

[20] According to Ontario corporate registry records, Integrated Business Concepts Inc.

("IBC") was incorporated in Ontario on 14 June 1994. We infer from the evidence relating to the

Synergy Tax Program that IBC and Independent Business Consulting Association ("IBCA"),

entities also involved in the program, shared Synergy's view that the program was not subject to

Alberta securities laws. Accordingly, and there being no evidence to the contrary, we further

infer that neither IBC nor IBCA filed a prospectus with the Commission or received a receipt

therefor in relation to the Synergy Tax Program.

B. Investments and Purchases

1. Money Raised

[21] From April 2004 through April 2006, Kustom Financial raised approximately US$1.9

million, most of which came from Alberta investors.

[22] From June 2006 through December 2006, Kustom Group raised almost US$3.2 million, a

significant portion of which came from Alberta investors.

[23] From April through October 2006, Hightide raised approximately US$613 210 from

Alberta investors.

[24] From December 2005 through January 2007, Kustom Financial sold units in the Synergy

Tax Program that raised approximately $2.4 million, most of which came from Albertans.

2. Solicitation Activities

(a) The Kustom Companies

[25] The Kustom Companies operated out of the same Calgary office (the "Kustom Office").

Kustom Financial solicited prospective investors to purchase investments in the Kustom

Companies, and Kustom Group and Hightide solicited prospective investors to purchase

investments in their respective companies, using the following means:

Kustom Financial sponsored educational seminars or information sessions

addressing the elimination of debt, minimization of tax and accumulation and

preservation of wealth. Those attending these information sessions – apparently

promoted in part via e-mail and online – were introduced to investments in the

Kustom Companies as well as "products", such as tax products, carried through

Kustom Financial's "strategic alliances".

About 20 commissioned associates employed by or under contract to Kustom

Financial (whose names were provided through counsel for Lepitre) referred

prospective investors to investments in the Kustom Companies.

Some of those seeking tax or accounting advice or services from the KD Group

were introduced to investments in the Kustom Companies.

The Kustom Companies apparently used the Internet to draw attention to

investments, presumably including investments in the Kustom Companies.

[26] In his investigative interview, Lepitre stated that, at Kustom Financial, "I am training

people [Kustom Financial associates] to educate people on Biblical principles of finance".

Lepitre elaborated about Kustom Financial's five-step plan or program (the "Five-Step

Program"):

We have a five-step plan, and the first step involves putting people in what's called a closed-circle

budget. Most people, I find, have not learned of finances in high school; they don't get the proper

training. So everything -- we learn and we grow to teach people so that they can, first of all, get

on a budget; second of all, eliminate debt; third of all, legally minimize tax; and fourth of all,

accumulate wealth; fifth of all, preserve the wealth that they've created.

. . .

What we basically have done is, on the education component, it gives people the free education

that empowers them. Then they can choose different strategic alliance and different products we

may carry through our strategic alliances . . .

(b) Synergy

[27] Similarly, through its information sessions, commissioned associates and apparently the

Internet, Kustom Financial solicited the purchase of units in the Synergy Tax Program. Also,

some of those seeking tax or accounting advice or services from the KD Group were told that

they could minimize taxes if they purchased units in the Synergy Tax Program through Kustom

Financial.

[28] In his investigative interview, Jones also spoke of the Five-Step Program:

We have a five-step program, and we work our way through starting with creating -- helping

people create proper budgets. We call it a closed-circle budget, and we help them understand what

a good debt is and a bad debt is and help them find different ways to eliminate their bad debts and,

where possible, turn them into good debts. And we discuss different tax strategies, ways of

minimizing your taxes, this would be step three, minimizing your taxes through write-offs,

through tax shelters, through different types of programs, like the Synergy program. Step four

was helping them create wealth, and step five is to help them maintain wealth through family

trusts, et cetera.

[29] Under the Agent Agreement, Synergy retained Kustom Financial to place "clients" into

the Synergy Tax Program. The Agent Agreement provided for Synergy's payment to Kustom

Financial of commissions described as "a percentage of client's funds committed to the

Alternative Tax Strategy Program". The Agent Agreement, although not signed or dated,

showed Zielke, western regional manager, as the signatory for Synergy and Lepitre as the

signatory for Kustom Financial. Synergy ultimately paid Kustom Financial commissions of

approximately $240 000.

[30] Although Zielke did not attend the Merits Hearing or offer any evidence, Synergy's

executive vice-president David Prentice ("Prentice") explained Zielke's role at Synergy. Zielke

was Synergy's western regional manager throughout the relevant period, although at the time of

the Merits Hearing he was no longer with Synergy. While Synergy's western regional manager,

Zielke was responsible for recruiting and guiding agents (also referred to as associates or

advisors) such as Kustom Financial, entering into agent agreements (such as the Agent

Agreement) for the sale of units in the Synergy Tax Program on behalf of Synergy, providing the

program documentation to agents, setting up presentations and attending seminars to speak about

the program, and dealing with existing and potential purchasers under the program. Indeed,

agents such as Kustom Financial were "under the direct guidance of [Zielke]".

IV. INVESTMENTS IN KUSTOM COMPANIES

A. Documentation

[31] Investments in the Kustom Companies generally involved the same documentation. The

three principal documents for each investment were: a promissory note ("PN"); an irrevocable

letter of assignment ("ILA"); and a private funds management agreement ("PFMA").

[32] The PNs generally identified the Kustom Company involved as the borrower, identified

the investor as the lender and indicated the amount of the loan. Interest payable under the PNs

for investment in Kustom Financial or Kustom Group ranged from 3 to 5% per month, payable

quarterly. Interest payable under the PNs for investment in Hightide was 50% per annum,

payable 30 days after the year's end. According to the PNs, once an investment was "placed",

the PN in question was to be "replaced" by an ILA.

[33] The ILAs, generally on the letterhead of the Kustom Company involved as the borrower,

purported to limit the liability of that Kustom Company to the principal only, identified the

investor and stated the amount invested and often the security therefor (for example, "RBC

Centura Bank" in Georgia, "Bank: Great Florida Bank", and "Lien on Land" in Alberta).

[34] The PFMAs, also generally on the letterhead of the Kustom Company involved as the

borrower, identified that Kustom company as the "Private Funds Manager" and the investor as

the "Private Funds Principal", stated the amount invested and the rate of return and purported to

incorporate an accompanying "explanation/summary package". When asked in his investigative

interview who set the 3% rate of return in Kustom Financial PFMAs, Jones responded:

"[Kustom Financial] with probably consultation between myself and [Lepitre]". The PFMAs

stated that the Private Funds Manager had a loan agreement with another entity or an individual

– Safeguard Asset Management Inc. ("Safeguard"), Sweet Water Equities Inc. or Sweet Water

Equity ("Sweet Water"), Knight Capital Corporation ("Knight", which was, according to

Lepitre's answer to an undertaking, Sweet Water renamed) or Akins – and that, if that entity or

individual defaulted on payment, then the Private Funds Manager would activate a "protection

mechanism", which would result in "all placed [principal] funds" being returned to the Private

Funds Principal, in certain circumstances with a 10% administration fee deducted by the Private

Funds Manager. The PFMAs also stated: "The Private Funds Manager is to have unconditional

authority to manage and direct the Private Funds Management activities for the benefit of the

parties herein."

[35] Typically, an investor executed a PN in conjunction with the following additional

investment documents (the "Supplementary Forms"): "Participant Information" ("PI");

"Beneficiary Designation" ("BD"); and "Non-solicitation/Non-disclosure/Non-Circumvention

Agreement" ("NSA") (we consider a page on which "ALL PARTIES ACKNOWLEDGE THEY

HAVE READ, UNDERSTOOD, AND AGREE TO THE TERMS SET FORTH IN THIS

AGREEMENT [emphasis in original]" as part of the latter). Then, at a later date, the investor

executed a PFMA and might execute a "Letter of Intent" ("LI"), and an ILA was completed.

B. Use of Investors' Money

[36] Typically, for an investment in Kustom Group, an investor who signed a PN and the

Supplementary Forms would pay the money for the investment to Custom House, a currency

exchange business situated in Calgary, or into a lawyer's trust account. The investor's money

was then pooled with other investors' money until approximately $1 million was collected. At

that point, the pooled money was apparently loaned to or placed with – after going through a

lawyer's trust account if it had not already – Sweet Water or Knight. The investor's execution of

a PFMA and the completion of an ILA followed. Somewhat similarly for an investment in

Kustom Financial or Hightide, an investor's money was pooled with other investors' money – in

at least some instances with Custom House involvement – until at some point the pooled money

was apparently loaned to or placed with Safeguard, Sweet Water or Akins, as the case may be.

We note that, among the Kustom Companies investor documentation in evidence, there are

copies of two Kustom Financial investors' cheques made out directly to Kustom Financial. We

also note that, in his investigative interview, Jones stated that he and Lepitre had signing

authority on the Kustom Group bank account.

[37] The Kustom Financial PFMAs stated that investors' money was loaned to either

Safeguard or Sweet Water. The Loans Receivable ledger for Kustom Financial showed that 15

payments totalling approximately US$2.2 million were made to undisclosed recipients between

1 May 2004 and 5 April 2006. There is in evidence little information about Safeguard and what

it did with any investors' money it received from Kustom Financial. According to CORES

records, Safeguard was incorporated in Alberta in 2003, a Merle Hartzler ("Hartzler") was one of

its directors, and Safeguard was struck on 2 September 2005. Investor witnesses KK and SS,

whose Kustom Financial investments involved their money apparently being loaned to

Safeguard, testified they were told that someone had taken or run off with the money. Evidence

before us concerning Sweet Water's dealings with any investors' money relates only to money

invested in Kustom Group.

[38] The Kustom Group PFMAs stated that investors' money was loaned to Sweet Water or

Knight. The Loans Receivable ledger for Kustom Group showed that three payments totalling

approximately US$3.2 million were made to undisclosed recipients between 15 July and

20 September 2006. According to Nevada corporate registry records, Knight (which was, as

noted, Sweet Water renamed) was incorporated in Nevada on 31 August 2006 and Toscano was

its president, treasurer and director. In his investigative interview, Lepitre said that Kustom

Group received no reporting on the performance of Sweet Water's investments but that he would

usually be notified by telephone that money from Sweet Water had "arrived" in Kustom Group's

bank account. According to Toscano's investigative interview and other communications with

Staff through his counsel, Kustom Group placed US$2.8 million in Toscano's lawyer's account in

Vancouver, which money was then forwarded by Knight to Virginia-based International

Fiduciary Corp. ("IFC"), whose principal was a Preston Pinkett ("Pinkett"), for investment in

medium-term notes. In a 20 February 2008 decision (Re International Fiduciary Corp SA, 2008

BCSECCOM 107) of the British Columbia Securities Commission (the "BCSC") concerning

allegations against, among others, IFC and Pinkett, a BCSC panel found (at para. 38): "The IFC

investment scheme was a sham. The so-called 1st Tier medium term bank notes do not exist."

Earlier, in 2007, the United States Securities and Exchange Commission (the "SEC") obtained

orders appointing a receiver over the assets of IFC, permanently banning IFC and Pinkett from

trading in securities and ordering IFC and Pinkett to disgorge approximately $24 million and

$5.1 million, respectively.

[39] The Hightide PFMAs stated that investors' money was loaned to Akins. The Hightide

ILAs identified, as security for the money loaned, a lien on a described quarter-section of land in

Alberta. The Loans Receivable ledger for Hightide showed that one payment of $613 210.45

was made to an undisclosed recipient on 30 June 2006. In his investigative interview, Akins said

that the money invested in Hightide was paid to a lawyer's office in Florida and was to be used to

fund a Florida lawsuit by a company called "Mambaliq", an opportunity presented through

Hartzler. According to Florida corporate registry records, a corporation named "Manbaliq

Corporation", of which Hartzler was a director, was incorporated in Florida on 6 August 2004

and apparently active in 2006. An Alberta land title certificate in evidence indicated that the

quarter-section of land described in the Hightide ILAs was registered in Akins' name and had

two mortgages registered on title as of 17 March 2008 – a first mortgage dated 26 June 2006 in

the amount of $1 044 000 and a second mortgage dated 6 February 2007 with Hightide as

mortgagee in the amount of $683 729. As of 25 August 2008 the first mortgagee was apparently

pursuing foreclosure in relation to this land.

C. Investors' Evidence

1. Investments in Kustom Financial

(a) KK

[40] KK, an Alberta resident, invested US$50 000 in Kustom Financial in December 2005.

[41] KK dealt at the KD Group with Lepitre, Jones and others. However, in making his

investment in Kustom Financial, KK dealt mostly with Lepitre and did not have any dealings

with Jones. Prior to making this investment, KK knew both Lepitre and Jones: Lepitre was one

of the accountants for KK and his company, and Lepitre's stepfather worked with KK; and KK

would review the final accounting paperwork with Jones at the end of each accounting year. KK

had also attended a few "[i]nformational meetings" at which Lepitre and Jones had been present.

As to whether KK considered Lepitre a friend at the time KK made this investment, KK testified:

"I had known [Lepitre] for two years. I guess I could consider [Lepitre] a friend, yes, at the

time."

[42] KK told Lepitre he was "looking for something to invest in". Lepitre informed KK that

the Kustom Financial investment involved "a loan to this Alberta corporation that was going to

be grouped together into a larger investment . . ., and I would just collect interest on my money",

the money would be invested "in an international bank fund" and "[m]y return would be

3 percent per month, paid out quarterly". According to KK, Lepitre gave information to KK

about – but did not encourage or pressure KK to invest in – the Kustom Financial investment.

Lepitre also mentioned a real estate investment and possibly other investments, in which KK was

not interested.

[43] On 9 December 2005 in Lepitre's office, KK signed a PFMA, PI, BD, NSA and LI, and

an ILA was completed, for KK's investment in Kustom Financial. A Kustom Financial associate

assisted KK in finalizing this paperwork. The documentary evidence relating to KK's investment

does not include a PN. KK did not recall any discussion with Lepitre or the Kustom Financial

associate about exemptions or qualifying for an exemption to make this investment.

[44] The LI signed by KK, which concluded with the words "[t]his is for information only and

not intended to be a solicitation", stated:

Please accept this letter as a statement of my intention to proceed with you in a Private Funds

Management opportunity subject to mutual approval of all documentation and information.

Further I do hereby affirm that I have requested specific information about Private Funds

Management opportunities or any other related strategies from [Kustom Financial] to serve only

my interest and purpose. I am fully aware that the information to be presented is not for the

solicitation of funds, but is for my general knowledge and information. I confirm that I have

requested the information of my own free will, choice and unsolicited initiative.

I further affirm that any funds placement that I decide to do will be done so on my own specific

initiative, risk and authorization with full consideration and without duress. I am aware that any

and all contemplated business is conducted on a "BEST-EFFORTS BASIS" as opposed to a

guaranteed-profit scenario. I further affirm that the information received from [Kustom Financial]

is intended solely for my private and confidential use only. I consider myself a prudent investor

and I am encouraged by [Kustom Financial] to independently secure the most competent,

knowledgeable counsel available, which is loyal solely to my personal interest.

The intent of any and all discussions is to learn enough to attempt to conduct honourable,

profitable business while upholding the laws and regulations of any and all pertinent domiciles to

the best of each person's understanding and ability. The violation of any law or regulation at any

time, in any way is not condoned for any reason. I also request information on how my [principal]

funds placement may be secured or protected.

Confidentiality and Privacy of all parties is requested, and each person who elects to take any

action and is accepted by [Kustom Financial] is behaving as an independent individual or properly

authorized representative of another entity, for perceived advantage.

Without exception, each discussion is conducted in good faith with a view to mutual benefit for

all. [Emphasis in original.]

