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GET YOUR MONEY BACK! Misconduct and malpractice. Investment industry "best and worst practices". Information to improve public protection. Expert witness services for industry and investors. Forensic investment analysis. • View topic - Financial Abuse by "Trusted Professionals"

Financial Abuse by "Trusted Professionals"

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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Oct 26, 2016 10:05 am

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This post was promoted by a recent article in the National Post about CIBC salespersons,being fined for pushing higher compensation investments on their unsuspecting clients. (despite the fact they portray themselves as “advisors” without holding the proper license for this title. TD was earlier caught doing same. Here is the link and a comment by a reader sent to me:

link http://business.financialpost.com/news/fp-street/cibc-latest-dealer-to-seek-to-settle-with-osc-reimburse-clients-after-charging-excess-fees?__lsa=7b40-d936


The allegations, revealed Tuesday by the Ontario Securities Commission, involve CIBC World Markets, CIBC Investor Services Inc. and CIBC Securities Inc.

The OSC said some CIBC clients with fee-based accounts paid excess fees for certain mutual funds, structured notes, exchange-traded funds and closed-end funds as far back as 2002, because various products with embedded fees were included in the calculations of their overall account management fees. The result was that the clients paid double fees for the investments..."

http://www.theglobeandmail.com/report-on-business/cibc-divisions-reach-deal-with-osc-over-excess-client-fees/article32521943/

Seems like a chronic problem among iiroc firms - where were supervision, compliance, management ( and investors) for FOURTEEN years???! They certainly weren't acting in their client's Best interests.We suspect the amounts run into the millions of dollars. Funny how with arrival of CRM2 cost reporting all these abuses are coming out.



71% of fund sales while I was at RBC were in DSC funds…despite a promise to place the interests of the client first and foremost….over 70% of RBC sales reps went for the commission……the 5% instant DSC commission brought in tens to hundreds of millions of dollars to the firm..never mind that they could have served clients with an identical but less costly solution.


The newest, richest form of taking advantage of customers is to move anything you can move into a “fee based” account, which has the effect of further distancing the client from top independent investment products and advice, whilst instead lining the pockets of the salespersons and dealer.

http://www.investisseurautonome.info/PDF-Downloads/FNB-FCP-COMPTES-INTEGRES-FONDS-MUTUELS/doc.1029-Hatanaka%20RBC%202001%20wealth%20management.pdf

backup copy here if (when:) top one is ethically cleansed from the web.
https://drive.google.com/drive/search?q=rbc%20hatanaka

$33.5 Billion in advisor and other fee-based accounts, earn a fee on EVERY dollar in EVERY Client fee account, every day of the year (2001) That’s gotta be in every client’s best interest, right?
(image below from page 15 of RBC management presentation)

Screen Shot 2016-10-26 at 11.02.06 AM.png


click on image to enlarge or to zoom in
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Fri Jun 12, 2015 4:29 am

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Executive Summary

The Ontario Securities Commission (“OSC”), acting on behalf of the Canadian Securities Administrators (“CSA”) commissioned The Brondesbury Group (“TBG”) to review existing research on mutual funds compensation. The objective of the literature review is
“...to evaluate the extent, if any, to which ...The use of fee-based versus commission-based compensation changes the nature of advice and investment outcomes over the long term”
(RFP, OSC 201314M-93, page 1). By commission-based compensation, we mean transaction-based compensation (various sales loads paid under front end and deferred sales charge arrangements) and asset-based compensation paid by the product provider to the advisor’s firm such as trailer fees in Canada and 12b-1 fees in the US.

Evidence from academic research is sufficient to form several clear conclusions about investor impacts of compensation.

 Funds that pay commission underperform. Returns are lower than funds that don’t pay commission whether looking at raw, risk-adjusted or after-fee returns.
 Mutual fund distribution costs raise expenses and lower investment returns.
 Advisors push investors into riskier funds.

 Investors cannot easily assess what form of compensation is
best for them and readily make sub-optimal choices.


Academic research also shows several important facets of advisor behavior related to compensation.

 Compensation influences the flow of money into mutual funds. Higher embedded commissions stimulate sales.

 Advisor recommendations are sometimes biased in favour of alternatives that generate more commission for the advisor.

 Commission is only one form of inducement that influences sales.
Other inducements (e.g., advancement, recognition, etc.) can also influence sales.
 Compensation affects the effort made by advisors to overcome investor behavioral biases, including biases that may lead to sub-optimal returns.
Where regulation has been changed to ban or limit commission, there is evidence that this change impacted investor outcomes.
 In the absence of embedded compensation, advisors recommend lower cost products. These typically have better returns because of lower expenses.
 While removing commission lowers product cost, advisory fees may rise as a means of paying for the cost of service. There may also be new or increased administrative fees, higher costs on margin accounts and lower payments on cash balances.
 It is not yet clear whether moving from commission-based to asset-based compensation will result in a net improvement in the overall return to the investor.

MUTUAL FUNDS FEE RESEARCH – OSC (SPRING 2015)

Brondusbury Group

http://www.osc.gov.on.ca/documents/en/S ... search.pdf
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Wed Jan 21, 2015 5:54 pm

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White House memo:
"..advisors often act opportunistically...detriment of their clients due to payments they receive…"
\

"consumers protections for investment advice…inadequate…creates perverse incentives…cost savers billions


With brokers advising on $2.8 trillion of IRA assets….the scope for harm to investors is large


"…Financial advisors systemically direct clients to mutual funds with unusually high conflicted payments and that these funds perform worse"


"……the economic harm to consumers justifies government action…"


"…..the current U.S. approach, which lacks and meaningful protections in the retail IRA market."


Alleged White House memo, sent/forwarded to me FYI. This contains a great deal of information about the various conflicts of interest in the financial and investment "advice" game, with candid looks at the cost to society of those conflicts.

It speaks well and directly to the industry deception of mixing investment "advice" with investment selling, which are two roles which do NOT go together, are often at great odds with one another.

I hope you enjoy this memo and I hope I can confirm it's origins given time:

https://drive.google.com/file/d/0BzE_LM ... NjS2s/view




Keywords: White House memo, conflicts of interest, memorandum
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Tue Oct 22, 2013 6:57 pm

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On why your financial "advisor" is actually your financial predatory, nine times out of ten......

http://www.investmentnews.com/article/2 ... term=text#

The result is shocking. I have done the math. Wirehouses destroy close to $50 billion in portfolio value each year. That's some 100 basis points in lost value that could be in their clients' portfolios, and isn't. It is $50 billion these clients are paying away in the form of unnecessary fees (which they may not even know are there), or depressed performance based on poor product choices, combined with high expense levels. Or both.

But why isn't it there?

The answer's really quite simple: Because if the money were there, the wirehouses wouldn't be.

Advertisement


Look at it this way: According to Cerulli Associates Inc., the big wirehouses manage over $4.7 trillion in client assets. One hundred basis points is the equivalent of nearly $50 billion. Assuming that just 25% of the excess pricing is retained by the wirehouse, there will be no wirehouse left.

But are you really that surprised?

As victims of their histories and their own legacies, the wirehouses have a business model that just cannot support them. And since the problem is intractable, they have been forced, among other things, to create inflated and opaque pricing structures that are then handed down to the brokers to implement. Because ultimately, wirehouses cannot sustain their businesses without this revenue stream.

When clients move their assets to one of our firms, our standard practice is to review their portfolios, and when we do, we nearly always find tremendous opportunities not only to reduce fees, but also to put them into far superior products. Three examples of egregious misallocations to clients' portfolios -- allocations quite obviously in the interest of the wirehouse and not the client -- will help to illustrate just some of what we see regularly.

First, there are high-commission structured products: Rarely is there a sound investment reason for them to be there. When is it ever in a client's interest to provide an issuer with cheap capital – without getting an appropriate return? Wirehouses virtually always sell these on a commission basis despite the existence of much-cheaper solutions designed for fee-based advisers. We've analyzed at least 100 wirehouse structured notes and found none to be in the clients' best interests.

Second, there are hugely marked-up bonds. The bonds in one pretty straightforward $40 million bond portfolio constructed by a well-known wirehouse had been marked up by $600,000 – about 1.5% on average; the client was told about the low management fee he was supposedly paying, but once he saw the real economics he moved his portfolio in a heartbeat. Third, wirehouses often significantly overweight clients in A shares, instead of other more efficient share classes. Wirehouses rarely provide clients with access to the cheapest share classes, dramatically increasing the cost of money management. We have seen total excess fees and product costs of easily 100 basis points and more, even for very affluent and sophisticated clients.

These are just three out of many examples that demonstrate that what is good for the brokerage firm is not good for the client. In each of these cases, the clients are kept in the dark about the extent of the “tax” they pay to support antiquated business models. None of these examples has anything to do with the excesses and fines imposed by regulators with a high level of publicity; these are examples of day-to-day, systemic behavior, probably perfectly legal, given the opacity of the suitability standard, but simply not in the best interests of the client.

However, I'm certainly not advocating that clients pick up the phone immediately and challenge their brokers (although taking a good look at their brokers' product selection may be essential for their financial health). They need to realize that it's the system that's at fault. Their brokers operate in an environment imposed on them by massive, anonymous organizations; every client is just a number for headquarters, nothing more. The best among the brokers go to battle every day on their clients' behalf, protecting them against yet another dictum coming from the top. (Oh, did I mention a close-to-absurd program to increase fees recently imposed by a wirehouse?) However, when brokers do decide to go independent, their clients really should go with them. It will be better for the clients. It will be better for the broker. And clients will not be alone. When really good brokers leave the wirehouses to go independent, in our experience, they usually take with them 90% to 95% of the assets they formerly looked after.

The wirehouse problem remains an insoluble one: they are not creating appropriate returns on equity despite smoke-and-mirror pricing and inferior product selection. They have been systematically losing market share for 20 years. Rising interest rates may help, but will just hide the real issue: Unless they learn to truly add value to their clients in a transparent way, their best clients and brokers will continue to move to Independence. Let's stop the $50 billion heist.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sat Jun 22, 2013 6:18 pm

In a manner similar to that of organized crime, the top players, in the financial industry collaborate to rig the game so everyone wins, everyone except the public that is. Governments, citizens, pensions, all are cheated and shortchanged when so-called-professionals work in an organized fashion to rig the game.

A short list in no order:

Investment Bankers
Regulators (Securities Commissions)
Self Regulators (Dealers organizations)
Lawyers serving all sides including themselves
Ratings agencies (see article)
Accounting and auditing firms
Politicians
and so on.......


Screen Shot 2013-06-22 at 7.13.12 PM.png


What about the ratings agencies?

That's what "they" always say about the financial crisis and the teeming rat's nest of corruption it left behind. Everybody else got plenty of blame: the greed-fattened banks, the sleeping regulators, the unscrupulous mortgage hucksters like spray-tanned Countrywide ex-CEO Angelo Mozilo.

But what about the ratings agencies? Isn't it true that almost none of the fraud that's swallowed Wall Street in the past decade could have taken place without companies like Moody's and Standard & Poor's rubber-stamping it? Aren't they guilty, too?

Man, are they ever. And a lot more than even the least generous of us suspected.

Thanks to a mountain of evidence gathered for a pair of major lawsuits by the San Diego-based law firm Robbins Geller Rudman & Dowd, documents that for the most part have never been seen by the general public, we now know that the nation's two top ratings companies, Moody's and S&P, have for many years been shameless tools for the banks, willing to give just about anything a high rating in exchange for cash.

[Read more from Rolling Stone: Everything Is Rigged: The Biggest Price-Fixing Scandal Ever]

In incriminating e-mail after incriminating e-mail, executives and analysts from these companies are caught admitting their entire business model is crooked.

"Lord help our [expletive] scam . . . this has to be the stupidest place I have worked at," writes one Standard & Poor's executive. "As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it," confesses a high-ranking S&P analyst. "If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value," complains another senior S&P man. "Let's hope we are all wealthy and retired by the time this house of card[s] falters," ruminates one more.

Ratings agencies are the glue that ostensibly holds the entire financial industry together. These gigantic companies – also known as Nationally Recognized Statistical Rating Organizations, or NRSROs – have teams of examiners who analyze companies, cities, towns, countries, mortgage borrowers, anybody or anything that takes on debt or creates an investment vehicle.

Their primary function is to help define what's safe to buy, and what isn't. A triple-A rating is to the financial world what the USDA seal of approval is to a meat-eater, or virginity is to a Catholic. It's supposed to be sacrosanct, inviolable: According to Moody's own reports, AAA investments "should survive the equivalent of the U.S. Great Depression."

It's not a stretch to say the whole financial industry revolves around the compass point of the absolutely safe AAA rating. But the financial crisis happened because AAA ratings stopped being something that had to be earned and turned into something that could be paid for.

That this happened is even more amazing because these companies naturally have powerful leverage over their clients, as they are part of a quasi-protected industry that enjoys massive de facto state subsidies. Largely that's because government agencies like the Securities and Exchange Commission often force private companies to fulfill regulatory requirements by retaining or keeping in reserve certain fixed quantities of assets – bonds, securities, whatever – that have been rated highly by a "Nationally Recognized" ratings agency, like the "Big Three" of Moody's, S&P and Fitch. So while they're not quite part of the official regulatory infrastructure, they might as well be.

