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Joel
Posted by Mr. Joel W. on Mar 30th, 2017 9:34am

                                                      DUTY TO WARN

                                                     by Joel Wiesenfeld

In investor loss actions against dealers and financial advisors, it is not uncommon for claims of a failure of a duty to warn, and corresponding findings of a Judge, whether on a pleadings motion, a class action certification motion, or in a trial or appeal decision, regarding the alleged duty to warn.  Duty to warn is a pithy phrase; yet in different contexts it may have very different meanings, sometimes with far less substance or definition than warranted by its use.  The 34 cases listed below all utilize the phrase, and a comprehensive reading of them leads to my posing the question of whether there exists a duty to warn in the following factual scenarios.

 

Is there a duty to warn:

by the financial advisor to his/her client; and/or

by the dealer to that client

-       where issues arise such as the suitability (or ongoing suitability) of a particular investment, investment strategy (such as borrowing to invest), level of risk, understanding of investment product or strategy that are or should be evident at the time of the investment or implementation of the strategy or on a suitability review or that arise subsequent to the investment?

-       really, this ‘duty to warn’ is usually just another way of phrasing the more general duty of providing investment advice that meets KYC, suitability and KYP requirements.  Most of the cases in the list below fall into this category.

-       in margin default/account liquidation cases, an alleged duty to notify (or warn) the client is generally determined by the wording of the account/margin agreement entered into between the client and the dealer.

Is there a duty to warn:

by the financial advisor and/or the dealer to a third party

-       on competency issues of the accountholder to family members or others, or in the event of a joint account where one of the accountholders may have such issues, a duty to notify (or warn) the other?

-       where the trading in the account raises concerns of large financial losses that would impact others, such as family members?

-       obviously serious privacy issues are engaged in these questions.

-       in Merit v. Mogil, one of the issues at trial was whether the financial advisor and dealer had a duty to warn the guarantor of the account of an individual of large losses arising from futures trading, over and above the annual positive audit confirmations sent to the guarantor.  In the particular circumstances of the case, there was not a finding of a duty to warn.

Is there a duty to warn:

by the dealer to the client base of its financial advisor

-       where an issue has arisen concerning the conduct of the financial advisor in relation to a particular client or clients (such as discretionary trading, off book investments, borrowing from a client, guaranteeing losses, etc.) that was not disclosed or evident to the dealer at the time of its occurrence, but which the dealer has become aware (usually as a result of a client complaint)?

-       for example, see the Markarian decision.

-       the issue has within it a duty to investigate component (on a red flag theory), whether or not the dealer suspects that the issues  might be widespread  within the financial advisor’s book.

Is there a duty to warn:

by the dealer to the its clients

-       where an issue presents (usually having to do with an error in the dealer’s systems or an investment product or strategy that might affect the entirety or a cross section of its client base), and not limited to a particular financial advisor)?

-       see Robert v. Versus, where the failure to warn clients of a systems error and its correction was held to be a negligent misrepresentation.  See also Hurst v. Armstrong & Quaile.

-       the question sometimes posed is whether the existence of a duty to warn is dependent on the standard of care owed to the client (as held in Carom v. Bre-X and in Transpacific v. Sprott) or exists independent of the standard of care (as found in Collette v. Great Pacific).

Is there a duty to warn:

by the dealer to a subsequent dealer to whom the financial advisor has departed; and/or

by the dealer to its former clients who have transferred their accounts to the new dealer

-       in circumstances where the original employing dealer is aware of financial advisor conduct issues, over and above reporting such issues on [whatever the current mode of regulatory reporting now is that is the successor to the old uniform termination notice] (ie, by a direct communication to the dealer)?

-       read Blackburn for a resounding yes to this question, and TechHi to the opposite effect, noting that in both cases, the same financial advisor and dealers were the defendants.  The trial and appeal decisions in S. Maclise were also to opposite effect, on the facts of that case.

-       what level of certainty is required by the dealer, noting defamation and interference with economic relations liability issues for the dealer if its allegations prove incorrect?

Conclusion

In the present regulatory climate, driven more by investor considerations and less by contractual and common law limitations beneficial to registrants, a dealer’s and financial advisor’s decision making on whether there is a duty to warn in specific circumstances is clarified by asking the question “what is in the clients’ best interests”.  Failure to ask and respond to that question may very well lead to civil and regulatory liability.  As is usual in investor loss civil litigation, the factual context of the relationship of the parties, their respective conduct usually over an extended period of time, the investor profile of the client, and the securities regulatory overlay, tends to be determinative of liability issues.

 

