COURT OF APPEAL FOR ONTARIO

CITATION: Straus Estate v. Decaire, 2012 ONCA 918

DATE: 20121224

DOCKET: C53471

Goudge, Simmons and Gillese JJ.A.

BETWEEN

Estate of Joseph Straus by its Executor, Angela Straus and Angela Straus

Plaintiffs (Respondents)

and

Roy Decaire, RCB Investors Choice Inc., IPC Investment Corporation, FundEX Investments Inc., Pacific International Securities Inc., Orion Securities Inc., Spectrum Meditech Inc., IRG Services Ltd., Cyclone Investments Inc., Northgate Holdings Inc., Millenium Medical Supply Inc., Millenium Medical Supply Corp., Kelly Fielder, Richard Savage and Nicola More

Defendants (Appellant)

Ross F. Earnshaw, for the appellant FundEX Investments Inc.

Gary L. Petker, for the respondents

Heard: September 19, 2012

On appeal from the judgment of Justice David S. Crane of the Superior Court of Justice, dated February 18, 2011, with reasons reported at 2011 ONSC 1157.

Gillese J.A.:

OVERVIEW

[1] Joseph Straus (now deceased) and his wife, Angela Straus, (together the Strauses or the plaintiffs) lived with their six young children in Waterloo, Ontario. Joe was a millwright with a grade 12 education. Angela was a homemaker with some part-time employment as a bookkeeper. At the relevant time, their youngest child was four years old. The children are approximately two years apart in age.

[2] Roy Decaire (“Decaire”) was Joe’s brother-in-law. He was also Joe and Angela’s financial advisor.

[3] Decaire was registered with the Ontario Securities Commission (“OSC”) as a salesperson. By virtue of his registered status, at the relevant time for this appeal, he was allowed to sell mutual funds and other financial products, but only for so long as he was employed by FundEx Investments Inc. (“FundEX”). Decaire had been previously employed by Associated Financial Planners Inc. (“AFP/IPC”)[^1] on a similar condition. Both FundEX and AFP/IPC were registered mutual fund dealers (“dealers”), regulated by the Securities Act, R.S.O. 1990, c. S.5.

[4] Decaire became associated with Kelly Fielder (“Fielder”), a stock promoter who was pursuing investment in needle incineration technology (“Needle-Ease”). Decaire was not legally permitted to promote or sell this investment. In promoting it, Decaire was acting “off the books”.

[5] Decaire convinced Joe and Angela to invest in start-up companies associated with Needle-Ease. The investment turned out to be worthless and they lost all that they had invested in it.

[6] The Strauses brought a lawsuit in which they sought to recover their losses from not only Decaire but also the financial firms with which he was affiliated during the relevant times.

[7] They were successful.

[8] In a judgment dated February 18, 2011 (the “Judgment”), the trial judge ordered that Decaire pay damages for the full amount of their investment of $277,471, plus interest and costs; that AFP/IPC pay damages of $154,471,[^2] the amount they invested while Decaire was its representative; and, that FundEX pay damages of $100,000, the amount they invested while Decaire was its representative.

[9] In addition, the trial judge awarded the Strauses costs payable by Decaire, AFP/IPC and FundEX, jointly and severally, with indemnity rights against one another in approximate proportion to the principal amounts awarded against each.

[10] FundEX appeals. It contends that the trial judge erred in finding it liable for Decaire’s actions during the period that he worked for it.

[11] For the reasons that follow, I would dismiss the appeal.

BACKGROUND IN BRIEF

Decaire

[12] Decaire played a central role in this matter. His employment history is a critical component of the saga. Thus, I begin there.

[13] Decaire was both a licensed life insurance agent and a licensed mutual fund sales representative. He was associated with Royal Sun Alliance, a life insurance company, at all material times.

[14] In 1997, Decaire was hired and fired by Regal Capital Planners.[^3]

[15] That same year, he went to work with Financial Concepts, where he lasted one month.

[16] From January 1998 to May 1999, Decaire worked at AFP/IPC.

[17] In May 1999, Decaire left AFP/IPC and joined FundEX.

[18] In the contract between Decaire and FundEX, Decaire agreed to operate as an independent contractor, not an employee, and that he would not hold himself out as a FundEX employee. He further agreed that he would comply with all industry standards relating to trading in financial products offered by FundEX, and all compliance and supervisory procedures.

[19] In order to sell mutual funds and other such financial products, Decaire had to be licensed by the OSC. Each of his employers, including FundEX, had to sponsor his application and his registration was conditional on him remaining employed by his sponsoring employer.

