Ontario’s Superior Court of Justice has ruled that TD Waterhouse was within its rights to sell off a client’s stocks in order to meet margin calls, even though it acted before the deadline it gave the investor.

An investor, Bruce Paciorka, claimed damages from TD Waterhouse relating to three sell-offs made by TD Waterhouse on Paciorka’s margin account between June and October 2002. Paciorka alleged that the sell-offs were both premature and excessive, resulting in losses to him and entitling him to damages.

He claimed that TD Waterhouse was not in compliance with industry standards and negligent in its handling of his account and responsible for his losses. In the alternative, he claimed damages because TD Waterhouse breached its statutory duty to him, or its fiduciary obligation to him as an investor.

The first margin call at issue was made on July 15, 2002. In a letter, TD Waterhouse set out a period of 10 days by which Paciorka was required to make a deposit in cash or stocks of $231,998. On the same day, however, TD Waterhouse sold 14,400 of the plaintiff’s shares for US$427,916.

The second disputed margin call was made on July 31, 2002. In a letter, TD Waterhouse demanded a capital injection of $15,970 by August 13, 2002. On August 15, 2002 TD Waterhouse sold US$118,166 worth of shares.

The third margin call was made on October 7, 2002. By letter, a demand was made for a capital injection of $132,414 by October 18. Yet, on October 9, TD Waterhouse sold assorted shares.

Paciorka alleged that TD Waterhouse breached the standard of care owed to him when it failed to honour the time frame set forth in the demand letters and to make sales that were vastly in excess of the amount required to cover the margin calls.

However, the court found in the brokerage’s favour. It noted that, “There is ample Canadian authority supporting the broker’s contractual right to take market action when sufficient margin is not posted… The real issue is whether a broker has the right to take market action on the same day as the margin call. It is my belief that the law stands firmly on the broker’s side.”

The court said that, although the discount broker may follow a public relations policy of attempting to notify customers by phone when a margin call was being made, this notice is not required if the margin agreement specifically states that the defendant is entitled to act in its sole discretion.

“The courts give deference to these types of provisions because of clear policy concerns respecting the position of brokers who must be able to act quickly to preserve their own financial position. The nature of the securities being purchased and the volatility of the market for those sorts of securities require that those agreements which empower the broker to act must be respected,” it said. “In these circumstances, any delay on the part of the broker could potentially put the broker’s own money at risk. As has been established by the case law, a broker is not to engage in co-speculating with their customers. Thus, the obligation to make a demand and give reasonable time before acting that are typically imposed on a creditor are narrowed in this type of relationship, because of the unique circumstances associated with margin accounts where the security is publicly traded securities.”

The court also ruled that TD Waterhouse did not act negligently in connection with any of the credit sell-outs in Paciorka’s margin account. “To the contrary, TD Waterhouse initiated the sell-outs as a result of the margin deficiencies in the accounts after Mr. Paciorka failed to respond to the margin calls,” it found. “The timing and the amounts of the sell-outs were determined in accordance with the state of the margin deficiency in the account at the particular times. The parties did not maintain a fiduciary relationship… In addition, a lower standard of care was imposed on TD Waterhouse by virtue of its position as a discount brokerage and the characteristics associated with such a position. Thus, negligence on the part of TD Waterhouse has not been established.”