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Margaret Davis holds up an agreement between her and Earl Jones at an information meeting along with other investors in Montreal, Sunday, July 12, 2009. Quebec's financial market authority has frozen the assets of the financial advisor. (Graham Hughes)
Margaret Davis holds up an agreement between her and Earl Jones at an information meeting along with other investors in Montreal, Sunday, July 12, 2009. Quebec's financial market authority has frozen the assets of the financial advisor. (Graham Hughes)

Personal Finance

Tips on how to avoid a financial scam Add to ...

In his three decades as a financial adviser in Montreal, Robert Kerr crossed paths with Earl Jones and marvelled at his achievements. "He had been very successful and I didn't know quite how. But whatever he was doing, he was doing it right. At least that was my feeling."

Mr. Kerr, the founder and chief executive officer Kerr Financial Corp., was as stunned as everyone else to hear that Mr. Jones had vanished, allegedly taking with him an estimated $50-million of his clients' money. The alleged theft arose from what authorities describe as a large Ponzi scheme, a financial scam where money from new investors was used to pay existing investors.

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It's not always easy to spot a scam artist - at one point Mr. Jones taught financial literacy courses - but there are steps that investors can take to protect themselves from financial fraud. Most of them revolve around doing research and asking questions.

Be skeptical, vigilant and informed

"People shouldn't be afraid of asking questions, even if it seems they are bothering their adviser," says Mr. Kerr, the former president of the Canadian Association of Financial Planners. "It's your money."

The case of Mr. Jones brings up an old adage and a golden rule of investing: If it seems too good to be true, it probably is. "High steady returns" at a time when the economy is tanking should spark concern, Mr. Kerr says. "They don't often go together."



A lot of trust is built through word of mouth and people rely on what they have heard, instead of doing their own due diligence. Paul Bourque, partner at Deloitte LLP


An investor asking for his or her money back and not getting it in a timely fashion, as was the case with Mr. Jones' clients, is another troubling sign. "The fact that they can not get your money for three weeks should raise questions. Why would it not be available?" Mr. Kerr asked.

Getting account statements late, or not at all, and if your adviser is using a closely-related or small external auditor are other reasons to be concerned. Investors should demand and receive a detailed and easy-to-understand investment statement each month, preferably one that comes from an independent third party.

Work with a licensed professional

A major problem for Mr. Jones's clients was that he was operating outside of any regulatory framework, says Paul Bourque, a partner of forensic and dispute services with Deloitte LLP.

In Quebec, it is illegal to call yourself a financial planner unless you are registered with a financial planning authority. Although Mr. Jones dodged that issue by calling his company Earl Jones Consultant and Administration Corp., he was, by all accounts, running a full-service financial investment advice shop, preparing his client's tax returns, paying their bills, administering their wills and providing them with a return on their investments.

In Canada, registration with a regulator is not mandatory. But, had Mr. Jones been registered, with either Quebec's financial watchdog, the (AMF), or the Investment Dealers Association (IDA), he would have been subject to regular compliance checks and forced to adhere to standards that would have ensured the safekeeping and segregation of client's money.

Belonging to a regulatory body also ensures that the person handling your money has the proper training. "In this case he was just advising people without any registration and [his clients]had no clear idea of what his qualifications were," says Mr. Bourque, who used to head up the enforcement division at the Investment Industry Regulatory Organization of Canada (IIROC).

Do your own research

Ultimately, the onus lies with investors to do their own homework. They need to be sure they are entrusting their money with an adviser who is part of an organization with checks and controls over his or her activities, says Mr. Bourque. "A lot of trust is built through word of mouth and people rely on what they have heard, instead of doing their own due diligence."

Because some - although not all - of the regulatory bodies have compensation funds, investors who have been swindled by a registered dealer also stand a better chance of recouping a portion of their losses.

Already, a Facebook group of Earl Jones clients has swelled to more than angry 100 members. Neil Stein, an insolvency lawyer representing some of Mr. Jones' clients, says it "is difficult to speak of what funds may be recovered at this stage." Media reports suggest there is very little money left. Although Montreal police are investigating Mr. Jones's firm, the man himself has not been charged with any crime.

Investors who suspect they have been cheated or defrauded should go to their local police or the RCMP, as well as their provincial securities regular, who will investigate the complaint, Mr. Bourque suggests.

IIROC, Canada's main investment industry watchdog, recently opened a whistleblower hotline where concerned investors can report any suspected market wrongdoing, like securities fraud. IIROC oversees stockbrokers, companies that trade in stocks, bonds and mutual funds while the Mutual Fund Dealers Association of Canada (MFDA), regulates companies that sell mutual funds to investors.

Canadians who have a complaint about their investor can go to The Small Investor Protection Association and Investor Education Fund websites for basic information.

Provincial regulators have also ramped up their efforts to educate the public on this front and many websites carry detailed information on how to recognize, avoid and report financial fraud, as well as tips on how to choose a financial adviser.

The Ontario Securities Commission has a phone number investors can call to make sure their adviser is registered. They can also provide information including how long an individual or firm has been registered, whether there are any terms and conditions on their registration, and if there have been any disciplinary actions against the individual or firm. Click here to see the OSC's tips on how to recognize a scam.

Roma Luciw is a writer and web editor of the Globeinvestor.com personal finance site. Please send any comments and story ideas to rluciw@globeandmail.ca.

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