Man Financial Canada Co. v. Keuroghlian, 2008 ONCA 592

CITATION: Man Financial Canada Co. v. Keuroghlian, 2008 ONCA 592

DATE: 20080819

DOCKET: C46082

COURT OF APPEAL FOR ONTARIO

ROSENBERG, FELDMAN and LANG JJ.A.

BETWEEN:

MAN FINANCIAL CANADA CO.

Plaintiff (Respondent)

And

HADJI SARKIS KEUROGHLIAN and AL-MUSTASHAR INVESTMENTS INC.

Defendants (Appellants)

AND BETWEEN:

HADJI SARKIS KEUROGHLIAN and AL-MUSTASHAR INVESTMENTS INC.

Plaintiffs by Counterclaim (Appellants)

And

MAN FINANCIAL CANADA CO., REFCO GLOBAL HOLDINGS INC., LLC., REFCO GROUP LTD. LLC. and PIERRE GLOUTNEY

Defendants by Counterclaim (Respondents)

Susan M. Chapman and John J. Adair for the appellants

Paul Le Vay and Johanna Braden for the respondent

Heard: December 17, 2007

On appeal from the judgment of Justice Douglas H. Lissaman of the Superior Court of Justice dated September 19, 2006 and reported at 2006 CanLII 32063 (ON S.C.).

FELDMAN J.A.:

I. OVERVIEW

[1] Hardi Sarkis Keuroghlian (“Sarkis”) was a foreign exchange trader with Refco Futures (Canada) Ltd. (“Refco”). Between 1997 and 2000, Sarkis executed multiple foreign exchange trades on behalf of certain clients, but never received funds from the clients to pay for the trades or to cover the approximately $5.4 million in losses suffered by Refco on the trades.

[2] Refco alleged that Sarkis manipulated Refco’s internal controls to ensure that Refco would not know that client funds to pay for the trades were not forthcoming, and that Refco’s own funds were being used to cover the losses. Sarkis testified that Refco management was aware of the disputed trades, but chose to allow the trades to continue. The central issue at trial was whether Refco knew the trades were unfunded and whether Refco authorized the disputed trades. The trial judge disbelieved Sarkis and found him liable for damages for fraud and for breach of contract. He dismissed Sarkis’ counterclaim for wrongful dismissal.

[3] For the reasons that follow, I would dismiss Sarkis’ appeal.

II. FACTS

The Parties

[4] The respondent Refco was an investment dealer with offices in Toronto and elsewhere in Canada. During the relevant timeframe, Refco was a wholly-owned subsidiary of Refco Global Holdings Inc., LLC, which was a wholly-owned subsidiary of Refco Group Ltd. LLC.

[5] In 2005 – after the events in issue in this case – Refco was purchased and is now Man Financial Canada Co. (Man Financial Canada is referred to here as Refco). Pierre Gloutney was the Chairman and CEO of Refco. Eugenia Chee was its Vice-President, Corporate Secretary, Chief Compliance Officer and Controller.

[6] The appellant Sarkis was a foreign exchange (“forex”) trader for Refco from 1988 to 1991 and Forex Manager from 1991 to February 2000. Sarkis was also the sole shareholder and President of the corporate appellant, Al-Mustashar Investments Inc., a personal holding company that had a futures trading account at Refco, but not a separate forex trading account, although Al-Mustashar traded in both futures and forex. The futures account was personally guaranteed by Sarkis.

Employment Relationship

[7] In 1988, Gloutney hired Sarkis as an account executive and Vice-President to promote and expand Refco’s foreign exchange business. When Sarkis was first hired, he signed a one-page engagement letter setting out his commission structure but no other terms of employment were specified.

[8] In June 1991, when Refco decided to expand its forex department from a service for customers to a profit-generating operation, Sarkis signed an employment agreement addendum and took on the title of Forex Manager. The relevant terms of the addendum were: (i) Sarkis was responsible for ensuring that the forex group operated according to Refco’s policies; (ii) Sarkis was responsible for customer debits (i.e., he was responsible to cover shortfalls in payments); and (iii) the addendum would be reviewed after three months.

