Out of the fry pan: on playing musical trading accounts (UPDATED)

Update:  I am happy and relieved to say that the rest of my US positions have been moved now to TD Waterhouse.  It is now only a matter of getting them to transfer any remaining dividends will be paid on the 15th of June.  Also, I’ve learned the reason for Penson Worldwide’s financial woes: a bad bet on a horse race track.

(NB: I’ve started to see my final positions show from Questrade show up in my TD Waterhouse US funds account after I published this post–so good news.  I’ve got my fingers crossed for now.)

In the Spring of 2011, when I was in the process of getting out of the United States tax system, my lawyer advised that I move my accounts out of TD Waterhouse into a company that had no holdings in the United States, as he thought the US could hold TD’s US assets as leverage against me.  So I took his advice, and moved my bank accounts to a credit union and my investment accounts to Questrade, a Canadian only company.  Thus, if things got nasty with FATCA, I would create distance between me and the United States.  I wonder how many US laws I broke doing this.

A few weeks ago, I decided to move my portfolios back to TD Waterhouse.  I showed them my CLN.  My reason:  One day in April, I tried to trade online, but was unable to do so at Questrade.  Neither was I able to reach anyone on the phone at Questrade.  Simple problem:  I can’t trade.  Simple solution:  I move back to a more robust platform and show them my CLN.

Questrade is a nice little Canadian discount brokerage.  But I learnt a few weeks ago that Questrade is just an “introducing broker” for a clearing house called Penson Financial Canada, which actually holds the stock portfolio (called, the “carrying broker”).  This is in the fine print, though not in the main advertising.  To be sure, when you speak to customer service, they never mention Penson Financial by name unless you press them.  They refer to Penson as the “backroom”.  It is not a backroom of Questrade.  It is a different company altogether, and it is an American-based company.  Penson Worldwide is the owner.

Penson Worldwide is bleeding money; they lost $48.47 million or $1.73 per share just last quarter alone.  The share price has fallen precipitously (see below chart).  It is now probably just a matter of time (days ? weeks?) before Penson goes the way of MF Global, Lehman Brothers, and Bear Stearns.  I spoke with Questrade, and their position is that everything is fine because Penson Financial Canada is a separate company as required by Canadian securities regulation, and therefore Penson Financial Canada will not be affected if Penson Worldwide becomes insolvent.  The word on the street, however, is that a person’s stock portfolio may be frozen for a period of time if things get messy.  Caveat emptor.

I have been in the process for the last few weeks of transferring everything back to TD Waterhouse–that’s right, for weeks, since April 25 when I was first in contact with TD Waterhouse; and I still have some remaining positions stuck over at Questrade. They insist that they have 10-20 business days to do the transfer (having apparently lost or never received the first corporate transfer request that TD says it made on May 10), but the manner in which it has taken place has been very troubling, and if I hadn’t been a squeaking wheel, I wonder if I would have made it even this far.  I’ve been on the phone numerous times insisting that they finish the transfer; I’ve even warned them that I would be blogging on the subject and that my blog has 5,000 views per day.

That warning got me some attention at first, but two weeks later, I still have one portion of an account that they have failed to transfer out:  that is the portion of my account which is held in US funds [**please note the update above that all these positions have now been transferred].  I asked Questrade where Penson physically holds my stock certificates and cash positions, and their representatives were unable to tell me anything except that Penson Financial Canada has its operations in Montreal.  This is a black box of the investment world that even many employees of a retail brokerage firm have never opened.  The answer is perhaps that the stocks and cash are actually held nowhere at all, neither in Canada nor the United States, because they don’t actually exist except as lines on an electronic ledger somewhere, since the current world of finances is inscrutable.

I want to apologize to anyone who asked me where I put my stock portfolio if they followed my lead to Questrade.  It certainly did not fulfill the requirements of my lawyer.  I moved from a Canadian based company with a minority of holdings in the US (TD) to a US based company (Penson Worldwide) with a minority of holdings in Canada (Penson Financial Canada).  Out of the fry pan, into the fire.  Any holdings under $1 million are protected, but trading access and money could be held up for I don’t know how long, when Penson Wordwide finally goes under.

10 year chart Penson Worldwide: source, TD Waterhouse

Penson Worldwide: Source TD Waterhouse


18 thoughts on “Out of the fry pan: on playing musical trading accounts (UPDATED)

  1. Thanks, Petros, for sharing this information. Sometimes it’s as important to know what not to do as to know what to do.

  2. Thanks, Petros. I’m passing this information on to another “U.S. person” in Canada who also has his/her entire portfolio with Questrade.

  3. @baird Remember, the portfolio is protected up to 1 million dollars by Canadian Investor Protection Fund. http://questrade.com/legal/member_iiroc_cipf.aspx

    I hope that when it comes to trading that all Canadians benefit from a country that still enjoys the rule of law, unlike the United States, where crooks and banksters manage to escape punishment for theft and fraud.

