Décision

Shinoff c. BMO Nesbitt Burns Inc.					2017 QCCS 3479
JD2935    SUPERIOR COURT
CANADA
PROVINCE OF QUEBEC
DISTRICT OF		MONTREAL
No:	500-17-058180-103
DATE:	July 6, 2017
______________________________________________________________________
PRESIDED BY:			THE HONOURABLE	FRANCE DULUDE, J.S.C.
______________________________________________________________________
STEVEN SHINOFF                                                                   and 7015909 CANADA INC.
Plaintiffs
v.
BMO NESBITT BURNS INC. and BARBARA SCHWARTZ-ZUKOR
Defendants
______________________________________________________________________
JUDGMENT
______________________________________________________________________

1.           Introduction AND ISSUES

[1]           Plaintiffs hold Defendants liable for the losses they allegedly suffered because Defendants did not properly manage and monitor the investments in their accounts with Defendant BMO Nesbitt Burns Inc. (BMONB).

[2]           The Defendants deny any wrongdoing.  They assert that the securities that Defendant Zukor (BSZ)[1] recommended to purchase were authorized by Mr. Shinoff and were suitable and in conformity with Plaintiffs’ investment objectives and investment profiles.

[3]           Against this background, the Court must decide if the Defendants committed a fault in the execution of their mandate for Plaintiffs and, if so, what damages were caused by it.

2.           FACTUAL BACKGROUND

[4]           In 1980, after completing his Bachelor of Commerce in Small and Medium Business and in Accounting at McGill University, Mr. Shinoff joined the family business, Rent-A-Tool, a tool and equipment rental company that was started by his father.  In 1983, Mr. Shinoff and his two sisters became the sole shareholders of the company, with Mr. Shinoff owning a little over 50%[2] of the shares and his two sisters owning the remainder equally.

[5]           In 1987, Mr. Shinoff became a client of BMONB’s predecessor company and BSZ became his investment advisor.  He opened two accounts there: account number [1] (the Personal Account) and account number [2] (the A-1 Account)

[6]           In 1997, Mr. Shinoff hired Frank Heller to work with him at Rent-A-Tool.  Part of the arrangement with Mr. Heller was that, should the company ever be sold, Mr. Heller would be entitled to receive 15% of the net proceeds of sale above four million dollars, the agreed-upon value at the time of Mr. Heller’s hire.  In fact, together they grew the business significantly thereafter.

[7]           In 2004-2005, Mr. Shinoff purchased his sisters’ shares in Rent-A-Tool for $1.2M[3] and undertook to repay their loans to the company.

[8]           In May of 2006, Mr. Shinoff advised BSZ that he was about to sell the business and that he would invest the net proceeds of sale through her and other brokers. 

[9]           He did, in fact, sell the company later that month, obtaining net proceeds of some $33M[4], which he transferred into account number [3] at BMONB (the 655 Inc. Account) he had opened in the name of his holding company, 6555420 Canada Inc. (655 Inc.)[5].  Of the net proceeds, Mr. Heller was entitled to approximately $5M, but which later on became $6.6M, with agreed-upon interest of $12k a month until payment.

[10]        On July 12, 2006, Mr. Shinoff opened a personal account at TD Waterhouse.

[11]        In December 2006 and March 2007, 655 Inc. paid Mr. Shinoff dividends of some $27M that he deposited in the Personal Account.  He then instructed BSZ to transfer $8M to his accounts managed by Bruce Kent at RBC Dominion Securities (RBCDS), leaving approximately $25M in the BMONB accounts.

[12]        In March 2007, Mr. Shinoff opened another account for 655 Inc. at TD Waterhouse.

[13]        By that time, BSZ had used the funds entrusted to her to create an investment portfolio that included a number of perpetual preferred shares (Preferreds)[6].  These shares started out performing very well, a result that Mr. Shinoff characterized as a “wonderful job with [his] portfolio in putting funds in the best possible place for [him] and [his] comfort level” [7].

[14]       However, in April 2007, the performance of the Canadian Preferreds market began to suffer.

[15]        In May 2007, Mr. Shinoff started to question the amount of the commissions he was being charged by BMONB for his accounts and asked that a summary of those be prepared.

[16]        BSZ’s son, Michael Zukor, worked with his mother and, in May of 2007, he started to be involved in Mr. Shinoff’s file to resolve the question of the fees charged to him. 

[17]        In June and July 2007, he observed that there was a deterioration of approximately $750k in the value of his BMONB accounts.  On August 1, 2007[8], he wrote to BSZ expressing his dissatisfaction with the investments made in Preferreds and his unhappiness with the explanations given by her regarding the risks and rewards associated with this particular type of investment.  Discussions ensued between him and BSZ and he ended up choosing to hold on to his Preferreds, as he felt reassured that the value of his accounts would recover.

[18]        Throughout the fall of 2007 and the first half of 2008, the value of his accounts continued to decrease and he raised his concerns on numerous occasions with BSZ. 

[19]        In fact, on November 6, 2007, he sent a first formal letter of complaint to BSZ.  In it, he restated his dissatisfaction and complained that the choice of investment in his portfolio did not respect his instructions that “a) the preservation of capital was first and foremost, and b) the responsibility was to establish a portfolio that performed well in a bad market.”[9]

[20]        As required by BMONB policy, BSZ transmitted the complaint to the compliance department.  In this way, it would be handled by someone other than her branch manager, Kristiane Béland.

[21]        After Cara Hayes, manager of the Retail Compliance Department of BMONB, acknowledged receipt of his complaint[10] and spoke to Mr. Shinoff, he wrote to her stating that he wanted the investigation to “be put on hold until the earlier of 2 weeks from today or [my] asking you to restart the investigation”.[11]  She responded that it was impossible to just put the file on hold.  She either had to close the file, upon reception of a written request to that effect, or continue to investigate his concerns[12].

[22]        In December 2007, Mr. Shinoff discussed with Gérald Taillon, first vice-president and division general manager of BMONB, and requested a guarantee of the performance of the Preferreds in his account[13]. Mr. Taillon informed him that BMONB could not provide such a guarantee and, on December 24, 2007[14], Ms. Hayes, having received no further word from Mr. Shinoff, advised him that the investigation would be closed. 

[23]        On January 7, 2008, Mr. Shinoff wrote to Mr. Taillon to express his disappointment with how his complaint had been handled, although he admits that the explanations given to him were to “the letter of the law”.[15]  Nevertheless, Mr. Shinoff decided to follow BSZ’s recommendation to “stay the course” and chose to hold on to his investments because he believed that the declines would probably only be temporary and that his account’s value would recover.

[24]        Hence, on January 15, 2008, he confirmed to Ms. Hayes that she could close the complaint file.

[25]        Following discussions he had with Mr. Zukor in February and March 2008, he purchased more Preferreds.  In spite of his optimism, during the first half of 2008, the value of his accounts continued to decrease.

[26]         On July 4, 2008, BSZ wrote to Mr. Shinoff, stating that “this is a difficult time for all investors.  [I] have learned that a good investor bears disappointment patiently.  History has shown that it is that type of investor who does well over the long term.  [Your] investment are all high quality and investment grade.”[16]

[27]        On July 7, 2008, BSZ received Mr. Shinoff’s second letter of complaint.  Again, he expressed his unhappiness with the “deterioration” in his account, which he estimated to be in excess of $2.5M[17].

[28]        On July 11, 2008, Ms. Hayes responded to Mr. Shinoff’s second complaint[18].  After reviewing the recommendations and transactions made in his accounts and the facts of his file, she noted that when the Preferreds had been recommended to him, he was informed that they would react to inflation rates and that there is always a possibility that an investment will lose some of its original value.  She pointed out that he understood that Preferreds were directly linked to interest rates and that he had accepted to take the risk.

[29]        She also reminded Mr. Shinoff that he made regular withdrawals from the sale of cash investments, and that this had the effect of his Preferreds making up a large portion of his accounts.  On this basis, she closed the compliant file.

[30]        In July 2008, approximately 33% of Preferreds remained in Mr. Shinoff’s global portfolio with BMONB. 

[31]        During the summer of 2008, he opened new accounts at TD Waterhouse and RBCDS, as well as at BMONB, in the name of a newly incorporated holding company, 7015909 Canada Inc. (701 Inc.). He proceeded to make a number of transfers among the new BMONB accounts and his previous ones, while continuing to complain about the suitability of his investments.  He, at the same time, made transfers in kind of securities from his Personal Account to the new 701 Account with Mr. Kent at RBCDS[19].

[32]        Mr. Shinoff insists that, throughout all this period, i.e., from May 2006 until November 2008, he repeatedly mentioned to BSZ that he had a very low risk tolerance and that his paramount objective was to preserve his capital.  He further affirms that he continued to receive the repeated assurance that the investments were all of high quality, that the value of his accounts would recover and that the declines were most probably temporary.

[33]       In September and October 2008, he sent a number of emails to BSZ, and her team, i.e. Mr. Zukor and Rosie Gentile[20] complaining about the poor performance of his investments.  Finally, in late October, he transferred nearly $4.3M from 701 Inc.’s BMONB accounts to accounts at TD Waterhouse[21].

[34]       Around this time, the Defendants advised Mr. Shinoff that they would no longer act as his investment advisor, since the mutual trust and respect necessary to acting in that capacity was no longer present.  They asked him to transfer his accounts elsewhere[22].

[35]       Mr. Shinoff thanked BSZ for her services and, over the next couple of months, transferred all his assets at BMONB to accounts at Scotia McLeod.  Three months later, on May 15, 2009, he sued BMONB in Ontario[23].

[36]       He eventually discontinued that action and instituted new proceedings in the present file in Québec, claiming $5,346,062M[24] for the loss he allegedly suffered.

3.           parties’ position

3.1     The Plaintiffs

[37]       The Plaintiffs assert that the Defendants failed to properly manage and monitor the investments in their accounts, breaching their professional, regulatory and legal duties.  More particularly, they allege that:

·           they failed to respect their wishes and to discuss or explain the investment strategy and to update their financial objectives and to respect Mr. Shinoff’s instructions that preservation of capital was paramount;

·           they failed to review at the outset Mr. Shinoff’s financial profile, investment objectives and risk tolerance, and regularly update and document it in the accounts’ files;

·           they failed to reveal the significant risks incurred in connection with the investments in the accounts and did not properly assess and to perform an ongoing assessment of the suitability of the investments purchased in the accounts, given their nature, magnitude, lack of diversification and volatility;

·           BMONB permitted BSZ to recommend the purchase of investments which involved unacceptable risks to the accounts in light of their expressed wishes;

·           they failed to advise Mr. Shinoff accurately and regularly on the risks of loss sustained in the accounts and incorrectly advised him when he made enquiries about the decline in the accounts’ values;

·           they failed to perform an ongoing assessment of the commission being charged to them;

·           they failed to monitor the accounts to ensure compliance with the internal corporate industry and regulatory standards;

·           they failed to monitor the losses sustained in Mr. Shinoff’s accounts in order to ensure that the losses did not exceed his loss tolerance[25].

[38]       In short, the Plaintiffs fault the Defendants for not fulfilling their obligations to determine the suitability of the investments they were recommending, to advise Mr. Shinoff in accordance with his investment profile and to monitor the investments adequately.  They allege that the Defendant managed the accounts in a negligent manner, failing to make appropriate recommendations that corresponded with Mr. Shinoff’s objectives and expressed wishes, causing them substantial losses for which they claim damages.

3.2     The Defendants

[39]       The Defendants disagree.

[40]       They plead that Mr. Shinoff received sufficient and proper information on the investments and that all recommendations were made in good faith, based on the information available at the time and with the interest of the Plaintiffs as a priority.  They add that Mr. Shinoff had full knowledge of and consented to the purchase and sale of all securities in the accounts, and that he received the appropriate information for each trade that they made.

[41]       They underline that Mr. Shinoff was never offered any guarantee regarding the market value or potential return of any specific investment, and that they could not make any promise of profitability of the investments and, ultimately, that he accepted the risk related to each investment.

