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