ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
VINEETH STEPHEN
Ronald Podolny, for the Applicant
Applicant
- and -
RADHAKRISHNA NAMBURI and VRK FOREX INVESTMENTS INC.
Darrell Paul, for the Respondents
Respondents
HEARD: December 15, 2020
REASONS FOR DECISION
DENNISON J.
Introduction
1The Applicant, Mr. Stephen, seeks damages from the Respondents, Radhakrishna Namburi and VRK Forex Investments Inc. (“the Respondents”), totalling $137,772 CAD. Mr. Namburi is the sole director of VRK Forex Investments Inc.
2Mr. Namburi and Mr. Stephen met at a Money Show in Toronto. They entered into an agreement where Mr. Namburi, as an employee, was trade high risk securities as per Mr. Stephen’s standard instructions. Mr. Namburi prepared the agreement. The agreement provided that Mr. Stephen was to provide his investment account and password number to Mr. Namburi, and Mr. Namburi would log onto this account and “work, watch and do transactions only as per his [Mr. Stephen’s] standard instructions”. Mr. Namburi was to receive 50 percent of the profits. The agreement disclosed that Mr. Namburi was not registered with the Ontario Securities Commissions (“the OSC”) but also stated that Mr. Namburi was not trading in securities. The agreement stated that this type of trading is risky and specified that the contract could be terminated by either party at any time.
3Mr. Stephen states that the agreement did not reflect the actual arrangement between the parties, but instead was an attempt by Mr. Namburi to skirt the undertaking he gave to the OSC not to trade or provide advice with respect to securities without first registering with the OSC. The true arrangement was that Mr. Namburi had unfettered discretion to trade securities on behalf of Mr. Stephen in exchange for 50 percent of the profits.
4Mr. Stephen submits that he was pressured into signing the agreement and that Mr. Namburi stated that he had to sign it to legally trade securities for Mr. Stephen. Mr. Stephen was misled by Mr. Namburi from the time they met at the Money Show. Mr. Namburi approached Mr. Stephen at the Money Show and told Mr. Stephen that he was an expert trader. Mr. Namburi explained to Mr. Stephen that he had a risk-free investing system that created at least a 1% return. Mr. Stephen was inexperienced in this type of high-risk trading but was impressed with Mr. Namburi’s expertise. Mr. Stephen opened an investment account and Mr. Namburi traded with unfettered discretion making very risky trades that depleted the money in the account.
5Mr. Stephen submits that he was misled by Mr. Namburi because he believed that Mr. Namburi was an expert who was lawfully entitled to trade in securities when in fact Mr. Namburi was not legally entitled to trade in securities on behalf of Mr. Stephen. Had Mr. Stephen known about the undertaking, he would not have entrusted his money to Mr. Namburi. Mr. Stephen ultimately lost most of the money he invested with Mr. Namburi.
6At the outset of this application, I raised a concern that there were credibility issues that could not be determined on the Application. I heard submissions from both parties and was satisfied on a prima facie basis that if I accepted the arguments as framed by the Applicant, the matter could be decided by way of Application. However, the parties were advised that after hearing full submissions and reviewing the record, the court reserved the right to convert the Application to an Action pursuant to s. 38.10 of the Rules of Civil Procedure.
7Ultimately, after hearing full submissions from the parties and carefully considering the record, I am of the view that the interest of justice requires that this Application be converted to an Action for the reasons set out below.
Relevant Facts
Mr. Namburi’s Undertaking to the Ontario Securities Commission
8In 2016, Mr. Namburi and VRK Forex Investments Inc. (“VRK”) gave a formal undertaking to the OSC. Mr. Namburi is the sole officer of VRK. Mr. Namburi admitted that he and VRK had engaged in the business of trading in securities on behalf of investors that required registration with the OSC. Mr. Namburi advised the OSC that the trading had stopped. Mr. Namburi and VRK undertook that,
in the future prior to entering Ontario’s capital markets and prior to accepting new money from investors the Respondents would obtain registration in accordance with Ontario Securities Law and/or retain the services of a registrant to assist in the operation of their business activities, ensuring they are in compliance with the requirements of the Ontario Securities Act.
Meeting Mr. Stephen at the Money Show
9Mr. Stephen has a Masters’ degree in Education and taught at the University of Ottawa. On September 8, 2017, Mr. Stephen attended the Money Show in Toronto to improve his investment acumen in trading in securities, including Forex and commodity trading.
10According to Mr. Stephen, Mr. Namburi approached Mr. Stephen. Mr. Namburi did not appear to have a booth or a formal presence at the conference. Mr. Stephen stated that Mr. Namburi appeared to be speaking to members of the South Asian community. Mr. Namburi introduced himself as an investment specialist. He told Mr. Stephen that he had a Ph.D. in Financing and had extensive experience in investing, particularly in Forex and commodity trading, and that he was a former senior official with the United Nations.
11Mr. Namburi stated that Mr. Stephen approached him to enter into the agreement.
12According to Mr. Stephen, Mr. Namburi stated that he had a system that utilized Forex, commodities, and exchange-traded funds (“ETFs”) to obtain a conservative daily rate of return of 1%. Mr. Namburi did not explain to Mr. Stephen how he would get that return, but simply stated he would trade products on the market 24 hours a day. Mr. Stephen stated that Mr. Namburi said they would share the profits 50-50. According to Mr. Stephen, Mr. Namburi repeatedly stated that there was no risk. Mr. Namburi showed Mr. Stephen an account statement from another client that showed impressive investment returns.
