Clients defrauded in LIRA schemes

(July 29, 2005) Many clients have locked-in retirement accounts (LIRA) as a result of changing careers several times during their lives. These assets are generally inaccessible to clients until they reach retirement, but unscrupulous advisors, several of whom are the targets of ongoing regulator investigations, are advertising to the contrary and preying on needy clients.

The Ontario Securities Commission (OSC) issued the latest decision regarding LIRA scams on Thursday. It found Nepean, Ontario broker Brian Verbeek violated a number of provisions in the Securities Act, and acted in a way that was harmful to investors and contrary to the public interest, in a scheme involving more than 670 investors and nearly $17 million.

Between August 1998 and November 2000, Verbeek posted advertisements offering “fast financial assistance” and low interest loans to people wishing to access funds in their locked in retirement savings plans. Many of the people who responded to the advertisements were low income earners in need of financial assistance.

Under the scam, clients signed documents to create new self-directed locked in RRSP accounts at the brokerage where Verbeek was registered, then directed their LIRA trustee to liquidate all investment holdings into cash and transfer the funds to their new trustee. The majority of funds, once transferred would be used to purchase shares of private companies or Canadian Controlled Private Companies (CCPC) that were supposed to be qualified investments for RRSPs. Unitholders then received between 60% and 80% of their assets as a loan from the companies.

Not only are the assets in this kind of situation subject to tax upon withdrawal from an RRSP account, the CCPC shares were not an eligible investment for registered plans and the shares were later proven to be worthless.

Although clients did receive some of their assets, roughly 35% was retained in each case, charged as an administrative fee. In many cases unitholders also made interest payments to the CCPC promoters with the understanding that if the loans were fully paid back, including interest, the shares would be redeemed.

Between 1996 and December 2000, Verbeek was registered as a salesperson with Manulife Securities, Fortune Financial Corporation, Dundee Securities (when the company acquired Fortune) and Buckingham Securities.

Unfortunately the case is one of several and not an isolated incident. Around the same time Verbeek was conducting business in Ontario and Quebec, Josephus Lewis was promoting a similar pension scheme involving 31 Manitoba residents. Ingram Jeffrey Eshun, a registered sales person with W.H. Stuart in Ontario helped by opening new client accounts without actually meeting any of the clients. Eric Sonego participated by signing documentation as an accountant, certifying the corporation shares as being qualified investments for registered plans. The Manitoba Securities Commission (MSC) says Sonego is not registered as an accountant in Ontario or Manitoba.

The MSC also found that W.H. Stuart acted improperly when they failed to detect the illegal trading activities and failed to act in an effective manner once the trading activity was identified. The Commission also says the firm failed to obtain or adequately review new client forms and applications to ensure they satisfied the “know your client” obligation.

The reality is most jurisdictions will not allow clients to unlock LIRA assets except under very specific circumstances. Clients may unlock their LIRAs before retirement if the combined value of all their locked in assets is less than a certain threshold percentage of the year’s maximum pensionable earnings (YMPE). The maximum pensionable CPP earning level in 2005 is $41,100. Thresholds for unlocking LIRA assets range between 4% and 40% of that YMPE number, depending on the province. In other words, a client in Saskatchewan for example, needs to earn less than 4% of $41,100 — or just $1,640 — in order to qualify.

Some provinces also have hardship provisions that allow clients to unlock their assets if they risk eviction, have a significantly shortened life expectancy, if they have unpaid medical expenses or if they require home renovations to meet the needs of a disabled family member.

To qualify, clients need to apply to the provincial pension authority governing their plan.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com