[9] The respondent’s witnesses said that they relied on Sarkis’ experience and knowledge in operating its forex department. For example, contrary to the recommendations in Refco’s Forex Trading Manual (“Manual”) to prepare segregated client account statements, Refco relied on Sarkis’ personal record of all his trades as the principal repository of information related to forex trading. The respondent claimed that Refco’s management permitted the use of this system because they had the utmost confidence and trust in Sarkis in relation to foreign exchange matters.

Refco’s Forex Trading Policy and Practice

[10] In 1997, in response to a recommendation by Refco’s auditor, Arthur Andersen, Chee drafted the Manual to establish policies for forex trading. Sarkis and Gloutney provided input into its terms. The basic terms of the Manual were: (i) a forex account was required for a client to engage in forex trading; (ii) clients who wanted to do forward forex trades were generally required to post a 5% margin before the forex order would be accepted; (iii) account executives were responsible for reviewing client accounts and making margin calls; and (iv) if client debits were not collected the account executive was responsible. The Manual also recommended that Refco discontinue its existing practice whereby all forex trades were conducted through one “house account”. Making this change would ensure that individual client’s debits could be tracked. Chee was responsible for ensuring compliance with the Manual.

[11] Although the Manual was approved by Arthur Andersen, many of the procedures prescribed in it were not implemented or adhered to. No system of tracking individual accounts was ever implemented, and certain “known clients” were allowed to trade without posting margin. Sarkis claimed that he refused to sign an acknowledgement of his agreement with the Manual’s terms because of the divergence between Refco’s actual practice and the policies set out in the Manual.

[12] In practice, and in contrast with the procedures prescribed in the Manual requiring segregated client account statements, Sarkis and the few other forex traders at Refco would each provide the back office employees with a daily handwritten list of credits and debits identifying the amounts of money that were expected to be transferred into and out of the house account. This information would then be used to compile a daily cash balancing spreadsheet called the “Cash Control”.

[13] The Cash Control was posted to a computerized system called the Customer Equity and Activity List (“CEAL”). The Cash Control would be reconciled on a daily basis against the transactions appearing on Refco’s bank statement from its accounts with the Royal Bank of Canada (“RBC”). Credits and debits that appeared on the CEAL but not on the bank statements were labelled by the back office staff as “reconciling items”. The reconciling items would be deducted from the CEAL.

Transactions in Dispute

[14] From late 1997 to February 2000, Sarkis entered into cross-trades[^1] involving the Swiss Franc and the Japanese Yen. No margin was provided for these trades and no funds were provided to pay for the settlements. These trades were all put through on the account of Al-Mustashar, Sarkis’ holding company. All of the trades were recorded on documentation provided to the back office which variously identified the client as either Al-Mustashar, Al-Mustashar/Berbari, or as Berbari. Sami Berbari was a Refco client known to Sarkis.

[15] Initially, the results of these trades were neutral. Eventually, however, the trades lost money because the trades speculated that the Franc would rise against the Yen when the opposite occurred.

[16] The back office was informed of all the disputed trades, however, the “credits” that Sarkis provided to the back office were never actually paid to Refco’s bank account. These items were labelled by the back office as reconciling items. When no funds were ever paid for these transactions, RBC withdrew money from Refco’s bank account to pay for the trades.

[17] In the latter half of 1999, Chee became concerned with the frequency of these reconciling items and approached Sarkis, who assured her that there was no problem. On February 16, 2000, Chee realized there could be a problem with the house account balance and approached Gloutney, who asked Sarkis to explain the trades. Sarkis stated that the trades were made on behalf of Berbari. Sarkis also stated that he would get the money from Berbari. He later told Gloutney that he would be physically harmed if he travelled to see Berbari to try to get the money he owed. Chee was told to investigate the issue. After investigating the issue over the weekend, Chee identified the credits that Sarkis had told the back office to enter but that had been subsequently reversed when the money did not come in. On February 24, 2000, Refco officially terminated Sarkis’ employment.

[18] The amount of the losses on the disputed trades as at the date when Sarkis was fired totalled approximately $5,377,000. Sarkis and Refco each received approximately $350,000 in commissions on the disputed transactions.

Events Following Sarkis’ Termination

[19] Following Sarkis’ termination, Gloutney requested that Refco Bermuda, an affiliate with more forex expertise, take over the two remaining open positions from Sarkis’ unauthorized trades in Swiss Francs and Japanese Yen in exchange for the losses in the accounts. Gloutney informed Philip Bennett, CEO of Refco Group Ltd., that although the positions were moving in Refco’s favour, Refco needed to transfer the losses to minimize regulatory problems, since Refco was required to maintain a minimum level of risk adjusted capital to conduct its operations.