13Mr. Stephen was impressed with Mr. Namburi and agreed to invest with him. Prior to investing, Mr. Stephen conducted an internet search on Mr. Namburi and VRK and did not find any red flags. Mr. Stephen also spoke to a reference on a three-way conference call with Mr. Namburi, but he did not get the name of the reference.
Setting up the Oanda Account
14Oanda is a registered investment dealer and a member of the Investment Industry Regulatory Organization of Canada (“IIROC”). Oanda offers over-the-counter derivatives in which the underlying interests consist of currencies and other asset classes, including contracts for difference (“CFDs”) to investors. Oanda uses a fully automated internet-based trading platform, which allows clients to trade CFDs on an execution basis only: Oanda (Canada) Corporation ULC (Re), 2019 CanLII 35259 (ON SEC.).
15A CFD is a derivative product that allows clients to obtain economic exposure to the price movement of an underlying instrument such as a share, currency, or commodity without the need to own the underlying instrument. A CFD is a derivative instrument that is an agreement between a counterpart and a client to exchange the difference between the opening price of a CFD position and the price of a CFD at the closing of the position. CFDs are not executed on an exchange: Oanda, at paras. 21-24.
16Margin trading allows a client to enter into positions that are larger than their account balance. This allows a client to obtain larger profits relative to the amount invested, but there is also an equal opportunity that you could incur significant losses.
17The Oanda agreement explained that a “margin requirement” required the account holder to maintain a certain amount of cash in the account to maintain open positions in the account. If the margin requirement is not maintained the client is sent a margin call notifying the client that they do not have the required amount of funds in the account. If further funds are not deposited there will be a margin close out that means all the opening positions will be closed in the account.
18On September 11, 2017, Mr. Stephen set up an online account with Oanda. Mr. Stephen stated that Mr. Namburi walked him through the process and told Mr. Stephen what to fill out. Mr. Stephen stated that Mr. Namburi had him select fields that gave Mr. Namburi full access to trade on the account without any limitations. Mr. Namburi denies this.
19Mr. Stephen signed a Risk Disclosure document with Oanda that set out the risks associated with trading in CFDs. As part of that contract with Oanda, Mr. Stephen undertook that he would deposit and maintain sufficient funds in his account to meet Oanda’s margin requirements. Oanda approved Mr. Stephen to open an account on September 13, 2017.
20Mr. Stephen stated that Mr. Namburi and Mr. Stephen agreed that Mr. Stephen would provide the capital and that Mr. Namburi would be the trader on the account. They agreed to split the realized profits 50-50, and that there would be no fees paid to Mr. Namburi for managing or trading on the account.
21Mr. Stephen wanted to open the account with a balance of $50,000.00 CAD. Mr. Namburi told him that the minimum requirement was $100,000.00 CAD, but that he would make an exception. Mr. Stephen initially deposited $5,000.00 CAD into his Oanda account.
Written Agreement between Mr. Stephen and Mr. Namburi
22At 9:00 a.m. on September 14, 2017, Mr. Namburi sent a text to Mr. Stephen stating that Mr. Namburi was preparing an agreement for Mr. Stephen to sign. Mr. Stephen stated that the agreement was backdated at the request of Mr. Namburi to September 12, 2018.
23Mr. Stephen stated that Mr. Namburi pressured him into signing the agreement. Mr. Namburi told Mr. Stephen that the agreement had been drawn up by a lawyer and Mr. Stephen could not work without it. Mr. Stephen stated that he understood the agreement to be a formality. He stated that while he read the agreement, he did not fully understand it, as it did not represent the arrangement they had. Mr. Stephen did not understand that Mr. Namburi not being registered meant Mr. Namburi was illegally trading in securities. He believed Mr. Namburi was an expert, which is why he agreed to let him trade in his account and sought training from Mr. Namburi.
24In the agreement titled “Mutual Agreement for working for Forex, Commodities CFDs and ETFs”, Mr. Stephen is listed as the employer/investor. VRK, represented by Mr. Namburi, is listed as the employee. The relevant terms in the contract are as follows:
Employer/investor agrees to pay 50% on the Net profit +/- financing as per the monthly statement of his Oanda Corporations trading account.
Employee gives training in trading in Commodities, Forex, CFDs and ETFs in Oanda Account. Total investment will be invested directly by Investor in Oanda Corporation trading accounts and arrange additional funds as per the margin requirement of Oanda. VRK Forex and Investments Inc./Staff/Dr. Radhakrishna Namburi are only responsible for-profit sharing/salary as per Realized profit… the relationship is employee and employer. Employer can terminate this contract at any time if VRK/Staff/Dr Radhakrishna is not working as per the Standard Instructions or needs of Employer/Investor.
VRK/Radhakrishna Namburi is not registered with the Ontario Securities Commission. They are not engaged in the business of trading in Securities as per Section 25 of the Securities Act, R.S.O., c. S. 5 as amended, and they didn’t take permission from regulators of National Instrument 31-103-Registration Requirements, Exemptions and Ongoing Obligations. They have no right to withdraw and deposit any funds to Oanda Accounts or Investors Bank Accounts. They are not advising or trading anything on their own wish in Investors Accounts. Oanda is regulated by IIROC, CIPF in Canada. VRK/Staff are working for investor as an employee with supervision and instructions of employer. They are spending and providing their time only for profit sharing not for any losses and litigations.