[45] At the time of signing the PFMA – which stated that the "Private [F]unds Manager

[namely Kustom Financial] has a loan agreement with [Safeguard]" – KK believed he

understood Safeguard's role: Kustom Financial would be forwarding his money to Safeguard

and his money would be grouped together into a larger investment, something to do with an

international bank fund, "[o]ne of the seven biggest banks in the world". Although the ILA

described the "Form of Security" as "Security Bonds + Promissory Note", KK did not recall the

security he was offered.

[46] A Kustom Financial letter to "All our Valued Clients and Prospective Clients", received

by KK and apparently signed by Jones, provided the following information:

[Kustom Financial] has entered into a private loan agreement with [Safeguard] to participate in

their investment ventures. [Kustom Financial] has a long-standing relationship with [Safeguard]

and has evaluated their business standards and past performance. Although past performance is

not a guarantee of future performance, their record over the last four + years of on time

disbursements speak[s] for itself. This venture is protected by a verified Bank guarantee/Letter of

Credit, issued by one of the top 50 Banks and it is in safe keeping at the bank with instructions to

liquidate in the event of default.

[Safeguard] invests in a variety of financial Instruments, Venture Capital, and Charitable Projects

as well as large Project Financing. Over the last 3+ years, [Safeguard] has formed alliances that

have proven to be not only profitable, but also mutually rewarding.

As a privately held company there will be no prospectus or offering memorandum needed for the

purpose of this overview.

All contracts with [Kustom Financial] are for one year at which time funds may be returned or re-

entered by request.

We look forward to hearing from you soon. If you have any questions, please contact our office at

your earliest convenience.

[47] Ultimately, KK conceded that he probably did not understand his investment in Kustom

Financial when he made it but said that he made this investment because he was "intrigued", was

looking for a way to make his pension "grow a little faster" and "wanted to get into the

investment world".

[48] KK borrowed against his pension to make his investment in Kustom Financial. At the

time of the Merits Hearing, he continued to make $1000 monthly payments on this loan, which

was arranged with the assistance of another Kustom Financial associate.

[49] KK said that, on his investment in Kustom Financial, he received five quarterly payments

– the last in February 2007 – of US$4050 each (US$4500 minus "[a]dministration fees" of

US$450 paid to Kustom Financial). (Other evidence before us recorded KK's receipt of four

such quarterly payments.) According to KK, the US$50 000 he invested is "either lost or it's

stuck somewhere, with one of the other companies that it was given to", and he does not know if

he will get his money back. KK, who made a written request for the return of his principal, said

that "the process was supposedly started". However, investors were called to a meeting, at which

they were informed that "the broker had taken off with money, but there was some other stuff,

maybe like bonds and stuff, that [was] being worked out to see about getting the money back".

Several pieces of correspondence that KK received from Kustom Financial, the earliest dated

16 April 2007 and the latest dated 31 March 2008, spoke of delays in quarterly and principal

payments and the reasons for them. Almost all of this correspondence closed with "Mike Lepitre

& Mark Jones" in type, with one e-mail closing with "Mark Jones" in type.

[50] Asked how his investment in Kustom Financial has affected his attitude about investing

in the Alberta capital market, KK responded: "I am not investing in anything."

(b) SS

[51] SS, an Alberta resident, invested US$10 000 in Kustom Financial in January 2006. As

discussed below, SS also invested in Hightide in June 2006 and purchased units in the Synergy

Tax Program, through Kustom Financial, in December 2005.

[52] An individual with whom SS was doing business referred SS to the KD Group. SS and

Lepitre met in October or November 2005, when SS retained the KD Group to do his personal

taxes. That same individual and SS also attended a "financial workshop" at the Kustom Office,

at which Lepitre spoke about investing in Kustom Financial – "the loan programme" – and at

which someone spoke about reducing taxes. While in the process of doing SS's 2005 personal

taxes, Lepitre introduced SS to the Synergy Tax Program. As to how the subject of investment

arose, SS recalled that "it was part and parcel even why I went" to the KD Group. He elaborated:

"[T]hey do investments, and they knew the accounting. But it all started with . . . Synergy,

because I was there to reduce taxes." SS did not recall how the progression into the investments

in Kustom Financial and Hightide occurred. Prior to SS participating in the Synergy Tax

Program and making his investments in Kustom Financial and Hightide, the only financial

information obtained by Lepitre from or about SS was that associated with doing SS's personal

taxes, and Lepitre did not inquire about SS's tolerance for risk.

[53] No one explained to SS that he had to qualify for an exemption for any investments to be

made. Further, SS's testimony revealed that he did not qualify as an accredited investor at the

times he purchased the units in the Synergy Tax Program and made his investments in Kustom

Financial and Hightide. When purchasing the units in the Synergy Tax Program and making his

investments in Kustom Financial and Hightide, SS dealt primarily, if not solely, with Lepitre,

and SS believed that he received investment advice from Lepitre in relation thereto. Afterwards,

SS dealt with Lepitre as well as others, including Jones and a Kustom Financial associate, with

whom SS had no prior relationship.

[54] Based on information provided by Lepitre, SS understood that an investment in Kustom

Financial "had to do with foreign exchange but it was fully backed by bank bonds, and they

would . . . invest the money, receive a bank bond and then . . . the banks could leverage money

on that bond". SS explained that "fully backed" meant, as he was told by Lepitre, "guaranteed by

a bank bond". Indeed, SS testified: "The key to my wife and I was it was virtually guaranteed

by this bank bond so principal was secure."

[55] SS signed a PN and BD for his investment in Kustom Financial on 12 January 2006. On

4 April 2006 SS signed a PFMA and an ILA was completed. These documents were apparently

signed by Lepitre. A signed PI dated 12 July 2006, a signed but undated NSA, and a completed

but unsigned and undated PI and BD are also in evidence. The documents signed by SS were

signed by him at the Kustom Office.

[56] Concerning the role of Safeguard, referred to in the PFMA, SS understood, based on

information provided by Lepitre, that Kustom Financial "needed to pool a million dollars to take

it to the next level", that Safeguard was that "next level" or "step above", that the pooled money

was sent to Safeguard, and that Kustom Financial "could request their principal back from

Safeguard". As for the "Security: RBC Centura Bank" reference in the ILA, SS understood that

was the bank "where our bonds were being held".

[57] SS received, on his investment in Kustom Financial, three quarterly interest payments for

2006 of approximately US$900 each. (Other evidence before us recorded SS's receipt of three

US$810 quarterly payments.) SS said that, although he asked, his principal has not been

returned. He did, at one point, receive a cheque that would have returned his principal in full,

but the letter accompanying that cheque asked that he not cash it. Subsequently, Lepitre told SS

that the individual holding the bonds "ran off with the money" and that Kustom Financial "was

working with another group to make the money back and return it to the investors". When SS

asked who had run off with the money and how, he was told that he did not "have a full

understanding of the investment".

[58] SS said that, because of his experience with the Kustom Financial and Kustom Group

investments and the Synergy Tax Program, he is not inclined to invest in anything other than

mutual funds through an accredited financial planner or stockbroker "unless I have absolute

control".

2. Investments in Kustom Group

(a) GN

[59] GN, an Alberta resident, invested US$100 000 in Kustom Group in June 2006. As

discussed below, GN also invested in Hightide in June 2006.

[60] GN spoke "a little bit" to a "Paul" (there is a Kustom Financial associate with that name)

but primarily to Lepitre in relation to making his investments in Kustom Group and Hightide.

Before making these investments, GN had known Lepitre "for a number of years". People who

attended GN's church had told GN that Lepitre, who was their godson, was "part of a company

that did accounting", and GN had taken his books – for accounting and tax work – to Lepitre

since some point in the 1990s. GN "just knew [Lepitre] from always going into the [Kustom

Office] and seeing him there". GN, who had heard people in the Kustom Office "talking about

investments and opportunities" offered by the KD Group, asked about them.

[61] GN could not remember if, when making his two investments, he and Lepitre discussed

GN's tolerance for risk. When making his two investments, GN recalled some discussion about

"friends and family" but not about "close". Further, GN's testimony revealed that he did not

qualify as an accredited investor at the times he made his two investments.

[62] The investment in Kustom Group was explained to GN by Lepitre. GN recalled that this

investment was an "[i]nvestment overseas". He could not say if he fully understood it although

he did "fully trust" Lepitre. GN said that Lepitre was "excited" about this investment, and GN

was under the impression that Lepitre or Kustom Group would "get something" for placing him

in this investment.

[63] GN signed a PN, PI, BD and NSA for his investment in Kustom Group on 21 June 2006.

On 19 September 2006 GN signed a PFMA and an ILA was completed. The PN, PFMA and

ILA were apparently signed by Lepitre. GN had no recall of the role of Knight, referred to in the

ILA, and the "Security: Bank: Great Florida Bank" reference also in the ILA. According to

GN, the money for this investment was changed into American dollars on 7 June 2006.

[64] GN received, on his investment in Kustom Group, one US$8100 quarterly payment in

November 2006. He did receive a 28 February 2007 cheque for another US$8100 payment, but

a 28 February 2007 letter concerning that cheque – from "Mike Lepitre & Mark Jones" in type –

asked that he not cash it. GN's principal has not been returned. A 1 September 2008 "KD Group

Investment Statement of Account" set out the value of GN's account as of that date as

US$154 000 (initial loan of US$100 000 plus interest accrued from November 2006 through July

2008 of US$60 000 less a 10% administration fee of US$6000). Subsequently, at a meeting at

the Kustom Office, GN received a 7 April 2009 cheque for $200. "Over the years", when GN

asked what was happening with his principal and the returns on this investment, he was told – by

a "Chico" at meetings at the Kustom Office – that the invested money was being held by a

securities commission or commissions in the United States and that "we had to wait to see what

came of that".

[65] GN obtained a line of credit on his house and borrowed against his registered retirement

savings plans ("RRSPs") to make his two investments. He said that, while he still trusts Lepitre

and Jones, his experience with the two investments has resulted in his being cautious about

investing.

(b) PD

[66] PD, an Alberta resident, invested US$49 799.91 in Kustom Group in June 2006.

[67] PD found out about Kustom Group "[t]hrough a friend". Then, in June 2006, he attended

an "info session" at the Kustom Office – about 15 to 20 people in total attended – at which

Lepitre and a Kustom Financial associate spoke and Jones answered questions, possibly tax

questions. PD did not know Lepitre, Jones or the Kustom Financial associate before attending

this session, which was "[b]asically . . . about financial . . . education, understanding your

expenses, minimizing taxes and other forms of investments". PD understood that Jones was "a

partner working with [Lepitre]". It was at subsequent meetings at the Kustom Office, perhaps

one month or two later and primarily with Lepitre, that PD "got more information" about the

investment in Kustom Group.

[68] Lepitre explained to PD that an investment in Kustom Group involved "trading bank

notes" with pooled money. Based on information provided by Lepitre and the Kustom Financial

associate, PD understood that "the principal was safe". He also understood that the rate of return

was 3% monthly, paid out quarterly. PD testified that, although he did not understand the

explanation of this investment, he invested because "I trusted them" – "[t]hey had done a lot of

tax work for friends of mine, and I thought they were decent people" – and "I trusted . . . that my

principal would be secure".

[69] PD said that, prior to making his investment in Kustom Group, there was no discussion

about his tolerance for risk or about doing his own research or getting independent financial

advice about the investment in Kustom Group. However, he did recall an analysis of his net

worth and assets and liabilities being done. PD's testimony revealed that he did not qualify as an

accredited investor at the time he made this investment. PD understood that Kustom Group

received a commission for selling this investment to him.

[70] PD signed a PN for his investment in Kustom Group on 23 June 2006. On 30 August

2006 PD signed a PFMA, PI, BD and NSA and an ILA was completed. The PFMA and ILA

were also signed by Lepitre. PD "really didn't understand" the role of Sweet Water, referred to

in the PFMA, and he has never seen a loan agreement with, or spoken with anyone from, Sweet

Water. Concerning the "Security: Bank: Great Florida Bank" reference in the ILA, PD

testified: "That was . . . the bank account in the U.S. that I believe our money would be – or KD

had an account, or our money would go there, something like that."

[71] PD obtained a loan from Pacific Financial Corp. ("Pacific"), using his RRSPs as security,

to make his investment in Kustom Group, and he has since used his savings to pay out this loan.

PD paid the money he borrowed to Custom House and assumed that, from there, it went to

Kustom Group, was pooled with other investors' money and then invested.

[72] PD said that, on his investment in Kustom Group, he received one quarterly payment of

US$4000 for the "last quarter of '06" and, at a meeting in April 2009 at the Kustom Office, he

received another cheque for $200. (Other evidence before us recorded PD's receipt of one

quarterly payment of US$4034.) PD did receive a 28 February 2007 cheque for another

US$4034 payment, but a 28 February 2007 letter concerning that cheque – from "Mike Lepitre

& Mark Jones" in type – asked that he not cash it. PD requested that his principal be returned

but was told by Lepitre: "[T]hey don't have the funds. It's out of their hands. They are doing

their best." Several pieces of correspondence that PD received from Kustom Group, the earliest

dated 31 March 2007 and the latest dated 22 May 2009, spoke of delays in quarterly and

principal payments and the reasons for them. All of this correspondence closed with "Mike

Lepitre & Mark Jones" or "Mark Jones & Michael Lepitre" in type. PD understood that his and

presumably other investors' money is "with the SEC" and that "they had frozen the funds". PD

conceded he did not know for sure that his money is among that frozen by the SEC, but he has

submitted a proof of claim to the SEC-appointed receiver. PD agreed that Jones has been

attempting to get PD's principal back for him.

[73] PD said that his experience with his investment in Kustom Group has made him wary

about investing and has caused him to question the legitimacy of many investments.

(c) MF

[74] MF and her husband, Alberta residents, invested US$356 379.19 in Kustom Group in

October 2006. As discussed below, MF's husband also invested in Hightide in June 2006.

[75] MF and her husband dealt with Lepitre and a Kustom Financial associate when making

their investment in Kustom Group, and MF and her husband dealt with Lepitre when making the

investment in Hightide. MF and her husband had not met Lepitre or the Kustom Financial

associate before the first of these investments – the investment in Hightide – was made. MF and

her husband, who visited the Kustom Office to inquire about investments, knew of the KD

Group because a relative of MF's husband is the chief accountant in the KD Group's accounting

department. MF said that Lepitre gave her and her husband advice about – in her words, Lepitre

"was recommending" – these two investments; however, she and presumably her husband did

not know of Lepitre's qualifications for doing so. MF said that the Kustom Financial associate,

who spoke with her and her husband about obtaining an investment loan, was "an investment

planner" and "was very positive about the investment skill that [Lepitre] has". MF did not know

who owned Kustom Group or Hightide.

[76] Prior to making these two investments, neither Lepitre nor anyone else from the KD

Group discussed exemptions or personal finances – income and assets – with MF and her

husband.

[77] Lepitre explained the investment in Kustom Group to MF and her husband, who

understood that this investment involved "foreign exchange trading". MF and her husband also

understood that the return on this investment would be "3 percent per month every quarter".

They believed this investment to be a good one because Lepitre told them that "foreign trading of

funds does bring in an excellent return" and because – although MF did not understand this

investment – they "really trusted that this was a sincere group that really believed that this was

. . . a good investment route". MF said that, when she pointed to a papered indication of this

investment being "high risk", Lepitre told her "that is what is signed in all kinds of investment

proceedings".

[78] On 18 October 2006, MF and her husband signed a PFMA, BD and NSA, and an ILA

was completed, for their investment in Kustom Group. The documentary evidence relating to

this investment includes an undated PI but does not include a PN. The documents signed by MF

and her husband were signed by them at the Kustom Office in the presence of Lepitre and

perhaps the Kustom Financial associate, and the PFMA and ILA were apparently signed by

Lepitre. Concerning the role of Knight, referred to in the PFMA, MF believed that it was the

organization responsible for "transferring of funds in the investment" or "moving the funds

toward this investment". As for the "Security: Bank: Great Florida Bank" reference in the ILA,

MF thought that "the monies would go to the Great Florida Bank and then the trading would

occur out of there".

