Ontario courts have clarified the law dealing with the obligations of investment brokers to their clients after dismissing all but two of an investor’s claims in a $7-million action against Jones Heward Investment Counsel Inc. because the portfolio manager had stayed within the company’s balanced growth model portfolio.

At the outset, Jean Dupéré (via his private holding company, 2878852 Canada Inc.) and Jones Heward agreed on a balanced growth portfolio with the objectives of safeguarding assets while generating income and growth. The model portfolio, which Jones Heward had applied to each of its clients’ accounts, includes a component for speculative investment in smaller companies, provided such an investment fit within principled parameters and the portfolio objectives. The strategy also calls for retaining no more than 5%-8% of the account in cash or short-term investments.

At the trial’s 2004 conclusion, Justice Ted Matlow ruled there had been an agreement between the parties and that Jones Heward had the authority to invest Dupéré’s funds according to the Jones Heward mo-del portfolio.

Matlow concluded Jones Heward acted honestly, in good faith and without negligence — with the exception of two instances of mismanagement. The first was holding between 30%-40% of the funds in short-term investments for 22 months; the second was the speculative purchase of shares in Kazakhstan Minerals Corp.

Matlow awarded damages of slightly more than $1 million to Dupéré, minus $102,830 for fees in 1998 that the investor had refused to pay Jones Heward.

On Jan. 12, 2007, the Ontario Court of Appeal agreed with Matlow’s conclusions and dismissed Jones Heward’s appeal with respect to the two exceptions.

This case demonstrates how the courts will treat a managed account or deal with a portfolio manager’s obligations, says Paul Le Vay, a lawyer with Stockwoods LLP in Toronto, who represented Dupéré.

“If the underlying contract clearly states investments are to be made in accordance with the model portfolio, that is the basis on which portfolio managers’ conduct will be assessed,” he says. “The other side of the coin is: if they deviate from what they’ve contractually agreed to, they’ll be responsible for damages flowing from that.”

The relationship between Dupéré and Jones Heward began in February 1993 with an investment of $5.5 million. Dupéré was a lawyer who was no longer in active practice. As president of a Quebec mining company, he had amassed a considerable fortune, which he decided to invest in Ontario.

The investment account agreement between Dupéré and Jones Heward was evidenced by a letter giving Jones Heward authority “to make and implement investment decisions for our account as you, in your discretion, deem proper and advisable from time to time.” It relieved Jones Heward of liability for errors of judgment or other acts or omissions, provided it acted in good faith and exercised due care.

Jones Heward provided Dupéré with quarterly and monthly account statements. Dupéré’s portfolio manager met with him annually and periodically reviewed his investments by telephone and other communications.

The first three years so satisfied Dupéré that he deposited another $14.4 million into the account in January 1996. But, over the next 22 months, 30%-40% of these funds were in short-term investments, such as GICs, T-bills, high-grade commercial paper and banker’s acceptances, earning only 5%-6% a year. In February 1997, Dupéré made a formal complaint about these short-term investments.

As well, in March 1996, Jones Heward purchased almost $90,000 worth of Kazakhstan stock in the account. It was dumped in September 1997 for about $6,000.

Over six years, Jones Heward invested in 159 stocks for Dupéré. In 1997 and 1998, Dupéré came to regard many of them as speculative and contrary to what he recalled as the agreed-upon strategy of investing in blue-chip stocks.

The parties were unable to resolve their differences. In December 1998, Jones Heward terminated Dupéré’s account, which stood at approximately $28 million. From 1993 through 1998, Dupéré earned a profit on his investment of more than $8.2 million, equal to an annual rate of return of about 10.7%.

He sued for $7 million in damages, but died suddenly after the discovery stage but before trial.

Matlow concluded Jones Heward acted appropriately, except for the two impugned investments. He held that Jones Heward — through its expert witness — conceded the Kazakhstan shares should not have been purchased, and thus awarded Dupéré $100,865.

@page_break@Regarding the retention of almost $6 million of the assets in short-term investments for 22 months, Matlow rejected Jones Heward’s position that it was acting on Dupéré’s oral instructions. He favoured Dupéré’s evidence to the contrary, mainly because of the absence of notes confirming the oral instructions.

As for Jones Heward’s failure to reinvest the short-term investments, Matlow wrote: “The defendant’s default was likely the result of oversight, which, under the circumstances, amounted to negligence and breach of the agreement that required the defendant ‘to exercise due care’ as a condition of avoiding liability.” He awarded Dupéré $919,439 on the matter.

Matlow found as fact that Du-péré was an experienced businessman and investor who understood how his account was being managed, concluding: “Dupéré was content to receive the benefits of the defendant’s services despite occasional complaints … this action is based, in part, on the plaintiff’s wish … to be relieved of the losses of those purchases that depreciated in value.” IE