Financial advisors and investment dealers will be sleeping more soundly, thanks to a recent ruling from the Supreme Court of Nova Scotia that past complaints against an advisor cannot be used in a current dispute.

“It’s definitely good news,” says Ellen Bessner, a partner with national law firm Gowling Lafleur Henderson LLP in Toronto. “It’s great that this decision is set out as clearly as it is.”

The decision in MacGowan v. RBC Dominion Securities Inc., revolves around a disgruntled couple, Bruce and Susan MacGowan. They were RBC Dominion Securities Inc. clients from 1997 to 2002. Their accounts were closed after they suffered significant losses. The following year, they took legal action against DS and their investment advisor, Hugh Bagnell, claiming negligence, breach of fiduciary duty and breach of contract. These claims were based on allegations of unauthorized and unsuitable trading in the couple’s accounts.

The MacGowans also contended in their statement of claim that DS failed to supervise Bagnell’s activities with respect to their accounts and failed to put in place adequate systems to prevent unauthorized and unsuitable trading in the accounts.

The former Investment Dealers Association of Canada (now the Investment Industry Regulatory Organization of Canada) agreed. In a formal hearing, a DS vice president was found not to have properly supervised the trading activity in the clients’ accounts to ensure that the recommendations were appropriate and in keeping with their investment objectives.

At the conclusion of the IDA hearing, the couple requested that DS produce, for purposes of litigation, various documents — including those pertaining to the complaints of other Bagnell clients — that had been entered as exhibits in the IDA regulatory hearing.

DS refused, and off to court they went. (By the time the case reached the court, only DS and the original clients remained. Bagnell had already had a default judgment entered against him.)

DS’s refusal to produce the documents is not surprising, says Laura Paglia, a partner with Toronto-based law firm Torys LLP: “This issue is a very common request. They ask; we always refuse. These kinds of motions are generally unsuccessful.”

That was certainly the case in this situation. Justice Robert Wright concluded in his seven–page decision delivered on June 30 that the documents regarding previous complaints were simply not relevant: “Similar act evidence of this sort has little probative value to an examination of the handling of the plaintiffs’ trading accounts and, in my opinion, is not necessary for disposing fairly of the proceeding.”

How the trading accounts of other clients were supervised has little value in this case, Wright stated: “Especially where different clients often have different investment objectives and risk tolerances in their trading activities.”

Says Bessner: “I always take the position that all other complaints are irrelevant. What is relevant is the duty of care to the specific plaintiffs.”

A request for documents such as these, she adds, “is a fishing expedition — and it’s a bully tactic.”

Brian Awad, a partner with Halifax-based law firm Burchell Hayman Parish and co-counsel for DS, agrees: “The fact that an advisor receives a number of complaints doesn’t make [him or her] a bad person. Litigation is not a popularity contest.”

It’s also a matter of how a request is framed. In this case, the onus was on one advisor and his supervisor. The statement of claim, as Wright noted, was confined exclusively to allegations against DS and Bagnell as they related to the plaintiffs’ accounts only.

Further, Wright added: “The defence does not sweepingly assert that all of [the advisor’s] client accounts were properly supervised or that the plaintiffs’ accounts were treated in like manner as they were for other clients, which might otherwise have brought other client records into play.”

A second issue central to the case was privacy of information. DS argued successfully that the documents being requested included personal financial information about other individuals who were not aware of the legal challenge. “You have a reasonable expectation,” Paglia notes, “that your information will be private and confidential.”

The MacGowan v. DS decision does not surprise those in the legal community, but the mere fact that it is now written down gives greater weight to what lawyers and their investment-dealer clients have been doing for years.

@page_break@“The concept is not new,” Paglia says. “Plaintiffs often allege other people are involved.”

However, having the concept set out in writing that such allegations cannot lead to production of documents related to past complaints is a significant weapon in a legal battle. In fact, Wright originally gave only an oral decision on Oct. 30, 2008. It was at the request of counsel that the judge put his ruling in writing.

“Counsel for the defendants submitted a request,” Wright noted, “that my oral decision be turned into a formal written decision for its precedent value in other broker/client litigation cases.”

Says Awad: “There are not a lot of cases that [tackle] this point dead on.”

Advisors may breathe easier as a result of this decision, which is likely to be cited across the country. But they shouldn’t get complacent. Although previous complaints against advisors may not find their way into a courtroom, they certainly can make an appearance at a regulatory hearing.

“The case does not affect a firm or an advisor’s obligation to provide similar documents to IIROC,” says Connie Craddock, IIROC’s vice president of public affairs, “in the course of an examination or investigation.”

Firms and individuals are required to provide any books, records, accounts and documents that IIROC determines may be relevant under Dealer Member Rule 19 and Section 10.2 of the Universal Market Integrity Rules. IE