                                                        LIST OF CASES

                                                          Duty to warn

  1. 820823 Ontario Ltd. et al v. Bruce Kagan (August 25, 2003) Toronto 01-CV-213776CM2 (Ont.S.C.J.).
  2. 875121 Ontario Limited v. Nesbitt Burns Inc. (1999), 50 B.L.R. (2d) 137 (Ont. S.C.J.).
  3. Baker v. Midland Doherty Ltd., [1987] B.C.J. 603 (B.C.C.C.), reversed [1988] B.C.J. 537 (B.C.C.A.).
  4. Blackburn v. Midland Walwyn Capital Inc. et al) (2003), 32 B.L.R. (3d) 11 (Ont. S.C.J.); aff’d (2005), 195 O.A.C. 181 (Ont. C.A.).
  5. Canarim Investment Corp. v. Mercer, [1985] B.C.J. No. 484 (B.C.S.C.).
  6. Carom et al v. Bre-X Minerals Ltd. (April 1988), Toronto, 97-GD-39574 (Ont. Gen. Div.) (Motion to Strike the Statements of Claim as disclosing no reasonable cause of action); (1998), 41 O.R.(3d) 780 (Ont. Gen. Div.) (Motion for leave to amend the Statements of Claim to add the fraud on the market theory); (1999), 46 B.L.R..(2d) 247 (Ont. S.C.J.) (Motion for certification of these proceedings as class actions); unreported endorsement on costs of Winkler J., dated June 24, 1999.
  7. Central B.C. Planners Ltd. v. Hocker (1970), 72 W.W.R. 561, 562, 565 (B.C.C.A.), leave to appeal to S.C.C. refused 16 D.L.R. (3d) 368.
  8. Collette v. Great Pacific Management Co., [2001] B.C.J. No. 253 (B.C.S.C.); [2002] B.C.C.A. 195; [2003] B.C.J. No. 529; [2004] B.C.J. No. 381; [2004] S.C.C.A. No. 174 (S.C.C.).
  9. Doraldick Investments Ltd. v. Canadian Imperial Bank of Commerce (1998), 44 B.L.R. (2d) 192 (Ont.C.J.(Gen.Div.)); affr’d (2000) 5 B.L.R. (3d) 200 (Ont. C.A.).
  10. Fogo v. FCG Securities Corp. (1998) 172 N.S.R. (2d) 266, 524 A.P.R., 266 (N.S.S.C.).
  11. Giesbrecht v. Canada Life Assurance Co., 2011 CarswellMan511 (Man. Q.B.); 2013 MBCA 53 (Man. C.A.).
  12. Hurst v. Armstrong & Quaile Associates Inc. (2007), 39 B.L.R. (4th) 230 (Ont. S.C.J.); additional Reasons  (2007), 39 B.L.R. (4th) 254 (Ont. S.C.J.).
  13. Ivany, et al v. Financiere Telco Inc., et al, 2011 ONSC 2785 (motion decision).
  14. Ivany et al. v. Financiere (certification motion); Ivany v. Canadian Western Trust Company (appeal) et al, 2013 ONSC 6347 (certification motion); Ivany v. Canadian Western Trust Company, 2013 ONSC 6969 (leave to appeal motion).
  15. Kerr v. CIBC World Markets Inc., 2017 ONSC 777 (trial judgment)
  16. Labricciosa v. TD Waterhouse Investor Services (Canada) Inc. (February 13, 2004) Toronto 01-CV-216709 CM; appeal dismissed, Endorsement of Labrosse, Weiler and Blair JJ.A. dated February 25, 2005.
  17. Markarian v. CIBC World Markets Inc. et al (February 13, 2004) Toronto 01-CV-216709 CM; appeal dismissed, Endorsement of Labrosse, Weiler and Blair JJ.A. dated February 25, 2005.
  18. Merit Investment Corp. v. Mogil, [1989] O.J. No. 429 (Ont. S.C.J.) (trial judgment)
  19. Paciorka v. TD Waterhouse (July 24, 2007) Toronto 05-CV-005093 (Ont. S.C.J.).
  20. Parent et al v. Merrill Lynch Canada Inc. et al (March 11, 2008) Toronto 02-CV-226371CM2; Costs Endorsement dated June 11, 2008.
  21. Politsky v. C.I. Mutual Funds Inc., [2007] O.J. No. 330 (Ont. S.C.J.).
  22. R. H. Deacon & Co. Ltd. v. Varga, [1973] O.R. 233 (C.A); [1975] 1 R.C.S. 39 (S.C.C.).
  23. Robert v. Versus Brokerage Services Inc. (c.o.b. E*Trade Canada), 14 B.L.R. (3rd) 72 (Ont. S.C.J.); additional reasons 2001 CarswellON 2128 (Ont. S.C.J.).   
  24. Ryder v. Osler et al (1985), 49 O.R. (2d) 609 (Ont. H.C.J.). 
  25. S. Maclise Enterprises Inc. v. Union Securities Ltd. et al, [2008] A.J. No. 370 (Atla. Q.B.); appealed [2009] A.J. No. 1405 (Alta. C.A.). 
  26. Shetty v. Gill, [2004] B.C.J. No. 268 (B.C.S.C.).
  27. Srivastava v. T.D. Waterhouse, 2003 CanLII 16441 (ON SC).
  28. Stein v. Cartier Partners Financial Services Inc. et al, 2009 CanLII 69787 (ON S.C.).
  29. Straus Estate v. Decaire, [2011] O.J. No. 737 (Ont. S.C.J.); aff’d 2012 ONCA 918.
  30. TechHi Holdings Limited v. Merrill Lynch Securities Inc. et al, [2004] O.J. No. 2265 (Ont. S.C.J.); ruling as to costs [2006] O.J. No. 1278.
  31. Transpacific Sales Ltd. (Trustee for) v. Sprott Securities Ltd., [2001] O.J. No. 597 (Ont.S.C.J.); aff’d  (2003), 67 O.R. (3d) 368 (Ont. C.A.).
  32. Young v. RBC Dominion Securities, 2008 CanLII 70045 (On S.C.).
  33. Valeurs mobilières Desjardins Inc. v. Lepage, 2011 QCCA 1837.
  34. White Tower Burgers Ltd. v. TD Securities Inc., [2004] O.J. No. 2986 (S.C.J.).

 


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