Any time any party can terminate this contract by writing to the other party by settling the commission…. Investor should always watch, instruct, supervise, and guide the trades, actions of VRK staff and Radhakrishna for his accounts. If investor fines[sic] any transactions, actions against his instructions cancel immediately and terminate this contract by paying commission. VRK or Radhakrishna Namburi are not responsible if investor doesn’t take action. It is assumed all are done as per the instructions and all the action are fully agreed by the investor/employee.
Employer/investor Mr. Vineeth Stephen authorized and provided Oanda Account username vineeth1 and password to Employee: VRK/Staff/Dr. RK to login his Oanda Trading accounts and work, watch and do transactions only as per his standard instructions… Investor accepted to take full risk and responsibility as stated in Oanda terms and conditions stated in www.oanda.com Web pages.
25At the bottom of the contract there is a “important note” that states:
Oanda Fx trading is highly risky. VRK Forex & Investments/Radhakrishna Namburi not registered under section 25 of the Securities Act, R.S.O., 1990, C.S.5 for trading or advising to anyone. They are only working as per investors instructions. Please take advice of your Financial Advisor before investing and trading with Oanda Fx Trad. Read Oanda.com. Past performance is not guaranteed for future. Returns and Profits were not guaranteed by VRK.
Investments and Communications between Mr. Stephen and Mr. Namburi.
26Mr. Stephen stated that Mr. Namburi told Mr. Stephen that, within seven days of his initial $5,000.00 CAD deposit, Mr. Namburi obtained a return of $13,000.08 CAD.
27In various test messages, Mr. Namburi encouraged Mr. Stephen to invest more money and to tell others about his business and to recruit more clients for him. Mr. Namburi also sent Mr. Stephen other client’s accounts and encouraged Mr. Stephen to open an account in Dubai. Mr. Stephen stated that he told Mr. Namburi that he did not have the funds to make a bigger investment. Mr. Namburi encourage Mr. Stephen to access more funds. Mr. Stephen states that, as a result of Mr. Namburi’s pressure, Mr. Stephen borrowed from multiple lines of credit and family members and he sold real estate investments.
28On September 21, 2017, Mr. Stephen deposited $80,000.00 USD into his USD Oanda account and $45,000.00 CAD into his CAD account. Mr. Stephen thanked Mr. Namburi for his excellent work on his accounts and stated that he trusted Mr. Namburi’s “excellent command of the CFD trading”.
29On September 25, 2017, Mr. Namburi advised that he generated a $30,000.00 CAD profit. With Mr. Stephen’s consent, Mr. Namburi withdrew $30,000.00 CAD from the Oanda account. On September 27, 2017, Mr. Stephen wired $15,000.00 CAD to VRK Forex Investments Inc.
30On October 4, 2017, Mr. Stephen invested another $50,000.00 CAD into his CAD Oanda account. Mr. Stephen instructed Mr. Namburi to maintain a working level of capital of $100,000.00 CAD in his CAD account and $100,000.00 USD in his USD account.
31Shortly after Mr. Stephen deposited more money in Oanda account, Mr. Stephen began to see losses. In a WhatsApp message to Mr. Namburi on October 16, 2017, Mr. Stephen demanded that Mr. Namburi take steps to protect the investments and put a safety mechanism in place after he saw a loss of 10% of the principle. Mr. Namburi stated that he would adjust.
32Mr. Stephen stated that he traveled to Brampton on November 11, 2017 for what was supposed to be a training lesson. Mr. Stephen stated that Mr. Namburi did not train him at all. They did not meet for any further training sessions.
33On November 23, 2017, Mr. Stephen told Mr. Namburi that he did not want him to take any more positions in the CAD account. Mr. Stephen told Mr. Namburi that he needed to withdraw a $100,000.00 CAD before December 19, 2017 to purchase a property. Mr. Stephen admitted this was not true, rather he just wanted to get his money out of the Oanda accounts.
34According Mr. Stephen, on November 27, 2017, Mr. Stephen suffered a single day loss of $25,000.00 CAD. On that same day, Mr. Stephen sent an email to Mr. Namburi requesting that Mr. Namburi devise an exit strategy. Mr. Stephen stated, “we need to review the exit strategy and this system is proving not inline with what you had promised”.
35On December 4, 2017, Mr. Stephen again requested Mr. Namburi to be conservative with his trades. Mr. Stephen suggested that the invested capital be withdrawn in portions week by week.
36On December 5, 2017, Mr. Stephen made a trade in the account closing a few profitable positions. In a WhatsApp message, Mr. Namburi told Mr. Stephen not to make any trades on his own as it created confusion.
37On December 12, 2017, Mr. Namburi cautioned that Mr. Stephen should not withdraw more than $50,000.00. Mr. Stephen again told Mr. Namburi that he needed to take out $100,000.00 CAD. Mr. Namburi said that would not be possible, in a WhatsApp message.
38Mr. Stephen stated that the losses continued. On December 13, 2017, Mr. Stephen withdrew $50,000.00 CAD out of the account. Mr. Stephen told Mr. Namburi that he needed the remaining $50,000.00 CAD to make a down payment on a property and told Mr. Namburi not to take any further positions or risky trades and to slowly exit the positions in the CAD account. Mr. Namburi told Mr. Stephen that “without following his ideas, withdrawing the additional 50k is highly risk [sic] and he did not like trading with high risk”. Mr. Namburi asked Mr. Stephen to arrange for another source of funds.
