The Nova Scotia Supreme Court released an important decision for employers and employees in the investment industry; Saturley v. CIBC World Markets Inc.,1 a wrongful dismissal action brought by a prominent Halifax investment advisor after being terminated for alleged discretionary trading in client accounts.
The plaintiff, Frederick Saturley ("Saturley"), was an investment advisor for CIBC Wood Gundy ("CIBC") for about seven of his 20 years in the industry. For many of his clients, Saturley used a unique and complex options strategy, holding both "put" and "call" options on the same securities, at the same time, with the same expiry date.
Largely, this strategy had been very successful for his clients. However, in October 2008, when the global economic crisis hit, Saturley was notified by CIBC of margin calls on 54 of his client accounts, meaning that these clients no longer held satisfactory assets in their accounts to meet potential account liabilities.
Saturley examined the client accounts and discovered that there had been an error by the third party that CIBC contracted with to calculate the account margins. It was Saturley's evidence at trial that, but for this margin calculation error, he would have taken measures to protect his clients much earlier, thus avoiding the approximately $38 million in losses that were incurred in their accounts.
Saturley proceeded to report this error up the ranks within CIBC, and also advised a number of his clients of the error, including one for whom he promised to testify in the event there was an action brought against CIBC.
As CIBC began to investigate this issue, it also began to suspect that Saturley had been engaging in unauthorized discretionary trading in client accounts. For example, it found that, on December 24, 2007, Saturley had entered over 150 trades for various clients before noon; it seemed highly suspect that Saturley would have been able to obtain instructions and process so many trades in such a short time frame.
Saturley was subsequently called to an interview with CIBC, vigorously denying that he had engaged in any discretionary trading. However, CIBC's investigation, which included speaking with some of Saturley's clients, concluded that Saturley had engaged in unauthorized discretionary trading and, as a result, Saturley's employment was terminated on a just cause basis.
At trial, Saturley argued that the investigation into his conduct was biased and otherwise inadequate. To this end, he suggested that CIBC attempted to make him the "fall guy" and to fire him for being the whistleblower on the margin calculation error. He relied in part on a note that he found that was written by one of his superiors prior to the issue of discretionary trading being raised which stated that Saturley was "done".
However, the Court disagreed, finding that the evidence of the investigation, which was quite robust and included testimony from individuals who participated in the investigation, internal emails, minutes of meetings, draft reports and recordings of the interviews with Saturley, did not support bias but rather supported an appropriate investigation. With respect to the note in question, the Court accepted CIBC's testimony that it was actually in reference to Saturley's mental health at the time.
Further, the Court was satisfied that Saturley had engaged in discretionary trading. The Court heard evidence from a number of Saturley's clients who, in large part, had been happy to give Saturley "cart-blanche" over their accounts while things were going well, and rarely spoke to Saturley. However, there was significant trading in a number of these accounts that clearly had not been authorized since the clients had not even spoken to Saturley in and around the time the trades were made.
The Court also refused to agree with Saturley that CIBC should not have terminated him, but should have employed some form of lesser discipline. To begin, Saturley was well aware of the seriousness of unauthorized discretionary trading. He had in fact been reprimanded for discretionary trading in 2004, investigated again in 2007 and had received numerous CIBC bulletins warning against discretionary trading.
Second, Saturley's conduct was not a simple error in judgment. He had engaged in a significant amount of discretionary trading over a period of several months for several clients. Further, when investigated, Saturley lied about the discretionary trading. In this respect, the Court noted that, had Saturley been forthright, CIBC may have applied a lighter penalty, such as allowing to him return to work under strict supervision.
For investment advisors, this decision reiterates a simple message: Do not engage in discretionary trading in non-discretionary accounts, even if the client is passive and seems happy to leave matters in your hands. It is clear that, in the years of success, Saturley and his clients became all too comfortable in his unilateral management of their accounts, something that came back to bite him when the market turned.
For employers, this decision highlights that the courts will support securities dealers that take unauthorized discretionary trading seriously, particularly if the internal investigation is carried out properly. This investigation in this case allowed CIBC to present a paper trail and other evidence showing:
- a pattern of discretionary trading;
- that Saturley was provided with an opportunity to come clean and admit the breach;
- previous occasions of the same conduct for which Saturley had been reprimanded;
- that the dealer expressed, on more than one occasion, that it does not permit this behaviour; and
- that bulletins had been circulated to advisors that warned that discretionary trading was not permitted.
We all know that documentation wins cases. This decision shows that a well documented and proper investigation that supports (i) a culture of compliance and (ii) a continual refusal by an advisor to adhere to the rules will support a finding of just cause for termination.
Footnote
1 Saturley v. CIBC World Markets Inc., 2013 NSSC 300
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
