The following summation is my response to accusations made against me by the B.C. Securities Commission. I did provide a written response addressing these charges to the Commission after the hearing was complete, however this response was not filed nor made available for public viewing despite assurances that it would be. It is my intention to have this response made available in order to defend my actions and my character and to provide a more balanced view of the issues and allegations made against me in the Commissions News Release dated May 5 / 97.
I decided not to put forth a defense at the time these charges were made primarily because of financial reasons and advise from my attorney's that such an effort or legal challenge would likely prove difficult to defend against. They explained that because of a lack of evidence supporting these claims it would come down to my word, or 'recollection of events' against that of a dozen or so complainants, and that I would stand little chance of successfully defending myself against such odds. I concluded at that time that it made little sense to invest approx. $200,000 in a defense that I had little chance of winning and therefore decided to let my fate rest with the Security Commission panel, a decision that I now strongly regret.
My side of this story has never really been told which is the purpose of this letter. While I am the first one to admit that misjudgments were made in several incidences which I claim full responsibility for, the vast number of these charges against me are based on errors not of my creation and were caused by a number of factors which I will now attempt to explain.
With respect to the first 'finding' listed in the Securities Commission news release dated May 5 / 97, that being the claim that I broke the 'know your client rule' by 'recommending that clients purchase securities that were not suitable for them in view of their investment needs and objectives'. On the contrary, I took a great deal of time getting to know my client's needs and objectives, my detailed notes of every meeting and conversation with my clients are testament to this. The fact is that these clients were not content with more traditional types of investments ( GIC's, mutual funds, etc. ) or they would never have invested in these other investments. Each of these investments had to pass ( what we were assured by our company president was ) a rigorous 'vetting' process, a process that often took many months and tens of thousands of dollars to complete. It was only after the investments received approval from our head office that we were allowed to offer them to our clients.
My duty as a financial advisor was to provide my clients with different and varied investment options and to provide them qualified advise on how best to accomplish their investment objectives. As an 'independent' advisor I was tied to no one company and could recommend a wide range of investment alternatives, all of which had been approved for distribution by our company, Vantage Securities Ltd. My quest for better investments is what got me interested in natural gas, tourism, etc.
These investments were presented to qualified clients as a means of diversifying their portfolios as well as potentially increasing their investment returns. Every client was encouraged to attend informational meetings regarding these investments. These presentations were conducted by the General Partner of the investment itself and were a forum where all of the details of the investment were explained in detail. A panel of so called 'experts' ( accountants, lawyers, etc. ) were present and could be questioned as to any aspect of the investment ( i.e.: potential risks, etc. ). I urged clients to attend these meetings and every client whom ultimately decided to make these investments had free and unfettered access to this information as well as these 'experts.' Client's whom decided to make these investments did so at their own free will, knowing that there were certain risks involved, and were never coerced in any way to make these investments by me nor the general partners involved.
The second and third findings state that I 'failed to disclose material negative factors associated with the investments, such as risks and liquidity.' Being a securities 'sales person' I have no doubt that my enthusiasm over the potential for these seemingly promising investments was sometimes hard to contain. For a lot of what seemed very good reasons at the time these looked like timely and promising investments, so much so that I invested virtually every penny I had in these very same investments and subsequently suffered the very same fate as my clients, or at least those whom had the misfortune of making what in retrospect we now know were poor investments ( Maxwell Energy common shares, Hakai Beach Resort. )
Contrary to this second finding, every client of mine was provided with complete, detailed information on these investments, including and most importantly an Offering Memorandum. As your report states "Each purchaser of the Maxwell Limited Partnership signed a subscription agreement confirming that the purchaser: 1) has received, reviewed and fully understands the offering memorandum and 2) has sufficient knowledge and experience the evaluate the prospective investment and fully understands the risks in purchasing the units". The obvious question is of course how can these people now claim that they did not receive an offering memorandum when each of them signed confirming that they did?
The fourth finding suggests that I 'told my clients that shares of Maxwell Energy would be listed on the Toronto Stock Exchange and that the shares would increase in value, contrary to the Securities Act.' I have never denied that I felt it likely that Maxwell Energy would eventually look for a listing on the TSE, indeed, this is the objective of almost every small company, or so I believe. I felt that it was my fiduciary responsibility to inform Maxwell investors of everything I knew about the company in which they were investing, withholding nothing of material value. This is why I told them that Maxwell 'may likely' seek a listing on the TSE. This is almost a foregone conclusion I believe as again this is the objective of most, if not all smaller companies. There is absolutely nothing wrong with expressing this in this way. At no time did I convey, orally or in writing that Maxwell "would be" listed on the Toronto Stock Exchange.