[Read more from Rolling Stone: The Scam Wall Street Learned From the Mafia]

It's not like the iniquity of the ratings agencies had gone completely unnoticed before. The Financial Crisis Inquiry Commission published a case study in 2011 of Moody's in particular and discovered that between 2000 and 2007, the agency gave nearly 45,000 mortgage-backed securities AAA ratings. One year Moody's doled out AAA ratings to 30 mortgage-backed securities every day, 83 percent of which were ultimately downgraded. "This crisis could not have happened without the rating agencies," the commission concluded.

Thanks to these documents, we now know how that happened. And showing as they do the back-and-forth between the country's top ratings agencies and one of America's biggest investment banks (Morgan Stanley) in advance of two major subprime deals, they also lay out in detail the evolution of the industrywide fraud that led to implosion of the world economy – how banks, hedge funds, mortgage lenders and ratings agencies, working at an extraordinary level of cooperation, teamed up to disguise and then sell near-worthless loans as AAA securities. It's the black box in the American financial airplane.

In April, Moody's and Standard & Poor's settled the lawsuits for a reported $225 million. Brought by a diverse group of institutional plaintiffs with King County, Washington, and the Abu Dhabi Commercial Bank taking the lead, the suits accused the ratings agencies of conspiring in the mid-to-late 2000s with Morgan Stanley to fraudulently induce heavy investment into a pair of doomed-to-implode subprime-laden deals, called Cheyne and Rhinebridge.

Stock prices for both companies soared at the settlement, with markets believing the firms would be spared the hell of reams of embarrassing evidence thrust into public view at trial. But in a quirk, an earlier judge's ruling had already made most of the documents in the case public. Although a few news outlets, including The New York Times, took note at the time, the vast majority of the material was never reported, and some was never seen by reporters at all. The cases revolved around a highly exotic and complex financial instrument called a SIV, or structured investment vehicle.

The SIV is a not-so-distant cousin of the special purpose entity, or SPE, which was the main weapon of destruction in the Enron scandal. The corporate scam du jour in those days was mass accounting fraud, in which a company would create an ostensibly independent corporate structure that would actually be controlled by its own executives, who would then move their company's liabilities off their own books and onto the remote-controlled SPE, hiding the firm's losses.

The SIV is a similar concept. They first started showing up in the late Eighties after banks discovered a loophole in international banking standards that allowed them to create SPE-like repositories full of assets like mortgage-backed securities and keep them off their own books.

These behemoths operated on the same basic concept as an ordinary bank, which borrows short-term cash from depositors and then lends money long-term in the form of things like mortgages, business loans, etc. The SIV did the same thing, borrowing short-term from investors and then investing long-term on things like student loans, car loans, subprime mortgages. Like banks, a SIV made money on the spread between its short-term debt and long-term investments. If a SIV borrowed on the commercial paper market at 3 percent but earned 6.5 percent on subprime mortgages, that was an easy 3.5 percent profit.

The big difference is a bank has regulatory capital requirements. A SIV doesn't, and being technically independent, its potential liabilities don't show up on the books of the megabank that created it. So the SIV structure allowed investment banks to create and take advantage of, without risk, billions of dollars of things like subprime loans, which became the centerpiece of the new trendy corporate scam – creating and then selling masses of risky mortgage-backed securities as AAA investments to institutional suckers.

Ratings agencies helped this game along in two ways. First, banks needed them to sign off on the bogus math of the subprime era – the math that allowed banks to turn pools of home loans belonging to people so broke they couldn't even afford down payments into securities with higher credit ratings than corporations with billions of dollars in assets. But banks also needed the ratings agencies to sign off on the safety and reliability of these off-balance-sheet SIV structures.

The first of the two SIVs in question was dreamed up by a London-based hedge fund called Cheyne Capital Management (pronounced like Dick "Cheney"), run by an ex-Morgan Stanley banker duo who hired their old firm to build and stock this vast floating Death Star of subprime loans.

Morgan Stanley had multiple motives for putting together the Cheyne deal. For one thing, it earned what the bank's lead structurer affectionately called "big fat upfront fees," which bank executives estimated would eventually add up to $25 million or $30 million. It was a lucrative business, and the top dogs wanted the deal badly. "I am very focused on . . . getting this deal done to get NY to stop freaking out" and "to make our money," said Robert Rooney, the senior Morgan Stanley executive on the deal. A spokesman for Morgan Stanley, however, told Rolling Stone, "Our sole economic interest was in the ongoing success of the SIV."

But that wasn't Morgan Stanley's only motive. Not only could the bank make the "big fat upfront fees" for structuring the deal, they could also turn around and sell scads of their own mortgage-backed securities to the SIV, which in turn would be marketed to investors like Abu Dhabi and King County. In Cheyne, 25 percent of the original assets in the deal came from Morgan Stanley – over time, $2 billion of the SIV's $9 billion to $10 billion portfolio of assets came from the bank as well.

Internal Morgan Stanley memorandums show that the bank knowingly stuffed mortgages in the SIV whose borrowers were, to say the least, highly suspect. "The real issue is that the loan requests do not make sense," complained a Morgan Stanley employee back in 2005. He noted loans had been made to a "tarot reading house" operator who claimed to make $12,000 a month, and a "knock off gold club distributor" who claimed to make $16,000 a month. "Compound these issues," he groaned, "with the fact that we are seeing what I would call a lot of this type of profile."

No matter – into the soup it went! Morgan sold mountains of this crap into Cheyne's SIV, where it was destined to be sold off to other suckers down the line. The only thing that could possibly get in the way of the scam was some pesky ratings agency.

Fortunately for the bank and the hedge fund, these subprime SIVs were a relatively new kind of investment product, so the ratings agencies had little to go on in the area of historical data to measure these products. One might think this would make the ratings agencies more conservative. In fact, caution in the face of the unknown was supposed to be a core value for these companies. As Moody's put it, "Triple-A structures should not be highly dependent on untestable assumptions."

But when it came to the Cheyne SIV, Moody's punted on caution. In an e-mail sent to executives from both Morgan Stanley and Cheyne in May 2005, David Rosa, a Moody's senior analyst, admitted that when it came to this SIV, he had nothing to go on.

"Please note that in relation to assumed spread [volatility] for the Aa and A there is no actual data backing up the current model assumptions," he wrote. In lieu of such data, he went on, "We will for now accept the proposal to use the same levels as [residential mortgage-backed securities] given that this assumption is supported by the analysis of the Aaa data . . . and Cheyne's comments on their views of this asset class."

Translation: We have no historical data, so we'll just accept your reasoning for the time being, even though you have every incentive in the world to lie about the quality of your product.

At one point, a Morgan Stanley analyst even claimed that the bank had written, in Moody's name, an entire 12-page "New Issue Report" for the Cheyne SIV – a kind of ratings summary in which Morgan Stanley appears to have given itself AAA ratings for large chunks of the deal. "I attach the Moody's NIR (that we ended up writing)," yawns Morgan Stanley fixed-income employee Rany Moubarak in a March 2006 e-mail. The attached document came proudly affixed with the "Moody's Investors Service" logo. (Both Moody's and Morgan Stanley deny that anyone other than Moody's wrote that report.)

Morgan Stanley ended up getting both Moody's and S&P to rate the deal, and that was not only common, it was basically industry practice. There were many reasons for this, but a big one was a concept called "notching," in which the agencies gave ratings penalties to any instrument that had not been rated by their own company. If a SIV contained a basket of mortgage-backed securities rated AA by Standard & Poor's, Moody's might "notch" those underlying securities down to A, or even lower. This incentivized the banks to hire as many ratings agencies as possible to rate every investment vehicle they created.

Again, despite the fact that the ratings agencies enjoyed broad quasi-official subsidies, and despite the powerful market leverage that techniques like "notching" gave them, they still routinely chose to roll over for banks. And the biggest companies were equally guilty. In the case of the Cheyne deal, Standard & Poor's was every bit as craven as Moody's.

In September 2004, an S&P analyst named Lapo Guadagnuolo sent an e-mail to Stephen McCabe, the agency's lead "quant" on the Cheyne deal, who apparently was on vacation. The e-mail chain was mostly a bunch of office gossip, where the two men e-whispered about an employee who was about to quit. But sandwiched in the office banter was an offhand line about the Cheyne deal and how full of shit it was. "Hi Steve!" Guadagnuolo wrote cheerily, adding, "How is Australia and how was Thailand????Back to [Cheyne] . . . As you know, I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it . . .

"Thanks and regards . . . have you heard that [redacted] has resigned . . . and somebody else will follow suit today!!"

McCabe, blowing off the "no science behind it" comment, answered eagerly, "Who, Who, Who????" The quadruple question mark must be an S&P-ism.

A month later, McCabe seemed more concerned about the lack of science in the Cheyne deal. He complained in an e-mail to his boss, Kai Gilkes, who was the agency's senior quantitative analyst in Europe.

"From looking at the numbers it is quite obvious that we have just stuck our preverbal [sic] finger in the air!!" he fumed.

Gilkes was experiencing his own crisis of conscience by mid-2005, complaining in an oddly wistful e-mail to another S&P employee that the good old days of just giving things the ratings they deserved were disappearing. "Remember the dream of being able to defend the model with sound empirical research?" he wrote on June 17th, 2005. "If we are just going to make it up in order to rate deals, then quants are of precious little value."

Frank Parisi, Standard & Poor's chief credit officer for structured finance, was even more downtrodden, saying that the model that his company used to rate residential mortgage-backed securities in 2005 and 2006 was only marginally more accurate than "if you just simply flipped a coin."

Given all of this, why would top analysts from both Moody's and Standard & Poor's rate such a massive deal like Cheyne without any science to back it up? The answer was simple: money. In the old days, ratings agencies lived on subscriptions sold to investors, meaning they were compensated – indirectly, incidentally – by the people buying the financial products.

But over time, that model morphed into the current "issuer pays" model, in which a company like Moody's or Standard & Poor's is paid directly by the "issuer" – i.e., the company that is actually making the financial product.

For Cheyne, for instance, the agencies were paid in the area of $1 million to $1.5 million to rate the deal by Morgan Stanley, the very company with an interest in getting a high rating. It's the ultimate in negative incentives, and was and continues to be a major impediment to honest analysis on Wall Street. Michigan Sen. Carl Levin, one of the few lawmakers to focus on reforming the ratings agencies after the crash, put it this way: "It's like one of the parties in court paying the judge's salary."

Thanks to this model, ratings-agency business soared during the bubble era. A Senate report found that fees for the "Big Three" doubled between 2002 and 2007, from $3 billion to $6 billion. Fees for rating mortgage-backed securities at both Moody's and S&P nearly quadrupled.

So there were powerful incentives to whitewash deals like Cheyne. The eventual president of Moody's, Brian Clarkson, actually copped to this awful truth in writing, in a 2004 internal e-mail. "To put it bluntly," he wrote, "the issuer could take its business elsewhere unless the rating agency provides a higher rating."

Read more Matt Taibbi on RollingStone.com

Both Moody's and Standard & Poor's employees described complex/exotic new financial products like CDOs and SIVs as "cash cows," and behind closed doors, executives talked openly about the financial pressure to give scientifically unfounded analysis to products the banks wanted to sell.

The minutes from a 2007 conference of Standard & Poor's executives show that the raters knew they were in way over their heads. Admitting that it was virtually impossible to accurately rate, say, a synthetic derivative loan deal with underlying assets in China and Russia, one executive candidly admits, "We do not have the capacity nor the skills in house to rate something like this." Another counters, "Market pressures have significantly risen due to 'hot money.'" The first retorts that bankers are pushing boundaries, asking the raters to help them play the highly cynical hot-potato game, in which bad loans are originated en masse and then instantly passed off to suckers who will take on all the risk. "Bankers say why not originate bad loans, there is no penalty," the executive muses.

Hilariously – or tragically, depending on your point of view – an S&P executive at the conference even tossed off a quick visual sketch of their company's moral quandary. The picture is atrociously drawn (it looks like a junior high school student's rendering of a ganglion cell) and comes across like the Wall Street version of Hamlet, showing the industry traveling down a road and reaching a "Choice Point" crossroads, where the two options are "To Rate" and "Not Rate."

The former – basically taking the money and just rating whatever crap the banks toss their way – is crudely depicted as a wide, "well marked super highway." Meanwhile the honorable thing, not rating shitty investments, is shown to be a skinny little roadlet, marked "Dark and narrow path less traveled."

Obviously, the ratings agencies like S&P ultimately decided to take the road more traveled, choosing profits over scruples. Not that there wasn't some token resistance at first. For instance, some at S&P hesitated to allow the use of a questionable technique called "grandfathering," in which old and outdated rating models were used to rate newly issued investments.

In one damning e-mail chain in November 2005, a Morgan Stanley banker complains to an S&P executive named Elwyn Wong that S&P was preventing him from putting S&P ratings on Morgan Stanley deals that used this grandfathering technique. "My business is on 'pause' right now," the banker complains.

