DATE: 20011227
DOCKET: C32746
COURT OF APPEAL FOR ONTARIO
FINLAYSON, CATZMAN and BORINS JJ.A.
B E T W E E N:
GEORGE ZRAIK and GRACE COSTA
Peter R. Jervis, for the appellants
Appellants
- and -
LEVESQUE SECURITIES INC. and ALFRED DROSE
Alan A. Farrer and Leah K. Bowness, for the respondents
Respondents
- Heard: November 28, 2001
On appeal from the judgment of Justice Todd L. Archibald dated June 17, 1999.
FINLAYSON J.A.:
[1] This appeal is a cautionary tale of how an experienced and successful entrepreneur sought easy riches in the futures market, a graveyard for even professional traders, and reaffirmed the old maxim that a shoemaker should stick to his last.
[2] The appellant George Zraik was 55 years old at the time this action was commenced. He ran a retail electronics store in what was then the City of Etobicoke and at all material times maintained investment accounts with the respondent Levesque Securities Inc. ("Levesque"). He also opened an account in the name of his daughter, Grace Costa but she is not a party to this appeal. The investment advisor he dealt with was Alfred Drose.
[3] In July of 1993, Zraik opened a conventional stock trading account and dealt primarily in the purchase of "blue chip" securities that he maintained he was holding for the long haul. He was successful in increasing the value of this account to approximately $200,000 (Cdn.) by February of 1995. At the same time (July of 1993), Zraik opened a commodities trading account and ventured onto the perilous seas of the futures market. He met with spectacular early success but ultimately fell victim to his own stubbornness and lost heavily because he insisted on sticking to his adopted theory that the Japanese yen would fall in value against the American dollar. In an action for negligence and breach of fiduciary duty, Zraik was successful in persuading the trial judge that Levesque was negligent in failing to properly supervise his commodities account to ensure that it complied with the requirements of the law relating to trading in this type of securities and in not observing Levesque's own internal guidelines. The action for breach of fiduciary duty was dismissed.
[4] The appellant Zraik appeals the quantum of the trial judge's assessment of damages and against his failure to find that aspects of the appellant's relationship with the respondents gave rise to a fiduciary duty that was breached by the respondents. The trial judge found that the appellant had suffered "financial calamity" in the loss of his entire stock trading account equity in the period of a few weeks in 1995 as a result of the negligence of the respondents in failing to comply with the statutory, regulatory and professional rules regulating commodity futures trading in Ontario. In short, Levesque should have shut down the account when it exceeded its risk capital limits.
[5] The trial judge found that the appellant's commodity trading losses between February 17 and March 24, 1995 of $415,741 were a "direct result of the [respondents'] negligent breaches of duty" and held that the appellant was not contributorily negligent. However, the appellant submits that the trial judge erred in deducting from those damages the "profits" earned in the account as a result of numerous different securities transactions in the years prior to 1995 when the cause of action arose because of the losses sustained in February and March 1995. This resulted in an award of $238,985 plus pre-judgment interest.
[6] Additionally, the appellant alleges that the trial judge erred in deducting the gross pre-tax profits in earlier years rather than taking account of the fact that the appellant's net profits after tax were less than half of the sums deducted and that the profits had been largely removed from the appellant's account by December 1994 and did not constitute the capital that was lost in 1995.
[7] Finally, in this appeal the appellant alleges that the trial judge erred in principle in failing to recognize that aspects of his relationship with the respondents created fiduciary duties that they breached. Specifically, the trial judge failed to consider that the appellant's significant informational deficit while he was in Thailand from February 14, 1995 to March 12, 1995 and the respondents' complete control over and transfer of the funds from his stock account created conditions of virtual total dependence and vulnerability giving rise to fiduciary duties.
[8] The appellant asks that this court vary the judgment below to increase the damage award to include his entire commodity trading loss being $415,741, less his $10,000 specified risk capital, for a total of $405,741 and additionally to award the loss of return on his long term stock portfolio plus gross-up which the trial judge stated he would award had he found a breach of fiduciary duty.
Overview of facts and findings of the trial judge
[9] The appellant, as found by the trial judge, was a sophisticated commodities trader, who independently analysed commodities, including foreign currencies and precious metals, and traded to such an extent that his gains and losses were recorded by him as business income. When he first opened an account with the respondent Levesque, he indicated on the initial application form that his risk limit was $10,000.00. However, thereafter, he regularly and knowingly risked considerably larger amounts.