The final finding of the Securities panel claims that I 'distributed shares of Jungle-Sea Ventures Ltd. without a prospectus.' Jungle-Sea Ventures Ltd. is a foreign based company which is outside of the legal jurisdiction of Canada and therefore a B.C. prospectus is not required. Contrary to the report, investors in Jungle-Sea Ventures have done extremely well, receiving dividends every year ( except 2003 - fire ) since the investment was created in 1992. The total return on this investment return has exceeded 20% since its' inception 9 years ago.
The report goes on to say that my 'breaches of duty to my clients was egregious and damaging'. At no time did I, or would I knowingly breach the duties I owed my clients. I am simply not of that character which those who know me will attest to. I performed my job to the best of my abilities and at no time knowingly deceived anyone or pressured any client into making an investment they did not want to make. Such statements as 'He has left a trail of hardship and broken dreams' are a little melodramatic I believe, particularly for what is essentially a government document which should perhaps stick more with the facts, of which there are few. This statement ignores the fact that my investment advise made many millions of dollars for clients in other, more conventional types of investments over my 13 years in the securities business.
Significant too was the fact that the Securities Commission was only able to convince 12 of my 250+ clients to testify against me in this hearing representing approx. 5% of my clients. The vast majority of my clients were not involved with these 'other' investments as their objectives and / or comfort level was not consistent with these securities and so far as I was aware were relatively satisfied with the financial counsel I provided them.
It is true that I recommended clients consider purchasing shares in Maxwell Energy ( in an amount consistent with their investment objectives and comfort level.)
I had personally made ( and subsequently lost ) almost $1 million dollars investing in the stock and obviously wanted my clients to participate in what I sincerely felt was a sound investment with a very promising future ( natural gas ).
The Securities Commission report confirms that I wrote to clients prior to their investing and explained that "Maxwell is a small, highly volatile company, dealing in a highly volatile commodity, and regardless of how promising the Company's outlook is, this type of security should never comprise more than 10% of an individuals portfolio". Furthermore, I insisted each client discuss this investment with a qualified stock broker and in the situations where the client did not have a relationship with a broker I often recommended Bob Shepherd from Haywood Securities whom I trusted and who would assist the client with the evaluation and purchase of Maxwell shares. At no time did I sell shares of Maxwell Energy to my clients, this would have been impossible as our firm did not have the facilities to process stock trades.
It is the responsibility of every securities sales person to establish suitability and this job was in part left to Bob Shepherd. As the report states, Bob's responsibility as a broker handling the trade was to "make sure that the client realized that it was a VSE company, that it's business was natural gas, that it carried with it various risks and that they had a clear understanding of the (potential) risks associated with this type of investment". His responsibility was also to "determine the clients net worth and investment experience and from that information determine whether the amount they wanted to invest was appropriate". The report confirms that on several occasions I warned clients of the potential volatility and risk of the stock, yet insists that I "represented to all investors that the Maxwell investments were without risk" This is obviously a contradiction which only serves to confuse the issue. The clients I dealt with were not always 'experienced' investors, but were intelligent people, and realized that an investment in oil and gas was by no means the same as purchasing a GIC or Canada Savings Bond and to suggest that they believed this investment was "without risk" is an insult to their intelligence as much as it an insult to my professional integrity.
The statement that my marketing style was "aggressive" and the further statement "no alternative were offered to his recommendations" is false and without merit in my view. I'll admit that I was very 'ambitious' perhaps even overly so. I felt you had to be ambitious to succeed in the business I was in. My ambitiousness earned me considerable respected from my peers in the industry. To suggest that I "intimidated" some clients, "ridiculing them if they were reluctant to follow his recommendations" is a claim which I do not personally understand as this was never, ever my approach. My job was simply to advise clients of their investment options and provide as much information to them as they required in order to make sound investment decisions.
Many people use the equity in their homes for investing and there is nothing wrong with doing that providing the client realizes the repercussions such a decision can mean. These loans were generally small in relation to the equity in their homes and with the interest cost being tax deductible their after tax cost of these funds was often considerably less than the expected after tax returns on certain investments. This was a decision for the client to make, I only let them know that this option did exist but never knowingly pressured any one into doing anything that would not be in keeping with their comfort level or with their long term investment objectives.
