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© Copyright 2000 Rogers Media. The following article first appeared in the January 2001 edition of
BENEFITS CANADA magazine.
What happened at Standard?
Standard Life employees exploited the company's international trading system to make personal
profits. Other companies should be on guard.
By Barbara Clapham
A glitch in the valuation system at standard life Assurance Company and employee wrongdoing has turned out
to be a costly combination. They've led to the firm firing 13 employees (who are now leading a wrongful
dismissal suit against the insurance company), paying out half a million dollars to its unitholders and
dealing with some unwanted media attention.
The terminated employees reportedly found a flaw in the pricing mechanism of two of the company's
segregated funds, and then took advantage of the defect to make personal profits. According to Michel
Dufour, manager of communications at Standard Life in Montreal, "the problem was that [the unit values]
were valued in the U.K. and posted in Canada 24 hours later. There was a time zone difference between the
actual computation in the U.K. and the posting of the unit values later on in Canada."
Since the valuation of the funds took place a day after the close of trading in their underlying
securities, employees could discern whether the value of the funds would increase or decrease the next day
and trade accordingly.
While these 13 employees only made personal profits of $20,000 combined, according to Standard Life, their
greed came at the expense of other unitholders in the fund. With the Standard Life employees actively
buying and selling, the rate of return on the fund would be different from what it would have been without
this kind of noise trading. As well, the employees bought or sold at an artificial price and unitholders
who traded did not receive a fair price.
Earlier this year Transamerica Life Canada encountered a similar problem. Beginning in November 1999, a
group of its employees exploited a flaw in the valuation method of the company's NN Information Technology
Fund. Based on the six-hour time difference between Toronto and Luxembourg, where the fund was
administered, employees would make late day trades in Toronto to take advantage of the day's closing value
of the fund.
Since the technology fund invested primarily in Nasdaq-listed companies, an employee could monitor the
direction of the Nasdaq, and if it was going up would buy the fund. Conversely, if the Nasdaq was falling
the employee would sell the units.
The trading scheme at Standard Life was only brought to light late last year when the employees launched
their wrongful dismissal suit. "They were violating our code of conduct," says Dufour, "which is very
specific and says that it is prohibited for anyone to use privileged or confidential company information
for their own personal gain."
As a result of employees' breach of trust, Standard Life paid the unitholders a half-million dollars as
restitution to bring their holdings back to where they would have been had this flaw not existed. While
this amount is small in the grand scheme of things, Standard Life could pay a greater price as a result of
its clients' loss of faith.
Standard Life was able to catch employees through its internal compliance monitoring. Not only are the
violators gone, but the company has also fixed its trading system.
"We have eliminated the time difference between the closing of markets in Europe and the posting of those
unit values in Canada, so now the values posted are actual values and not those of the previous day," says
Dufour.
With the increasingly global nature of fund management, other companies should take heed and be on the
alert for deficiencies in their own systems.
Barbara Clapham is editor of Canadian Investment Review and a contributing editor to BENEFITS CANADA. bclapham@rmpublishing.com.
*** ***
CONFERENCES
Canadian Investors' and Issuers' Forum on Asset Securitization
Jan. 25 and 26, 2001
Metropolitan Hotel, Toronto.
A comprehensive look at asset securitization, one of the fastest growing methods of financing for Canadian
corporations and financial institutions.
To register, call (877) 927-7936, or in Toronto, call (416) 927-7936.
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