|
There have been a number of developments in securities
litigation in areas as diverse as brokers' liability,
take-over bid cases and shareholder's litigation. There is
not one common theme that ties these decisions together. It
is clear, however, that the courts and the legislature in
particular are increasingly sympathetic toward individual
investors and increasingly skeptical of broker-dealers,
issuers and insiders.
BROKER LIABILITY
A significant decision in the area of broker liability is
Blackburn v. Midland Walwyn Capital Inc., [2003] O.J. No.
621 (S.C.J.), aff ‘d [2005] O.J. No. 678 (C.A.), leave to
appeal refused [2005] S.C.C.A. No. 196. For the first time,
the decision imposes an obligation on broker-dealers to warn
their clients when they become aware that one of their
brokers has engaged in unauthorized or otherwise
inappropriate conduct in the account of one or more clients.
The warning extends not only to the clients in whose account
the activity takes place, but to all clients of the broker.
The Blackburns began a relationship with a young broker,
George Georgiou, in 1989. Over the course of six years,
Georgiou managed the Blackburns' investment accounts, first
at Midland Walwyn, then at Levesque. From the beginning of
his career at Midland, Georgiou was earning high commissions
for himself and for the firm, but was doing so in an
aggressive, manipulative and questionable manner. In 1993,
after numerous warnings, Georgiou was terminated by Midland
and was immediately hired by Levesque. In 1995, Georgiou was
terminated by Levesque for similar reasons and subsequently
left the investment industry.
During his relationship with the Blackburns, Georgiou
engaged in unauthorized trading in Dr. Blackburn's
investment account. When Dr. Blackburn confronted Georgiou,
he convinced Dr. Blackburn to enter an agreement whereby
Georgiou personally guaranteed that the Blackburns would not
suffer any losses as a result of the unauthorized trade in
exchange for their promise that they would make no
complaints to the investment firms with respect to
Georgiou's questionable conduct. In the end, the Blackburns
lost approximately $190,000 and brought an action against
Georgiou, Midland and Levesque, seeking recovery of their
losses.
In finding for the Blackburns on the issue of liability, the
trial judge held that, given the firms' knowledge of
Georgiou's trading practices, Midland and Levesque failed
both in their duty to inform securities regulators and their
duty to inform the Blackburns of Georgiou's misconduct in
the accounts of his other clients. The trial judge grounded
these duties in the regulations imposed by securities
regulators, established to protect the clients of brokers
and investment firms. Further, the trial judge relied on
cases that establish and apply the general principle of a
“duty to warn,” which flows from the duty of care owed in
negligence cases. On appeal, the Ontario Court of Appeal
upheld the trial judge's imposition of a duty to warn on
Levesque and Midland.
Blackburn was recently applied by the Quebec Superior Court
of Justice in Markarian v. Marches mondiaux CIBC inc.,
[2006] J.Q. no 5467 ( J.C.S.). In Markarian, the court
considered the actions of CIBC World Markets Inc. (“CIBC”)
with respect to its clients Haroutioun and Alice Markarian
(the “Markarians”). The Markarians routinely signed
documents presented to them by their CIBC broker, Harry
Migirdic (“Migirdic”). According to the Markarians, they
never received the documents before signing, nor did they
have an independent understanding of their meaning, relying
always on Migirdic's explanations. The trial judge concluded
that Migirdic took advantage of the Markarians' trust by
asking them to sign blank guarantees, which Migirdic used to
guarantee losses in the accounts of other clients that he
was managing illegally.
For years this situation continued, despite the fact that
the Markarians' low-risk accounts were purported to
guarantee the high-risk accounts of people they did not
know. Although CIBC's compliance department repeatedly
questioned Migirdic and his branch manager, Tom Noonan, with
respect to these irregularities, the situation was allowed
to continue for several years, until Migirdic confessed to
CIBC. In spite of Migirdic's confession and his assertion
that the Markarians had no knowledge that their accounts
guaranteed the badly failing accounts of strangers, CIBC
chose to act upon the guarantees, causing the Markarians a
loss of $1.5 million. The Markarians pursued an action
against CIBC seeking reimbursement of their losses. In a
lengthy and strongly worded condemnation of CIBC's actions,
the trial judge ordered that the bank return the Markarians'
illegally appropriated funds. Further, the trial judge
awarded the Markarians $50,000 each in general damages, and
an additional $1.5 million in punitive damages, for a total
award of more than $3.1 million.
Although the trial judge refers to the decision in Blackburn
several times in Markarian, his most significant reliance on
Blackburn is with respect to the duty of investment firms to
inform their clients of broker misconduct. The trial judge
heard evidence that, throughout the course of his employment
with CIBC, and certainly prior to obtaining the fraudulent
guarantees of the Markarians, Migirdic had been reprimanded,
suspended, and threatened with termination several times due
to violations of internal and external rules. Relying on
Blackburn, the trial judge held that CIBC was negligent in
failing to warn its clients that its employee was dishonest
and breached regulations.
|