[42]       They argue that all the transactions done by them for Mr. Shinoff were suitable in that:

·           they were of well-established, financially solid corporations and not speculative investments; and

·           Mr. Shinoff’s current and future capital requirements were discussed and taken in account when providing recommendations.

[43]        They point out that Mr. Shinoff did not follow their recommendations to rebalance his holdings upon the sale of certain cash investments for personal reasons, thus creating an overly heavy presence of Preferreds in their portfolios.

[44]        Moreover, they argue that an investment advisor is not liable for the performance of the market.  Hence, they are not responsible for the performance of Mr. Shinoff’s investments resulting from the 2008 world-wide financial crisis.

[45]        The Defendants assert that BSZ’s recommendations were suitable, given the client’s investment knowledge, investment objectives and tolerance to risk, as reported in the accounts’ documentation.  In short, they plead that they have committed no fault.

4.           governing law

4.1     General principles

[46]        The legal relationship between an investment advisor and his client is governed by the rules of mandate[26].  As such, the investment advisor must act as a knowledgeable professional, demonstrating honesty, prudence and diligence in the best interest of his client.  It goes without saying that he must also avoid any conflict of interest[27].

[47]        The Securities Act and the Securities Regulation also govern the conduct of investment advisors in their dealings with clients and they both provide that an investment advisor, in the execution of his mandate, must act with the care that is expected of an informed professional placed in similar circumstances[28].

[48]        In the case of Les Immeubles Jacques Robitaille Inc. v Financière Banque Nationale[29], Justice Danielle Blondin explains the duties of investment advisors to their clients as follows:

13. Les faits invoqués ainsi que la législation et la jurisprudence pertinentes amènent le Tribunal à retenir que les principes suivants sont applicables à l'espèce :

-    les relations du courtier en valeurs mobilières et son client sont régies par les règles du mandat telles qu'énoncées au Code civil du Québec (art. 2130 et s.) ainsi que par des normes législatives et réglementaires particulières telle la Loi sur les valeurs mobilières et sa réglementation pertinente⁷ et la Loi sur la distribution de produits et services financiers, plus d'autres règles d'organismes d'autoréglementation.

-    dans l'exécution de son mandat, le courtier doit agir avec prudence, diligence, honnêteté, loyauté et dans les meilleurs intérêts de son client;

-    l'étendue de ses obligations varie selon l'objet du mandat et les circonstances;

-    le courtier a l'obligation de prodiguer des conseils à son client, de lui faire des recommandations qui l'informent des risques inhérents aux opérations proposées et il doit s'assurer qu'il a compris ses explications;

-    l'obligation du courtier comme mandataire, à moins de stipulation contraire, n'en est pas une de résultat mais de moyens de sorte qu'un mauvais rendement sur un placement à risque plus élevé ne constitue pas nécessairement un comportement fautif;

-    le courtier a l'obligation de connaître son client (KYC), d'identifier ses objectifs, ses limites, ses moyens financiers, sa connaissance du marché et sa tolérance au risque;

-    plus le degré de connaissances et d'expérience du client est limité, plus l'obligation de conseil est grande (intensité et spécificité de l'obligation de conseil);

-    le client a l'obligation d'être prudent et d'exiger des explications supplémentaires si le besoin s'en fait sentir et de fournir un "effort minimum de compréhension";

-    dans un compte non-discrétionnaire, comme en l'espèce, le courtier achète ou vend des valeurs au nom de son client et sur les instructions de celui-ci;

-    la maison de courtage doit surveiller de façon adéquate les agissements de son courtier.

[49]        As recognized by both parties, the know-your-client rule is the cardinal rule for any investment advisor (KYC Rule)[30]. This rule requires him to inform and provide investment recommendations that are suitable to each client.  To do so, he must identify his client’s objectives, in light of his knowledge of trading and his risk tolerance.  He must be diligent in explaining the relevant details, taking into account the level of investment sophistication of the client who, for his part, must be prudent and make a minimum effort to understand the information that is provided to him. Investment advisors’ obligation is one of means and not results[31].

[50]        As correctly pointed out by Plaintiff, the KYC Rule applies throughout the relationship between the client and the investment advisor.  As such, the investment advisor must enquire about changes in his client’s personal circumstances in order to ensure that his investments are in conformity with his objectives and risk tolerance[32] and are suitable and appropriate[33].

[51]        Hence, in determining the suitability of a transaction, the investment advisor must consider various factors such as:

·           the client’s financial situation;

·           the client’s investment knowledge;

·           the client’s investment objectives;

·           the client’s risk tolerance;

·           the time horizon[34] .

[52]        The investment advisor’s obligation to ensure that the recommendations are suitable or appropriate is not satisfied by simply disclosing to him the risks involved in the transactions.  Nor is it diminished by the fact that the client claims to understand and accept the risks involved in the investment[35].

[53]        It goes without saying that “the mandate between a manager and his client is imbued with the concept of trust, since the client places his trust in the manager.” [36]  Overall, in order to assess what is reasonable conduct on the part of an investment advisor, it is useful to consider the applicable legislative and regulatory provisions or norms adopted by self-regulatory organizations such as the Investment Industry Regulatory Organization of Canada (IIROC)[37], although it is important to avoid the error of “perfect hindsight” when undertaking such assessment[38].

[54]        The content of the investment advisor’s obligation will vary with the object of the mandate and the circumstances of the case[39].

4.2     Liability of the brokerage firm

[55]       Pursuant to Article 1463 of the Civil Code of Quebec and to Section 80 of An Act Respecting the Distribution of Financial Products and Services[40], a brokerage firm is responsible for the damages caused to a client by the fault of one of its representatives in the performance of his duties[41]. 

[56]       As well, Section 85 of that act imposes a duty on a brokerage firm to oversee the conduct of its representatives.  Hence, within its general duty of diligence, the brokerage firm has a duty to monitor[42]. In this respect, the firm is liable for the prejudice without regard to its own direct fault[43].

5.           MANDATE GIVEN TO THE DEFENDANTS

5.1     Mr. Shinoff’s accounts

[57]        In order to address the parties’ arguments, the Court must look at the client account agreements and the information given by Mr. Shinoff at the time, including the level of his investment knowledge, experience, risk tolerance and investment objectives he chose for each of his accounts.  As mentioned, he opened accounts not only at BMONB, but also at TD Waterhouse, RBCDS and Scotia McLeod.

[58]        The following table provides the necessary information on each of the relevant accounts.

 

5.1.1      BMONB

ACCOUNT #[1] - THE PERSONAL ACCOUNT

Date	Investment knowledge / experience	Investment objectives	Risk tolerance
New Client’s Application January 22, 1987[44]		25% security, 25% income, 25% growth	25% risk
Client Account Agreement updated in 1991[45]	Experience: Moderate for common shares, preferred shares, bonds, money market new issues and mutual funds and none for options, commodities / futures and real estate.	70% capital preservation and 30% moderate growth for regular account and 80% capital preservation and 20% moderate growth for RRSP account.
Client Account Agreement updated on October 30, 2003[46]	Knowledge: “Limited - I understand the basics of investing and have had limited to moderate experience with different types of investments and strategies.”[47]   Experience in: strip bonds, common stocks and equity mutual funds.	4, i.e. Growth with asset allocation of 0-40% in cash or equivalents, 0-50% in fixed income, 50-100% in equities and 0-30% in aggressive investments and strategies “ Growth - My emphasis is on the potential for above-average return. With few exceptions, I am willing to accept a moderate to high level of risk to achieve it. I will tolerate short-term price volatility in the pursuit of long-term growth. I have little or no requirement for income from my portfolio at this time.”[48]

 

ACCOUNT #[2] - THE A-1 ACCOUNT

Date	Investment knowledge / experience	Investment objectives	Risk tolerance
New Client’s Application April 10, 1990[49]		25% security, 25% growth, 25% income	25% risk
Client Account Agreement is updated on June 7, 1993[50]	[51]	50% preservation of capital and 50% income
Update to client Account Agreement form on February 2, 1996[52]		65% income and 35% growth[53]
Client Account Agreement is updated (re: margin) June 2, 1997[54]	Knowledge: Average[55]   Experience: Moderate for common shares, preferred shares, bonds, money market, new issues and mutual funds and none for options, commodities / futures and real estate	50% income and 50% moderate growth	Risk factors: Some[56]
Client Account Agreement October 1, 2003[57]	Knowledge: “Limited - I understand the basics of investing and have had limited to moderate experience with different types of investments and strategies.”[58]   Experience in: T-bills, savings bonds, bonds, strip bonds, common stocks and equity mutual funds	4, i.e. Growth with asset allocation of 0-40% in cash or equivalents, 0-50% in fixed income, 50-100% in equities and 0-30% in aggressive investments and strategies “ Growth - My emphasis is on the potential for above-average return. With few exceptions, I am willing to accept a moderate to high level of risk to achieve it. I will tolerate short-term price volatility in the pursuit of long-term growth. I have little or no requirement for income from my portfolio at this time.”[59]

 

ACCOUNT #[3] - THE 655 INC. ACCOUNT

Date	Investment knowledge / experience	Investment objectives	Risk tolerance
Client Account Agreement June 27, 2006[60]	Knowledge: Limited / Average - “I understand the basics of investing and have had limited to average experience with different types of investments and strategies.”   Experience in: T-bills, savings bonds, money market mutual funds, common stocks, income trusts, bonds, GICs, new issues / initial public offerings	3, i.e. Balanced with Asset allocation of 0-40% in cash or equivalent, 30-70% in fixed income and 30-70% in equities. Balanced being defined as: “My emphasis is on preserving the money I have invested, with enough growth to keep me ahead of inflation. I may or may not require income from my portfolio at this time.”	With few exceptions, I have a low to moderate tolerance for risk, but I am willing to accept short-term price volatility in order to achieve better long-term returns.

 

ACCOUNT #[4] - THE 701 INC. 1^ST ACCOUNT

Date	Investment knowledge / experience	Investment objectives	Risk tolerance
Client Account Agreement July 24, 2008[61]	Knowledge: Limited / Average - “Understands the basics of investing and limited to average experience with different types of investments and strategies.”   Experience in: T-bills, savings bonds, bonds, GICs and common stocks.	2, i.e. Income with mix of 0-100% in cash or equivalents, 0-100% in fixed income, 0-40% in equities (including income generating equities) and 0-10% in aggressive investments and strategies. Income being defined as: “An emphasis on protecting investments rather than the potential of superior returns. The Client may be willing to own some equities. The Client may or may not require income from the portfolio at this time.”	With few exceptions, the Client has a low tolerance for risk investments and prefers a low degree of price volatility.

 

ACCOUNT #[5] - THE 701 INC. 2^ND ACCOUNT

Date	Investment knowledge / experience	Investment objectives	Risk tolerance
Client Account Agreement July 25, 2008[62]	Knowledge: Limited / Average - “Understands the basics of investing and limited to average experience with different types of investments and strategies.”   Experience in: T-bills, savings bonds, bonds, GICs and common stocks.	2, i.e. Income with mix of 0-100% in cash or equivalents, 0-100% in fixed income, 0-40% in equities (including income generating equities) and 0-10% in aggressive investments and strategies. Income being defined as: “An emphasis on protecting investments rather than the potential of superior returns. The Client may be willing to own some equities. The Client may or may not require income from the portfolio at this time.”	With few exceptions, the Client has a low tolerance for risk investments and prefers a low degree of price volatility.

 

[59]    All these accounts are transactional accounts, which means that the investment advisor has no authority to make trades without the express authorization of the client for each trade.  In a managed account on the other hand, the portfolio manager makes the investment decisions on behalf of the client[63].

