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Recent Developments in Litigation - Securities

Prepared By

David Di Paolo
Phone: (416) 367-6108 Fax: (416) 361-2454
Borden Ladner Gervais LLP
4100- 40 King St W, Scotia Plz
Toronto   ON  Canada   M5H 3Y4



Prepared by:

David Di Paolo

Borden Ladner Gervais LLP

There have been a number of developments in securities litigation in areas as diverse as brokers' liability, take-over bid cases and shareholder's litigation. There is not one common theme that ties these decisions together. It is clear, however, that the courts and the legislature in particular are increasingly sympathetic toward individual investors and increasingly skeptical of broker-dealers, issuers and insiders.

A significant decision in the area of broker liability is Blackburn v. Midland Walwyn Capital Inc., [2003] O.J. No. 621 (S.C.J.), aff ‘d [2005] O.J. No. 678 (C.A.), leave to appeal refused [2005] S.C.C.A. No. 196. For the first time, the decision imposes an obligation on broker-dealers to warn their clients when they become aware that one of their brokers has engaged in unauthorized or otherwise inappropriate conduct in the account of one or more clients. The warning extends not only to the clients in whose account the activity takes place, but to all clients of the broker.

The Blackburns began a relationship with a young broker, George Georgiou, in 1989. Over the course of six years, Georgiou managed the Blackburns' investment accounts, first at Midland Walwyn, then at Levesque. From the beginning of his career at Midland, Georgiou was earning high commissions for himself and for the firm, but was doing so in an aggressive, manipulative and questionable manner. In 1993, after numerous warnings, Georgiou was terminated by Midland and was immediately hired by Levesque. In 1995, Georgiou was terminated by Levesque for similar reasons and subsequently left the investment industry.

During his relationship with the Blackburns, Georgiou engaged in unauthorized trading in Dr. Blackburn's investment account. When Dr. Blackburn confronted Georgiou, he convinced Dr. Blackburn to enter an agreement whereby Georgiou personally guaranteed that the Blackburns would not suffer any losses as a result of the unauthorized trade in exchange for their promise that they would make no complaints to the investment firms with respect to Georgiou's questionable conduct. In the end, the Blackburns lost approximately $190,000 and brought an action against Georgiou, Midland and Levesque, seeking recovery of their losses.

In finding for the Blackburns on the issue of liability, the trial judge held that, given the firms' knowledge of Georgiou's trading practices, Midland and Levesque failed both in their duty to inform securities regulators and their duty to inform the Blackburns of Georgiou's misconduct in the accounts of his other clients. The trial judge grounded these duties in the regulations imposed by securities regulators, established to protect the clients of brokers and investment firms. Further, the trial judge relied on cases that establish and apply the general principle of a “duty to warn,” which flows from the duty of care owed in negligence cases. On appeal, the Ontario Court of Appeal upheld the trial judge's imposition of a duty to warn on Levesque and Midland.

Blackburn was recently applied by the Quebec Superior Court of Justice in Markarian v. Marches mondiaux CIBC inc., [2006] J.Q. no 5467 ( J.C.S.). In Markarian, the court considered the actions of CIBC World Markets Inc. (“CIBC”) with respect to its clients Haroutioun and Alice Markarian (the “Markarians”). The Markarians routinely signed documents presented to them by their CIBC broker, Harry Migirdic (“Migirdic”). According to the Markarians, they never received the documents before signing, nor did they have an independent understanding of their meaning, relying always on Migirdic's explanations. The trial judge concluded that Migirdic took advantage of the Markarians' trust by asking them to sign blank guarantees, which Migirdic used to guarantee losses in the accounts of other clients that he was managing illegally.

For years this situation continued, despite the fact that the Markarians' low-risk accounts were purported to guarantee the high-risk accounts of people they did not know. Although CIBC's compliance department repeatedly questioned Migirdic and his branch manager, Tom Noonan, with respect to these irregularities, the situation was allowed to continue for several years, until Migirdic confessed to CIBC. In spite of Migirdic's confession and his assertion that the Markarians had no knowledge that their accounts guaranteed the badly failing accounts of strangers, CIBC chose to act upon the guarantees, causing the Markarians a loss of $1.5 million. The Markarians pursued an action against CIBC seeking reimbursement of their losses. In a lengthy and strongly worded condemnation of CIBC's actions, the trial judge ordered that the bank return the Markarians' illegally appropriated funds. Further, the trial judge awarded the Markarians $50,000 each in general damages, and an additional $1.5 million in punitive damages, for a total award of more than $3.1 million.

Although the trial judge refers to the decision in Blackburn several times in Markarian, his most significant reliance on Blackburn is with respect to the duty of investment firms to inform their clients of broker misconduct. The trial judge heard evidence that, throughout the course of his employment with CIBC, and certainly prior to obtaining the fraudulent guarantees of the Markarians, Migirdic had been reprimanded, suspended, and threatened with termination several times due to violations of internal and external rules. Relying on Blackburn, the trial judge held that CIBC was negligent in failing to warn its clients that its employee was dishonest and breached regulations.