A hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) has found that Charles Floyd, a registered representative in Edmonton, made unsuitable recommendations and unauthorized discretionary trades for a client.

The panel also found that Floyd’s branch manager James Gordon McDonald failed to properly supervise the account.

According to the panel’s decision and reasons, in the spring of 2008 Leonard Stokes opened an account with Floyd at the Edmonton branch of Union Securities Ltd.

Stokes originally met Floyd in 2007 through a group of friends that met for dinner about once a week. During that time, Floyd often spoke of his business and aggressive investment strategy in equities. Stokes, who was almost 60 in 2008, came into an inheritance and decided to open an account because of his many conversations with Floyd about investments and his feeling that he would look out for Stokes’ best interest. Until that time, Stokes had only invested in mutual funds and guaranteed investment certificates in a registered retirement savings plan (RRSP).

Although Floyd argued that Stokes’ investment knowledge was “average” the New Client Application Form (NCAF) lists his knowledge as “limited.” The primary reason for opening the Union account was to use the inheritance money to provide funds for Stokes’ retirement at age 65. As such, the investment objectives listed on the NCAF were as follows: 70% capital preservation, 20% income and 10% long-term growth.

During the hearing, Floyd argued that the account was not meant to be a portfolio but that it was primarily to be used for the purchase of BCE Inc. shares which he had spoken of extensively to Stokes at the weekly dinner parties.

Once the account was opened, Floyd purchased 7,000 shares of BCE on Stokes’ behalf. Floyd assured Stokes that BCE was a good investment with “zero risk” because the announced takeover of the company by the Ontario Teachers’ Pension Plan was a “done deal.” Floyd purchased another 2000 shares of BCE for the account in September 2008.

That same month, according to IIROC documents, a margin account was opened on Stokes behalf. Floyd did not explain how margin accounts worked, what a margin call was and how margin increases the risk of investments. At one point, over $480,000 was borrowed in the account. Money from the margin account was used to purchase several other stocks. Three of those transactions were made without Stokes consent.

During this same time, as part of his role as branch manager, McDonald would conduct regular reviews of client accounts. However, McDonald never made any notes regarding Stokes account or attempted to speak with him personally, neither when the margin account was opened nor when the commissions were in excess of $1,500, something McDonald testified he would normally do.

McDonald’s argument to the IIROC panel was that informal conversations with Floyd at the branch and the client signature on the NCAF document were enough to satisfy him as to the suitability of the investments held in the account.

A penalty hearing has yet to be scheduled.