ALBERTA SECURITIES COMMISSION

DECISION

Citation: Kustom Design Financial Services Inc., Re, 2010 ABASC 415 Date: 20100826

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 and Richard Finn for Commission Staff

Alistair Crawley

for Synergy Group (2000) Inc.

Date of Hearing: 29 July 2010

Date of Decision: 26 August 2010 #3617387 v1

I. INTRODUCTION [1] On 22 April 2010 this Alberta Securities Commission (the "Commission") panel issued its decision (the "Merits Decision", cited as Re Kustom Design Financial Services Inc., 2010 ABASC 179) following a hearing into the merits of allegations (the "Merits Hearing") made by staff ("Staff") of the Commission in an amended amended notice of hearing dated 1 October 2009 (the "Notice of Hearing") against 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"). (As we did in the Merits Decision, we refer to Kustom Financial, Kustom Group and Hightide collectively as the "Kustom Companies".) [2] In the Merits Decision, all of the Respondents were found to have contravened Alberta securities laws and acted contrary to the public interest by trading in and distributing securities without the requisite registration and prospectus or available exemptions and, in the case of Kustom Financial and Lepitre, by acting as advisors without the requisite registration or an available exemption. [3] Following the issuance of the Merits Decision, this proceeding moved to a second phase to determine what, if any, orders should be made against the Respondents. Of the parties to the proceeding, only Staff provided written submissions on the issues of sanction and costs. At a hearing on those issues (the "Sanction Hearing"), which was held on 29 July 2010 and in which Staff and Synergy participated, Staff adduced documentary evidence and we heard testimony from two witnesses called by Staff (we refer to this documentary evidence and testimony collectively as the "Additional Evidence"). Staff and Synergy also made oral submissions. [4] For the reasons set out below, we conclude that it is in the public interest to make orders sanctioning all of the Respondents and it is appropriate to make costs orders against certain of them, summarized as follows:

• Kustom Financial, Kustom Group and Hightide: • are each barred from trading in or purchasing securities and from using

exemptions under Alberta securities laws, and all trading in or purchasing of securities of Kustom Financial, Kustom Group and Hightide must cease, permanently;

• Synergy:

• is barred from trading in or purchasing securities and from using exemptions under Alberta securities laws, and all trading in or purchasing of securities of Synergy must cease, until such time, if ever, as the Executive Director of the Commission (the "Executive Director") issues a receipt for a prospectus in respect of any securities that Synergy wishes to trade;

• pay an administrative penalty of $150 000; and • pay $20 000 towards the costs of the investigation and hearing;

• Lepitre: • is barred from trading in or purchasing securities and from using

exemptions under Alberta securities laws (with limited exceptions), from acting as a director or officer of any issuer and from acting in a management or consultative capacity in connection with securities market activities, until (and including) 1 September 2030;

• pay an administrative penalty of $150 000; and • pay $60 000 towards the costs of the investigation and hearing;

• Jones:

• is barred from trading in or purchasing securities and from using exemptions under Alberta securities laws (with limited exceptions), from acting as a director or officer of any issuer and from acting in a management or consultative capacity in connection with securities market activities, until (and including) 1 September 2020;

• pay an administrative penalty of $50 000; and • pay $22 500 towards the costs of the investigation and hearing; and

• Zielke:

• is barred from trading in or purchasing securities and from using exemptions under Alberta securities laws (with limited exceptions), from acting as a director or officer of any issuer and from acting in a management or consultative capacity in connection with securities market activities, until (and including) 1 September 2020;

• pay an administrative penalty of $25 000; and • pay $10 000 towards the costs of the investigation and hearing.

II. BACKGROUND [5] We provide, for context, the following summary of the factual background and the Respondents' contraventions, more fully discussed in the Merits Decision. The Merits Decision should be read in conjunction with this decision. [6] Between 2004 and 2006, the Kustom Companies, Calgary-based companies, raised over US$5.5 million from trading in and distributing securities of the Kustom Companies – Kustom Financial traded in and distributed Kustom Companies securities, and Kustom Group and Hightide traded in and distributed their respective securities – to investors, many of whom were resident in Alberta. Lepitre was one of two directors and a 50% shareholder of Kustom Financial and Hightide and the sole director and president of Kustom Group. Jones was the other director and 50% shareholder of Kustom Financial and Hightide and the secretary and treasurer of Kustom Group. We found Lepitre to be the controlling mind of the Kustom Companies. We also found that Lepitre and Jones traded in and distributed the Kustom Companies securities. [7] The Kustom Companies, Lepitre and Jones, who were not registered to trade in securities in Alberta and were not distributing the Kustom Companies securities under any prospectus, purported to trade in and distribute these securities in reliance on the "family, friends and business associates" exemption from the registration and prospectus requirements of the

