Another very negative story on CM in Fin Post
Senior learns tough lesson on perils of leveraged investing
Placed borrowed $90,000 in CIBC's Nasdaq index fund
Jonathan Chevreau
Financial Post
Carlo Allegri, National Post
David Meal borrowed $90,000 from CIBC to invest in the CIBC Nasdaq index fund. The money was later moved to the Global Technology fund.
It's late 1999. Imagine you're a bank loans officer and a 72-year-old retiree proposes that you lend him $90,000 to buy a Nasdaq index fund. He's not in the best of health, but offers to put up $10,000, for a 9-to-1 leveraged investment loan. His only income is $2,000 a month from his RRIF and he still has a $66,000 mortgage on a modest home in the country.
I don't know about you but if it were me, I'd decline making the loan.
Trouble is, this is a true story. The retiree in question is David Meal of Georgetown, Ont., originally from Scotland. The lender was the local branch of the Canadian Imperial Bank of Commerce.
According to Robert Goldin of MacGold Direct Inc. -- an investment dispute consultant retained by Meal -- within the two years that followed, Meal lost $71,500 on the value of the CIBC Nasdaq index fund (which was switched in March, 2000, to the equally volatile CIBC Global Technology fund). He has also been paying $400 a month interest on the loan (taken out at half a point above prime), and has been forced to make periodic margin payments to keep the loan within the bank's 9-to-1 guidelines. In all, counting $27,000 in taxable annual distributions (despite the losses), Goldin estimates Meal is out $131,500. That's his estimate in a December, 2001, letter sent to Howard Maker, the Canadian Banking Ombudsman.
As it stands, Meal and his wife Agnes live in fear of the bank calling his loan and losing their small condominium apartment. Goldin thinks he may have a case but that Meal can't afford the $50,000 or more that would be needed to take on the bank in a protracted legal battle.
Neither Maker nor the CIBC's internal ombudsman, Lachlan McLachlan, are particularly sympathetic to Meal's plight. Their view is he was a moderately knowledgeable investor with high risk tolerance who was hell-bent on implementing his investment strategy, and only wanted the bank to help him facilitate it.
The bank claims it advised against the Nasdaq investment in favour of a more balanced approach. And so, as Maker concluded after his review of the case, "We see nothing unfair in him being required to accept the unfortunate consequences of his decisions."
No doubt this sad tale at the height of the technology bubble has been enacted in thousands of variations throughout North America. It has taken this long for this particular episode to wend its way from the bank to the ombudsmen, securities regulators, consultants and now to the press. It may yet end up in the courts.
I can see the bank's point of view. Had Meal's gamble worked out more happily, it's doubtful we would have heard about it. This is a man who also invested in Bre-X, JDS Uniphase and Nortel Networks. In fact, his investment in the Nasdaq fund was well-timed, since the index continued to rise in value until March, 2000. Had he cashed out and repaid the loan at that point, he would have been well ahead of the game. In hindsight, his real mistake was switching from the bank's Nasdaq index fund to its Global Technology fund.
Despite the bank's claim it was carefully "monitoring" his investment, this chance to take short-term trading profits was not capitalized on. Instead, his local CIBC financial advisor -- Janice Kouyoumijia -- seemed fixated on a long-term buy-and-hold approach. "You are investing for the long term, and understand that equities provide the best opportunity for long-term growth," is the boilerplate description the bank used to summarize Meal's investment approach.
Excuse me? We're talking about a man who has already completed his biblically promised three score and 10 years. Just how long did the bank think he had left to recoup his disastrous investment?
As Meal's lawyer, Roger Fisher, puts it in a letter to the CIBC, Meal is "an elderly man in poor mental and physical health ... [with] ... a history of health problems, including serious heart problems and several mini-strokes. He is also diabetic. His doctor has warned him to avoid any stressful situation."
The 9-to-1 ratio is far in excess of what someone buying a stock on margin would be granted through an investment dealer, no matter how young or aggressive the investor were. It is also well beyond the typical 3-to-1 leverage deals that more aggressive mutual fund dealers might extend.
The banking ombudsman explains in a Feb. 6 letter to Goldin that "the bank does not, as a technical matter, use the term 'margin' in its material." Instead it speaks to permitted "loan to value ratios" backed by specific securities. It further explains "the bank is not an investment dealer and is not subject to IDA regulations regarding margin. It is governed in this regard by its own internal credit policies."
Unhappily for Meal, those policies permit loans of up to 90% of the value of the security pledged, if the borrower meets its credit criteria and if the security is eligible mutual funds. It also explains the bank's own mutual funds are deemed eligible.
Which perhaps is the crux of the matter. This is hinted at by Ontario Securities Commission inquiries officer Denis Donnelly when he refers Meal (in a Dec. 4, 2001 letter) to a 1988 OSC bulletin that expressed "regulatory concern that dually employed salespersons at financial institutions might engage in excessive lending to encourage mutual fund sales." As Goldin points out in an interview, the bank stood to benefit both on the interest on the loan as well as the commissions and management fees on the funds Meal bought.
This appears to be a classic tale of greed and questionable judgment. To be determined is in what proportions those sins should be attributed to Meal, the bank or both parties.
jchevreau@nationalpost.com |
