Young Estate v. RBC Dominion Securities, an Ontario Superior Court decision released on December 17, 2008, is a recent addition to the jurisprudence arising out of the high tech crash, which illustrates that this event continues to have legal repercussions for financial institutions today, even years after it ended.
The plaintiffs, Murray Young (“Murray”) and the estate of his late mother, Dorothy Young (“Dorothy”), sued the defendants, their former broker, David Houghton, and his employer, RBC Dominion Securities, after Murray and Dorothy suffered substantial losses from the plummeting value of their Nortel and other high tech stocks. Mr. Houghton had originally completed his clients’ KYC forms in 1988. The plaintiffs claimed that Mr. Houghton breached his duty of care to them by failing to know his clients; update their KYC forms; recommend investments consistent with their goals; readjust their investments to comply with these goals; and give them appropriate cautionary advice regarding their over-concentration in high tech stocks. In addition, the plaintiffs claimed that RBC had not adequately supervised Mr. Houghton.The Court found that Mr. Houghton had not breached his duty of care to his clients and that he was more of an order-taker than a fiduciary. He had served as their investment advisor and not as a financial planner; both plaintiffs had non-discretionary investment accounts; and Murray engaged in a number of unsolicited transactions. Moreover, by the time that they began to invest in high tech stocks, both plaintiffs were knowledgeable and well-informed investors and Mr. Houghton communicated with and advised them regularly — in particular, about the risks associated with overconcentration in Nortel and other high tech stocks. The Court rejected the plaintiffs’ submission that Murray was as an unsophisticated investor dependent on Mr. Houghton. The Court likewise concluded that Dorothy was a tough and thoughtful investor, despite her very advanced age. Thus, while the portfolios of both plaintiffs were over-concentrated in high tech stocks, the Court found that Mr. Houghton had indeed offered appropriate cautionary advice to both plaintiffs and they had simply not heeded his warnings
Of note is the Court’s treatment of entries in brokers’ electronic record-keeping systems. In line with other decisions, the Court accepted these electronic notes as evidence of the fact that Mr. Houghton had given the appropriate advice to his clients. What was new was that the Court also recognized such entries as “business records”. Consistent with the Ontario Evidence Act requirement for “business records”, these electronic notes were made in the ordinary course of business, regarding a business transaction, occurrence or event, and were made at the time of the transaction or shortly thereafter by someone with knowledge of the transaction or event recorded. Accordingly, the Court admitted Mr. Houghton’s entries “as prima facie proof” that he or other RBC employees had sent certain information and documents to the Youngs, had taken certain actions on their behalf, and had had certain conversations with them.
In future, this legal characterization of such entries should make it easier for brokers to prove that they have fulfilled their duties to their clients, and provide them with a strong incentive to keep detailed electronic records of their interactions with clients, especially those who have been unwilling to follow the broker’s advice. The Court further confirmed that while KYC forms are important, and observed that the forms in this case had not been updated, such non-compliance with industry standards or regulations does not give rise to damages without proof that it has caused the losses alleged. In this case, the failure to update KYCs did not cause the losses. Moreover, Mr. Houghton was able to establish, through other records, that he was familiar with his clients, and in particular with their financial circumstances, investment objectives and risk tolerances, and therefore “knew his clients”. This underlines the importance of a complete documentary record of the relationship between broker and client.