[10] The trial judge ultimately held that Zraik's evidence concerning his extreme vulnerability was simply not believable, making the following finding on the evidence:
Mr. Zraik is a sophisticated and intelligent businessman. He is also a man of considerable common sense and sagacity. His assertions concerning his naïveté and ignorance about the commodity market simply ring hollow in all of the circumstances. Mr. Zraik is a man of considerable business acumen which is in marked contrast to his portrayal of unsophistication in his evidence.
[11] The trial judge concentrated his findings of negligence on the lack of supervision of Zraik's commodity account to ensure that it complied with provincial statutes, regulations and professional standards. To ensure such compliance, Levesque had a Supervisory Guide for Commodity Futures Accounts, which outlined its general policies concerning, inter alia, a client's maximum risk, and a client's position limits. The Supervisory Guide specifically provided that, for the purpose of risk management, limits be determined according to the following criteria:
(i) The initial margin required must not exceed the capital which the client is willing to risk;
(ii) The number of contracts must not exceed 1/2000 of the above-mentioned capital.
[12] These requirements reflected statutory and regulatory requirements and were designed to ensure that a client traded within his or her initially indicated risk capital. In Zraik's case, he should have been restricted to three commodities contracts at one time unless his $10,000 risk limit was increased. It is conceded that the general policies set out in the forms were not heeded, and that Zraik was permitted to trade in excess of the specified maximum risk and/or position limits throughout 1994 and 1995.
[13] In 1994, Zraik made over $166,755.00 (Cdn.) trading in commodities. From November 1993 onwards, and throughout 1994, he profited directly from the fact that he regularly and repeatedly traded in excess of his specified risk capital and position limits. He continued to trade in excess of his initial risk limit in 1995. In that year, he suffered losses following February 17, 1995. His losses continued through March 1995. After March 1995, Zraik closed his account at Levesque but continued to trade in commodities with another broker and lost more money.
[14] Just prior to his departure on a mixed business and pleasure trip to Thailand, Zraik instructed Drose to add additional contracts to his account, refusing to accept Drose's advice that he either lighten his position or in fact cease trading and close his account while he was in Thailand, as there might be difficulties communicating, and Zraik might be difficult to reach at times. If Zraik had followed Drose's advice to liquidate his accounts prior to leaving for Thailand, Zraik would have remained in a profit position regarding his commodity trading. Instead, the appellant advised Drose that he would resolve the communication difficulties for himself by obtaining a cellular telephone in order to maintain daily contact, and instructed Drose to keep the accounts open.
[15] Zraik's testimony at trial, that at no time did Drose suggest to him that his account be closed during the time that he would be in Thailand, was rejected by the trial judge as not meeting the test of common sense or logic. Rather, the trial judge accepted Drose's evidence concerning the advice that had been provided. This is significant to the complaint in this court that the trial judge failed to recognize the vulnerability of Zraik when he was in Thailand when it was necessary for Levesque to call on the provisions of the margin agreements and satisfy the margin deficits in the commodities account by transferring moneys from the stock account. Indeed, far from being placed by Levesque in a position of vulnerability, Zraik refused to close his accounts prior to his departure for Thailand and was told by Drose that he, the appellant, was "on his own", and that while he, Drose, would continue to transact Zraik's business thereafter, Drose would essentially act as an order taker, providing Zraik with no recommendations whatsoever. Moreover, Drose specifically cautioned Zraik: "I think you shouldn't be doing this. I don't want you to. If you want to insist on trading, I'll transact business for you. I wish you well. I'm going to be here every day to transact the business for you, but I'm not making any further recommendation in regards to this account because I'm dead set against what's happening." The trial judge accepted Drose's testimony on this issue.
[16] The trial judge accepted the argument of the respondents that Zraik's monitoring of and ongoing input into his account prior to his departure for Thailand was a pattern that would not have changed when Zraik left for Thailand. It is evident from the record that Zraik never totally relied on Drose throughout his entire trading history at Levesque. The trial judge properly rejected the contention of Zraik that Drose did not update Zraik on a daily basis. Consistent with his advice to Zraik prior to his departure for Thailand, Drose did not make any recommendations to Zraik during Zraik's absence from Toronto.
[17] According to Drose, it was always Zraik who insisted upon adding additional contracts following his departure for Thailand. While he was not prepared to make a finding of contributory negligence against the appellant (and there is no cross-appeal on this finding), the trial judge noted Drose's evidence that the financial disaster which befell Zraik was a direct consequence of Zraik's obdurate insistence upon maintaining the short Japanese yen contracts in the face of the yen moving dramatically up against the U.S. dollar.