[79] MF and her husband used money from their RRSPs to make their investment in Kustom

Group. With the assistance of the Kustom Financial associate, they transferred money from their

RRSPs into bonds, which were used to obtain an investment loan from a British Columbia

company, which was in turn used to make this investment. That loan was paid off in May 2009

using a line of credit secured against MF and her husband's house. MF continued, at the time of

the Merits Hearing, to make monthly payments on that line of credit.

[80] A 1 September 2008 "KD Group Investment Statement of Account" set out the value of

MF and her husband's account as of that date as US$548 823.95 (initial loan of US$356 379.19

plus interest accrued from November 2006 through July 2008 of US$213 827.51 less a 10%

administration fee of US$21 382.75). MF and her husband received only one payment of $200

on their investment in Kustom Group, which cheque MF did not cash. MF said that, although

she asked, the principal has not been returned. Lepitre told MF that, because the principal is

being held by the SEC, "[t]here's no money". MF has filed a proof of claim with the SEC-

appointed receiver in relation to this investment. Four pieces of Kustom Group correspondence

received by MF, the earliest dated 17 July 2008 and the latest dated 22 May 2009, spoke of

delays in quarterly and principal payments and the reasons for them. This correspondence closed

with "Mike Lepitre & Mark Jones" or "Mark Jones & Michael Lepitre" in type. According to

MF, Jones has been involved with this investment only through his efforts to get the invested

money back to MF.

3. Investments in Hightide

(a) SS

[81] SS invested US$70 000 in Hightide in June 2006.

[82] SS understood that his investment in Hightide "was going to be secured by a second

mortgage on [Akins'] land" for $1 million; "the investment was basically going to be a loan to

[Akins] in return for second mortgage on his house", with the loaned money to be used by Akins,

"an oil man", to pursue another investment. SS also understood that this investment "was going

to be quite similar to the Kustom Financial" and "would pay 50[%] at the end of the year".

These understandings were based on information provided by Lepitre. SS did "a great deal" of

research on the investment in Hightide. Lepitre mentioned a confidentiality issue and asked that

SS not speak with Akins regarding the mortgage. SS, who had "pulled title" on Akins' land,

knew that Akins did not owe much on the first mortgage, and SS had been shown a real estate

appraisal for that land of approximately $3 million.

[83] For his investment in Hightide, SS signed a PN – which indicated a return of 50% per

annum – on 12 June 2006, a PFMA on 19 June 2006, a PI and BD on 19 June 2006 and an NSA

on 19 and 20 June 2006, and an ILA was completed on 7 September 2006. SS could not recall

who was with him when he signed the documents, but the PN and BD were apparently signed by

a Kustom Financial associate, with the PFMA and ILA apparently signed by Lepitre. SS said

that he "pulled" the money for this investment "out of my house", and he recalled that Custom

House changed the money into American dollars.

[84] "Fairly quickly" after making his investment in Hightide, SS had "second thoughts". SS

told Lepitre he wanted as much of his money back as he could get. About three weeks to one

month later, another Kustom Financial associate personally bought out SS's entire investment in

Hightide. There is, in evidence, a 29 January 2007 document signed by SS, the Kustom

Financial associate and Lepitre concerning the transfer of the 7 September 2006 ILA from SS to

the associate.

(b) TC

[85] TC, an Alberta resident, invested US$35 523.98 in Hightide in June 2006.

[86] TC was referred by a friend to the KD Group, which – through Lepitre and to a limited

extent Jones and another – has been providing personal and business accounting and tax services

to TC for about six years or so. According to TC, over the years the KD Group, primarily

through Lepitre, introduced her to a number of investments, a few of which she pursued. One

investment she made was an investment in Safeguard introduced to her by Lepitre in, she

believed, 2003. TC received no return on her investment in Safeguard despite documentation

indicating earnings of $108 000, but the principal invested was returned to her about 2½ or three

years ago. TC also attended investment seminars at the invitation of the KD Group. At one such

seminar, attended by Lepitre, TC was introduced to another investment involving tax

minimization. TC invested therein, with the paperwork for her investment being "done through"

the KD Group. The tax deduction associated with this investment was initially allowed by

Canada Revenue Agency ("CRA") but at the time of the Merits Hearing was under review by

CRA. TC did not recall any discussions with Jones about investing.

[87] Asked if the investments introduced to her by the KD Group, primarily through Lepitre,

were recommended to her, TC replied "not so much recommended, just . . . these are options that

you can go into". As to how having her accounting and tax work done progressed into looking at

investment opportunities, TC explained: "I think I had discussions with [Lepitre] in that . . . I

had gone through a divorce and I was trying to build back my portfolio. And, you know,

obviously if there [were] any tax strategies, being a sole business owner, or opportunities that he

was aware of."

[88] In relation to her investment in Hightide, TC dealt primarily, if not solely, with Lepitre,

with whom she had "mostly a business relationship". Lepitre explained to TC that this

investment involved a short-term loan of one year to Akins, with his land – a second mortgage

thereon – as collateral, and that Akins "was involved in a court case and needed the funds to keep

him going [until] the court case was kind of won". TC also understood that she was to receive a

50% return on this investment. TC could not recall if Lepitre expressed an opinion about this

investment. She said that "I felt that land is a pretty safe investment, and as a second mortgage

on a property I thought that that would be a fairly safe investment for a one-year term".

[89] TC used money from other investments to make her investment in Hightide. For this

investment, TC signed a PN, PI, BD and NSA on 15 June 2006 and an undated PFMA, and an

ILA was completed but undated. The PFMA and ILA were apparently signed by Lepitre. TC

did not recall any discussions with Lepitre about her tolerance for risk or about doing her own

research or getting independent financial advice about this investment, nor did she recall any

discussions about exemptions. TC's testimony revealed that she did not qualify as an accredited

investor at the time she made this investment.

[90] TC has received no return on her investment in Hightide, and she has asked for, but not

received, the return of her principal. TC was told, through several pieces of correspondence

received from Hightide, that there was a problem with the court case, that Akins "had not

received anything" and that there were foreclosure proceedings in relation to Akins' land. Those

several pieces of correspondence, the earliest dated 17 September 2007 and the latest dated

25 August 2008 – many closing with "Mike Lepitre & Mark Jones" in type – provided reasons

for the delayed receipt of her principal or any return, discussed alternative financing efforts and

gave status reports on the foreclosure proceedings in relation to Akins' land.

(c) GN

[91] GN invested US$67 000 in Hightide in June 2006.

[92] GN understood that the investment in Hightide involved a loan to Akins, the owner of a

ranch that would be security for the loan. GN could not recall the basis for this understanding,

nor did he know what Akins would be doing with the loaned money. GN thought that this

investment would be "pretty secure" because "everything was going well in Alberta" and he

"always felt land was a good investment".

[93] For his investment in Hightide, GN signed a PN, PI, BD and NSA on 21 June 2006 and a

PFMA on 19 September 2006, and an ILA was completed on 19 September 2006. The

documents signed by GN were signed by him in Lepitre's office in the presence of Lepitre and

perhaps others, and the PN, PFMA and ILA were apparently signed by Lepitre. GN "never saw

[Jones] as part of" this investment. According to GN, Custom House changed the money for this

investment into American dollars on 7 June 2006.

[94] GN has received no return on his investment in Hightide, and he has asked for, but not

received, the return of his principal. GN was told – where, when or by whom he was unsure –

that Akins had been unable "to come up with the funds" and "had no way of paying us back or

the bank", so the land was "tied up in whatever [Akins] had to do". At the time of the Merits

Hearing, GN was waiting for "that process to work through".

(d) CN

[95] CN, an Alberta resident and GN's sister-in-law, invested US$10 659.09 in Hightide in

June 2006.

[96] The KD Group had provided personal and business accounting services to CN and her

husband's flooring company since mid-2005. CN dealt primarily with Lepitre at the KD Group

and it was Lepitre with whom CN and her husband had discussions about various investment

opportunities offered by the KD Group, including the investment in Hightide. CN elaborated:

"[W]e had asked for some, you know, help and ideas. You know, financial planning basically,

which is the service that they offered." In 2006 CN decided to invest in Hightide.

[97] At the time of her investment in Hightide, CN understood that she was investing in land

in the Calgary area. CN said that she decided to invest in Hightide because "it had a very

attractive interest rate", "it didn't sound . . . like a high-risk kind of a thing", "it sounded good at

the time" and "we trusted [Lepitre]". Sometime later, CN learned that "the money was used to

secure a person's court case with land as security to that investment". CN told us that, had she

known this at the time of her investment in Hightide, she never would have invested in Hightide.

[98] To complete her investment in Hightide, CN signed a PN, PI, BD and NSA on 21 June

2006 at the Kustom Office. The rate of return stated on the PN was 50% per annum. On 30 June

2006 CN paid $12 000 to Custom House, which in turn issued a cheque for US$10 659.09 to

"Kustom Design Land Deal" as payee. On 29 August 2006 CN signed a PFMA and an ILA was

completed. The PN, PFMA and ILA were apparently signed by Lepitre. CN recalled a general

discussion with Lepitre about her tolerance for risk – "we had spelt out our situation that, you

know, [we were] wanting to rebuild". She did not recall any discussions with Lepitre about

doing her own research or getting independent financial advice about this investment. CN's

testimony revealed that she did not qualify as an accredited investor at the time she made this

investment.

[99] The money for CN's investment in Hightide came from a loan from Pacific, which had

required CN to transfer some of her RRSP money to another RRSP account at Envision Credit

Union. According to CN, this transfer, which was facilitated by the KD Group, might result in

penalties being assessed against her by CRA. CN has received no return on this investment, and

she has asked for, but not received, the return of her principal. She continued, at the time of the

Merits Hearing, to make payments on the loan she received from Pacific.

(e) MF

[100] MF's husband invested US$89 493.47 in Hightide in June 2006.

[101] From their discussions with Lepitre, MF and her husband understood that an investment

in Hightide was an investment in land that would somehow generate a 50% return at the end of

one year. They also understood that Akins was an owner of land that was connected to this

investment. MF and her husband were told that this was a "pretty straightforward" investment

and that, in relation to the safety of the principal, there was nothing to worry about.

[102] For this investment in Hightide, MF's husband signed a PN on 22 June 2006, a PI, BD

and NSA on 26 June 2006 and a PFMA on 29 August 2006. An ILA was completed on

29 August 2006. The documents signed by MF's husband were signed by him at the Kustom

Office in the presence of MF and Lepitre and perhaps others, and the BD, PFMA and ILA were

apparently signed by Lepitre. Concerning the "Security: Lien on Land" reference in the ILA,

MF and her husband understood that "if this investment fell through for some reason, there

would be a lien on the land that [Akins] owns". MF never checked to see if there was such a

lien.

[103] MF and her husband used their savings to make this investment in Hightide. MF could

not recall, but said her husband knew of, Custom House's role in facilitating this investment.

[104] No return on this investment in Hightide has been received by MF or her husband, and

MF has not received, although she has asked for, the return of the principal. Lepitre told MF that

"[t]here's no money" because "it's all tied up" and that Akins used the invested money for a

purpose other than an investment in land. MF was also told that the foreclosure process in

relation to the land owned by Akins has begun, but, at the time of the Merits Hearing, she did not

know the status of the process. A 25 August 2008 Hightide letter from "Mike Lepitre & Mark

Jones" in type – received by MF – spoke of foreclosure and indicated that Akins "still expects to

pay us in full no matter which way it goes". According to MF, Jones has been involved with this

investment only through his efforts to get the invested money back to MF.

V. SYNERGY TAX PROGRAM

A. Documentation

[105] Those who wished to participate, through Kustom Financial, in the Synergy Tax Program

were asked to sign three documents: a "Unit Purchase Agreement" ("UPA"); a "Transfer Agent

Agreement" ("TAA"); and a "Business Referral Agreement" ("BRA"). Some were also asked to

execute a "Non-Disclosure Agreement".

[106] Each single-page UPA between Synergy and a "Purchaser" was headed by a Synergy

logo and stated:

Whereas the Purchaser wishes to enter into an agreement with the company [Synergy] to assist

with Alternative Income Tax Strategies to help reduce or defer income tax and participate within

this program.

1. The Agreement (as stated above)

2. The Purchase price of increments of $1000.00 units. The purchase price

includes all expenses relating to the proposed transaction.

3. Appointment of Agent. The Purchaser hereby appoints [Synergy] as agent to

assist with securing small to medium size business in the alternative income tax

strategy.

4. Governing Law. This Agreement shall be governed and construed in

accordance with the laws of the Province of Ontario and the Laws of Canada

applicable therein. The parties agree that the courts of the Province of Ontario

will have non-exclusive jurisdiction to determine all disputes and claims arising

between parties.

5. Execution. This agreement may be executed in two or more counterparts, with

the same effect as if all parties hereto had signed the same document. All

counterparts shall be construed together and shall constitute one and the same

Agreement.

Cheques or Money Orders are to be made Payable to: [Synergy]

Total amount of Units purchased __________ x $1000.00 [Emphasis in original.]

[107] Each UPA concluded with spaces for the signatures of the "Purchaser" and a "Witness"

but no space for the signature of a Synergy representative:

IN WITNESS WHEREOF this Agreement has been executed as of the day and year first written

above.

____________________________ ____________________________

(Witness) (Purchaser[']s Signature)

[108] Each single-page TAA between Synergy as "Transfer Agent" and a "Purchaser", also

headed by a Synergy logo, stated:

WHEREAS the Client [otherwise called the Purchaser] is interested in purchasing units in small

to medium sized, privately owned businesses that are under the management and guidance of

Integrated Business Concepts Inc. (hereinafter referred to as IBC).

AND WHEREAS the Transfer Agent has been directed to act as Liaison between the Purchaser

and IBC to facilitate the placement of capital into aforementioned small and medium sized,

privately owned businesses.

NOW THEREFORE IN CONSIDERATION of the fulfillment of each party of the agreements

contained herein, the parties hereto agree as follows:

1. The Purchaser irrevocably nominates, constitutes and appoints [Synergy] as the

true and lawful agent and attorney-in-fact of the undersigned for taking all

proceedings and executing all documents with respect to acquiring the capital

(purchase) and forwarding these funds to IBC for enactment of the transaction.

2. IBC agrees to execute the purchase on behalf of the Purchaser, provide complete

documentation to support the purchase and any related tax benefit and provide

all necessary follow-up documentation and service in the event that Canada

Revenue Agency requests substantiating proof of Purchasers' Participation and

any resulting Income Tax Deduction claims.

3. The undersigned hereby acknowledges that he/she has received independent

financial advice and has reviewed the risk with his/her Advisor. [Emphasis in

original.]

[109] Each TAA concluded with spaces for several signatures, none of which was clearly for

that of a Synergy representative:

Witness _________________________ Purchaser ___________________________

Agent _________________________ IBC Representative ___________________

[110] The "Agent" space on many of the TAAs in evidence was filled in with the name or

purported signature of a Kustom Financial representative, but that space on some of the TAAs in

evidence was filled in with "Len J. Zielke, Western Regional Manager" in type. The "IBC

Representative" space on the TAAs in evidence was not filled in except in two cases, where the

name of a Kustom Financial representative appeared in print, apparently in error.

[111] Each single-page BRA between Synergy as "company" and a "participant" (a purchaser

of units), also headed by a Synergy logo, stated:

Whereas the company and the participant desire to enter into an agreement to explore alternative

income tax strategies by purchasing units in small to medium Businesses. [Emphasis in original.]