39On December 22, 2017, Mr. Stephen sent an email to Mr. Namburi, explaining that he spoke with Oanda and learned about the Enable Hedge position feature that cannot be added once the position is already opened. Mr. Stephen instructed Mr. Namburi to use the USD funds and use the hedging safety mechanism. Mr. Stephen continued and stated,
I have very limited knowledge on trading and Forex, and you are making all the trading decisions. I trust you will follow this recommendation for risk management and only use enable edge [sic] and/or stop loss for every trade position.
40On that same day Mr. Stephen also advised Mr. Namburi that the trades Mr. Namburi made “on his own accord” had led to a loss of more that 65.6% (-$52,851.00 USD) of the account value. Mr. Stephen requested the return of the $15,000.00 CAD profit. Mr. Namburi refused and told Mr. Stephen that Mr. Stephen needed to deposit what Mr. Stephen previously withdrew and to “please go and read and follow mutual agreement.”
41On the same day, Mr. Stephen sent a text with the following:
You took all the risky trades and decisions on your own without any input from me. I told you about the $100K requirement for real estate purchase in November when there was sufficient balance of $110 but you did not take correct action. Again, please rectify this situation as per my instructions.
42Mr. Namburi responded that Mr. Stephen should arrange for more funds so that Mr. Stephen would not lose all the investments in the Oanda account, and that Mr. Stephen needed patience to recover the losses.
43As the accounts continued to lose money, Mr. Namburi showed Mr. Stephen examples of other accounts that were earning money.
44On January 5, 2018, Mr. Stephen asked Mr. Namburi whether he was trading various accounts against each other from his clients’ accounts. In the WhatsApp message, Mr. Namburi stated “You don’t understand. Mother looks [sic] kids grow and develop. Take more care on [sic] weak kids. Same way I work hard for loss recovering than profit made accounts.”
45According to Mr. Stephen, on January 10, 2018, the accounts combined margin position was above 50 percent and there were no stop losses on any of the trades in the accounts. Mr. Stephen told Mr. Namburi that he was stressed out and had lost his life savings. Mr. Stephen stated that Mr. Namburi did not follow Mr. Stephen’s instructions.
46On January 17, 2018, a full margin closeout was executed in the CAD account resulting in a net loss of approximately $19,721.98 CAD plus fees. Mr. Stephen had sent several messages to Mr. Namburi that day telling him to bring the margin losses below 50 percent. Mr. Namburi did not respond until the account closed.
47On January 18, 2020, Mr. Stephen told Mr. Namburi to stop trading. Mr. Namburi said he was missing out. On January 21, 2018, Mr. Stephens changed the password on the Oanda account and locked Mr. Namburi out. Ultimately, Mr. Stephens filed a complaint with the OSC. Mr. Stephen closed out his positions in the accounts.
48Mr. Stephens states that he lost $137,772.00 CAD. This includes $121,722.00 CAD in his accounts and the $15,000.00 CAD he paid to Mr. Namburi. It also includes interest of $1,000.00 CAD, that Mr. Stephen was required to pay on his loans as a result of Mr. Namburi’s failure to release the requested funds by December 19, 2017.
49The OSC is investigating Mr. Namburi. It is alleged that he breached the undertaking he made to the OSC and caused losses to investors totalling over one million dollars.
Position of the Parties
Applicant
50Mr. Stephen’s Counsel submits that it is not necessary for the court to resolve any credibility issues surrounding Mr. Stephen’s degree of investment sophistication to determine, that Mr. Namburi was negligent, that he made deliberate misrepresentations and that the contract was illegal.
51Counsel submits that whether Mr. Namburi was trading in securities can be determined based on the words of the contract and the text messages between the parties. There is no real factual dispute regarding the conduct of the parties and what happened in the account. Rather, the dispute is with respect to how the conduct is characterized.
52Counsel submits that it is in the interest of justice to proceed as an Application given the expense and delay that would occur if this matter proceeded as an Action.
53Mr. Stephen’s Counsel submits that the legal question the court must determine is whether Mr. Namburi’s conduct was authorized by law. If Mr. Namburi was not registered and engaged in trading or advising in relation to securities, then he was negligent. He would not have met the standard of care of an investment adviser because he was not registered with the OSC and knew he was illegally trading in securities contrary to s. 25 of the Securities Act, R.S.O. 1990, c. S.5.
54It is also Mr. Stephen’s position that Mr. Namburi made misleading misrepresentations that permits the recovery of Mr. Stephen’s losses. Mr. Namburi held himself out as a bone fide expert in trading, when in fact he was not legally qualified to trade in any securities on behalf of others. He also misrepresented the risks and returns associated with trading in derivative products. Mr. Namburi was also negligent in failing to disclose that he was not legally allowed to trade or give advice to others in Ontario. By failing to advise Mr. Stephen of the undertaking to the OSC, Mr. Namburi deliberately lied to Mr. Stephen. Mr. Stephen’s reliance on Mr. Namburi’s representations was reasonable because Mr. Stephen had limited investment skills.
55Counsel for Mr. Stephen also submits that the contract is void for unconscionability because Mr. Namburi pressured Mr. Stephen into signing the agreement, despite the fact that the written agreement did not reflect the true nature of the parties’ arrangement. Mr. Namburi took advantage of Mr. Stephen’s lack of investment knowledge and made an improvident bargain where Mr. Stephen took all the risk and Mr. Namburi received all the benefits without suffering any of the losses. Counsel admits that, under this doctrine, the court would have to give some consideration to Mr. Stephen’s investment knowledge.