The Report states (page 13 ) that in 1995 I "asked clients ( Mr. & Mrs. Orr ) for as loan."This is an inaccurate statement. What is true is that in 1995 Jungle-Sea Ventures required additional funding to compete their resort development and was successful in raising these funds ( $100k ) from the issue of 90 day promissory notes which were purchased by shareholders in the company. As the report correctly states, 'these notes were paid, in full and with interest within the required 90 day period.'
Page 16 of the report states that although "it is acceptable to consider the equity in a client's home when establishing their net worth" yet also states that I "overvalued my client's net worth by including in every case the value of the client's personal residence." Obviously there is a contradiction here but I believe that most financial advisors would take what is almost always a clients largest asset into consideration when calculating their net worth. Not to do so would be a significant error in my view.
The Report claims that my "new client application forms were not accurate, overstating the portion of the portfolio that the investor wished to invest in venture situations". It is important to realize here that it was the client whom determined what, if any portion of their investments they wished invested in higher risk investments. I had no part in this as it is a personal matter and one needs consider carefully the question of just how much of their money they are willing to risk in higher potentially producing types of investments. I had nothing to gain by recommending higher risk investments Vs. lower risk investments. In fact, quite the opposite occurred. Almost all of the funds which were invested in Maxwell Energy stock were moved from other assets which were sold in the clients portfolios. Because these funds were moved from my account, to that of a stock broker ( i.e.: Bob Shepherd ), I actually lost some influence over these funds as well as the management fee which I was being paid whilst they were within the portfolios I was helping manage on behalf of the client. My objective was clearly to maximize client gains even if it was at my own expense.
I take exception to Mr. Williams ( the person who purchased my business ) claim that I "abandoned any sort of portfolio approach to my clients' accounts" further stating that my files revealed no sound portfolio structure" This comment has little merit in my view. Contrary to the approach many of my colleagues took, I used tools taught to me such as the 'age balance indicator' ( ABI ) in order to determine correct portfolio balance. This tool has been used for many years in our industry and is invaluable in determining the amount of one's assets which should ideally be invested in the various areas of investment, be they low, moderate or high variability. My portfolio structures were so admired that I was often asked to teach these tools to many of my contemporaries and did so on a number of occasions in classes sometimes exceeding 50 persons.
The report details the trials and tribulations associated with two of the investments in question, those being the Hakai Beach Resort and the Maxwell Energy partnerships. I was the principal fund raiser for the Hakai Beach resort and was also, personally one of it's largest investors. This business had great potential, I believed, and was doing extremely well until 1994 when the normally reliable run of Salmon did not show up. This situation continued in 1995 and with no Salmon to catch and financial reserves scarce the Resort had no choice but to close. Losses generated from this closure were considerable and for a lot of us very painful. As badly as I feel for myself and especially the other investors whom saw such promise in this business, there is no way we could have foreseen two years without any fish, this was an unprecedented in modern history and fortunately for the new buyer this situation has seemingly corrected itself and the fish returned on schedule in 1996. Testament to our original business plan the Hakai Beach Resort has thrived under the new owners and is today in of the pre-eminent fishing resorts on the B.C. coast.
Contrary to the report, investors in either of Maxwell Energy's partnerships did very well. Shortly after this report was published these partnerships were sold and each investor received back their original investment as well as a substantial profit.
The Securities Commission levied a $50,000 fine against me, an amount which was later reduced to $12,000. The charge was reduced because I was finally able to convey my side of the story and though I admit I made mistakes which I now regret, at no time did I ever knowingly pressure or deceive a client and by my estimation only about 25% of what was stated in this report was actually accurate, hence the 75% reduction in this fine. I feel deeply for those clients' whom lost money in these investments, but must again insist that they made these investments freely, without duress and with all necessary information on the investment easily and freely available to them. Fortunately my client's portfolios were balanced and because of this the exposure to these ill-fated investments was very limited, in most cases.
I will continue to work on re-establishing my reputation in the business community. It is my sincere hope that anyone interested in the truth consider what I have stated above carefully, and where possible provide me the benefit of the doubt,
Sincerely,
Bruce Foerster
Feb. 2 / 05