[20] On February 22, 2000, Refco transferred the two open positions to the account of Wells Ltd. at Refco Bermuda. On February 23, 2000, $6.5 million Cdn. was transferred to Refco’s account at RBC and the next day, that amount was credited to the house account. Of this amount, $5.4 million was treated as a subordinated loan from Refco Global Holdings to Refco. On February 23, 2000, an agreement pertaining to this indebtedness was entered into between Refco and Refco Global Holdings. The Montreal Exchange was a party to this agreement. When Man Financial Canada acquired Refco, the subordinated debt was converted into 5.4 million senior Canadian preferred shares worth $1 each with attached retraction rights that allow the holder, Refco’s new parent company, to require Refco to redeem the shares and pay the $5.4 million plus any accrued dividends.

[21] Refco also obtained a Mareva injunction freezing Sarkis’ accounts. Based on Refco’s allegations, criminal charges were laid against Sarkis, but these charges were withdrawn by the Crown Attorney in August 2001 on the stated basis that, although there were grounds for laying the charges, the matter was a civil one.

III. Issues

[22] The appellant raises five issues on the appeal but central to all of them is the appellant’s position that the trial judge’s reasons for judgment are inadequate and do not allow the appellant to know the basis on which he was found liable, or to discern whether the higher standard of proof for fraud was applied. According to the appellant, the reasons are insufficient to allow for meaningful appellate review. In that context, the following five specific issues are raised:

(1) Did the trial judge provide reasons sufficient to permit effective appellate review?

(2) Did the trial judge err in his application of the burden of proof for allegations of fraud?

(3) Did the trial judge err in either failing to consider whether, or in wrongly deciding that, Refco personnel were entitled to rely on Sarkis’ alleged misrepresentations?

(4) Did the trial judge err in finding that Sarkis’ employment contract made him liable for his clients’ failure to pay for their trades?

(5) Did the trial judge err in his conclusion that Refco proved its damages?

IV. ANALYSIS

(1) Adequacy of Reasons

[23] The trial of this action took five weeks spread over five months. The trial was conducted by experienced counsel on both sides. Twenty-one witnesses testified, including 19 for the respondent and two for the appellant: he and his wife. The evidence of how forex trading works, how the Refco forex trading operation was conducted and how the particular trades in question were handled was complex. Both sides filed lengthy and detailed written argument to the trial judge, including reply argument on both the claim and the counterclaim.

[24] The reasons for judgment are 78 pages in length. They are structured with an introductory description of the circumstances that gave rise to the action and a brief roadmap through the judgment that identifies the basic issue: whether Refco’s management knew of and authorized the impugned trades. The introductory section also identifies the two standards of proof that the trial judge applied: to findings of fact, proof on a balance of probabilities; for findings of fraud, proof based on clear and cogent evidence commensurate with the gravity of the allegations.

[25] Then follows a long section that describes: the parties and players involved in the action; the complexities and conduct of forex trading generally and in particular at Refco, including its accounting practices; Sarkis’ employment responsibilities; the details of Refco’s Manual; the evidence regarding whether brokers were responsible for client debits, including Refco documentation and industry practice; the evidence regarding the disputed trades, including Sarkis’ role and how the trades were recorded and treated by the back office at Refco; the evidence regarding the 1999 audit by Arthur Andersen and the explanations for some of the disputed trades given to the auditors; the evidence regarding the 1999 audit of Refco by the Montreal Exchange; the evidence regarding the timing and extent of Refco staff’s knowledge and understanding of the disputed trades, including the knowledge of Gloutney, Chee and the back office staff; a description of the events of February 17 to 24, 2000 when Chee and Gloutney discovered the problem with the reconciling items, confronted Sarkis and ultimately fired him; the respondent’s transfer of the loss to Wells Ltd. at Refco Bermuda and ultimately to the parent company using the mechanism of a subordinated loan transaction involving the Montreal Exchange; the evidence regarding the criminal charges and the Mareva injunction; and the evidence regarding the calculation of Refco’s loss (paras. 9-220). At various points in this section, the trial judge expressed his factual findings on this evidence.

