ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 02-CV-231826CM
DATE: 20121211
BETWEEN:
GORDON VIPOND
Plaintiff
– and –
AGF PRIVATE INVESTMENT MANAGEMENT, a Division of AGF Funds Inc., WILLIAM J. SMITH, SCOTT LUIK and LAURA WALLACE
Defendants
Helen A. Daley , Daniel Bernstein for the Plaintiff
Janice Wright, Greg Temelini for the Defendants
Pepall J.
Introduction
[ 1 ] This action involves claims by an investor arising from the provision of discretionary investment management services.
[ 2 ] The Plaintiff, Gordon Vipond, claims damages in the amount of $5 million for breach of fiduciary duties, negligence and breach of contract from the Defendant AGF Private Investment Management, a Division of AGF Funds Inc. (“AGF”), and from AGF’s employees, the Defendants William J. Smith, Scott Luik and Laura Wallace. The claim for punitive damages in the amount of $500,000 was withdrawn during closing argument.
Facts
Mr. Vipond
[ 3 ] Mr. Vipond was born in Montreal in 1946. He completed grade eleven at high school and then worked for a number of years in clerical positions in the banking, textile and food industries. He also did manual work. His father was a senior executive at Bell Canada. By 1982, Mr. Vipond was dependent on his parents for his financial needs. As of that year, he received $5,000 a month from them. His only sibling had died at a young age so Mr. Vipond was in essence an only child.
[ 4 ] Mr. Vipond’s father died in August 1984 and his mother died on November 19, 1997. Mr. Vipond was appointed as the executor of his mother’s estate and was her principal beneficiary. Among other things, he inherited a portfolio of securities with an approximate value of $6.5 million. The securities were in certificate form in his mother’s name and were kept in her safety deposit box. They mainly consisted of common shares of Nortel Networks Corporation (“Nortel”), BCE Inc. ("BCE") and TD Bank. Mr. Vipond’s father, having been a lifelong Bell Canada employee, had held Bell Canada shares which had been converted into Nortel and BCE shares.
[ 5 ] Prior to his mother’s death in 1997, Mr. Vipond had not owned any stocks and had never had an account with a stockbroker. He had never had a professional adviser and indeed had not filed income tax returns for about ten years. Mr. Vipond’s passion was automotive racing. It certainly was not investments. In spite of this, after his mother's death, Mr. Vipond did keep track of the securities in the estate and would go to the library to check their progress, albeit somewhat irregularly.
Mr. Campbell
[ 6 ] Michael Campbell was a financial planner with Campbell Graham Cartier Partners in Kingston, Ontario. He was licensed to market mutual funds and life insurance but not stocks. Mr. Vipond’s mother had been his client since 1984. She had had mutual funds that had been managed by him. Mr. Campbell had a complete understanding of her financial situation.
[ 7 ] After Mrs. Vipond died, Mr. Campbell continued to manage the mutual funds that had belonged to her, and Mr. Campbell’s firm did Mr. Vipond’s income tax returns and the estate returns. Mr. Campbell and Mr. Vipond met regularly to discuss the estate and his inheritance and they became friends. They did not discuss individual stocks to any degree apart from acknowledging that the estate was very highly concentrated in a few stocks. Mr. Campbell told Mr. Vipond that he could run into a bad time if he adopted the family philosophy of simply buying and holding.
Investigation of Investment Alternatives
[ 8 ] In the two years after his mother’s death, the value of the stock portfolio increased until 1998 when there was a decrease. By the latter part of 1999, Mr. Campbell had persuaded Mr. Vipond that he should investigate professional investment options.
[ 9 ] Mr. Campbell and Mr. Vipond discussed both a discretionary managed account ("managed account" or "discretionary account") and a traditional brokerage account. Mr. Vipond understood that with the latter, a broker would call with a suggestion and Mr. Vipond would then have to make the purchase or sale decision himself. In contrast, with a managed account, the professional would make all of the purchase and sale decisions and maintain all of the records. Someone else could put together a portfolio, remove the risk and diversify the shareholdings. Mr. Campbell’s preference was that Mr. Vipond use a managed account.
[ 10 ] Mr. Vipond and Mr. Campbell made some inquiries. Mr. Vipond contacted his friend Larry Fraser of Goodman Private Wealth Management (“GPW”) and received some literature from him and also from TD Bank. He also discussed AGF with Mr. Campbell.
Introduction to AGF
[ 11 ] Mr. Campbell had a relationship with AGF and had invested client funds in their mutual funds. AGF is a Canadian public financial services corporation with more than 40 years of money management experience. Mr. Campbell liked AGF's Canadian Equity Fund, which was managed by Laura Wallace. Mr. Campbell had also heard Scott Luik of AGF speak at a promotional meeting in 1999.