5.1.2      TD Waterhouse

ACCOUNT #[6] - [6]A (CDN) AND [6]B (US) - THE STEVEN SHINOFF PERSONAL TD ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Account Application July 12, 2006[64]	Knowledge: Average[65]   Experience with: stocks, bonds, mutual funds for 25 years.	Capital gains. short term 50%, medium term 25%, long term 25%	Medium (100%)[66]

 

ACCOUNT #[7] - [7]A (CDN) AND [7]B (US) - THE 655 INC. TD ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Account Application March 13, 2007[67]	Knowledge: Average[68]   Experience with: stocks, bonds, mutual funds for 25 years.	Capital gains. short term 10%, medium term 20%, long term 70%	High (20%) Medium (80%)[69]

 

ACCOUNT #[8] - [8]A (CDN) AND [8]B (US) - THE 701 INC. TD ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Account Application July 2008[70]	Knowledge: Average[71]   Investment experience Stocks : 20 years, bonds : 20 years and mutual funds: 20 years.	Capital gains. long term 50%, income 50%. [72]	Medium (100%)[73]

5.1.3      RBCDS

ACCOUNT #[9] - THE STEVEN SHINOFF PERSONAL RBCDS ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Client account form March 8, 2007 Know Your Client (KYC) form[74]	Knowledge - Limited “Limited knowledge of the markets and experience with some types of investments”[75]   Experience in : bonds / GICs and stocks	Income: 50%, long term growth: 25%, medium term growth: 25%[76]	Low: 50%, medium: 50% [77]
Update - October 10, 2007[78]	Knowledge - Limited “Limited knowledge of the markets and experience with some types of investments”   Experience in : bonds / GICs and stocks	Income: 30%, long term growth: 35%, medium term growth: 35%, short-term	Low: 50%, medium: 50%

 

ACCOUNT #[10] - THE 655 INC. RBCDS ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Client account form March 8, 2007 Know Your Client (KYC) form[79]	Knowledge - Limited “Limited knowledge of the markets and experience with some types of investments”   Experience in: bonds / GICs and stocks	Income: 30%, long-term growth: 35%, medium-term growth:35 %	Low: 50%, medium: 50%, medium-high: 0%
Update: June 2, 2007[80]	Knowledge - Limited “Limited knowledge of the markets and experience with some types of investments”   Experience in: bonds / GICs and stocks	Income: 50%, long term growth - 25%, medium-term growth: 25%, short-term	50% low, 50% medium

 

ACCOUNT #[11] - THE 701 INC. RBCDS ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
Client Account Form July 24 2008[81] and Know Your Client (KYC) form	Knowledge - Good “good working knowledge of the markets and experience with various types of investments”	Income: 25%, long term growth : 37%, medium term growth: 38%	Low: 50%, Medium: 50%

 

[60]        Since the accounts at RBCDS were all managed or discretionary accounts, Investment Policy Statements were also completed for the accounts of Steven Shinoff, 655 Inc. and 701 Inc.[82]

[61]        The Investment Policy Statement allowed for a maximum of 60% in equities, which percentage was increased to 80% and later increased again to a maximum of 85% in its last version.

[62]        In all the said Statements, it is written under the heading “Tolerance for Fluctuations”: “in some years, we may not achieve our rate of return objectives and in fact may have negative returns. You [Mr. Shinoff] have indicated that you are willing to accept this risk, in order to achieve above average long-term results”.

[63]       With respect to 701 Inc., in July 2008, Mr. Shinoff signed a revised statement of objectives and investment policy^[83] and in August of 2008 received a summary account guidelines for 701 Inc. where it is written that:

The trading authority has a good working knowledge of the markets and experience with various types of instruments. ^[84]

5.1.4      Scotia McLeod

ACCOUNT #[12]7 - THE 655 INC. SCOTIA MCLEOD ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
New Client Application December 16, 2008[85]	Experience in: Mutual funds: low Fixed income: moderate Stocks: moderate Margin: very low Options: very low Short sales: very low   Overall investment experience: very low	Income:100 %	90% low, 10% medium

 

ACCOUNT #[13] - THE 701 INC. SCOTIA MCLEOD 1^st ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
New Client Application December 16, 2008[86]	Experience in: Mutual funds: low Fixed income: moderate Stocks: moderate Margin: very low Options: very low Short sales: very low   Overall Investment experience: very low	Income :100 %	90% low, 10% medium

 

ACCOUNT # [14] - THE 701 INC. SCOTIA MCLEOD 2^ND ACCOUNT

Date	Investment knowledge	Investment objectives	Risk tolerance
New Client Application: January 8, 2009[87]	Experience in: Mutual funds: low Fixed income: moderate Stocks: moderate Margin: very low Options: very low Short sales: very low   Overall Investment experience: low	Income :100 %	90% low, 10% medium

 

 

5.2     Mr. Shinoff’s investment knowledge and experience

[64]        As said, all of Mr. Shinoff’s accounts with BMONB were transactional accounts, since he wished to oversee his accounts and wanted his investment advisors to discuss the trades with him[88].

[65]        Before the sale of Rent-A-Tool, BSZ would offer her advice on trades and, in the vast majority of cases, he followed her recommendations.  For a period of almost 20 years, he invested in different types of securities, including common stock, bonds, strip bonds, mutual funds and Preferreds.^[89]  The Court notes that between 1994 and 2006, Mr. Shinoff realized, although relatively small, more than thirty trades on Preferreds.

[66]        While he now affirms that his investment knowledge changed only a little during the twenty years, the proof shows that, in fact, it improved and his investment objectives became more aggressive with time^[90].

[67]        This said, BSZ nonetheless confirmed that Mr. Shinoff’s assessment of his investment knowledge in 2006 was correctly evaluated in the client account agreement as being “limited / average”^[91].  The next category up: “good / knowledgeable”, was for investors who had a good knowledge of investing and a moderate to extensive experience with different types of investments and strategies^[92].  This was not Mr. Shinoff’s case.

[68]        Hence, in 2006, prior to investing the proceeds from the sale of Rent-A-Tool, the evidence shows that Mr. Shinoff had limited to moderate experience with various instruments and strategies.  He clearly understood more than the basics of investing but, for BSZ, the fact that he assessed his knowledge in a lower category only meant that she needed to offer more explanations.

[69]        After Mr. Shinoff wired the proceeds of the sale to BMONB in June 2006, he followed his investments closely, asked many questions and discussed on a regular basis with BSZ and Mr. Zukor[93]. 

[70]        Starting in July 2007, he extensively used BMONB Gateway[94] to review the value of his accounts or to consult the available information.  This process helped increase his investment knowledge.

[71]        In July 2008, he admits that he had a better knowledge of investing and a greater experience with different types of investments and strategies.  The account documentation at TD Waterhouse indicated his investment knowledge as “average” ^[95] and not “limited”, and the client account documentation that he signed at RBCDS in the same period indicated his investment knowledge as “good”^[96].

[72]        For a reason that was not explained, when Mr. Shinoff opened the accounts with Scotia McLeod in December 2008 and January 2009, he stated his “overall investment experience” in the client account documentation as being “very low”^[97]. At trial he admitted that this was probably an understatement^[98], and the Court questions whether he was trying to downplay his investment experience at the time.

[73]        This said, Mr. Shinoff’s investment knowledge and experience had undoubtedly improved over the years and, by the fall of 2007, he clearly understood:

·           the difference between a transactional and a discretionary account^[99];

·           the difference between stocks and bonds[100];

·           the different terms of bankers’ acceptances^[101];

·           that choosing high quality issuers is a way of managing the risk that is inherent to equities[102];

·           that an increase in interest rates has an effect on the value of Preferreds and the extent of the volatility of Preferreds^[103];

·           the difference between a system offering “live quotes like a ticker” and a system allowing a client to look at his or her trading history[104].

[74]        Thus, the Court concludes that, at trial, Mr. Shinoff tried to downplay his investment knowledge and experience[105].  The proof shows that, even though in the summer of 2006 his investment knowledge might have been “limited to average”[106], by 2007-2008, even if he indicated his knowledge to be at the same level in the BMONB account documentation, it, in fact, had improved to “average to good”.  This said, BSZ confirmed at trial that in July 2008, she was nonetheless still comfortable with the indication “limited to average”.

5.3     Mr. Shinoff’s risk tolerance

[75]        Mr. Shinoff affirms that, throughout the years, he repeatedly expressed that he is extremely risk-averse.  The proof shows, however, that this was not expressed as clearly as he now would like the Court to believe.

[76]        Although he was obviously a prudent investor who followed all his investments very closely, he was sometimes willing to make speculative investments and he came to understand the real risks associated with his decisions.  Moreover, at times he showed a fairly high level of temerity. For example:

·           In October 1996, June and July 1997, November 1999, and March and December 2000, he made unsolicited, speculative transactions[107];

·           Between 2005 and the beginning of 2007, he invested a small amount in three private placements that he agrees were risky investments^[108].  Before the Court, he qualified these amounts as “play money”;

·           In March 2007, he entrusted $8M to Bruce Kent of RBCDS in a discretionary account to be invested mainly in equities.  At the time, he understood the market risks associated with this decision.

·           In March 2008, he was interested in foreign exchange and considered day-trading in US and Canadian dollars, and this, in tranches of $250k^[109].

[77]        The Court believes Mr. Shinoff when he asserts that he was always concerned about not losing his “hard-earned” money. However, he cannot be described as being completely risk-averse, as he tries to portray himself.  Clearly, he was willing at times to go into speculative investments, albeit only with a relatively small portion of his overall portfolio.

[78]        This said, in the summer of 2006, Mr. Shinoff had a low risk tolerance that, with respect to his BMONB investments, did not significantly change with time^[110].

5.4     Mr. Shinoff’s instructions when investing the proceeds of the sale

[79]        The parties have differing versions of the mandate given in relation to the investment of the proceeds of the sale of Rent-A-Tool.

[80]        Mr. Shinoff explained at trial that he attached no importance to the application form for 655 Inc.’s account with BMONB^[111] because, for him, it was only an administrative document that did not change the mandate given to the Defendants.

[81]        With respect to his instructions related to the investments, he asserts that he discussed with BSZ shortly before the deposits on May 24, 2006^[112] and May 31, 2006^[113].  He states that he informed BSZ at that time that:

·           Out of the $33M, he would be left with approximately $25M after taxes to invest;

·           He wanted to preserve his capital, which, for him, was enough to live on for the rest of his life;

·           He would be satisfied with a portfolio that would bring a return of 4% to 4.5%^[114], mostly made up of fixed income securities.

[82]        Mr. Shinoff asserts that a 4% rate of return on a $25M^[115] portfolio totalled $1M in annual income, which was more than enough for his needs. This said, he testified that he did not request any specific amount of income, as he only needed about $250k after taxes.

[83]        He says that he further explained his future financial obligations and projects to BSZ as follows:

a)     He had to pay an estimated $8M in capital gain taxes on the sale of Rent-A-Tool shares;

b)     He intended eventually to divide the money with two other investment advisors and that BSZ would end up investing only $8M in the long-term;

c)      He wanted to buy a new house for his wife;

d)     He wanted to reward Mr. Heller for his contribution to Rent-A-Tool’s success;

e)     He wanted to have access to cash in order to invest in a new company, if a nice business opportunity arose.

[84]        In turn, BSZ’s version of their discussion dealt with his investment objectives and future projects with respect to:

a)     The $8M in taxes he had to pay;

b)     His intention to invest with other investment advisors, although he did not mention how much, nor when he intended to do so;

c)      His intention of buying a new house for his wife, although he did not mention when or the amount he was contemplating spending;

d)     The possibility of investing in a new company if a future opportunity arose, although he did not mention when he would need the funds or the amount he was contemplating investing^[116];

e)     His desire to generate pre-tax income of $1M annually.

[85]        She insists that he never mentioned that he intended to give approximately $5M as a “reward” to an associate who contributed to Rent-A-Tool’s success.  Nor did he advise her that only $8M of the $33M would be staying at BMONB. BSZ pointed out that Mr. Shinoff’s mandate, as described by him, involved the construction of a balanced portfolio, as mentioned in the account form that he signed. On the other hand, Mr. Shinoff asserts that it involved either a “conservative income” or an “income” strategy as defined in the account form[117]. 

[86]        Mr. Shinoff’s expressed objectives with respect to the $33M of net sale proceeds are as set out below.