Securities Act, R.S.A. 2000, c. S-4 (the "Act"). We found that exemptions from the registration and prospectus requirements of the Act were not available for all of the trades and distributions of the Kustom Companies securities. Thus, we concluded that the Kustom Companies, Lepitre and Jones illegally traded in and distributed securities in contravention of the Act and in so doing engaged in conduct contrary to the public interest. [8] Synergy, an Ontario company, offered alternative tax strategies, one of which was units in small to medium-sized, privately-owned businesses through its "Alternative Tax Strategy Program" (the "Synergy Tax Program"). Zielke was the western regional manager for Synergy and responsible for its investor relations activities – focused on creating investor interest and in selling units in the Synergy Tax Program – in British Columbia, Alberta and Saskatchewan. Units in the Synergy Tax Program were sold in Alberta by Kustom Financial pursuant to an "Agent Agreement" between Synergy and Kustom Financial. 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. By October 2009, Synergy had apparently raised about $83.5 million from the sale of units in the Synergy Tax Program to Canadian investors. [9] Synergy argued that the product it was offering for sale did not involve a security within the meaning of the Act. We found that the sale of units in the Synergy Tax Program involved trading in and distributing securities, requiring registration and a prospectus or reliance on an exemption or exemptions from those requirements. We also found that Synergy, Kustom Financial, Lepitre, Jones and Zielke traded in and distributed the Synergy Tax Program securities. Synergy, Kustom Financial, Lepitre, Jones and Zielke were not registered to trade in securities in Alberta, were not distributing the Synergy Tax Program securities under any prospectus and had not relied on any of the exemptions from the registration and prospectus requirements because they did not believe that the Synergy Tax Program involved an offering of securities. In the result, we found that Synergy, Kustom Financial, Lepitre, Jones and Zielke illegally traded in and distributed securities in contravention of the Act and in so doing engaged in conduct contrary to the public interest. [10] Kustom Financial and Lepitre not only traded the Kustom Companies and Synergy Tax Program securities to Alberta residents but also recommended purchases and offered opinions on the merits of these securities. We found that Kustom Financial and Lepitre acted as advisors without the requisite registration or an available exemption and thus contravened the registration requirement under the Act and in so doing engaged in conduct contrary to the public interest. III. SANCTIONS A. Additional Evidence

1. Nature of Additional Evidence and Parties' Positions [11] As noted, at the Sanction Hearing, Staff provided Additional Evidence: documentary evidence; and testimony from two witnesses who spoke to the documentary evidence – a Staff investigator and a certified general accountant (the "CGA"), whose clients were among those who invested in the Synergy Tax Program. The documentary evidence consisted of:

• two extant interim orders issued by the Commission: a 12 July 2007 order against the Kustom Companies and Lepitre (the "Kustom Interim Order"), directing that

all trading in the Kustom Companies securities cease, that the Kustom Companies and Lepitre cease trading in all securities and that all exemptions contained in Alberta securities laws do not apply to them (with limited exceptions applicable to Lepitre); and a 29 June 2007 order against Synergy, Zielke and others (the "Synergy Interim Order"), directing that, among other things, Synergy and Zielke cease trading in all securities and all exemptions contained in Alberta securities laws do not apply to them;

• Alberta Corporate Registration System records for three Alberta corporations, all

active as of 6 July 2010: 1271984 Alberta Ltd. ("127"), incorporated on 2 October 2006, with Lepitre as director and a family trust (the "Trust") as shareholder; Kustom Design Educational Corp., incorporated on 12 September 2007, with 127 and the Trust as shareholders; and Kustom Design Strategies Inc., incorporated on 27 March 2009, with Lepitre as director and 127 and the Trust as shareholders;

• documents from Synergy's website and from the "Kustom Design Group of

Companies" website, all printed on 29 April 2010; and

• documents prepared or received by the CGA concerning updates about investments in the Synergy Tax Program as well as the September 2009 launch of a new, restructured investment product called, among other things, the "IBCA2009 CJV".

[12] According to Staff, the Additional Evidence suggests that the Respondents subject to the Kustom and Synergy Interim Orders have engaged in trading in breach of those orders. This, Staff argued, should be considered an aggravating circumstance in our determination of what sanctions are in the public interest – in other words, a circumstance favouring the imposition of sanctions on the higher end of those sought by Staff – against those Respondents. Staff noted that the companies referenced on the "Kustom Design Group of Companies" website are not the Kustom Companies, but urged that certain striking similarities or commonalities would permit our drawing of an inference that the companies so referenced and the Kustom Companies are essentially the same. Staff fairly conceded that there is no direct evidence that securities within the meaning of the Act have been offered through the "Kustom Design Group of Companies" website or the IBCA2009 CJV. [13] According to Synergy, nothing in the Additional Evidence should lead us to conclude that there has been aggravating conduct on the part of Synergy justifying an escalation of any sanctions ordered against it. Synergy noted that the Additional Evidence relates to activities pre-dating the Merits Decision and that there was no allegation in the Notice of Hearing against Synergy relating to any product other than units in the Synergy Tax Program. Synergy also contended that the Additional Evidence is unclear, and inadequate to establish, that the IBCA2009 CJV was or involved a security within the meaning of the Act. [14] We received no submissions about the Additional Evidence from the Kustom Companies, Lepitre, Jones or Zielke.