Wong took the news that S&P was holding up deals over the grandfathering issue badly. "Lord help our fucking scam," he said. "This has to be the stupidest place I have worked at." Wong, incidentally, was later hired by the U.S. Office of the Comptroller Currency, our top federal banking regulator.

The purists, however, couldn't hold out for long. In the Cheyne case, when one of the "quants" tried to hold the line, Morgan Stanley went over their heads to someone on the business side at the company to get the rating it wanted.

In July 2004, for instance, analyst Lapo Guadagnuolo sent an e-mail to Morgan Stanley's point man on the Cheyne deal, Gregg Drennan, and told him that the best he could do for the "mezzanine capital notes" or "MCN" piece of the SIV – a piece that Drennan wanted at least an A rating for – was BBB-plus. Drennan responded in an e-mail that CC'd Guadagnuolo's boss, Perry Inglis, telling him that Morgan Stanley "believe[s] the position the committee is taking is very inappropriate."

Ultimately, the analyst committee agreed to give the dubious Mezzanine Notes an A rating, marking the first time these middle-tier investments in a SIV ever received a public A rating. For Wall Street, this was occasion to par-tay. In the summer of 2005, one of the Cheyne hedge-funders sent out a celebratory e-mail to Morgan Stanley execs, bragging about getting the ratings companies to cave. "It is an amazing set of feats to move the rating agencies so far," the hedgie wrote. "We all do all this for one thing and I hope promotions are a given. Let's hope big bonuses are to follow."

Later on, S&P caved even further, agreeing to allow Morgan Stanley to lower the "capital buffer" in the deal protecting investors without suffering a ratings penalty. As late as February 1st, 2006, Guadagnuolo was defiantly telling Morgan Stanley that the one-percent buffer was a "pillar of our analysis." But by the next day, Morgan Stanley executive Moubarak had chopped Guadagnuolo's knees out. He cheerfully announced in a group e-mail that the bank had managed to remove this "pillar" and get the buffer knocked down to .75 percent.

Tina Sprinz, who worked for the Cheyne hedge fund, sent an e-mail that very day to Moubarak, thanking him for straightening out the pesky analysts. "Thanks for negotiating that," she says. The ratings process shouldn't be a "negotiation," yet this word appears throughout these documents.

In the Cheyne deal, just the plaintiffs in the lawsuit invested a total of $980 million in "rated notes," and those who invested in these "MCNs" were completely wiped out. Analysts from both agencies would express regret and/or trepidation about their roles in unleashing the monster deals and their failure to stop the business-side suits running the companies from selling them out. Gilkes, the S&P analyst who worried about shunning real science in favor of just making things up, later testified that the subprime assets in such SIVs were "not appropriate."

"They should not have been rated," he said.

If the significance of Cheyne is that it showed how the ratings agencies sold out in an effort to get business, the significance of the next deal, Rhinebridge, is that it showed how low they were willing to stoop to keep that business.

Rhinebridge was a subprime-packed SIV structured very much like Cheyne, only both the quality of the underlying crap in the SIV and the timing of the SIV's launch were significantly more horrible than even Cheyne's.

Not only did Morgan Stanley insist that the ratings agencies allow the bank to pack Rhinebridge full of a much higher quantity of subprime than in the Cheyne deal, they were also pushing this massive blob of toxic mortgages at a time when the subprime market was already approaching full collapse.

In fact, the Rhinebridge deal would launch with high ratings from both agencies on June 27th, 2007, less than two weeks before both Moody's and S&P would downgrade hundreds of subprime mortgage-backed securities. In other words, both Moody's and S&P were almost certainly in the process of downgrading the underlying assets in the Rhinebridge SIV even as they were preparing to launch Rhinebridge with AAA-rated notes.

"It was the briefest AAA rating in history," says the plaintiffs' lawyer Dan Drosman. "Rhinebridge went from AAA to junk in a matter of months."

There is an enormous documentary record in both agencies showing that analysts and executives knew a bust was coming long before they sent Rhinebridge out into the world with a AAA label. As early as 2005, S&P was talking in internal memorandums about a "bubble" in the real-estate markets, and in 2006 it knew that there had been "rampant appraisal and underwriting fraud for quite some time," causing "rising delinquencies" and "nightmare mortgages."

In June 2007, the same month Rhinebridge was launched, S&P's Board of Directors Report talked about a total collapse of the market. "The meltdown of the subprime-mortgage market will increase both foreclosures and the overhang of homes for sale."

It was no better at Moody's, where in June 2007, executives were internally discussing "increased amounts of lying on income" and "increased amounts of occupancy misstatements" in mortgage applications. Clarkson, who would become president two months later, was told the week before Rhinebridge launched that "most players in the market" believed subprime would "perform extremely poorly," and that the problems were "quite serious."

Yet the two ratings agencies not only kept those concerns private, they both took outlandish steps to declare just the opposite.

In a pair of matching public papers, both Moody's and S&P proclaimed that summer that while subprime might be going to hell, subprime-packed investments like SIVs might be just fine. The Moody's report on July 18th read "SIVs: An Oasis of Calm in the Sub-prime Maelstrom," while an S&P report on August 14th, 2007, was titled "Report Says SIV Ratings Are Weathering Current Market Disruptions."

The S&P report was so brazen that it even shocked a Morgan Stanley banker involved in the SIV deals. "I cannot believe these morons would reaffirm in this market," chortled the banker in an e-mail the day after the paper was released.

Rhinebridge, cheyne and a hell of a lot of other subprime investments ultimately blew to smithereens, taking with them vast amounts of cash – 40 percent of the world's wealth was wiped out in the aftermath of the mortgage bubble, according to some estimates. 2008 was to the American economy what 9/11 was to national security. Yet while 9/11 prompted the U.S. government to tear up half the Constitution in the name of public safety, after 2008, authorities went in the other direction. If you can imagine a post-9/11 scenario where there were no metal detectors at airports and people could walk on carrying chain saws and meat cleavers, you get a rough idea of what was done to reform the ratings process.

Specifically, very little was done to change the way AAA ratings are created – the "issuer pays" model still exists, and the "Big Three" retain roughly the same market share. An effort by Minnesota Sen. Al Franken to change the compensation model through a new approach under which agencies would be assigned randomly to rate new issues through a government agency passed overwhelmingly in the Senate, but in the House it was relegated to a study by the SEC – which released its findings last year, calling for . . . more study. "The conflict of interest still exists in the exact same way," says a frustrated Franken.

The companies by now are all the way back in black. In 2012, for instance, Moody's profits soared 22 percent, to $1.18 billion. McGraw-Hill, the parent company of Standard & Poor's, scored $437 million in profits last year, with the rating business accounting for 70 percent of the company's profits.

In February, the Obama Justice Department, in an action that seems belated, filed a $5 billion civil suit against Standard & Poor's, drawing upon some of the same data and documents that were part of the Cheyne and Rhinebridge suits. As part of that action, high-ranking officials at S&P were interviewed by government investigators and admitted that they had shaded their ratings methodologies to protect market share. In this deposition of Richard Gugliada, head of S&P's CDO operations, the government asks why the company was slow to implement updates to its model for evaluating CDOs:

Q: Is it fair to say that Standard & Poor's goal of preserving an increasing market share and profits from ratings fees influence the development of the updates to the CDO evaluator?

A: In part, correct.

Q: The main reason to avoid a reduction in the noninvestment grade ratings business was to preserve S&P's market share in that category, correct?

A: Correct.

Years after the crash, it's a little insulting to see industry analysts blithely copping under oath to having traded science for market share, especially since the companies continue to protest to the contrary in public. Contacted for this story, Moody's and S&P insisted many of the documents in this case were simply taken out of context, and that their analysis throughout has been rigorous, objective and independent.

It's a thin defense, but it's holding – for now. McGraw-Hill stock plunged nearly 14 percent when news of the Justice Department suit leaked, and dropped nearly 19 percent for February, but has since regained much of its value – its stock rose nearly 16 percent in March and April, as markets reacted favorably to, among other things, its recent settlement of the Cheyne and Rhinebridge suits. The markets clearly think the ratings agencies will survive.

What's amazing about this is that even without a mass of ugly documentary evidence proving their incompetence and corruption, these firms ought to be out of business. Even if they just accidentally sucked this badly, that should be enough to persuade the markets to look to a different model, different companies, different ratings methodologies.

But we know now that it was no accident. What happened to the ratings agencies during the financial crisis, and what is likely still happening within their walls, is a phenomenon as old as business itself. Given a choice between money and integrity, they took the money. Which wouldn't be quite so bad if they weren't in the integrity business.

This story is from the July 4 - July 18, 2013 issue of Rolling Stone

Read more Matt Taibbi on RollingStone.com

http://ca.finance.yahoo.com/news/the-la ... l?page=all
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sun May 26, 2013 9:41 am

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Does IFIC guard the public or do they guard the pack?
Is the public the "prey" because of this? Thanks IFIC for the wonderful job you do........of protecting......never mind.

Peter

This is a wonderful dissertation in plain language. Well said.

Do not expect an answer - IFIC treats retail investors with .........

On May 26, 2013, at 12:18 PM, Peter wrote:

Dear Ms De Laurentiis,

As you are the CEO of the IFIC, it is understandable that you are promoting influences that are in the best interests of members of the Investment Funds Institute of Canada, rather than influences that are in the best interests of the investors who are paying the bills. There is however, a limit as to how far you can push misrepresentation of the facts in order to influence public opinion in your favour.

You are quoted as saying, - "IFIC also argues that the use of embedded trailers favours small investors. "The embedded fee model is of particular benefit to small and first time investors," said IFIC president and CEO, Joanne De Laurentiis. "Most first time investors in Canada start with less than $25,000, which translates into an annual fee for investment advice of about $100. Compare that to hourly fees of $150 to $300 per hour, and it's clear that the trailer fee represents exceptional value for smaller investors."

►Q2. Ms De Laurentiis, we previously asked you to name some of the investments that only cost $100. annually in Trailer Commissions when I invest $25,000. That is a Trailer Commission of only 0.004% ? ? ? We never received your response !

Without any factual response supporting your pronouncement, your explanation is nothing less than an attempt to influence the reader with a misleading theory. At the time that a mutual fund purchase is made (with Trailer Fees) through an Investment Dealer Representative, the Representative makes a commission for that sale. After the sale is made and the sales commission is paid to the Dealer Representative, why is it obligatory for the investor to continue to pay Trailer Fees when the investor has already paid for the advice to make that particular investment in the first place ?

Any price for new "advice" from the Dealer Representative regarding benefits of making new investments, or investment changes, is remunerated from the commissions paid by the investor on the next purchase. Therefore, your theory that embedded Trailer Fees are "exceptional value" has no credibility. Your theory has no credibility because you are not prepared to come forward with substantial facts and evidence to support your claims. Specifically, what actual service does the Dealer Representative perform that they are not being remunerated in some other way ? Remember, the Investment Dealer also charges the investor annual administration and supervisory fees, so what services does the Dealer Representative perform which justify the ongoing Trailer Fees ?

On the question of Mutual Fund Sales Commissions. You make the point that investors are better off paying mutual fund Sales Commissions and Trailer Fees than paying $150. to $300.per hour for professional investment "advice". Here are some real live facts that deflate the appearance of reasonableness of the mathematical theory that you are promoting.

Your theory of introducing and making a comparison between paying $150. to $300. per hour versus paying Trailer Fees for "advisory" services after an investment purchase has been made, holds no water. Why does an investor need more advice after the purchase has been made ? We have previously asked you to explain this question of justifying the Trailer Fees.

If the Dealer Representative "advisor" is recommending mutual funds or other investments where the investor pays a separate purchase commission at the front or back-end, then the option to purchase "advisory" services on an hourly basis seems like a sensible option. However, when there is an option to purchase on a Deferred Sales Charge (DSC) basis, one would not expect to also pay for "advisory" services on an hourly basis. The reason being that the Dealer Representative "advisor" automatically receives a 5% sales commission that is embedded in the mutual fund purchase price.

Our first experience with an Investment Dealer Representative never gave us the option to purchase his services on a per hour basis. Instead, he just convinced us to invest about 90% of our RRIF portfolios in mutual funds (we were 70 and 72-years of age at that time and in the distribution mode). He also convinced us that it was in our best interests to purchase over $200,000. in mutual funds on a Deferred Sales Charge (DSC) basis. The net result was that our Dealer Representative "Advisor" immediately pocketed over $11,000. in sales commissions. There is something egregious about this equation.

Using your $150. per hour "advisory service charge", we paid for 73 hours of his time to write up a Proposal Letter and IPS and list the mutual funds, etc. investment mix. Including our face to face introductory meeting and subsequent telephone discussions, we indirectly paid the Dealer Representative over $11,000. At the most, the Dealer Representative spent 10-hours making this sale. The simple mathematics makes this remuneration at about $1,100. per hour.

Remember, this $1,100. per hour was to give us advice on the best investments for creating our RRIF portfolios. After that point, you seem to be quite comfortable for the "advisor" to also receive Trailer Fees ? ? ? ! ! !

There is something seriously wrong in the Dealer Representative remuneration systems that are disproportionate to the value of the services performed. Trailer Fees and selling mutual funds on a DSC basis needs to be outlawed because they provide the Dealer Representative "advisors" with the facility to abuse the interests of the investor without the investor necessarily being aware that thay are being skewered.

