Court File and Parties

Court File No.: CV-10-416253 Date Heard: April 7, 2016 Endorsement Released: April 15, 2016

Superior Court of Justice - Ontario

Re: INDUSTRIAL ALLIANCE INSURANCE AND FINANCIAL SERVICES INC., INVESTIA FINANCIAL SERVICES INC. and MONEY CONCEPTS (CANADA) INC. v. AEGON CANADA INC.

Before: Master R. Dash

Counsel: Caitlin Sainsbury, for the plaintiffs Doug McLeod, for the defendant

Reasons for Decision

1The plaintiff seeks leave to file a fresh as amended statement of claim that includes four new paragraphs that reference a decision and findings of a disciplinary panel of the Central Regional Council of the Mutual Fund Dealers Association (“MFDA”) in connection with the activities of David Karas (“Karas”). The decision was released 4½ years after the action was commenced. The defendant opposes the amendments on a number of grounds.

Relevance

2The defendant is contractually liable to the plaintiffs inter alia for claims of third parties related to the inappropriate use of leveraging in transactions for clients of Aegon Dealer Services Canada Inc. (“ADSCI”) representatives where the cause of action giving rise to the claims arose before May 8, 2008. Claims have been made by clients of Karas, an ADSCI sponsored salesperson, particularly in a certified and settled class action, and which claims are said to fall into the category of improper use of leveraging, for which indemnity is available. The MFDA disciplinary panel found on June 1, 2015 that between 2002 and 2008 Karas had, inter alia, failed to ensure the suitability of his leveraged investment recommendations to at least 18 clients.

3The improper use of leveraged investments without regard to the suitability to the client as found by the panel is the same claim that is made by clients in the class proceeding and underlies the indemnity claim in this action. The two proceedings are based on the same underlying facts and the same legal requirements of representatives such as, and in particular, David Karas. Prima facie therefore, the impugned amendments are relevant to the cause of action against the defendant.

Similar Fact Evidence

4The defendant argues that the impugned paragraphs improperly plead similar fact evidence. I disagree. The defendant has failed to satisfy me that the 18 clients referenced by the MFDA panel only by initial are different from, rather than part of, the clients for whom claims have been advanced as class members in the class proceeding. The class definition is broad and more or less includes all clients of Karas who borrowed for and held leveraged investments that are the subject matter of this action. I am not satisfied that the facts (i.e. the clients) referenced by the MFDA panel are “similar” to (but different from) the clients in the class action as opposed to being some of the very clients in the class action and subject to indemnification. Put another way, I am not satisfied that the plaintiffs are attempting to plead as a similar fact that the MFDA panel determined that Karas inappropriately recommended leverage to clients A, B and C who were not members of the class in support of their claims for indemnity as a result of Karas inappropriately recommending leverage to clients X, Y and Z who were members of the class.

5Indeed, it may well fall upon the plaintiffs to establish at trial that the investors identified by initial at the MDFA hearing were members of the class for whose claims indemnity is sought, in order for any weight to be given to the panel’s findings. At the pleadings stage however, the onus should be on the party alleging that similar fact evidence is being pled to establish that the pleading is of similar facts.

6Therefore as I am not satisfied that the impugned paragraphs purport to plead similar fact evidence, it is not necessary to call upon the plaintiffs to establish that the test for pleading similar facts – that the added complexity to the proceeding from pleading those additional facts does not outweigh their probative value. [1] If I had been satisfied that the plaintiff was purporting to plead similar fact evidence, I would have concluded that the similarity of the Karas actions as reviewed by the discipline panel are so close to the actions of Karas in issue in this action that its probative value would outweigh the relatively minimal added time and complexity that would be required to conduct discovery and lead evidence at trial on the findings of the disciplinary proceeding, even if necessary to identify the clients referenced by the panel by means of initials.

Pleading the “Findings” of a Discipline Panel

7The defendant states that if I determine that the impugned paragraphs do not plead similar facts, it would not object to the addition of paragraphs 12 and 14 of the draft amended pleading – the fact of the hearing and decision and the imposition of specific sanctions on Karas, but would object to paragraphs 13 and 15 dealing with findings that Karas failed to ensure the suitability of the leveraged investment recommendations for at least 18 clients and that he disregarded his duty to use due diligence to ensure the suitability of the investment for the client.

