Check for investor protection

The questions: Who is the watchdog for investors? Who polices the investment industry? To which the industry proudly replies-we police ourselves. Self-regulatory bodies oversee the financial markets, ensure that brokers and dealers are properly trained and that employees stay within the law.

Most of the time, the arrangement works: The public is protected and the industry has a cost-effective way to regulate its own. And if it doesn’t work, no problem. We have the Canadian Investor Protection Fund (CIPF). This contingency fund is sponsored by the industry to cover customers for any financial failure of brokerage firms.

Well, not necessarily so.

We alerted readers about the CIPF in the CARPNews FiftyPlus Financial Guide in January. We urged them to make sure their investment firms were members. Unfortunately, the recent experiences of some 100 Ontario investors make it clear the advice bears repeating. Their sad plight also highlights serious shortcomings in the system.

Lost millions
These people lost about $10.4 million when Toronto-based investment dealer Essex Capital Management Ltd. and its affiliate, Nelbar Financialorp., went belly up in 1999. But they were covered by the contingency fund, right? Not so. Many are still fighting for compensation from the CIPF.

One reader invested a portion of her 85-year-old mother’s money in what turned out to be worthless ‘investment certificates’ from Nelbar. And these losses likely will not qualify for CIPF coverage because of a technical glitch.

You see, Essex was a member of the CIPF, while its close affiliate, Nelbar, was not. And few if any of Nelbar’s investors knew the difference.

Understand protection
Understanding a company’s status in terms of CIPF protection is crucial. It’s akin to bank customers knowing about protection under the Canada Deposit Insurance Corporation (CDIC). For insurance buyers, the comparison is CompCorp, that industry’s contingency fund.

Well, easier said than done where affiliated investment companies are concerned. More than 100 claims resulting from the Nelbar/Essex case have been filed. To date, only 19-about $1.5 million worth-have been settled.

Successful claims
What makes a claim successful or not? It depends largely on whether the loss was suffered by a client of Essex, the CIPF member, or Nelbar, who was not.

There’s little doubt that the two were inextricably intertwined. Both operated out of the same offices. Both were headed by the same person (George Nelson Allen, who has since been charged with fraud). And a $190,000 loan from Nelbar to Essex helped that company maintain status as a member of the Investment Dealers Association (IDA).

Ironically, the Essex IDA membership qualifies one set of investors and not the other for protection. Coverage flows automatically to any member of one of the CIPF sponsoring organizations. This includes the IDA as well as various stock exchanges.

Legalities, risks
But these are legal fine points. The contingency fund should get out from behind hair-splitting and cover all the losses. There’s no question that most of their customers believed Essex and Nelbar were one and the same.

Investors face many risks-changes in a company’s fortunes, or in the economy, even the fickle moods of fellow investors. But we tend to discount the risk of being defrauded by investment professionals.

While knowledge may be an investor’s best defence, we also look to authorities and industry leaders for accountability and protection.

Now we hear the IDA is reviewing the way it judges such related companies. Improvements would be welcome. But any changes may come too late for unwary Essex/Nelbar customers.