[20] Decaire remained with FundEX until 2002. On leaving, Decaire transferred his book of business to Gordon Stoll. Mr. Stoll completed the first and only Straus investment application on record at FundEX, albeit only for Joe Straus. This application showed that Joe’s investment objectives were tax savings, retirement planning and growth. His risk tolerance was rated at medium.

Decaire’s Relationship with Millenium

[21] In 1998, Decaire became associated with Fielder. At all material times, Fielder was an insider of, and a fund raiser for, the defendants Millenium Medical Supply Inc., Millenium Medical Supply Corp., and Spectrum Meditech Inc. These companies are insolvent; no claim was advanced against them at trial. Fielder was also the principal and guiding mind of the defendant corporations Spectrum Meditech Inc., IRG Services Ltd., Cyclone Investments Inc. and Northgate Holdings Inc. Neither Fielder nor these corporations defended the action at trial. For ease of reference, I will refer to all of these companies as Millenium.

[22] From 1998 onward, Decaire was a vigorous proponent of investment in Millenium. The trial judge found that his commitment to Millenium and Needle-Ease was “beyond reason and objectivity” and that it continued well after their insolvency.

[23] Decaire introduced, promoted and assisted the sale of Millenium shares to his mutual fund clients. He was rewarded for his efforts by Millenium, a fact hidden from the plaintiffs and his other clients. For example, he signed a contract with Millenium under the terms of which he was to receive 1.5 million shares plus $5,000 (USD) per month for promoting Millenium. At other points during this sad saga, he was gifted 107,500 shares “for his participation in the development and design of the Canadian marketing effort” and later received a further gift of 550,000 shares in Spectrum Meditech Inc.

The Strauses Invest in Millenium

[24] Decaire was Joe and Angela’s sole source of investment advice and information. Angela did not know the difference between segregated funds, mutual funds or stocks. She did not know the difference between a stockbroker and those who could only sell mutual funds. Even at trial she was still unsure of what a segregated fund is. It was only during the course of the lawsuit that she had learned that it was an insurance product.

[25] In 1998, the Strauses bought four Royal Sun Alliance segregated funds, a life insurance product, for $80,000.

[26] After Decaire got involved with Fielder, he advised Joe and Angela to invest in Millenium to the full extent of their financial resources. As previously noted, he never disclosed to them that he was reaping financial gains for his promotional efforts in respect of Millenium. He did not give Joe and Angela any documentation or disclose the risks associated with the investment. He led the Strauses to believe that they would not lose their money – that the investment was as safe and secure as if it had been invested in a Canada Savings Bond or GIC.

[27] While Decaire was at AFP/IPC and on his advice, the Strauses invested approximately $170,000 in Millenium.

[28] When Decaire joined FundEX, he transferred the Straus investments to it.

[29] While at FundEX, Decaire maintained “unfounded faith in the business viability of Needle-Ease”[^4] and continued to vigorously promote Millenium, even though by that time he knew it was worthless. He made no secret of his involvement with Millenium and Needle-Ease. He kept its promotional material on his desk in his FundEX office. He talked with anyone and everyone about Needle-Ease as an investment.

[30] In August 1998, on Decaire's advice, Joe and Angela liquidated their Royal Sun Alliance segregated funds and used the proceeds of approximately $95,000, supplemented by other personal funds, to make a further investment of $100,000 in Millenium.

[31] FundEX called no witnesses at trial.

Expert Evidence at Trial

[32] Sergio Cechetto was the only expert at trial qualified to testify on matters relating to mutual fund dealers including mutual fund industry practice, compliance practices and the compliance duties of dealers during the relevant time period.

[33] Mr. Cechetto testified that the Mutual Fund Dealers Association (“MFDA”) was formed in June 1998 but it was not until 2000-2001 that it was fully established as a self-regulatory organization. However, by 1999, all dealers were aware that the MFDA was in place or about to be in place and become effective. He said that every dealer had to come up with a compliance plan consistent with the minimum standards contained in the regulations.

[34] The trial judge accepted Mr. Cechetto’s evidence that as part of compliance, dealers are obliged to oversee the activities of their sales representatives so that clients are not put into products that are inappropriate for them. He also accepted Mr. Cechetto’s testimony that dealers have a duty to have in place a robust compliance plan and they also have a duty to their clients to ensure compliance with codes of conduct, which provide protection to investors from unfair, improper or fraudulent practices.

THE TRIAL JUDGMENT

[35] The trial judge found that Joe and Angela were “simple people in financial and business matters” – unsophisticated investors with a moderate tolerance for risk. They had a very minimal knowledge and understanding of investments in securities regulated under the Securities Act. Their purchase of Millennium shares was their first corporate share transaction, a transaction that the trial judge found was suitable only for sophisticated investors with a high risk tolerance. He found the purchase to be clearly unsuitable for the Strauses.

