The decision rendered by the Québec Court of Appeal (the "QCA") on February 11, 2013, in the case of Mazzarolo v. BMO Nesbitt Burns, shows how important it is for investors to pay close attention to the reports they receive from their brokers and to complain within a reasonable time about investments they believe to be unauthorized or non-compliant with their investment profile.
On April 26, 2000, the appellant Ivonis Mazzarolo ("Mazzarolo") met with representatives of the brokerage firm BMO Nesbitt Burns ("Nesbitt Burns"), L and A, and opened several non-discretionary accounts.
On August 23, 2000, L and A presented Mazzarolo with an investment plan. Mazzarolo would have indicated that the proposal did not provide for a sufficient proportion of investments relating to emerging technologies. By December 31, 2000, such investments (which were considered speculative) comprised approximately 60% of Mazzarolo's portfolio. The portfolio subsequently generated significant negative returns, leading to a deterioration of the relationship between the investor and the representatives of Nesbitt Burns.
On March 22, 2001, Mazzarolo met with L and A's supervisor at Nesbitt Burns to complain - for the first time - about the poor return on his investments.
Mazzarolo subsequently launched an action against Nesbitt Burns in which he claimed $4 million in damages. In a judgment rendered on January 20, 2009, the Superior Court dismissed the action.
Decision of the QCA
On February 11, 2013, in a judgment authored by Mr. Justice Guy Gagnon, the QCA affirmed the decision of the trial court.
In his appeal, Mazzarolo criticized the trial judge for not having accepted his argument that L and A had de facto managed his portfolio in a discretionary manner, outside of his investor profile.
The QCA, however, confirmed the trial judge's conclusion that it was in fact Mazzarolo who wanted to invest more heavily in the technology sector.
The QCA found that L and A recommended transactions to Mazzarolo (or "solicited" transactions from Mazzarolo) which the latter authorized in advance of their execution. In light of such prior approval (which, the Court held, was given on a fully informed basis), Mazzarolo could not complain after the fact.
Importantly, the Court added that, even if it had concluded that Mazzarolo had not given prior approval for the transactions in question, it would have come to the same conclusion in virtue of the fact that he had not objected to them in a timely manner. In other words, if a client fails to question or complain about transactions within a reasonable period, despite having received monthly statements and transaction notifications from the brokerage firm, a court may conclude that the client has implicitly ratified or accepted the contested transactions.
Applying the contextual analysis recommended by the Supreme Court of Canada in Laflamme v. Prudential-Bache Commodities, the QCA confirmed the trial judge's conclusion that Mazzarolo was an investor who had a good knowledge of the market. In effect, given that Mazzarolo had made various investments with several brokers over the course of 30 years, that he had at his disposal an expert accountant to advise him on his investments and that he had been a successful businessman, the trial judge concluded that he sufficiently understood the transactions carried out by the two representatives and that the statements sent by the firm were enough to keep him sufficiently informed.
Lastly, the QCA concluded that Mazzarolo had lost a significant percentage of his capital as a result of the collapse in 2000 of the "Internet bubble". In that context, we are reminded of the words of the late American judge Milton Pollack, then 96 years old, in the case of In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig.:
Seeking to lay the blame for the enormous Internet Bubble solely at the feet of a single actor, Merrill Lynch, plaintiffs would have this Court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners. [P]laintiffs brought their own losses upon themselves when they knowingly spun an extremely high-risk, high-stakes wheel of fortune1.
The Mazzarolo case opens the door to an obligation on the part of the investor to monitor his portfolio, take cognizance of the documents sent to him by his broker and, if necessary, react in a timely manner. The QCA reminds us that when it comes to market investments, an investor, even a neophyte, is held to a certain duty of diligence. In short, a reasonable investor must make some minimum effort to understand the documents provided by the broker.
It seems more difficult today for investors to engage in speculative trading and then, if the results do not meet their expectations, to challenge the transactions after the fact, especially when the contested transactions had been promptly disclosed by the broker. One could certainly question what impact the Mazzarolo decision will have on investors who, unlike Mazzarolo, have more limited investment knowledge. Could they simply ignore documents sent to them by their brokers and then invoke their ignorance to avoid the application of the doctrine of implied ratification?
Certainly, the intensity of the duty of diligence by an average or neophyte investor is not as high2. On the other hand, to the extent that the brokerage firm promptly reported to the investor, a ratification argument would seem to be more and more feasible.
To be continued.
The authors wish to thank Frédérique Tremblay for her assistance.
1.In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 273 F. Supp. 2d 351; 2003 U.S. Dist. LEXIS 11005, **11-12 (United States District Court for the Southern District of New York). See also Valeurs mobilières Desjardins inc. v. Lepage, 2011 QCCA 1837 (CanLII), para. 89.
2.Souscripteurs du Lloyd's v. Alimentation Denis & Mario Guillemette inc., 2012 QCCA 1376 (CanLII), para. 36.
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