Canada: Broker’s Report

Last Updated: March 17 2006

By James D.G. Douglas -National Group Leader, John D. Blair, Georges R. Thibaudeau, Carole J. Brown, David Di Paolo and Gordon R. Johnson


On November 23, 2005, Justice R.J. Smith of the Ontario Superior Court of Justice dismissed a claim brought by two registered representatives, Derek King ("King") and William Crook ("Crook"), against their former employer, Merrill Lynch Canada Inc. ("Merrill Lynch"). King and Crook sought damages for wrongful dismissal, loss of economic opportunity, interference with economic relations, unjust enrichment, and breach of fiduciary duty and confidence following their termination from Merrill Lynch. At the time of their termination, King and Crook held a book of business totalling $180 million, earning gross commissions of $3.2 million per year.

Merrill Lynch terminated King and Crook for cause, alleging that they had engaged in discretionary trading with approximately 200 clients who were involved in a covered call strategy recommended by King and Crook. The strategy required King and Crook to contact each client on the option expiry date, which was the third Friday of each month, to obtain instructions before any trade was made on their behalf.

The first issue considered by Smith J. was whether King and Crook were employees of Merrill Lynch, independent contractors, or had some other unique relationship. King and Crook took the position that they had a unique relationship with Merrill Lynch and that they could not be characterized as employees or independent contractors. They argued that as a result of this unique relationship, the book of business and the clients (who invested with Merrill Lynch through their efforts) belonged to the brokers. The Court found that Merrill Lynch exercised a high degree of control over King and Crook and as such they were employees.

Smith J. then considered who owned the book of business. The Court found that, in the absence of a written employment contract, King and Crook were able to solicit their former clients and work for a competitor provided they did not take customer lists and did not use lists to solicit business. However, absent a specific agreement or a clearly established industry practice, King and Crook did not acquire an ownership interest in the book of business. Moreover, given that clients opened accounts and signed contracts with Merrill Lynch, received monthly statements from Merrill Lynch, called Merrill Lynch’s office to speak to their financial consultants and that Merrill Lynch would be responsible for any mistake or negligent act that occurred in a customer’s account, the Court concluded that the clients belonged to Merrill Lynch, not King and Crook. Given this finding, the Court dismissed King and Crook’s claims for loss of economic opportunity, interference with economic relations, unjust enrichment and breach of fiduciary duty and confidence, which all relied on the underlying premise that the book of business belonged to them.

Finally, as regards the claim for wrongful dismissal, both parties acknowledged that if King and Crook had engaged in discretionary trading, it would constitute a serious breach of securities regulations, Merrill Lynch’s policies, and the clients' trust. King and Crook denied engaging in discretionary trading and claimed that they called every client and obtained instructions before each trade was made. However, given the large number of clients King and Crook would have had to contact on the third Friday of each month, telephone records showing few calls to clients, client witnesses who testified they were not called, as well as employee witnesses who said King admitted that he had not made the required calls, the Court concluded that King and Crook had engaged in discretionary trading in multiple client accounts and that this constituted grounds for dismissal. Merrill Lynch counterclaimed for the balance owing on a promissory note and for losses suffered resulting from settlements made with clients as a result of the discretionary trading. That counterclaim was allowed in part. The promissory note related to one of King’s clients that had gone bankrupt while holding a margin account. The Court found that the note was invalid, however, King and Crook were liable to Merrill Lynch for damages incurred as a result of the discretionary trading.


On January 12, 2006, the Investment Dealers Association ("IDA") ordered Robert Ernest Leo Hart ("Hart") to pay a fine of $1.3 million and costs in the amount of $40,797. Additionally, the hearing panel ordered that Hart be permanently prohibited from receiving IDA approval in any capacity. Hart did not appear at the hearing and did not serve a Notice of Response, however, pursuant to IDA Rules 7.2 and 13.5, the matter proceeded in Hart’s absence. The hearing panel accepted the facts and allegations as stated in the Notice of Hearing and concluded that the charges alleged had been proven.

The Notice of Hearing alleged that between May 2002 and November 2004, while Hart was employed as a registered representative at CIBC World Markets Inc. ("CIBC"), he fraudulently misappropriated approximately $900,000 in funds from two widow clients. Specifically, the Notice of Hearing alleged that Hart forged cheques and receipts in the widows’ names and deposited their money into his personal bank account, contrary to IDA By-Law 29.1.

In its reasons, the hearing panel found that Hart encouraged the widows to rely on his financial advice and his handling of their financial affairs. Hart prepared income tax returns for one of the widows and visited both women so as to appear like a helpful friend. This represented an "egregious breach of trust committed against two vulnerable individuals". In addition, Hart refused to cooperate with the internal investigation commenced by CIBC as well as the IDA’s investigation. Recently, the IDA disclosed that Hart has been arrested on criminal charges of fraud over $5000 and uttering a forged document in relation to the same conduct.

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.

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