Advisor conducted business outside of firm

In February 1999, Mr. C opened an RRSP account. Five years later, he closed the account when he sold all of his investments to purchase a new home. Mr. C had no further contact with his former advisor until early 2008, when they ran into each other at a local store.

By Mr. C's recollection, the advisor suggested they meet to discuss an investment opportunity, he could earn a guaranteed monthly return of 5% and the principal could be repaid after six months with 30-days written notice.

Mr. C and the advisor met in April 2008 at Mr. C's home where he signed documentation agreeing to lend the advisor and the advisor's personal company $20,000 for a period of twelve months. Mr. C. wrote a cheque payable to the advisor for $18,000 and said the advisor made up the $2,000 difference from his own personal funds. In return, Mr. C expected to receive monthly interest payments of $1,000 and principal repayment at the end of the loan period.

In July 2008, Mr. C met the advisor a second time at his home and signed another loan agreement to lend the advisor and his personal company an additional $60,000 for six months. For this loan Mr. C expected to receive monthly interest payments of $3,000 and principal repayment at the end of the loan period. Mr. C wrote a cheque payable to the advisor for $60,000.

In October 2008, the advisor notified Mr. C that, due to the economic downturn, his interest payments would be lower than planned for the next four months.

After the four months were up, Mr. C received no further interest or principal repayments. By May 2009 the advisor stopped returning Mr. C's calls or emails. After months of trying, Mr. C complained to the advisor's firm asking for his money back, saying he trusted the advisor because he represented a credible company and that he believed the investments had been made through the firm. The firm responded that the loans were a personal matter between Mr. C and the advisor, and that it had no responsibility in the matter. Mr. C then complained to us.

Complaint not upheld

During our investigation, Mr. C acknowledged that the advisor had not referenced or presented himself as representing the firm when they met at Mr. C's home rather than the firm's office. We found that the advisor had not provided a business card or asked Mr. C to sign any forms showing the firm's name or logo as he had in the past. Similarly, the advisor did not ask Mr. C to sign documents to open a new account with the firm despite the fact that Mr. C had closed his account four years earlier.

The loan agreements, which Mr. C said the advisor had read to him aloud, made no reference to the firm, only to the advisor and the advisor's personal company. The advisor also made no suggestion to Mr. C that the money would be used to purchase an investment. It was clear Mr. C was lending the money. For each loan, Mr. C had written cheques to the advisor personally, whereas he had previously written cheques for his investments payable to mutual fund companies. After writing the cheques, Mr. C did not receive any transaction confirmations or account statements from the firm as he had for previous investments, nor did Mr. C contact the firm to get statement information or to try to collect interest or principal owed before his complaint in November 2009. The firm argued that Mr. C was not a client of theirs at the time and that it had no responsibility in the matter.

While firms are in fact responsible and liable for the actions of their advisors, and it seems apparent that the advisor was conducting personal financial dealings outside of the firm contrary to securities regulation, we must consider what's fair in the circumstances in our investigations. We found clear evidence that Mr. C knew he was providing personal loans to the advisor and was not purchasing investments through the firm. As a result, we could not find the firm responsible for Mr. C's losses and did not recommend compensation.

(2011)