8The defendant opposes these paragraphs on the basis that even if the parties were the same, only the fact of the regulatory hearing and the ultimate disposition of the panel may be proven and therefore pled, but not the findings or reasons of the panel. The cases proffered by the defendant stand for the propositions that “reasons” for conviction or “findings of fact” in support of a conviction in a criminal trial are not admissible in evidence in a civil proceeding [2] , that the “fact of a conviction” is admissible in a subsequent civil proceeding, but the “reasons for conviction and findings” are not, especially where the parties and issues are not identical [3] and that parties to a civil dispute arising out of a Ponzi scheme cannot be bound by the “reasons” and “findings of fact” made by the Alberta Securities Commission in a proceeding in which they were not parties. [4]

9On the other hand, in a decision proffered by the plaintiff, a defendant doctor in a medical malpractice action was permitted to put into evidence reports of the Complaints Committee of the Ontario College of Physicians and Surgeons and the Health Disciplines Board for purpose “of determining the results of such reports” but the “findings” of those bodies would be considered as one piece of evidence to be weighed by the trier of fact, together with the rest of the evidence, but would not be considered determinative of the action. [5]

10The trial judge cited another case where a finding by the Discipline Committee of the Ontario College of Physicians and Surgeons that a doctor was guilty of professional misconduct for failing to meet the standard of practice of the College was admissible evidence in a medical malpractice action and a factor to be considered by the trier of fact in determining whether the doctor acted within the standard of care of his profession, but the evidence, although admissible, could not be given much weight nor would it be determinative of the issue. [6] The trial judge also referenced another medical malpractice case where in reference to a decision of the same Discipline Committee stated that “while such decision may be admissible in evidence in this action, it would only be prima facie evidence of her failure to maintain proper standards of care and subject to rebuttal by the defence.” [7] The court commented that the findings (in the sense of the decision) of the committee may be pleaded. [8]

11In my view, none of the cases provided by the defendant stand for the proposition that the conclusions of a discipline panel cannot be pled or proven in a civil action, if otherwise relevant. Rather, it is the reasons for coming to those conclusions or the findings of fact that led to those conclusions that would not be admissible. The weight to be given to those conclusions is left for determination by the trial judge.

12In this case the discipline panel of the MFDA released its decision and reasons on June 1, 2015. The formal order stated that the hearing panel “concluded” that between 2002 and 2008 Karas “misrepresented, failed to fully and adequately explain, or omitted to explain the risks…of leveraged investment recommendations that he made to at least 18 clients, thereby failing to ensure that the leveraged investment recommendations were suitable for the clients…contrary to MDFA Rules 2.2.1 and 2.1.1” and that Karas between 2002 and 2008 “failed to ensure that his leveraged investment recommendations were suitable for at least 18 clients and in keeping with their investment objectives, having regard to the clients’ ‘Know your Client’…financial circumstances…contrary to MFDA Rules 2.2.1 and 2.1.1”. The operative term of the order was that Karas be permanently prohibited from conducting certain securities related businesses pursuant to MFDA By-law No. 1 and that he pay a fine and costs.

13In argument, counsel for the defendant submitted that the plaintiffs could plead only the fact of the hearing (paragraph 12 of the proposed amendment) and the sanction imposed (paragraph 14), which was the operative term of the order. In my view those paragraphs, without pleading the panel’s specific conclusions that Karas breached specific rules of the MDFA (paragraph 13 and the first sentence of paragraph 15) and which led to the penalty imposed, would leave the remaining paragraphs with no meaningful material facts pled.

14Pleading the finding that specific rules have been breached is analogous to pleading the offence for which an accused is convicted, and which the jurisprudence has held can be pleaded and depending on the circumstances, admitted into evidence, subject to weight. Naming the infractions of the MFDA rules (both by words and by rule number) which Karas was found to have committed does not amount to improperly pleading the reasons by which the panel reached its conclusion or the findings of fact underlying those conclusions. To be able to plead the result reached by the panel, the plaintiff should be entitled to plead not only the penalty, but also the “offence” or breach of rule that resulted in the penalty. If this were not the case, it would be analogous to pleading a sentence in a criminal proceeding without being able to plead the offence for which the accused was convicted and sentenced.

15On the other hand, the second sentence of paragraph 15, that pleads “The Hearing Panel further held that Karas’ conduct was ‘…so egregious, so persistent, so general and was so contrary to the fundamental responsibility of the financial advisor’ that he should be permanently removed from the securities business over which the MDFA has jurisdiction” is clearly not a plea of the panel’s conclusion and finding as to breach of certain rules, but is rather in the category of “reasons” given for imposing the penalty that it did. That is improper and cannot be pled.

Parties are Different

16The defendant submits it will suffer prejudice if the amendments are allowed arising from the fact that the parties to the discipline proceeding were the Mutual Fund Dealers Association and Karas. None of the parties to this litigation were parties to or represented at the discipline hearing. In my view this means that the defendant may be able to argue at trial that the findings of the panel, that Karas failed to ensure the suitability of his leveraged investment recommendations to at least 18 clients, would not be binding on the defendant with respect to indemnification of claims made by members of the class resulting from improper leveraging by Karas of his clients at ADSCI. That is a question of the admissibility of the findings, the use that can be made at trial of those findings, and if admitted, the weight to be given to it. I do not make determinations of admissibility of evidence at trial on a motion to amend pleadings. That would usurp the functions of the trial judge. I determine if the pleading is properly pled as a material fact, relevant to the cause of action and in compliance with the rules of pleading.