[112] Each BRA concluded with spaces for the signatures and names of the "Agent" and

"Client", none of which was clearly for the signature or name of a Synergy representative:

____________________________ ____________________________

(Agent[']s Signature) (Client[']s Signature)

____________________________ ____________________________

(Agent[']s Name) (Client[']s Name)

[113] The "Agent[']s Name" space on many of the BRAs in evidence was filled in with the

name of a Kustom Financial representative, often accompanied by the purported signature of that

representative in the "Agent[']s Signature" space. However, the "Agent[']s Name" space on

some of the BRAs in evidence was filled in with "Len J. Zielke, Western Regional Manager" in

type, with no accompanying signature in the "Agent[']s Signature" space.

[114] At least one purchaser was provided with a chart that described the structure of the

Synergy Tax Program as follows:

Tax Strategy Structure

Transfer Agent

[115] IBCA or IBC provided each purchaser with a T2124 CRA form, which reported the

consolidated revenues and expenses for the businesses and allocated a share of the profits or

losses to the purchaser to be used in the preparation of the purchaser's income tax return for the

year in which units in the Synergy Tax Program had been purchased.

B. Use of Purchasers' Money

[116] As noted, Kustom Financial, through its information sessions, commissioned associates

and apparently the Internet, solicited the purchase of units in the Synergy Tax Program. Also,

some of those seeking tax or accounting advice or services from the KD Group were told that

they could minimize taxes if they purchased units in the Synergy Tax Program through Kustom

Financial. Prospective purchasers were told that they would pay money to Synergy to purchase

"units" in small to medium-sized businesses, and that a portion of the profits or losses of those

businesses would flow back to the individual purchaser. Any losses could be claimed by the

purchaser as a tax deduction for the particular year in which units in the Synergy Tax Program

had been purchased from Synergy and, if allowable, the previous two years.

IBC Synergy

Group

Op Cos.

Business Income

(80/20 Rule)

IBCA

(Biz Assoc.)

Tax Payer

(Indiv. or

Corp.)

Develops Clients

Profit/Losses Profit/Losses

JV Financing Cash Participation

[117] Prentice explained that Synergy was the sales and marketing arm of the Synergy Tax

Program, with IBCA and IBC responsible for the relationships with the small and medium-sized

businesses. Synergy's primary role was to solicit persons to participate in the Synergy Tax

Program by purchasing units and paying the money for the units to Synergy. Synergy would

then forward the purchasers' money to IBC in return for a 20% commission. Synergy paid 15%

of the 20% commission to its regional managers and agents, such as Kustom Financial. In the

result, Synergy retained 5% of the 20% commission for its efforts.

[118] We were told by Prentice that Synergy and IBC had no common ownership or

management. We note, however, that Ontario corporate registry records indicated that the

registered office and mailing addresses for Synergy and IBC are the same. We also note that in

two agreements entered into evidence by Synergy – one between IBC and a joint venture partner

and the other between IBCA and the same joint venture partner – the signature affixed for IBC is

the same as that affixed for IBCA.

[119] IBC, described by Prentice as an "incubator", would recruit small and medium-sized

businesses to participate in its development and funding program. Prentice indicated that

Synergy also had recruited some of the businesses (presumably Synergy retained a greater than

5% commission in those circumstances, although there is no evidence on this point). IBC was to

provide management services and bridge financing to the participating businesses. The money

for the bridge financing came from the money raised by Synergy. A participating business

signed two agreements with IBC.

[120] One agreement indicated that IBC would assist the participating business "in the

development of an organized, productive, profitable and entrepreneurial [b]usiness". In return,

the participating business was to provide IBC with operational, performance and financial data to

assist in evaluating and measuring the business's performance, evaluating the business's financial

status and preparing short and long-term plans for the business's use. Participating businesses

agreed to pay a one-time fee, sometimes waived, and a percentage of monthly-generated

revenues.

[121] The other agreement noted that the participating business required money to develop its

business into a profitable business and gave IBC an option to obtain a certain equity percentage

in the business in exchange for IBC's provision of management services and bridge financing.

Prentice noted that approximately 200 participating businesses had received bridge financing in

2006. At the time of the Merits Hearing, 215 participating businesses were being loaned

approximately $83.5 million.

[122] A participating business was also required to enter into an agreement with IBCA. The

agreement referred to IBCA as a "partnership" and the individual business as the "Joint Venture

Partner (JVP)". It also stated that the participating business lacked resources and that "IBCA,

through its agent [Synergy]", had agreed to provide the necessary "management services and

capitalization to develop [the JVP's] business into a successful and profitable operation". This

agreement further indicated that net profits of the participating business would be allocated 95%

to the business and 5% to IBCA, while 100% of the losses were to be allocated to IBCA.

[123] Prentice said that IBCA was created as a joint venture "holding and reporting company"

so that the economic results – the profits and losses – generated by the participating businesses

could be flowed back to the Synergy Tax Program purchasers. Prentice explained that, during

the 2005 to 2006 period, IBCA was the overarching association and within IBCA itself were 55

different sub-associations. Synergy Tax Program purchasers were assigned to a specific sub-

association comprised of a number of participating businesses. The profits and losses of those

participating businesses would be consolidated or pooled, then allocated to the individual

purchasers assigned to the sub-association on the basis of the units they had purchased.

Purchasers had no say as to which sub-association they were assigned and no knowledge of the

participating businesses comprising the sub-association to which they were assigned – as to

individual or aggregate economic viability. Profits or losses realized would vary among

purchasers in the same year, depending on the sub-association to which they were assigned.

[124] At the end of the year in which the purchaser had contributed money, a T2124 CRA form

would be prepared by either IBC or IBCA for that purchaser reporting all of the revenue earned,

expenses incurred and the purchaser's resulting share of the gain or loss relating to the businesses

in the assigned IBCA sub-association for that taxation year. Prentice noted that third party

accounting firms for each individual business would prepare a joint venture report, allocating to

IBCA gains (5%) or losses (100%) of the business. That report would then be provided to

IBCA. That information was consolidated and formed the basis of the T2124 CRA form that

was ultimately provided to the Synergy Tax Program purchaser. Prentice noted that, over the

past 3½ years, the businesses in IBCA had generated predominantly losses. Prentice said that,

on average, Synergy Tax Program purchasers had received tax losses on a ratio of 5:1 – a $5 tax

loss for each $1 of "capital" contributed – over the past three years.

[125] According to Prentice, Synergy Tax Program purchasers' income tax returns were

processed in 2005 and 2006 generally without incident. However, in 2007 CRA began issuing

notices of reassessment to Synergy Tax Program purchasers, disallowing or proposing to

disallow deductions claimed for losses allocated to IBCA. Prentice estimated that, of

approximately 10 000 Synergy Tax Program purchasers, only 1500 had been reassessed by CRA.

We note that CRA has reassessed all three Synergy Tax Program purchasers who testified at the

Merits Hearing, disallowing or proposing to disallow their deductions claimed for IBCA losses.

Prentice suggested that there are regional disparities in the CRA's treatment of the Synergy Tax

Program, with a higher number of reassessments in western Canada, perhaps due, he said, to

more aggressive regional CRA offices.

[126] Synergy has assisted the Synergy Tax Program purchasers in dealing with CRA,

including filing notices of objection. According to Prentice, at the time of the Merits Hearing,

Synergy, IBC and IBCA were in negotiations with CRA to resolve outstanding issues and were

cooperating with the CRA's audit of the books and records of the businesses involved in the

IBCA joint venture for the 2006 tax year.

C. Purchasers' Evidence

1. SS

[127] SS paid $40 000 to purchase 40 units in the Synergy Tax Program in December 2005.

[128] As noted, it was in the process of doing SS's 2005 personal taxes that Lepitre introduced

SS to the Synergy Tax Program, participation in which had to occur before 1 January 2006. As

to the quality of the Synergy Tax Program, Lepitre told SS that it was "very firm" and "virtually

guaranteed" and that "[t]hey had a long-standing relationship with CRA". Lepitre told SS to

speak to anyone he liked about the Synergy Tax Program. SS asked for a CRA opinion, which

Lepitre said "they" had and was "definitely there" and about which Lepitre said "they" had "been

working with . . . IBC". Although Lepitre was unable to get the CRA opinion to SS "in the time

frame", SS thought that "it looked like a good opportunity", so he went ahead with it. SS did not

again ask for a CRA opinion, and one has never been provided to him.

[129] SS understood that Synergy was "the marketing arm for IBC" and that IBC purchased

business losses that people were unable to write off, which "almost functioned as a flow-through

share where I could then write off those business losses" against personal income, going back

three years. According to SS, this was explained to him by Lepitre at a meeting in the Kustom

Office, also attended by Jones or a Kustom Financial associate. SS received a chart (reproduced

earlier in these reasons) that assisted in the explanation of the Synergy Tax Program. SS

subsequently elaborated that the Synergy Tax Program "was for the most part a tax strategy" but

that there was either a "real off chance that some of these companies might make money" or a

"fairly minute" "possibility of return on the companies", the "companies" being those involved

with IBC and Synergy. SS did not recall being given or seeing the names of any of the

companies, nor did SS recall being told that IBC was in fact lending money to small and

medium-sized businesses.

[130] On 23 December 2005 at the Kustom Office, SS signed a UPA, TAA and BRA for his

purchase of units in the Synergy Tax Program. Lepitre was with SS when he signed these

documents. The purchase money, which came from a private company owned by SS and his

wife, was provided by cheque or money order to someone at the Kustom Office.

[131] SS expected that the writing off of losses would result in his paying 18% tax, rather than

36%. SS did write off losses for 2003, 2004 and 2005. He believed that he received information

directly from Synergy respecting the losses he could claim. CRA initially gave SS the refund

claimed for 2005 but disallowed the writing-off of losses for 2003 and 2004 and subsequently

proposed to disallow the writing-off of losses for 2005. In a 15 February 2007 letter to SS

regarding his 2005 income tax return, CRA wrote, in part:

As a result of our review we are proposing to disallow the loss claimed on the T2124 Statement of

Business Activities filed with your 2005 T1 Income Tax Return.

The loss from Independent Business Consultants Association reported on the T2124 Statement of

Business Activities, has not been supported.

The T2124 Statement of Business Activities filed with your 2005 T1 Income Tax Return indicates

that you are a partner claiming a loss. To date no documentation has been provided to CRA to

support the loss claimed on your 2005 T1 Income Tax Return.

. . .

The loss from Independent Business Consultants Association reported on the T2124 Statement of

Business Activities is the subject of a criminal investigation. The scheme and the promoters of the

scheme are also subject to that investigation. There is a possibility that any documentation or

information provided by you on a voluntary basis may be used in the investigation being

conducted.

If you do not want to provide documentation or information on a voluntary basis, you should wait

for the notice of reassessment to be issued. You then have the right to file a notice of objection

with the Appeals Division. . . .

[132] Synergy has assisted SS in his dealings with CRA. Synergy prepared the 16 August 2007

notice of objection (the "Notice of Objection") filed by or on behalf of SS with CRA. The

Notice of Objection stated, in part:

Facts

1) In the year [2005] I became a member of the Independent Business Consultants Association

(IBCA) and contributed $40,000 to IBCA.

2) IBCA joint-ventured with many small businesses to assist them with business advice and with

satisfying their financial requirements.

3) One of the methods to attract funds to such small businesses is to flow through profits and

losses that have been recorded by them to individual participants such as myself. To facilitate this

the small businesses agree to flow their profits and losses to IBCA.

4) To do this IBCA contributes capital and management expertise to the target small business in

return for a portion of the profits or losses of the business to be allocated to IBCA.

5) The profits or losses are pooled and broken down into units, which are distributed to individual

participants in IBCA such as myself and thereby allowing the flow through of the profits and

losses to the members such as myself.

6) At the end of the year the IBCA produces a report on form T2124 which is then allocated to the

members of IBCA in proportion to the number of units held by each of the members of IBCA.

7) The members of IBCA are deemed to be a partnership and in accordance with standard long

accepted rules [in] relation to partnerships, the profits and losses are allocated to each of the

partners of IBCA[.]

8) Canada Revenue Agency reassessed my T1 return to disallow the loss reported on the T2124

from IBCA[.]

Reasons for Objection

1) The members of the IBCA are a deemed partnership and IBCA is following the standard

partnership rules for allocation of profit and loss.

2) The losses have been allocated to the members of the IBCA as part of the joint venture

agreement between IBCA and the business entity receiving the support.

3) I am a true partner in IBCA. My contribution was real. My contribution was not risk free.

4) The losses I claim are real.

5) No other party has claimed the losses.

6) In the tax year subject to the Reassessment(s) I carried on an active business as an "Adventure

or Concern in the Nature of Trade" through the IBCA Partnership[.]

7) The total of all losses allocated to IBCA have been aggregated on form T2124 and allocated to

the members on a pro rata basis based on their contribution into IBCA in a correct manner that has

long been recognized and accepted by Canada Revenue Agency.

8) Profit and Loss flow through is allowed by Canada Revenue Agency with regard to larger

public companies. Small businesses require the same structure. CRA has unjustifiably refused to

accept the loss when it relates to small businesses[.]

9) CRA has accepted the use of the loss and profit flow through until 2006 and has arbitrarily

ceased to accept the claiming of the losses and gains[.]

10) The loss constitutes an Allowable Business Investment Loss. An Allowable Business

Investment loss may be deducted from all sources of income for the taxpayer for that year. CRA

has unjustifiably refused to accept that loss.

11) The loss constitutes a loss from an investment in an unincorporated business [–] IBCA being a

partnership. The loss has been generated from an Adventure or Concern in the Nature of Trade.

Therefore the total loss can be set off against other income. CRA has unjustifiably refused to

accept that loss.

12) Furthermore, the loss may be an investment in an incorporated business. Therefore the loss

generates an Allowable Business Loss, which generates a loss which can be set off against income

from whatever source and may be carried back for three years or carried forward for seven years.

CRA has unjustifiably refused to accept that loss.

13) The allocation of profit and loss is rational, reasonable and normal.

[133] SS acknowledged that the "Facts" numbered 2 through 6 in the Notice of Objection

coincided with his understanding at the time he purchased units in the Synergy Tax Program.

[134] At the time of the Merits Hearing, this matter with CRA was not yet resolved and SS

owed CRA approximately $36 000, which was a cause of stress and concern. Although SS has

asked for his $40 000 principal back, he has not received it. After SS received the letter from

CRA disallowing the writing off of losses, he spoke approximately six to eight times with Zielke.

From an e-mail or e-mails received from Zielke, SS understood Zielke to be Synergy's president

or vice-president in western Canada. All of SS's dealings with Zielke post-dated SS's purchase

of units in the Synergy Tax Program. Zielke told SS that he is not to worry and "[t]hey're going

to win their case with CRA". Lepitre similarly told SS that "[i]t's just bully tactics" and "they're

confident that they should still win this appeal".

2. RI

[135] RI, an Alberta resident, paid $15 000 to purchase 15 units in the Synergy Tax Program in

December 2005.

[136] RI learned of the KD Group from a friend, but he had played hockey with Lepitre and

Jones for a year or so before he attended at the Kustom Office in connection with the filing of his

2005 personal income tax return. RI described Lepitre as a friend, although he had not socialized

with Lepitre outside of hockey. RI said that, while he was seeking advice about tax

minimization and planning, Lepitre presented him with – indeed, "recommended" – "a couple of

options", one of which was the Synergy Tax Program. When asked if Lepitre expressed an

opinion about Synergy as an "investment", RI said that Lepitre was "impartial" and "definitely

wasn't recommending one over the other to me". According to RI, he did not discuss with Jones

the Synergy Tax Program or "any investment whatsoever".

[137] From Lepitre's explanation, RI understood that Synergy would invest his money in its

portfolio of businesses; if the businesses did well, he would "reap the benefits . . . of those

profits", and, if the businesses did not do well, he would "benefit from the business losses" as "a

tax write-off". RI agreed that he may well have been told his money would be loaned to the

businesses, but, to him, investing in or loaning to the businesses "kind of means the same thing".

