Octagon

The Ombudsman for Banking Services and Investments (OBSI) has held firm in their intent to name and shame companies that do not comply with their findings and rulings.

They issued this press release on Octagon Capital Corporation.

You can read the full report as a downloadable pdf here.

The short story is that Octagon Capital Corporation refused to compensate an elderly investor client of more than $181,000 lost due to unsuitable investments. The report is tough to read. The client was a female, not employed outside the home, who did not manage any of the household finances or investments until her husband died. She opened accounts with Octagon in 2004 when she was 62 years of age. She trusted them to appropriately manage her investments.

This is what happened to her portfolio during the four-year period she invested with Octagon:

Net amount invested: $497,429
Ending equity: $376,188

She lost roughly $121,241. According to her complaint, she also paid $47,000 in commissions. There was evidence of high frequency trading, short trading and highly speculative penny stocks — clearly unsuitable for an elderly woman hoping to derive retirement income from her investments.

OBSI considered what the financial impact would have been to her portfolio had she been invested in a low-risk income-oriented portfolio.

If she had been placed in a portfolio with 100% GICs:

Net amount invested: $497,429
Suitable ending value: $549,793

Net gain: $52,364

If she had been placed in a portfolio with 70% GICs and 30% in the TSX 60:

Net amount invested: $497,429
Suitable ending value: $657,267
Less commissions: ($3,300)

Net gain: $156,538

Both conservative models. One provides no commission to the advisor and the other provides little in the way of commissions. The OBSI report highlights that the IIROC panel was concerned that the advisor may have been motivated to trade frequently in the account to earn commissions.

The conclusion of the report:

Octagon is vicariously liable for Mr. H”™s unsuitable activities in Mrs. B”™s accounts. Octagon also had responsibility through its compliance function to ensure that Mrs. B was suitably invested. By not identifying that Mrs. B”™s accounts were unsuitable even relative to the inaccurate KYC information on record, Octagon enabled Mr. H to continue to invest Mrs. B”™s money in unsuitable investments and to conduct trades without authorization. Octagon was responsible and best positioned to prevent Mrs. B”™s losses and we recommend Octagon compensate her 100% of her financial harm being at least $173,605. In addition, we recommend $7,734 in interest on the losses from February 20, 20085for total compensation of $181,339.

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