Industry muzzles its victims

Too often, the consumer/victim of abuse starts to go down the legal path in an effort to recoup their lost retirement capital. But the closer they get to exposing the villains in court or the press, the more likely they will be offered a partial settlement. Once settled out of court, everyone agrees to shut up. The chance to warn other investors is lost because of gag orders the lawyers are allowed to attach to settlement agreements. The perpetrators are free to go their merry way and find new victims.

National Post
October 23, 2003

Industry muzzles its victims
Gag orders keep bad advisors’ names out of the press
Jonathan Chevreau

One of the frustrations with this job is some of the most potentially instructive stories can't be made public. Since the stock bubble of 1999 burst, many tales of investor abuse involving leveraged loans have come to my attention.

Too often, the consumer/victim of abuse starts to go down the legal path in an effort to recoup their lost retirement capital. But the closer they get to exposing the villains in court or the press, the more likely they will be offered a partial settlement.

Once settled out of court, everyone agrees to shut up. The chance to warn other investors is lost because of gag orders the lawyers are allowed to attach to settlement agreements. The perpetrators are free to go their merry way and find new victims.

A source familiar with such behind-the-scenes negotiations says this: "The problem is gag orders are allowed by the financial industry. We're not treating our financial well-being like we treat our medical well being. Can you imagine a medical officer knowing the person working next to you has SARs and not letting you know about it?"

Occasionally, as with the courageous Georgetown, Ontario, pensioner David Meal, the public learns about actual identities.

Meal's story about getting a 9 to 1 leveraged loan from CIBC to buy the Nasdaq late in 1999 has been described here before. However, odds are you'll hear no more about him because the Toronto law firm of Groia & Co. has taken on the case.

My prediction is the whole thing will get swept under the carpet and the name of the CIBC advisor will never be revealed.

A similar case was recently settled out of court. Instead of a retiree it concerned a Baby Boomer couple in Ontario. It also involved leverage and investments made in 1999. As dictated in their agreement, the protagonists declined to talk to me.

We'll call our victims John and Sue (not their real names.) We'll call the advisor Will Leverage, or W.L. for short. He's written at least one financial book and often gives free financial seminars. (Published "authors" often have perceived authority when hosting their asset-gathering seminars.)

Unlike Meal, who saw only the upside of the New Economy in 1999, both Will and his clients were concerned about Y2K''s possible impact on the stock market. The husband worked in the computer industry, which may have been a factor. [Y2K was a concern I shared, as shown in the Krash! book I coauthored then.]

In February, 1999, the couple exhibited an interesting mixture of fear and greed in borrowing $150,000 to buy a "market neutral" hedge fund from @rgentum Management & Research Corp. In 1999, that was the minimum investment needed for hedge funds sold to sophisticated investors in Ontario. Designed to protect investors, in this instance the rule seems to have backfired. The rules have since changed.

The couple asked Will for a safe, low-risk investment. They planned to increase their risk level to "medium" if Y2K passed without incident. On their Know Your Client form Will described the couple as knowledgeable with "medium" risk tolerance. The couple didn't learn this until after they sued him.

In Will's defence, @rgentum described the fund as low risk, although it replaced the fund manager for poor fourth-quartile performance (which persists to the present). The fund was prematurely short the technology sector and suffered losses as the bubble expanded in 1999. It lost 26% that year and continued to lose through most of the years since.

The leverage amplified the couple's losses, which soon passed $100,000. Meanwhile, Will put another $100,000 of the couple's savings in bond funds, which then fell 40%. "He put us into bonds at the worst possible time," Sue told my source. "We now have most of our money in the bank, as we are petrified."

By settling for less than 30% of their losses, the couple chose not to warn other investors. For the advisor, it's cheap hush money.

Worse, because of the gag order, the Ontario Securities Commission and advisor-policing self-regulatory organizations like the Investment Dealers Association and Mutual Fund Dealers' Association know nothing of the case. As my source says, "Will Leverage is free to find new uneducated-in-financial-literary victims to be in his food chain."

Asked about the advisor, an OSC spokesman would neither confirm nor deny an investigation is proceeding against him.

"Our system in Canada for handling complaints still leaves a lot to be desired," says former OSC commissioner Glorianne Stromberg. "The regulatory process has favoured the industry over investor protection."

But, she adds, the financial industry is "not alone in its cover-up." Doctors can move to another jurisdiction butchering patients, and child molesting teachers can move to different schools.

A spokeswoman for W.L.'s firm confirmed only he is still with them. "We don't comment on something like this to protect the privacy of the individuals."

Gag! So who's protecting Will Leverage's next victims?

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