56It is also the position of Mr. Stephen that the agreement is void ab initio because it was based on material misrepresentations. Mr. Namburi promised a positive rate of return when the return was negative across all accounts. The second material misrepresentation was that Mr. Namburi held himself out as an expert in CFD trading when he was in fact prohibited from engaging in such activity unless he registered with the OSC. Mr. Namburi also made a material misrepresentation that he was an “employee” when that did not reflect the true nature of the relationship.
57Counsel also submits that the agreement is void ab initio because it was illegal. The substance of the contract was that Mr. Namburi would trade in securities on behalf of Mr. Stephen. Mr. Namburi knowingly violated subsections 25(1) and (3) of the Securities Act.
58Finally, Mr. Stephen’s counsel submits that even if the agreement was valid, Mr. Namburi violated the terms of the contract. First, Mr. Namburi agreed to train Mr. Stephen and that did not happen. Second, Mr. Namburi breached the term that did not allow Mr. Namburi to make any trades without Mr. Stephen’s instructions. Mr. Namburi also breached the terms that the provides that Mr. Stephen was to instruct Mr. Namburi when he failed to follow Mr. Stephen’s instructions.
59Counsel for Mr. Stephen submits that on any of these basis, Mr. Namburi is liable for the losses that Mr. Stephen suffered. Mr. Stephen did not have the knowledge or ability to take over the investments and in any event, the losses were so great that Mr. Stephen did not have the funds to get the margins to a sufficient level so that the Oanda accounts would not be closed out.
Respondent
60Mr. Namburi’s counsel takes the position that this matter should be converted to an Action. Counsel submits that there is a live issue as to the sophistication of the Mr. Stephen’s investment abilities and his credibility, which must be considered in determining if Mr. Namburi misled Mr. Stephen.
61Counsel submits that Mr. Stephen’s assertion that he was not knowledgeable is undermined by the fact that he approached Mr. Namburi, that Mr. Stephen opened the account with Oanda and signed all the documentation that set out the risks in trading in CFDs.
62Mr. Namburi states that Mr. Stephen lied about receiving training. Mr. Stephen received ongoing training throughout the months on the live account as is demonstrated by the calculations that Mr. Stephen provided to Mr. Namburi in December 2017.
63Mr. Namburi denies that he had unfettered discretion to trade in the accounts. Rather, Mr. Stephen provided Mr. Namburi “standard instructions” and was actively involved in monitoring the account. Mr. Stephen could have terminated the contract at any time if he were not satisfied with Mr. Namburi’s work.
64Counsel submits that Mr. Stephen’s evidence is not credible. For example, Mr. Stephen lied about the reason why he needed to withdraw $100,000 CAD from the account. Initially, Mr. Stephen told Mr. Namburi that he needed to take money out of the account for a down payment on a property. In his affidavit, Mr. Stephen stated that he was not purchasing a property, but rather wanted to recoup his losses.
65Mr. Namburi’s counsel submits that Mr. Namburi is not responsible for any of the losses suffered by Mr. Stephen. Mr. Stephen was aware of the risks of trading in CFDs. Mr. Stephen entered into a contract with Oanda, accepted all the terms and conditions stated in the account opening document which outlined the risks of trading in CFDs. Mr. Stephen was also made aware of the risks of trading in CFDs in the agreement he signed with Mr. Namburi.
66It is also the position of Mr. Namburi, that he did not mislead Mr. Stephen. The signed agreement states that Mr. Namburi is not registered with the OSC. The agreement also states that Mr. Namburi was only working as per the investor’s instructions, the investor should take advice of his financial advisor and that VKR is not responsible for any losses. Mr. Stephen accepted these terms in the agreement. Mr. Stephen could have ended the agreement at any time but did not do so.
67Mr. Namburi submits that he should not be responsible for any of the losses Mr. Stephen suffered. Mr. Stephen signed an agreement with Oanda, in which he stated that he was willing and able to finance the account and assumed the risks of trading in CFDs. Mr. Stephen was aware of the risks of trading in CFDs because those risks were outlined in the contract with Oanda. Mr. Stephen agreed to maintain the margins to avoid “close outs” in his Oanda accounts.
68Counsel for Mr. Namburi submits that it was Mr. Stephen’s decision to withdraw the funds from the Oanda account, which resulted in a shortfall of his account and the margin closeout notices from Oanda. Despite having received numerous closeout notices from Oanda, Mr. Stephen decided not to maintain the required balance in his accounts as he had agreed to do in his contract with Oanda. In these circumstances, Mr. Stephen caused the losses he suffered, not Mr. Namburi.
Legal Principles
69This Application was brought pursuant to Rule 14 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, on the basis that it is “unlikely that there will be any material facts in dispute”: r. 14(.05)(g). Alternatively, the relief claimed is the determination of rights that depend on the interpretation of a contract: r. 14.05(d).
70Where there is a prima face right to proceed by Application, the matter should not be converted into an Action without good reason: Sekhon v. Aerocar Limousine Services Co-operative Ltd., 2013 ONSC 542, at paras. 48-49; College of Opticians (Ontario) v. John Doe, 2006 CanLII 42599 (ON SC), at paras. 18-21.
