Definition of financial advice debated as Costello case concludes

(December 13, 2002) The professional fate of popular financial seminar speaker and media commentator Brian Costello is in the hands of an Ontario Securities Commission disciplinary panel. Hearings in the case wrapped up earlier this week, with arguments on both sides squarely focused on the issue of what constitutes financial advice.

The OSC alleges Costello gave advice without being registered and touted specific investments without revealing he would personally profit from their sale. Although the allegations are separate, OSC staff lawyers linked the two, arguing that Costello engaged in the business of financial advice, as defined by Ontario’s Securities Act, through his investment recommendations.

“A person who goes beyond providing simply factual information about a security to recommending the purchase of a security or offering an opinion on the investment merits of a security is acting as an advisor,” wrote OSC lawyer Hugh Corbett in his closing arguments.

Costello’s lawyer, Joseph Groia, maintained that his client’s business was as a “seminar leader, commentator, newsletter publisher, author and financial spokesperson.”

“His business purpose was to educate Canadians about financial matters,” Groia stated in his closing arguments. “While he may have, in few instances, referred specifically to specific investments in the course of his business, those instances are merely incidental to his overall business.”

“He made it clear to everyone that he was not in the business of advising, he took no clients and he encouraged his listeners to seek independent financial advice from a registrant,” Groia said. “Mentioning a stock does not meet the definition of advice.”

Corbett argued that because Costello never discussed any of the risks of investing in the specific products he discussed, his seminars could not be considered educational. “The clear weight of the evidence suggests that Costello was motivated far more by financial gain than by any altruistic aim of educating Canadians,” Corbett said.

Costello held a 47.5% interest in Ontario dealer The Financial Planning Group. The OSC alleges that Costello conducted seminars arranged by FPG in which he recommended two limited partnerships, Synlan and Enervest, without disclosing he had a financial interest in FPG.

Corbett noted that Costello sold his share of FPG for $2.75 million in 1997, after making an initial investment of $80,000.

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But no sales or investments were ever made at a Costello seminar, Groia said, and that his client always suggested that seminar participants consult an independent financial advisor. “Often he included a warning that individuals verify the qualifications of their advisor to ensure they are being serviced by a certified financial planner,” Groia added.

The premise that Costello was steering seminar guests toward independent advisors was “largely illusory,” Corbett argued. Because only FPG sales representatives were present at the seminars and because Costello went to great lengths to explain how he had handpicked them, he was “expressly endorsing” the FPG reps, Corbett said.

“Costello’s recommendation that the guests consult a financial planner was motivated as much by his desire to deliver prospects to the FPG sales reps than by his concern for the seminar guests,” Corbett said.

Groia questioned the “huge” delays in the OSC investigation (the alleged transgressions took place between 1994 and 1997) and complained about the commission’s “inexcusable” failure to simply approach Costello and ask him to register. “The only reasonable explanation… is that the OSC staff did not want to give up on an opportunity to take punitive proceedings against another popular, high-profile and successful public figure like Costello,” Groia said.

Groia also argued that expanding the definition of advisor to include speakers like Costello is a violation of freedom of speech rights and said that requiring registration for anyone providing advice would “open up the regulatory floodgates.”

Costello did not appear as a witness at the hearing and has refused comment on the proceedings. He faces a possible lifetime trading ban if the allegations against him are upheld. Some observers feel that’s exactly what will happen. One industry veteran told Advisor.ca he feels the OSC will throw the book at Costello to send a message to other financial seminar speakers. “I think those guys are already being more careful,” another source said. The three-member panel, led by commissioner Paul Moore, is expected to bring down its decision early in 2003.

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Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(12/13/02)

Doug Watt