Junko v. Canaccord Capital et al.

113 O.R. (3d) 579
2012 ONSC 6966

Ontario Superior Court of Justice,
Goldstein J.

December 11, 2012

Agency -- Stockbrokers -- Duties -- Client trading highly risky derivative securities on margin at time of great market volatility -- Client suffering heavy losses on one day -- Client signing promissory note to his brokerage -- Client failing to pay and brokerage suing him successfully -- Client counterclaiming against brokerage and his stockbroker claiming that he suffered losses because stockbroker made unauthorized trades in his account and forced him to sign promissory note -- Counterclaim dismissed -- No fiduciary relationship existing between client and stockbroker in circumstances of this case -- Client's know-your-client form indicating that his investment objective was 100 per cent speculative high-risk investments -- Client being knowledgeable investor who made his own decisions -- Trades not unauthorized and stockbroker not forcing client to sign promissory note -- Stockbroker not liable for mistake about direction on which market would move on day in question. [page580]

In late 2008, at a time of extreme market volatility, the plaintiff by counterclaim, J, invested in a derivative product ("SKF") that inversely tracked the movement of the Dow Jones financial index by a multiple of two. J traded SKF on margin. His brokerage was the defendant by counterclaim Canaccord, which extended credit to him so that he could trade on margin. His stockbroker was the defendant by counterclaim T. On October 10, 2008, J lost a considerable amount of money trading SKF on margin. Canaccord sold off other securities in his account to cover the losses, but in the end he owed $292,398. He signed a promissory note to Canaccord. When he did not make payment on the promissory note, Canaccord sued him. He counterclaimed, added T as a defendant and claimed damages for breach of contract, breach of fiduciary duty and breach of statutory and regulator duties. Against T, he claimed for contribution and indemnity for any amounts for which he was found liable to Canaccord. He claimed that he suffered the losses because T made unauthorized trades in his Canaccord account and forced him to sign the promissory note. Summary judgment was granted in favour of Canaccord, and the trial of the counterclaim was heard.

Held, the counterclaim should be dismissed.

No fiduciary relationship was created in the circumstances of this case. When J opened his account at Canaccord, his know- your-client form indicated that his investment objective was 100 per cent speculative high-risk investments. J was a knowledgeable investor who made his own decisions. He was not at all vulnerable. J was not a credible witness. Rather, he had a tendency to blame others for his mistakes. There was no doubt that the trades on October 10, 2008 were authorized. J and T had a disagreement on that date about whether the market would move up or down. T was mistaken, and the market moved up. However, investment advisors are not expected to have a crystal ball capable of predicting the movement of the market. Furthermore, J failed to take meaningful steps to repudiate the transactions.

COUNTERCLAIM for damages and for contribution and indemnity.

Cases referred to
820823 Ontario Ltd. v. Kagan, [2003] O.J. No. 3425, [2003] O.T.C. 788, 125 A.C.W.S. (3d) 375 (S.C.J.) ; Connolly v. Walwyn Stodgell Cochran Murray Ltd., 1993 NSCA 141 () , [1993] N.S.J. No. 191, 121 N.S.R. (2d) 278, 1993 CarswellNS 436, 40 A.C.W.S. (3d) 661 (C.A.); Davis v. Orion Securities Inc., [2006] O.J. No. 3198, 41 C.C.L.T. (3d) 302, [2006] O.T.C. 732, 150 A.C.W.S. (3d) 745, 2006 CarswellOnt 4800 (S.C.J.) ; United States of America v. York, 933 F.2d 1343 (1991); Young Estate v. RBC Dominion Securities, [2008] O.J. No. 5418, 46 E.T.R. (3d) 14, 173 A.C.W.S. (3d) 668 (S.C.J.)

Zenon Junko, on his own behalf.
Helen Daley, for defendant Canaccord Capital Corporation.
Jeffrey Larry, for defendant David Toles.

