Former advisor fined $30K, suspended over unsuitable recommendations

IIROC has fined a former Saskatoon-based investment advisor $30,000 and suspended him for two months over unsuitable recommendations that led to large losses for three clients.

Troy Nagy, who worked in a branch of CIBC World Markets at the time of his misconduct, recommended “concentrated positions in an alternative investment product that he did not fully understand,” an IIROC settlement agreement says. His actions resulted in combined client losses of almost $1 million over a five-year period.

The settlement says Nagy also had personal financial dealings with two clients.

In 2010, Nagy recommended that three of his clients (one man in his 40s and a couple in their late 50s) invest in a private placement fund that was not listed or quoted on any exchange, the settlement agreement says. The Offering Memorandum for the fund, filed in 2010 and updated in 2011, stated the security could be hard to sell, that a positive return was not guaranteed and that significant risks were involved, the agreement adds.

Nagy learned of the fund through a sales presentation at his firm and then conducted his own research, the agreement says.

He concluded that the fund was “a lower-risk fixed income product, which held first priority mortgages against established commercial properties in Canada, and that it was similar to a mortgage fund.” He also believed it would provide daily liquidity.

However, the settlement agreement says, the fund “was an alternative investment product which was high risk, and could be illiquid. If Nagy had conducted the necessary due diligence, the risk level and lack of liquidity of the ROI PPF investment would have been, or ought to have been, apparent.”

Between 2010 and 2012, the three clients to whom he recommended the fund invested a combined total of approximately $2.2 million, with the couple investing the most at about $1.6 million, the agreement says. They were “not told about a potential lack of liquidity.”

Further, all the clients had a high level of concentration in the fund, which “significantly increased the risk level” of their portfolios, the agreement adds.

Between 2010 and 2016, all three clients wanted to sell the fund units “numerous times,” the agreement says. That wasn’t possible “due to the lack of liquidity, lower price and the 2012 suspension of all redemptions.” Further, when trading was possible, units “traded at a lower price than Nagy expected,” the agreement says.

The clients were able to redeem some units that resulted in proceeds in 2013 and 2014. However, between 2010 and 2016, the couple lost $806,000 in total, or 34.1% of their portfolio, the agreement says. The other client sustained a loss of $163,000, or 38.7%.

Over the same period, the S&P/TSX Composite gained, as did the DEX Universe Bond Index, the agreement adds.

Since Nagy “failed to perform the necessary due diligence,” the agreement says, he “was not in a position to recommend [the fund] to these clients, or to ensure that it was a suitable investment for them.”

Nagy was terminated in 2016, the agreement says, and the clients received compensation from CIBC: $535,000 for the couple and $160,000 for the individual. Nagy has repaid $663,000 to the firm through “payroll deductions and deferred compensation share forfeitures.”

With respect to his personal financial dealing with two clients, the settlement says Nagy made “29 monthly deposits of $1,800 totalling $52,200 into a credit union account” held by the clients—a couple in their 70s. The deposits were made through his personal bank account between 2010 and 2013, the clients were listed as active, and his firm was not aware of and hadn’t approved the transactions, it adds.

In addition to his fine and suspension, Nagy must pay costs in the amount of $5,000.

Read the full settlement agreement.