Three former employees of Standard Life Assurance Co. have lost their appeal against damages imposed on them for conspiracy to defraud, breach of fiduciary duty and breach of their employment contracts.

The British Columbia Court of Appeal recently affirmed the Trial Court’s October 2003 decision, and more than doubled the combined amount to be paid by Martin Horsburgh, Donald Liesch and Peter Plunkett. A judgment of $1.1 million and a “tracing order” to track down and pay back any hidden profits was imposed on them.

Publicity generated by the case — in which the three employees set up an outside insurance brokerage in order to facilitate a fraudulent fee-splitting scheme — will put both insurers and their reps on high alert against future wrong-doing. “The important message from this case is if insurers uncover wrongful conduct, the appropriate response is not to sweep it under the carpet but to deal with it,” says Richard Olson, the Vancouver sole practitioner who was Standard Life’s lawyer.

If an insurer’s employees profit from wrongful conduct and the insurer doesn’t do anything about it, then the insurer is “as bad as the people who have done it,” he adds.

This case began in early 2000. At that time, Standard Life began a broad internal investigation of various branches to determine if unauthorized commissions were affecting the rate of return on clients’ pension plans. The investigation was triggered by an incident in a London, Ont.,
office at which a sales rep had been receiving unauthorized commissions through a company operated by his wife.

In B.C., Standard Life found that between 1991 and 2000, 13 corporate pension plan clients received a lower rate of return because of commissions the plans had paid to Priority Financial Services Ltd., a company owned by Liesch’s cousin, Daniel Hintz.

The investigation showed that Hintz received no more than 5% of the commissions paid to Priority. The remainder was paid to Horsburgh, Liesch and Plunkett or to companies held by their wives.

Liesch and Horsburgh each received at least 40% of the commissions, which translated into as much as $40,000 a year.
Plunkett received 10%.

For 12 of 13 clients, payment of the commissions to Priority had not been authorized.

Standard Life fired the three men — they are no longer licensed in B.C. — and sued them. The lower court ordered them to repay almost $450,000 in unauthorized commissions. Standard Life repaid the defrauded clients.

Standard Life allows corporate clients to deal directly with its sales reps or with an independent insurance broker. If the client chooses the rep, the rate of return is not affected because reps are salaried and the cost is built in. If a client chooses to deal through a broker, the rate of return is reduced because the commission for the insurance broker is deducted from the return on the plan.

The three defendants were working at Standard Life’s Vancouver office. Liesch was the regional group manager of the pension division for B.C. and was responsible for the management of the life and health division, as well. Horsburgh was the sales manager in the group pensions and savings division, while Plunkett was the branch administrator in the Vancouver group department.

In 1996, Standard Life replaced its group pension plan, and all existing clients had to be set up again as if they were new clients.
The paperwork was received for all 13 clients. The evidence showed that five signatures were forged.

The defendants argued in B.C. Supreme Court that Standard Life was not misled and that there was a culture within the organization in which fee-splitting was known and accepted. But, wrote the B.C.
Supreme Court judge: “The defendants knew or ought to have known that their actions would cause Standard Life harm.
Standard Life is dependent on clients.”

The full extent of Standard Life’s claim was not awarded, however, because of contradictory evidence regarding fee-splitting. But the BCCA disagreed with that part of the lower court’s decision.
Employees simply cannot profit by taking unauthorized advantage of their positions, it said: “There is no doubt that the employees obtained the commissions … because of the positions they held. They must account to Standard Life for all of the profits derived from the brokerage commissions that they wrongfully took for themselves.”