A pair of recently filed lawsuits by aggrieved investors has prompted questions about the liability of financial institutions when rogue employees break the rules.

Although statements of defence have not been filed in either case and none of the allegations have been proven in court, the cases do highlight dealer responsibility.

In August, a Winnipeg couple sued Great-West Life Assurance Co. and their former financial advisor for more than $436,000 they allege was withdrawn from their accounts without their consent. In a statement of claim filed in the Court of Queen’s Bench, Michel and Lorraine Mignault allege their portfolio, which they had been building for 15 years, is now worth less than $9,600.

The couple alleges the advisor, Gary Palmer — who was licensed to sell Great-West Life products — told them a number of times to withdraw funds from their Great-West Life accounts and move them into their personal bank accounts. The money was then to be deposited in Palmer’s firm, J.D. Raleigh & Co. Ltd. , before being reinvested with Great-West Life.

It wasn’t until they received letters from the Winnipeg-based insurance giant last winter, requesting confirmation of several transactions in their accounts, that the Mignaults discovered something was amiss.

The second case involves a group of high-profile investors in a Winnipeg-based distillery and its parent company. In mid-September, they filed a lawsuit against Astra Credit Union Ltd. for $5.9 million, including $3.9 million they had invested in the two firms.

The group — which includes former Winnipeg Jets captain Thomas Steen — alleges Astra participated in a “cheque-kiting” scheme that enabled Maple Leaf Distillers and Protos International to access millions of dollars in unauthorized loans. The statement of claim alleges senior Astra officials “knew or should have known” of the cheque exchange and that they “personally deposited the cheques from related companies knowing the accounts were significantly overdrawn and beyond authorized credit limits.”

According to the court document, the investors allege Protos had an authorized credit limit of $50,000 but had accessed more than $1.1 million through its line of credit. Maple Leaf Distillers, meanwhile, had drawn down its line of credit to $6.4 million despite having approval for just $3.4 million.

Great-West’s director of media and public relations, Marlene Klassen, says the company terminated Palmer’s licence earlier this year following an investigation. Over a period of several years, she says, about 20 clients withdrew about $1.25 million from Great-West products and turned the money over to Palmer to be invested.

She says there was evidence of improper conduct once the money was withdrawn. The firm provided its findings to the Winnipeg Police Service, the Insurance Council of Manitoba and the Manitoba Securities Commission.

“We’re co-operating with the authorities on this matter. We take client concerns seriously,” she says.

Astra CEO Ian Dark, on the other hand, says the lawsuit filed against his firm has no merit: “We’re absolutely going to defend it. We’re not expecting to have to pay out on this. We think we’re in a pretty strong position.”

In situations such as this, dealers often try to shield themselves when an independent contractor breaks the rules by saying they didn’t have an employer/employee relationship, says Neil Gross, a partner at Toronto-based law firm Carson Gross Christie Knudsen. But that strategy won’t necessarily work, he says, noting the law tended to favour corporations in the past, but that things have evened out in re cent ears.

“The courts will look at a number of factors. Were these people dealing with an agent of the firm, or someone who ran an intermediary business between the client and the firm? They’ll also look at the surrounding circumstances. Did communication come on letterhead with the name and logo of the company? And did clients make out their payments to the company or was this person cashing the cheque and handing it over to the dealer?”

The independence of the intermediary is an important factor, says Gross. For example, was the person provided with office space by the firm or did he or she have to lease it on his or her own?

“If the insurance company is supplying the [intermediary], that’s a good indicator of whether he or she is truly independent. Does the intermediary work for somebody else? If he or she only has one client who effectively directs everything, he or she is not really independent,” he says. “The courts will look at the reality of the reality.”

@page_break@The dealer also has a responsibility to supervise what employees and agents do, and to have adequate controls in place, says Gross. In situations in which fraud has occurred that couldn’t have been detected, the firm may not be guilty of direct negligence but still may have vicarious liability for what its agent or employee did.

“Even though you didn’t authorize these loose cannons to do what they did, you may be liable because they were part of the business relationship your company established with the outside world. By putting agents out in the world to do your company’s business, you’ve created a certain amount of foreseeable risk of harm,” he says.

In the law’s eyes, Gross says, the dealer created the risk for its own benefit and it’s appropriate that it be liable for any harm generated by that risk — even though it didn’t intend anyone to be harmed.

“It’s a balancing act between two innocent parties. You have an innocent corporation with a rogue employee or agent, and an innocent customer. What the rogue did is related to the business activity of the corporation. It’s more appropriate for the corporation to pay than the customer, even though the corporation wasn’t negligent and is relatively innocent,” he says.

Banks, dealers, credit unions and other financial institutions are vulnerable to advisors, employees and independent contractors because they have trusted relationships with them, says Ellen Bessner, a partner at Gowling Lafleur Henderson LLP in Toronto.

“They may have controls in place. But if someone figures out how to steal from clients, anything is possible,” she says.

Bessner says that once firms are in possession of documentation of a client who, for example, is asking to redeem, they are obligated to redeem the investment. Prying into the client’s rationale is not part of the contract. “If an advisor wants to dupe a client or the firm, it is difficult to detect. It’s tough on dealers. Their internal controls can be excellent, but a redemption is a redemption,” she says.

A multimillion-dollar claim and the bad publicity can turn into a nightmare, she says. IE