2. Conclusions about Additional Evidence [15] There is insufficient evidence before us to allow us to find, or infer, that the Respondents subject to the Kustom and Synergy Interim Orders have engaged in activities that would be in breach of those orders. Therefore, in determining what, if any, sanctions are in the public interest here, we find no aggravating circumstance based on the Additional Evidence. B. Parties' Positions

1. Staff [16] Staff submitted that the public interest would be served by:

• banning the trading in or purchasing of the Kustom Companies securities, banning the Kustom Companies from trading in or purchasing securities and denying the Kustom Companies the use of all exemptions under Alberta securities laws, permanently;

• banning the trading in or purchasing of securities of Synergy, banning Synergy

from trading in or purchasing securities and denying Synergy the use of all exemptions under Alberta securities laws, until Synergy has filed a prospectus with the Commission for which the Executive Director has issued a receipt; and by ordering that Synergy pay an administrative penalty of $200 000 to $250 000;

• banning Lepitre and Jones from trading in or purchasing securities and using

exemptions (with limited exceptions), and from acting as a director or officer of any issuer (with limited exceptions), for 20 to 25 years and 10 to 12 years, respectively; and by ordering that Lepitre pay an administrative penalty of $150 000 to $175 000 and that Jones pay an administrative penalty of $75 000 to $100 000; and

• banning Zielke from trading in or purchasing securities and using exemptions

(with limited exceptions), from acting as a director or officer of any issuer (with limited exceptions), and from acting in a management or consultative capacity in connection with securities market activities, for 20 years; and by ordering that Zielke pay an administrative penalty of $75 000 to $100 000.

[17] Staff directed us to the sanctioning factors identified in Re Lamoureux, [2002] A.S.C.D. No. 125 at para. 11 (affirmed on other grounds 2002 ABCA 253), and restated in Re Workum and Hennig, 2008 ABASC 719 at para. 43. Having regard to those factors, Staff contended that, among other things, the Respondents' misconduct was serious, the Respondents do not recognize their misconduct's seriousness, the Respondents' misconduct harmed Alberta investors and the Alberta capital market but benefitted the Respondents and thus significant sanctions against the Respondents, providing the necessary specific and general deterrence, are warranted.

2. Synergy [18] Synergy acknowledged the sanctioning principles and factors of general application in Commission enforcement proceedings. Synergy noted that the market-access restrictions sought by Staff against it appear to be consistent with the nature of its misconduct, as found in the Merits Decision. Noting also that an administrative penalty appears to be typically ordered in

response to an illegal distribution finding, Synergy submitted that a lower administrative penalty than that sought by Staff would be better suited to the findings made against Synergy, which did not include findings of abusive sales practices or additional capital market misconduct.

3. Kustom Companies, Lepitre, Jones and Zielke [19] We did not receive written or oral submissions on the issues of sanction and costs from the Kustom Companies, Lepitre, Jones or Zielke. C. Sanctioning Principles and Factors [20] Sections 198 and 199 of the Act provide for a variety of possible sanctions, including market-access restrictions and monetary administrative penalties of up to $1 million per contravention. In exercising its authority to order sanctions in the public interest under sections 198 and 199, the Commission's objective is a prospective one – to protect against and prevent future harm to Alberta investors and in our capital market, not to punish or to remedy capital market misconduct (Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37 at paras. 39-45). The need for specific and general deterrence is an important consideration in making these protective and preventative orders (Re Cartaway Resources Corp., 2004 SCC 26 at paras. 52-62). [21] Several factors may be relevant in determining what, if any, sanction or combination of sanctions is in the public interest in respect of a particular respondent in the circumstances of a particular case. We are guided in our determination by a consideration of the factors identified in Lamoureux at para. 11, as restated in Workum at para. 43:

• the seriousness of the findings against the respondent and the respondent's recognition of that seriousness;

• characteristics of the respondent, including capital market experience and activity and any prior sanctions;

• any benefits received by the respondent and any harm to which investors or the capital market generally were exposed by the misconduct found;

• the risk to investors and the capital market if the respondent were to continue to operate unimpeded in the capital market or if others were to emulate the respondent's conduct;

• decisions or outcomes in other matters; and • any mitigating considerations.