[18] The record does not support the appellant's allegation of his vulnerability to Levesque in the operation of his accounts nor of his ignorance of the availability of credits in his conventional stock account to meet margin obligations in his commodity account. Zraik signed a Margin Account Agreement, a Risk Disclosure Statement, and a Commodity Futures Trading Agreement with Levesque in 1993 in order to trade in commodities with this commodity house. He also received a Summary Disclosure Statement. There is nothing unique to the brokerage business in these documents and they make clear the right of the brokerage house to have recourse to all of Zraik's accounts in the event that any one of them fell below its margin requirements. Zraik was familiar with such documents, as similar documents had been signed or received by Zraik at other brokerages where he had traded in commodities. He was not, as he contended, an unsophisticated trader and he fully understood futures trading.
[19] The above documentation outlined the risks associated with commodity trading, and explained the concepts of "initial margin", "maintenance margin", and the circumstances and manner in which Zraik could be called upon to deposit additional margin funds to maintain his position, should a margin deficit arise in his accounts. Zraik's evidence that he did not understand such documentation and was extremely vulnerable to Drose and Levesque was not considered believable by the trial judge.
[20] The trial judge concluded that Zraik's stock account was not a long-term hold. Zraik's evidence that he wanted to maintain his stock holdings as his cardinal investment position was rejected by the trial judge, and the evidence in fact indicated the opposite. When given the choice of either liquidating his commodity account to make up for the considerable margins existing in February and March 1995, or selling his stocks to meet those margins, Zraik chose to sell his stock.
[21] The appellant's tax returns from 1991 through 1994 indicated significant purchases and sales of the very same stocks which formed Zraik's stock portfolio, and the trial judge was not, accordingly, prepared to award any amount for the loss in the value of the share prices over those four years.
[22] The trial judge found that Zraik's knowledge and sophistication concerning commodity trading belied the suggestion that he was reliant upon Drose's skill, knowledge, and advice, which finding led to his conclusion that a fiduciary relationship was not in existence between Drose and Zraik.
Issues
• Did any aspect of this commodities account create a fiduciary relationship?
• Did the trial judge err in subtracting the account profits in early years from the losses in the period claimed by the appellant?
Analysis
[23] Given the very clear findings of the trial judge, there is no basis in law for the submission that a fiduciary relationship was created between the appellant and the respondent Levesque. He may have been unwise in going into the commodities market in the first place, but it was his decision. The trial judge found that he was an experienced investor and that he made his own evaluation of the underlying market values of the minerals or currencies involved in his commodities contracts. He was burned when the yen increased in value against the American dollar, but so were a lot of other people. He certainly was not pressured into shorting the yen and indeed if he had followed the advice of Drose, he could have closed his commodities accounts when he went to Thailand and realized a profit on the trading up to that point in time.
[24] The Supreme Court of Canada in Hodgkinson v. Simms, 1994 SCC 70, [1994] 3 S.C.R. 377 at 408 and 462 recognized that there are three components which will often give rise to the imposition of fiduciary obligations. These characteristics were stated to be as follows:
The fiduciary has scope for the exercise of some discretion or power;
The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests; and
The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.
[25] Additionally, the words of Sopinka J. in LAC Minerals Ltd. v. International Corona Resources Ltd., (1989), 1989 SCC 34, 61 D.L.R. (4th) 14 at 63 (S.C.C.) were relied upon by both parties in the appeal. As Sopinka J. remarked in that case, "it is possible for a fiduciary relationship to be found although not all of these characteristics are present, nor will the presence of these ingredients invariably identify the existence of a fiduciary relationship." Nevertheless, the "one feature, however, which is considered to be indispensable to the existence of the relationship...is that of dependency or vulnerability."
[26] The trial judge's findings destroy any basis for applying the criteria above to establish a fiduciary relationship in whole or in part. There was no relationship of dependency or vulnerability. Zraik monitored his own account closely and gave the instructions for every trade. He sought advice, but as we have seen he did not always follow it. The suggestion that during the Thailand trip Levesque acted unilaterally and at its own discretion in transferring funds from the stock account to meet the margin requirements ignores the reality that the transfers were triggered by the orders of Zraik and the enabling language of the standard margin account agreements that Zraik had signed.