[26] The next 16 pages of the reasons describe in detail the positions of the parties on all issues. These positions were set out in the written argument filed with the trial judge, copies of which were provided to this court following oral argument.

[27] The trial judge set out the balance of his findings in the last four pages of the reasons. His credibility findings are contained in paras. 316-22 and 330:

In my view, the evidence of the witnesses called on behalf of the plaintiff and in particular the evidence of Ms. Chee and Mr. Gloutney was far more believable than the evidence of Sarkis himself who was the only witness called on his behalf other than, of course, his wife. Sarkis’ wife’s evidence only related to – what I will call – the after the fact effect of Sarkis’ conduct on himself and his family.

Sarkis’ evidence in this case was that the plaintiff at all times knew exactly what he was doing during the period, starting sometime in 1997 to February 2000, which resulted in such losses.

It is also a fact that Sarkis was paid commission of approximately $ 350,000.00 on the trades that lost money for Refco.

I find it unbelievable that Refco management would allow on a regular basis and for many months the types of trading Sarkis was in engaged in, which had the effect of increasing the debit loss and the effect of paying substantial commissions to Sarkis.

I further find that Sarkis deliberately hid from Refco management the true picture of what was happening in the Sarkis/Al-Mustashar accounts. The continually used Sarkis system of credits and debits was a device analogous to a smoke screen that I find was created and used to deceive Refco management from the true state of affairs. Refco was entitled to rely on Sarkis’ representations and did. Such conduct is clearly fraudulent and I so find it to be.

In addition to finding Sarkis liable in fraud to the plaintiff I find him liable in contract as well. Without repeating evidence I find that the terms of Sarkis’ employment were such that he was responsible for losses incurred not only by himself, but also by his clients. Clearly, Sarkis had some interest in Al-Mustashar and I am somewhat convinced that he was trading on behalf of foreign nationals and/or people out of Canada who had not put up the usual deposits the purpose of which is to protect management.

In my view, the evidence clearly is conclusive that a trader was responsible for bad debts. The management and Sarkis’ colleagues clearly supported the conception of the trader being responsible for unpaid losses.

The consequences of Sarkis’ conduct have clearly been disastrous. Sarkis at the time of his dismissal was 54 years old and had been with Refco for approximately 12 years. Even though Sarkis has done his best to convince me he was really a trader with a fancy title I am of the opinion that he was a senior manager with great responsibilities.

[28] The appellant complains that these reasons for judgment, although lengthy, are not adequate for appellate review, that the findings portion of the reasons is brief and conclusory and does not explain the trial judge’s reasons for his findings, that the first 315 paragraphs are taken “virtually verbatim” from the written submissions of counsel and “involve a mechanistic review of the evidence”, and that the credibility findings are insufficient because they do not address and resolve the discrepancies in the evidence, particularly among Chee, Gloutney and Sarkis.

[29] I do not agree. The trial judge heard the evidence of all the witnesses and also had the benefit of the parties’ detailed written argument, including a review from each side that highlighted the alleged discrepancies in the evidence, as well as improbabilities, co-incidences and other features that go into an assessment of credibility. He chose to structure his reasons by topic, synthesizing the complex evidence on each topic, and where required, stating which evidence he preferred.

[30] The trial judge did make use of the written argument of counsel, as he was entitled to do. He included some verbatim sections, particularly in his description of the intricacies of forex trading. The balance of the reasons leading up to his findings section draws on the written argument as well as the oral and other evidence. It is inaccurate to characterize his reasons as a virtually verbatim recitation of counsel’s written submissions.

[31] The findings at the end of the trial judge’s reasons are fully comprehensible in the context of the preceding portion of his reasons setting out the evidence related to the issues before the court. Interspersed in the trial judge’s summary of the evidence are factual findings that explain his ultimate findings. For example, the parties disputed whether Sarkis was always merely a forex trader, or whether he assumed the more responsible position of Forex Manager in 1991. Refco’s position was that in 1991, when Sarkis signed the employment agreement addendum and took on the title of Forex Manager, Sarkis was given oversight of and management responsibility for the forex department. In contrast, Sarkis claimed that this title was “meaningless” and that, even after 1991, he was just another trader with a fancy title.

