The Court of Appeal for British Columbia has ruled that an investor who was unsuitably invested in a high-risk options trading program by his investment advisors should be held partly responsible for the program’s losses because he went along with the unsuitable strategy.
According to a decision from the B.C. Court of Appeal, the Supreme Court of B.C. ruled that the investment advisors were negligent for failing to meet Know York Client (KYC) and suitability standards when they put a client into what the court says “can only be described as a high-risk options program”. It found the advisors, and their firm, Canaccord Genuity Corp., vicariously liable for his losses.
Both sides appealed the decision. The firm and the advisors appealed the ruling of negligence, and argued that the investor should be held at least partially liable, too. The investor appealed the fact that the court only awarded damages for his net losses (subtracting the initial gains generated by the strategy).
In the decision for Marlin Investments Inc. v. Moldovan released Thursday, the B.C. appeal court dismissed Canaccord’s appeal on negligence, but ruled that the lower court did err in not finding the investor “contributorily negligent”. The appeal court ruled that the fault should be divided 80% to the firm and the advisors, and 20% to the investor.
The investor in the case is a company, Marlin Investments Inc. (MII), which the decision indicates was a company set up by Kenneth Marlin, in 2004 when he was about 80 years old and retired. “The company is clearly Mr. Marlin’s alter-ego,” the appeal court said. It noted that Marlin had a history in the investment business, and that he “held very senior positions in the 1970s and 1980s in investment firms in Alberta selling mutual funds and investment contracts, he was a victim of the Principal Group’s financial collapse in the late 1980s. He was “virtually wiped out” and made an assignment in bankruptcy in 1988.”
The appeal court noted that trial judge found the firm and the advisors in the case negligent, ruling that they did not properly follow KYC practices, and that they filled in certain information on Marlin’s KYC form before sending it to him. Ultimately, the trial judge found that the advisors “failed to take reasonable care in assessing MII’s suitability for participation in the options program,” and ” if a proper assessment had been done, MII would not have been accepted as a client.”
On the issue of contributory negligence, the trial judge found that the advisors “did not do what a reasonably prudent investment advisor would and should have done, and they breached their duty to ‘know your client’. In those circumstances, I am not prepared to find that MII was also at fault for the damage caused,” the trail judge said.
While the appeal court agreed with the trial judge on the basic question of liability, it also found that the trial judge did not “come to grips with the central question in the consideration of any contributory negligence …”
Instead, the appeal court ruled that, “It is clear that Mr. Marlin ‘did not in his own interest take care of himself’. Although he may not have been responsible for the erroneous information on the account forms, he chose to participate in the options program and to continue participating in it despite his inexperience with options trading, his limited financial resources and his ailing health. Mr. Marlin’s failure to take reasonable care of himself contributed to his losses.” The appeal court ruled that Marlin was 20% responsible for his losses as a result.
On the question of calculating the damages, the court also dismissed the investor’s appeal, ruling that the trial judge was right to deduct the investor’s initial gains of about $98,000 from its ultimate losses of over $300,000 when assessing damages.