In closing, Ms De Laurentiis, your pronouncement that, "Most first time investors in Canada start with less than $25,000, which translates into an annual fee for investment advice of about $100. Compare that to hourly fees of $150 to $300 per hour, and it's clear that the trailer fee represents exceptional value for smaller investors." is erroneous and misleading. With Trailer Fees running at 1 1/4% (for other than DSC basis), the annual Trailer Fees on a $25,000. mutual fund investment would be $312.50, not the "about $100." as you try to convince the reader.

Perhaps the IFIC can start giving some real consideration to the interests of the small investor.

Peter Whitehouse

(Advocate comments: Thanks Peter for being so revealing about the predatory habits of the financial sales industry. If I can add one item of potential interest: When I was employed as a big-bank-broker (quite some time ago) I was always told that it was costing the big-bank brokerage nearly $300,000 in expenses "just for my desk". In other words, management was saying that unless I "produced" close to $300,000 in commissions (or fees) I was a "money-loser" for the bank. It was the talk closely related to the "achieve or leave" talk that every broker-salesperson knows about.

So to put that into perspective, lets imagine a broker working about 200 days per year (my experience, not everyones) needing to produce $300,000 just to keep from being fired. That translates to a "need" to produce $1500 in commission for every day of work just to survive. A million dollar producer (someone whom my regional manager called a "big swinging dick" (sorry, he was old school and highly inappropriate, but true story) would be producing an average of $5000 in commission for every day he or she worked. This is the real picture of what goes on behind the curtains, and the promises of "trusted financial advice". It is a sales game, nothing more, nothing less. As a client, unless you are dealing with a true fiduciary (they are out there), you are the prey, nothing more, nothing less.

So the next time you have a telephone call from your big-broker.......imagine how many customers like you he or she has talked to today, and how much commission (or fees on your assets) he or she needs to earn. That might give you an insider glimpse into whether you are being "served" by your particular salesperson, or whether you are the "prey".

See http://www.youtube.com/user/investoradv ... ature=mhee



To your financial health.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sat Mar 09, 2013 10:14 pm

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We believe that a legal “best interest” standard should NOT be implemented.


Investment Funds Institute of Canada submission to regulators, hmmmm.

59 pages of paper wasted to lobby for continued access to more of the public's money.....
Some further interesting quotes from the 59 pages:

It is difficult to understand how a legislated “best interests” standard would come into effect where a dual-licensed advisor recommends a non-securities product and a client then claims that the advisor should have recommended a mutual fund product instead of the insurance product. Would the advisor have breached the legislated standard for recommending an insurance product not governed by the securities regulators? Hmmmm. Complicated. We don't know how to handle complicated. We prefer to keep as many conflicts of interest as possible.

A statutory best interest standard may impact the premiums due for Errors & Omissions insurance.
Oh, that is a tremendous reason to NOT want to put client interests first.

The issue of civil liability and the application of the standard to a civil case should be left to the courts to determine. As investors currently have access to the courts, they should continue to have that option if a best interest standard after careful study is imposed.
This excuse is brutal. To assume that these people wish customers to have to negotiate a ten to twenty year legal battle, against billion dollar corporations is the height of ridiculous. Shame for setting this legal "trap" as the only out for those you fail to serve professionally.

We believe that the current standard coincides with the principles of a fiduciary duty and that it, in effect, obligates dealers and advisors to act in the best interests of a client and place the client’s interests first and foremost.
We just do not want to put that in writing the rules..............but as we said, we DO believe it:)

Investors can already sue for breach of contract or negligence.
Yes, great solution, again, to force each individual claimant to pursue financial corporations into their nursing home years, at costs of tens or hundreds of thousands of dollars in matters where you claim that "We believe that the current standard coincides .....blah blah blah"

A legislated “best interest” standard without clear parameters, which is equated to a fiduciary standard, would likely cause unintended consequences for dealers, advisors, clients, and the industry.......
Self serving nonsense. Again, shame.

It would likely be impossible to develop a trade supervision system that could determine whether the investor has purchased the “best” product. Hmmmmm. I think the proposals are asking only about "best interest" and you are changing the requirements now to false ones, and then arguing against the false that you created?

The statutory best interest standard described above would have negative impacts on clients. ???

The “best interest” standard, as described in Question 17, could call into question the existence of an exclusive sales force model. Many exclusive sales forces restrict themselves to offering only proprietary products, or giving prominence to proprietary products. Could a recommendation from a limited set of product choices be reliably demonstrated after the fact to have been made in a client’s best interest?

Now you are confusing me about whether your salespeople are "salespeople" or are they "advisors"? Do you wish to open the can of worms that describes one of the greatest "bait and switch" schemes in the world? Perhaps it might be best to open up the "suitability" or best interest standards question to those who sell house brand funds only......perhaps it is time to come clean with the public about the many shortcomings of dealing with only a "life insurance licensed salesperson" who calls themselves an "advisor? See this video http://youtu.be/qqLhMw3y9bI

I have to stop here, I am at page 20 out of 59 pages. 59 pages of mostly bullshit intended to force customers into an unfair, possibly misrepresented sales relationship, where the industry can use their advanced level of information and knowledge to abuse the customer. Just like a used car salesperson does, hiding the known faults and pitfalls from the customer........but you can take the billion dollar financial firm to court.......if you have 20 years and $200,000 to waste. That is the strategy of a bully, not that of a professional service.

Thanks IFIC, you guys are the best.........Canada needs more professionals just like you.

http://www.osc.gov.on.ca/documents/en/S ... entisj.pdf
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Thu Mar 07, 2013 7:16 pm

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It may be nothing more than a flesh wound on the gravy train that has kept groups of lawyers and various accounting firms profitably employed working through the Nortel Networks bankruptcy.

With professional fees of more than $800-million paid already – or more than 10% of the proceeds now in escrow awaiting disbursement – context is required for this week’s small victory by the U.S. Trustee for Bankruptcy: a zero sum game is at work which is not good news for some groups including Nortel’s pensioners.

This week, the U.S. Trustee opposed a motion for Nortel’s U.S. estate to be exempt from a Department of Justice rule requiring the disclosure of fees paid to professionals retained by law firms. (That rule, designed to achieve greater transparency, came into effect on Feb 1.) Nortel wanted an exemption on the grounds that such information could tip off adversaries to its litigation plans. Judge Kevin Gross agreed to a limited exemption, whereby at some future date Nortel will be required to disclose how much it spent on the 29 law firms that have been retained.

Related
Nortel saga highlights why boards will kill their own
Verdict recasts sordid history of Nortel Networks

Meantime, the judges have the final say on what fees will be paid out of the estate. (A monitor, typically an accounting firm, oversees bankruptcies, with the courts giving the final approval.) And given that battles are also occurring in Canada and the U.K., the judges have been busy distributing more than $800-million.

While the disbursing process is time-honoured, there does seem to be a close relationship on bankruptcy/insolvency matters between the bench and the lawyers involved at a time when much of the focus in public policy is on transparency.


Locally the Insolvency Institute of Canada seems to be front and centre with the mingling. It defines itself as “Canada’s premiere private sector insolvency organization” that it says is “dedicated to improving the insolvency process and enhancing the professional quality of, and public respect for, the insolvency and bankruptcy practice in Canada.”

One of its claims is that it “provides a unique forum for leading members of the insolvency community to interact and have meaningful dialogue with other members, as well as senior representatives of the federal and provincial governments and members of the judiciary.”

In this way it’s a “valuable forum for members, legislators, academics, and members of the judiciary to exchange ideas and share experiences.”

Apart from making submissions, the IIC also holds an annual conference that is “for members, spouses/guests and invited guests only. Non-member substitutions are not permitted,” notes the brochure for a recent conference.

This year’s bash will be held in Palm Springs in November. The 2012 conference was held at Whistler. Some of the agenda items involve matters that are live or ongoing.

Calls to IIC seeking a comment weren’t returned.

Based on recent conferences, the federal superintendent of bankruptcy is the first speaker. (That office supervises the administration of the Bankruptcy and Insolvency Act. Since late 2009, the superintendent has the authority to supervise the monitor.)

And before the formal part of the conference there is a judicial forum but that’s for “invited judicial guests only.”

The National Conference for Business Law (whose sustaining sponsor is the IIC) is another entity that holds an annual conference where practitioners and judges mix – though the judges pay a lower fee than the other attendees.

For both entities here’s a challenge: at your next conference conduct a session on how to make the system more effective and not a gravy train.

http://business.financialpost.com/2013/ ... ankruptcy/
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Fri Feb 22, 2013 6:04 pm

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The following letter is written by the family member of a 90 year old victim of financial abuse, who, after receiving yet another "brush-off" by those who "self" regulate, penned this response about his feelings and experiences of the industry:

Dear Mr. Lilienfeldt:

cc
Jeff Mount, MFDA
Doug MacKay, BCSC
Donna Bobbett, BCSC
Sydney, Inquiries Dept BCSC

I am writing to follow up on an observation that is characteristic of the financial regulation and oversight agencies operating in BC. I have noted that all organizations that I have encountered appear to have no mandate to look at evidence that leads to a record of violation of Criminal Code prohibitions against 1) misrepresentation of securities, 2) generating false records, 3) requiring an unsatisfied client to sign a final release absolving the investment company of any liability and REQUIRING THAT THE CLIENT AGREE TO GIVING THE COMPANY THE RIGHT TO SUE THE CLIENT IF THAT CLIENT TELLS ANYONE THAT THEY HAVE SETTLED WITH THE INVESTMENT COMPANY.

In order to have discipline in the investment sales industry, it is essential that the oversight agencies be cognizant of the distinction between honest errors that are amenable to negotiation, and malicious predatory acts that are aimed at frail, uninformed seniors. The example above of a demand that a client sign a right of claim by the investment company to sue for the full value of the client's portfolio, if that client is suspected of saying a word to anyone about settling with the company in question, is not a condition that should be imposed on any cheated client. Please look at the following definition of extortion: [Taken from the Mirriam Webster Dictionary online version]

extortion noun (Concise Encyclopedia)
Unlawful ex(tr)action of money or property through intimidation or undue exercise of authority.
It may include threats of physical harm, criminal prosecution, or public exposure. Some forms of threat, especially those made in writing, are occasionally singled out for separate statutory treatment as blackmail. See also bribery.

It is clear that wayward investment dealers in Canada are given impunity to victimize clients in the manner cited above, due to a prohibition against upholding community standards of honest dealing within the regulatory and oversight agency community.

Therefore, I am asking you and every oversight organization that I have communicated with on the complaint of Harold C. Blanes, to explain exactly by what operating rule your agency is governed by that prevents your 1)confronting the stated standards of honest dealing stated in sections 361-363 in the Criminal Code of Canada, including all other parts of the Criminal Code governing sale of securities; and 2) being willing to analyze breaches of these rules, and 3) questioning a brokerage that is conducting itself outside of these rules, and 4) documenting the response of the brokerage, and 5) making an accurate report to law enforcement of the response from the investment dealer that has been acting in bad faith against a vulnerable client.

I would like to get your agency's terms of reference that explicitly forbids your personnel from acknowledging the Criminal Code in these cases. The current policy overwhelms the police with demands to start from scratch in looking at abuses. Your agency has a duty to the community to assist in clarifying the issues to law enforcement so that they can proceed from a manageable starting point. Police at present are just too overloaded to be of any value to an aggrieved client in this kind of situation.

The result of this unacceptable and irresponsible policy of refusing to assist in upholding the good faith standards of business practice - that is clearly stated in the Criminal Code, means that the law is being excluded from being available to the elderly who are being preyed upon by investment dealers who have been conditioned to think that they have impunity to act in bad faith.

The egregiously irresponsible policy that forces victimized seniors to have to fend for themselves puts the individual victim in a situation where they are required to privately put out tens of thousands of dollars in legal fees to fight these bad faith practices. This is another shameful and preventable form of elder abuse.

I am asking for your co-operation in identifying where this willful disregard of the Criminal Code originated in your policy rules, so that we are able to get the duty of care of all provincially chartered organizations to begin to do their part in prevention of elder abuse in this province. Harold Blanes is very injured by the fact that his retirement savings have been hijacked under false pretenses, and the company that has perpetrated this offense is offering to return only about half of what would be banked, if the company had honoured what it originally offered by way of the representations of its agent, XXXXXXXXXX. Harold Blanes has provided evidence that XXXXXXXXX has acknowledged in a memo that he was asking for guaranteed investment. I as witness have heard her say on at least a dozen times to my Dad, that "all your investments are in guaranteed securities - you have absolutely nothing to worry about". We have found that this was false representation.

In order for BC to have a trustworthy and investment worthy economy, we will have to get a lot more serious about stopping bad faith business practices within the industry. This can begin if you are able to provide me with your operating protocols that forbid staff from getting familiar with the rules against deception within the Criminal Code of Canada.

Thank you very much for your co-operation,

Alan Blanes, for:
Harold C. Blanes
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Tue Jan 29, 2013 9:53 am

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Corporate salvage operations need rescuing

Theresa Tedesco | Jan 29, 2013 7:38 AM ET
More from Theresa Tedesco | @tedescott
The business of salvaging distressed companies itself is in desperate need of rescue.