D. Sanctioning Considerations [22] In applying the sanctioning principles and factors to the circumstances of this case, we are of the view that, for the following reasons, the public interest requires that all of the Respondents be sanctioned and significantly so.

1. Serious Misconduct and Recognition [23] The Respondents contravened the registration and prospectus requirements of the Act that provide fundamental protections to investors. As we stated in the Merits Decision (at para. 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.

[24] Trades and distributions of securities that do not comply with Alberta securities laws deprive investors of these fundamental protections provided by our securities regulatory system, threaten the integrity of the Alberta capital market and impair confidence in that market. Had investors in the Kustom Companies or Synergy Tax Program securities had the benefit of the advice of a registrant and the disclosure provided by a prospectus, they might not have invested in these securities and exposed themselves to or sustained financial losses. [25] Kustom Financial played a key role, including that of advisor, in the illegal trades and distributions of the Kustom Companies and Synergy Tax Program securities, while Kustom Group and Hightide played a key role in the illegal trades and distributions of their respective securities. Lepitre's role in and responsibility for the misconduct were significant – more so than those of Jones, Synergy and Zielke – in that he was directly involved in, or instrumental in effecting (including through advising), many (if not all) of the illegal trades and distributions of the Kustom Companies and Synergy Tax Program securities. Lepitre was also the controlling mind behind the Kustom Companies' offerings of securities. Although Jones was found to have considerably less direct involvement with the impugned trading and distributing, his role and responsibility were not inconsequential. Lepitre and Jones were the only directors and shareholders of Kustom Financial and Hightide, and no one other than them held director or officer positions with Kustom Group. We are satisfied that both Lepitre and Jones were the management of the Kustom Companies. In the result, Jones knew of the business activities of the Kustom Companies and that they were raising significant amounts of money by selling investments in and through themselves, including units in the Synergy Tax Program through Kustom Financial. Synergy was less involved in the misconduct, its involvement being limited to the illegal trades and distributions of the Synergy Tax Program securities; and Zielke's involvement was lesser still, being restricted to only some of these illegal trades and distributions. These illegal capital market activities of the Respondents were serious misconduct, calling for meaningful sanction. [26] Synergy participated throughout the hearing, and we, having regard to its submissions in the Sanction Hearing, accept that it recognizes the seriousness of, and accepts responsibility for, its misconduct. This, we find, argues for some moderation in sanction against it. [27] The Kustom Companies, Lepitre and Jones participated in the Merits Hearing but did not participate in the Sanction Hearing. Having regard to the extent of their participation, we cannot find that they fully recognize the seriousness of, or truly accept responsibility for, their misconduct. Thus, the need for meaningful sanction against them is not diminished. [28] Zielke failed to attend two interviews scheduled by Commission investigators, and he did not participate in either phase of the hearing. This lack of cooperation and response to the allegations made against him suggests no recognition by him of the seriousness of his misconduct and no respect for securities regulation. This argues for meaningful sanction against him.

2. Capital Market Experience and Activity [29] It seems that neither Lepitre nor Jones had significant experience in the capital market – particularly in raising money from investors – before the Kustom Companies began selling securities in 2004. However, Lepitre and Jones were in the business of providing accounting and tax advice and services. That being the case, both should have been alert – but were not – to the possibility of regulatory requirements associated with raising money in the capital market and that it was incumbent on them to learn of, and comply with, any such requirements. We are, in all the circumstances, concerned about their fitness to hold positions of authority with any issuers or to act in a management or consultative capacity in connection with securities market activities. This calls for sanction against them. [30] Synergy was active in the capital market, apparently raising by October 2009 approximately $83.5 million through the Synergy Tax Program from Canadian investors, which was then apparently loaned to numerous small to medium-sized, privately-owned businesses. Synergy and its principals, in the business of providing "effective tax 'compression' combined with efficient wealth development" and alternative tax strategies, should have been alert to the possibility of regulatory requirements associated with their money-raising activities and that it was incumbent on them to learn of, and comply with, any such requirements. Indeed, given the magnitude and nature of Synergy's capital-raising and other business activities, we find it perplexing that Synergy and its apparently business-savvy principals did not consult with relevant professionals to ensure their activities adhered to all applicable laws, including securities laws. David Prentice ("Prentice"), Synergy's executive vice-president, referred in his testimony in the Merits Hearing to receipt of legal advice regarding the Synergy Tax Program, but, at the insistence of his counsel, we did not place any weight on that testimony. Thus, no evidence was tendered to demonstrate what legal advice, if any, had been obtained by Synergy regarding the application of securities laws to the Synergy Tax Program. While such evidence may have argued for some mitigation in sanction, we are compelled, in the circumstances, to conclude that Synergy was at the very least reckless in failing to learn of, or comply with, any securities regulatory requirements, which calls for meaningful sanction against it. [31] We have no evidence of Zielke's experience or activity in the capital market prior to his relationship with Synergy.