71In determining whether the Application should be converted to an Action, the court must consider:
(a) whether there are material facts in dispute,
(b) the presence of complex issues,
(c) whether there is a need for the exchange of pleadings and discovery, and
(d) the importance and the nature of the relief sought by the application.
72The court should also consider whether the affidavits and transcripts of cross-examinations are enough to decide any credibility issues: Sekhon, at para. 51, citing Metropolitan Toronto Condominium Corp No. 747 v. Korelokh, 2010 ONSC 4448, at paras. 57-61.
73Not every factual dispute creates a reason to convert an Application into an Action. The facts in dispute must be material to the issues before the court: Niagara Air Bus Inc. v. Camerman (1989), 1989 CanLII 4161 (ON SC), 69 O.R. (2d) 717 (H.C.), at pp. 725-26. The court will only require a trial if there is good reason to so and no determination can be properly made on the Application Record. For example, where there is a concern about the credibility of the witnesses the matter should proceed by way of Action: Gordon Glaves Holdings Ltd. v. Care Corp of Canada, 2000 CanLII 29058 (ON CA), at para. 30.
74The court should also consider whether a summary judgment would be granted if the matter had commenced as an action as opposed to an application. As noted in Sekhon, “it makes little sense to convert an application, which is essentially a motion procedure, into an action procedure that could be determined by a motion for summary judgment”: at para. 52.
Analysis
75After reviewing the record and hearing submissions of counsel, it is my view that there is good reason why this Application should be converted into an Action with terms.
76I have no difficulty finding that Mr. Namburi drafted the agreement, that he and Mr. Stephen signed, for the purpose of trying to skirt the undertaking that Mr. Namburi gave to the OSC. I find that Mr. Namburi chose the language in the agreement to avoid breaching the undertaking. For example, Mr. Namburi defined himself as an “employee” who worked under “standard instructions”. He also disclosed that he was not registered with the OSC but that he was not trading in securities.
77I also have no difficulty finding on this record that Mr. Namburi engaged in trading in securities on behalf of Mr. Stephen and that he knew that this was contrary to s. 25 of the Securities Act. Just because the written agreement described the relationship between the parties as an employee/employer relationship, the court must look at the true nature and substance of the arrangement between the parties. As noted in Bagrianski v. Aero Surveys Inc., 2004 CanLII 26914 (ON SC) at para. 73;
A written agreement must not be disregarded; indeed, an agreement freely entered into should carry significant weight. But the case law is clear that such an agreement is only one circumstance in the determination of the substance of the arrangement
There is evidence in the Application Record that Mr. Namburi engaged in trading securities on behalf of Mr. Stephen on his own accord on many occasions.
78The principle argument raised by Mr. Stephen is that he was misled by Mr. Namburi into believing that Mr. Namburi was an expert CFD trader. Mr. Stephen would not have entrusted his money to Mr. Namburi had he known that Mr. Namburi was not legally entitled to trade in securities.
79The difficulty I have with Mr. Stephen’s submissions is that Mr. Namburi disclosed to Mr. Stephen that Mr. Namburi was not registered with the OSC in the agreement that Mr. Stephen signed. If that information was not disclosed in the agreement, this would have been a very different Application. As stated by Cromwell J. in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 SCR 494 at para. 73, “the duty of honesty means “simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract.” Mr. Namburi’s failure to disclose that was not registered with the OSC when he entered into an undertaking that he would not engage in trading unless he was registered would have supported a finding that Mr. Namburi knowingly misled Mr. Stephen about his “expertise” as a CFD trader.
80However, Mr. Stephen signed the agreement which disclosed that Mr. Namburi was not registered with the OSC. Regardless of whether Mr. Stephen thought the contract was a formality, he was told that Mr. Namburi was not registered. Mr. Stephen’s knowledge and understanding of what it means not to be registered under s. 25 of the Securities Act is therefore critical in assessing whether Mr. Namburi misled Mr. Stephen and is liable for the losses suffered by Mr. Stephen.
81Mr. Stephen states that Mr. Namburi pressured him into signing the agreement, claiming that it would be illegal for him to conduct trades for Mr. Stephen if the agreement was not signed. Mr. Stephen stated that, at the time he signed the agreement,
he was unaware of what such registration requirements entailed, as well as of the regulatory context behind the disclaimer under term 3 of the Agreement, which Mr. Namburi at no point disclosed to me throughout our engagement.
82The court must make a credibility assessment regarding Mr. Stephen’s level of investment knowledge and whether he truly did not understand what the registration requirements meant to determine whether Mr. Stephen was misled by Mr. Namburi. If Mr. Stephen understood what it meant not to be registered, Mr. Stephen entered into the agreement knowing that Mr. Namburi was not a legal investment advisor. Mr. Stephen would therefore assume the risk of having a person who is not an investment advisor trade on his behalf.
83The importance of Mr. Stephen’s knowledge in determining issues of liability is acknowledged by Mr. Stephen in his Reply Factum, which states that “the Respondent’s status as ‘unregistered’ was of little significant to a lay person such as Stephen, who had been led to (mistakenly) believe that the Respondents were legally permitted to trade in securities and give investment advice.” Mr. Stephen also submits that, had Mr. Namburi disclosed the undertaking with the OSC to Mr. Stephen, Mr. Stephen would have understood that the agreement was illegal and would not have signed the agreement.
