Canada: Supreme Court Finds Lawyer Liable For Referral To Financial Advisor

Last Updated: March 19 2019
Article by Uri Snir

According to a recent decision of the Supreme Court of Canada, lawyers can be held liable for referring clients to another professional who subsequently turns out to be a fraudster, especially where the actions of the lawyer go beyond a mere referral. In this case, the lawyer in question not only referred clients to his financial advisor, he also recommended and endorsed the advisor's investments over several years.

Background: Kenneth Salomon was the longtime lawyer for Judith Matte-Thompson and her company 166376 Canada Inc. ("166") (collectively, the "Respondents"). In 2003, Salomon introduced Matte-Thompson to his close friend and financial advisor, Themis Papadopoulos. Salomon repeatedly endorsed Papadopoulos as a financial advisor and encouraged the Respondents to invest with Papadopoulos' investment firm, Triglobal Capital Management Inc. ("Triglobal"). Salomon specifically recommended and encouraged the Respondents to invest in two offshore hedge funds linked to Triglobal. He did so without performing even a minimum amount of due diligence, which would have revealed that the two hedge funds were not registered with Quebec's financial markets regulator, the AMF, and that Triglobal was not authorized to offer these investment funds.

Over a period of four years, the Respondents invested over $7.5 million in Triglobal.

Beginning in 2006, Matte-Thompson expressed concern to Salomon regarding her investments. Each time she expressed concern, Salomon promptly reassured her, or informed Papadopoulos, who would himself reassure her.

In 2007, Papadopoulos, and his associate Mario Bright, disappeared with the savings of around 100 investors, including those of the Respondents. The two hedge funds the Respondents had invested in turned out to be part of a Ponzi scheme, and the Respondents lost upwards of $5 million.

The Respondents not only sued Papadopoulos and Bright, but also sued Salomon and his law firm for professional negligence. The Respondents claimed that Salomon was negligent in two ways: (1) by breaching his duty to advise the Respondents by recommending, endorsing, and encouraging inappropriate investments; and (2) by placing himself in a conflict of interest and breaching his duty of loyalty.

Decisions of the lower courts: The trial judge found Papadopoulos and Bright liable, but dismissed the action against Salomon and his law firm. According to the trial judge, Salomon only breached his professional standard of care by making the initial recommendation to Matte-Thompson. However, the trial judge found no causal link between that fault and Matte-Thompson's subsequent losses. The trial judge also concluded that Salomon had not been in a conflict of interest when making the referral.

The Quebec Court of Appeal found that the trial judge made palpable and overriding errors in her decision, and unanimously allowed the appeal. The Court of Appeal found: (1) that Salomon's faults were not limited in time to that of the initial recommendation; (2) that those faults were committed not only against Matte-Thomson, but also against 166; and (3) that those faults caused the losses suffered by the Respondents. The Court of Appeal also held that Salomon acted in a conflict of interest when making the recommendations.

The Court of Appeal ordered Salomon and his law firm to fully compensate the Respondents for their losses.

The Supreme Court's Ruling: In an 8-1 majority ruling, the SCC dismissed the appeal. The Court endorsed the following standard of conduct for lawyers who refer clients to other professionals or advisors:

Lawyers who refer clients to other professionals or advisors have an obligation of means, not one of result. Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in question. Referring lawyers must be convinced that the professionals or advisors to whom they refer clients are sufficiently competent to fulfill the contemplated mandates.1

The Court found that Salomon had done more than merely refer the Respondents to Papadopoulos. Salomon's acts subsequent to the referral included recommendation, promotion, and endorsement of Triglobal products. He also continuously reassured the Respondents in the months leading up to Triglobal's collapse. The Court held that just as a referral is not a guarantee of the services rendered by the professional or advisor to whom the client is referred, it is also not a shield against liability for other wrongful acts committed by the referring lawyer. 

The Court held that Salomon breached his duty to advise and his duty of loyalty. He continually recommended financial products to the Respondents without performing any due diligence or asking any questions about them. His personal and financial relationship with Papadopoulos placed him in a conflict of interest, and caused him to neglect his professional duty to advise the respondents.

The SCC also agreed with the Court of Appeal that there was a causal link between Salomon's negligence, and the losses suffered by the client and her company. Although Salomon was not involved in the fraud that caused the Respondents' losses, the Court held that more than one fault can cause a single injury so long as each of the faults is a true cause, and not a mere condition of the injury.

The Court found that Salomon's faults with respect to both his duty to advise and his duty of loyalty were true causes of the losses suffered by the Respondents. The Respondents would have never invested in the two hedge funds had Salomon performed the requisite due diligence.

The Takeaway:

Lawyers who refer clients to other professionals or advisors must act competently, prudently and diligently in making such referrals. Lawyers should also be careful not to make recommendations that go beyond a "mere referral".

Footnote

1 2019 SCC 14 at para 45.

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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