Winnipeg investment adviser faces discipline over railway pension funds
Gosia Sawicka | CBC News | Posted: September 17, 2014 10:15 AM | Last Updated: September 17, 2014
A second Winnipeg investment adviser is facing discipline for his handling of railway pension funds.
Donald Earl Phillips will face an enforcement hearing before a panel with the Investment Industry Regulatory Organization of Canada (IIROC) following allegations that he failed to use due diligence and learn essential facts about 11 of his clients before putting their money into "Flow Through Limited Partnership" units.
The flow-through shares are considered high-risk and offer investments in oil, gas and mining exploration.
"The Respondent (Phillips) failed to know these clients, and failed to recognize that such an investment was unsuitable for them," according to a written statement of allegations signed by Warren Funt, IIROC's vice-president in western Canada.
Between 2006 and 2008, Phillips, who was working with Wellington West Capital at the time, was advising employees of CN and CP Rail on pension investments.
Investigators allege that Phillips "made unsuitable recommendations" and in nine of the client files made trades without the clients' permission.
The statement of allegations describes the relationship between Phillips and another adviser, Ken Muzik. The allegations refer to Muzik by his initials, KM.
The allegations state that KM "advised clients on the possibility of a tax free rollover of their pension funds." He would offer presentations to railway workers, showing the benefits of opting out of their pension plans and investing the lump sum with him. Many of the lump sums were valued at $500,000 or more.
Phillips and Muzik allegedly suggested an investment in flow-through units could reduce tax burden on the lump sum.
Investigators say KM was unable to sell the flow-through shares, so he introduced the railway workers to Phillips.
Phillips allegedly shared a slideshow on flow-through investments to prospective clients. The two men shared commissions on the trades.
"In the course of recommending the flow-through units to his clients, the Respondent failed to inform them that they were high risk, speculative securities. Similarly, the Respondent's slideshow failed to provide a balanced portrayal of the risks associated with Flow-Through Units," the allegations state.
"Many of the flow-through units declined in value. As a result, eight of the eleven clients suffered losses in their accounts," according to IIROC.
Investigators say Phillips had little or no contact with the 11 clients. None "wished to invest in high risk securities," the agency said.
"The Clients would not have invested in flow-through Units if they had understood that they were high-risk, speculative investments," the statement reads.
In a December 2011 proceeding involving another regulator, the Manitoba Securities Commission, Muzik was reprimanded for recommending investments that were outside the risk tolerance of clients. He is not currently licensed to sell securities.
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The clients include William Worthington and Les Painter, who were previously interviewed by the CBC News I-Team.
Phillips received $6,450 in commissions for the 11 clients. He is no longer registered with IIROC, pending his hearing. He could not be reached for comment. The allegations have not been proven.