5.5     Mr. Shinoff’s future financial obligations and projects

5.5.1      The taxes, the new house and the future business

[87]       There is no dispute among the parties on any of these points.  All agree that Mr. Shinoff had to pay approximately $8M in capital gains taxes and that the new house and the possible acquisition of a new business were future projects for which he would require some liquidity, but with no specific amounts or timeframe being identified.

5.5.2      The disposable income

[88]        BSZ affirms that Mr. Shinoff wanted his portfolio to generate income of approximately $1M before tax.

[89]         Mr. Shinoff denies having required such an income. He asserts that BSZ knew^[118] that the income generated from his portfolio would be used for his day-to-day needs, about $480k a year, before taxes, including approximately $4,500 a month for his father’s needs. In support of this, he refers to the average amounts he withdrew from his BMONB accounts: $198,913 in 2007 and $347,519 in 2008.

[90]        Since his income expectations were defined on the basis of the return on instruments as safe as bankers’ acceptances, and the amount actually invested, Mr. Shinoff argues that it was unnecessary to take any additional risk in order to generate a higher return.

[91]        If that was the mandate, Mr. Shinoff knew as early as fall of 2006 that BSZ was not following his instructions.

[92]        Mr. Shinoff did not succeed in convincing the Court that he never mentioned to BSZ that he wanted an income level that required her to take some risk, or that he mentioned that with approximately $25M in assets, his objectives could be reached simply by buying only safe instruments, like bankers’ acceptances.

[93]        First, he testified that, out of the $33M invested, there would be about $24M or $25M left after paying the $8M in taxes^[119].  However, this does not take into account the $5M^[120] promised to Mr. Heller, which reduced the amount to be invested to about $20M.

[94]        Second, he stated that he wanted to buy a new house^[121] and was contemplating the possibility of investing in another business.  Although he did not specify the amount or timing for these two projects, they would nevertheless have required him to use some of his capital.

[95]        Third, he testified at trial that the $20k a month that he used as living expenses for himself and his father, was significantly less than what he expected he needed.  This indicates that $500k before taxes was insufficient for his initial objectives[122].

[96]        Fourth, his calculation of his day-to-day needs did not include the $12k a month interest he agreed to pay to Mr. Heller, as well as other withdrawals he made^[123].

[97]        Fifth, his account application forms, whether at BMONB, RBCDS or Scotia McLeod, all reflect an income level of approximately $1M a year^[124].

[98]        In short, the proof adduced at trial established on the balance of probability that, although Mr. Shinoff used approximately $500k a year before tax in 2006-2008 to maintain his lifestyle, in May 2006 he was looking to obtain an income of approximately $1M before taxes from his investment and that’s what he asked BSZ to provide. 

5.5.3      The money to other investment advisors

[99]        Mr. Shinoff insists that he informed BSZ that he would leave only $8M with her in the long-term.  He affirms that the contemporary evidence confirms this assertion[125].

[100]     The Court is not of that view.

[101]     The proof shows that, although he informed BSZ that he intended to send some money to another investment advisor, he never mentioned how much nor when he expected to do so.  In fact, it was only in March 2007[126] that BSZ learned for the first time, through an email sent by Mr. Shinoff, that $8M would be sent to Bruce Kent at RBCDS.

5.5.4      The payment to Frank Heller

[102]     BSZ testified that Mr. Shinoff never mentioned that he wanted to make a $5M payment to Mr. Heller, and the Court believes her.

[103]     Initially, Mr. Shinoff portrayed this as a gift[127], but the proof established that it was, in fact, a debt owed pursuant to an agreement made in 1997^[128].  For some reason, this agreement appears to have been kept a secret by Mr. Shinoff and it was only in June of 2008 that BSZ learned of it, and not in May of 2006, as Mr. Shinoff asserts^[129].

5.6     Mr. Shinoff’s objectives

[104]    In May 2006, when the proceeds of the sale were transferred to BMONB, the client application forms for Mr. Shinoff’s Personal and A-1 Accounts were not updated.  As well, and contrary to what is recommended in the Standards of Practice Handbook^[130], BSZ took no notes with respect to Mr. Shinoff’s objectives.  Nor did she prepare an investment policy statement, but that is in compliance with BMONB policy that does not permit its investment advisors to prepare written investment plans in transactional accounts.  Thus, there is nothing more in writing describing what Mr. Shinoff would have communicated as to his investment objectives other than the information contained in the client application form for the 655 Inc. Account[131].

[105]     Based on that and the proof adduced at trial, the Court cannot conclude, as Mr. Shinoff alleges, that he had given a clear mandate to BSZ and told her, on several occasions, that he was completely risk-averse and that his sole objective was capital preservation, with a 4 to 4.5% return on $25M, assuming a 50% tax rate.

[106]     Mr. Shinoff is a very intelligent man.  The Court does not believe that he would have simply signed the client account agreement forms filled out by BSZ without really looking at them, thinking that they had no importance for him.  Nor would he have blindly agreed to the investment strategy described in the form without discussing it.

[107]     In the same manner, BSZ did not succeed in convincing the Court that Mr. Shinoff did not mention his objective of “fixed income and capital preservation” before his August 1, 2007 email of complaint[132].

[108]     As Mr. Shinoff points out, BSZ herself described his investment objectives in the letter she sent to IIROC on July 31, 2009 as follows:

Mr. Shinoff expressed [during discussions that took place from May to July 2006] that one of his main objectives was to have a steady stream of income invested for the long-term, as well as capital preservation. ^[133]

[The Court’s emphasis]

[109]     The Court concludes that this is how Mr. Shinoff described his objectives at the time.  In witness of that, BSZ testified at trial that Mr. Shinoff had a double objective: he wanted to preserve his capital and he wanted his investment to generate an income of approximately $1M before taxes in the long-term.

[110]     This reflects a “balanced mandate”, since, as BSZ explained, a balanced mandate specifically indicates that the client’s emphasis is on “preserving the money [he] had invested, with enough growth to keep [him] ahead of inflation.  With few exceptions, [he has] a low to moderate tolerance for risk, but [he is] willing to accept short-term price volatility in order to achieve better long-term returns” [134]. 

[111]     Since a balanced mandate provides for an asset allocation of 40% in cash or equivalent, 30-70% in fixed income and 30-70% in equities, and this generally matches his portfolio makeup, the Court concludes that BSZ discussed and recommended a balanced mandate and he agreed to it when he signed the 655 Inc. opening account form[135].

 

6.           FAULT

Did BSZ or BMONB commit a fault in the fulfillment of their mandate?

6.1     Discussion

[112]     Mr. Shinoff argues that he retained BSZ’s services to advise him and to develop a portfolio that was suitable for his situation.  He asserts that her role involved more than simply presenting suitable securities within the proportions set out in the client account agreement forms.  He insists that she should have approached the mandate in the manner specified in the Canadian Securities Course^[136], which describes the portfolio management process.

[113]     Given the nature of the mandate, the relationship of trust they had and his investment knowledge^[137], Mr. Shinoff feels that BSZ had the obligation to consider his risk tolerance, the time horizon and his investment objectives in putting together his portfolio, and this, notwithstanding the fact that his were non-discretionary accounts.

[114]     Mr. Shinoff pleads that BSZ committed a fault in failing to :

·        determine his investment objectives and constraints;

·        develop a strategy and formulate an asset allocation consistent with the objectives and constraints;

·        explain the strategy and the asset allocation to him;

·        implement a suitable strategy;

·        monitor the strategy in light of the economy, the markets, the portfolio and the client;

·        evaluate the portfolio performance.

[115]     The Court will now examine his arguments.

6.1.1      The determination of Mr. Shinoff’s objectives and constraints surrounding the early investments of 655 Inc. and construction of a portfolio

[116]    Mr. Shinoff argues that, since the client agreement form did not contain sufficient indication of the client’s objectives, risk tolerance, time horizon and liquidity needs, BSZ needed to consult with him in order to obtain the necessary information to construct a suitable portfolio.  Despite their longstanding professional relationship, he affirms that BSZ should have proceeded with a complete review of those factors, since a significant change had occurred in his life with the sale of the company.

[117]    He adds that BSZ offered three different versions of his investment objectives^[138], thus showing that she failed both to determine his income and capital preservation objectives and to establish his need for liquidity and time horizon.  As a result, she failed to establish how the desired income level from his investments would be affected by future withdrawals as his liquidity needs materialized^[139].

[118]     He claims that he received no information from her on the risk or suitability of his portfolio or the strategy behind its construction.  He states, for example, that from July 2006 to April 2007, BSZ recommended the purchase of Preferreds without divulging the effects of a small increase (1/4%) in the Bank of Canada’s key interest rate on their value.

[119]    BSZ answered that at the beginning, she had to take consideration of his financial plans and needs, for instance, the taxes, a new house, a possible new business, the intervention of other investment advisors and his fundamental objective of generating an annual income of $1M.

[120]    She claims that the first investments made in the 655 Inc. Account were in bankers’ acceptances from a number of different banks, all of which had an annual yield of 4.25% and came due on September 1, 2006^[140]. In July, she suggested the purchase of 10,000 shares^[141] of a new issue of non-cumulative Preferreds of the Royal Bank at 4.7%.

[121]    She testified that, at the time, she discussed with him the risks associated with such Preferreds and explained their sensitivity to interest rates.  She indicated that when the interest rates go up, the price of the Preferreds can go down but, in the same manner, when the interest rates go down, the value of the shares can go up.

[122]     Although Mr. Shinoff confirmed that he had been informed of this risk, he adds that he was never made aware of the extent of such sensitivity and that BSZ indicated that the shares could fluctuate only within a narrow bandwidth of 25 or 50 cents.  BSZ denies having ever referred to such a narrow bandwidth.

[123]     From this, the Court concludes that, in the summer of 2006, Mr. Shinoff was made aware of the interest rate risks of Preferreds, but not the extent of such sensitivity.  However, since he had been investing for close to 20 years, he was familiar with the risks that securities carry generally.

[124]     BSZ also affirms that, as the credit risk was very important^[142], she presented only investment grade Preferreds to Mr. Shinoff based on the Preferreds’ ratings by the Dominion Bond Rating Service or by Standard & Poor’s[143].  She stated that she further explained to him that the dividend tax credit can be subject to changes by governments and that the value of the Preferreds could fluctuate.  The Court believes her. 

[125]     At the time, Mr. Shinoff might not have realized the full extent of the sensitivity of the Preferreds to interest rate fluctuations, but he had been informed of the risks.  He nevertheless agreed to purchase Preferreds, because it would serve to generate a dividend income more advantageous than the rate available through the banker’s acceptances.

[126]     In fact, as early as July 20, 2006, Mr. Shinoff sold a portion of the banker’s acceptances in the 655 Inc. Account to purchase his first Preferreds^[144].  Mr. Shinoff then chose to purchase 20,000 shares of the new issue instead of the 10,000 shares discussed. The next month, on August 3, 2006, he sold bankers’ acceptances in the 655 Inc. Account and purchased non-cumulative Preferreds of Power Financial Corporation^[145].  At that time, he received prospectus that described the securities in detail^[146] and also asked BSZ for additional information on the difference between cumulative versus non-cumulative Preferreds^[147].

[127]     Obviously, Mr. Shinoff was satisfied with the information given, as he wrote the following to BSZ on August 7, 2006:

Dear Barbara, Treat it as all the other money.  No house on the immediate horizon.  Best rate with my traditional risk component or a preferred similar to before. Preferably, cumulative. ^[148]

[Emphasis in the original]

[The Court underlines]

[128]     In the following weeks and months, he sold other bankers’ acceptances in the 655 Inc. Account and purchased cumulative Preferreds, Preferreds and newly issued trust units^[149].

[129]     On December 19 and 20, 2006, BSZ and Mr. Shinoff exchanged emails concerning the transfer of funds from the 655 Inc. Account to the Steven Shinoff Personal Account.  The purpose was to instruct her to effect the dividend election provided for in a tax planning letter prepared by his attorney^[150].

6.1.2     The development of a strategy and the portfolio as of March 8, 2007

[130]     In January of 2007, Mr. Shinoff met with Bruce Kent of RBCDS, an investment advisor who had done extremely well for a close friend and his family.  On March 8, 2007, Mr. Shinoff informed BSZ that he would move $8M over to Mr. Kent very shortly[151].  He intended to invest this amount in a stock-based portfolio[152].