Consider that insolvency practitioners — lawyers, accountants, consultants and the like — in Canada, the U.S. and the U.K. have pocketed $837-million in professional fees and disbursements since Nortel Networks Corp. filed for court protection from creditors in January, 2009. And the tab is still running.

The restructuring of General Motors Corp. cost shareholders US$1-billion to put the automaker back on the road; over US$900-million to sort out the wreckage of Wall Street investment firm Lehman Bros and $100-million to work out the tangled web of the asset-backed commercial paper (ABCP) debacle in Canada.

Clearly, corporate clean ups are big business. A self-regulated industry where few restrictions on billings mean the meter is always running. The messier the cleanup, the bigger the pay day for the hired guns.

To wit, professional fees in the United States have increased 9.5% annually since 2007. In the United Kingdom, a recent government study found that insolvency practitioners pocket £1-billion for every £5-billion in assets they recover for creditors.

While the sheer magnitude of the dollar amounts is attracting more attention, there’s been very little public pushback.

It seems people are either fascinated – or repulsed – by the numbers.


In Canada, that hasn’t materialized into much debate, let alone a Royal Commission, over the potential impacts higher professionals fees may be having on the efficiency of the country’s insolvency regime and the overall economy. After all, millions in professional advisory fees could be the difference between rehabilitation and liquidation.

That may be changing. Nortel’s Canadian pensioners are now challenging the “excessive payments.” Currently embroiled in a protracted and expensive battle with the company’s other creditors over the $9-billion that remains of the once mighty telecommunications equipment maker, they’ve watched their benefits slashed. And given that two weeks of mediation failed to resolve the bitter impasse between the company and its creditors, the tab will just keep running.

In an effort to stop a fees frenzy, Nortel’s Canadian disabled long-term pensioners filed official complaints with bankruptcy watchdogs in Canada and the United States on Jan. 25, asking regulators to investigate the payments. Clearly, it’s a challenge for distressed companies to impose discipline on costs when the interests are so fractured along different constituency groups.

Gone are the days of simple balance sheet workouts. Today’s complex corporate capital structures take more time to restructure. For example, Nortel had substantial assets in 130 different jurisdictions, each with distinct bankruptcy regimes. With so many competing interests, quickie resolutions are now the exception, not the rule, so the fee meters tend to stay on longer.

Complicating matters is the emergence of aggressive distressed investors who are radically changing the way restructurings are unfolding today.

Given this new reality, a review of the existing bankruptcy regime in Canada is in order, at the very least, if not a fundamental overhaul.

Obviously insolvency experts are entitled to be paid for their work. Still, there should be greater transparency and scrutiny of the fees billed with an eye to whether they represent value for the money. For example, charging $100 to send an email or piling on hundreds of dollars an hour for a couple of junior lawyers to assist a senior legal gun already being paid top dollar doesn’t instill much confidence in the system.

In Canada, the industry is less transparent because documents filed in court aren’t required to delve into nitty gritty details. All expenses under the Companies’ Creditors Arrangement Act (CCAA) are approved by a judge with the support of the court-appointed monitor, who plays role of gatekeeper during the restructuring process. In the U.S., the opposite is true. Bankruptcy trustees review files to control costs but they often tend to sweat the small stuff and pay less attention to big-ticket items.

The U.K. is leading the charge. Having examined its insolvency regime for more than a year, the government announced a review of the current regime last month. The move is the result of a 12-week study by the Office of Fair Trading in 2010, which found that the insolvency market may not work in the best interests of all creditors. Among the findings: secured creditors, the first in line to get money, have a strong incentive to control fees and are usually paid in full.

Not so for unsecured creditors, the report concluded. Bankruptcy experts in the U.K. charge 9% more for their services when an unsecured creditor is paying them. It’s little wonder the U.K. government has called for “far-reaching reforms” to make the system fairer to the participants and the overall economy.

The flip side to this worrisome trend is that climbing advisory fees may make it prohibitively expensive for companies on the verge of collapse to even attempt a salvage operation. It’s widely accepted that if there isn’t $1-million in cash in the coffers to pay for advisers up front, a company can’t afford to file for CCAA — and usually doesn’t. The fallout is devastating to employees and investors.

Still, don’t look to the industry to scream for reforms because there’s little incentive. Besides, most bankruptcy professionals argue there’s nothing wrong with the current system and dismiss complaints about expensive advisory fees as griping and whining, or worse, ill-informed. So for now, that leaves Nortel’s long-term pensioners to carry the spear – until perhaps the next monitor’s report.




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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Thu Jan 10, 2013 11:57 pm

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Kenmar Associates
Investor Education and Protection

ALERT ALERT ALERT ALERT

January 11, 2013 ALERT: "Adviser" titles used to mislead seniors
To: Retail Investors
Widows and widowers Seniors
Near retirees and Retirees Pensioners
The infirm

Most investors don’t realize that when they deal with a bank or brokerage firm branch, the representatives there are essentially free to emblazon their business cards with whatever titles they please-seniors specialist, financial consultants, advisors, wealth managers, to name a few. But if you’re looking for someone who is qualified to give solid advice about all aspects of your financial life while keeping costs down, you need to put your guard up. This widespread lack of awareness about advisor designations increases the potential for abuse, especially for the elderly.

The term "advisor" as used by about thousands of Canadian investment product sellers, is not the legal license category - they were licensed as "salesperson" until Sept 2009.and are now registered as dealer representatives. We regard using the word “advisor” as misleading since qualification can be minimal and most do not work under a fiduciary standard. Regulators have not traditionally enforced the use of designations /titles although recently the Investment Industry Regulatory Organization of Canada (IIROC) has launched an initiative to rein in the proliferation of designations .Title inflation is expanding aimed at the elderly. Using a meaningless designation like “ Seniors Planner”makes a bad situation worse.

Retail investors can’t be blamed for failing to recognize the differences between a glorified salesperson pushing a particular fund and a professional advisor who is required to act in your best interest, but there are many. Here's one. If two similar mutual funds are available, brokers can choose to put you in the one that lines their pocket at your expense as long as it’s considered “suitable” for your needs . They aren't required to reveal the nature of the advice they can provide. They aren’t always required to disclose conflicts-of- interest that may influence what they ultimately decide to recommend. Nor are they always obliged to tell you how they are compensated or who is ultimately paying them. Professional investment advisers are supposed to do all of those things. Read more about fiduciary duty at http://faircanada.ca/wp- content/uploads/2012/06/Why-A-Fiduciary-Standard_-Kivenko.pdf

Over the past few years we've seen a dramatic growth in titles that imply a specialization in helping seniors ( 55+) invest their life savings One or more words such as “senior,” “retirement,” “elder,” or like words is combined with one or more words such as “certified,” “registered,” “chartered,” “advisor,” “specialist,” “consultant,” “planner,” or like words, in the name of the certification or professional designation is designed to deceive. It's generally recognized that seniors with attractive nest eggs are an especially vulnerable segment of investors and that's why they are targeted. According to a 2011 report from the Ombudsman for Banking Services and Investments,individuals over the age of 60 generated approximately 53% of the complaints investigated (70% of senior complainants are retired).

For many of these individuals, the financial harm they suffer from bank or investment firm abuse is magnified by having fewer years to make up the losses and fewer income or job opportunities. Seniors should carefully check the credentials of individuals holding themselves out as “retirement Experts”,“senior specialists ”, "Certified Advisor for Senior Investing" and the like. These individuals invent designations implying that they have special expertise in assisting seniors in structuring their investments in such a manner as to reduce income taxes, avoid probate fees or generate steady income with minimal risk. We're not aware of any accredited entity in Canada that confers seniors designations that are robust .

For this reason, senior investors should, as a minimum, make sure they work only with dealers licensed by provincial securities Commissions and Self Regulating Organizations. You can check if your dealer is registered with the Investment Industry Regulatory organization of canada (IIROC) http://www.iiroc.ca or the Mutual Fund Dealers Association( MFDA) http://www.mfda.ca by looking up the Member list. If they're on the list at least you know they are under some regulatory oversight and you can access OBSI http://www.obsi.ca in the event of a dispute. If you're not sure, simply ask your representative which organization to check. If they are not members, you could be facing an Earl Jones type experience. Earl Jones, a non-registered Montreal “advisor” who pleaded guilty to running a Ponzi scheme which reportedely cost his victims over $50 million in losses.After pleading guilty to two charges of fraud in 2010, he was sentenced to 11 years in prison.Read more at http://en.wikipedia.org/wiki/Earl_Jones ... nt_advisor) .

Even properly registered individuals may call themselves “Retirement specialists” to create a false level of comfort among seniors by implying a certain level of education/training on issues relevant to the elderly. But the training they receive is often nothing more than marketing and selling techniques aimed at exploiting seniors. These salespersons and the alphabet soup of letters after their names can be confusing, and in too many cases, has proven costly to seniors. Victims have been sold expensive products, products with hefty early redemption penalties, unsuitable investments, illiquid securities and been encouraged to take on unnecessary debt .The adverse impact on their finances and health has been devastating.

One of the most devastating cases is Markarian vs. CIBC World Marketshttp://maisonneuve.org/pressroom/article/2010/sep/6/incredible-true-story-mr-makarian/ - the use of misleading titles/designations played a key role in this case.

Make- believe senior specialists commonly target senior investors at “ free lunch” seminars ( some held in retirement residences!) where the “expert” reviews seniors’ assets. Typically, the so-called expert recommends selling existing securities positions and using the cash to buy products that will generate lucrative sales commissions, like mutual funds. If you do attend these events, sign nothing until you've had a chance to fully digest the offering. Take a read of what the BCSC has to say about these seminars.http://www.investright.org/news_post.aspx?%20blogid=212&id=707

Another technique used by unscrupulous advisors is to join a church or social group with many senior members. Experience shows that most Canadians blindly trust their advisers, so danger abounds.
In 2008 , in response to growing problems,the North American Securities Administrators Association (NASAA) issued a model rule prohibiting the misleading use of senior and retiree designations NASAA Model Rule on the Use of Senior-Specific Certifications and Professional Designations.

To learn more about various professional designations, please visit the Alberta Securities Commission for a good description of what the most common designations used in Canada are http://www.albertasecurities.com/INVESTORS/HOWDOI/Pages/designations.aspx You'll not see any with the word senior in it.

Summary and Conclusion

A recent Investment Funds Institute of Canada Investor Survey found that older investors (56% of those 55 and older) are more likely than younger investors (43% of those 35 to 54) to say they make the decision jointly with their advisor. Advisors play a major role in the financial seniors’ decisions. They can be a source of sound advice but they can also bring much pain and sufffering.

The misleading use of senior designations can result in the sale of unsuitable investments and can have a life-altering effect on the financial well-being of senior citizens and retirees. We opine that there are more consumers duped by misleading titles than anyone wants to admit- titles appear to be very persuasive in building confidence in the minds of trusting, vulnerable seniors with sizable nest eggs. Legitimate titles and credentials imply a connection to licensing organizations and a duty on the part of the advisor using them to adhere to the ethical and professional standards those organizations impose on them. If an accredited financial advisor fails to adhere to the standards associated with their titles and credentials there could be a possibility of victim restitution if these breaches lead to substandard work and the work results in financial loss . However, if you are taken in by a inflated designation “advisor”, making a claim for compensation will be much more difficult. Investor advocates recommend ignoring advisors that use inflated titles .

You might find it useful to read Working with a financial advisor http://www.securities-%20administrators.ca/uploadedFiles/General/pdfs/Working%20with%20an%20adviser%20%20web_ENG_2012.pdf

Be aware. CAVEAT EMPTOR .Remember, it's YOUR money. Kenmar Associates

DISCLAIMER
Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document is to alert complainants about what they may face when interviewed by an investigator. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.
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Kenmar Associates
Investor Education and Protection

https://docs.google.com/file/d/0BzE_LMP ... ZGLUU/edit

(advocate comment.......check your "advisor's" true licence title here: http://www.securities-administrators.ca/nrs/nrsearch.aspx?id=850 if the license does NOT match the business card they are in violation of industry rules and principles. What does that say about how they may treat your money?)
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Fri Jan 04, 2013 7:51 pm

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January 04, 2013


Me Anne-Marie Beaudoin

Corporate Secretary
Autorité des marchés financiers

800, square Victoria, 22e étage
C.P. 246, Tour de la Bourse

Montréal, Québec
H4Z 1G3
Fax: 514-864-6381

e-mail: consultation-en-cours@lautorite.qc.ca

John Stevenson,
Secretary
Ontario Securities Commission

20 Queen Street West
Suite 1900, Box 55

Toronto, Ontario
M5H 3S8
Fax: 416-593-2318

e-mail: jstevenson@osc.gov.on.ca

COMMENTS ON CSA Consultation Paper 33-403

To whom it may concern:

Further to CSA Discussion Paper 81-407 Mutual Fund Fees, which examines the mutual fund fee structure in Canada and identifies potential investor protection issues arising from that structure.

I now have slightly over 30 years of experience with the Canadian investment industry. I feel privileged to have this dialogue about matters which are not typically allowed to be discussed in this industry. I will try and cut straight to the points that I feel are most important to the welfare of Canadian investors.