[36] In respect of Decaire, the trial judge found that he acted unlawfully in his off the books activity with Millenium and that he violated the fundamental obligation of honest dealing in his promotion and misrepresentation of Millenium to FundEX mutual fund customers. Further and significantly, the trial judge found that in so doing, Decaire acted in an open and readily discoverable manner.

[37] The trial judge concluded that FundEX had failed in its duty to protect the plaintiffs from Decaire’s off the books activity. He found that FundEX, through its corporate policy and practices, placed Decaire into the community so as to obtain the plaintiffs’ trust and confidence as their financial advisor, all without proper supervision or governance of his activities and while knowing that there was a reasonable risk that Decaire would abuse that confidence by putting clients into inappropriate products.

[38] And, the trial judge found at para. 25 of his reasons,

Decaire at the direction of [AFP/IPC] and subsequently FundEX, jointly and severally for their respective profit, adopted a model for the sale of mutual funds by creating a fiction that their sales representatives were financial advisors.

[39] The business model AFP/IPC and FundEX employed was to have Decaire solicit his family members, relatives and friends, all on the basis that he was an officially registered financial advisor employed by a large mutual fund company to perform these services. The mandate and instruction of the two defendants was for Decaire to obtain his clients’ confidence and trust both for immediate purchases and for the development of long term loyalty to the defendant dealer.

[40] In holding FundEX liable in negligence, the trial judge made these further findings:

1. Decaire came to FundEX with bad judgment and little knowledge, ability or training to be a financial planner or advisor. He was a persuasive salesperson qualified to sell mutual funds, provided he was given instruction and supervision;
2. FundEX failed to inquire into Decaire’s activities at AFP/IPC and his potential for continuing those activities while at FundEX;
3. FundEX failed to train Decaire for the purpose of committing him to the compliance requirements of the mutual fund industry;
4. FundEX’s governance officer failed to make even a superficial inquiry into Decaire’s activities and any reasonable inquiry would have revealed Decaire’s off the books activity;
5. FundEX failed to monitor and supervise Decaire’s daily activities after he began working for it. In so doing, it failed to meet its legal responsibilities under the Securities Act;
6. FundEX failed to examine Decaire’s books;
7. In light of Decaire’s employment history in the financial industry, FundEX failed to make reasonable inquiries that would have disclosed Decaire’s off the books activity;
8. FundEx failed in its obligation to the plaintiffs to ensure that it met its compliance requirements of oversight and that codes of conduct were followed.

[41] The trial judge also found FundEX liable on the basis that it was vicariously liable for Decaire’s activities during that period.

THE ISSUES

[42] FundEX submits that the trial judge erred in finding that it:

(1) owed a duty of care to the plaintiffs; and

(2) was vicariously liable for Decaire’s activities.

[43] FundEx also sought to appeal the cost order below. However, at the oral hearing of the appeal, counsel for FundEx indicated this ground would be pursued only if the appeal were successful. As I would dismiss the appeal, it is unnecessary to deal with this issue.

ANALYSIS

Did FundEX owe the plaintiffs a duty of care?

[44] FundEX’s submission on this ground rests on the different regulatory regimes for life insurance agents and mutual fund sales representatives. FundEX complains that the trial judge imposed liability on it based upon a duty to supervise the liquidation of life insurance products. It points to the fact that the Royal Sun Alliance segregated funds were liquidated by Decaire, through Royal Sun Alliance, under the authority of his life insurance designation. FundEX contends that as a mutual fund dealer it cannot be held responsible for Decaire’s actions as a life insurance agent in the sale and liquidation of life insurance products.

[45] This submission, in my view, completely misses the point. The trial judge held FundEX liable in negligence based not on a duty to supervise the liquidation of life insurance products, as FundEX contends, but based on the breach of its duty to supervise Decaire in his role as a mutual fund sales agent. The source of the plaintiffs’ funds (i.e. their life insurance investments) for the additional $100,000 “investment” in Millenium during the time that Decaire worked for FundEX is not legally significant in the circumstances of this case. What is significant is that the investment was made at Decaire’s urging, while he was a licenced mutual fund agent working for FundEX, a registered mutual fund dealer. The trial judge held FundEX liable in negligence because, after enabling Decaire to hold himself out as a registered financial advisor working with a registered mutual fund dealer, it failed to adequately (or at all) train, monitor or supervise Decaire while he worked for it, contrary to its regulatory and industry obligations.