[131]    Mr. Shinoff states that he had discussed the transfer of funds to Mr. Kent with BSZ prior to that, but she insists that it was only on March 8, that she learned of the amount to be transferred.

[132]     At the same time, he informed her that $3.6M in taxes for 655 Inc. would be due by the end of May and that he would need an additional $3.5M for his personal taxes before April 30 of the next year^[153].

[133]     On March 9, 2007, BSZ sent him a portfolio report that showed the following^[154]:

·            The Personal Account had:

Value as of November 30, 2006	Value as of March 8, 2007	Cash (%)	Fixed income (%)	Equity (%)
$183,424	$15,270,271	24.36%	13.19%	5.43%

 

·            The 655 Inc. Account had:

Value as of November 30, 2006	Value as of March 8, 2007	Cash (%)	Fixed income (%)	Equity (%)
$33,731,202	$20,253,536	21.29%	30.86%	4.87%

 

·            Thus, the total portfolio value was:

Value as of November 30, 2006	Value as of March 8, 2007	Cash (%) or short term	Fixed income (%) and related securities	Equity (%) and related securities
$33,914,626	$35,523,806	45.65%	44.05%	10.30%

[134]     Of the 44.05% in fixed income securities, there were $11,459,000 in Preferreds[155] from issuers such as BMO, BNS, CIBC, RBC, TD, Power Corp, Power Financial, Great West Life and Co., Manulife and Sun Life Financial.  The common equity shares were from companies such as General Electric, Enbridge and Trans-Canada.  Some 30% of the total portfolio was in US dollars.

[135]     In all, the portfolio had the following composition by industry on March 8, 2007:

	Value	Percentage
Cash and short-term	$16,214,000	45 %
Fixed income	$4,190,000	11 %
Preferred shares	$11,458,000	32%
Financials	$1,372,000	3.9%
Industrials	$375,000	1%
Energy	$492,500	1%
Materials	$12,522	0.1%
Utilities	$271,500	0.1%
Investment trusts	$1,204,000	3.2%

[136]     Both parties agree that this portfolio would have provided an annualized income of $1.58M.  BSZ adds that the value of the portfolio at that time was $1.6M higher than it was on November 30, 2006.

[137]     On March 9, 2007, Mr. Shinoff wrote to BSZ to express his satisfaction:

I thoroughly enjoyed our discussion today.

I just spoke to my dad and told him of it and he too was very happy.

I overlooked thanking you for having done such a wonderful job with my portfolio over the past 9 months - Thank you! I know that you spent a lot of time, energy and concern on putting the funds in the best possible place for me and my comfort level. I am grateful. ^[156]

[138]     There was, however, a cloud on the horizon.  All agree that March 2007 was the peak of the Canadian Preferreds market^[157].

[139]     Although Mr. Shinoff did not completely and blindly follow her recommendations, the above portfolio was, by BSZ’s own admission, based mostly on her suggestions^[158]. BSZ affirms that it met Mr. Shinoff’s objectives.  The $16M in cash and short-term gave him the liquidity he needed and the $17M in fixed income and common equity generated the $1M a year required in the long-term.

[140]     Mr. Shinoff underlines that BSZ was, as said, not only never asked to generate $1M, but even less on only part of his portfolio.  Accordingly, it was not necessary for her to have him assume a needless risk on the long-term portion.

[141]     He notes that, as at November 30, 2006, he held over $10.5M in Preferreds in Canadian and in US dollars.  He also had some $2M in common shares in the 655 Inc. Account^[159]. He argues that the recommendation to purchase such quantities of Preferreds was not in conformity with the BMONB’s Chief Fixed Income Strategist^[160].

[142]    In December 2006, BSZ testified that she became concerned about a possible increase in interest rates^[161], which could have an effect on the value of the Preferreds, and warned Mr. Shinoff accordingly.  Also, when instructed to transfer $8M to another investment advisor, and given the possibility of rising interest rates, BSZ affirms that she recommended that Mr. Shinoff rebalance his portfolio.

[143]     However, according to Mr. Shinoff, the inconsistency of the trades in both the 655 Inc. Account and his Personal Account from December 2006 to May 2007^[162] shows the contrary, as seen in the following examples^[163]:

·            Approximately $1.2M in sales of Preferreds on December 22 in the 655 Inc. Account;

·            Approximately $2M in purchases of Preferreds on January 17, 19 and 24 and February 2, 2007 in the Personal  Account;

·            Approximately $2.4M in sales of Preferreds in March 2007 in the Personal  Account;

·            Approximately $625k in purchases of Preferreds on April 18, 2007, in the Personal  Account;

·            Approximately $1.2M in sales of Preferreds on May 16, 22 and 24 in the Personal Account;

·            Approximately $1M in purchases of common shares and another $800k in 2007 in the Personal Account[164].

[144]     Unfortunately, Mr. Shinoff does not recall the discussions surrounding the different transactions.

[145]     One thing is sure however; as of March 2007, he was quite happy, as shown in his email of March 9, 2007.  Also, his knowledge was sufficient to understand the proportion of the different securities he held in his accounts and the risks that rising interest rates would have on the value of his Preferreds.

[146]     Although he is now trying to present himself as being completely risk-averse, in March 2007, he agreed with the strategy BSZ recommended and the makeup of his portfolio.

6.1.3      The portfolio following the transfer to Bruce Kent

[147]    In March 2007, there were two events that led to a change in the overall structure of his portfolio, one being the transfer of $8M to Bruce Kent and the other being the sale of securities in order to pay income taxes, both on very short notice to BSZ[165].

[148]    Once again, Mr. Shinoff states that he does not recall the details of the discussions with BSZ concerning the securities to be sold to generate the funds to be transferred to Mr. Kent.

[149]    Concerning the taxes, he had received a memo on this from his accountants on March 14, but did not share it with BSZ until March 28, and this, for a transaction that had to take place by March 31[166].

[150]    Thus, on March 30, he transferred approximately $12M worth of securities from the 655 Inc. Account to his Personal Account after giving only very short notice to BSZ.

[151]    Concerning the sales made for the transfer to Bruce Kent, BSZ explained that the securities sold were either money market instruments or bonds and that there was also cash in the accounts.  Although she recommended that Mr. Shinoff sell more of his Preferreds and equities, given that it was a perfect time to sell at a profit, Mr. Shinoff did not follow her recommendations[167].

[152]    Whether BSZ recommended selling more Preferreds and equities or not, following the transfer to Bruce Kent at the end of March 2007, Mr. Shinoff’s portfolio had a similar asset allocation to what it had at March 8[168].

[153]    All agree that, in April 2007, the performance of the Canadian Preferred Share market began to suffer as interest rates rose.

[154]    In May of that year, Mr. Shinoff started to voice concern over the fees BMONB was charging him^[169].  After receiving a summary of the fees, he was still not satisfied with the details obtained with respect to bonds and kept asking questions and expressing his annoyance.  It was around then that the relation of trust that previously existed between the parties started to decline.

[155]    During the summer of 2007, Mr. Shinoff agreed to increase Frank Heller’s payment to $6.6M, to be payable at the end of 2011 or early 2012 with interest of $12k a month in the meantime^[170]. Mr. Shinoff did not disclose this agreement to BSZ, which, had he done so, would have allowed her to take that payment into consideration when structuring his portfolio.

[156]    On his May 2007 statement from BMONB, Mr. Shinoff noticed the first decrease in the total value of his accounts, but said nothing at the time.  Then in July, having gained online access to his BMONB accounts[171], he noted a more significant drop in value, mostly in his Preferreds^[172] .

[157]    This appears to have been the impetus for Mr. Shinoff’s father’s letter to Mr. Zukor of July 25, wherein the senior Shinoff noted that it was his son’s observation that “a 25 to 50 basis point change in the Bank Rate can have a 15 to 20% effect in the capital portion of a Preferred […] it is unlikely that another instrument that increases in value according to the increases of the bank rate, would come anywhere near the capital losses of the Preferreds”^[173].

6.1.4      The August 1, 2007, exchanges, and the recommendations that followed

[158]     On August 1, 2007, Mr. Shinoff and BSZ had different exchanges with respect to the Preferreds situation.

[159]     In essence, Mr. Shinoff expressed to BSZ his dissatisfaction about the performance of his Preferreds on a number of occasions.  She recommended that he wait before selling, assuring him that they were all quality investments that should come back to their purchase price, though she could not promise that.  He stated that he trusted her and that he was not prepared to panic sell.

[160]     She explained that the Preferreds should be seen as long-term dividend-bearing investments bought to produce income, but cautioned that they would fluctuate with market conditions and changes in interest rates.  She also reminded him that he was aware of this fact when he bought them. BSZ also added that the prices of the Preferreds could go even higher than par value if the economic data failed to be promising and that they may have many exit points along the way. 

[161]     Without reproducing the entire August 1, 2007 email exchanges, the following emails reflect the tone of the changed relationship between the parties:

August 1, 2007, 5:39 pm

(from Mr Shinoff),

I never knew that a 1/4% change in interest rates could have that effect on my Preferreds. You know that if I knew that, there’s no way that I would be there. I am clearly about fixed income and capital preservation, and that clearly does not look like where I am! There is not a chance in hell that I would have gotten into any instrument that would evaporate 6% of the investment's value on a $10 million position. You knew that and know that.

Every discussion that I had with you was that there is more than $25 million and at 4% and a 50% tax rate, I would never have to worry and I could never spend the income. The reward was clearly not worth the risk on such a material investment. That is why I am really, really unhappy.^[174]

 

August 1, 2007, 5:50 pm

(from BSZ)

As soon as we bought your Preferreds they went up about 6% or so. I did not notice you calling about that. Although there might be short term volatility, they are providing you with a far superior return after tax than 90 day bills. They are not meant for you to worry over nor to examine their mkt value. 1 Million came due and we placed at the overnight rate of 4.15% until Aug 16th. 4.15 is very far from 7.5. The short term volatility is worth it for some people in order to get higher returns. They are meant for people who are living from the income.

Do you examine the movement of the price of your house every month. I would like to concentrate on your accounts in a positive way Steven. If you are more comfortable with a different asset mix then we can also make minor changes.^[175]

 

August 1, 2007, 6:06 pm

(from Mr. Shinoff),

1)    You have been told for close to 20 years that I am risk averse and that I don’t measure the upside. My measuring stick is and will always be the downside! Your 6% increase is not a relevant statement.

2)    If it is short term volatility, that is one thing and I can live with it.

What you were asked to do is to make sure that my capital is protected and that I have a stable source of income, in that order.

3)    Little positions of risk, such as the stocks you have purchased is one thing, but if I have 10 million of a risky instrument, then you took me somewhere that I didn’t want to be.^[176]

[The Court’s emphasis]

[162]    Mr. Shinoff asserts that these exchanges reflect his incomprehension of the reasons for the strong decrease in the value of his Preferreds and show that he was not properly informed of the real risks involved, especially in light of his limited investment knowledge.

[163]    He goes on to say that he never expected such a decrease in a short period of time and that he is not the kind of person who deals well with being behind.  If that is the case, one can only wonder why he did not start selling some of his Preferreds at that point, or at least inquire about the “possible exit points along the way”, that BSZ referred to, or consult with some of the other investment advisors with whom he was then dealing.

[164]    It is true that these exchanges do not show that BSZ explained the Preferreds’ sensitivity to interest rates in mathematical detail, but they do not support Mr. Shinoff’s contentions either.  They indicate that, at the time, he clearly had more than “minimal investment knowledge”.  He was able to analyse his statements and identify a cause for the fluctuations in the value of his Preferreds.  Moreover, as seen through this exchange, he also understood that:

·           there was no guarantee that the value of his Preferreds would ever recover;

·           the value of his Preferreds could vary outside the alleged “narrow bandwidth” that he indicated was his understanding of the extent of the interest rate risk;

·           his capital invested in Preferreds was not protected.