GOLDSTEIN J.: -- Introduction

1October 2008 was a wild time in the financial markets. In the midst of a U.S. presidential election, the "sub-prime" [page581] mortgage market imploded, venerable investment banks failed and governments intervened heavily to prevent the collapse of the financial system. Canadian as well as U.S. stock markets gyrated wildly and even more unpredictably than usual.

2In the midst of this near-chaos, Junko, the plaintiff by counterclaim, invested in a derivative product called Proshares Ultrashorts. Proshares Ultrashorts were the name of a family of exchange-traded funds. [See Note 1 below] SKF inversely tracked the movement of the Dow Jones financial index (the "Dow") by a multiple of two. In other words, if the stock exchange moved down by 1 per cent, for example, SKF would gain 2 per cent. If the stock exchange moved up by 2 per cent SKF would lose 4 per cent. SKF was obviously a very risky investment.

3To add to the risk, Junko traded SKF on margin. Margin trading occurs where a client is extended credit by his stock brokerage in order to trade. The client does not need cash in the brokerage account to buy or sell securities. He or she can use the credit facility provided by the brokerage. The client is ultimately responsible to cover any loss, usually by the end of the trading day. Junko's brokerage was the defendant by counterclaim Canaccord Capital Corporation ("Canaccord"). Canaccord extended credit to Junko so that he could trade on margin.

4Trading derivatives is risky. Trading on margin is risky. Trading derivatives on margin multiplies the risk. Trading derivatives on margin during a period of extreme volatility is at the farthest edge of riskiness.

5On October 9, 2008, Junko made money trading SKF on margin. On October 10, 2008, Junko lost a considerable amount of money trading SKF on margin. Canaccord sold off other securities in his account to cover the losses, but in the end Junko owed $292,398. Junko signed a promissory note to Canaccord, promising to pay that amount as well as interest. Junko says he suffered the losses in his account because his stockbroker, the defendant by counterclaim David Toles, made unauthorized trades in his Canaccord account. Junko also says that Toles forced him to sign the promissory note.

6When Junko did not make payment on the promissory note, Canaccord launched an action against him. Junko counterclaimed and added Toles as a defendant. Canaccord brought a [page582] motion for summary judgment on the promissory note. That motion came before me. I found that there was no genuine issue for trial on the promissory note and granted summary judgment. I permitted Canaccord to take steps to collect on the judgment, such as a judgment debtor examination, short of actual enforcement. A few weeks later, I heard the trial of the counterclaim.

7Junko counterclaims as follows:

-- against Canaccord for damages in the amount of the securities sold by Canaccord to satisfy the trading losses;

-- against Toles for contribution and indemnity for any amounts for which Junko is found liable to Canaccord;

-- against Toles and Canaccord for damages in an amount to be particularized prior to trial for breach of contract, breach of fiduciary duty and breach of regulatory and statutory duties, as well as interest and costs. [See Note 2 below]

8For the reasons that follow, I find that Junko is the author of his own misfortune. He decided to trade highly risky derivative securities on margin. I find that he authorized the trades in his account on October 10, 2008, the critical day where he sustained massive losses. This trial turns largely on the finding of fact that the trades were authorized. Junko's attempt to blame Toles for the losses was self-serving and not credible. I find that neither Canaccord nor Toles breached any duties that were owed to Junko. The counterclaim is dismissed. Evidence

... (continues exactly as in the source) ...

75Mr. Junko's counterclaim is dismissed. If the parties are unable to agree on costs, I will receive brief costs submissions [page600] (not exceeding two pages) and a costs outline from each of Ms. Daley and Mr. Larry within 14 days of the date of this judgment. I will receive brief costs submissions (not exceeding two pages) and a costs outline in reply from Mr. Junko within 30 days of the date of this judgment.

Counterclaim dismissed.

Notes

Note 1: Proshares is a company that manages exchange-traded funds. Ultrashorts are the brand name of a family of funds. SKF is the stock symbol for the security at issue in this case. In these reasons, I refer interchangeably to "Ultrashorts" and "SKF" depending on the context.

Note 2: The amounts were never particularized by Junko.

Note 3: I keep the original spelling, punctuation and grammar in each e-mail in these reasons.