Should investment advisers be allowed to sleep with their clients?

A lawsuit involving RBC Dominion Securities could hold the answer

Mixing business with pleasure

OCEAN/CORBIS

For obvious reasons, doctors are not allowed to sleep with their patients. In Ontario, where the rules are strictest, even a consensual affair will trigger an automatic five-year suspension. The guidelines for lawyers are not quite so specific, but considering that every attorney is duty bound to avoid “conflicts of interest,” it’s hard to imagine a sex-with-client scenario that isn’t out of bounds. Even soldiers have rules to obey when it comes to romance. They are free to fraternize with fellow troops—as long as they’re not deployed together. (Apparently, sex in battle is bad for discipline.)

But what about investment advisers? Should brokers be allowed to pursue more than a client’s portfolio?

That question is now at the heart of a $2.1-million lawsuit that could force Canadian banks and brokerages to impose much tighter controls on what their employees do after hours. Currently, there is no rule that prohibits (or even discourages) investment advisers from sleeping with a customer. “I strongly believe that an investment adviser having a sexual relationship with a client does affect their ability to give independent investment advice,” says Joseph Groia, a long-time securities litigator in Toronto. “There is no reason why the industry wouldn’t be better off by saying: ‘If you want to have a personal relationship with someone who is your client, thou shalt send them to another adviser.’ ”

The lawsuit, filed against RBC Dominion Securities, was launched by Irene Slegers, a Strathroy, Ont., woman who claims she lost her entire life savings—nearly $1.6 million—after a year-long tryst with her investment adviser. In court documents, Slegers says her broker, Paul Sullivan, told her she was “the one” and led her to believe that wedding bells were in their future. But when the relationship abruptly ended, she claims, Sullivan paid “insufficient attention to her investments,” resulting in hefty losses when the markets plummeted in 2008. “[Sullivan] placed himself in a conflict of interest position by pursuing a personal and sexual relationship with Slegers while continuing to advise her on her investments,” contends her statement of claim. “[He] placed himself in a further conflict of interest by not terminating the adviser-client relationship after Slegers ended their personal relationship.”

Sullivan, who works at an RBC branch in London, Ont., denies any wrongdoing. In a statement of defence, RBC admits its employee was intimate with Slegers but says “such encounters were infrequent and occasional, and were not part of a long-term relationship.” Sullivan also insists that his “conduct was not contrary to any industry bylaw, regulation or standard, and did not affect his ability to provide competent investment advice.”

Although that’s technically true, the optics certainly aren’t good. “I teach ethics to all the M.B.A. students going through the school, and I tell them that the perception of a conflict is just as important to manage as a real conflict,” says Richard Powers, a business professor at the University of Toronto’s Rotman School of Management. “So you would certainly advise against someone starting an intimate relationship with a client. The bottom line is this case is generating press—and not positive press. And that’s why the perception of a conflict can be just as damaging as a real conflict.”

However, Powers also points out that there is much more to this case than simply sex. In order to win damages, Slegers will have to prove that Sullivan was actually negligent in some way, whether it was making unauthorized trades or investing in securities that were too risky for her stated comfort level. “She can’t successfully sue for poor performance,” he says, especially considering how many others lost their life savings during the 2008 collapse. “There is no crystal ball. But as long as the adviser acted consistently, I’m not sure she is going to be successful just on the fact that they’ve had an intimate relationship.”

Ten years ago, Slegers was badly injured in a car accident that, to this day, has left her unable to work. According to her statement of claim, she received a $243,000 settlement, which Sullivan, an old high school friend, “urged” her to invest with him. “Sullivan assured Slegers that given their long-standing friendship, he would pay special attention to her investments and take care of her portfolio,” the claim reads.

His advice, she says now, was faulty. According to her version of events, Sullivan pushed her to open a margin account, allowing her to use credit to boost her investments. He also advised her not to repay her student loan, now more than $48,000. By early 2007, when their friendship turned sexual, Slegers says she believed Sullivan was treating her money as if it was his own. “Sullivan was in a relationship with another woman,” the statement of claim says. “Despite this, Sullivan told Slegers that Slegers was ‘the one’ and that she was the type of woman he wanted to settle down with and eventually marry.” In her eyes, he was a source of “emotional and financial stability.”

By May 2007, however, Sullivan had still “not broken up with the other woman,” and Slegers “began to question whether [his] behaviour on a personal level might not be affecting his management of her portfolio.” In a series of emails, she told Sullivan “that he had used and deceived her.” By the end of the year, the affair was over.

“At no point from November 2007 onward did Sullivan advise Slegers that given her inability to work and lack of other resources she should adopt a conservative, long-term approach to investing,” the claim says. “Instead, he continued to advise her to make use of the margin that was available to her to buy more stocks in the same sorts of investments that he had previously recommended.”

In the fall of 2008, when the markets melted, Slegers was forced to sell all her equities in order to pay back her hefty margin debt. She was left with “virtually nothing.”

“There was a huge level of trust and reliance, and my client believed they were going to have a long-term future together,” says Kenneth Dekker, Slegers’s lawyer. “In late 2007, she suddenly realized that she was going to have no source of income other than her investments. In this action, we say that steps should have been taken to make sure that money wasn’t lost.”

Not surprisingly, Sullivan has a very different recollection of his relationship with Slegers—both professional and personal. In the statement of defence, RBC and Sullivan describe her as “a well educated, intelligent, sophisticated investor” with an M.B.A. from the University of Western Ontario’s Richard Ivey School of Business and “a history and knowledge of investing in high-risk companies.” It was Slegers, he says, who wanted to purchase high-risk stocks and open a margin account. “Sullivan repeatedly advised [her] to adopt a more conservative approach,” says the statement of defence. “She did not follow Sullivan’s advice even while the value of her accounts fell precipitously.”

As for the sex, Sullivan says it was “sporadic” and “never had any impact on the advice given or his handling” of her accounts. “Slegers was never ‘deceived’ by Sullivan and there was never any ‘relationship’ between Sullivan and Slegers to end,” his lawyers wrote. “Sullivan never told Slegers that she was ‘the one’ or that he wanted to settle down with Slegers and eventually marry her.”

Like the industry as a whole, RBC does not have a specific rule that forbids sex with clients. The company’s code of conduct, available on its website, simply demands that every employee “consistently maintain the highest possible standards of honest and ethical behaviour.” Claire Holland, an RBC spokeswoman, would not answer specific questions about Sullivan’s case because it’s still before the courts, but she did say “that a thorough internal investigation by [Dominion Securities] determined the adviser’s management of the client’s portfolio was appropriate at all times and that the adviser remains with the firm in good standing.”

A judge may reach a different conclusion next April, when the trial is scheduled to begin. But regardless of the outcome, Groia, the securities lawyer, says the case should be a warning for other advisers. “I don’t think anyone at Dominion Securities is happy to be defending a case where there was that kind of personal relationship,” he says. “It may very well be that the stocks were suitable. It may very well be that everything this fellow did for this woman turns out at the end of the day to be perfectly okay. But nonetheless, everyone’s view of the case is going to be coloured by the relationship.”




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Should investment advisers be allowed to sleep with their clients?

  1. What if the relationship between the investment representative broke-up a marriage and caused spouse to end up in the hospital?

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