An Ontario court decision ends another round in the long-running contest between investment advisors and investment dealers over ownership of an advisor\u2019s book of client accounts. But the battle will probably continue.
In an Oct. 12 ruling, replete with criticism of BMO Nesbitt Burns Inc.\u2019 <\/b>s management, Justice Peter Jarvis of the Ontario Superior Court of Justice has ruled the firm violated an \u201cimplicit covenant of fair dealing\u201d in denying former broker Richard Clark the right to sell his book of business to a colleague.
\u201cThis is a ruling that is undoubtedly going to send shock waves through management offices of every investment firm in the province,\u201d says Toronto lawyer Kenneth Dekker, a specialist on recent Canadian cases involving investment advisors\u2019 books of business.
\u201cInvestment firms typically view the books of business as belonging to the firms,\u201d Dekker says. \u201cBut this ruling verges on elevating brokers\u2019 proprietary interest in their books into a contractual right. The only thing more shocking about this ruling would be if it is not appealed.\u201d
JoAnne Hayes, Bank of Montreal<\/b>s senior manager of corporate communications, confirms an appeal is indeed being considered.
Justice Jarvis found that Clark \u2014 who had discussed selling his $42-million book with a colleague in Nesbitt\u2019s 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 \u2014 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\u2019s $15-million book of business for $55,000 in 2001.
\u201cThere was no justification at all to not allow Mr. Clark to proceed to attempt to sell his book,\u201d Justice Jarvis concluded. \u201c[A] sale could almost certainly have been accomplished within a reasonable period of time had he been able to stay.\u201d
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 \u201cupwards of $175,000.
\u201cAny reasonable agreement would have received the approval of management acting out of faith,\u201d Judge Jarvis wrote, after noting that Nesbitt manager Ray Lessard\u2019s actions in firing Clark without notice and then transferring his book to a broker within Lessard\u2019s own branch at the \u201cadvantageous\u201d price of $50,000 \u201chad the effect of protecting, if not increasing Mr. Lessard\u2019s own participation in its proceeds.\u201d
Justice Jarvis found that Lessard had dealt with Clark \u2014 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 \u2014 \u201cin a cold and impersonal\u201d manner \u201ccalculated to hurt.\u201d
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\u2019s conduct toward Clark.
Despite this outcome, Clark is not happy about the outcome from a financial perspective. \u201cThe amount of money I won pales in comparison with what I would now be earning,\u201d he says. \u201cAnd my lawyer says [Nesbitt] will appeal on the basis that it doesn\u2019t want it getting out that you can sell your book.\u201d
Noting that the judgment assesses the value of Clark\u2019s book well below the price at which he expected to sell it, Clark suggests Nesbitt singled him out to try to roll back brokers\u2019 proprietary control.
In a business built on brokers\u2019 performance, Clark asserts, the right to sell books of business stands as a key incentive. \u201cEveryone should have a right to sell their book,\u201d he insists. \u201cNesbitt had a policy of allowing you to sell the book. That\u2019s how they reward you for bringing in the clients.\u201d
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\u2019s ruling affirms precedents established in several recent cases, including two from British Columbia that have affirmed brokers\u2019 proprietary interests in their books of business.
\u201cI was surprised that [Nesbitt] didn\u2019t acknowledge ownership,\u201d Harris says. \u201cIt 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\u2019 proprietary control.\u201d
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<\/i> case should be looked at \u201cin its isolated facts\u201d \u2014 especially considering the well-established practice of buying and selling books within Nesbitt.
\u201cI don\u2019t see the court doing anything here in terms of changing the law in this area,\u201d he says.
Concerning the practice of selling books within the investment dealer, says Clarke: \u201cYou can\u2019t sell what you don\u2019t 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.\u201d
Unlike Dekker and Harris, Clarke doesn\u2019t view the Ontario Superior Court decision as establishing a broader entitlement to brokers throughout the industry. \u201cI don\u2019t see everyone having an ownership on the basis of this decision,\u201d 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.<\/b> sued Merrill Lynch Canada Inc. <\/b> for poaching an entire brokerage team away from DS\u2019s branch in Cranbrook, B.C.
In that judgment, delivered by Justice Mary Southin of the B.C. Court of Appeal, each of DS\u2019s departing employees was found to be entitled \u201cwithout 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.\u201d
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.
\u201cAnytime you have a situation in which a past practice is not clear,\u201d Clarke suggests about these disputes over books of business, \u201cyou\u2019re always better off when you have formal agreements.\u201d \tIE<\/b>
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