3. Harm to Investors and Capital Market [32] The Respondents' failure to comply with the registration and prospectus requirements of the Act put Alberta investors' economic interests at risk. [33] Lepitre, together with Jones, conceived of using the Kustom Companies as investment vehicles for their clients, vehicles that would take client money, pool it and then reinvest it. It appears that those who, through illegal trades and distributions, invested in the Kustom Companies securities have lost some, if not most, of the money they invested, as well as the anticipated returns:

• client money that Kustom Financial invested with Safeguard Asset Management Inc. was apparently lost when someone "had taken off" or "ran off" with it;

• client money that Kustom Group, and perhaps Kustom Financial, invested with Sweet Water Equities Inc. (or Sweet Water Equity) or Knight Capital Corporation was apparently lost after being reinvested with another entity in the United States, since found, by the United States Securities and Exchange Commission and the British Columbia Securities Commission, to have operated a sham investment scheme; and

• client money that Hightide invested with an individual for the purpose of funding

a Florida lawsuit and secured by a second mortgage on land owned by that individual was apparently lost, with no money being generated by the lawsuit and the first mortgagee pursuing foreclosure in relation to the secured land.

[34] Synergy Tax Program investors were to recover their investments through the receipt of financially-beneficial losses and, perhaps, the receipt of some profits; the expectation was that, for most investors, business losses would be received that could then be used to reduce an investor's taxable income. Some Synergy Tax Program investors have since learned that claimed tax losses are being disputed by Canada Revenue Agency ("CRA") with the possible result that they have lost the money they invested in the Synergy Tax program, having received none of either the resultant tax benefits or promised profits. [35] Moreover, illegal advising, trades and distributions always harm the integrity of the Alberta capital market and confidence in that market because investors, deprived of the protections provided by registrant advice and prospectus disclosure, often suffer financial loss. Others hearing of the plight of such investors understandably become less confident about investing in the capital market, leading to overall reputational damage to that market. [36] This factor calls for meaningful sanction against the Respondents.

4. Benefits Received [37] The Kustom Companies and their principals, Lepitre and Jones, raised over US$5.5 million through the sale of the Kustom Companies securities to investors, many of whom were resident in Alberta. Synergy apparently raised about $83.5 million through the sale of Synergy Tax Program securities to Canadian investors, of which Kustom Financial raised approximately $2.4 million, mostly from Albertans. The Respondents clearly intended to benefit – and at least in some instances did benefit – from those of these sales that constituted illegal trades and distributions by earning commissions or other such monetary reward. The exact amounts so earned by the Respondents are unknown. We note, however, that the Kustom Companies were to earn a 10% administration fee from returns realized by their respective investors (or some of them), that Kustom Financial received commissions of approximately $240 000 (10% of the 20% commission) for its sales of Synergy Tax Program securities and that Synergy retained approximately $120 000 (5% of the 20% commission) in relation to these sales. This enrichment, or expectation of enrichment, by the Respondents argues for meaningful sanction against them.

5. Mitigating Factors [38] None of the Respondents has been previously sanctioned by the Commission. All else considered, however, we accord little to no weight to this factor in our sanctioning of the Respondents. [39] We are prepared to accept, in mitigation, that Synergy has assisted Synergy Tax Program investors in dealing with CRA, including filing notices of objection. However, we consider the mitigating effect of these efforts to be minimal given that they have yet to – and may not – result in any recovery by or benefit to Synergy Tax Program investors harmed by the misconduct. [40] In contrast, we do not find mitigating any efforts made by Lepitre and Jones purportedly directed at assisting investors harmed by the illegal trades and distributions of Kustom Companies securities. In our view, these efforts exacerbated the harm done by giving investors unfounded assurances that their invested money would be recouped and by blaming regulatory authorities for some of the losses sustained.

6. Previous Decisions [41] Staff referred us to several authorities involving illegal distributions: Re Atlas Communications, 2007 ABASC 749; Re Executive Marketing & Strategies Ltd., 2008 ABASC 384; Re Sea Sun Capital Corporation, 2009 ABASC 407; Re Maitland Capital Ltd., 2007 ABASC 818 (affirmed 2009 ABCA 186); and Re Malsbury Investment Corporation, 2009 ABASC 370. [42] We do not view these authorities to be sufficiently relevant to the circumstances of this case to be of much assistance. Executive Marketing and Malsbury involved admissions and joint recommendations as to sanction, and we are mindful that such admissions and recommendations are negotiated and may be reflective of considerations and motivations unknown to us. Further, while there were findings of illegal distributions in Atlas, Sea Sun and Maitland, there were also findings of prohibited representations or other illegalities that are not present here. Any protective and preventative orders made in the public interest in a particular case are those required by the circumstances of the particular case.