The investment industry is perversely incentivized to increase profits even at the expense of doing intentional harm to investors interests.
The protective duty owed to the public interest by industry, and by regulatory and self regulatory agents, appears to have been lost, forgotten, or silenced. I have found this to be the case time after time. Despite all attempts to portray the industry as a professional body acting in positions of trust, this submission will attempt to show how far short the industry has come in living up to the promises.

The regulatory industry appears to have become a “business within a business”, earning considerable salaries and job security by catering to the investment industry, while acting willfully blind to numerous public harms. Provincial regulator salaries of triple to quadruple those paid to provincial premiers, have ensured a loyalty and a protective bias towards the industry.

Regulatory actions appear to be aimed only at the smallest and least important players, while large scale or systemic crimes against the public have an investigation or prosecution rate that is statistically zero. It is an industry where it appears that “anything goes” as long as it is profitable to the strongest financial institutions in the world.

One result of the “sale” of the public protective interests by regulators, is that the average Canadian could be cheated, shortchanged or abused by persons in positions of trust, to an extent where half of their future retirement (or more) could be removed from them, and placed into the hands of those persons posing as trusted professionals.

This commentary hopes to open a dialogue on the abusive nature of our system. How it relates to retail mutual funds is but one example of many.
The author, Larry Elford, worked inside the retail investment industry for two decades, and upon retirement, founded the web forum for ethical professionals at http://www.investoradvocates.ca . The forum is directed to industry best practices, and to highlighting abuses of the public which appear to run rampant.
This commentary will look at the issue of high investment costs from the standpoint of a former industry insider. It will look at some facts about the industry, some possible explanations why things are as they are, and two simple solutions.

Executive Summary:

- Mutual fund costs in Canada are the highest in the world.
- Coincidentally, the Canadian financial system is reputed to be the strongest in the world.
-That strength now appears to have become an abuse of market dominance.
-Highest-cost investments are typically sold to consumers by persons on commission, but who are allowed to deceive the public into the belief that they are licensed professional “advisors”.
- Most investment customers thus fail to receive investment advice, from so-called professionals who promise investment “advice”.
-Customers are thus being tricked into a relationship where the product or service they get is not what was promised to them, nor what they are led to expect. It is the foundation for intentional deceit of the public.
-Regulators are incentivized toward protecting the interests of the industry that pays them, while having little interest in protecting consumers from systemic industry deception.
-Other countries have the ability, and maturity, to discuss and address these issue, to the benefit of all. (UK, Australia etc) Canada stands alone in the practice of letting the strongest financial institutions in the world get away with abuse, misconduct and sales malpractice against the public.



Table of Contents

CANADIAN SECURITIES ADMINISTRATORS DISCUSSION PAPER AND REQUEST FOR COMMENT 81-407 MUTUAL FUND FEES

January 13, 2013

Cover Letter and executive summary (page 1)
Are Mutual Fund Fees Abusive in Canada? (page 4)
A former industry participant looks at a few reasons why. (page 5)
Two simple solutions. (page 9)
Codes, rules, promises, laws, etc., often violated by “trusted” investment professionals. (page 11)
Candid quotes about violations of the public. (deception, deceit, fraud) (page 16)
Conclusion/Summary page (page 15)
Some legal definitions (page 16)


Section 2
Are Mutual Fund Fees Abusive in Canada?

Are mutual fund fees too high in Canada? The answer is yes. Further to the high costs, is the abusive manner by which Canadians are tricked into the belief that their mutual fund seller is a trusted “advisor”.

I refer to the Keith Ambaschteer (U of T Rotman School) study titled The $25 Billion Dollar Pension Haircut as a very credible analysis. His study suggests that Canadian retail investors are being gouged to the tune of $500 million dollars a week. Half a billion each week, transferred from the hands of trusting Canadian investors, into the hands of people claiming to be “trusted professionals”.

In my own experience, this is not simply a matter of charging customers a “fair, honest or good faith” amount for a service, as the industry requires. It is the result of an unfair, and un-level playing field, where misleading clients helps them to be cheated and shortchanged of their rightful returns. A predatory relationship is provided where a professional one is promised. Simple fraud is a rather impolite term for this but perhaps it is time to move beyond polite, for the sake of Canadian’s financial health.
The $25 Billion dollar figure represents 2% to 3% of the total amount of mutual fund assets held by Canadians. It should be noted that a consumer “haircut” of 2% of annual investment returns will cut ones future portfolio in half, over a 35 year time frame.

Thus, without even factoring in examples outside of the scope of Keith Ambaschteer’s study, Canadians retirement lifestyles are being cut by half, or more by the current self regulating and self serving system. Also mentioned, or linked herein are additional methods, tricks of the trade, if you will, that in my opinion increase the “take” from Canadians to closer to one billion dollars per week from systemic abuses.

In recent work as an expert witness and investigator of financial misconduct and malpractice, I have seen investment products, or portfolios, consisting of fees, on top of fees, sometimes on top of other fees. Always on top of about 5% commissions to the salesperson (or “advisor”). It seems apparent that the industry has found the perfect manner of capturing and then abusing their dominant position in the markets.

I refer to these results as “systemic financial abuse of consumers, by persons in positions of trust”. This appears to be “standard” industry practice, or at very least, the path that four out of five persons referring to themselves as “advisor’s” are willing to take to earn greater commissions. Sadly, I can now also include management as well as regulators in this same category of practice, all too often.

This “request for comment 81-407” encouraged comments on the broader aspects of the industry, and not only on the mutual fund segment. I will dedicate the remainder of my comments to some of the underlying causes I found for abuses of Canadian investors.



Section 3
A former industry participant looks at a few reasons why.

The ability of this industry to “self” regulate, is one of the root causes that allows abuse of market dominance and abuse of Canadian retail investors.

Self regulation appears to be mastered by the financial industry to an extent where police, prosecutors, civil and criminal courts either “defer” action against this industry, or accept without question the actions and decisions of the industry. Notwithstanding that financially abusing investors of their rightful returns may be damaging Canadians to an amount greater than each and every other “traditional” crime in Canada, combined.

To think that one industry can, with the help of thousands of industry helpers and handmaidens, can serve themselves to nearly one billion dollars a week of money that rightfully belongs to Canadian investors is amazing. They do this by ignoring the requirements of “fairness honesty in good faith”. They get away with this through use of the high moral ground of “self” regulation and captured regulation. All of this is done by ignoring the requirements of “fairness, honesty and good faith” dealing with the public.

One foundational example of the “willful blindness” which self regulation allows is the standard industry practice of allowing persons licensed, trained and paid in the capacity of commission salespeople, to misrepresent themselves to an uninformed Canadian public as trusted “professional advisors”.

An entire country is duped into a game of “professional advisor bait and switch”, through massive advertising, and promotional efforts, with the public losing at nearly every turn, and the industry profiting immensely.
By way of background, on the following page I have reprinted a recent industry article written by myself about this ability to deliberately deceive the public.












The following article, published December, 2012 (http://www.sipa.ca), by Larry Elford, former industry participant, outlines some of the issues related to this industry bait and switch:


THE DELIBERATE DECEPTION OF CONSUMERS - by Larry Elford

One definition of fraud is “the deliberate deception of consumers”.  In this column I would like to open a conversation into a dark world of deception within some of the most “trusted” financial institutions in North America.  Sadly, during the twenty years I worked inside the investment industry, this conversation was never allowed.

In the United States there are more than 11,000 registered investment advisors according to the SEC. These are generally people who are licensed, trained and paid to act in the capacity of a professional advisor.  In this capacity they are required to act in the best interests of the customer and they give this to you in writing.  It falls under the Investment Advisor Act of 1940.

There are also some 600,000 broker-dealers registered in the United States and they do not have to act in the best interests of clients.  They are more likely the brokers and salespersons trying to earn a commission from selling a product such as a stock, bond, or mutual fund etc..

The problem for consumers begins when those 600,000 broker-sales-types identify themselves to customers by the title “advisor” even though they don’t have the proper license or registration under the law.  In my experience, this sleight of hand is done to allow salespersons to raise the level of trust in customers, while lowering their level of caution or suspicion.  The comments about title misrepresentation by  Quebec Superior Court Judge in Markarian V CIBC is along those lines as well.  See  “Misleading Titles” beginning at paragraph 262 here  http://investorvoice.ca/Cases/Investor/Markarian/Markarian_v_CIBCWorldMarketsInc.htm

If you take this information to independent legal counsel you may also get comment on “phony titles and negligent misrepresentation”. 

Here in Canada there are approximately 150 firms who are members at  www.portfoliomanagement.org.
 


These professional investment managers are legally registered as “adviser’s” and they provide a written duty to place the interests of the customer first. 

Then there are the 150,000 registrants, who were legally licensed as “salespersons”, until September of 2009, when the word “salesperson” was deleted from the Securities acts of 13 provinces and territories, and replaced with the words “dealing representative”.  Nearly 100% of these sale-types usually refer to themselves as “advisor’s” in an effort to increase the “trust” they hope to earn with customers.

Each one of those people may also be trying to represent that they are “advisors” and using the word advisor to imply that they will give advice that is in the best interest of the customer.  This often forms a part of the deliberate deception that was spoken of at the outset of this article.  

An interesting side benefit of dealing with a registered adviser is that usually the investment management fees start out in the neighborhood of one to 1 1/4% and there are no sales commission people who may be motivated to increase those fees in ways that can harm the customer.

So with a licensed and registered advisor, a customer gets a true professional with the fiduciary duty and an almost wholesale level of investment pricing if you are fortunate enough to deal with them.  

With a salesperson or broker, representing him or herself as an “advisor”, there is less qualification, no advisor license, no duty to place the interests of the client first,  and fees will usually begin at about 2% and go as high as more than 5% on some products sold.  In defense of the sales side of the industry, some do have professional membership which requires them to pledge allegiance to ethics and fair treatment of clients, however I have yet to see enforcement of those pledges within the industry.

In two most recent cases of financial misconduct I have found investments with multiple layers of fees, piled one on top of another, on top of another.  Fees in excess of 5% annually are the kind of things that turns a broker-salesperson, into a “vice president” or a “million dollar producer”.  Unfortunately none of that serves the customer.

I spoke about one specific example at the launch of the THIEVES OF BAY STREET book and it’s on my YouTube channel here  http://youtu.be/diEjitz-4So  along with a dozen video presentations on this and related topics.  

So customers who end up dealing with a salesperson-broker in Canada or the United States, most often get a person who is (a) pretending that they are an investment advisor , who (b) is not a licensed and registered professional in the category claimed on their business cards, and (c) does not owe customers a duty of care to place customers interests ahead of the seller.   

I believe that salesman-brokers who call who call themselves “advisers” are one of the greatest systemic bait and switch operations in the world.  I encourage victims of this misconduct to seek legal opinion from far outside of the financial industry in order to gain objective access to the law.  If you ask a securities lawyer or regulator, you are very likely to get an answer as independent as the advice you get from a non-licensed “advisor”.   (see comments regarding this in the SEC petition in following paragraph)

During my research for this story I ran across this well informed agency in the United States, and a written petition they made to the SEC.  It is among the most candid and enlightening articles I have seen, to honestly discuss a matter which is cheating and shortchanging North Americans of billions of dollars, and putting those billions into the pockets of industry members who are acting with misconduct.   It is found here at the  SEC: http://ftp.sec.gov/rules/petitions/2012/petn4-648.pdf





Section 4
Two simple solutions.

First Proposed Solution:

1. If persons selling investments refer to themselves as “salespersons” then there is no fiduciary responsibility.

2. If persons selling investments refer to themselves as “advisor” or any similar term, they must accept a fiduciary responsibility for those they claim to advise.

This simplicity meets the standard of fair, honest and good faith dealing which is promised by the industry.
It also meets the “true, plain and clear” standards often referred to.

Terms like 'registered representative' are industry insider “jargon” and should not be used to address the public. Jargon is currently allowed to confuse the public, and assist those who would mislead and misdirect them for commission or fee purposes. Any industry claiming to deal in trust and honesty, must demonstrate the maturity to move beyond such sleights of hand.

Simplicity like this is either in place or in discussion in other developed countries. Canada needs to professionally “grow up”, if they are to reverse the destruction of the reputation of the financial industry.

Failure to act in a professional manner, is putting billions into the hands of current market participants, but like the CEO of Lehman in the US, it is not mature to destroy the reputation (or company, or industry) simply to earn a personal salary or bonus. Many of today’s Canadian market participants appear willing to take the short term view, rather than the longer term approach, and this must be prevented even if it means a new regulatory system must be put into place.
















Second Proposed Solution:

Establishment of true “Investor Protection”, which does not pretend a false dual role of claiming to serve the interests of the public, while being paid by the industry. Reports have come out of Osgood Law to this effect, and the mission statement of one Alberta Investor Protection group is illustrative:

What is the mission of Alberta Investor Protection?

1. Albertans require investment regulation and protective rules which do not act against the public. The Alberta Securities Commission has acted contrary to the public interest and has allowed investment sellers to repeatedly breach securities laws that exist to protect Albertans. Victims of systemic regulatory misconduct deserve their money back through Alberta Finance and Enterprise, the legislated department responsible for the conduct of the Securities Commission, if recompense is not found in the investments themselves.

