Investor understood investments were not sanctioned by firm

Mr. Y was approached about an investment opportunity by an advisor at his investment firm who was not the person he usually received advice from.

Following some initial discussions, the advisor visited Mr. Y at his home where he explained that the investment was in the form of a loan to a company. Mr. Y agreed make a $50,000 investment and in return received a promissory note indicating he would receive 1% interest per month for one year. After this period, the principal would be returned.

Mr. Y became frustrated when his principal was not returned on the expected date. Instead, he received a letter notifying him that all interest payments and redemptions were suspended indefinitely while the company restructured. Mr. Y first tried unsuccessfully to contact the company for the return of his principal. He then complained to his investment firm, holding it responsible for his losses since the investment was recommended by one of its advisors.

The firm declined compensation. The firm and Mr. Y's longstanding advisor had no knowledge of this investment made outside of his portfolio at the firm. It explained that it was not responsible for the losses since Mr. Y had made these investment arrangements independently. It noted that Mr. Y kept the investment secret from his investment advisor and only divulged details after trying unsuccessfully to recover the funds. Unsatisfied with the firm's response, Mr. Y brought his complaint to OBSI.

Complaint not upheld

Our investigation centered on the circumstances surrounding Mr. Y's investment purchase. The promissory note and accompanying documentation clearly described the investment as a loan agreement between Mr. Z and the principals of the company receiving the loan. The investment dealer was not mentioned.

We also reviewed email correspondence between Mr. Y and the advisor who arranged the loan. The emails strongly suggested the advisor communicated that the investment was made outside of the firm, and that Mr. Y understood that this was an unrelated investment. While firms are generally responsible and liable for the actions of their employees and agents, in this case we found that the client knowingly purchased an investment separate from the investment dealer and only complained to the firm when his first attempt to recover the funds from the company failed. We did not recommend compensation.

(2013)