[32] In the evidentiary portion of the trial judge’s reasons under the heading “Sarkis’ Employment Responsibilities”, which sets out part of the evidentiary basis for his findings on the breach of contract cause of action, the trial judge found at para. 84: “the weight of the evidence is that Sarkis was given the title of Forex Manager in 1991, pursuant to the addendum to his original employment contract. However, more important to this litigation is the duties and responsibilities that came with the title.” The trial judge then described the different witnesses’ views on that issue, highlighting the increased responsibilities and benefits that Sarkis had compared to other forex traders and also the relevant duties and responsibilities that Gloutney and Chee had in relation to those of Sarkis.

[33] The trial judge concluded that Sarkis’ claim that he was not acting in a managerial capacity was undermined by the significant duties and responsibilities that were given to him by management, as well as by his guaranteed salary of $5000 per month plus commission, in contrast with the other Refco brokers who did not earn such a salary (Reasons, paras. 85 and 330).

[34] Another example of how the trial judge’s lengthy review of the evidence makes comprehensible his ultimate findings relates to the heavily contested issue of whether senior management knew the details of Sarkis’ disputed forex trading and acquiesced in his conduct. Sarkis claimed that Refco was aware of all his transactions even though there was no individual tracking of client accounts. He contended that Gloutney, Chee and the back office all knew what he was doing, since he reported all of his transactions, but they did not care about it until the weekend before he was dismissed. Sarkis relied on Chee’s responsibility for financial compliance at Refco, as well as the fact that Chee failed to implement the policies in the Manual, to argue that Chee and Refco failed to institute procedures to protect against the problems that emerged, and that Chee and Gloutney abdicated their responsibilities for monitoring forex trading and instead improperly relied on Sarkis to ensure compliance. Finally, Sarkis submitted that Gloutney and Chee failed to take basic investigatory steps when confronted with the problem.

[35] The respondent’s position was that Sarkis’ disputed credit entries were fictitious credits amounting to written misrepresentations, which he used to maintain a positive balance in the CEAL. The respondent claimed that when the credits did not come in, the back office would reconcile them, at which point Sarkis would make more fictitious credits to cover his tracks, and that Chee was not aware of this practice because of the volume of money and trades going through the account and the CEAL. Chee testified that when she became concerned over the reconciling items in question, Sarkis’ assured her that the fictitious credits represented promised payments from Berbari or provided other oral misrepresentations. Given all the evidence, the respondent submitted that the only possible inference was that the purpose of the ever-changing, unidentified credits was to confuse the back office and hide the Al-Mustashar debit.

[36] The trial judge accepted the respondent’s position that Refco management was not aware of the Al-Mustashar debts as a result of the fictitious credits used by Sarkis. In this regard, he pointed to Chee’s evidence that she did not notice the funds being deducted from Refco’s accounts to cover the fictitious credits, and the trial judge observed at para. 168 that it was easy to see why these transactions went undetected:

When one looks at the account statements, it is easy to see why [Chee did not notice the funds being deducted from the accounts]. There are millions of dollars moving in and out of these accounts. Even the larger sums deducted from time to time by the Royal Bank are relatively small compared to the overall account, and given that RBC was the counterparty for Refco’s Forex trades, there appeared to be absolutely nothing unusual about them.

[37] Thus, although the trial judge did not attempt to directly reconcile every alleged discrepancy in the evidence, he fully discussed the details of the trades and what the Refco employees knew about them and he considered the explanations for why the trades did not set off alarm bells until February 2000. He also described instances where Sarkis contradicted his own testimony or acknowledged that he had changed his story. By preferring the evidence of the Refco witnesses over the evidence of Sarkis, the trial judge accepted their explanation that the debits went undetected as a result of both the trust and responsibility reposed in Sarkis in relation to forex trading at Refco and as a result of Sarkis’ oral and written misrepresentations.

