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| Court certifies class action against TD |
| Suit covers all B.C. investors, who,
since 1994, claim brokerage units skimmed profits in foreign-exchange
trades |
Mid-October, 2001
By James Langton
The supreme court of British Columbia has certified a lawsuit against TD
Bank’s brokerage units concerning its foreign-exchange pricing
procedures as a class action. If successful, the suit could cost the
firm millions of dollars.
The suit alleges that TD Waterhouse Investor Services Inc. and TD
Securities Inc. gouge their clients when converting currencies to make
trades on foreign markets. Lawyer Joe Groia, founder of Toronto’s Groia
& Co., is representing the plaintiffs in the suit, along with B.C.-based
attorney Ward Branch of Branch Macmaster.
This preliminary certification covers all B.C. investors who have made
trades involving conversion of foreign currency with TD Waterhouse and
TDSI since May 16, 1994. Groia suggests the suit could be expanded to
cover the entire nation because the client agreement that is the subject
of the suit is used by TD Waterhouse across the country. He refuses,
however, to speculate about whether the case will be expanded
nationally. There are just the two B.C. representative plaintiffs, he
notes.
Jessica Mossman, a media relations representative with TD Waterhouse,
says the firm intends to appeal the original certification decision on
the grounds that its foreign-exchange practices are "lawful, fair and
consistent with industry practice."
Groia contends that it is not relevant whether TD is consistent with
industry practice, and that in any case its practice is neither fair nor
lawful.
In certifying the suit, the court frames the suit’s central issue as
whether TD Waterhouse’s foreign-exchange rates on clients’ securities
transactions amount to "a scheme to obtain millions of dollars of
undisclosed profit," or are simply a transparent and universal industry
procedure that allows it to cover its costs and manage the currency risk
of foreign-exchange transactions.
Alleging that it is nothing more than a profit grab, the plaintiffs
accuse the firm of breach of contract, negligence and unjust enrichment.
The representative plaintiffs in the suit, Mark Scott and Chris
Ballingall, have been offered a $35,000 settlement by TD to correct
their specific case, but they are plowing ahead with the case instead.
Scott and Ballingall brought the suit accusing the broker of making an
unfair and undisclosed profit when setting the foreign-exchange rate on
four trades they made in the stock of an Indonesian company, T.T. Medco,
on the Djakarta Stock Exchange. The trades involved the conversion of
Indonesian rupiahs to U.S. dollars.
Scott claims to have uncovered the anomaly when he saw the conversion
rates TD Waterhouse used on the trades in his account statements and
noticed that they were higher than the Reuters’ rate at the time. Scott
is described in the B.C. court’s decision as an experienced investment
banker, although Groia refers to him as an "experienced investor,"
noting that he does not have extensive foreign-exchange experience.
TD Waterhouse has admitted it made mistakes on three of the four trades
by Scott and Ballingall, which it offered to rectify with its
settlement. Instead, it faces a proposed plaintiff class of between
19,533 and 29,331 individual accounts, and between 119,110 and 178,665
individual transactions in B.C. alone. Damages could be in the millions
of dollars.
If every trade skimmed an extra $100 for the broker, it would be facing
at least a $12-million hit. It is alleged that each trade probably would
spark a claim of between $50 and $400, which would put possible damages
somewhere in the range of $6 million-$71.5 million.
Mossman says she doesn’t know if TD has made any provision for possible
damages stemming from this case.
Many of the facts of the case are not in dispute. The broker does not
disclose its foreign-exchange rates in client agreements, except to say
that they are set on the day of the trade. The firm unilaterally sets
rates on Canada-U.S. trades, which are the majority of trades handled.
TD Waterhouse adds a point to the quoted bid-ask spread set on the
interbank spot market. Is this justified, or is it a sly source of
profit?
Groia argues that TD Waterhouse was not entitled to profit on top of the
trading commissions it charges unless it makes disclosure of how it set
rates, and its clients consent to the firm profiting from that
procedure. He says that whether TD Waterhouse is just following industry
practice is not the issue in dispute. The issue, he says, is that the
practice is employed without the knowledge and consent of the firm’s
clients.
"It is not relevant [whether this is industry practice]," says Groia.
What’s important, he says, is that the firm is acting as an agent for
clients and it is making an undisclosed profit in the process.
In its defence, TD Waterhouse insists that its currency-exchange
procedures are disclosed to clients in their account statements, albeit
after the fact. It insists that it needs the extra point on the spread
to manage the risk of currency fluctuations between the trade date and
settlement, although it concedes that this does present the opportunity
for profit.
The firm argues that it is not obligated to forgo profit because its
contract with clients allows it to act as principal or agent in a trade,
and it chooses to act as a principal. It also argues that, as an
experienced investment banker, Scott should have known that there would
be an opportunity for currency-exchange profit in such trades.
The court found that, whether the brokerage was operating as an agent or
principal, it could still be found that the firm did have a duty not to
profit. Still, it requests better arguments on the issue from the
plaintiffs.
Ultimately, this initial decision is a slam dunk for the plaintiffs: the
B.C. court found that the class action can be certified, covering every
foreign-exchange trade made through TD Waterhouse in B.C. in the past
seven years. It also has spelled out the 10 common issues which should
be considered at trial, including the regulatory duties that are owed by
the firm in setting f foreign-exchange rates, the industry customs in
setting these rates and whether these are reasonable.
In the meantime, the court has concluded that a class action is the best
way to consider these issues. "Behaviour modification is the primary
goal of this class proceeding. I must assume, for this purpose, that the
allegations of wrongfully taking an undisclosed profit can be proven,"
the judge wrote.
"It is in the public interest to ensure that the defendants are not
permitted to fill in contractual gaps the way they see fit without
judicial controls, and to be sure that they do not and are not tempted
to take advantage of their position."
Although Round 1 has gone to the little guy, the case still appears to
be far from over. Mossman indicates that the firm intends to defend
itself vigourously in this case. With the prospect of lengthy appeals
ahead, it appears that the case could drag on for years. IE
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