[165]    Finally it is important to note that, notwithstanding the drop in the capital value of the Preferreds, at that time he had still made a gain of $167,607 on his investment^[177].

[166]    On August 8, 2007, BSZ sent Mr. Shinoff the Preferred Share Quarterly Update - Summer 2007 and wrote:

I notice that the Preferreds are recovering a bit each day. Especially when the mkt turned down, there was a flight to quality and safety so this was good for the pref’s. ^[178]

[167]     Mr. Shinoff testified in chief that this article reassured him that he should be patient and hold on to his Preferreds.  However, in cross examination he admitted that he had no specific recollection of reading the article at that time. 

[168]     In any event, the evidence shows that from then on he followed his Preferreds closely^[179].

[169]    During the fall of 2007, he continued to inquire about the commissions he was paying.  BSZ asked her son to resolve the issue with him directly and, therefore, Mr. Zukor had many discussions with Mr. Shinoff on the subject.  On October 24, as per Mr. Shinoff’s request, he finally proposed a fee structure based on a portfolio of over $10M^[180]. 

[170]    During exchanges relating to commissions, Mr. Shinoff admitted to Mr. Zukor that he understood when he purchased his Preferreds that they were directly linked to interest rates, but added that he never realized the extent of the sensitivity.  Mr. Zukor proposed to sell at least some of them at that time, but Mr. Shinoff refused, saying that he did not want to sell them at a loss[181].

6.1.5      The first complaint and the monitoring of Mr. Shinoff’s accounts thereafter

[171]    Mr. Shinoff continued complaining about his results, which prompted BSZ to ask him to send a formal letter of complaint to BMONB’s compliance department.  He did so on November 6, 2007, although he addressed it to BSZ directly.  It reads as follows:

             Dear Barbara,

             Needless to say, you are not happy with my approach recently and for that I am sorry. That being said, I think it is fair to recognize that I am the client and justifiably upset based on my current circumstances. I have written a letter to Mr. Taillon, but have chosen not to send it before I gave it one last attempt to find a solution with you, my Broker of close to 30 years.

Your choice of investments has not respected by clear and repeated instructions in our numerous phone conversations that: 1) Preservation of Capital is first and foremost and (2) your responsibility is to establish a portfolio that performs well in a bad market.

I was asked by (Mr. Zukor), what type of resolution I was looking for and told him that I expect to be put in a position with the Preferreds that is equivalent to maintaining my Capital and having the income level of the Banker’s Acceptances that we were invested in prior to your foray into approximately $10 million of Preferreds.

It was very disappointing to hear from you that “it isn’t going to happen”. It is in this difficult situation that I hoped you would take ownership of the problem and provide solutions or options to reach a resolution. This is the first time in close to 30 years that I have called on you for assistance, and the extent of your recommendation was: be patient - we have high quality investments and that they will come back. That response does not respond to my solution, but I might be fine with waiting if I know what time period you deem to be reasonable and what BMO is prepared to do if your prognosis is wrong. In other words, is it “Buyer Beware” or is BMO there for me?

As it stands, I have losses on Preferreds of approximately $1,500,000 on $10,000,000 invested that had the upside of earning me an additional $150,000 per year in fixed income, all figures pre tax. This is not the deal that I signed up for, so I am putting the ball in your court.

It would be to our mutual benefit if we can resolve this ourselves,

Sincerely,

Steve Shinoff^[182]

[The Court’s emphasis]

[172]    As required by BMONB’s internal policy, BSZ forwarded Mr. Shinoff’s letter to the retail compliance department and Mr. Shinoff was then contacted by Cara Hayes, manager of that department.  He was also in contact with Mr. Taillon, first vice-president and managing director, who told him that BMONB would not and could not provide him with a guarantee on the performance of his Preferreds.

[173]    Around the same time of this first complaint[183], the Personal Account and the 655 Inc. Account were changed to meridian accounts.  This resolved the commission issue to Mr. Shinoff’s satisfaction[184].

[174]    Interestingly, once the commission issue was settled, Mr. Shinoff gave instructions to sell approximately $1.7M in equities from his Personal Account, all at a profit.  He then purchased approximately the same amount of a safer instrument, a BNS discount note^[185].

[175]    It is relevant to note, however, that he did not sell almost $3M worth of equities or $6.9M worth of Preferreds in his Personal Account^[186], nor did he ask to transfer all or part of his accounts to another investment broker.  Moreover, a month later, on December 11, 2007, he purchased Preferreds in his Personal Account. 

[176]    He denies that this transaction originated with him[187] but, given that this was a transactional account, he had to approve all transactions.  In light of that, it is difficult to understand why he would purchase additional Preferreds at a time when he was complaining about their fall in price and asking for a guarantee of performance on them.

[177]     At the end of December of 2007, he finally agreed to sell Preferreds, which was done at a loss, but this transaction was done for tax purposes[188].  It is rather surprising then that, during the same period, he again purchased more Preferreds^[189].

[178]     His gain and loss report for the year 2007^[190] showed that the 655 Inc. Account generated about $116k in income over the year^[191], while the Canadian component of his Personal Account generated some $450k in income^[192].

[179]     In a January 7, 2008 letter to Mr. Taillon, Mr. Shinoff concludes by saying:

I feel compelled to tell you that your explanations, albeit eloquent, and “to the letter of the law”, from your perspective, have not served to enhance my 25 year loyalty to your firm. You clearly had the resources to resolve this in a way that made me feel that I was “treated right”, but have chosen not to do so! Accordingly, I have more questions than answers as to the direction I will take with my portfolio in the future even, if the Portfolio does turn itself around.^[193]

[The Court’s emphasis]

[180]     Nevertheless, on January 15, he wrote to Cara Hayes to confirm that his complaint file could be closed, although he reserved his right to open it again in the future^[194].

[181]     Without going through all the exchanges and the transactions that were made following the closing of his complaint file, it is useful to examine some of them.

[182]     On January 16, 2008, Mr. Shinoff transferred $1.2M from his Personal Account to the A-1 Account with BMONB and asked that it be “put overnight” while he worked on it^[195].

[183]     On February 1, 2008, Mr. Shinoff sold some common shares and on February 4 and 5, 2008, he sold some Preferreds in his Personal Account ^[196] but purchased more Preferreds in the 655 Inc. Account^[197].

[184]     On February 22, 2008, Mr. Zukor discussed with Mr. Shinoff concerning an amount of $345k US that had come due in his Personal Account and they talked about the possible purchase of Preferreds of the Royal Bank of Scotland.

[185]     Mr. Zukor wanted to make sure that Mr. Shinoff was comfortable with the transactions and, after explaining the risk, he wrote in his note^[198]:

Spoke to steven shinnof (sic) regarding the 345k usd that had come due and discussed which options he wanted to pursue. He said that he was interested in buying and rbs pref security for 150k, putting 150k into a ba, and spending 45k on a depressed stock with a dividend such as BAC.

I discussed that while rbs.pr.m has a 6.85% current yield and it could be called in 2009 since it has a high cpn relative to other rbs issues, there is also downside risk. I highlighted the fact this security was already at 19.57 and therefore it showed already that it has downside potential. While I said we do think it’s a good instrument for a long term investor who wants above average income, it will increase his weighting in perpetual fixed income securities. He responded that there is upside and downside potential but it’s a much better return than leaving it in a ba, and that since he has about a large amount in liquid instruments (ie 46%) he was comfortable with doing this: ^[199]

[The Court’s emphasis]

[186]     On February 27, 2008, Mr. Shinoff bought some Royal Bank of Scotland Preferreds and he received a portfolio report and performance report^[200] showing that his Personal Account and the 655 Inc. Account together were up $303,717 in 2008 and the annualized income was $420,863. It also showed an unrealized loss of the Preferreds of $849,736[201].  On the same day, he wrote to Mr. Zukor:

Dear Michael,

I am not sure which way the Cdn $ is going today, but my thought yesterday was: Possibly to buy $250k of US in 655 Inc. when it was above 1.02. To watch and see when it hit the top and buy it. Even if it then went up to 1.03, I would be fine, as I could decide to buy more at that time, but I would have 250k to balance a bit of the 90 cent dollars that we have in the portfolio.

Let me know your thoughts.^[202]

[187]     Upon receipt, Mr. Zukor wrote to his mother so as to let her know that he specifically told Mr. Shinoff that he thought it was not a good idea.^[203]  At the time, he recommended to Mr. Shinoff to dispose of his non-guaranteed investments, including his Preferreds.

[188]     On the very same day, Mr. Shinoff purchased some common shares and, on March 3, 2008, he purchased additional Royal Bank of Scotland Preferreds in his Personal Account^[204].

[189]     Clearly, these transactions indicate that, even when informed of the risks related to Preferreds, Mr. Shinoff was willing to acquire them, and other securities, of his own accord. The exchanges show that he felt capable of making such decisions and that he understood more than the basics of investing.

[190]     On March 13, 2008, Mr. Zukor sent to Mr. Shinoff, as requested, an analysis focused on his Preferreds[205]. It showed, taking into account the income derived in 2007 from the Preferreds, that the unrealized loss on the Preferreds was $331,257.

[191]      Mr. Shinoff chose not to sell his Preferreds at that time, even though Mr. Zukor suggested to him to do so “if he was all about capital preservation”.

[192]    In April 2008, Mr. Zukor and his mother advised Mr. Shinoff that some investors were selling Preferreds in order to replace them with “fixed reset” shares, a new type of Preferreds that had become available in the Canadian Market.  This type of Preferreds was popular, as it offered a fixed rate for five years, at the end of which, the shareholder could retain the shares with the rate reset for another five years or the issuer may elect to call the issue at par^[206].

[193]    BSZ and her son explained that the availability of this type of asset raised a concern that there would be a significant selling-off of Preferreds leading to a drop in their value.  Nevertheless, although on April 14, 2008 Mr. Shinoff sold some Preferreds, he purchased other Preferreds, but with higher coupons^[207].

[194]    On April 15, 2008, following a discussion he had with Ms. Gentile, Mr. Shinoff wrote to her to suggest that “in the regular account Preferreds, these should be looked at”[208] and again, on April 17, 2008, he wrote to Ms. Gentile with respect to all the investments in his A-1 Account and mentioned that he was “working on the overnight rate”^[209].

[195]     On April 24, 2008, Mr. Shinoff asked that $1.5M from his Personal Account be transferred to his A-1 Account^[210], and the next day, he wrote to BSZ:

Dear Barbara,

I just realized that we have had pound and euros sitting around. and l presume not earning any interest??

What should we be doing?

Steve^[211]

[196]     On April 26, 2008, Mr. Shinoff wanted to obtain more information about the fixed resets for the 655 Inc. Account. He wrote to BSZ to that effect and added that “I think that some of the Preferred stuff that we talked about - fixed resets - would be worthy of discussion for 655 Inc. High dividends with Div. tax credit that resets itself, seems like a good combo. Are there downsides to it that I need to know about?” ^[212]

[197]      BSZ, in fact, suggested that he replace some of his Preferreds with fixed resets, but he chose not to follow that recommendation at that time.

[198]     On May 1, Mr. Shinoff wrote to Ms. Gentile to underline that the Gateway was not showing the interest rates on some of his Preferreds and he wanted to follow up on other Preferreds^[213].  Then on May 15, after noticing that the value of his account had dropped $100k since the day before, he asked Ms. Gentile to provide him with a printout of his Personal Account as of May 14^[214] .

[199]     From the above-mentioned correspondence, it appears clear that Mr. Shinoff was following his accounts very closely and was asking questions and discussing with BSZ and her team on a regular basis.

[200]     From June 9 to 11, 2008, he agreed to sell almost $1M Preferreds at a loss^[215].  Contrary to what was recommended, he purchased only $500k of fixed resets, instead of $1M, choosing to invest the remaining $473k in a T-Bill so as to eventually pay Frank Heller.  This shows that Mr. Shinoff was capable of making his own decisions on the transactions to be made. 

[201]    On June 16, 2008, Mr. Shinoff wrote to Michael Zukor concerning his portfolio review and his 2006 gain/loss report for 655 Inc.:

Dear Michael:

I thought that when you sent me the last one in May, that we discussed sending it monthly. Am I mistaken?

