Grievances never see the light of day
Banks, brokerages use confidentiality pacts to great effect
Jonathan Chevreau
Financial Post
June 25, 2004
CREDIT: Yvonne Berg, CanWest News Service
Stan Buell, founded the Small Investor Protection Association after settling a dispute with a big bank several years ago: "The [financial] industry covers up this huge problem of investors losing due to industry wrongdoing."
Quietly, behind the scenes, investors who lost money the last few years are receiving settlements from Canadian financial institutions.
But you won't hear about them in the press because one of the stipulations made is to adhere to the terms of so-called "gag orders."
In return for financial compensation, these investors are put in a position where they would violate legal contracts if they tell the world specifics of their arrangements.
Several large banks or their brokerage arms are involved, including several cases once prominent in the press.
Some got nowhere going to industry ombudspersons, associations or regulators. Legal action and the threat of airing their grievances publicly seems to have been what motivated institutions to settle.
As they pay their hush money, high-priced lawyers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though it's hard to draw any other conclusion.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got."
Even with the promise of anonymity, this source would not divulge the terms of the settlement. "We are not being made whole. It's just a cessation of hostilities."
But I was given a sample of the legalese in the gag order. He/she "will not disclose terms and conditions of the settlement offer to any third party except financial advisors or lawyers, except as required by law and excepting any communication with securities regulatory or other enforcement authorities and self regulatory organizations."
In other words, plenty of professional people know about these cases -- just not the press and the general public.
A confidentiality agreement for another case which reached the Ontario Supreme Court reads in part: "is not to be, and will not be disseminated or disclosed to anyone, whether individual, corporation or other entity, public or private ... the Undersigned covenant & agree that they will only state to any third party that they can not speak about the Action."
The only exceptions are for disclosures made to lawyers or accountants for tax purposes.
The agreement makes explicit reference to the payment made to the investor: "In consideration of the within settlement, this Release, and the payment of the said consideration, the Releasors shall not make a claim or take proceedings against any other person or corporation ...."
Investment Dealers Association vice-president of enforcement Alex Popovic says the latter agreement contravenes Member Regulation Notice 076, issued May 22, 2001.
That notice clearly states agreements "shall not contain language which would prevent the client from disclosing to securities regulatory authorities, self-regulatory organizations or other enforcement authorities the facts or terms of the settlement."
Popovic appends his personal view that "anything that chills a client from coming forward is not in keeping with the intent of this notice."
The Mutual Fund Dealers Association also prohibits confidentiality restrictions on settlements between IDA members and clients, says MFDA president Larry Waite. Any settlement above $25,000, and in some cases $15,000, must be reported, he says. However, he adds, these disclosure requirements do not extend to the press.
Investor advocate Joe Killoran (www.investorism.com) suggests settlements are being wrapped up in advance of the election because "the banks are hoping the Liberals get back in and allow amalgamation."
Another investor advocate who fought and won his own case before taking on others is Jim Roache. He says there was a "flurry" of settlements two months ago, when it looked like a re-elected Liberal majority was a slam dunk. Bay Street wanted to clear the decks for a new round of bank mergers and didn't want the dirty laundry of abused investor cases upsetting their cosy relationships with the ruling party.
Seldom do these investors recoup their losses, Roache says. Most are lucky to get 50 cents on the dollar five years after the fact. "Many get nothing. The vast majority decide to write it off to experience."
Settlements save both sides the costs of dragging litigation through the courts. The rule of thumb is it's not worth pursuing unless the amount involved is at least $250,000 and you have another $250,000 to chase it down, Roache says.
The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Killoran says. Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being, Killoran believes.
Stan Buell created the Small Investor Protection Association after settling a dispute with a big bank several years ago. Since then, a number of SIPA members have quietly settled out of court.
"The industry covers up this huge problem of investors losing due to industry wrongdoing."
Ironically, Buell suggests it may be better that these cases are covered up. "If everyone knew the truth there would be many fewer small investors."
He concludes regulators have failed to protect investors and it's "time for the government to step in." Buell has contacted leaders of all major federal parties and hopes investor protection legislation will be introduced after the election.
© National Post 2004
