Thursday, August 26, 2004
The founding chair of Advocis is being
sued by a former assistant to his financial planning practice at a
division of Assante Corp.
In some ways, this is a classic David vs.
Goliath tale. The goliath figure is Brian Mallard, a wealthy, often-quoted
industry figure with multiple credentials and 32 years in the business.
He manages an Assante branch in
Saskatoon. He also was -- from January, 2003 until May, 2004 -- the
founding chair of Advocis, which represents Canada's financial advisors
and insurance sales-people.
Facing him is a figurative David:
Shirley, a Saskatoon-based financial advisor who filed a constructive
dismissal lawsuit in March. Shirley is suing Mallard personally, plus two
companies bearing his name and Assante Financial Management Ltd.
Mallard's amended statement of defence
and counterclaim, filed in Saskatoon in June, depicts Shirley as a
troubled young man with a host of personal problems.
In an interview, Mallard indignantly
dismisses the suit as an attempt to "extort" $50,000 from him: the amount
Shirley borrowed from a bank to buy Assante stock from his (Shirley's)
brother, also with Assante. Mallard cosigned the loan, pledging Assante
stock as collateral.
Shirley won't speak on the record about
his motivations, but far from shutting up and disappearing, the opposite
seems to be happening.
What began as an obscure employment
dispute is escalating into a case that could shed much light on sales
practices in Canada's financial advice business.
Shirley provided extensive documentation
to the Saskatchewan Securities Commission, the Mutual Fund Dealers
Association (MFDA) and the RCMP.
His statement of claim alleges Mallard
did not practise what he preached in his founding role at Advocis. Or as
the document puts it in more formal language: "The Defendants condoned,
engaged in and required Shirley to engage in unethical and/or illegal
The suit says the defendants "regularly
breached codes, laws, rules and regulations and required him to do so as a
condition of his continued employment." Shirley was expected to
"participate in, and/or turn a blind eye to, the Unethical Practices."'
The alleged unethical practices include
providing insider information to clients, making personal loans to
clients, giving stock advice to clients, facilitating trades while not
properly licensed to do so, selling personal stock to clients, and issuing
personal guarantees on client accounts.
All those allegations are false, the
defence argues, "brought solely to embarrass the Defendants and tarnish
their reputations." The defendants "deny breaching ethical codes, laws,
rules and regulations or requiring the Plaintiff to do so as a condition
of his continued employment." Mallard's counterclaim also seeks damages
for negligent or intentional misrepresentation and breach of contract.
In an interview, Mallard defends each
charge, but admits he provided personal guarantees to some clients worried
about bear market losses in 2000. However, he says this was acceptable
practice before the MFDA set up shop.
Except for seven months' medical leave in
2002-2003, Shirley's suit says he was "employed full time" at Assante from
1996 until January, 2004.
Mallard denies Shirley was constructively
dismissed; he says he was a contract worker rather than a salaried
employee, and wasn't terminated but quit.
Either way, Shirley was afforded a
bird's-eye view of internal incentives for advisors to replace third-party
funds in client portfolios with more profitable in-house Assante product.
He was also there as this strategy was parlayed into the ultimate sale of
the firm to C.I. Fund Management.
It's this aspect of the case which has
attracted the attention of Joe Killoran, who describes himself as
"Canada's most feared investor advocate" [see
believes the case illustrates how the industry is still not properly
Killoran focused on the sale of
proprietary funds in a presentation last week to the Ontario Finance
Committee's five-year review of the Ontario Securities Commission. He
accused the OSC and other provincial securities commissions of "gross
malfeasance" in the lax way they permit integrated fund manufacturer/
distributors to incent advisors to sell in-house proprietary funds.
This has become an issue in the United
States, which is why
Killoran forwarded Assante's pre-IPO business plan to
New York State Attorney General Eliot Spitzer. Killoran drew Spitzer's
attention to the sales practices of Assante's U.S. arm: Loring Ward
International. Killoran says he contacted Spitzer because Canada does not
have the whistle-blower protection laws the U.S. has had since 1989.
Killoran says the original business plan
outlined payment of bonus Assante shares to advisors once they converted
40% of client assets to Assante's proprietary Optima funds. He says this
practice skewed the provision of objective advice.
For his part, Mallard insists, "I have
500 clients that love me." In typically strong language, he adds he's
"pissed off with a system that assumes every advisor is guilty."
He says the more interesting story is
Assante's reaction to the suit, including the firing of at least one
internal compliance officer.
Mallard says securities commissions have
ceded authority to self-regulated bodies like the MFDA and the Investment
Dealers Association. Rather than investigate alleged abuses themselves,
the MFDA tells dealers they have received a complaint about an advisor. At
its request, two Assante compliance officers audited the Saskatoon branch
in May, Mallard says. One later moved to the MFDA.
This case may or may not end up swept
under the rug. But from what I've seen, it merits closer attention.