An Ontario court decision ends another round in the long-running contest between investment advisors and investment dealers over ownership of an advisor’s book of client accounts. But the battle will probably continue.

In an Oct. 12 ruling, replete with criticism of BMO Nesbitt Burns Inc.’ s management, Justice Peter Jarvis of the Ontario Superior Court of Justice has ruled the firm violated an “implicit covenant of fair dealing” in denying former broker Richard Clark the right to sell his book of business to a colleague.

“This is a ruling that is undoubtedly going to send shock waves through management offices of every investment firm in the province,” says Toronto lawyer Kenneth Dekker, a specialist on recent Canadian cases involving investment advisors’ books of business.

“Investment firms typically view the books of business as belonging to the firms,” Dekker says. “But this ruling verges on elevating brokers’ proprietary interest in their books into a contractual right. The only thing more shocking about this ruling would be if it is not appealed.”

JoAnne Hayes, Bank of Montreals senior manager of corporate communications, confirms an appeal is indeed being considered.

Justice Jarvis found that Clark — who had discussed selling his $42-million book with a colleague in Nesbitt’s Burnamthorpe branch in Mississauga, Ont., shortly before that branch was closed and Clark was terminated in April 2004 without notice and without cause at age 52 — had every right to expect to be able to sell his book.

This finding is largely based on a long-standing tradition of such transactions within the firm, including one earlier management-approved deal in which Clark had purchased another broker’s $15-million book of business for $55,000 in 2001.

“There was no justification at all to not allow Mr. Clark to proceed to attempt to sell his book,” Justice Jarvis concluded. “[A] sale could almost certainly have been accomplished within a reasonable period of time had he been able to stay.”

Well before Clark was terminated, Justice Jarvis noted, a colleague had expressed an interest in buying the book from Clark, who was contemplating retirement in order to pursue other business interests after 17 years at Nesbitt. Judge Jarvis noted the two advisors had informally agreed that the book was worth “upwards of $175,000.

“Any reasonable agreement would have received the approval of management acting out of faith,” Judge Jarvis wrote, after noting that Nesbitt manager Ray Lessard’s actions in firing Clark without notice and then transferring his book to a broker within Lessard’s own branch at the “advantageous” price of $50,000 “had the effect of protecting, if not increasing Mr. Lessard’s own participation in its proceeds.”

Justice Jarvis found that Lessard had dealt with Clark — who at the time of dismissal was embroiled in a bitter marital separation battle in which damaging, although later withdrawn criminal allegations had been asserted against Clark — “in a cold and impersonal” manner “calculated to hurt.”

Judge Jarvis awarded Clark 18 months pay in lieu of notice, along with $90,000 for the value of his book and $25,000 in damages stemming in part from Lessard’s conduct toward Clark.

Despite this outcome, Clark is not happy about the outcome from a financial perspective. “The amount of money I won pales in comparison with what I would now be earning,” he says. “And my lawyer says [Nesbitt] will appeal on the basis that it doesn’t want it getting out that you can sell your book.”

Noting that the judgment assesses the value of Clark’s book well below the price at which he expected to sell it, Clark suggests Nesbitt singled him out to try to roll back brokers’ proprietary control.

In a business built on brokers’ performance, Clark asserts, the right to sell books of business stands as a key incentive. “Everyone should have a right to sell their book,” he insists. “Nesbitt had a policy of allowing you to sell the book. That’s how they reward you for bringing in the clients.”

Nesbitt has the right to appeal the decision for up to 30 days following the Oct. 12 judgment. At the time of publication, the investment dealer was reviewing the decision and considering whether it should appeal.

Malcolm MacKillop, the lawyer in Toronto who defended Nesbitt, is not discussing the case at present.

@page_break@Lawyer David Harris, the wrongful dismissal specialist who represented Clark, notes that Justice Jarvis’s ruling affirms precedents established in several recent cases, including two from British Columbia that have affirmed brokers’ proprietary interests in their books of business.

“I was surprised that [Nesbitt] didn’t acknowledge ownership,” Harris says. “It seems to want to establish the principle that it is not going to allow brokers to keep their books. But this decision adds weight to individual brokers’ proprietary control.”

Not all legal analysts agree, however. In Calgary, Gary Clarke, a lawyer specializing in employment law who follows cases involving books of business with special attention, thinks the Clark case should be looked at “in its isolated facts” — especially considering the well-established practice of buying and selling books within Nesbitt.

“I don’t see the court doing anything here in terms of changing the law in this area,” he says.

Concerning the practice of selling books within the investment dealer, says Clarke: “You can’t sell what you don’t own, which indicates some
sort of ownership was accepted within the firm. But this [basis for ownership] will only be the case within a firm at which this was customary.”

Unlike Dekker and Harris, Clarke doesn’t view the Ontario Superior Court decision as establishing a broader entitlement to brokers throughout the industry. “I don’t see everyone having an ownership on the basis of this decision,” he says.

Instead, Clarke suggests the case should be seen as a wake-up call to the industry that ownership of books is an issue that warrants clarification within investment firms, a conclusion he also draws from a B.C. case earlier this year in which RBC Dominion Securities Inc. sued Merrill Lynch Canada Inc. for poaching an entire brokerage team away from DS’s branch in Cranbrook, B.C.

In that judgment, delivered by Justice Mary Southin of the B.C. Court of Appeal, each of DS’s departing employees was found to be entitled “without fear of litigation, to prepare a list of his own book of business from the records of the brokerage house. To hold in the 21st century that an advisor, who usually, by considerable personal diligence, has built his book of business, must rely on his memory for the full names, addresses, telephone numbers and e-mail addresses of his clients, is not, in my opinion, in the interests on the clients and, therefore, is not in the public interest.”

Clarke notes that Justice Southin had underlined the fact that DS had no formal agreement with its advisors regarding ownership of the books, an issue that he notes also arises from the Nesbitt case.

“Anytime you have a situation in which a past practice is not clear,” Clarke suggests about these disputes over books of business, “you’re always better off when you have formal agreements.” IE