[38] Sarkis effectively acknowledged that what he was doing would have been a fraud on the company unless the company knew about it and acquiesced. The trial judge concluded that senior management did not appreciate what was going on and they certainly did not acquiesce. This conclusion was open to him and, indeed, was a very reasonable one on the evidence. The trades were done on the account of Sarkis’ personal holding company. There was no concrete evidence that the trades were ever done for Berbari or any other client, since no client ever supplied any funds in relation to the disputed transactions. It was therefore fair for the trial judge to conclude that he was only “somewhat convinced” that the trades were for clients of Sarkis who failed to put up any money. Whether they were for Sarkis alone or for his friends, either way, Gloutney, Chee and Refco did not stand to profit from the trades in the same way that Sarkis did. Besides earning $350,000 in commission on the trades, Sarkis was conducting the disputed trades with personal upside but no downside. Although Refco earned commission as well, because the trades resulted in losses, that commission was merely an accounting entry. There was thus no logical basis to draw a conclusion that senior management acted as Sarkis’ willing accomplices. Moreover, they denied this suggestion in their testimony and the trial judge accepted their evidence, as was open to him to do.

[39] The trial judge recognized that credibility was the key issue before him. He focused on it by outlining the story in a logical way, then at the end making his finding that the respondent’s story was far more believable than the appellant’s. There are many ways to structure reasons for judgment. The task is more difficult in a complex case. In my view, the trial judge’s reasons were sufficient for the appellant to understand why he was found liable and to permit effective appellate review.

[40] I would add that the appellant’s theory of the case is not at all compelling. He did not suggest that the Refco management specifically told him it was fine if he continued to hide the debits that he was incurring. His theory at trial and on appeal is essentially that, because what he was doing was transparent, Refco management must have understood and either approved of, or at least acquiesced in, his conduct and therefore he was not committing a fraud on the company. The problem with this theory is that Sarkis was still effectively taking money from the company by gambling with its funds for his personal benefit. Without express authorization, the basis for which is not easily imagined, the appellant was committing a fraud on the company. Had the trial judge found senior management complicit in his conduct, they may well have shared the legal responsibility for the losses.

(2) Burden of Proof for Allegations of Fraud

[41] The appellant submits that the trial judge did not use the more rigorous standard of proof that is required when allegations of fraud are made. Again, he points to the conclusory nature of the findings portion of the reasons and the alleged failure of the trial judge to reconcile conflicting evidence or to state specifically why he accepted the evidence of the respondent’s witnesses and not that of the appellant.

[42] There is no merit to this submission. First, the trial judge referred specifically to the burden of proof he was applying to findings of fraud in the opening portion of his reasons, that is, findings made on clear and cogent evidence commensurate with the gravity of the allegations.

[43] Second, contrary to the submission of the appellant, the trial judge did not simply prefer the evidence of the respondent’s witnesses. He stated that the evidence of Chee and Gloutney was “far more believable” than the evidence of Sarkis. In the context of the two burdens of proof that the trial judge said he was applying, I understand this to be a reference to the higher standard: see Stetler v. Ontario Flue-Cured Tobacco Growers’ Marketing Board (2005), 2005 CanLII 24217 (ON CA), 76 O.R. (3d) 321 (C.A.), at para. 79.

(3) Refco’s Entitlement to Rely on Sarkis’ Representations

[44] Sarkis argues that Gloutney’s and Chee’s reckless disregard of their statutory duties of care and internal compliance obligations was so egregious that Refco lost the right to hold Sarkis responsible, even if he did engage in misrepresentation.

[45] There is no basis in law for this submission. A similar argument was made in the British Columbia Supreme Court in United Service Funds v. Richardson Greenshields of Canada (1988), 1988 CanLII 2955 (BC SC), 22 B.C.L.R. (2d) 322. There, Southin J. stated at p. 335 that “[c]arelessness on the part of the victim has never been a defence to an action for fraud.” She went on to say at p. 336:

Once the plaintiff knows of the fraud, he must mitigate his loss but, until he knows of it, in my view, no issue of reasonable care or anything resembling it arises at law.

And, in my opinion, a good thing, too. There may be greater dangers to civilized society than endemic dishonesty. But I can think of nothing which will contribute to dishonesty more than a rule of law which requires us all to be on perpetual guard against rogues lest we be faced with a defence of “Ha, ha, your own fault, I fool you”. Such a defence should not be countenanced from a rogue.

[46] The appellant argues that this situation represents an exception because of the position of Chee and Gloutney as senior employees with knowledge and responsibilities for strict compliance with trading rules. These of course are duties they owe to their employer and to the public. They are not duties they owe to their own Forex manager to prevent him from defrauding them and the company.