RI did not know what role IBC played in the Synergy Tax Program. RI said that there were no

discussions about qualifying for an exemption in connection with his purchase of units in the

Synergy Tax Program.

[138] On 20 December 2005 at the Kustom Office, RI signed a UPA, TAA and BRA for his

purchase of units in the Synergy Tax Program. Lepitre, who was with RI when he signed these

documents, apparently witnessed RI's signature on the UPA and TAA. RI made his cheque

payable to Synergy and gave it to Lepitre to be forwarded to Synergy.

[139] RI's 2005 personal income tax return, prepared by the KD Group, claimed a business loss

relating to the losses stemming from his purchase of units in the Synergy Tax Program. RI did

not know which IBCA companies generated these losses for him. This business loss was

disallowed by CRA. RI's 6 July 2007 notice of reassessment stated that "[y]our business loss

from [IBCA] has been disallowed", resulting in a change of tax payable of some $29 000. In

November 2007 RI attended an information session given by Synergy in Calgary where the

status of the Synergy Tax Program was discussed. RI said that he has received assistance from

Synergy in dealing with CRA and that Zielke sent RI a notice of objection form. At the time of

the Merits Hearing, RI understood that Synergy was still working with CRA and that a resolution

was expected shortly.

3. GM

[140] GM, an Alberta resident, paid $25 000 to purchase 25 units in the Synergy Tax Program

in December 2005.

[141] GM learned of the KD Group and the Synergy Tax Program through a friend. In

December 2005 GM met with Lepitre and a Kustom Financial associate at the Kustom Office to

discuss the Synergy Tax Program. Prior to purchasing any units, GM also participated in a

conference call with Zielke, during which Zielke explained the Synergy Tax Program in more

detail. GM understood that Synergy was the agent working on behalf of IBCA to market the

Synergy Tax Program. GM also understood that he was investing in small and medium-sized

IBCA businesses, from which any profits or losses would be flowed back to the investor,

"similar to an oil and gas flow-through investment". GM further understood that he could claim

any losses on his tax return. GM confirmed that he had no input into the businesses selected and

that, once he paid his money, his only involvement was to receive the profits or losses.

[142] Lepitre and the Kustom Financial associate told GM that the Synergy Tax Program

"should produce fairly good returns" – more than "a GIC investment", "[p]robably in excess of

10[%]" – but that there was risk involved. GM said that there were no discussions about

qualifying for an exemption in connection with his purchase of units in the Synergy Tax

Program. GM's testimony revealed that he did not qualify as an accredited investor at the time

he purchased the units in the Synergy Tax Program.

[143] On 29 December 2005 at the Kustom Office, GM signed a UPA, TAA and BRA for his

purchase of units in the Synergy Tax Program. Zielke's name appears in type at the bottom of

the TAA and BRA. GM made his cheque payable to Synergy and gave it to the Kustom

Financial associate, who had witnessed GM's signature on the UPA and TAA.

[144] When GM filed his 2005 income tax return, he claimed a loss associated with his

"investment" in the Synergy Tax Program, which was based on a form received from IBCA.

GM's notice of assessment for 2005 allowed the loss but withheld his refund. GM was

subsequently reassessed by CRA and the loss was disallowed. GM has filed a notice of

objection that Synergy assisted him in preparing. At the time of the Merits Hearing, GM

understood that Synergy was still dealing with CRA to resolve the issue.

[145] GM testified that he received a cheque from IBCA in 2008 for "some income" or, he

guessed, "some profit" associated with his purchase of units in the Synergy Tax Program.

VI. ISSUES

[146] Based on the Notice of Hearing, the issues we must determine are:

Were the investments in the Kustom Companies "securities" under the Act, and, if

so, were:

Kustom Financial securities "traded" and "distributed" by Kustom

Financial, Lepitre and Jones;

Kustom Group securities "traded" and "distributed" by Kustom Group,

Kustom Financial, Lepitre and Jones;

Hightide securities "traded" and "distributed" by Hightide, Kustom

Financial, Lepitre and Jones;

in contravention of the registration and prospectus requirements of the Act?

Did the Synergy Tax Program involve "securities", and, if so, were they "traded"

and "distributed" by Synergy, Kustom Financial, Lepitre, Jones and Zielke in

contravention of the registration and prospectus requirements of the Act?

Did Kustom Financial, Lepitre and Jones act as advisors without being registered

to do so?

If so, did the Respondents engage in conduct that was contrary to the public

interest?

VII. ANALYSIS

A. Trading and Distributing Securities

1. Regulatory Regime

[147] Section 75(1)(a) of the Act prohibits a person or company from trading in a security if not

registered to do so with the Executive Director of the Commission (the "Executive Director")

(unless an exemption applies). Thus, to find a contravention of section 75(1)(a), we must

conclude from the evidence that:

there was a security as defined in the Act;

a trade or act in furtherance of a trade occurred as defined in the Act in relation to

that security; and

the person or company was not registered (and no exemptions were available).

[148] Section 110(1) of the Act prohibits the distribution of a security if no prospectus has been

filed with the Commission and receipted by the Executive Director (unless an exemption

applies). Thus, to find a contravention of section 110(1), we must conclude from the evidence

that:

there was a security as defined in the Act;

there was a distribution as defined in the Act of that security; and

a prospectus was not filed or receipted (and no exemptions were available).

[149] The registration and prospectus requirements play a fundamental role in protecting

members of the public who are contemplating a purchase of securities and in ensuring an

efficient and fair capital market. Registration serves to provide a prospective investor with the

benefit of advice from a salesperson with requisite proficiency and ethical standards. A

prospectus is designed to provide a prospective investor with comprehensive and reliable

information on which to assess the risks and benefits of making a certain investment.

[150] Alberta securities laws recognize that not every securities transaction or every

prospective investor requires these protections. Exemptions from the registration and prospectus

requirements are provided under Alberta securities laws in certain specified cases in which the

purchasers' characteristics, the nature of the trades or other conditions obviate the need for

registrant involvement or prospectus disclosure. Included in the exemptions set out in National

Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") (until 13 September

2005, Multilateral Instrument 45-103 Capital Raising Exemptions ("MI 45-103")) are sales made

to accredited investors (assessed by reference to specified financial or other criteria) and those

made to family, friends and business associates of an issuer's directors or senior officers. The

rationale for these exemptions is that such individuals either have the financial ability to

withstand financial loss or retain advice or a sufficiently close relationship with an issuer's

principals to allow for an assessment of their capabilities and trustworthiness.

2. Investments in Kustom Companies

(a) "Securities"

[151] The term "security" is broadly defined in section 1(ggg) of the Act. The pertinent parts of

the section for purposes of this proceeding provide that a "security" includes:

(ii) any document constituting evidence of title to or interest in the capital, assets, property,

profits, earnings or royalties of any person or company; . . .

(v) any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit

certificate, participation certificate, certificate of share or interest, preorganization

certificate or subscription . . .; . . .

(ix) any profit-sharing agreement or certificate; . . .

(xiv) any investment contract; . . .

[152] The loan of money by investors to each of the Kustom Companies was secured by

promissory notes and, subsequently, irrevocable letters of assignment. These clearly fell within

the definition of "security" in section 1(ggg)(v) of the Act – a "note or other evidence of

indebtedness". Thus, each issuance for money of a PN or ILA by the respective Kustom

Companies constituted a "security".

[153] We also consider whether the loan arrangements between investors and each of the

Kustom Companies were investment contracts under the Act. The term "investment contract",

which is not defined in the Act, has been defined through jurisprudence. The leading Canadian

case is Pacific Coast Coin Exchange of Canada Limited v. Ontario (Securities Commission),

[1978] 2 S.C.R. 112, affirming (1975), 8 O.R. (2d) 257 (C.A.), affirming (1975), 7 O.R. (2d) 395

(Div. Ct.), in which the majority of the Supreme Court of Canada referred to two American

decisions (SEC v. W.J. Howey Co., 328 U.S. 293 (1946); and State of Hawaii v. Hawaii Market

Center, Inc., 485 P.2d 105 (1971)). This jurisprudence defines an investment contract as an

investment of money in a common enterprise with expected profits arising significantly from the

efforts of others. The Court in Pacific Coast stressed that this definition reflects the economic

realities of the transaction in that it recognizes the investor's dependence on the efforts of third

parties to realize the profits expected from the transaction. This reasoning, we note, is consistent

with the views expressed by the Supreme Court of Hawaii in Hawaii Market (at 109) that the

"subjection of the investor's money to the risks of an enterprise over which he exercises no

managerial control is the basic economic reality of a security transaction".

[154] In our determination of whether the loan arrangements between investors and each of the

Kustom Companies were securities, we are mindful that remedial legislation such as the Act is to

be construed broadly; as stated by the Supreme Court of Canada in Pacific Coast at 127 (citing

Tcherepnin v. Knight, 389 U.S. 332 at 336 (1967)), "in searching for the meaning and scope of

the word 'security' in the Act, form should be disregarded for substance and the emphasis should

be on economic reality".

[155] The Supreme Court of Canada in Pacific Coast also commented that a flexible

interpretation should be applied in determining whether a transaction is found to be an

investment contract (at 127-28):

In the search for the true meaning of the expression "investment contract", another guideline must

also be present in the forefront of our thinking. In the words of the Supreme Court of the United

States in SEC v. W.J. Howey Co. [328 U.S. 293 (1946)], any definition must permit (at p. 299):

. . . the fulfillment of the statutory purpose of compelling full and fair disclosure

relative to the issuance of 'the many types of instruments that in our commercial

world fall within the ordinary concept of a security.' . . . It embodies a flexible

rather than a static principle, one that is capable of adaptation to meet the

countless and variable schemes devised by those who seek the use of the money

of others on the promise of profits.

Which does not mean that the legislation is aimed solely at schemes that are actually fraudulent;

rather, it relates to arrangements that do not permit the customers to know exactly the value of the

investment they are making.

[156] The loan arrangements between investors and each of the Kustom Companies involved

money paid by investors to the respective Kustom Companies, with the indebtedness initially

secured by promissory notes made in favour of the investors. The Kustom Companies were

seeking risk capital from the public for use in business enterprises of the respective Kustom

Companies' choosing. The payment of money by the investors was clearly made with an intent

by them to profit, and there was clearly a common enterprise between each investor and the

respective Kustom Companies. Once the investors had paid their money to the respective

Kustom Companies, it was pooled with other investors' money and lent out to third parties, and

the promissory notes were replaced by irrevocable letters of assignment and PFMAs. The

PFMAs gave the respective Kustom Companies full control over the use of the money deposited

by investors with the respective Kustom Companies, which was said to be for the benefit of both

investors and the respective Kustom Companies. Investors were not required to do anything

further to earn the promised returns; the profits were to come from the efforts of other parties –

Safeguard's investing in other financial instruments, Sweet Water's (or Knight's) foreign currency

trading, or Akins receiving money from the settlement of a lawsuit. There is no question that

these were strictly passive investments, wholly dependent on the efforts of these other parties

and the success of their actions.

[157] We therefore find that these loan arrangements between investors and each of the Kustom

Companies were also "investment contracts" captured as "securities" under section 1(ggg)(xiv)

of the Act.

(b) "Trades"

[158] Section 1(jjj) of the Act broadly defines "trade" to include a "sale or disposition of a

security for valuable consideration" (at section 1(jjj)(i)) and "any act, advertisement, solicitation,

conduct or negotiation made directly or indirectly in furtherance" of a trade (at section 1(jjj)(vi)).

Thus, in addition to an actual sale in securities, a trade includes any act in furtherance of a sale of

securities.

[159] In analyzing whether an act in furtherance of a trade has occurred, we take guidance from

the reasoning of the Ontario Securities Commission (the "OSC") in Re Costello (2003), 26

O.S.C.B. 1617 (at para. 47):

There is no bright line separating acts, solicitations and conduct indirectly in furtherance of a trade

from acts, solicitations and conduct not in furtherance of a trade. Whether a particular act is in

furtherance of an actual trade is a question of fact that must be answered in the circumstances of

each case. A useful guide is whether the activity in question had a sufficiently proximate

connection to an actual trade.

[160] Thus, it is a question of fact whether a particular act is in furtherance of a trade. We

consider the totality of the conduct and the context in which the acts occurred, including the

effect on investors. The Commission has found that acts such as accepting investor money,

depositing investor money into bank accounts, preparing and providing forms of agreements for

signature by investors, meeting with individual investors, conducting or holding information

sessions with investors, preparation and dissemination of advertisements, newsletters and other

promotional material and hiring of salespersons to sell securities may constitute acts in

furtherance of a trade in a security (see, for example, Re Maitland Capital Ltd., 2007 ABASC

357; Re KCP Innovative Services Inc., 2007 ABASC 584; and Re Gold-Quest International

Corp., 2010 ABASC 18).

[161] The evidence is clear that Kustom Financial was involved in the sale of the Kustom

Companies securities and that Kustom Group and Hightide were involved in the sale of their

respective securities. Indeed, it appears that a significant business activity of Kustom Financial

was the sale of investments in the Kustom Companies and the re-investment of the invested

money in other ventures. Kustom Financial employed or contracted with a group of about 20

commissioned associates for the purpose of referring prospective investors to, and selling,

investments in the Kustom Companies. Further, it appears that the business activity of each of

Kustom Group and Hightide was limited to the sale of investments in the respective company

and the re-investment of the invested money in other ventures. The documentation necessary to

complete investments in the Kustom Companies was provided by the Kustom Companies

principals or Kustom Financial associates, and completion of that documentation was finalized

with their assistance or in their presence. Finally, the money invested in the respective Kustom

Companies was paid directly to or as directed by the respective Kustom Companies. These

activities of the Kustom Companies were, we find, acts of actual trading in their securities or acts

in furtherance of such trades.

[162] Lepitre did not testify at the Merits Hearing. However, the evidence is clear that he was a

director and 50% shareholder of Kustom Financial and Hightide and a director and officer of

Kustom Group. We find, on the evidence, that he was the controlling mind of the Kustom

Companies. Lepitre spoke at information sessions promoting investments in the Kustom

Companies. He trained Kustom Financial associates in the Five-Step Program, who then

referred prospective investors to, and sold, investments in the Kustom Companies. Lepitre

himself met with prospective investors and sold investments in the Kustom Companies to

investors. All of the Kustom Companies investors who testified at the Merits Hearing said that

they dealt primarily, if not solely, with Lepitre when they purchased their investments in the

Kustom Companies. Lepitre provided PNs and PFMAs to numerous Kustom Companies

investors for their signatures. The PNs and PFMAs set out rates of return payable to the Kustom

Companies investors, all of which – having regard to Jones' investigative interview testimony as

to the setting of the 3% rate of return in Kustom Financial PFMAs and to Lepitre's and Jones'

roles with the Kustom Companies – we infer were determined by Lepitre and Jones in concert.

Lepitre, on behalf of the Kustom Companies, signed PNs, PFMAs and ILAs to complete the

sales to numerous investors of investments in the Kustom Companies. According to Jones,

Lepitre was a signatory on the Kustom Group bank account, and we infer from the evidence as a

whole that he also had access to and control over the Kustom Financial and Hightide bank

accounts. Indeed, there is, on the evidence, no question that Lepitre was instrumental in creating,

marketed and sold investments in the Kustom Companies. We therefore find that Lepitre

engaged not only in actual trades of the Kustom Companies securities but also in acts in

furtherance of such trades.

