Following up on threat to “name and shame” investment dealers that are refusing to follow its compensation recommendations, the Ombudsman for Banking Services and Investments (OBSI) said Friday that Octagon Capital Corp. is refusing to compensate one if its customers $181,339 as OBSI is recommending.
This is the first time that an investment dealer has been publicly outed for refusing an OBSI recommendation, and is just the second refusal in OBSI’s history. On Thursday, the dispute resolution service said that it plans to begin publicizing refusals, after efforts to overcome firms’ resistance to paying recommended compensation have failed.
OBSI noted that there are 21 complaints classified as “stuck” earlier this year; one of those is undergoing an independent review, and several others have since been resolved. OBSI hopes that more of these stuck complaints will be resolved as it follows through on its threat to publicize firms’ refusals, which is its only real enforcement power.
In the case announced Friday, OBSI reports that Toronto-based Octagon is refusing its recommendation for compensation to an elderly widow, known only as Mrs. B, whose account was unsuitably invested, according to OBSI. It says that her advisor traded frequently in her accounts, and “often without her authorization”, and that the securities he purchased “were too risky for her, as were the margin and short selling strategies he used”.
Although OBSI doesn’t name the advisor involved, referring to him only as Mr. H., it reports that he was the subject of an enforcement proceeding brought by the Investment Industry Regulatory Organization of Canada (IIROC), concerning the unsuitable investments and unauthorized trading in her account.
In December 2011, an IIROC panel fined former Octagon advisor, Randall William Harding, $125,000, ordered costs of $25,000 and disgorgement of almost $18,000 in commissions, and suspended his registration for five years, after finding that he made unsuitable recommendations and engaged in unauthorized trading. However, the investor didn’t receive any compensation as a result of that decision; and, it notes, that he is no longer employed as an advisor.
According to OBSI’s investigation report, which was also released Friday, Octagon argued that about half of the client’s losses came in positions she entered with her advisor at another firm, and were transferred to Octagon. Octagon notes that her margin account had a debit balance and a short position when it was transferred in, so “it is not credible that Mrs. B did not understand her investments, trading on margin or short selling.”
The firm also points out that the biggest loss on securities purchased at Octagon was due to a fraud perpetrated by the president of the issuer, Southwestern Resources Corp. And, it relied on her signed client documents, and maintained that her asset mix was suitable for her circumstances.
However, OBSI rejects those arguments, ruling that the firm is vicariously liable for the advisor’s actions, and that it was in the best position to identify her unsuitable investments and avoid her losses.
OBSI says that its compensation recommendation is based on calculating the difference between the amount the investor’s account should have been worth had it been suitably invested, and the actual value as of the date she removed her investments from the firm, plus interest calculated from the date when she first complained to the firm. It calculates her damages at $173,605, based on how she would have fared if she was entirely invested in GICs. If it merely replaced the high-risk component of her portfolio (25%) with low-risk securities, her damages would be $338,640, it notes.
Octagon was among those offered the opportunity for an independent review of this “stuck” complaint, but OBSI says that “Octagon chose not to take up this offer”.
Octagon has also yet to respond to a message from Investment Executive seeking comment on Friday’s announcement by OBSI.