Questrade Inc. v. Chow, 2015 ONSC 1450

Court File and Parties

CITATION: Questrade Inc. v. Chow, 2015 ONSC 1450

COURT FILE NO.: CV-13-492529

DATE: 20150305

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Questrade Inc., Plaintiff, Defendant by Counterclaim

AND: Carol Chow, Defendant, Plaintiff by Counterclaim

BEFORE: F. L. Myers, J.

COUNSEL: L.J. Horwitz, for the Plaintiff, Defendant by Counterclaim

C. Chow, Self-represented

HEARD: March 2, 2015

ENDORSEMENT

[1] The defendant had a sophisticated stock trading strategy in which she bought and sold naked puts and calls in illiquid options of a volatile underlying security. She used a discount broker to save money as she did not need advice.

[2] In June, 2013 the defendant’s portfolio declined as the underlying shares increased in price. On June 6, 2013 the plaintiff made a margin call and the defendant deposited $100,000 into her account. The decline continued. The defendant knew June 12, 2013 was going to be a bad day. On her reckoning, she lost 30% of her remaining equity in the morning. She did not pay to receive real-time quotes. The plaintiff says that using real-time numbers, the defendant’s equity was nearly gone at 12:30 PM. It called the defendant. She closed some positions voluntarily. The plaintiff was not willing to risk incurring losses on the defendant’s account. Since her positions were largely short sales, continued rises in the price of the underlying stock could not only wipe out her equity, but expose the plaintiff to losses of unlimited value if it closed out the defendant’s position that she could not or would not pay.

[3] The plaintiff acted in its own interest to liquidate the defendant’s portfolio. It cost $88,000 more to buy closing positions than the value of assets in her account. The plaintiff seeks payment of the $88,000 that it spent on the defendant’s behalf buying the puts and calls required.

The defendant states:

a. She was not out of equity when the plaintiff moved;

b. The plaintiff gave her insufficient notice;

c. The plaintiff should have let her post cash to her account as the options were not at risk of coming due any time soon; and

d. The plaintiff’s zeal to close out illiquid positions led it to pay prices grossly in excess of the fair market value i.e. the plaintiff caused the losses by improvident realization strategy.

[4] The defendant counterclaims for the amount she says she would have made had she held her positions to November 18, 2013-a date that suits her strategy.

[5] The laws is very clear that a broker, especially a mere order-taker, is not required to become a co-speculator with the customer (see Janic case). Nor is the broker required to wait for the customer’s position to go negative. Nor must it understand the customer’s strategy and work with the customer on that basis.

[6] The broker’s documents and the parties’ contracts follow the forms recognized as “iron clad” in the case law.

[7] The defendant delivered no expert evidence to raise a triable issue as to whether anything done by the plaintiff failed to meet any duty of care that might remain owing despite the broad contractual protections afforded to the broker. The contractual waivers of notice, limitations on damages and ousting of common-law duties on realization all apply on these facts. There is no basis to find the contract terms void or unconscionable under Tercon.

[8] I am satisfied that even on the defendant’s evidence, there is no serious issue to be tried. There is ample evidence to enable the court to find the relevant facts and apply the law without resort to the enhanced fact-finding powers of rule 20.04 (2.1). Moreover, both sides seek summary judgment given the limited amount in issue.

[9] The defendant certainly had good reason to prefer that the plaintiff had given her the choice to deposit greater margin. Given its assessment of the risk it was facing at the defendant’s hands, the plaintiff chose not to do so. It liquidated the defendant’s positions just as the agreements between them allowed. Absent evidence of bad faith or a failure to meet an established duty of care, the law enforces bargains freely entered into by the parties.

[10] Shorting naked puts and calls is about as risky as it gets. The defendant was not perfectly hedged and the market moved against her putting the plaintiff at risk of significant liability. It was entitled to act under the contract.

[11] The plaintiff is entitled to judgment against the defendant for $88,111. Prejudgment interest may be added under section 128 of the Courts of Justice Act, RSO 1990, c.C. 43. Costs of $1,200 are also payable by the defendant to the plaintiff

F. L. MYERS, J.

Date: March 5, 2015