[163] Jones also did not testify at the Merits Hearing. However, the evidence is clear that he

was a director and 50% shareholder of Kustom Financial and Hightide and an officer of Kustom

Group. The evidence as a whole suggests that Jones had limited personal interaction with the

Kustom Companies prospective investors or investors. However, Jones knew of the business

activities of the Kustom Companies and that they were raising significant amounts of money by

selling investments in themselves to investors. Two copies of the Kustom Financial letter

addressed to "All our Valued Clients and Prospective Clients" in evidence before us – a

communication clearly designed to solicit interest in the Kustom Financial investment – were

signed by Jones. The PNs and PFMAs set out rates of return payable to the Kustom Companies

investors, all of which – having regard to Jones' investigative interview testimony as to the

setting of the 3% rate of return in Kustom Financial PFMAs and to Lepitre's and Jones' roles

with the Kustom Companies – we infer were determined by Lepitre and Jones in concert. Jones

signed one Kustom Financial PFMA, three Kustom Financial ILAs and one Kustom Group ILA

to further, if not complete, the sale of the related investments. Jones acknowledged that he was a

signatory on the Kustom Group bank account. We infer from the evidence as a whole that he

also had access to and control over the Kustom Financial and Hightide bank accounts. We

therefore find that, while Jones was not primarily directly involved in the sale of the Kustom

Companies securities, his activities certainly constituted acts in furtherance of trades in such

securities.

[164] We found that actions undertaken by each of the Kustom Companies, Lepitre and Jones

were acts of trading in securities or acts in furtherance of trades in securities within the meaning

of sections 1(jjj)(i) and (vi) of the Act. Thus, we find that:

Kustom Financial, Lepitre and Jones traded in Kustom Financial securities in

Alberta;

Kustom Group, Kustom Financial, Lepitre and Jones traded in Kustom Group

securities in Alberta; and

Hightide, Kustom Financial, Lepitre and Jones traded in Hightide securities in

Alberta.

(c) "Distributions"

[165] Section 1(p) of the Act defines "distribution" as including "a trade in securities of an

issuer that have not been previously issued", namely securities that are issued directly to the

purchaser from the issuer's treasury or first created then issued. Here, the Kustom Companies

securities traded had not been previously issued; their first issuance was to the investor on

execution of a PN.

[166] Having found that the Kustom Companies, Lepitre and Jones all traded the Kustom

Companies securities in Alberta within the meaning of the Act as set out above, we thus find that

the trades in the following were "distributions" in Alberta:

Kustom Financial securities by Kustom Financial, Lepitre and Jones;

Kustom Group securities by Kustom Group, Kustom Financial, Lepitre and Jones;

and

Hightide securities by Hightide, Kustom Financial, Lepitre and Jones.

(d) No Registration or Prospectus

[167] We found that the loan arrangements with the Kustom Companies were securities and

that:

Kustom Financial, Lepitre and Jones traded and distributed Kustom Financial

securities in Alberta;

Kustom Group, Kustom Financial, Lepitre and Jones traded and distributed

Kustom Group securities in Alberta; and

Hightide, Kustom Financial, Lepitre and Jones traded and distributed Hightide

securities in Alberta.

[168] Therefore, registration and a prospectus were required unless an exemption was

available. Based on the facts found, we further find that none of the Kustom Companies were

registered to trade in securities in Alberta, nor had they filed any prospectus with the

Commission to distribute securities. We also find that neither Lepitre nor Jones was registered to

trade in securities in Alberta. Therefore, in the absence of an exemption, each of the Kustom

Companies, Lepitre and Jones contravened sections 75(1)(a) and 110(1) of the Act when they

traded and distributed the Kustom Companies securities. As we discuss below, none of these

Respondents established that exemptions to trade and distribute all of the Kustom Companies

securities were available to them.

3. The Synergy Tax Program

(a) "Securities"

(i) Staff Position

[169] Staff submitted that each "unit" sold by Synergy in the Synergy Tax Program that entitled

a purchaser – according to Prentice's testimony – to "share in the profits or losses generated by

the small and medium sized businesses" fit within the definition of "security" under

section 1(ggg) of the Act as a "document constituting evidence of title to . . . profits . . . of any

person" under subclause (ii), a "unit" under subclause (v) or a "profit-sharing agreement" under

subclause (ix). Staff contended that the broad and flexible approach taken by the Supreme Court

of Canada in Pacific Coast is the proper approach to follow in determining whether a particular

transaction is a security and subject to regulation under the Act.

[170] Staff submitted that the UPA by its own terms told purchasers they were purchasing

"units", although Staff conceded that it is not clear from the UPA what entity – Synergy, IBC or

IBCA – was issuing the "units". Staff then argued that, as Synergy was the only other

contracting party to the UPA and the UPA provided for purchasers to make their cheques or

money orders payable to Synergy, a plain reading of the UPA leads to the conclusion that

Synergy was the issuing entity.

[171] Staff disagreed with the testimony of Prentice that the use of "units" was notional, used

only as a means of "measuring an input and providing remuneration (sic) to the advisor network"

as "technically there wasn't units in anything". Staff suggested that there were units in

something, however amorphous. Staff pointed to Prentice's testimony that a "unit" entitled a

purchaser to "share in the profits or losses generated by the small and medium sized businesses".

Staff also noted that Prentice said each purchaser received a specific and unique "allocation" of

one of 55 different sub-associations and that each sub-association had a "distinct identifier". In

essence, Staff argued that Synergy's failure to issue a tangible "unit" cannot be fatal to a finding

that a "unit" was issued and a "security" existed.

[172] Staff also pointed to the information in the notices of objection filed with CRA. Those

documents referred to the members of IBCA as a partnership. They stated that each purchaser

was "a true partner", that "IBCA is following the standard partnership rules for allocation of

profit and loss" and that "profits or losses are pooled and broken down into units, which are

distributed to individual participants", "[a]t the end of the year", "in proportion to the number of

units held by each of the members of IBCA".

[173] Therefore, Staff argued that, in these circumstances, each "unit" – which entitled a

purchaser to share in profits or losses or assets (because a loss that can be deducted from income

and therefore reduce the amount of tax payable is an asset) of IBCA – was a "document

constituting evidence of title to . . . profits . . . of any person" (the definition of "person" in

section 1(mm) of the Act includes a partnership or unincorporated association), a "unit" and a

"profit-sharing agreement" under sections (1)(ggg)(ii), (v) and (ix) of the Act.

[174] Staff also submitted that the purchases through the Synergy Tax Program qualified as an

"investment contract" under section 1(ggg)(xiv) of the Act. Staff submitted that the elements of

an investment contract were present – purchasers paid money to participate in a common

enterprise (the receipt of profits or losses from small or medium-sized businesses) in which the

purchasers were entirely dependent on the significant efforts being made by Synergy, IBC or

IBCA to manage successfully the business and affairs of the Synergy Tax Program.

(ii) Synergy's Position

[175] Synergy's primary argument was that, although it may have entered into agreements with

Alberta residents to participate in the Synergy Tax Program, no securities of Synergy were

traded or distributed. In the result, Staff's allegations in the Notice of Hearing that securities of

Synergy were traded or distributed are incorrect and no finding can be made that Synergy

breached either section 75(1)(a) or 110(1) of the Act.

[176] Synergy submitted that, because Staff focused on the three agreements entered into with

purchasers – the UPA, BRA and TAA – and not the entirety of the Synergy Tax Program, Staff

misapprehended the nature of the arrangements entered into between Synergy and purchasers of

units under the UPA and have presented an incomplete evidentiary record. Synergy submitted

that the Commission has insufficient evidence before it "to make an informed and reasoned

judgment about the legal character or merits of the tax program", as it did not hear evidence from

IBC, IBCA or any of the businesses that took part in the joint venture with IBCA.

[177] Synergy also argued that this is not a case in which the Commission should exercise its

broad powers to intervene in the public interest. In Synergy's submission, the Synergy Tax

Program was designed to allow purchasers to utilize tax losses generated by third party

businesses, so is not a typical "security" or "investment" that the Commission would regulate.

Synergy suggested that a "security" is typically "an investment in something, or a defined

fraction of something, with the expectation that it will increase in value over time so that it can

be sold for a greater sum than it was purchased for or that the increase will be paid directly to the

investor". Synergy noted that the Synergy Tax Program is more appropriately regulated by CRA

because the principal financial benefit that accrues to participants arises from operation of the

Income Tax Act (Canada). Synergy also suggested that the IBCA joint venture arrangement has

conferred benefits on junior or distressed businesses through the provision of bridge financing

and management services and that Commission intervention may well result in negative

consequences for these businesses. Synergy further commented that there has been no

suggestion that purchaser money was used for any other purpose than to provide capital to small

businesses, or that purchasers were misled by any material aspects of the Synergy Tax Program,

including use of funds and risks or benefits of the program. Rather, purchasers of units received

exactly what they purchased and expected – tax losses that could be used to reduce their taxable

income.

[178] Synergy argued that the Commission ought to construe narrowly the definition of

"security", referring us to the following: Re Albino (1991), 14 O.S.C.B. 365; Re Sunfour Estates

(1992), 15 O.S.C.B. 269; and Pacific Coast Coin Exchange of Canada Limited v. Ontario

(Securities Commission) (1975), 7 O.R. (2d) 395 (Div. Ct.)).

[179] Synergy contended that a review of the three agreements – the UPA, BRA and TAA –

demonstrates that the UPA and BRA are simply agreements to agree and the TAA is an agency

agreement. In Synergy's submission, none of these agreements evidence any interest – capital,

assets, property, profits, earnings or royalties – in any person or company, nor are they profit-

sharing agreements. That is, the purchaser of units does not receive any rights to any property,

including "units". Further, Synergy pointed out there is no evidence that any actual "units" were

sold on completion of the TAA or that purchasers received any voting or non-voting shares or

any other defined interest in a company or venture that could be resold. Synergy submitted that

the word "units" used in the agreements was "meant to denote increments of payment for the

purpose of measurement". In the result, Synergy would have us conclude that a purchase

through the Synergy Tax Program was not an investment in a "security" under section 1(ggg)(ii),

(v) or (ix) of the Act.

[180] Synergy disputed that the UPA, BRA and TAA, either separately or together, constituted

an investment contract. Synergy submitted that purchasers who executed a UPA, BRA and TAA

did not invest in a common enterprise with a view to a profit. While Synergy acknowledged that

there was the possibility of profits being paid to purchasers, it noted that the primary focus of the

arrangement was the transfer of tax losses, not profits. Synergy also suggested that the prospect

of receiving funds derived from profits was very low and noted that there was no ongoing

investment expected to increase in value, as would typically be expected from an investment in a

security.

[181] Synergy concluded that Staff did not prove that purchases made using the UPA, BRA and

TAA documentation were investments in a "security" and, therefore, allegations that Synergy

breached sections 75(1)(a) and 110(1) of the Act and acted contrary to the public interest must

fail.

(iii) Analysis

(a) Interpretative Approach

[182] The purpose of securities law is to regulate investments – transactions in which investors

pay money to a venture that involves the risk of financial loss – in whatever form they take and

by whatever label participants use to describe the venture. To that end, the legislature has

enacted a broad definition of "security" intended to capture any arrangement or instrument that

might be sold as an investment. Securities legislation is remedial, to be construed broadly and

liberally in the context of the economic realities under consideration: Pacific Coast (S.C.C.).

[183] We apply a purposive approach in determining what a "security" is under an embracive

statute and provision, such as the Act and the relevant definition, respectively. That is, a

particular offering may be found to involve a distribution of a security if investors would be

protected by receiving full, true and plain disclosure of all material facts in a prospectus and the

advice of a registered securities dealer or salesperson.

[184] We now consider whether purchases through the Synergy Tax Program constituted an

investment in a "security". In our view, we do not require a full and complete understanding of

the nature and extent of the relationship, contractual or otherwise, among Synergy, IBC, IBCA

and the recruited small to medium-sized businesses to determine whether purchasers in the

Synergy Tax Program received a "security". In other words, while we find the evidence before

us regarding the operation of IBC, IBCA and the recruited businesses helpful in gaining an

understanding of how purchasers' money was ultimately used and the resultant flow of profit or

loss to purchasers, the precise details are not critical to our determination of whether the Synergy

Tax Program involved an offering of securities to the public. As the Ontario Divisional Court

said in Ontario (Securities Commission) v. Lett, [2006] O.J. No. 751 (at para. 9):

The precise details of the high-yield program may not have been determined but sufficient of its

characteristics were [in evidence through an Agreed Statement of Facts] to warrant the finding by

the Commission that the program was itself an investment contract. The program was the security

and not the individual assets that might be acquired by the program.

[185] Thus, what is relevant to our inquiry is a sufficient understanding of the attributes of the

Synergy Tax Program, such as the rights and obligations involved in the transaction between

each purchaser and Synergy, including the purchasers' understanding of what they were to

receive in return for the money they paid. For example, it is clear from the UPA, TAA and BRA

that the purchasers' contractual obligations were with Synergy, not with IBC, IBCA or any of the

businesses recruited into IBCA, and that Synergy was appointed as the purchasers' agent to enter

into other arrangements. Ultimately, we find that we have a sufficient understanding of the

attributes of the Synergy Tax Program to make our finding below that a purchase through the

Synergy Tax Program was an investment in a "security".

(b) "Interest in Profits, Earnings", "Units" or "Profit-

sharing Agreement"

[186] We first consider whether the purchase of units in the Synergy Tax Program as

documented in the UPA, TAA and BRA constituted "evidence of title to or interest in the capital,

assets, property, profits, earnings or royalties of any person or company", a "note or other

evidence of indebtedness, . . . unit, unit certificate" or a "profit-sharing agreement" within the

meaning of sections 1(ggg)(ii), (v) and (ix) of the Act.

[187] While all of the documentation effectively speaks to purchases of "units" in small to

medium-sized, privately-owned businesses, no tangible units or unit certificates were ever issued

to purchasers. In our view, however, that failure is not determinative of the issue of whether the

Synergy Tax Program involved a security. The form of the transaction should not override the

substance of the transaction. As stated in Pacific Coast (S.C.C. at 127): "[s]ubstance, not form,

is the governing factor". Further, the purposes of our securities laws would be circumvented

were we to excuse arrangements from our regulatory regime solely because their promoters had

the guile not to paper them fully or properly. Indeed, this Commission has appropriately

regulated in many instances where a security was found to have been offered despite the lack of

promised share certificates.

[188] There is little jurisprudence on the interpretation of sections 1(ggg)(ii), (v) and (ix) of the

Act. However, a provision of Ontario securities laws essentially equivalent to our

section 1(ggg)(ii) was considered in Re Ontario Securities Commission and Brigadoon Scotch

Distributors (Canada) Limited, [1970] 3 O.R. 714 (H.C.J.). In that case, the court held that

whisky warehouse receipts were securities and emphasized that the definition under

consideration covered such documents of title only when bought and sold for investment

purposes (in contrast to, for example, consumption or inventory purposes).

[189] In the present case, in exchange for money, purchasers were told that they were

purchasing units in small to medium-sized, privately-owned businesses. This would give the

purchaser an interest in any profits – or earnings (negative or positive) – from those businesses.

We note that purchasers were primarily expecting negative earnings, which would result in the

anticipated tax benefits. In our view, participation in the Synergy Tax Program was therefore for

the purpose of making a profit or sharing in earnings (negative or positive). In effect, this would

mean the return of capital contributed plus a gain, generally expected to be in the form of a tax

refund or a lesser amount of taxes payable. We are of the view that this construction is

consonant with modern economic realities. Thus, the UPA, TAA and BRA together constituted

evidence of an interest in profits and earnings within the meaning of, and should be classified as

a "security" under, section 1(ggg)(ii) of the Act. We so find.

[190] Staff did not establish to our satisfaction that the Synergy Tax Program was a "security"

as contemplated by section 1(ggg)(v) or (ix) of the Act and thus we make no findings on the

applicability of these two sections.

(c) "Investment Contract"

[191] We now consider whether the Synergy Tax Program arrangements met the criteria of an

investment contract. As discussed above, the requirements to found an investment contract,

which is not defined in the Act, are set out in Pacific Coast (S.C.C.). There are three prongs

(although some characterize the test as only two-pronged): the transaction in which "an

investment of money" is made must be "a common enterprise" and the expected profits must

depend on "the undeniably significant" efforts of the promoter or other third party.