7. Risk to Investors and Capital Market [43] While the Additional Evidence was insufficient to allow us to find, or infer, that the Respondents subject to the Kustom and Synergy Interim Orders have engaged in activities that would be in breach of those orders, the Additional Evidence does cause us concern that Lepitre, personally or through corporate entities, remains interested in pursuing ventures in the Alberta capital market similar to those pursued by and through the Kustom Companies. Somewhat similarly, it seems from the Additional Evidence that Synergy remains interested in offering investment products to Albertans that may involve securities. [44] It also seems that Jones has an interest in pursuing capital market ventures similar to those pursued by and through the Kustom Companies. To this end, we note that, shortly after the Kustom Interim Order was issued, an Alberta numbered company operating under the trade name KD Financial, with Jones as sole director, was incorporated, which according to evidence before us in the Merits Hearing apparently continued at least some of the business activities of Kustom Financial, including Kustom Financial's five-step plan or program and product referrals.

[45] Zielke's apparent lack of respect for securities regulation suggests to us a propensity to disregard or flout securities laws in the future. [46] Having regard to the totality of the circumstances, we are satisfied that, unless we restrain the Respondents' future access to our capital market and deter them from similar capital market misconduct through meaningful sanction, they would pose serious risk to the investing public as well as the integrity of that market. Substantial specific deterrence is therefore warranted. [47] Moreover, any sanctions we impose must provide sufficient general deterrence – that is, suffice to dissuade others from similar capital market misconduct. E. Sanctions Ordered [48] Failures to comply with the registration and prospectus requirements of the Act will generally attract significant sanctions – from considerable curtailment to denial of the privilege of access to our capital market, often in conjunction with monetary administrative penalties of sufficient magnitude that they cannot be characterized as a mere "cost of doing business" – in order to achieve the necessary protection and specific and general deterrence in the public interest. For the reasons given, we are satisfied that the public interest demands the imposition of significant sanctions against all of the Respondents. [49] In the case of the Kustom Companies, we conclude, for the reasons given, that a permanent ban on trading in or purchasing of their securities, a permanent ban on their trading in or purchasing securities and a permanent denial-of-exemptions will suffice, in the public interest, to protect Alberta investors and the integrity of our capital market. [50] In the case of Synergy, it seems that it, apparently a going concern, did not obtain appropriate legal advice or did not act on legal advice that the sale of units in the Synergy Tax Program involved the sale of securities requiring compliance with securities laws. It is clear to us that Synergy Tax Program investors, some of whom have been harmed financially, would have benefited from – and should have received – the advice of a registrant and prospectus disclosure in making their decisions to invest in the program. We agree with Staff that, in the circumstances, any trading in or purchasing of Synergy securities and any trading in or purchasing of securities or use of exemptions by Synergy must cease until a receipted prospectus has been issued by the Executive Director for any securities that Synergy wishes to trade. In our view, making Synergy's future access to the Alberta capital market conditional on a receipted prospectus will, in the public interest, provide Synergy and prospective investors with the benefit of a prospectus that reflects professional involvement and advice and contains disclosure of all material facts, including risks about investing in the security, that will enable investors to make informed investment decisions. We are also cognizant that any sanctions ordered against Synergy must serve to deter not only it but also others from similar failures to ensure compliance with Alberta securities laws. We believe that a substantial administrative penalty of $150 000 – which exceeds the money retained by Synergy from the illegal trades and distributions of the Synergy Tax Program securities in Alberta – will accomplish this objective in the public interest while taking into account the required moderating and mitigating factors as discussed above. [51] For the reasons given, with emphasis on Lepitre's significant role in and responsibility for the misconduct found, we find it is in the public interest to order that, for a significant period, Lepitre be banned from the Alberta capital market, from positions of authority with any issuers