  4. @Petros

    All customers of MF Global Canada(which was a seperate operating subsidiary based in Canada of MF Global)got all their funds back in full. However, there accounts were frozen were several weeks while they were being transferred to RBC and Fidelity Canada I believe. A couple of other points no has been no brokerage firm failure in Canada before MF Global for at least ten plus years(Lehman Canada actually never filed for bankruptcy and was bought in full by Barclays who bought Lehman’s operating assets like computers and buildings but did assume any liabilities other than employee salaries in the US). Some of this might explain why the process was so slow with MF Global Canada. My understanding though of MF Global Canada was that once the US Parent filed there was no realistic possibility that the Canadian wing would continue to operate. I suspect it would be the same with Penson.

  5. @ Tim: That is a frightening prospect for Canadian investors: your funds and positions are guaranteed, but you have no access to them for several weeks.

  6. The last article cited by Tim says:

    Sure, plenty of Canadian investors haven’t been thrilled with the way MF Global Canada’s bankruptcy has played out. The Canadian arm of MF Global’s empire wasn’t actually insolvent (it was forced into bankruptcy due to a short-term capital shortfall, when funds residing south of the border got frozen in its parent’s U.S. bankruptcy), and all of its funds appear to have been present and accounted for, yet Canadian clients went weeks with their accounts frozen, unable to trade or even to get to their cash. And the regulators, the CIPF and the court-appointed trustee haven’t done the best job of communicating their progress to nervous stakeholders.

    See, this is where my question about where our cash and securities are actually held by Penson is pertinent. Even if guaranteed by CIPF, there is the worry that funds would be frozen for a period of time, who knows how long.

    When Penson goes down, it is not likely to bode well for Questrade–They would be store front with no backroom.

  7. My personal opinion is avoid all non bank/credit union owned brokers(owned as in owned not just having a marketing agreement with a particular credit union) unless one of the following conditions is met:

    1. You are getting a highly superior level of customer service.
    2. The broker is privately owned by someone with a lot of money and reputation to lose. In this category would be places like Fidelity Canada, RJ O’Brien Canada(primarily a futures brokerage that has been picking up a lot of MF’s business), maybe Canacord Capital. (Where the ownership has unlimited liability is even better but no place has the arrangement anymore other than Brown Brothers Harriman).
    3. Even if the two conditions are met there is always the risk of fraud or embezzlement bringing down the company although someplace like Fidelity is pretty sophisticated in this regard.

    As an aside I heard from several people that in the midst of the financial crisis back in 2008 the familiy that owns Fidelity were prepared to write out personal checks out in the hundreds of millions of dollars if any of Fidelity’s money market funds were in danger of breaking the buck. While Fidelity’s role in financial crisis is not often discussed they in fact delivered the killer blow to both Bear Stearns and Lehman when Fidelity’s money market funds refused to roll Bear and Lehman paper.

  8. @ Tim And above all, avoid the United States investments which are as likely to be fraudulent as on the level, and where banksters have more protection than retail investors.

  9. @Petros: When you transferred back to TD Waterhouse, were you presented with any requests to identify your citizenship or to fill out the US person form. I’m quite confident we (and the world) would have heard about it if you did, but it is being discussed on another thread.

  10. This is why I can’t — for the life of me — understand why segregated accounts are not required ** BY LAW ** in the US, as in the UK and Switzerland. The only explanation I can gather is “corruption” at the top, which is no surprise.

    Personally, I would avoid anything related to the US. After all, the government makes it very clear through it’s actions that top-level banksters can steal your money with total impunity.

    Real Estate here is very good, and harder for a foreign government (the USA) to demand a piece of it. As far as stocks go, I agree with Mona Lisa. For me at least, I’m done with it because I think the people who make the REAL money are the Wall Street firms. My next investment will be a Eucalyptus farm.

    By the way, if anybody is ever interested in some joint projects with me, they could “possibly” get an investor visa and apply for citizenship after 4 years. I said “possibly” because jobs have to be created. Either way, with or without employees the investments are a heck-of-a-lot better than trusting your money to Wall Street.

  11. Penson Worldwide’s problems stem from sweetheart bond deal to an insider. The insider owned a horse track, Retama Park, and he was a member of the board; Penson lent $42.6 million in bonds to Retama Park. Long story short: the race track apparently couldn’t pay, and the insider resigns from the board.

    So this is what passes for securities regulation in the United States. A broker which carries people’s retirement money in Canada collateralizes its own debt with bonds from horse track. This is Stephen Dunn’s “rule of law”?

    See http://www.securitiestechnologymonitor.com/news/-27911-1.html

  12. Pingback: Out of the fry pan: on playing musical trading accounts (UPDATED) | The Righteous Investor

  13. Petros–What reaction did you get from TD Waterhouse when you presented your CLN? Did you have to complete any IRS forms, eg W8-BEN?

  14. My rep there hadn’t seen one before. He only understood the issue of FATCA because I’d explained it to him–at least that’s the impression he gave me. He took a photocopy to for the file. I was not required to fill out any IRS forms, nor would I have done it if asked.

  15. @all, my predictions are coming true, at least on the United States side of the border. See, http://www.bloomberg.com/news/2012-05-31/grace-financial-seeks-injunction-against-penson-financial.html

    On the Canadian side: http://www.theglobeandmail.com/search/?q=Penson+financial

    On the other hand, maybe its restructuring (announced today) will provide stability in Canada too: http://www.marketwatch.com/story/peak6-and-penson-announce-formation-of-apex-clearing-2012-05-31

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