You were also going to do that analysis on the payback on the Preferreds. Loss of capital vs. the benefit from the Dividend Tax Credit and the difference in Interest Rates between the Preferreds and the BA’s.

We should also take a look at what mid-term bonds were in that period.

My recollection was that BA’s were in the 4.3-4.4 range and the Preferreds were in the 4.5-.4.9% range.

I would imagine that the mid-range Bonds would have been higher than the BA’s as well and that would have most likely been the alternative to the Preferreds on the fixed income side if we were going to use a relevant comparator.^[216]

[202]     On June 20, he wrote to BSZ:

The discussion we were having related to the breakeven point between the extra Net income I am getting by having dividend tax treatment and higher rate of dividend compared to the BA’s or Bonds that would have been the alternative treatment. I know what it is, but Michael was suggesting that I wasn’t that far behind, so he was going to do it.

Steve^[217]

[203]     Hence, the Court concludes that, throughout the period of October 2007 to July 2008, Mr. Shinoff was provided with options and advice regarding his holdings and was able to weigh in on the pros and cons of the transactions proposed, and he obviously had an investment knowledge that allowed him to understand the portfolio reports and the gain and loss reports that were sent to him.

[204]     Overall, BSZ claims that, after his first letter of complaint up to July 2008, Mr. Shinoff refused to rebalance his portfolio, as she recommended, while he insists that he continued to rely on her advice.

[205]     During the first half of 2008, the value of his accounts continued to decrease and he was concerned.  However, he asserts that he received reassurance by both BSZ and her son that the declines would be temporary and that the account values would recover, as seen from an email from BSZ on July 4, 2008.

Dear Steven,

[…]

I know that this is a difficult time for all investors. I have learned that a good investor bears disappointment patiently. History has shown that it is that type of investor who does well over the long term. Your investments are all high quality and investment grade.

I have also spoken to the preferred share specialist before I left. The prices are very low now and the yield is high. The volume is also low as it is mainly retail investors who are selling indiscriminately, and we are in a week where there are two holidays, Canada Day and July4th. This is why I only sold a bit where I saw the price was still good based on its quality and yield. The 500k has been put in short term money market. Things need to settle down a bit before doing more.

Barbara. ^[218]

[The Court’s emphasis]

 

 

6.1.6      The second complaint and the monitoring of the accounts thereafter

[206]     In July 2008, Mr. Shinoff received his June 2008 portfolio report for his Personal Account[219].  As he was still unhappy with the results, BSZ requested that he send a formal complaint.  He did so on July 7^[220].

[207]     In this letter, Mr. Shinoff mentions for the first time that only one third of the proceeds of the sale would remain with BMONB in the long-term, but he still does not mention the payment owed to Frank Heller.

[208]     This time, Cara Hayes, from the compliance department, answered him.^[221]  After addressing his concerns, she concluded that BMONB could not be held liable and that, consequently, the complaint file was closed.

[209]     In light of these events, it is somewhat surprising that, that same July, Mr. Shinoff opened two new accounts with BMONB for his new holding company, 701 Inc.^[222] At the time, he had a professional relationship with other investment advisors^[223] and could easily have opened these accounts only with them^[224].

[210]     When Mr. Shinoff filled out the client account agreement form for the new accounts^[225], he made the following hand-written annotations:

·          In the investment knowledge section, he placed his checkmark between “none” and “limited to average”;

·          In the investment objectives section, when choosing “conservative income”, he underlined “protecting investment”.  He also double underlined “very” and crossed out “prefers” for “requires” in the sentence “The client has a very low tolerance for risk with investments and requires a low degree of price volatility”;

·          Then, at the end of the same section, when choosing “income”, he underlined “protecting investment”.  He also added the word “very”, added and double underlined the second “very” and crossed out “prefers” for “requires” in the sentence “With very few exceptions, the Client has a very low tolerance for risk with investments and requires a low degree of price volatility”.

·          In the next sentence, he crossed out “some” and replaced it with “very few” and added “of very conservative nature” to the sentence “The Client may be willing to own very few equities of very conservative nature”.

·          He added a side note that read: “Note. Capital preservation is paramount. Very limited stock. Very conservative investments.” He underlined the words “very” in both those sentences.

[211]        In accordance with BMONB’s policy, the Defendants refused these annotated forms and Mr. Shinoff resubmitted forms without alterations.  In them, he declared that his investment knowledge was “limited to average”, he had a low tolerance for risk, and he chose “income” as his account strategy, not “conservative income”, indicating that he did not want to sell all of his equities. 

[212]    In comparison, in the forms he filled with RBCDS around the same time, he indicated that his risk tolerance was “50% low and 50% medium”, evaluating his investment knowledge as “good” [226].  He indicated his investment objectives as being “38% medium-term growth, 37% long-term growth and 25% income”.  In the section entitled “Tolerance for Fluctuations”, the broker writes: “In some years, we may not achieve our rate of return objectives and in fact may have negative returns. You [Mr. Shinoff] have indicated that you are willing to accept this risk, in order to achieve above average long-term results”.  Although Mr. Shinoff signed this statement of objectives and investments policy, he says that he did not really look at it before doing so. 

[213]     In the form he filled with TD Waterhouse around the same time, he declared that he had a “medium” risk tolerance and he evaluated his investment knowledge as “average”[227].   

[214]     On July 25, 2008, he caused cash and securities to be transferred in kind from his Personal and the A-1 Accounts, both coded as “growth”[228], to the two new 701 Inc. accounts that were coded as “income”^[229].

[215]      During the fall of 2008, Mr. Shinoff continued to follow his investments closely and frequently asked that his money be invested diligently^[230]. He made numerous requests, asked many questions about the commission charges and the overnight rate and complained regularly about his money not earning interest.

[216]      On October 31, 2008, he transferred $4.365M from 701 Inc.’s account to TD Waterhouse^[231].

[217]      It was on November 3 that BSZ asked him to transfer his accounts to another firm, since “the mutual trust and respect that is necessary to continue in my role as your advisor, is no longer in place.”^[232]

[218]     On December 16, 2008, he opened corporate accounts at Scotia McLeod and transferred the assets in the BMONB corporate accounts to them within a week.

[219]     In the Scotia McLeod client agreement forms^[233], he indicated having a 90% low risk tolerance and 10% medium risk tolerance.  He also qualified his overall investment experience as “very low” and chose “income” as his investment objective.

[220]     On January 8, 2009, he opened a second account for 701 Inc. with Scotia McLeod and signed another client application form.  In it, he described his risk tolerance and objectives in the same manner as in December, but indicated that his overall investment experience was low, instead of very low^[234].

[221]     Between January and March of 2009, he transferred all the assets left in the BMONB accounts to the Scotia McLeod accounts^[235].  He also moved the assets held at RBCDS and TD Waterhouse there.

[222]     While the Court agrees with Mr. Shinoff that the information contained in the client account agreement and the transactions made in his accounts with other brokers are not relevant to the analysis of BMONB’s fault, the mandates and the declarations given to the other institutions on his risk tolerance and his investment experience reflect on the probative value and credibility of Mr. Shinoff’s versions.

[223]     As seen above, between 2006 and 2009, he indicated different risk tolerances and investment objectives to different brokers.  There is nothing wrong with that.  Those can change over time and between accounts. 

[224]     What is more problematic is that he also downgraded his knowledge of investing from “average” at TD Waterhouse in December 2006 to “very low” and “low” at Scotia McLeod in January 2009[236].  It is difficult to accept, in light of the investment experience and knowledge he gained over that period and of the active role he played in his accounts.

[225]     The Court also notes that he continued to purchase Preferreds even while their price was falling^[237].

[226]     As for when he transferred the accounts to Scotia McLeod, he asserts that the portfolio changed based on the recommendations of his new investment advisor.  The Defendants point out, however, that at the time of the transfer he chose not to sell his Preferreds.  In fact, Mr. Shinoff started to sell some Preferreds only as of August 2009[238].

[227]     Moreover, in January 2009, he purchased new issues of fixed resets and, in February, gave unsolicited instructions to his broker at Scotia McLeod to sell common shares and trust units, rather than Preferreds.

[228]     In fact, Mr. Shinoff kept his Preferreds for some time, while giving unsolicited instructions to purchase even more speculative investments^[239].  This demonstrates that he was not as adverse to risk as he claims.  It also shows that he was more comfortable than he admits with holding Preferreds, and this, even after he understood the risks associated with them.

[229]     Also, when questioned about the difference between the annotations contained in the client account agreements submitted to BMONB and the ones submitted the very same day to TD Waterhouse with respect to his investment knowledge, Mr. Shinoff answered again that he paid no attention to them. 

[230]     The Court cannot conceive that Mr. Shinoff would have signed this type of form twice in the same day[240] without noticing what he was indicating as his risk tolerance and investment knowledge.  This does not align with the Court’s perception of him as being a very careful man.

[231]     It appears to the Court that in July 2008 Mr. Shinoff wanted to downplay his investment knowledge in the annotated client agreement submitted to BMONB.  It seems clear from the above analysis that, by then, he had investment knowledge far higher than what he admitted to, i.e., very low or even limited or low.

[232]     It also seems clear from the above-mentioned exchanges that Mr. Shinoff was not following BSZ’s advice blindly. The notion of trust that may have existed before was no longer there.

 

[233]     Furthermore, the Court notes that the RBCDS documentation provided for a maximum in equities varying in the range of 60% to 85% with time and Mr. Shinoff admits that the $8M invested with Bruce Kent was in a managed account made up of a large portion in equities^[241].  Again, this does not show the great adversity to risk that he put forth at trial.

[234]     Based on the preceding, the Court finds it difficult to take Mr. Shinoff’s testimony at face value and, where it is contradicted by other evidence, including that provided by BSZ, the Court must prefer that version to his.

6.1.7      The IIROC’s involvement and CFA Institute investigation

[235]     It is relevant to note that, when informed by BMONB as per the regulatory requirements of Mr. Shinoff’s lawsuit, IIROC opened two investigations into the Defendants’ handling of Mr. Shinoff’s portfolio.  They addressed two questions to BSZ, who answered on July 31, 2009^[242].

[236]     IIROC did not contact Mr. Shinoff or ask that he communicate any documents to them.

[237]     Both investigations were closed without imposing any actions, disciplinary or otherwise, against either of the Defendants[243].

[238]     In the same manner, the CFA Institute, when informed by BMONB of the lawsuit, determined after completion of its review that no further enquiry was necessary and considered the “investigation concluded” ^[244].

[239]     This said, it is with reasons that Mr. Shinoff underlines, that BSZ’s answer to IIROC contains a slightly different version than the one provided at trial[245].

[240]     Despite these differences, the Court is of the view that it does not affect the overall credibility of the version given by BSZ[246].

[241]     There is no need to elaborate further on the IIROC and the CFA Institute investigation since their conclusions do not bind the Court[247].

 

6.2     The Analysis

6.2.1      The duty to know-your-client

[242]     Mr. Shinoff alleges that BSZ did not abide by the fundamental KYC Rule, since the investments she recommended were not consistent with his investor’s profile and objectives.  For him, to really know your client, it is not enough to refer to the account application form.  A more thorough and complete knowledge of the client is required[248].

[243]     He says that the BMONB account forms are too imprecise to allow BSZ to really know him. Hence, BSZ should have met with him in order to assess his personal situation and investment objectives when the proceeds of the sale came in.  Throughout the duration of the mandate, she should have made sure that the information provided at the beginning was still accurate and appropriate. As such, she should have updated the application forms.

[244]     So be it, but the proof shows that his investment objectives were fully discussed between him and BSZ, with whom he had been doing business for more than 20 years.  Even though the client account agreements were not updated after the sale of the company, he had ample opportunity to provide her with all the necessary information concerning his present situation and needs and he did so, but only partially. 

[245]     Although he now claims that he needed an income of only $500k per year, in reality, he insisted at the beginning, on obtaining an income of $1M per year.  He also omitted to divulge certain aspects, like the debt to Mr. Heller and his intention to leave only $8M with BMONB to manage at the end, information that is generally not communicated in a new client account application form.  Advising her of these elements earlier would have allowed her to have a full understanding of his objectives and future requirements at the time she was first structuring his portfolio. 

