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Victoria broker nailed for misleading client

September 05, 2005

A Victoria woman has successfully sued her former Camosun College teacher, financial advisor and friend for breach of fiduciary duty in the handling of her investment portfolio.
Wendy Osborne will receive between $246,000 and $465,000 in damages from Brian Alexander Harper once Justice Jon Sigurdson of the B.C. Supreme Court hears full legal arguments from both sides this month.


Following a six-day trial in Victoria in February and June this year, the judge ruled that Harper, who taught an investment course at Camosun College for about 13 years and was a broker at RBC Dominion Securities until 1993, concealed the true conditions of Osborne's investment from her.


"I think that he actively misled her as to the health of the investments and that this concealment started even before she had made all of the investments," Sigurdson stated in his 64-page judgment.

The judge also ruled that RBC Dominion Securities was vicariously liable for Harper's actions.
In 1979, Osborne, who was born in Victoria in 1955, was introduced by her grandmother to Harper, who was a broker at Pitfield McKay Ross, a predecessor to RBC Dominion Securities. She was a Camosun College student at the time and had $10,000 in savings with which she opened an account with Harper's firm to acquire gold or silver stocks she had heard about on the radio.


In 1984, Osborne's father died. However, he left his estate to his sister, not his daughter.
Harper recommended that Osborne obtain legal advice about her father's estate and as a result, Osborne received her father's entire estate, which was worth about $600,000.
Osborne, who described herself in court testimony as "a worry-wart who was concerned about world calamity," opened an options account and signed a margin agreement with Harper's firm.


She testified that Harper described the margin account as a formality, that it enabled him to do "certain manoeuvres" and that it was necessary because he had "special techniques he wanted to employ."


Harper told the court Osborne understood options and margin trading, that she understood the risks and his strategies and that options and trading on margin were acceptable, given her risk tolerance.


At least a portion of the proceeds from Osborne's settlement of her father's estate were initially invested at Royal Trust. In July, 1987, $354,000 was transferred to her account with Harper at RBC Dominion Securities.


In April, 1988, the first of three disputed investments occurred when Osborne purchased four units in the Victoria Securities Trust for US$60,000. The transaction involved Victoria Securities Depository Inc. (VSDI), which was to hold shares of a company called MB Canadian Tropic Line Ltd.


According to the MB Canadian Tropic Line business plan, that company was formed to acquire the rights to a marine transport service said to be modeled after European costal freighter companies with 50.1 per cent of the common shares owned by VSDI and 49.9 per cent owned by Michael Von Brauchitsch of Hamburg, Germany.


Harper was president and sole director of VSDI and described the venture capital investment as an investor group developing a shipping business along the west coast of North America. Sigurdson noted that rather than putting the investors' money into MB Canadian Tropic Line, Harper used it as an extra layer to act as a unified front in dealing with Von Brauchitsch, whom Harper characterized as "an unknown."


Osborne told the court Harper described the venture as a special opportunity and a wonderful thing. He said that they were going to ship Corona beer and that the contract was "in the bag."


The entire investment was ultimately lost.


Later that year, Osborne invested $25,000 in a joint venture unit of Canadian Shipping Containers. She said Harper told her it was a very good opportunity and that only a select group of people were going to be participating.


This investment was also ultimately lost.


The third investment in dispute came in the fall of 1989 when Osborne bought another unit in Victoria Securities Trust. Harper said that MB Canadian Tropic Line was essentially insolvent at the time and that he told Osborne it was extremely serious and was a high-risk investment. Osborne denied being told before she made her investment.


When asked why Osborne would put that much money into a company that she was told was insolvent, Harper testified "there was a prospect of a sale for the company and it was her belief, and certainly other of the investors' belief that the prospect for sale would provide recovery of all funds that they had invested."


All three of the investments failed and ended up having no value.


The judge said he found Osborne's evidence concerning her acceptable risk level and description of herself as a "worry-wart" consistent with his assessment of her.


"She is not particularly worldly, but rather appeared to be quite a naive and sheltered person," Sigurdson stated. "She has no friends, was not engaged in the working world and appeared to be at least somewhat reclusive."


He said Osborne's testimony that Harper was her only friend "rang true."


Sigurdson said that to some degree, Harper's trustworthiness as a witness was put into question by the very nature of some of the transactions: he borrowed money from a client in clear contravention of ethical standards and in the third investment, had his client invest in what he appeared on the evidence to know to have been a faltering enterprise.
"Credibility is often best assessed by comparing testimony to objectively-proven facts. Here, (Harper) relies heavily on (Osborne's) trading patterns over an extended period of time to show her tolerance for risk.


"The fact that she operated a margin account and an option account simply does not suggest to me an in-depth understanding of those investment mechanisms in the circumstances of this case, rather, I think that they were investment devices that Mr. Harper recommended and used in the operation of her account."


The judge found that Osborne had a significant degree of vulnerability and was naive and unsophisticated. As well, she was very dependent on Harper, not only in financial matters, but for friendship and advice on personal matters as well.


Sigurdson said the code of ethics and conduct for registered representatives indicates that the client's interest must be the foremost consideration: all recommendations must be based on a careful analysis of both the client information obtained and the information related to the particular transaction.


"The 'know your client rule' is well known and accepted and requires the investment dealer to determine the general investment needs and objectives of the client and the suitability of a proposed purchase or sale for that client."


In finding Harper in breach of his fiduciary duty, the judge ruled that Harper ought to have recommended against the high-risk investment because it was outside Osborne's accepted risk. Rather than acting in good faith by providing Osborne with full and frank disclosure, Harper failed to warn her of the risk and took advantage of their trust relationship in order to get her to contribute to a start-up venture in which he had a substantial stake. He described Harper's disclosure of his interest in the investment as "somewhat coy."


"I accept the submissions of [Osborne's lawyer, Bruce McConnan, Q.C.] that these investments were part of a complex investment scheme with companies controlled by Mr. Harper directly or indirectly and that a reasonable person in the shoes of [Osborne] being told what she was by Mr. Harper would not have known of the losses until at least 1992 or possibly even later [when the fiduciary relationship between the defendant and the plaintiff was terminated]."


In assessing damages, the judge noted Osborne claimed losses amounting to $444,696.07 while Harper argued the loss was only $270,030.02, of which $126,720.02 was interest. Sigurdson said he would not determine the amount until he heard full submissions from both sides within a month.


But the judge awarded $20,000 in punitive damages to Osborne for Harper's "high-handed behaviour" in recommending that his client invest in high-risk ventures in which Harper had substantial personal interests, ventures in the marine cargo business in which Harper had no previous experience.

McConnan said Osborne would not be willing to be interviewed until the case is completed.


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