Mutual fund salesman faked signatures, couple out $80K

An Ontario couple is going public about how a mutual fund salesman gambled with their money and lost $80,000 by copying their signatures to buy high-risk investments, against their explicit wishes.

When we gave him the cheque, I said at least four or five times We cant afford to lose one cent, said Elaine Hotchkiss.And he kept saying, Trust me. Trust me. Trust me.'

We had asked for short-term, low-risk investments, said her husband Don. We were both very upset when we found out how much we had lost.

The retirees from Parry Sound are equally upset that Equity Associates Inc., the Markham firm salesman Mervyn Fried sold through, refused to compensate them for their losses,even after the Ombudsman for Banking Servicesand Investmentsfound the company responsible.

The ombudsman's recommendations have no teeth to make them work, said Don. Its been horrible.

Stress took a toll

His wife has since developed a heart condition, which she blames on the stress.

I never had any health problems prior to this, said Elaine. I am now on two heart meds, five times a day. I am furious. And every time this comes up,it starts all over again.

As a result of this case, Frieds licence to buy and sell mutual funds is now inactive.

However, he still runs his own company,MJF Financial Consultants, an investment services firm in Concord. His son Hayden is vice-president and is licensed to handle mutual fund purchases.

Six years ago, the couple gave Mervyn Fried $268,000 from the sale of their houseto invest just for a few months, because they needed it to pay for a new home.

We had trusted him to make the right choices for us, said Don.

Salesmanpocketed fee

He had them write an additional cheque up front payable to him personally for $2,680, which represented his one per cent commission.

The couple didnt know it is against the rules for salespeople to pocket fees from clients like that. Equity Associates later refunded them that amount.

The ombudsmans investigation found Fried used liquid paper to erase information on old forms the couple had signed for RRSP investments. He copied thoseto make blank formswith photocopied signaturesand used them to buy the high-risk funds.

When I [later] saw the papers I said, That is not my signature! said Elaine.

At the time, Fried already had his commission. He stood to earnanother one per cent from the mutual fund companies on the principalplus any gains.

I have the feeling that he was trying to earn us a little bit more. Get brownie points for that. Hes a hero, Don said,

Fried invested in the funds when stock markets had dropped, in the summer of 2008. When the bigger crash came that fall, the couple lost 30 per cent of their money for good.

Scramble to recover

The ombudsman found Fried was evasive about the lossesand tried to get the couple to leave their money in longer. They had to scramble and borrow to pay for the new home they had already purchased.

It hurt. It put us in debt for the first time in quite awhile, said Don. The dishonesty that he displayed and the lack of compassion it really has bothered both of us that anybody can do that.

The ombudsman concluded Equity Associates should pay the couple back in full, because it allowed Fried to invest their money without knowing what their risk tolerance was.

Mutual fund dealers must obtain a written declaration of a clients preferences for each investment account. The ombudsman found Equity Associates didnt do that in this case.

The ombudsman's recommendations arent binding, however, and the company refused to compensate. It is among a growing list of dealers refusing to pay in the last three years. Those firms were deemed responsible for a total of $1.4 million worth of client losses.

Industry strategy?

The Small Investor Protection Association said it believes some dealers are making a concerted effort to undermine the ombudsmans office, by not paying.

The industry for whatever reason doesnt like what the ombudsman is doing. And the way to discredit him is to have a lot of people refuse his recommendations, said the association president Stan Buell.

The ombudsman said it is also concerned about the spike in refusals, but not for that reason.

We dont believe there is a concerted effort to refuse OBSIs recommendations, said spokesman Tyler Fleming. He said some companies didnt have insurance to cover compensation and others were going out of business.

Buells organization is lobbying Ottawa to make it mandatory for firms to follow the ombudsman's recommendations.

It's an abysmal situation. Nobody knows the magnitude of whats going on. We estimate its in themultibillions of dollars Canadians are losing to fraud and wrongdoing within the regulated investment industry," said Buell.

We feel the government of Canada should step up and do something.

More clients allegedly hurt

The national industry regulator will hold a hearing into possible disciplinary action against Fried in September.

Beyond this case, the Mutual Fund Dealers Association (MFDA) also alleges he falsified or copied the signatures of several other clients and improperly pocketed almost $10,000 in fees in 21 cases.

Those allegations have not been proven. Fried has filed a response, denying any wrongdoing.

The regulatorsaid it has disciplined 200 members in the last three years for violations involving blank signed forms, signature falsification and other issues involving client signatures.

Since 2012, the MFDA has implemented a bulk-track process to enable the hearing of multiple hearings in one sitting.This has enabled the MFDA to bring forward a large proportion of blank signed form cases to a hearing in order to send a strong message of general deterrence against this activity, the regulator said.

The ombudsman said it also hears cases of signature irregularities,butit said it doesnt report them to police.

We dont have the same tools as the courts or police to detect criminal activity, nor is it our role to do so. OBSIs role is to determine whether compensation is warranted, not to sanction or punish individuals or firms, said Fleming.

Buell said his group reported 10 cases of alleged forgery to the RCMP a few years ago, but nothing came of that.

Tougher penaltiescalled for

I think they should face criminal charges, said Buell. Its common practice. So if you know one person who has been victimized there are probably a hundred or more in the same boat. I see that all the time.

The mutual fund industry regulator said it initiated discipline against 877 members in the last three years.

It said dealers lost their licences in only four of those cases, though, suggesting most got warnings or cautionary letters.

Buell said he believes industry wrongdoing goes unpunished too often.

"If [salespeople are] absorbed this industry culture and youve been doing these things yourself, you dont really see any harm in it. And maybe they dont even realize its wrong," he said.

I dont think the regulators are doing their job."

Equity Associates CEO Bob Goodish didnt answer Go Publics requests for a response. Mervyn Frieds son said his father was out of the country and also refused comment.

Don and Elaine Hotchkiss think its outrageous that essentially nothing has come of their case after six years of fighting.

You become numb after awhile, said Elaine. When it starts to affect your health you start to think, 'I have to put this somewhere in a corner and put it away,because it could kill you.'

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