Investors Scrutinizing the Regulators

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Fox Guarding the Hen House

Assante lawsuit bears a closer look
Mutual fund sales practices at centre of employment suit


Jonathan Chevreau

Financial Post


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: Kent 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 conduct."

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]. He believes the case illustrates how the industry is still not properly regulated.

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.