[ 12 ] Mr. Luik graduated from the University of Toronto in 1993 and began his investment career in 1995. He became a Chartered Financial Analyst in 1998 and joined AGF that same year. From February 2000 until February 2001, he was the Director of Business Development & Client Services at AGF Private Investment Management. His role was to work with financial advisors and to direct clients so as to educate them on how AGF managed money. He also developed investment policies for clients and serviced clients. Although he was licensed to be a portfolio manager, he had no involvement in trading at AGF. He was the client relationship manager at AGF.
[ 13 ] Mr. Campbell exchanged a few telephone calls with Mr. Luik. According to Mr. Campbell and Mr. Vipond, in March 2000, they met with Mr. Luik at Mr. Campbell’s office in Kingston. Mr. Vipond described the meeting as a sales meeting. AGF was proposing the managed option in which their representatives would be the decision makers. Mr. Vipond had no specific recollection but assumed that the materials given to him that day included a sample portfolio showing Nortel comprising 12.05% of the total portfolio and another showing Nortel at 2.6%. He also assumed a portfolio summary was given to him which showed benchmarks consisting of the TSE 300 Total Return Index, the S&P 500 Total Return Index (Converted to Canadian Dollars), the Scotia Overall Mid-Term Bond Index, and Cash (Scotia McLeod 91 Day T-Bills). He had no understanding that the benchmarks described in that document were the benchmarks to be used for his portfolio.
[ 14 ] Mr. Luik did not recall this meeting. Mr. Luik testified that he did not meet Mr. Vipond until June 2000, but for the reasons described below, I find that Mr. Luik’s recollection is inaccurate on this point.
March 2000 Proposal Letter
[ 15 ] Mr. Campbell asked Mr. Luik to provide a proposal for Mr. Vipond’s consideration. Mr. Campbell had provided Mr. Luik with some information about Mr. Vipond and Mr. Luik sent him a draft proposal letter dated March 27, 2000. It contained neither a model portfolio nor any details of proposed investments. On March 28, 2000, Mr. Campbell wrote an e-mail to Mr. Luik advising that Mr. Vipond’s first question would be: “What investments will you make?” Mr. Campbell noted that if Mr. Vipond kept all the BCE, Nortel and TD shares, AGF’s proposed portfolio would be less growth. He wrote:
You can suggest, or cover in your letter, that a further meeting with him and me could help finalize the direction and Laura could then put together a proposed stock list based on then current market activity.
[ 16 ] The reference to Laura in the e-mail was to Laura Wallace, AGF’s portfolio manager. It is clear from this e-mail that at this time it was not known whether Mr. Vipond would be transferring the Nortel, BCE and TD shares to AGF for management. It would appear that Mr. Luik did meet with Mr. Vipond and Mr. Campbell prior to the June meeting, as otherwise Mr. Campbell would not have spoken of "a further meeting". Mr. Luik was mistaken when he testified that he did not meet Mr. Vipond until June 2000.
[ 17 ] Mr. Luik incorporated Mr. Campbell’s feedback into his proposal and after receiving his approval, sent a revised proposal letter to Mr. Vipond dated March 29, 2000. In the letter, Mr. Luik thanked Mr. Vipond for including AGF in his search for a discretionary investment manager.
[ 18 ] In the letter, Mr. Luik provided some information on how AGF managed investments for clients and specifically how they proposed to manage Mr. Vipond’s investments. The letter made numerous representations on the service and capabilities of AGF. It committed to provide the highest level of personal service. Mr. Luik wrote that AGF believed in a long-term approach to both money management and client relationships, and their primary commitment to their clientele was to provide superior investment results with lower risk and volatility at a reasonable cost. He wrote that he understood that Mr. Vipond’s profile and investment needs were as follows:
you are single and do not have any dependants
you do not spend frivolously and have learned to live with very little
you have an “average” level of investment knowledge and would like to increase that going forward (you are considering doing the Canadian Securities Course)
you are the lone beneficiary of an investment portfolio which has a current market value of approximately $6,500,000
a large percentage of this investment portfolio resides in three securities (approximately 75% in BCE, Nortel and TD Bank)
you require an after-tax income of between $90,000 - $120,000 per year.
[ 19 ] In the letter, Mr. Luik described risk as the volatility of returns and not the permanent loss of capital. He wrote “the latter is dealt with through proper diversification. Portfolio volatility should be above average and consistent with the primary objectives of growth and inflation protection. The portfolio should have a high degree of equity exposure, to provide capital growth and inflation protection, and should be oriented to long-term considerations.”