84The issues to be determined on this Application go beyond simply interpreting the terms in the contract. They raise material credibility issues regarding Mr. Stephen’s investment knowledge and the true nature of the relationship between Mr. Stephen and Mr. Namburi.
85Given the number of reasons that Mr. Stephen’s counsel submits Mr. Namburi is responsible for Mr. Stephen’s losses, I will first explain why determining Mr. Stephen’s investment acumen and the true nature of the relationship between the parties is relevant to each issue. Second, I will explain, the material facts that are in dispute that require a credibility assessment.
86First, Mr. Stephen submits that Mr. Namburi was negligent in providing a service. The service provided by Mr. Namburi was trading in securities on behalf of Mr. Stephen. Mr. Stephen submits that Mr. Namburi was negligent because he was not legally entitled to trade in securities. If Mr. Stephen understood that Mr. Namburi’s failure to be registered with the OSC meant he was not lawfully entitled to engage in security trading, Mr. Stephen knew Mr. Namburi was not a licensed investment advisor.
87Second, as set out in the Applicant’s Factum, “Mr. Namburi misrepresented himself as an expert in trading when he was not in fact legally qualified to do so”. There could be no misrepresentation if Mr. Stephen understood that Mr. Namburi’s lack of registration meant that he was not legally qualified to trade in securities. Mr. Namburi appears to have been truthful about his other qualifications such as his PHD.
88Third, Mr. Stephen claims that the agreement is void for unconscionability. Mr. Stephen’s ignorance of the language of the bargain as well as his lack of investment knowledge are relevant factors to consider under this head of liability.
89As explained by the Supreme Court of Canada in Norberg v. Wynrib, 1992 CanLII 65 (SCC), [1992] 2 S.C.R. 226, an agreement can be set aside where there is an overwhelming imbalance in the power relationship between the parties. In Titus v. William F. Cooke Enterprises Inc., 2007 ONCA 573, at para. 38, the Court of Appeal for Ontario explained that four elements are necessary for a finding of unconscionability:
i) a grossly unfair and improvident transaction; and
ii) victim’s lack of independent legal advice or other suitable advice; and
iii) overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
iv) other party’s knowingly taking advantage of this vulnerability.
90The court must assess whether Mr. Stephen was truly inexperienced in this type of trading and that he did not understand the language of the bargain, particularly what Mr. Namburi’s failure to be registered with the OSC meant. The true nature of relationship between the parties, which is disputed, must also be determined.
91Fourth, Mr. Stephen submits that the agreement was based on material misrepresentations. Mr. Stephen submits that the material misrepresentations were the promised rate of return, Mr. Namburi holding himself out to be an expert, and Mr. Namburi characterizing the relationship as that of an employee, who would provide training to Mr. Stephen.
92If Mr. Stephen understood that Mr. Namburi was not registered, and therefore not legally entitled to trade securities on behalf of another, then it is difficult to see how Mr. Stephen was misled. Similarly, it is difficult to see how Mr. Stephen could have been misled by Mr. Namburi’s statements regarding the 1% return on the accounts given that the Oanda contract and the agreement with Mr. Namburi both outlined the risks of trading in CFDs. Whether Mr. Stephen was taking advantage of by Mr. Namburi must be determined which requires a credibility assessment of both parties.
93Fifth, Mr. Stephen submits that the agreement is void for illegality because Mr. Namburi knew that trading on behalf of Mr. Stephen was illegal. Similarly, if Mr. Stephen understood Mr. Namburi’s failure to be registered with the OSC meant Mr. Namburi’s conduct was illegal, Mr. Stephen is also responsible for the illegal agreement.
94Finally, it would be premature for the court to determine that the terms of the contract were breached without first determining if the contract is valid. For the reasons stated above, this determination cannot be made without resolving credibility issues involving the parties.
95Now turning to the credibility concerns. The crux of this case is whether Mr. Namburi misled Mr. Stephen despite the fact that the agreement disclosed that Mr. Namburi was not registered with the OSC.
96The court must make a credibility assessment whether Mr. Stephen’s evidence is truthful that he did not appreciate what the lack of registration with the OSC meant. This cannot be done on the Application Record. Nor can the court fully assess the true nature of the relationship between the parties without assessing the credibility of both parties given their very different view of the nature of their relationship.
97Mr. Stephen submits that he had limited investment knowledge and there is evidence to support this, including the text messages that he sent Mr. Namburi. There is other evidence that suggests that Mr. Namburi had some experience and understanding about investments that could undermine Mr. Stephen’s evidence that he did not understand the importance of registration and was misled by Mr. Namburi.
98Mr. Stephen stated that he had limited knowledge and experience in investments relating to FX, commodities and CFDs, and exchange-traded funds. He stated that this was why he attended the Money Show and engaged Mr. Namburi. Even accepting that Mr. Stephen attended the Money Show to increase his knowledge of trading in CFDs, Mr. Stephen’s attendance at the Money Show and his interest in trading in CFDs suggests that Mr. Stephen had some investment knowledge. CFDs are not traded on the exchange and appear to be a more sophisticated type of securities trading than trading securities on the stock exchange.
99There is also a dispute in the evidence as to who approached whom, which is relevant in determining Mr. Stephen’s degree of investment sophistication, the nature of the relationship between the parties and whether Mr. Stephen was misled. Mr. Stephen stated that, after Mr. Namburi discovered that Mr. Stephen was inexperienced with investing, Mr. Namburi aggressively promoted his Oanda-based strategy in FX and CFDs, which he presented as risk-free. Mr. Namburi also told him that his principle would be fully protected and there would be no risk involved in the strategy that he conservatively estimated would create a 1% daily return.
