OBSI: Monarch refuses its recommendation
Employing a plethora of financial schemes and tactics, such as forging signatures, falsifying documentation, and misled signings of blank Know-Your-Client forms, a few dishonest financial advisors make excessive gains at the financial loss of their innocent clients, many of whom are newcomers from the same ethnic communities.
But the fraudulent behavior is hardly able to evade from authorities. As Kevin Jia reports, once convicted, those who took advantage of investors face stern punishments from regulators and victims may be entitled to compensation after filing complaints with OBSI.
In 2007, Mr. Xu and Mrs. Xu (not real names) immigrated to Canada. Like many immigrants, they had no family or friends in Canada. But the couple frequently attended their local church and after several services, they were approached by Mr. Zhang, a financial advisor who worked for an investment firm (Firm A). Soon after, Mr. Zhang showed them a lucrative leveraging strategy -- borrowing to invest.
The couple was not interested in his offer and refused. However, Mr. Zhang applied for the loan in 2007 without the couple’s approval. According to the OBSI investigation, Mr. Zhang borrowed $200,000 on the couple’s account and invested it into mutual funds. By the end of 2007, Mr. Zhang switched firms and started to work for Monarch Wealth Corporation, but the couple’s account had also been transferred without their approval.
“The couple had no knowledge of the transfer… Even the paperwork for the firm switch had many irregularities…The driver’s license signatures weren’t even close,” said Doug Melville, CEO of Ombudsman for Banking Services and Investments (OBSI).
Shortly after Zhang’s transfer, Mrs. Xu went on maternity leave. Yet, neither Zhang nor Monarch had properly reassessed the couple’s financial situation. It was at that time Mrs. Xu began noticing interest payments in her bank statements. She immediately contacted the bank and was informed the interest was accumulated from loans. Sensing deception, she met with Zhang but was assured that the loan was a miscommunication. However, Mrs. Xu insisted she wanted to pull out, but Zhang intimidated her with incurred fees and heavy losses.
However, during the financial meltdown of 2008, the value of the losses mounted and by 2009, the CRA challenged the couple’s tax returns and subsequently required them to pay $9,000 in taxes. As they grew increasingly anxious, Zhang once more reassured them. Soon after the CRA demands, Zhang attempted to switch firms yet again and invited the couple to sign a set of transfer forms. This was the first time the couple had learned that Mr. Zhang had already transferred to Monarch.
Despite the couple’s growing apprehension, Zhang continued his tactic to keep the couple hooked. However the market value of the investment had fallen well below $160,000. With interest payments mounting and further CRA demands, the couple was now exhausted and cornered. Out of options, they approached Monarch and eventually, their complaint reached OBSI and the Mutual Fund Dealers Association (MFDA).
Borrowing to invest is a very risky investment and may only be suitable for those who are sophisticated investors with strong financial assets to sustain losses. The investment strategy was perilous as the risk factors of the investment are amplified by debt and interest payments. Given the couple’s income, investment knowledge and risk tolerance, OBSI found that the investment strategy was unsuitable for the couple.
As such, the OBSI, which believes that investment firms are responsible for the unsuitable advice provided by their agents, made recommendations that Firm A and Monarch compensate for the couples’ total financial loss of $62,000 by each making half of the total repayments. While Firm A has settled with the couple, Monarch refused the OBSI’s recommendation. In other words, the couple has not been able to recoup their entire losses to the investment.
Financial advisors make commissions based on the amount of clients’ investment assets. According to FAIR Canada, there is systemic incentive for investment advisors to push leveraged investment that can bring inflated asset value. As such, advisors could make excessive gains by luring clients into “borrowing to invest” strategy.
Apart from offering the unsuitable investment advice to the couple, Zhang also breached regulatory policies. According to the MFDA investigation, Zhang was found to have forced the couple into signing blank Know-Your-Client (KYC) forms and had altered financial information to apply for investment loans without the couples’ authorization. Furthermore, the MFDA received several other complaints regarding similar allegations against Mr. Zhang. After the MFDA hearings, Zhang’s license was permanently revoked and he was fined $75,000 in penalties.
Zhang’s penalty will hopefully serve as a strong deterrence to others who intend to exploit victims through misrepresentation, falsification, and forgery. However, despite the mechanism to protect public interests, the victims of fraud cases may not be able to recoup their lost investments after a long and tedious investigative process. The financial losses, coupled with the emotional turmoil endured all stress the need that victims safeguard their own interest. The best protection is self protection. Melville, who revealed that a high proportion of victims in the similar cases involved Chinese community members, advises all immigrants, especially those who are not proficient in English, to be wary and skeptical of investment schemes and unscrupulous sales tactics.
“If an advisor says you can make a lot of money without risk, their lying. When you suspect something is wrong, always approach the advisor’s firm. But before you sign anything, you need to not just read it, but understand it. Ultimately, you’re going to be bound to it.”
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