Advisor liability For misrepresentations

By Richard E. Austin | August 1, 2010 | Last updated on August 1, 2010
4 min read

On May 13, 2010, the Alberta Securities Commission imposed sanctions against Hav-Loc Private Wealth Partners Inc. and its President and CEO, Thierry Gevaert, for making misleading and untrue statements in the company’s marketing material regarding its due-diligence activities, thereby breaching securities laws. The message? Due diligence misrepresentations will have serious consequences.

Securities legislation includes provisions that permit the imposition of sanctions on any registered person or company who makes untrue or misleading statements in marketing materials.

Gevaert launched a company he touted as unique for being able to investigate and develop private-equity instruments “without any conflict of interest.” The company claimed to “complete due diligence in an objective manner” and pledged to “share a responsibility” with clients to ensure each new product balanced three fundamental elements: capital preservation, risk and return, and overall tax effectiveness.

Despite this pledge, Gevaert sold limited partnership units through Hav-Loc and received hefty commissions. In short, Hav-Loc and Gevaert made misleading and untrue statements in Hav-Loc’s marketing material by stating they conducted objective due diligence into the securities they were selling, when in fact they had done none at all.

Don’t rely on related-party claims

For advisors, what this case seems to stand for is this: if you claim to have done due diligence in your marketing materials, you could be held liable for misrepresentation if you yourself haven’t actually performed the promised due diligence, or if you’ve overstated the nature of such activity.

If you’re unable, unwilling or lack the requisite capabilities, an option is to hire a duly qualified third party to conduct due diligence on your behalf. The third party must be independent of the promoter, the issuer of the securities and any of their affiliates, and his or her compensation must not be tied to the dealer’s success at selling the offering.

This seems like common sense, but it wasn’t to the defendants involved in this case. Hav-Loc and Gevaert relied on the due diligence statements of a person closely related to the limited partnerships, despite the marketing claims they made.

Repercussions can be severe

Misrepresentations by advisors or dealers, whether intentional or through negligence, can attract liability on several fronts. On the regulatory front, any misleading or untrue statements could result in an enforcement action by a securities regulator. The sanctions could include a fine, suspension or termination of registration; a cease-trade order; or the appointment of a monitor to review the dealer’s policies and procedures and determine their effectiveness – not an inexpensive proposition.

In this case, a cease-trade order for five years was issued against both Hav-Loc and Gevaert, and they were jointly and severally ordered to pay a $15,000 administrative penalty and $2,000 of the costs of the investigation and hearing. Gevaert was also prohibited from acting as director or officer of any issuer for five years. Staff had sought a much stiffer penalty: a permanent trading ban and a $200,000 administrative penalty.

In determining the penalty, the Alberta Securities Commission considered the seriousness of the offence, the harm done, the benefits received by the respondents, the prior history of the respondents and future risk. Misrepresentations can also land you in a civil court. While only misrepresentations in a prospectus, offering memorandum or circular will give rise to a statutory right of action for damages under securities law, advisors and dealers could also face civil actions in cases of negligent misrepresentation or deceit (fraudulent misrepresentation).

To be successful, a plaintiff would have to prove, on a balance of probabilities, that an advisor or dealer either made a representation he or she knew to be untrue, or made a representation and was reckless as to whether it was true or not. The plaintiff would also have to prove he or she relied on the misrepresentation in making an investment and suffered a loss due to such reliance.

Here, Hav-Loc clearly misrepresented that it had conducted its own due diligence. The firm and its principal, Gevaert, knew this to be untrue. In the regulatory context, the Alberta Securities Commission commented on the seriousness of this kind of misconduct, but concluded the harm done was of a more general sort to investors as a whole, rather than harm to a particular investor. The evidence was not clear regarding the specific losses suffered to investors who may have relied on the misrepresentation.

Securities laws impose a standard of care that an advisor or dealer owes to the client. Advisors and dealers should understand that under securities legislation, they have a duty to treat their clients fairly. The concept of fairness presumes the duty not to make intentional or careless misrepresentations to one’s clients.

  • Richard Austin, is Counsel at Borden Ladner Gervais LLP in Toronto. This article was written with assistance by Michael Ahmadi & Katherine Spassov, Students-at-law.

    Richard E. Austin