[192] Before beginning the three-pronged analysis, we address a preliminary issue that arises in

the particular circumstances of this case. Here, the primary anticipated benefit was the tax losses

flowed through from the primarily-IBC-recruited businesses to the purchaser of units in the

Synergy Tax Program. This raises the novel question of whether tax benefits stemming from

corporate losses constitute "profits" within the meaning of the Pacific Coast (S.C.C.)

interpretation of the investment contract branch of the definition of "security" in the Act.

[193] In interpreting "profit" we take a broad, liberal view of the concept, consistent with other

securities regulatory decisions considering whether a particular transaction falls within the

definition of a "security". In our view, profit need not be a direct monetary benefit, restricted to

common forms of profit such as interest, dividends or capital appreciation. Rather, the concept

of profit ought to encompass all types of economic return, financial benefit or gain. In this case,

the primary benefit purchasers expected to receive from purchasing the units in the Synergy Tax

Program was, in substance, clearly a financial benefit, even though described as tax losses.

Purchasers made an investment in the Synergy Tax Program – they risked financial loss to gain

certain potential financial advantages. We are of the view that purchasers in the Synergy Tax

Program fully expected to benefit financially or "profit" by receiving back more than the

principal of their investment in the form of a tax refund or reduction in taxes payable. To

suggest otherwise would be economically nonsensical.

[194] As we were pointed to no Canadian jurisprudence on the issue, we take guidance from

American case law, which has determined that the promotion of an investment largely for tax

advantages provides an expectation of profits within the meaning of the Howey test (from which

the majority of the Supreme Court of Canada formulated the Pacific Coast test). For example, in

Kolibash v. Sagittarius Recording Company, 626 F.Supp. 1173 (S.D. Ohio 1986), District Judge

Kinneary found that a tax shelter scheme involving leases of music recordings to investors was a

security. In analyzing the requirement in Howey that profits be derived solely from the efforts of

others, District Judge Kinneary determined that tax benefits could constitute "profits" because (at

1179):

. . . excluding tax benefits from the scope of the meaning of profits, particularly when tax benefits

are the primary inducement for an individual to invest in a scheme, flies in the face of the

economic reality. More importantly, a definition of "profits" which excludes tax benefits, at least

under the circumstances of the present case, would be contrary to the remedial nature of the

securities laws and their central purpose of protecting investors. [Tcherepnin], supra, 389 U.S. at

336, 88 S.Ct. at 553. Indeed, courts are admonished to broadly and liberally construe the meaning

of "security" in order to advance the purposes of the securities laws. Id. at 336, 88 S.Ct. at 553;

[Sharp v. Coopers & Lybrand, 457 F.Supp. 879 (E.D.Pa. 1978)] at 889. Therefore, the Court

concludes that where, as in the present case, tax benefits are the primary or dominant economic

inducement for investing, such tax benefits may properly be considered "profits" within the

meaning of Howey. . . .

[195] This confirms our rationale and conclusion that purchasers of units in the Synergy Tax

Program expected to receive a "profit" in the form of a tax benefit or advantage. We so find,

thus leading to a consideration of the three-pronged test.

[196] In this case, there is no question that the first and second prongs of the Pacific Coast

(S.C.C.) test were fulfilled – an investment of money in a common enterprise. Purchasers were

invited to, and did, pay money to purchase units in the Synergy Tax Program and understood that

their money would be pooled with other purchasers' money. Purchasers further understood that

Synergy would then provide that pooled money to be used as capital by small and medium-sized

businesses. Through this, purchasers shared in promises of both profits and financially-

beneficial losses. Their financial return was dependent entirely on Synergy finding new capital

from purchasers and giving purchaser money to IBC, with IBC and Synergy using their expertise

to find businesses to participate in IBCA. For all of this activity and expertise, Synergy and IBC

and presumably IBCA received compensation. In short, the efforts of Synergy, IBC and IBCA

affected each purchaser's receipt or expected receipt of financial benefits through the Synergy

Tax Program. Thus, the Synergy Tax Program involved a commonality between each purchaser

(as investor) and Synergy (as promoter) and IBC and IBCA (as the managers of the investment).

[197] The third prong of the test requires that the expected profit – or, in these circumstances,

the financially-beneficial loss – come from the significant efforts of a party other than the

investor. There is no doubt that the expected tax benefits were to be derived from anticipated

losses from businesses participating in IBCA and that these benefits flowed from the tax write-

off program developed and promoted through Synergy, IBC and IBCA. Purchasers' only role in

the Synergy Tax Program was providing money. The only efforts that mattered were those

undertaken by Synergy, IBC and IBCA, as they were undeniably essential to the overall success

or failure of the Synergy Tax Program. The risk to purchasers – the chance of not recovering

their investment through receiving profits or financially-beneficial losses – depended on the skill

with which Synergy attracted new purchasers to put up capital, the skill with which IBC and

Synergy recruited businesses, and the skill with which IBC managed, guided and provided

capital to businesses it and Synergy convinced to participate in IBCA.

[198] In our view, this is not a borderline transaction. The Synergy Tax Program, in its

simplest terms, involved Synergy seeking to attract the passive investor for whose benefit

securities laws were enacted. Investors gave their money to Synergy. Once money left the

hands of the investor, any financial gain realized significantly depended on the efforts of others.

Investors had no choice as to which sub-association they would be assigned or any input into the

selection of participating businesses that formed any one sub-association. Synergy forwarded

pooled investor money to IBC, whose expertise was primarily depended on to find small and

medium-sized businesses in need of capital and management services. IBC provided investor

money as capital to these businesses and provided management services to the businesses.

Investors' return would be their proportionate share of the pooled profits or losses generated by

those businesses. The expectation was that, for most, business losses would be received that

could then be used to reduce an investor's taxable income, resulting in a tax refund or reduction

in taxes payable, which would provide a return or gain to the investor. There might also be some

profits received.

[199] We conclude, in light of the economic realities of the Synergy Tax Program, that the

Synergy Tax Program arrangements were also "investment contracts" within the meaning of

Pacific Coast (S.C.C.) and therefore "securities" under section 1(ggg)(xiv) of the Act.

(iv) Other Considerations

[200] Synergy argued that, even if the Synergy Tax Program technically qualified as a

"security", there is no need for the Commission to exercise its broad powers to intervene in the

public interest because the Synergy Tax Program is more appropriately regulated by CRA under

the Income Tax Act (Canada). We disagree. CRA has a very different regulatory focus –

administering and ensuring compliance with Canadian tax laws. In contrast, the Commission's

mandate is investor protection and the facilitation of a fair and efficient capital market. CRA has

no mandate to shield investors from the harsh realities of caveat emptor by ensuring that the

investing public has access to proper information and protections when making investment

decisions. While CRA regulates some aspects of the Synergy Tax Program, that cannot justify

depriving investors of the benefits of securities laws.

[201] In our view, as set out above, the Synergy Tax Program arrangements fell under the

definition of a "security". The Synergy Tax Program thus rightly engaged, and attracted the

protections of, Alberta securities laws – investors are entitled to receive the benefits of the

disclosure provided in a prospectus and the advice provided by a knowledgeable, skilled

securities salesperson who knows the investment product on offer and knows the client's

investment objectives and risk tolerances. In this case, investors were not given these

protections. It is clear to us that prospective investors in the Synergy Tax Program would have

benefited from – and should have received – these statutory protections.

[202] We also do not accede to Synergy's argument that our finding the Synergy Tax Program

arrangements are a "security" and subject to Alberta securities laws would be detrimental to the

participating businesses that have benefited from injections of risk capital sourced from investors

who purchased units in the Synergy Tax Program. Requiring compliance with Alberta securities

laws does not prevent the raising of capital; rather, these laws set up a regime that facilitates the

appropriate raising of venture capital for a variety of purposes.

(v) Conclusion

[203] Accordingly, we find that investments in the Synergy Tax Program were investments in

"securities" as defined in the Act.

(b) "Trades"

[204] As a result of our finding that investments through the Synergy Tax Program were

investments in securities, any sales of units in the Synergy Tax Program or acts in furtherance of

such sales would be trades under section 1(jjj) of the Act. As discussed above, the breadth of the

concept of trade covers a range of activities and typically, as here, no single factor is

determinative of the issue. We examine the entirety of the circumstances in assessing whether

any conduct had a proximate connection to an actual or intended trade in the Synergy Tax

Program securities.

[205] Synergy sold the Synergy Tax Program securities to members of the public and therefore

engaged in actual sales of these securities.

[206] Kustom Financial was retained by Synergy to act as an agent in selling the Synergy Tax

Program securities to investors. Kustom Financial forwarded to Synergy approximately $2.4

million raised through its sales of units in the Synergy Tax Program from December 2005 until

January 2007. For these sales Kustom Financial received commissions of approximately

$240 000. Kustom Financial therefore engaged in actual sales of the Synergy Tax Program

securities.

[207] Lepitre, a director and 50% shareholder of Kustom Financial, was an active presenter in

Five-Step Program information sessions at which the Synergy Tax Program was recommended

to attendees as a means to reduce income tax payments. Lepitre himself met with prospective

investors and sold units in the Synergy Tax Program to investors. He was the signatory on some

of the TAAs and BRAs executed to complete investors' purchases of units in the Synergy Tax

Program. Lepitre was instrumental in selling units in the Synergy Tax Program to all three

purchasers who testified at the Merits Hearing. He was presumably a beneficiary of

commissions paid to Kustom Financial for the sale of the Synergy Tax Program securities.

These activities of Lepitre were, we find, acts of actual trading in the Synergy Tax Program

securities or acts in furtherance of such trades. (We note that, in his submissions, Lepitre

admitted that he promoted the sale of units in the Synergy Tax Program but stated that he had

been told by Synergy's management and legal team that the Synergy Tax Program did not

involve a "security". However, no evidence was tendered to demonstrate what legal advice, if

any, had been obtained or what the opinion stated. Prentice had referred in his testimony to

receipt of legal advice regarding the Synergy Tax Program, but his counsel asked that the panel

not place any weight on that reference because Synergy had not waived the attached solicitor-

client privilege. Accordingly, we do not place any weight on that testimony of Prentice.)

[208] Jones was a director and 50% shareholder of Kustom Financial, an entity that was

retained to sell the Synergy Tax Program securities. Jones was a, if not the, key person at

Kustom Financial responsible for the provision of tax advice, and, as such, he participated in

Five-Step Program information sessions at which the Synergy Tax Program was recommended

to attendees as a means to reduce income tax payments. In his investigative interview, Jones

acknowledged that "[o]nce in a while" he would speak at Kustom Financial information sessions

for the promotion of tax and investment products, his participation, he said, being "strictly tax

write-offs, that type of thing". He was presumably a beneficiary of commissions paid to Kustom

Financial for the sale of the Synergy Tax Program securities. It appears that Jones had very

limited dealing with the actual sales of the Synergy Tax Program: his investigative interview

testimony suggests that he directly referred approximately 10 to 15 clients to the Synergy Tax

Program. We find that – viewed in the context of the business activity of Kustom Financial and

the presumed resultant benefit to Jones – the activities of Jones were promotional in nature, the

objective of which was to create an interest in the Synergy Tax Program and solicit prospective

investors to purchase units in the Synergy Tax Program. These activities of Jones were, we find,

acts in furtherance of trading in the Synergy Tax Program securities. (It also seems, from Jones'

submissions, that he may have been informed by Synergy that the Synergy Tax Program did not

involve a "security".)

[209] There was ample evidence that Zielke engaged in acts in furtherance of trades in the

Synergy Tax Program securities. Throughout the relevant period, Zielke was Synergy's western

regional manager and responsible for investor relations – that is answering the questions of and

otherwise dealing with potential and existing purchasers under the Synergy Tax Program. Zielke

set up presentations and attended seminars at which he spoke about investing in the Synergy Tax

Program. Purchaser witness GM received additional details from Zielke about the Synergy Tax

Program before purchasing units in the program. Zielke was responsible for recruiting and

managing agents (such as Kustom Financial) retained to sell the Synergy Tax Program securities

and for entering into the accompanying agent agreements (such as the Agent Agreement). Zielke

also provided the documentation – the UPAs, TAAs and BRAs – to agents for execution by

Synergy Tax Program investors. We find that, taken as a whole, Zielke's activities were focused

on creating investor interest in the Synergy Tax Program and selling units in the program to

prospective investors.

[210] All of these activities were clearly acts of actual trading in securities or acts in

furtherance of trades within the meaning of sections 1(jjj)(i) and (vi) of the Act. We find that

Synergy, Kustom Financial, Lepitre, Jones and Zielke "traded" in the Synergy Tax Program

securities in Alberta.

(c) "Distributions"

[211] As was the case with the Kustom Companies, the Synergy Tax Program involved

securities that had not been previously issued. We therefore find that the trades by Synergy,

Kustom Financial, Lepitre, Jones and Zielke in the Synergy Tax Program securities were

"distributions".

(d) No Registration or Prospectus

[212] We found that the Synergy Tax Program involved the issuance of a security and that

Synergy, Kustom Financial, Lepitre, Jones and Zielke traded and distributed the Synergy Tax

Program securities. Therefore, registration and a prospectus were required unless an exemption

was available.

[213] We find that Synergy was not registered to trade in securities in Alberta, nor had it filed a

prospectus with the Commission to distribute securities. In addition, we have inferred that

neither IBC nor IBCA filed a prospectus with the Commission or received a receipt therefor in

relation to the Synergy Tax Program. Further, we found or find that none of Kustom Financial,

Lepitre, Jones and Zielke was registered to trade in securities in Alberta. Therefore, in the

absence of an exemption, each of these Respondents contravened sections 75(1)(a) and 110(1) of

the Act when they traded and distributed the Synergy Tax Program securities. As we discuss

below, none of these Respondents established that they relied on exemptions to trade and

distribute the Synergy Tax Program securities.

B. Advising

1. Law

[214] Staff alleged that the actions of Kustom Financial, Lepitre and Jones went beyond merely

offering the Kustom Companies and Synergy Tax Program securities for sale and making sales

to Alberta residents. Instead, Staff contended that their conduct fell into the ambit of "advising"

because they recommended purchases and offered opinions on the merits of the securities they

were selling.

[215] Section 75(1)(b) of the Act, as it read during 2004 through to January 2007, prohibited a

person or company from acting as an advisor unless registered to do so with the Executive

Director (or an exemption was available). Section 1 at that time defined "advisor" as "a person

or company engaging in or holding out the person or company as engaging in the business of

advising others with respect to investing in or the buying or selling of securities or exchange

contracts".

[216] In Re Costello, the OSC ruled (at para. 25): "The trigger for registration as an adviser is

not doing one or more acts that constitute the giving of advice, but engaging in the business of

advising." In determining whether a person or company engaged in the business of advising,

advising need not be the only business activity that the person or company is conducting.

Typically, though, isolated pockets of providing advice on specific investments or securities will

not evidence that advice had been given for a business purpose. Further, it is unnecessary that

any person followed or acted on the advice; the focus is on the action of giving the advice.

[217] In Re Donas, 1995 LNBCSC 18, the BCSC described the nature of communicating

advice:

. . . The concise Oxford Dictionary of Current English (1990 ed.) defines "advice" as "words

given or offered as an opinion or recommendation about future action or behaviour . . .".

. . .

As indicated by the definition of "advice", the nature of the information given or offered by a

person is the key factor in determining whether that person is advising with respect to investment

in or the purchase or sale of securities. A person who does nothing more than provide factual

information about an issuer and its business activities is not advising in securities. A person who

recommends an investment in an issuer or the purchase or sale of an issuer[']s securities, or who

distributes or offers an opinion on the investment merits of an issuer or an issuer[']s securities, is

advising in securities. . . .

