Branch manager sold investment products not approved by firm

OBSI received multiple complaints over a short period about an investment firm and Mr. V, an investment advisor and branch manager. The complainants had no connection to one another other than having Mr. V as their advisor.

Mr. V had worked at the firm for many years, and his clients regarded him as knowledgeable and trustworthy given his dual advisor and branch manager roles. He had recommended a fund to the complainants that he promised would provide guaranteed 10% interest. The clients wrote cheques, for varying amounts, and gave them to Mr. V. In return they received a “promissory note" detailing an interest payment schedule.

At first, the complainants received regular payments as expected. Then, within a year, the interest payments suddenly stopped. After many failed attempts to contact Mr. V the complainants eventually complained to the firm's head office and demanded their money be returned.

Unbeknownst to the complainants, the fund Mr. V sold them was not approved by the firm. The firm explained that Mr. V had made these transactions “off-book", meaning he had sold securities outside the firm and in this case without the firm's knowledge. The firm sympathized with the complainants but did not offer compensation, as the losses resulted from securities not actually purchased through it. Unsatisfied, the complainants brought their complaint to OBSI.

Complaint upheld

During our investigation we interviewed the complainants and found them to be generally unsophisticated investors with limited investment experience who relied heavily, if not entirely, on Mr. V for their investment decisions. The fact that he was also a branch manager provided extra assurance to many of the complainants. Some complainants had previously purchased other securities through Mr. V and his firm without having any problems, and believed this promissory note was no different.

Our investigation revealed that Mr. V had a checkered history as an investment advisor. He was reprimanded by his firm ten years prior to the complaints after being caught trying to execute transactions on a client's account without head office approval. He once received a one-year “compliance-related suspension" from the firm and multiple branch audits found repeated deficiencies in his practices.

The firm's regulators strongly recommended that it closely supervise Mr. V. The firm's Chief Compliance Officer had even told the regulators of his intention to find a new branch manager but Mr. V remained in this role for at least two more years. We inquired with the firm what, if any, actions were taken to properly monitor Mr. V but were not provided with a satisfactory response.

We concluded that the firm failed to adequately supervise Mr. V. There were many red flags that ought to have prompted the firm to take action that could have prevented the complainant's losses.

Firms are vicariously liable for the actions of their investment advisors. The fact that Mr. V sold securities not approved by the firm does not automatically excuse its responsibility. Fairness requires us to also look at the issue from the perspective of the complainants.

From the complainants' perspectives, their advisor worked for the firm and they purchased the promissory note through the firm. Mr. V met with the complainants at his office and used firm resources to carry out the transactions. The purchase of the off-book securities was similar to other previous firmapproved transactions. The complainants had every reason to believe they were dealing with Mr. V in his capacity as an agent of the firm.

Based on OBSI's conclusions, the firm agreed to compensate the complainants amounts totaling almost half a million dollars.

(2013)