and from acting in a management or consultative capacity in connection with securities market activities and that he be required to pay a substantial administrative penalty. With respect to the management-or-consultant ban, we note that our authority to impose such a sanction dates from November 2008, which post-dates Lepitre's misconduct. However, the presumption against retrospectivity does not preclude our imposition of such a sanction, one with a protective purpose (Alberta Securities Commission v. Brost, 2008 ABCA 326 at para. 57). Further, Lepitre had notice that such a sanction could be imposed because the Notice of Hearing and its previous iteration informed him that the Commission would be asked to consider whether it is in the public interest to impose certain specified orders as well as "[s]uch further and other order under [s]ection 198 as the Commission deems appropriate". With respect to the quantum of the administrative penalty, one of our objectives is the effective negation of any benefits derived by Lepitre through his illegal capital market activities. In sum, we are satisfied that the imposition of the mentioned market-access bans until (and including) 1 September 2030, in conjunction with an administrative penalty of $150 000, will provide the protection and specific and general deterrence necessary in the circumstances of Lepitre. [52] For the reasons given, and mindful of Jones's role in and responsibility for the misconduct found, we find it is in the public interest to order that, for some time, Jones be banned from the Alberta capital market, from positions of authority with any issuers and from acting in a management or consultative capacity in connection with securities market activities and that he be required to pay an administrative penalty. For the reasons discussed above, we have the authority to impose the mentioned management-or-consultant ban. In our view, an administrative penalty of $50 000, together with the mentioned market-access bans until (and including) 1 September 2020, will provide the protection and specific and general deterrence necessary in the circumstances of Jones. [53] Zielke's contraventions were serious, but, more importantly, his failure to cooperate with Staff during the investigation and to engage in the hearing process suggest that his attitude in future towards compliance with Alberta securities laws would be wanting. Full cooperation of capital market participants when questioned by the Commission – their regulator – is essential to maintaining the integrity of, and preventing abuses in, the Alberta capital market. Individuals who occupy positions of authority with issuers or act in a management or consultative capacity in connection with securities market activities are expected to comply with all laws, including Alberta securities laws, and to provide timely, complete responses to Staff's inquiries. In our view, Zielke's apparent disdain for Alberta securities laws and regulation makes him unfit at present to hold positions of authority with any issuers, or to act in a management or consultative capacity in connection with securities market activities, and thus bans to that end are in the public interest. For the reasons discussed above, we have the authority to impose the mentioned management-or-consultant ban. Further, in all the circumstances, the public interest requires that Zielke be denied the privilege of access to the capital market for some time and that he also be required to pay an administrative penalty. In sum, we are satisfied that the imposition of the mentioned market-access bans until (and including) 1 September 2020, in conjunction with an administrative penalty of $25 000, will provide the protection and specific and general deterrence necessary in the circumstances of Zielke. [54] The orders made against each of Lepitre, Jones and Zielke will permit limited personal trading for the benefit of one or more of each, his spouse and his children, which we do not perceive to be contrary to the public interest.

[55] Accordingly, considering that it is in the public interest to do so, we order that:

Kustom Financial, Kustom Group and Hightide • under sections 198(1)(a), (b) and (c) of the Act, all trading in or purchasing of

securities of Kustom Financial, Kustom Group and Hightide cease, each of Kustom Financial, Kustom Group and Hightide cease trading in or purchasing securities, and all of the exemptions contained in Alberta securities laws do not apply to Kustom Financial, Kustom Group and Hightide, permanently;

Synergy • under sections 198(1)(a), (b) and (c), all trading in or purchasing of securities of

Synergy cease, Synergy cease trading in or purchasing securities, and all of the exemptions contained in Alberta securities laws do not apply to Synergy, until such time, if ever, as the Executive Director issues a receipt for a prospectus in respect of any securities that Synergy wishes to trade; and

• under section 199, Synergy pay an administrative penalty of $150 000; Lepitre • under sections 198(1)(b) and (c), Lepitre cease trading in or purchasing securities,

and all of the exemptions contained in Alberta securities laws do not apply to him, until (and including) 1 September 2030, except that this order does not preclude Lepitre from trading in or purchasing securities through a registrant (who has first been given a copy of this decision) in: • one account for Lepitre's benefit; • registered retirement savings plans ("RRSPs"), registered retirement

income funds ("RRIFs") or registered education savings plans ("RESPs") (as defined in the Income Tax Act (Canada)) or locked-in retirement accounts for the benefit of one or more of Lepitre, his spouse and his children; or

• both; • under sections 198(1)(d) and (e), Lepitre resign all positions he holds as a director

or officer of any issuer, and he is prohibited from becoming or acting as a director or officer (or both) of any issuer, until (and including) 1 September 2030;

• under section 198(1)(e.3), Lepitre is prohibited from acting in a management or consultative capacity in connection with activities in the securities market, until (and including) 1 September 2030; and

• under section 199, Lepitre pay an administrative penalty of $150 000; Jones • under sections 198(1)(b) and (c), Jones cease trading in or purchasing securities,

and all of the exemptions contained in Alberta securities laws do not apply to him, until (and including) 1 September 2020, except that this order does not preclude Jones from trading in or purchasing securities through a registrant (who has first been given a copy of this decision) in: • one account for Jones's benefit;

• RRSPs, RRIFs or RESPs or locked-in retirement accounts for the benefit of one or more of Jones, his spouse and his children; or

• both; • under sections 198(1)(d) and (e), Jones resign all positions he holds as a director

or officer of any issuer, and he is prohibited from becoming or acting as a director or officer (or both) of any issuer, until (and including) 1 September 2020;

• under section 198(1)(e.3), Jones is prohibited from acting in a management or consultative capacity in connection with activities in the securities market, until (and including) 1 September 2020; and

