Blogs & Comment

The bad apple review

Most financial advisors are hard working and honest, as they say. But some bad apples do exist. While we may complain about the ease with which they can dodge fines by simply resigning from the industry, we cant lament the lack of disclosure by regulators. In the case of mutual-fund salespersons, disciplinary proceedings are published for all to see on the websiteof The Mutual Fund Dealers Association of Canada (MFDA).
The case histories explain in detail how wayward members of the industry allegedly violated the by-laws and rules of the MFDA. Reading them, the investor is likely to find entertainment (in a Judge Judysort of way) as well as the kind of edification that could keep them from becoming a victim themselves. Lets review what MFDA documents say about some of the cases scheduled to appear in hearingsbefore enforcement officials within the next three months. A few could fit right in with Ripleys Believe it Not.
Selling unauthorized investments (Nigerian scams of all things)
MFDA documents report that Wayne Larson was victimized by an Internet lottery scam in September 2005. Around the same time, he came across information on the Internet about a company called Global Consulting Corp., which advertised short-term term investments paying rates of return between 12% and 20%. Mr. Larson solicited money for investment in this company, collecting $1.76 million from 7 clients. A large portion came from his elderly aunt in a long-term care facility. The MFDA document reports: it appears that GCC was a Nigerian scam established to defraud unsuspecting investors. Mr. Larson was terminated by the insurance company and has not responded to MFDA correspondence.
Criminal record (for tax fraud and evasion)
Purisima Dy was convicted of fraud in July 2007 and sentenced to two years in jail and three years probation because, as a MFDA document states, she knowingly produced fraudulent 2005 income tax returns for 1,190 tax clients that included approximately 1,393 false donation receipts totaling $3,791,338, thereby defrauding the Government of Canada of tax revenues of $1,065,922.32. She also failed to disclose at the time of her hiring as a mutual fund salesperson that she had been convicted of tax evasion in 1995, fined approximately $150,000 and sentenced to 60 days in jail.
Bad faith (trailer fee rebate program canceled)
ASL Direct Inc. (ASL) offered a trailer fee rebate program to clients for $29.95 a month. Under this program, ASL promised to reimburse or reinvest trailer fees relating to investments in client accounts. Since approximately July 2006, without written notice to the clients, ASL has ceased payment and reinvestment of the trailer fees but ASL has continued charging the clients the monthly fees, noted the MFDA Notice of Hearing document. ASL and owner Adrian Samuel Leemhuis are also charged with maintaining insufficient capital and selling unregistered investments (offshore mutual funds).
Cheques written in name of advisor
Michele and Jeffrey Longchamps sold $1.6 million in GICs and other financial products to 22 clients but allegedly directed the money to themselves by having clients write checks in Ms. Longchamps name and the name of their private companies. Acknowledgements were sent out on the letterhead of their companies or of the GIC supplier (without latters knowledge). Statements were also issued bearing the logo of the GIC supplier (never issued by the supplier). In June 2007, the couple advised co-workers that they were going on vacation and did not return.
Pre-signed forms (81 of them)
A 2004 MFDA compliance review found Gary Alan Price was in possession of blank investment instruction forms signed by two clients. He agreed to destroy them. In 2007, a MFDA audit found copies of pre-signed forms and he again agreed to destroy them. During an unscheduled inspection by the MFDA a month later, he was found to have in his possession 81 signed blank investment instruction forms.
Conflict of interest (selling securities in companies)
Barry James Raymer became a shareholder and director in two companies and then arranged for 24 of his clients to purchase more than $1 million in high-yielding promissory notes issued by those two companies. These were not investments authorized by his employer. They were also high risk investments, yet many of the clients had indicated on their Know Your Client forms they were low- or medium-risk investors.
Churning accounts
Tony Tung-Yuan Lin processed 34 related redemption and purchase transactions in 8 client accounts, generating sales commissions in the total amount of $65,020.16 over an eleven week period. In other words, the funds were sold to collect early redemption fees and then repurchased the same day, only to collect other fees such as front-end commissions. Tung-Yuan Lin apparently obtained the consent of clients but later said the majority were for the purpose of generating commissions.