2. The public requires an investor protection agent which solely protects the interests of the public. The Alberta Securities Commission does not. Albertans deserve public protection not designed to allow mandate dilution, or corruption through financial (or other considerations) connections to the industry, political appointments, or cronyism.  

3. Albertans expect the Criminal Code of Canada to be the guiding principles by which regulators, prosecutors and police protect investment and financial markets.
“Self Regulation” and self-policing of investment fraud and misconduct is not serving the public. It is allowing corruption and self serving behaviors to grow.

4. Albertans deserve a full public inquiry, under the Provincial Inquiries Act, into systemic failures, connections, corruption and actions known to be contrary to the public interest, and the resulting damage to Albertan’s from negligence, gross negligence, misfeasance, or conscious wrongdoing at the Securities Commission.








Section 5,
Codes, rules, promises, laws, etc., often violated by “trusted” investment professionals.

From the high-moral-ground of self regulation, along with some high-six-figure salaries paid to provincial government regulators by the industry, anything, literally anything appears possible. Up to and including gaining exemptive relief to our very laws, often at tremendous harm (and semi-secrecy) to the investing public. ($35 billion was the cost (to Canada) of just the recent sub prime ABCP collapse)

When combined with the ability to self regulate, an industry of highly profit-driven people who misrepresent themselves as licensed and professional “advisors”, the customer is bound to be hurt. In this industry the customer is nearly each and every Canadian with an objective of saving, investing, or living off their investments in retirement.

We are thus allowing the abuse of elderly Canadians, for the benefit of the investment industry.


The cost to the country is not being tracked officially, but well into hundreds of billions over time. The profits to the industry are obvious.

Some of those profits to the industry, which come at harm to the customer include the following types of public harms:
Double dipping, a form of extra billing (adding “advisory” fees on top of commissions already paid).
Fees layered on top of other fees. See presentation at http://youtu.be/diEjitz-4So to view nine or ten ways todays “advisor” can cut their customer’s retirement by half or more in an attempt to increase their own revenues.

Selling the highest-compensating-choice of an investment product about 80% of the time (deferred sales charge funds for one example)
Selling the highest profit margin product (over 90% of mutual funds sold in 2007 were WRAP funds) (source Investment Funds Institute of Canada)



Wrap funds include “funds made up of other funds” (and fees on top of other fees) as well as proprietary funds (house-brand funds) which increase profit margins to the seller by up to 26 times. (according to the OSC Fair Dealing Model Appendix F, page 10, titled “Compensation Bias’s)
Exemptions to the law (including exemptions to firms like Assante and Berkshire so that the house branded funds mentioned above could be easily foisted upon clients of these firms)
Exemptions to the law to allow banks to “unload” poor selling investment underwritings into the mutual fund portfolios of their trusting and unsuspecting customers.
Exempt market products. (approximately $2 billion of which are currently failing in Alberta alone)
Too many other examples to list herein, show how “the harm done to customers is the increased profit for the salesperson on a commission, or the industry”.









Section 6
Candid media quotes about violations of the public.
The quotes following, are from respected experts and refer to industry misrepresentation, deceit, false pretense or outright fraud:

1. “.........financial advisors, wealth managers, senior financial planners, financial analysts, and investment managers are just a short list of titles that salespeople like to adopt, in an effort to steer clear of the “salesperson” stigma........”

From “Understanding Misleading Financial Advisor Titles – Your Right to Know”
Bryon C. Binkholder




2. "Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying. " Edward Waitzer article, Financial Post · Tuesday, Feb. 15, 2011) (Mr. Waitzer is a Bay Street Lawyer and former Securities Commission chair, and this quote ( by another person) appeared in his article.

viewtopic.php?f=1&t=173&p=3438&hilit=waitzer&sid=315213c6fd740f3160d45ff7965fd5de#p3438



3. “The greatest risk the average investor runs is the risk of being misled into thinking that the broker is acting in the best interest of the client, as opposed to acting in the firm’s interest,” Professor Laby said. New York Times (Arthur Laby, a professor at Rutgers School of Law-Camden, and a former assistant general counsel at the S.E.C.)
http://www.nytimes.com/2012/07/07/your- ... html?_r=1&



4. This misrepresentation allows persons with a “phony title” to financially violate trusting and vulnerable Canadian investors (and similar across the USA)...............here is one comment from Quebec Superior Court Justice The Honorable Jean-Pierre Senécal, J.S.C., Quebec Superior Court , District of Montreal
The Honorable Jean-Pierre Senécal, J.S.C.

¶ 263      The defendant attributed to Migirdic fake titles, i.e. "vice-president" and "vice-president and director", in addition to letting him use the title "specialist in retirement investments". Those titles were false representations that misled the plaintiffs, hid reality from them, disinformed them, comforted them in their confidence in Migirdic, reduced their distrust, and contributed to Migirdic's fraud. The defendant committed a fault in terms of its obligation to inform and advise, in addition to misleading the plaintiffs.

Further and link to full court documents here: [url]http://www.investoradvocates.ca/viewtopic.php?f=1&t=10&p=3454&hilit=markarian#p3454
[/url]
5. The self regulatory nature of the industry then gets to “handle” each complaint “within” , essentially employing “investigators, judge and jury”, from persons employed (or paid) by the industry itself. This then forms a secondary form of abuse, which is the withholding of justice, and access to the courts for victims.

They are dealt with in a manner resembling a Kangaroo court where bias is towards protection of the industry. Many victims tell that it is like being traumatized a second time by the system itself. An American advocacy organization submitted a very well written petition to the SEC, describing this problem in better words than my own. It is found here http://ftp.sec.gov/rules/petitions/2012/petn4-648.pdf



Section 7
Conclusion and Summary page
In conclusion:

-Your investment “advisor” can give you advice which harms you.
-Your investment "advisor" does not have to have an advisor license.
-Your “advisor’s” conflicts and incentives mean that harming your interests means improved profit to the industry.
-Fraud, misrepresentation, false pretenses may be used to harm you.
-The law may not be applied to help you if you are harmed in these or other improper ways.
-The law may even be "exempted" so your investment firm can more easily profit, despite harm to you.
-Self regulation allows persons paid by the investment industry to act as if they are paid to protect the public, which does not often appear to be the case.
-Canadians lose billions of dollars of rightful investment earnings, while the strongest financial institutions in the world gain billions.

To repeat for clarity, we are not talking about charging a “fair, honest and good faith” price for investment services. That is not the question under discussion. The question under discussion is whether Canadians should be harmed by billions of dollars, using deceit, false pretenses, misrepresentation and so on.

Should the investment industry be allowed to get away with such behavior, and does the regulatory system in Canada that appears to be willfully blind to these and other abuses, need to be replaced or enhanced, with one solely dedicated to the protection of investors?

The best thinking in Canada has given us a system where financial abuse of Canadians is not only tolerated when done by our giant financial institutions, but it appears to be “built in” to the system. Doing financial harm to investment customers is now legally allowed, having removed the “customer interests must come first” provisions of a few years ago, and replaced them with a much lower standard of “suitability”, without informing the public about the change. “Suitable” is measured by the provider of the investment and is not only subject to his or her definition, in the case of “intangible” things such as investments, it can become nearly impossible to nail down accurately. They can thus sell almost anything and call it “suitable”.

The abusive of customers despite promises of professionalism, client first promises, etc, allows a bullying treatment of elderly victims, first financially abusive, followed by corporate bullying for those customers (or employees) who refuse to be silent to financial abuse, and finally, many years of legal bullying by the financial industry for those with the strength to demand “fairness, honesty and good faith” from the worlds strongest financial institutions.


Section 8

Legal and principles

Further to violations of the public trust. Some definitions which may be applicable to protect Canadians.
-- Sections 78 and 79 of the Competition Act “abuse of a dominant position”
---Misleading Advertising Provisions of the Competition Act of Canada
--The false or misleading representations and deceptive marketing practices provisions of the Competition Act contain a general prohibition against materially false or misleading representations.
--Bait and switch selling.....the marketing of professional “advisory” investment services, with the implication of a licensed, trained, and properly compensated professional with a duty to give advice that is in the best interest of the customer.....and then the delivery of a commission salesperson with no such license. Against the spirit and the intent of the Competition Act of Canada.
Section 74.04 of the Competition Act is a civil provision.
Section 74.04 was drafted in contemplation of situations where the person who advertises the product would be the same as the one who supplies it.
http://www.competitionbureau.gc.ca/eic/ ... .html#bait

--Conspiracy, Section 45
Section 45 is the cornerstone cartel provision of the Competition Act. It makes it a criminal offence when two or more competitors or potential competitors conspire, agree or arrange to fix prices,
A cartel is a formal or informal group of otherwise independent businesses whose concerted goal is to lessen or prevent competition among its participants.
*****
Section 380 Criminal Code of Canada
--Fraud is proved when it is shown that a false representation has been made

(1)  knowingly, or (2) without belief in its truth, or (3) recklessly, carless whether it be true or false.


*****




--Competition Act of Canada

PART VII.1
DECEPTIVE MARKETING PRACTICES
Reviewable Matters
Marginal note:
Misrepresentations to public
74.01 (1) A person engages in reviewable conduct who, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever,
(a) makes a representation to the public that is false or misleading in a material respect;

http://laws-lois.justice.gc.ca/eng/acts ... ns#s-74.01

*****







--What is a false pretence under the Criminal Code?
Under Section 361., (1), a false pretence is a representation of a matter of fact either present or past, made by words or otherwise, that is known by the person who makes it to be false and that is made with a fraudulent intent to induce the person to whom it is made to act on it.  Subsection (2) states that exaggerated commendation or depreciation of the quality of anything is not a false pretence unless it is carried to such an extent that it amounts to a fraudulent misrepresentation of fact.  For the purposes of subsection (2), it is a question of fact whether commendation or depreciation amounts to a fraudulent misrepresentation of fact.
Under the Criminal Code, every one who commits an offence under paragraph (1)(a) (a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding ten years,

******




On quiet industry settlements:
Customers who make it through the five to ten years of financial abuse and trauma, to perhaps see a return of some money, are asked to sign confidentiality agreements, which then allow the harms done by financial firms to be kept secret, thus allowing them to continue those harms, for any other Canadian, one at a time. It is the perfect process to launder billions of dollars from the hands of the public, into the hands of the strongest financial institutions in the world and never be held accountable.

******


IIROC Rules and Standards:

(Investment Industry Regulatory Organization of Canada)

(8)    Misleading Trade Name
No Dealer Member or Approved Person shall use any business or trade or style name that is deceptive, misleading or likely to deceive or mislead the public.source  IRROC 29.7A8

Link to source: http://iiroc.knotia.ca/Knowledge/View/D ... 98#para_46



800.15. The purpose of these Rules is to spell out as far as practical what can be done under these Rules without breaking the letter or the spirit of them.  It is common knowledge that there are innumerable ways of circumventing the purposes of the Rules, but any such method so adopted can only be considered a direct contravention of the letter and spirit of these Rules and contrary to fair business practice.

source IIROC

Source Link: http://iiroc.knotia.ca/Knowledge/View/D ... &tocID=559

******

From the BCSC Securities Act (link 1) comes this;

Persons who must be registered
34  A person must not
(a) trade in a security or exchange contract,
(b) act as an adviser,
(c) act as an investment fund manager, or
(d) act as an underwriter,
unless the person is registered in accordance with the regulations and in the category prescribed for the purpose of the activity.

Screen Shot 2013-01-02 at 3.14.48 PM.png


If we are being honest, the two promises in the CSA (Canadian Securities Administrators) image above, Protecting Investors” and “Maintaining confidence in Canada’s markets” are not met. I argue that the exact opposite is what Canada’s regulatory regime and investment industry is accomplishing. It could just turn out to be one of the best con games this country has ever experienced. Time will tell.
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Fri Dec 21, 2012 3:41 pm

Screen Shot 2012-12-21 at 3.20.24 PM.png


Thank God you finally asked CFP's. Lets truly get an honest conversation started:

Screen Shot 2012-12-21 at 3.22.12 PM.png


Actually the comments in this image are not quite accurate. The CFP is usually the "entry level" or "beginning" level of educational courses, and most likely completed by those acting in a commission selling capacity. The true "highest level" is likely the CFA (Chartered Financial Analyst) designation (full disclosure, the author held a CFP designation) and they are the least likely to be involved with commission selling of investment products. As we know, commission selling of investment products is often contrary or at very least in conflict with the act of providing investment "advice". Selling is NOT advice, and advice is NOT selling. Blending them is usually of harm to the client and of benefit to the seller.

Screen Shot 2012-12-21 at 3.28.04 PM.png


The thing I find of concern here is that while these are wonderful words, I am not certain that the track record of investigations lives up to the wonderful words. In other sources found in the public record, I have seen where the CFP organization has only completed a handful or less of investigations. Personally I am aware of many indiscretions that get swept under the carpet, rather than having anything reflect negatively on this organization. Perhaps you could place in your brochure just how many investigations you have completed to protect the public. If memory serves me I think the number is ONE. I could be wrong.