• under section 199, Jones pay an administrative penalty of $50 000; and Zielke • under sections 198(1)(b) and (c), Zielke cease trading in or purchasing securities,

and all of the exemptions contained in Alberta securities laws do not apply to him, until (and including) 1 September 2020, except that this order does not preclude Zielke from trading in or purchasing securities through a registrant (who has first been given a copy of this decision) in: • one account for Zielke's benefit; • RRSPs, RRIFs or RESPs or locked-in retirement accounts for the benefit

of one or more of Zielke, his spouse and his children; or • both;

• under sections 198(1)(d) and (e), Zielke resign all positions he holds as a director or officer of any issuer, and he is prohibited from becoming or acting as a director or officer (or both) of any issuer, until (and including) 1 September 2020;

• under section 198(1)(e.3), Zielke is prohibited from acting in a management or consultative capacity in connection with activities in the securities market, until (and including) 1 September 2020; and

• under section 199, Zielke pay an administrative penalty of $25 000. IV. COSTS [56] In addition to sanctions, Staff sought orders under section 202 of the Act requiring that certain of the Respondents pay, in total, $150 000 of the costs of the investigation and hearing: Lepitre, $60 000; Jones, $22 500; Synergy, $45 000; and Zielke, $22 500. To that end, Staff tendered a two-page itemization of investigation costs (of $96 529.08) and hearing costs (of $88 865.49), totalling $185 394.57, in addition to a binder of supporting documentation. Staff did not explain the approximate $35 000 difference between the total costs sought from certain of the Respondents and the total costs claimed to have been incurred. [57] From among the Respondents, only Synergy made submissions on the issue of costs. Synergy did not take issue with the total amount of costs claimed to have been incurred. However, Synergy asked that we, in deciding what, if any, costs order to make against it, bear in mind it provided a good level of cooperation in the efficient conduct of this proceeding, including the provision of evidence through Prentice in Calgary that proved to be of assistance in determining the principal issue concerning Synergy. [58] An order for payment of costs under section 202 of the Act – which is not a sanction – is directed at the recovery of costs incurred by the Commission in conducting enforcement

proceedings. A costs order is also a means by which the Commission can promote procedural efficiency in the conduct of enforcement proceedings. It is generally appropriate that, when a respondent has been found to have contravened Alberta securities laws or acted contrary to the public interest, the respondent be required to pay at least a portion of the costs of the investigation and hearing that led to such a finding or findings. In determining the quantum of a costs order, one of the factors we consider is the extent to which the respondent facilitated or impeded an efficient investigation and hearing process. [59] The types of costs itemized by Staff are the types for which we can make costs orders under section 202 of the Act. While the total amount of costs does not appear unreasonable for the investigation and hearing that occurred here, we consider it fair to accept Staff's proposed reduction to $150 000. To that end, we consider it reasonable to attribute some of that reduction to the non-recoverable investigation and hearing costs associated with the advising allegation made against Jones, which was not sustained. We further reduce the hearing costs by $4000 (rounded upwards) to account for charges in excess of the daily maximums prescribed in the Alberta Securities Commission Rules (General). Accordingly, we accept that $146 000 is potentially recoverable under costs orders against the Respondents. [60] We will make no costs orders against the Kustom Companies because they, effectively, were Lepitre and Jones. Therefore, we will allocate the potentially recoverable costs among Lepitre, Jones, Synergy and Zielke. Further, we will do so having regard to the roles played by the Respondents, as discussed above, in the misconduct found because we consider it reasonable to conclude that the costs incurred in investigating and proving these roles varied in proportion to their significance. [61] There will be no reduction in the costs allocated to Lepitre, Jones or Zielke based on contributions to procedural efficiency. While we acknowledge that Lepitre and Jones, for themselves and the Kustom Companies, made some efforts to contribute to the efficiency of the hearing process, these efforts were counteracted by certain of their actions directed at impeding Staff's investigation. Zielke impeded Staff's investigation, and he made no efforts to contribute to the efficiency of the hearing process. In contrast, Synergy's efforts did contribute to the efficiency of the hearing process, which will result in a reduction in the costs allocated to it. [62] Finally, while we believe the foregoing reasons would justify the imposition of costs orders against Lepitre and Jones of greater quanta than those sought by Staff, we are disinclined to make orders against them requiring payment of more costs than Staff sought against them. [63] In the circumstances, we consider it appropriate to order under section 202 of the Act that Lepitre pay $60 000, Jones pay $22 500, Synergy pay $20 000 and Zielke pay $10 000 in costs of the investigation and hearing. V. INTERIM ORDERS [64] The Kustom Interim Order expires, by its terms, with the issuance of this decision. We note that the Synergy Interim Order, issued in relation to another matter, remains in effect, unaffected by this decision.

VI. PROCEEDING CONCLUDED [65] This proceeding is concluded. 26 August 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