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© Copyright 2000 Rogers Media. The following article first appeared in the January 2001 edition of
BENEFITS CANADA magazine.
A standard problem
Standard Life has fired 13 employees for illegal trading. Something you might not have known about
if they hadn't sued for wrongful dismissal.
By Murray Gold
Ethics again.
The Standard Life Assurance Company has fired 13 employees in its Montreal office after uncovering a
trading scheme that some of its employees engaged in for their personal benefit. The scheme reportedly
involved the alleged use of confidential inside information affecting how the funds were valued.
In November, The Globe and Mail quoted Claude Garcia, president of Standard's Canadian operations,
as saying that segregated funds were valued a day after the close of trading in their underlying
securities. It would appear that the employees profited by being able to predict, with certainty, whether
the funds would increase or decrease in value the next day, on the basis of the closing prices of the
fund's underlying securities.
Garcia told The Globe that policyholders "lost a total of about $500,000 allegedly as a result of
the employees' trading." The clients have been reimbursed for these losses.
A similar trading scandal was uncovered at Transamerica Life Insurance Company of Canada in August. That
scandal involved the same type of scheme, except on a different order of magnitude. Transamerica agreed to
pay $6.2 million in restitution to 12,971 policyholders.
CONFIDENCE AND TRUST
People who invest other people's money need to have their confidence and trust. Indeed, that is integral to
the investment decision-making process.
Investors need to have confidence in management's communications. They need to feel secure in the integrity
of the firm's financial statements and the independence of its auditors. They need to trust in the good
faith and high standards of corporate directors. And they need to know the organization is in full
compliance with the rules designed to ensure that shareholders' interests are protected against conflicts
and abuses.
The Standard case came to light because 13 employees were fired, and have sued the firm for wrongful
dismissal. Standard Life did not publicly disclose the alleged trading schemes at the time they were
discovered because, the company said, the losses were "not material."
But materiality is in the eye of the beholder. Yes the sums were small and the policyholders were
reimbursed. But the significance of this breach should not be measured by the dollars at stake. Either
investors can put their trust in a service provider, or they cannot.
Those allegedly involved were supposed to be working for Standard Life. Standard was supposed to be working
for its clients. Instead, the allegation is that employees used information they gleaned from Standard not
to benefit the company's clients, but to benefit themselves. The conflict was direct and material.
Standard Life should have publicly disclosed the trading scheme at the earliest opportunity. Early, frank
disclosure--combined with corrective action and a commitment to rectify the underlying problem--are
important to the integrity of the markets in which Standard deals. Immediate disclosure would have sent a
signal that any conflict between Standard and its clients won't be tolerated.
Employees have been terminated, clients have been reimbursed and the valuation mechanism that allowed this
abuse to occur has been eliminated. These steps were essential. But they are targeted directly at this
specific abuse.
Increasingly, the question that institutional and retail investors are asking is whether the culture of
compliance is intact in Canada's money management industry. Does something more need to be done to
ensure that service providers value the integrity of their operations, and are committed to ensuring that
their services are delivered in their clients' interest, free of conflict and in compliance with all
investor protection rules?
The answer to that question will tell the real story.
Murray Gold is a partner in the pension law section of Koskie Minsky in Toronto. mgold@koskieminsky.com.
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