to download a PDF of this paper
arising from trading losses by investors against their
brokers is occurring with increasing frequency, exacerbated
by the current decline in stock market prices relative
to those in the mid 1990s. The typical scenario is that
an individual invests $200,000 in 1990 and by the end
of 2001 the stocks remaining have a market value of
only $12,000. Is the loss really $188,000. And whose
fault is it?
Superficially, such claims appear to be straightforward.
The calculation seems to be obvious, and the regulations
administered by the British Columbia Securities Commission
and the Investment Dealers' Association of Canada ("the
IDA") are specific. Serious problems may arise, however,
from the documentary underpinnings of the claim.
When presenting their cases, investors invariably forget
the extent to which they withdrew or deposited cash
and securities during the claim period. A typical case
involves a married couple whose investments are in registered
retirement saving accounts and non-registered margin
or cash accounts segregated between Canadian and US
funds; it is not unusual for such a couple to maintain
six separate accounts with a single broker and for numerous
transfers to occur between the accounts. If there has
been extensive trading in options, the loss attributable
to that activity should usually be analysed separately.
The consequence of the foregoing complexity to claimants
and their counsel is that the magnitude of the claimable
loss, if any, is an unknown until a serious amount of
analytical work has been done at a significant cost.
CSA's experience has been that about 30% of potential
claims are, upon analysis, reduced to an amount that
does not justify full Supreme Court proceedings. After
we analysed two cases, the purported loss actually turned
into a profit!
CSA has been retained in a sufficient number of such
matters that it has been feasible to develop a methodology
and identify the resources that enable us to provide
preliminary assessments and deliver final reports in
a cost effective and timely manner.
Our approach is as follows:
Performing detailed analysis of trading experience,
reconciling cash and security positions to calculate
the primary trading loss.
first, critical step in the analysis is to reconcile
the trading experience of the investor so that a
summary can be reconciled to the monthly statements
provided to the investor by the brokerage house.
The summary contains the following elements:
Securities transferred in at market value
Dividends and interest received
(Interest on margin trading)
Trading profit or (loss)
US exchange gain or (loss)
(Cash or market value of securities removed)
(Cash and market value of securities remaining
at the end of the claim period)
The results of the foregoing analysis, converted
into Canadian funds, must equal zero.
This analysis, or reconciliation, can be time-consuming.
CSA's fee for this exacting task is $110 per hour.
Determining the type of portfolio suitable to
the needs and objectives of the plaintiff investor;
There are two dimensions to this aspect of securities
claims. First, the trading experience must be reviewed
in order to learn whether the broker followed the
investor's instructions as set out on the New Client
Application Form. ("NCAF") The second is to determine
whether those instructions were suitable to the
needs and goals of the investor.
CSA addresses these issues as follows:
The securities held in the investor's account are
analysed at appropriate intervals to determine whether
the holdings correspond to the original NCAF instructions
and if the NCAAF has been properly updated. In that
review, we also examine whether an excessive concentration
has occurred in any investment sector or in any
specific security. In the current market, an excessive
concentration in high-tech stocks, particularly
Nortel, is a common complaint.
If the instructions in NCAF have been carried out,
it is necessary to determine whether the broker,
given the fiduciary responsibility recognized by
the IDA, should have accepted those instructions.
In this respect, CSA, through its Vice-President,
Stirling Shultz, will report on an asset mix that
would have been suitable for that investor. Stirling's
opinion is based on his financial planning qualification
and his practical experience in giving such advice
to actual clients.
An important part of this review is to assess the
supervisory responsibility of the branch office
and the head office of the investment dealer. This
task is accomplished by analysing the monthly commissions
paid by the investor and reported in item 1 above;
the IDA sets parameters for mandatory review by
branch managers and head office, based on monthly
Reporting on the investment results that would
have obtained over the specific period in any combination
of stocks, bonds, and treasury bills.
When computing the loss from alleged deficiencies
in the manner in which brokers' have discharged
their responsibilities, it is necessary to consider
not only the trading loss discussed above, but also
the gain or loss that would have occurred if the
funds entrusted to the broker had been invested
in a manner suitable to the goals and needs of the
investor. The principle, if not the methodology,
has been established in
Laflamme v. Prudential-Bache Commodities Canada
Ltd.,  1 S.C.R. 638.
The calculation of this alternate, or suitable,
investment return is complex. The gain or loss on
cash and investments entrusted to the broker's care
must be measured from the date of investment and
must be adjusted by withdrawals or disinvestments.
As well, since no perfect asset mix can be defined,
it is important for the parties and the court to
be able to compare the results of varying asset
CSA has developed a computer model by which the
alternative investment results can be accurately
measured under varying assumptions. After the dates
and amounts invested have been posted, alternate
returns may be instantly determined under varying
assumptions. The model is based on the TSX 300,
long-term Canada bonds and Canada treasury bills.
It factors in the broker's commissions, dividends
compounded quarterly, interest compounded semi-annually,
and capital gains on both stocks and bonds.
A sample of this aspect of our reporting is to be
found at alternative investment return.
Determining the extent to which the defendant investment
advisor and his or her employer are in compliance
with the standards required by British Columbia
Determination of the "ultimate question", that is
the liability of the defendants and the quantum
of the award, rests with the tribunal, not an expert
retained by a party. CSA, through its President,
Clayton Shultz, will report on the extent that the
recommendations and actions of the defendant investment
advisor and his or her employer are in compliance
with the letter and spirit of the securities regulatory
environment in British Columbia. Such reporting
and testimony is designed to acquaint the tribunal
with the standards and practice appropriate to participants
in the securities industry.
Potential claimants whose estimated losses are $50,000
or less should carefully consider the many advantages
of the Securities
Dispute Resolution Programme sponsored by
the IDA and administered by The British Columbia
International Commercial Arbitration Centre in Vancouver.
Provided that claimants commence arbitration proceedings
before initiating a Supreme Court action, the broker
is bound to participate in the arbitration process.
A worthwhile second alternative to a fully litigated
dispute is the Summary trial procedure, rules of
which are to be found at: http://www.ag.gov.bc.ca/courts/scrules/rule_18a.htm.
As a final, but important, note, CSA strongly recommends
that parties to disputes in the securities area
be represented by lawyers who are members of the
Law Society of British Columbia. In our extensive
experience, have found that self-representation
has proven to be detrimental to claimants' interests.