[27] The suggestion that, having found that Levesque was liable in negligence for not closing down Zraik's account, the trial judge should have constituted Levesque a fiduciary with respect to the blue chip stocks in the regular stock account is novel. The consequences of contractual negligence cannot change the contractual relationship into an equitable one. The appellant argues that despite the clear language of the contracts between the parties, the misconduct of Levesque somehow placed the stock portfolio off limits and that Zraik was entitled to trace the lost profits on the sale of that portfolio. There is no merit to this argument. The appellant's loss because of negligence was the amount of the deficit in his commodity trading account. The transfer, as authorized by the agreements between the parties, of a credit balance in the stock trading account was not a transfer of the proceeds of trust stocks. In any event, the appellant could have replaced these stocks at will. IBM, Northern Telecom, Eastman Kodak and the like are established stocks that trade at the market. Anyone can buy them at any time. If the appellant believed that some or all of them would increase in market value at a rate that would justify holding them longer, he could have repurchased them on his return from Thailand or at any time thereafter. However, he preferred to attempt to recoup his commodities losses in the commodities market. The quantum of his loss on his common stock portfolio was precisely the same as the losses in his commodities account that the common stock was transferred to cover. There is no other loss. The appellant is entitled to that amount and pre-judgment interest.
[28] The second issue has more substance. Zraik's cause of action arose between February 17, 1995 and March 24, 1995, when Zraik sustained the losses complained of that resulted from the respondents' negligent conduct. This trading constituted the cause of action. The gains that were realized in Zraik's commodities account prior to that time arose independently of the cause of action and should not have been considered in assessing the damages.
[29] It is trite law that for a cause of action in negligence to be constituted, and a remedy to be available to a plaintiff, three elements must be present:
(a) a duty of care must exist;
(b) there must be a breach of that duty; and
(c) damage must have resulted from the breach.
See A.M. Linden, Canadian Tort Law, 6th ed. (Toronto: Butterworths, 1997), at p. 98.
[30] The trial judge found that the respondents permitted Zraik to trade in his commodities account in breach of certain professional duties in November, 1993. He considered the many transactions in Zraik's account between November 1993 and March 1995 to constitute "the same breach". While the laxness of the brokerage firm in supervising the account continued over a period of years, this does not take away from the fact that the trades were separate and distinct transactions in different contexts, each of which had to be independently evaluated for its suitability in the context of the respondents' policies. These transactions constituted a series of independent breaches of duty.
[31] In addition, the profits that had been earned in Zraik's account in 1993 and 1994 that the trial judge credited to the respondents had been largely removed by him for purposes other than investment. He had never communicated to the respondents that he was willing to risk the previous pre-tax profits from commodity trading. Before the contracts that led to the devastating losses in February and March, 1995 were purchased, Zraik had only a few contracts in the accounts. The account equity as of December 30, 1994 was less than $50,000, which was not significantly more than it had been before the gains arose. He was essentially starting from a clean slate, with approximately the same level of capital as the previous year.
[32] In fact, the earlier trades are not only separate transactions and removed in time from the cause of action, they could never constitute an actionable tort because they resulted in profits, not losses. The appellant is correct that there can be no liability for negligence unless some damage has been suffered by the appellant. See A.M. Linden, Canadian Tort Law, supra, at pp. 100-101. The mere threat of future harm or the exposure of another to danger will not be actionable. Rather, there must be actual damage in order to establish negligence. See J. G. Fleming, The Law of Torts, 9th ed. (Toronto: Carswell, 1998) at pp. 216-17.
[33] Each case must turn on its own facts, but in my opinion the trial judge erred in principle in this case when he placed all the commodity trading accounts of the appellant on the table from their inception. I find offensive the notion that a brokerage firm, when called to account for a disastrous series of trades that were the direct consequence of its lack of supervision of the account, can defend on the basis that it is entitled to an offsetting credit for profits in earlier years when they were every bit as lax in supervising the account. The effect of this treatment of damages is to make Zraik and Levesque partners throughout. This result can only be justified in law by a finding that Zraik was negligent as well as Levesque and this is a finding that the trial judge was not prepared to make.
[34] For reasons that I do not fully understand, the appellant concedes that he is unable to claim the full amount of his commodities trading losses because he cannot recover the $10,000 he stated as his risk limit. Accordingly, I would allow the appeal, increase the damage award to $405,741 as requested by the appellant. He is entitled to have his award of pre-judgment interest adjusted accordingly. He is also entitled to his costs of the appeal.
Released: DEC 27 2001 Signed: "G.D. Finlayson J.A."
GDF "I agree M.A. Catzman J.A."
"I agree S. Borins J.A."