A hearing panel of the Mutual Fund Dealers Association of Canada (MFDA) has found that a North Bay, Ont. mutual funds salesman recommended and sold a leveraged investment strategy to clients without proper due diligence or explanation.
According to the panel’s decisions and reasons, in March 2006, a husband and wife (aged 57 and 77 at the time) became clients of Equity Associates Inc. salesman Enzo DeVuono after an introduction from the wife’s son.
DeVuono became registered in British Columbia in order to work with the clients who lived on Bowen Island, B.C. At that time, the clients mortgaged their home to invest in a leveraged strategy recommended by DeVuono.
The strategy had the clients invest $250,000 as two separate accounts of $125,000. Each account was then used as collateral for “2 for 1” margin loans. In total, the clients invested $750,000 invested in mutual funds as part of the strategy.
The clients invested with DeVuono as a way to generate income to make ends meet. In 2005, the wife had a yearly income of roughly $19,000 made up of her Canada Pension Plan and Old Age Security payments. Her husband, who has a mental disability, could only work menial jobs and made between $400 and $1,900 in that year. Neither of the clients had any understanding of investments or any previous experience with investing.
The panel’s decision outlines that DeVuono purposely hid his client’s lack of investment experience and knowledge of the clients as well as their household income. For example, on the Know-Your-Client portion of the New Account Application (NAAF) form, DeVuono indicated that the client’s estimated income was between $26,000 – $50,000, that they had an estimated net worth of over $200,000 and that their investment knowledge was good.
As well, DeVuono also indicated that he had witnessed the signatures on the Know-Your-Client and NAAF forms when, in fact, the documents had been signed by the wife in B.C. and were then faxed to the advisor.
Starting in February 2008, margin calls were made on the account and by the fall of that year the monthly distributions the clients depended on from the investment started to decline.
The unsuitability of the investment strategy came to light after the wife’s son went to an independent legal advisor for the purpose of guaranteeing a signature on a document as part of a plan to maintain the investment. Shortly after that, the portfolio was collapsed and the clients were left with more than $285,000 in loans including their mortgage.
In its conclusion, the MFDA panel stated DeVuono’s “recommendations had devastating consequences to the clients”, and that by recommending the investment strategy he “breached his suitability obligations to the clients.”
No penalties have been determined as of yet.