The Inadequacies of the Discipline Hearing Process

17The defendant also points to the fact that the process before the hearing panel was flawed and its conclusions should not be used against the defendant in this litigation. This includes the fact that the panel relied on anonymous affidavits and hearsay evidence, no cross-examinations were conducted and Karas did not appear at or participate in the hearing after his request for adjournment was denied. In my view these matters go to the weight of the evidence and possibly its admissibility. They are fertile grounds for discovery and for challenging the evidence at trial, but it should not be stopped at the front door by denying the right to plead the hearing and its findings. As a master on a pleadings motion I should not predetermine what rulings may be made by the trial judge in this action.

Pleading Evidence Rather Than Material Facts

18I did raise with counsel my concern that the impugned paragraphs were a plea not of material facts as required by rule 26.01(1), but rather the evidence by which the material facts were to be proven. It was my view that the material fact to be pled could have been, for example, “Karas failed to ensure the suitability of leveraged investments he recommended to clients and this resulted in indemnifiable claims as against the defendant” and that part of the proof of that material fact, to be explored at discovery and, subject to admissibility and weight, at trial would have been the findings of the MFDA panel. Material facts “include any facts that the party pleading is entitled to prove at trial, and at trial, anything that affects the determination of the party’s rights can be proven; accordingly, a material fact is a fact that can have an influence on the determination of a party’s rights.” [9] There is however not an “absolute distinction” between material facts and evidence and a material fact should not be excluded “simply because it is also evidence.” [10]

19In any event, the defendant does not argue that the findings of the panel are evidence rather than material facts. In fact when the plaintiff offered to leave the impugned amendments out of the pleading without prejudice to relying upon them at trial as relevant, asking questions on discovery and producing them in their affidavit of documents, the defendant objected and took the position in an email of August 21, 2015 that if the plaintiff did not move now to amend to include the impugned allegations, any reference to them in the litigation would be precluded (although they would oppose the inclusion of those paragraphs in the proposed amendments). I therefore do not refuse the amendments based on them being evidence rather than material facts.

Result

20The amendments will be permitted with the exception of the second sentence of paragraph 15. The parties may have productions and discovery on the facts raised by the amendments. As noted, this does not in any manner determine the admissibility of the evidence at trial, the use that can be made of the evidence and the weight to which the trier of fact may afford to the evidence.

Costs

21The parties submitted similar costs outlines. They agreed that costs of $12,500 inclusive of disbursements and HST would be awarded to the plaintiffs if the amendments were permitted or to the defendant if denied. That could be varied by the court if there were mixed success. The plaintiffs were entirely successful on the various arguments raised in opposition to the amendments, although one sentence of the proposed amendments was disallowed. They should have their costs of the motion in the agreed amount, but with a discount for the limited division of success. In my view $11,000 would be fair and reasonable and within the reasonable contemplation of the defendant.

Order

22I hereby order as follows:

(1) The plaintiffs have leave to amend their statement of claim in the form of the fresh as amended statement of claim attached as Schedule “A” to the notice of motion other than the second sentence of proposed paragraph 15 which shall be deleted from the proposed amendments.

(2) The defendant shall pay to the plaintiffs their costs of this motion within 30 days fixed in the sum of $11,000.

Master R. Dash

DATE: April 15, 2016

Footnotes

1City of Toronto v. MFP Financial Services Ltd. , [2005] O.J. No. 3214 at para. 17(e) and 19

2Taylor v. Baribeau , (1985) , 51 O.R. (2d) 541 (Div. Ct.) at para.14; Potter v. Swain , [1945] O.W.N. 514 (C.A.) at paras. 3 and 5

3Edwards v. Law Society of Upper Canada , [1995] O.J. No. 2900 (O.C.G.D.) at para. 9

4Lindsey Estate v. Merendon Mining Corporation Ltd. , 2010 ABCA 191 at para.11.

5Etienne v. McKellar General Hospital , [1994] O.J. No. 2602 (O.C.G.D.) per Platana J. at para. 21, and for context, para. 3-4

6Etienne , supra at paras. 13-14 quoting from the decision of Lang J. in Pittman v. Bain (no citation).

7Etienne , supra at para. 15 quoting from a decision referred to as Kenyeres (no citation).

8Etienne , supra at para. 16

9Kang v. Sun Life Assurance Co. of Canada , 2011 ONSC 6335 , [2011] O.J. No. 4792 (SCJ) at para. 71

10MFP Financial , supra, at para. 23