[46] FundEX made a related argument based on Doiron v. Devon Capital Corp., 2002 ABQB 664, 319 A.R. 387. In Doiron, Forsyth J. of the Alberta Queen’s Bench found Manufacturers Life Insurance Company, functioning as Manulife, was not liable for off the books activity by one of its agents. At para. 21, the court stated that Manulife had a duty to supervise the agent but that duty only extended to his Manulife-related activities. Therefore, while Manulife had a duty to ensure that the life insurance policies and annuities that the agent solicited were appropriate for the particular client, that duty did not extend to the agent’s “collateral investment projects”.

[47] The trial judge’s findings of fact in the present case make it clear that Doiron is a very different case. Decaire did not promote Millenium completely independently of FundEX. On the contrary, he did so openly and vigorously while at his FundEX office and to anyone who would listen, including FundEX colleagues. Indeed, when Decaire left FundEX in 2002, he transferred his book of business to Gordon Stoll, a mutual fund salesperson at FundEX whom he had convinced to invest in Needle-Ease.

[48] The trial judge held FundEX liable in negligence based on extensive findings of fact. On the record, those findings were fully available to him. I see no basis for appellate intervention.

[49] Accordingly, I would dismiss this ground of appeal.

Is FundEX vicariously liable for Decaire’s activities?

[50] FundEx makes two submissions in arguing that the trial judge improperly found it vicariously liable for Decaire’s off the books activity.

[51] The first submission is based on 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983. At para. 33 of Sagaz, the Supreme Court of Canada states that the relationship of an employer and independent contractor typically does not give rise to a claim for vicarious liability. FundEX says that the relationship it had with Decaire was that of employer and independent contractor, not employee. Therefore, the trial judge erred in fixing it with vicarious liability for the plaintiffs’ losses arising from the August 1999 Investment.

[52] FundEX’s second submission is that the trial judge erred by expanding the doctrine of vicarious liability to encompass the principal and agent relationship by fixing it with liability, as principal, for damages arising from Decaire’s acts which were prohibited by law, performed contrary to FundEX policies and which the plaintiffs knew to be completely unrelated to FundEX.

[53] The trial judge was fully alive to the distinction between an employee and an independent contractor and the implications of such a determination when determining whether vicarious liability was to be imposed. He thoroughly canvassed the relevant legal principles, paying particular attention to the Sagaz decision.

[54] Despite the terms of the written contract between Decaire and FundEX, in which Decaire agreed he was an independent contractor, the trial judge concluded that Decaire was an employee. He reached this conclusion after a close examination of the total relationship between FundEX and Decaire, with particular attention to the factors set out in Sagaz and informed by the policy considerations of fairness and deterrence – as set out in Bazley v. Curry, 1999 CanLII 692 (SCC), [1999] 2 S.C.R. 534 – that justify the imposition of vicarious liability. He found that Decaire was not performing as if he were a person in business on his own accord. Decaire did not hire employees. He worked from an office at FundEX, in which, parenthetically, he kept promotional material on Needle-Ease. He was not free to choose his method of marketing. Rather, he followed FundEX’s business model, one which the trial judge found created a risk that Decaire would place FundEX clients in inappropriate products. His mutual fund agent licence was obtained under the auspices of FundEX and his registration with the OSC was conditional on him remaining employed by FundEX. He could not market or promote financial products without this registration. And, the trial judge understood Mr. Cechetto’s evidence as an expert on the structure of the mutual funds industry to be that Decaire was more akin to an employee of FundEX.[^5]

[55] I see no basis for appellate intervention with the trial judge’s determination of the character of the employment relationship. Having found that an employer-employee relationship existed, there was no error in holding FundEX vicariously liable for Decaire’s wrongdoing.

[56] Accordingly, it becomes unnecessary to determine whether the trial judge correctly held that FundEX, as principal, was vicariously liable for Decaire’s wrongful acts.

DISPOSITION

[57] Accordingly, I would dismiss the appeal with costs to the respondent fixed at $15,000.00, all inclusive.

Released: December 24, 2012 (“E.E.G.”)

“E.E. Gillese J.A.”

“I agree S.T. Goudge J.A.”

“I agree Janet Simmons J.A.”

[^1]: Investment Planning Counsel of Canada Limited was the successor to AFP and AFP Wealth Management Limited. In the style of cause, it was named as the defendant IPC Investment Corporation. [^2]: In the reasons for decision, AFP/IPC was held liable in damages of $177,471. However, the Judgment shows liability in the amount of $154,471. [^3]: There is some confusion in the record over the precise dates of his employment with Regal Capital Planners. It may be that he worked for it from sometime in 1996 to sometime in 1997. [^4]: As described by the trial judge at para. 94 of his reasons. [^5]: Mr. Cechetto testified that it was an independent contractor relationship for the purposes of the tax treatment of expenses but it was a principal/agent relationship in terms of the employee having to comply with the employer’s way of doing business and meeting the legislative requirements.