100Mr. Stephen stated that he relied on Mr. Namburi’s assurance that there was no risk in trading in CFDs, yet Mr. Stephen signed the agreement with Mr. Namburi. That agreement sets out that returns and profits were not guaranteed, and that the investor should take advice of his financial advisor before investing and trading with Oanda. Mr. Stephen stated that he thought this agreement was a formality. Mr. Stephen also signed the Oanda account opening documents, which clearly set out the risk involved in this type of trading and stated that his risk tolerance was $250,000.00 CAD. The court will need to assess whether Mr. Stephen was truly misled by Mr. Namburi given that Mr. Stephen was advised of the risks of trading in CFDs in these two agreements.
101In considering the level of Mr. Stephen’s investment knowledge and whether he was misled, the court also needs to resolve the issue of whether Mr. Namburi instructed Mr. Stephen how to open the Oanda account and set up the accounts to give Mr. Namburi more flexibility in trading without any safety measures, or whether Mr. Stephen opened the accounts understanding full well the risks he was taking.
102The court must also resolve the issue of the degree of discretion that Mr. Namburi had in trading in the accounts because this is relevant to determining Mr. Stephen’s degree of investment knowledge and the relationship that existed between the parties.
103Mr. Stephen stated that Mr. Namburi had unfettered discretion trading in securities. Mr. Namburi stated that he only acted on standard instructions. Mr. Namburi stated at one point in cross-examination that he could not sell at a loss, but at another point he agreed that he bought and sold securities without Mr. Stephen’s instructions. While it is easy to infer that Mr. Namburi often traded without Mr. Stephen’s direct involvement, Mr. Stephen had some involvement as evidenced from the various texts.
104The fact that Mr. Stephen did not know that Mr. Namburi breached an undertaking does not assist in resolving the issue of whether Mr. Stephen understood that, because Mr. Namburi was not registered, Mr. Namburi’s conduct was illegal under the Securities Act. If Mr. Stephen understood what registration meant, he would have known that Mr. Namburi was not a legal advisor but nonetheless agreed to let him manage his money.
105It is not clear to me that Mr. Namburi had to disclose that he had an undertaking not to trade in securities without being licensed given that he disclosed that he was not registered with the OSC in the agreement. The fact that Mr. Namburi did not disclose his prior undertaking to the OSC is however, a further piece of evidence that may assist the court in finding that Mr. Namburi misled Mr. Stephen.
106If Mr. Namburi is found liable, Mr. Stephen’s investment knowledge is also relevant to the calculation of damages. Mr. Stephen had a right to end the contract at any time. Mr. Stephen stated that he could not do anything but withdraw the remaining funds because he did not understand how to trade in these types of transactions. If this is indeed true, then this is relevant to Mr. Stephen’s ability to mitigate losses. In addition, I would note that there is no documentary evidence explaining the quantum of losses that Mr. Stephen states he suffered.
107In all of the circumstances, I am satisfied that the interest of justice and procedural fairness require that this matter be converted into an Action pursuant to rule 38.10 of the Rules of Civil Procedure.
108This matter occurred in 2017. The issues are fairly focused. As such, this matter should be expedited and proceed to trial as quickly as possible. The trial in this matter should not take more than two to three days to complete.
Disposition
109For the reasons set forth above, I order as follows:
The Application is converted into an Action. The Applicant shall be the Plaintiff and the Respondents shall be the Defendants.
The Plaintiff shall deliver a Statement of Claim within fifteen (15) days from today’s date.
The Defendants shall deliver a Statement of Defence within fifteen (15) days after receiving the Plaintiff’s Statement of Claim.
The Affidavit of Documents shall be exchanged thirty days after the pleadings are exchanged.
All cross-examinations to date shall be deemed to constitute Examinations for Discovery and all cross-examination transcripts shall be treated as Discovery Transcripts in this Action.
If the parties wish to conduct further discovery of either Mr. Stephen or Mr. Namburi, the cross-examination are to take place ninety days after the Affidavit of documents are exchanged. The further discovery is limited to five hours per person.
Any motions with respect to undertakings or refusals are to take place thirty days after the discoveries are concluded.
The Trial Record is to be prepared by September 30, 2021.
If there is disagreement or difficulties with respect to complying with this timetable that Counsel cannot resolve, Counsel are to contact the Trial Coordinator to set up a Zoom call before me at 9:00 a.m. on a date that I am available.
Once the Trial Record is complete, the parties may contact the Trial Coordinator’s office to set up a Judicial Pretrial before me any day that is available at 9:00 a.m.
Costs
110The parties are encouraged to work out the issue of costs between themselves.
111If the parties are unable to resolve the issue of costs, the Respondents shall serve and file written submissions of no more than two pages, double-spaced, twelve-point font, not including relevant case law within ten (10) days of receipt of this endorsement as well as a detailed bill of costs and any offers to settle.
112The Applicant may file a response consisting of written submissions of no more than two pages, double-spaced, twelve-point font, not including the relevant case law within ten (10) days receipt of the Respondents’ submissions and a detailed bill of costs and any offers to settle.
113The Respondents may file a one-page reply, double-spaced, twelve-point font, within five (5) days of receipt of the Applicant’s submissions on costs.
Dennison J.
DATE: January 14, 2021