Screen Shot 2012-12-21 at 3.32.47 PM.png


I must ask if it is intentional of this organization to fail to inform the public if their members have a fiduciary obligation to place the interests of the customer ahead of the interests of the commission in cases where the CFP is a commission seller? The lower standard of course if the "suitability" standard, which is a bit like your salesperson being the judge of whether or not the product sold to you would be "drinkable".......for them to determine if the product is "suitable" leaves a door open for some fairly client abusive products to be sold, and still (perhaps laughingly all the way to the bank) judged "suitable" by the seller. Please update your brochure with this important distinction, as it is currently missing information which the public deserves full, plain and clear disclosure on from a professionals in a position of trust.


I must also ask if the CFP organization condones the use of a title for it's members where no license exists to back up the title, a form of misrepresentation. From CSA (Canadian Securities Administrators) license search at http://www.securities-administrators.ca ... spx?id=850 we find that most mutual fund and stock salespeople are licensed in the category of dealing representative, (formerly "salesperson"). Yet most refer to themselves as if they held the license of an "advisor". Is this misrepresentation fair and honest to the public?
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sun Dec 09, 2012 9:44 am

Screen Shot 2012-12-01 at 6.17.24 AM.png
From Ken at http://www.canadianfundwatch.com comes this excellent piece.

It relates to how people refer to themselves as financial "advisors" in the retail sales environment are perversely incentivized to do harm to their clients. In addition, the industry has removed the requirement to not harm the investor.


Kenmar Associates
The Voice of the retail investor
Impact of Financial Incentives on Retail Investors
A Resource that can be used when debating the Best Interests standard for advisors/dealers

“ Financial products are sold , not bought ”

The trouble with the compensation systems that prevail throughout most of the retail financial services industry is they provide financial incentives that can skew the advice clients receive. Different commission rates and compensation schemes for different ...................continued at the link below

https://docs.google.com/open?id=0BzE_LMPDi9UOOC1POTNadWJVU0E
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Re: Financial Abuse by "Trusted Professionals"

Postby admin » Sat Dec 08, 2012 9:35 am

Screen Shot 2012-12-08 at 9.33.13 AM.png
Profit Notes — they sounded so promising, so simple, that even the name was part of the allure for some investors.

The bonds were issued by Proforma Capital Group, an Edmonton financial services company. They offered up to 10 per cent annual interest, paid out monthly and were purportedly “100 per cent guaranteed” against loss by two insurance policies. Bulletproof. Too good to pass up for anybody with the minimum investment of $25,000.

That they were presented to Peter Petrik by someone he had known for 20 years and come to trust, Proforma Capital president Robert Frost, made it all the more reasonable to believe it was a safe investment.

“He said, you can’t miss this. This is a fantastic thing. We are very proud of it. And the best of it, it’s 100 per cent insured, you can’t lose a penny on it,” said Petrik.

“And then when he throws in the 10 per cent interest …”

It was 2009 and Petrik, then 79, was comfortably retired with his wife, Diana, in Canmore, after working as a pathologist in Edmonton for 30 years.

He had previously purchased insurance and invested in mutual funds through Frost’s companies and so, at what he characterized as Frost’s urging, Petrik put their entire RRSP cache into Profit Notes to attain the highest interest rate possible.

He said he was told by Frost and company vice-president Joseph Francese that the money would fund an accounts receivable financing facility — also known as factoring — to be used by New Solutions Financial Corp. of Ontario, an umbrella company owned by Ronald James Ovenden.

New Solutions was supposed to use the money collected by Proforma to buy accounts receivables from stable corporations, allowing those companies access to revenue months before those accounts would normally have been settled. New Solutions would make its money by charging those corporations a percentage of each account it purchased.

It’s a legitimate investment vehicle, when exercised properly.

But the Petriks’ retirement money, or at least most of it, is gone. New Solutions and its associated companies entered creditor protection on April 11 and owe more than $200 million to hundreds of creditors, including Proforma Capital.

In a statement of defence, Frost, Francese and Proforma claim “the investments made by the plaintiffs (were) subject to certain risk factors set out in that document (the offering memoranda), which risks were known and appreciated by the plaintiffs. Any losses which may be incurred by the plaintiffs are as a result of one or more of the risk factors.”

In a brief telephone interview Friday morning, Frost said “I really can’t comment on anything because everything is before the courts.” He did say that his firm is trying to recover as much capital for its clients as possible.“They haven’t lost everything yet.”

The fallout from the Ontario court action is both a tragic human story of enormous financial loss and an intricate tale involving accounts receivables, a fraudulent insurance policy, a portfolio of bad loans and a web of companies formerly run by Ovenden. One of those firms is Wideawake-Deathrow Entertainment LLC, the one-time parent company of legendary rap label Death Row Records, home to Tupac Shakur, Snoop Dogg and MC Hammer.

“Of course I feel very stupid, but I know some basics,” said Petrik.

“I know if something looks too good to be true, it’s probably not.

“I also know never put all the eggs in one basket. But when all this came around (Frost) was so persuasive, that this is so absolutely secure that in fact I would have felt I’m doing something very stupid if I’m missing this opportunity. You know, looking back, I now feel, how could I have done that? Putting everything there. But at the time ... you know, he was a guy I totally trusted.

“And that was the thing. I would say if you ask me how I feel, am I angry, my first thing to tell you, I’m terribly sad.

“I’m totally disappointed. Somebody betrayed me. That’s my feeling more than anger.”

Profit Notes investors such as Petrik had been receiving monthly interest payments from Proforma for months or years. They were surprised, then, to receive a letter rather than more money from Frost in February.

“On February 15, 2012, Proforma did not receive the payment due pursuant to the New Solutions debentures. As your Profit Notes monthly interest payments are dependent on receipt of payments from New Solutions, your interest payments are as a consequence suspended while this situation is being addressed,” the letter stated.

Ten months later, Profit Notes investors are left with largely unanswered questions about their missing principal, about loans made by New Solutions with their money that voided one insurance policy, and about another policy that was an outright fraud, despite the fact it cost them one per cent of their interest payments.

Frost has issued monthly client updates and his latest landed Tuesday. It came a day after the court-appointed monitor, Meyers Norris Penny, posted its sixth report detailing the pending sale of Wideawake-Death Row Entertainment to a “global leader in the entertainment industry.”

Because the purchaser is a publicly traded company, its identity and the purchase price was redacted from the sale agreement posted online. Wideawake’s library of rap and hip-hop recordings makes it New Solutions’ most valuable asset. It was bought by New Solutions out of bankruptcy for $18 million in 2009.

The first $3 million from the sale will be used to repay the debtor-in-possession lender and the balance will be paid to New Solutions to offset some of the $31 million owed to it by Wideawake. Frost told Profit Notes investors in his Tuesday update that they would be sharing in the sale proceeds.

“We are hoping to have that money be paid out to investors shortly after Christmas,” he stated. “We are continuing to work on getting the rest of the assets sold and paid out to investors and are pushing to get the (Companies’ Creditors Arrangement Act) process wrapped up shortly. Submission of the insurance claim is to follow the initial cash payout to investors.”

The claim will apparently be made against insurance held by Ovenden.

A small number of additional assets — land and corporations — have been or will be sold, but the return appears likely to be minimal and the losses staggering, particularly for Proforma, since it is the largest creditor of New Solutions, owed about $122 million. Argyle Funds of Barbados, a company run by Canadian Jeffrey Lipton, is out $55 million.

Of course, the money actually belongs to investors in each company, people who thought their money was safe. Investors who were sold on its security by Proforma principals Frost, Francese and Scott Reed. Investors who believed the trademarked company slogan: Protect Capital. Deliver Returns. Repeat.

In an undated letter issued some time in late 2008, Frost, Francese and Reed told investors “our success with Profit Notes is truly a dream come true.” They announced that “one of the largest and most conservative insurance companies in the world” had investigated Profit Notes and found them to be “extremely solid and secure” and agreed to issue “100 per cent deposit insurance for our investors up to $5 million per transaction with unlimited deposit insurance coverage for each client.”

The available insurance influenced the decisions of investors such as Petrik, who said he was told by Frost that the money he put into Profit Notes was being used in factoring, also known as accounts receivables financing, a legitimate investment vehicle. If that had been true, the Atradius policy would have covered some investor losses. But most and possibly all of the money Proforma invested with New Solutions was diverted instead by Ovenden into loans to other companies, several of which he controlled, including Wideawake, which received $31 million.

“The monitor has determined that the majority of the factoring transactions were converted to equity,” Frost’s client update said in August. “Because the investment funds were moved outside of factoring and were invested in equity, the Atradius insurance will not pay out.”

One financial adviser said recently he knew “a couple of years ago” that the New Solutions loans weren’t all factored and he stopped selling Profit Notes at that point. But a statement of defence filed in October by Proforma, Frost and Francese claims they only knew about irregularities with the loans after New Solutions defaulted in January.

“Though information was slow to come out, over the coming months it was revealed that New Solutions had invested Proforma’s money in investments that were contrary to the terms of the loan agreements and offering memoranda of New Solutions. In addition, these facts had been covered up by New Solutions in numerous ways for a period of at least 18 months prior to January 2012,” said the statement of defence.

It was filed in answer to a $10.75-million statement of claim launched in August against Proforma, Frost, Francese and others by Melvyn Kassian of Sherwood Park. Kassian invested $650,000 in Profit Notes in December 2010 through his company Mel’s Rock Pile Inc., and followed it up with $10.1 million three months later. He did not return phone calls seeking comment.

His lawsuit alleges deceit, fraudulent behaviour and breach of contract for failure to provide insurance on the investment and because Proforma’s initial representations to Kassian and Mel’s Rock Pile were “untrue, inaccurate or misleading.”

In their statement of defence, Frost, Francese and Proforma deny “that there has been any breach of the terms of the offering memoranda, or misrepresentation, or other negligence or breach of contract giving rise to damages to the plaintiffs.”

The other insurance policy touted by Proforma as a fail-safe measure was a fraud. Jared Howard Clarke and his company, Summit Underwriting Group, were convicted in 2011 in an Ontario court of unlicensed activity and were fined $56,000 in conjunction with the matter. Though Profit Notes investors were charged one per cent of their returns to fund that policy, it simply didn’t exist. Clarke had held himself out falsely as a representative of PT Prudential of Jakarta, Indonesia. He could not be reached for comment.

Ovenden is said to be co-operating with the monitor’s investigation and is scheduled to appear before the Ontario Securities Commission in May. The OSC suspended New Solutions and Ovenden April 26 and said it appears they “may have failed to deal fairly, honestly and in good faith with their clients.” Ovenden could not be reached for comment.

Frost told Profit Notes clients in the August update that none of Proforma’s principals have drawn a salary since January, there are only two part-time office staff remaining and the company’s legal bills are being paid by New Solutions.

“Recently I sold my MGA (insurance) business and put all of the proceeds against my growing debt. We continue to press on through the help of family, savings, credit lines and the grace of God,” wrote Frost.

Profit Notes investor Deepak Chaitanya is not waiting to be saved. He is helping to lead an investors group that claims 60 members, and they have retained a lawyer. Chaitanya believes many investors in Profit Notes are unaware that their money, at least most of it, is long gone.

“I am a very stubborn person. This money is lost and there are some people who would just give it up. I’m not one of those. I’m here to the last post. I am going to pursue with (lawyers) Duncan and Craig what all of my options are. They said you need to know two things, ‘who is at fault and does he have money?’”

Deepak, who blames both Ovenden and Frost, has considered the impact on the investors group when answers to those two questions are known.

“It would attract a lot of (investors to the group) if they see hope. But it will also shave off lots of people if there is no hope.

“But I think a few guys like us would still be there. If there is no money, no problem, what is the next recourse? They have to be brought to justice. Whoever they are.”

Chaitanya is skeptical of Frost now but he was a believer when he invested $150,000 of his wife Vijay’s money in Profit Notes in early 2009, then another $500,000 after a lunch with Frost.

“He gives me such a nice spiel and his handwritten documents, which I have given to the lawyers, that say ‘it is 100 per cent guaranteed and we always go to triple-A clients,’ so you trust him. Fortunately for my wife, she would not let me do more,” said Deepak, a provincial government employee in Edmonton.

“We have some other investments. It is kind of diversified. But it is a big chunk. My heart really goes out (to) people who really sunk in their life savings and are living on credit lines.”

Petrik, who is a member of the investors group, cannot bear to keep up with developments. He has one of his sons read the online reports from the monitor.

“I don’t have the nerve.”

He hopes, against reason, that their life savings are not totally wiped out.

“I know it’s totally unrealistic to expect we’ll get everything back. If there is absolutely nothing to be gained back, at least I want to have peace of mind because all of this, it’s totally destructive. It’s a roller-coaster. You always have a little hope and then everything comes crashing down. You can’t live like that.”

His wife has a serious chronic disease that has been made worse by the stress. He is clinically depressed. They are forced to live a scaled back life.

“We have some little income which fortunately was not part of this. How are we surviving? We had to drastically change our lifestyle, absolutely drastically. Absolutely no frills.”

dbarnes@edmontonjournal.com

http://www.edmontonjournal.com/business ... story.html

Alberta
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