[47] The appellant also refers by analogy to the insurance context and this court’s decision in Pereira v. Hamilton Township Farmers’ Mutual Fire Insurance Co. (2006), 2006 CanLII 12284 (ON CA), 209 O.A.C. 127, where there is reference to an exception to the general rule that an insurer has no duty to investigate the representations made by an insured when applying for insurance. That exception may impose a duty to enquire where an insurer is effectively on notice that something the insured says is untrue.

[48] Assuming, without deciding whether such an analogy can be drawn in law, in this case, Chee did make inquiries of Sarkis about his debits and credits and he gave her explanations and assurances that she accepted. It hardly lies in Sarkis’ mouth to say that she should not have believed him, and because she did, it was her fault that he defrauded their employer.

(4) Contractual Liability

[49] The appellant argues that the trial judge erred in holding that he was under a contractual obligation to bear the cost of unpaid client debits. He submits that the only written instruments that set out the terms of his employment were the 1988 initial engagement letter, the 1991 employment addendum and the Manual. The appellant observes that the 1988 letter does not make any reference to the issue of broker liability for client fees. Although the latter two documents do mention such liability, the 1991 addendum did not bind Sarkis, because it was reviewable after three months and the practices at Refco subsequently shifted such that they no longer reflected the terms of the addendum, and Sarkis did not sign the acknowledgement recognizing the terms of the Manual.

[50] I would reject this ground of appeal. The trial judge found that the terms of Sarkis’ employment made him responsible for losses incurred for his own account as well as for his clients. On the first issue, Sarkis was trading at least to some extent for himself because of his interest in Al-Mustashar, his holding company. The trial judge was only “somewhat convinced” that he was trading for foreign clients, because no client ever put up any funds. However, even if he was trading for clients, the trial judge accepted the evidence given by Refco management and traders that standard industry practice is such that traders are liable for unpaid client debts. The trial judge was entitled to accept this evidence and there is no basis to interfere with his findings.

(5) Damages

[51] The appellant claims that Refco did not prove that it suffered any actual pecuniary loss because of the intercorporate steps it took to move the forex trade position to another company. The appellant says that Refco was paid more than the loss and did not prove that the payment or any part of it constituted an actual intercorporate loan liability for that transfer.

[52] The appellant also complains that the trial judge dismissed this argument in perfunctory reasons. The trial judge referred to the appellant’s submission on this issue at paras. 267-72 of his reasons and set out the respondent’s position at paras. 296-97. At para. 324, he commented that the appellant’s submission was “very complicated and of no merit.”

[53] The appellant also asks this court to reassess the evidence regarding the transfer of the loss position to Wells Ltd. and the documentation supporting that transaction, including the subordinated loan agreement, to find that Refco did not use the best evidence to support its version of what occurred.

[54] I would dismiss this ground of appeal as well. The trial judge was entitled to accept the evidence given by and on behalf of Refco as to how it dealt with the loss once it was discovered. The series of transactions is complex. However, the trial judge evidently accepted the fact that Refco was left with a subordinated loan obligation reflecting the amount of the forex loss as calculated by the expert who testified regarding the quantum of the loss. The appellant did not call any expert to refute that calculation. He only argued that the amount of the loss was mitigated by its sale to Wells. The trial judge accepted that part of the sale involved incurring the loan obligation, so that the loss was not mitigated. He was entitled to do so.

[55] In response to the argument made on the appeal that Refco did not put forward the best evidence of full documentation to explain the sale and loan transactions and that an adverse inference should have been drawn, the respondent says that it called the best evidence that was available by the time of the trial. By that time, the Refco Group had fallen apart, its U.S. CEO had been arrested for fraud, and there were no further witnesses available to testify.

[56] The positions of both parties on this issue demonstrate the wisdom of the rule that deference is accorded to the trial judge on evidentiary issues, including the sufficiency of the evidence to prove an issue in the case. The trial judge was in the best position to assess the evidence, including whether he was satisfied that the best evidence had been called on the issue in all the circumstances.

V. CONCLUSION

[57] I would dismiss the appeal with costs fixed at $30,000 inclusive of G.S.T. and disbursements.

Signed: “K. Feldman J.A.”

“I agree M. Rosenberg J.A.”

“I agree S.E. Lang J.A.”

RELEASED: “KNF” August 19, 2008

[^1]: A cross-trade is a type of forex trade in which one currency is bought and another is sold and neither is in the U.S. dollar.