[218] This Commission recently commented on activity indicative of advising in Re Global

Trading Center LLC, 2009 ABASC 614 (at paras. 32-33):

The determination of whether a person is "advising", for purposes of the Act, involves two

considerations, described as follows by D. Johnston and K.D. Rockwell in Canadian Securities

Regulation, 4th

ed. (Markham: LexisNexis, 2006) at 359:

First, did the purported adviser express an opinion or make a recommendation?

Merely reciting facts does not make one an adviser; recommending an

investment or opining on the investment merits of an issuer or securities is

advising. Second, did the purported adviser offer the recommendation in a way

which reflected a business purpose? [original emphasis]

As to whether the person is in "the business of advising", this in our view connotes elements both

of intended profit and a degree of organization, repetition or regularity – neither a gratuitous

provision of advice nor a merely isolated act or incident would generally suffice to evidence a

business.

[219] Thus, the mere providing of factual information about a proposed investment does not

constitute advising. Rather, advising involves a business of providing subjective views, opinions

and recommendations on the merit or value of a specific investment or security to a person or

company.

2. Kustom Financial

[220] A significant business activity – and purpose – of Kustom Financial was the promotion

and sale of investments in the Kustom Companies and other investment products it offered for

sale, such as the Synergy Tax Program.

[221] In pursuit of this significant business activity and purpose, Kustom Financial offered

financial and tax planning information sessions to interested persons, featuring its Five-Step

Program. These information sessions were used to promote the investments in the Kustom

Companies and other investment products Kustom Financial offered for sale. Kustom Financial

also employed or contracted with commissioned associates. Once trained in the Five-Step

Program, these associates educated others about it and referred them to investments in the

Kustom Companies and other investment products Kustom Financial offered for sale. The

Kustom Financial associates were paid commissions for completed sales of these investments.

We do not doubt that Kustom Financial associates recommended to prospective investors the

purchase of investments in the Kustom Companies and other investment products Kustom

Financial offered for sale – the business purpose of their retainer was to sell these investments.

[222] Kustom Financial also advised investors how to finance the investments they purchased

in the Kustom Companies. For example, investor witness KK borrowed against his pension to

make his investment in Kustom Financial, with the loan being arranged with the assistance of a

Kustom Financial associate. Also, it was with the assistance of a Kustom Financial associate

that investor witness MF and her husband transferred money from their RRSPs into bonds,

which were used to obtain an investment loan from a British Columbia company, which was in

turn used to make their investment in Kustom Group.

[223] We earlier referred to letters to "All our Valued Clients and Prospective Clients" from

Kustom Financial (sometimes unsigned, some signed by Kustom Financial associates and two

signed by Jones). Those letters stated that Kustom Financial had evaluated Safeguard's "business

standards and past performance" and suggested that "[a]lthough past performance is not a

guarantee of future performance, [Safeguard's] record over the last four + years of on time

disbursements speak[s] for itself". Further, the letters stated that Safeguard "has formed alliances

that have proven to be not only profitable, but also mutually rewarding". Staff suggested that

this communication provided more than just information, as it seemed to express opinions and

recommend the associated Kustom Financial investment. In our view, this communication,

while perhaps attempting to create an impression of soundness, was merely vague promotional

information presumably designed to solicit interest in the Kustom Financial investment. While

this communication was clearly an act in furtherance of a trade, it fell short, in our view, of

expressing opinions or making recommendations about the Kustom Financial investment that

would constitute the giving of investment advice.

[224] Kustom Financial was also specifically retained as an agent to sell the Synergy Tax

Program securities. Kustom Financial used its tax and accounting services to promote and

recommend the Synergy Tax Program as an alternative tax strategy to minimize income tax

payments. Synergy paid Kustom Financial commissions for any sales of the Synergy Tax

Program securities by or on behalf of Kustom Financial.

[225] When viewed in totality, the evidence clearly demonstrates that Kustom Financial's

investment consultation services focused on providing investment advice and recommending

investment products to potential investors. Kustom Financial received money, variously referred

to as administration fees or commissions, for selling the Kustom Companies securities and

Synergy Tax Program securities. These fees and commissions resulted directly from the advice

given to investors by Lepitre or Kustom Financial associates. We conclude that Kustom

Financial and those acting for it – as we discuss next, specifically Lepitre – had a business

purpose in providing investment advice to investors.

[226] We therefore find that Kustom Financial acted as an advisor although not registered as an

advisor under the Act. Therefore, in the absence of an exemption, Kustom Financial

contravened section 75(1)(b) of the Act. As we discuss below, Kustom Financial did not

establish that any exemptions were available for any advice given by or on behalf of it respecting

the Kustom Companies securities or Synergy Tax Program securities.

3. Lepitre

[227] The evidence demonstrates that Lepitre was actively involved in creating or promoting

(or creating and promoting) investments in or through the Kustom Companies. Lepitre was an

active presenter at, if not the organizer of, information sessions sponsored by Kustom Financial.

Through the Five-Step Program developed by Lepitre and Jones, prospective investors were

introduced to investments in the Kustom Companies and other investment products Kustom

Financial offered for sale, including the Synergy Tax Program. Indeed, there is evidence before

us of Lepitre steering prospective investors toward these investment opportunities. As well, the

nature of the conversations Lepitre had with some of the investor and purchaser witnesses went

beyond the simple provision of factual information.

[228] To illustrate, investor witness MF said that Lepitre gave her and her husband advice

about – in her words, Lepitre "was recommending" – the two investments they made, one in

Kustom Group and the other in Hightide. According to MF, she and her husband believed the

Kustom Group investment to be a good one because Lepitre told them that "foreign trading of

funds does bring in an excellent return". Lepitre also told MF and her husband that an

investment in Hightide was a "pretty straightforward" investment and that, in relation to the

safety of the principal, there was nothing to worry about. Purchaser witness RI said that, while

seeking advice about tax minimization in connection with his personal income tax return, Lepitre

recommended to him two options (although he did not recommend one over the other) available

through Kustom Financial, one of which was the Synergy Tax Program, which he then pursued.

According to investor witness SS, he went to the KD Group because "[t]hey do investments",

and he believed he received investment advice from Lepitre in relation to his purchase of

Synergy Tax Program units and his investments in Kustom Financial and Hightide. As to the

quality of the Synergy Tax Program, Lepitre opined to SS that it was "very firm" and "virtually

guaranteed". Lepitre also told SS that an investment in Kustom Financial was "guaranteed by a

bank bond".

[229] We are satisfied, on the evidence, that Lepitre gave his opinions on the investment merits

of the various investments offered by the Kustom Companies and recommended that prospective

investors invest in them.

[230] We are also satisfied, on the evidence, that Lepitre either directly or indirectly received a

share of the administration fees for selling the Kustom Companies securities and commissions

for selling the Synergy Tax Program securities. We find that the money Lepitre received

established that Lepitre clearly had a business purpose in providing the investment advice he did

to Alberta investors.

[231] We therefore find that Lepitre acted as an advisor although not registered as an advisor

under the Act. Therefore, in the absence of an exemption, Lepitre contravened section 75(1)(b)

of the Act. As we discuss below, Lepitre did not establish that any exemptions were available

for any advice given by him respecting the Kustom Companies securities or Synergy Tax

Program securities.

4. Jones

[232] The evidence before us is not sufficiently clear to satisfy us that Jones acted as an

advisor.

C. Availability of Exemptions

[233] As discussed above, we found that the Respondents traded securities without registration

and distributed securities without a prospectus and that Kustom Financial and Lepitre acted as

advisors without registration. Accordingly, the onus shifted to the Respondents to prove that one

or more of the exemptions from the registration and prospectus requirements under MI 45-103 or

NI 45-106 was or were available and applicable for all trades and distributions made by them

without registration and a prospectus and, in the case of Kustom Financial and Lepitre, was or

were available to enable them to advise without registration (Re Bartel, 2008 ABASC 141 at

para. 109). Thus, unless the Respondents reasonably relied on available and applicable

registration and prospectus exemptions provided under Alberta securities laws for all trades and

distributions made by them without registration and a prospectus, they will be found to have

contravened sections 75(1)(a) and 110(1) of the Act. Similarly, unless Kustom Financial and

Lepitre reasonably relied on an available registration exemption or exemptions provided under

Alberta securities laws enabling them to advise without registration, they will be found to have

contravened section 75(1)(b).

[234] None of the Kustom Companies, Lepitre and Jones demonstrated that there was an

exemption available or applicable for all trading in or distributing of the Kustom Companies

securities. None of Synergy, Kustom Financial, Lepitre, Jones and Zielke established that they

relied on exemptions to trade and distribute the Synergy Tax Program securities. Kustom

Financial and Lepitre also failed to demonstrate that there was an exemption available to enable

them to advise without registration.

[235] It was suggested that, in trading and distributing the Kustom Companies securities, the

Kustom Companies, Lepitre and Jones were relying on the family, friends and business

associates exemption found in section 3.1 of MI 45-103 and section 2.5 of NI 45-106. There are,

in evidence, investor lists provided by counsel for Lepitre in which all Kustom Companies

investors were claimed to be family, friends or business associates. Some of the investors who

purchased the Kustom Companies securities may well have qualified under the parameters of the

family, friends and business associates exemption. However, the evidence is clear and we find

that the Kustom Companies investors who testified at the Merits Hearing were not family, nor

had sufficient bonds of interest or association to qualify (within the requirements of the

exemption as set out in section 3.1 of MI 45-103 or section 2.5 of NI 45-106) as either close

personal friends or close business associates of Lepitre or Jones, who were directors, executive

officers or both of each of the Kustom Companies. The evidence is also clear and we find that

many of these same investors did not qualify as accredited investors – they did not meet the

specified income and asset thresholds – under section 5.1 of MI 45-103 or section 2.3 of NI 45-

106. Further, Lepitre's investigative interview testimony revealed his misapprehension about the

nature of the relationships on which the family, friends and business associates exemption is

premised. For example, referring to the "Kustom Design family of people", Lepitre said: "[W]e

consider them family automatically as brothers and sisters of Christ." Finally, it appears and we

find that no attempt was made by the Kustom Companies, Lepitre and Jones to assess the

availability or applicability of any exemption before the Kustom Companies securities were sold

to investors. It also appears and we find that no exemptions were available for any advice given

by Kustom Financial or Lepitre respecting the Kustom Companies securities.

[236] Since none of Synergy, Kustom Financial, Lepitre, Jones and Zielke believed that the

Synergy Tax Program involved an offering of securities, none of these Respondents made any

attempt to rely on any exemptions to trade and distribute the Synergy Tax Program securities and

thus we find that none of these Respondents established reliance on any such exemptions. It also

appears and we find that no such exemptions were available in respect of the trades and

distributions of these securities to the purchasers who testified at the Merits Hearing. Further, it

appears and we find that no exemptions were available for any advice given by Kustom

Financial or Lepitre respecting the Synergy Tax Program securities.

[237] We also note that none of the Respondents filed reports of exempt distribution required

(under section 7.1 of MI 45-103 or section 6.1 of NI 45-106) of issuers who purport to rely on

certain of the registration or prospectus exemptions.

[238] Accordingly, given the actions of the Respondents and our findings of the lack of

available and applicable exemptions, we conclude that the Respondents did breach the trading

and distribution provisions of the Act and that Kustom Financial and Lepitre did breach the

advising provisions of the Act.

D. Findings

[239] We therefore find that:

contrary to sections 75(1)(a) and 110(1) of the Act:

Kustom Financial, Lepitre and Jones illegally traded in and distributed

securities of the Kustom Companies;

Kustom Group illegally traded in and distributed securities of Kustom

Group;

Hightide illegally traded in and distributed securities of Hightide; and

Synergy, Kustom Financial, Lepitre, Jones and Zielke illegally traded in

and distributed the Synergy Tax Program securities; and

contrary to section 75(1)(b), Kustom Financial and Lepitre acted as advisors

without being registered to do so.

VIII. CONDUCT CONTRARY TO PUBLIC INTEREST

[240] Between 2004 and 2006 the Kustom Companies and their principals, Lepitre and Jones,

raised in excess of $5.5 million through the sale of the Kustom Companies securities to investors

resident in Alberta. The investors appear to have lost some, if not most, of the money they

invested in the Kustom Companies securities, as well as the anticipated returns.

[241] Between December 2005 and January 2007 approximately $2.4 million was raised from

investors resident in Alberta from the sale of units in the Synergy Tax Program. Some of these

investors have now found that claimed tax losses are being disputed by CRA with the possible

result that they have lost the money they invested in the Synergy Tax Program, having received

none of either the promised profits or resultant tax benefits.

[242] Securities of the Kustom Companies were sold by the Kustom Companies, Lepitre and

Jones in contravention of the registration and prospectus requirements contained in Alberta

securities laws and thus were illegal trades and distributions of securities. The Synergy Tax

Program securities were sold by Synergy, Kustom Financial, Lepitre, Jones and Zielke in

contravention of the registration and prospectus requirements contained in Alberta securities

laws and thus were also illegal trades and distributions of securities. In addition, Kustom

Financial and Lepitre engaged in unregistered advising. As discussed above, the registration and

prospectus requirements are the key provisions of Alberta securities laws whose objectives are to

protect investors and instil in investors confidence in the integrity of our capital market. The

Respondents engaged in conduct that deprived investors of the benefit of these fundamental

protections. Investors have told us that their confidence in investing has been shaken by this

experience. Thus, the integrity of the Alberta capital market and the confidence of investors

have been damaged by these actions of the Respondents. We therefore find that the

Respondents' conduct not only contravened Alberta securities laws but was contrary to the public

interest.

IX. CONCLUSIONS

[243] We found that:

contrary to sections 75(1)(a) and 110(1) of the Act:

Kustom Financial, Lepitre and Jones illegally traded in and distributed

securities of the Kustom Companies;

Kustom Group illegally traded in and distributed securities of Kustom

Group;

Hightide illegally traded in and distributed securities of Hightide; and

Synergy, Kustom Financial, Lepitre, Jones and Zielke illegally traded in

and distributed the Synergy Tax Program securities;

contrary to section 75(1)(b), Kustom Financial and Lepitre acted as advisors

without being registered to do so; and

in so doing, the Respondents engaged in conduct contrary to the public interest.

[244] This decision concludes the first part of the hearing. It remains to be decided what, if

any, orders for sanction or costs we should make against the Respondents. Staff are directed to

provide their written submissions on the issues of sanction and costs to the panel (through the

Registrar of the Commission) and to the Respondents who participated in the Merits Hearing, or

have since advised the Registrar that they wish to participate in the sanction phase of the hearing,

by the close of business on 14 May 2010. If, in turn, any Respondent wishes to respond to

Staff's submissions, those written submissions must be sent to the panel (through the Registrar),

to Staff and to all other Respondents who participated in the Merits Hearing, or have since

advised the Registrar that they wish to participate in the sanction phase of the hearing, by the

close of business on 4 June 2010. Staff may then reply in writing to any such written

submissions, that reply to be provided to the panel (through the Registrar) and to the

Respondents who participated in the Merits Hearing, or have since advised the Registrar that

they wish to participate in the sanction phase of the hearing, by the close of business on 11 June

2010.

[245] If any party wishes to make oral submissions concerning the issues of sanction and costs,

that party must so advise the Registrar by the close of business on 16 June 2010, with an

indication of whether that party proposes to call witnesses and the amount of hearing time

expected to be required. If such a request is made, the panel will set a date for oral submissions

and advise the parties accordingly. The panel of its own accord may also set a date for oral

submissions, if it considers that this would be of assistance to it.

22 April 2010

For the Commission:

"original signed by"

Glenda A. Campbell, QC

"original signed by"

Beverley A. Brennan, FCA

"original signed by"

Kenneth B. Potter, QC