[ 20 ] He wrote that if a portfolio were to be liquidated or seriously reduced within a given time frame, AGF would describe it as having a “time horizon” of that term. This would affect the asset mix if there was insufficient time for equities to realize their full potential and would also control the maturity schedule of the bond portfolio. The time horizon on Mr. Vipond’s investment portfolio was described as being long-term. He was described as being in the highest tax bracket and that from a taxation point of view, returns on capital gains and dividends were preferable to returns from interest. Most desirable were unrealized capital gains.
[ 21 ] Under the heading ‘Recommended Strategy’, AGF recommended a growth portfolio with an equity content between 75% and 100%, of which 20% to 50% would be Canadian. Mr. Luik wrote under the heading ‘Constraints’ that “[n]o one issuer will account for more than 8% of the equity portfolio”. He went on to add that within the equity markets, the funds held in the portfolio “would be invested in different sectors of the economy to diversify risk”. AGF and Ms. Wallace admitted that more than 8 to 10% in any one stock would represent undue concentration. [1]
[ 22 ] The letter contained a model growth portfolio which was stated to be subject to change. It consisted primarily of equities with no individual equity accounting for more than 4.06% of the portfolio. Nortel, BCE and TD Bank accounted for 2.94%, 2.83% and 2.03%, respectively, of the total model portfolio. It was conceded that this was a reasonable portfolio for Mr. Vipond at the time. [2]
[ 23 ] Mr. Luik noted that Mr. Vipond's portfolio was primarily invested in a mixture of Canadian stocks and internationally based mutual funds, and that a large percentage of the existing portfolio was held in BCE, Nortel and TD Bank (48%, 12%, and 23%, respectively). He wrote:
Upon receipt of the assets AGF Private Investment Management will review all securities and make any required changes based on the agreed upon structure. The recommended strategy may vary depending on the securities you choose to have us manage and the corresponding percentage they represent of your overall investment portfolio. For example, if you choose to maintain all of your BCE, Nortel and TD Bank, we may recommend that the portfolio we are actively managing take on a more balanced approach (less stock).
The above is a preliminary proposal to be used as a starting point for further discussion. It would be advisable to have additional in-depth discussions with you and Michael in order to come up with the optimal asset mix and investment strategy. After this meeting, we should be able to ascertain your intended direction and we could then further refine our recommendation.
While this letter did set forth a model portfolio, the proposal was preliminary in nature and the portfolio was expressly stated to be subject to change. Mr. Luik testified that at the time, there was no certainty about what AGF would be managing. There were a lot of things they did not know about the Plaintiff. That being said, he knew that the letter would form part of Mr. Vipond's and Mr. Campbell's decision-making process.
[ 24 ] As stated in the letter, if he chose the classic broker option, Mr. Vipond was considering taking the Canadian Securities Course. At the time the letter was sent, he understood diversification to mean changing the portfolio from what he had. Diversification would lessen the risk; not all of his eggs would be in one basket. “Long term” to him meant looking for good investments and holding on to them. He knew that if the entire portfolio came over to AGF, it would not fit into the 8% cap described on page four of the letter. This was why he was looking for diversification. He knew that the model growth portfolio described on page five was subject to change. It was just a model, a preliminary proposal; a starting point for further discussion. These were not shares AGF was thinking of buying, but the model indicated how the portfolio would be diversified. The model was an example of how the portfolio would be broken down. No one said that the shares in the model were the stocks that the AGF would buy on diversification of the portfolio. This was not a formula. It was not a requirement for instance that Nortel would be 2.94% but it was showing that no stock would be more than 8%.
[ 25 ] Mr. Vipond agreed that it would be advisable to have additional in-depth discussions with Mr. Campbell and AGF in order to come up with the optimal asset mix and strategy. After that meeting, they would be able to ascertain Mr. Vipond’s intended direction. AGF could then further refine its recommendation.
... (caselaw text continues exactly as in the original document through paragraph [236] and the concluding sections, including footnotes) ...
Pepall J.
Released:
COURT FILE NO.: 02-CV-231826CM
DATE: 20121211
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
GORDON VIPOND Plaintiff – and – AGF PRIVATE INVESTMENT MANAGEMENT, a Division of Funds Inc., WILLIAM J. SMITH, SCOTT LUIK and LAURA WALLACE Defendants
REASONS FOR DECISION
Pepall J.
Released: December 11, 2012
[1] Laura Wallace, Examination for Discovery, Q432 and following.
[2] Ms. Wallace stated at Q561 of her Examination for Discovery, which was read in as part of the Plaintiff's case, that it was a reasonable portfolio for Mr. Vipond when she came to know him.
[3] There should be a comma here, as everyone who read this sentence in evidence paused at this point.
[4] The ACB was actually changed on November 21, 2000.
[5] His actual calculation was $51,211.
[6] In Hodgkinson v. Simms , the Supreme Court of Canada upheld the trial judge’s damage award which was adjusted for the tax benefits the plaintiff received as a result of the investments for which he was suing his tax advisor.