[246]     The Court concludes that the evidence has shown that BSZ fulfilled her obligation to know her client.

6.2.2      The duty to inform and to advise

[247]     As noted earlier, the investment advisor must disclose to the client all relevant information about the recommended transaction[249]: the product’s attributes, the pros and cons of the transaction, the risks it involves, the state of the market, etc.  The extent of the investment advisor’s duty to inform will vary according to the nature of the service rendered to that client,^[250] and to the client’s knowledge of investments^[251].

[248]     This said, while the duty to inform and to advise is heavier when the client does not have investment acumen, the investment advisor has an obligation to provide information and advice even to a knowledgeable client that has investment experience[252].

[249]      In broad terms, BSZ had the duty to evaluate Mr. Shinoff’s level of understanding of the transactions she, or even he, on his own, proposed to ensure that he could adequately evaluate the advantages and risks involved.

[250]     Mr. Shinoff argues that the duty to inform and to advise goes much further than just presenting securities for each proposed trade, she had to provide him with all relevant information relating to the overall strategy.

[251]     Mr. Shinoff pleads that the focus of the exchange in the summer of 2006 was on the return of his investment and not on the risk of the products recommended^[253]. He affirms that BSZ led him to believe that the Preferreds would fluctuate within “a narrow bandwidth”^[254] and that she never discussed with him the usefulness of the Preferreds that she recommended.

[252]        Mr. Shinoff adds that, since BSZ’s strategy was characterized by inconsistencies and contradictions, it could not have been adequately explained to him.  As such, he contends that he did not receive information on different asset allocations, since no alternative ways to meet his income and capital preservation objectives were offered to him.

[253]     In fact, it does not appear that, in the summer of 2006, BSZ provided him all the information needed on the advantages and disadvantages of holding Preferreds in comparison to other types of instruments, or that she explained in detail the strategy she intended to develop.  As well, she did not quantify the risks associated with the recommended trades.

[254]     However, the evidence shows that, prior to purchasing any Preferreds, BSZ described the product and explained to him the concept of Preferreds, including their particularities and advantages.  She informed him that they could fluctuate with interest rates and explained the other risks associated with them, including market risk, credit risk, and reinvestment risk. 

[255]      As for common shares, she alleges that the ones she recommended were of good quality and were suitable for him because they allowed for diversification by asset class.  They always discussed each purchase before it occurred and Mr. Shinoff was able to ask all the questions he felt were necessary.

[256]     He received monthly account statements, portfolio reviews and performance reports for all of his accounts, as well as a prospectus for each new issue of Preferreds.

[257]     In general, as the Court mentioned earlier, Mr. Shinoff had sufficient knowledge to understand the pros and cons of the proposed transactions, all of which he authorized, sometimes following her recommendations, sometimes not, and sometimes acting on his own.

[258]     BSZ and her son spoke with Mr. Shinoff about his investments on a regular basis, at certain times even daily.  Mr. Zukor testified that he had constant verbal communication with Mr. Shinoff and he spent countless hours discussing the proposed transactions with him.

[259]     Thus, the Court is satisfied that the Defendants provided sufficient information and advice to him, given his circumstances, and that they adequately explained the risks involved with the recommended trades, thereby fulfilling their duty to Mr. Shinoff in that regard.

[260]     With respect to Mr. Shinoff’s complaint regarding the absence of information relating to an overall strategy and to an alternative asset allocation, the Court will address this question when discussing the duty to provide suitable investment recommendations.

6.2.3      The duty to provide investment recommendations that correspond to the client’s investment objectives

[261]    Mr. Shinoff asserts that he followed BSZ’s advice but that the strategy recommended was unsuitable for his investment objectives and constraints, since it did not take into account a number of factors such as:

·           his return objectives^[255];

·           his risk tolerance^[256];

·           his liquidity needs and his time horizon[257];

·           the risk involved in the Preferreds and common shares recommended to him^[258].

[262]     In other words, Mr. Shinoff asserts that BSZ did not employ a structured approach, as required by the nature of her mandate.  He says that she did not develop a proper strategy and did not ensure the suitability of the investments, as she made him assume a risk that was unnecessary in light of his return objectives.

[263]     He pleads that only the $8M that was to remain with BMONB in the long-term should have been invested in accordance with his investment objectives and risk tolerance. 

[264]     In support of his argument that BSZ failed to recommend suitable investments, Mr. Shinoff’s experts presented hypothetical asset allocations that, in their opinion, would have been suitable for his investment objectives and constraints. ^[259]  The Court will now turn to their evidence.

6.2.3.1       The experts

[265]    At the outset, there were objections as to the qualification of the experts and their obligation not to express legal opinions. The Court will address these questions first.

6.2.3.1.1      The governing law on the qualification of experts

[266]    In general, the admissibility of expert evidence depends on the application of the following criteria established by the Supreme Court of Canada in R. v Mohan[260]:

1.      its relevance;

2.      its necessity in assisting the trier of fact;

3.      the absence of any exclusionary rule;

4.      the properly qualified expert.

[267]     The expert must have the expertise to offer an opinion in the relevant area. As such, the evidence must be given on matters for which the expert has acquired a special skill, knowledge or training through his study or experience or a combination of both[261].

[268]     The threshold of admissibility of an expert’s report is not high[262].  The expert may provide opinions on matters that are beyond his area of specialty, as long as he possesses some special knowledge relating to the matter being discussed that is not possessed by an ordinary untrained person, or that is outside the experience and knowledge of a judge[263].

[269]     However, the initial qualification of an expert by the Court does not guarantee that his testimony will be followed, as noted by Professor Béchard:

6.    Le fait qu’un tribunal permette à un témoin de témoigner comme expert ne l’empêche pas de lui dénier par la suite cette qualité afin d’écarter son témoignage;

9.    Le témoignage de l’expert qui témoigne dans un domaine qui ne relève pas de son véritable domaine d’expertise aura peu de valeur probante, surtout lorsqu’il est contredit par des experts spécialistes dans le domaine en question. [264]

[270]     The expert must respect the rule that his primary duty is to the Court and to instruct and assist the trial judge. As such, he is expected to be impartial and objective[265].

[271]     The expert’s opinion must also be founded on proven facts[266] and the expert should state the facts or assumptions on which he bases his opinion[267]. He may relate to hearsay or inadmissible information, but it cannot be used as proof of the facts[268].

[272]     Finally, the expert must avoid any attempt to usurp the Court’s role.  Although he can express an opinion on matters of facts at issue[269], he cannot analyze the proof and the witness’ behaviour[270].  In other words, he must not express a legal opinion.  This said, expert evidence should not be excluded simply because it contains some incursions into the law, as long as it is not the main purpose of the opinion[271].

[273]     In the present matter, Defendant challenged the qualification of both of Plaintiffs’ experts, Mr. Hymas and Mr. Zimbresteanu, and, not to be outdone, Plaintiff challenged the qualification of Defendants’ experts, Mr. Perreault and Mr. Horgan.

[274]     Hence, the Court will address the qualification issue of each expert before looking into the merit of his report.

6.2.3.1.2      Mr. Catalin Zimbresteanu

i.       Mr. Zimbresteanu’s qualification

[275]     Plaintiffs seek to have him qualified as an expert in 1) portfolio modeling and scenario analysis, 2) portfolio analysis and 3) risk management.  Although Defendants do not challenge his expertise in risk management, they are opposed to the other two qualifications.  The Court took their objection under reserve and will rule on it now.

[276]     Mr. Zimbresteanu has a long and focused career path.  He took the Canadian Securities Course and Conduct and practices handbook. In addition to taking specialized courses in the Chartered Financial Analyst program and the Financial Risk Manager course[272], he has the following experience[273]:

·           1988 -  graduated from university[274] with an M.Sc. in electrical engineering;

·           1994 - obtained an MBA in Finance from McGill University;

·           1996 to 1997 - worked as a senior analyst at First Marathon Securities preparing research reports and doing operational work for high-net worth and institutional clients[275] and assessing the risks of the operation of the bank;

·           1997 to 1999 - vice-president, market and operational risk management at Société générale (Canada), tasked with building and operating a risk function;

·           1999 to 2001 - worked as a senior consultant, capital markets, at Ernst & Young assisting clients in building risk management policies, processes and infrastructure, implementing performance policy procedures and risk systems, compliance with regulatory laws, advising on performance, measurement and reporting process and streamlined data flow process and procedure;

·           2001 to 2002 - worked as a chief financial engineer at the Montreal Exchange, doing client consultations and participating in the conception of trading derivatives on the market;

·           2002 to 2007 - worked as a senior director, investment risk, at Canada Public Service Pension Investment as part of the investment risk team reporting to the CEO and members of the management investment committee, on which he participated and was responsible, among other things, for identifying risk factors, building the asset allocation to be recommended, building the risk function and servicing the investment team, which included scenario analysis[276];

·           2008 to 2009 - worked as head of risk at Newedge Canada, Société générale Group of Montreal, where he was responsible for business development and for following and monitoring the risks, the creditory risks and the market risks incurred by the financial advisors in transactions of clients, as well as operational and regulatory features of new institutional clients.

·           2010 to 2012 - worked as a manager at ARB Group responsible for the designing, building, and optimizing portfolio strategies and launching of a systematic multi-assets investment algorithm;

·           2013 to present - working as senior advisor, research and development, at the Montreal exchange, with responsibilities for:

·               Asset manager analysis;

·               Development of existing products;

·               Regulatory and fiscal trends;

·               Regulatory filings.

[277]     This is, however, Mr. Zimbresteanu’s first experience as an expert before a Court of law.

[278]     In their contestation of his qualifications, the Defendants argue that Mr. Zimbresteanu:

·           has never worked as an investment advisor and never provided investment advice to retail clients.

·           has never managed or supervised any investment advisors.

·           has never handled or investigated any complaints related to the work of investment advisors;

·           has never registered in any capacity with IIROC or with any other organization.

[279]     Moreover, Defendants point out that Mr. Zimbresteanu created Finance Risk Expert for the sole purpose of submitting his expertise report in the present matter.

[280]     The Court notes that Mr. Zimbrestenau has professional experience in portfolio construction and analysis.  As he explained at trial, although he has not provided investment advice to retail clients, he has done portfolio modeling, so he has an experience that allows him to be qualified as an expert in that field.

[281]     The Court shares that view.  His qualifications make it likely that he can be of assistance to the Court as an expert in portfolio modeling, scenario analysis and portfolio analysis.  The objection is dismissed.

[282]     This said, the concerns raised by the Defendants over the extent of his experience merit consideration.  This aspect can be dealt with when determining the weight to be given to his evidence.

ii.      Mr. Zimbresteanu’s expert report

[283]     Mr. Zimbresteanu’s first report is dated April 15, 2011.^[277]

[284]     Taking into account Mr. Shinoff’s profile and after reviewing BMONB’s documentation, Mr. Zimbresteanu opined that BMONB’s account forms and updates are too imprecise and general to allow an advisor to really know his clients.  As such, BSZ should have obtained more information with respect to Mr. Shinoff’s profile before recommending an asset allocation.

[285]     She should have evaluated and quantified Mr. Shinoff’s total return performance, his objectives and his time horizon and, based on that, presented a choice of asset allocation.  She then should have performed an evaluation in percentages of his risk tolerance in a continuous manner and discussed with him the pros and cons of each alternative, instead of only describing the asset allocation proposed.

[286]     Hence, he states that the know-your-client rule was not respected by BMONB nor documented.

[287]     In his first report, the expert analyzed the different transactions recommended by BSZ, but only in Mr. Shinoff’s Personal Account and in the two 701 Inc. accounts, omitting the account of 655 Inc.[278], starting in December 2006, rather than May 2006^[279], and ending on November 31, 2008.

[288]     Considering the recommended transactions and Mr. Shinoff’s portfolio by asset class, he affirms that the allocation recommended was not suitable because of an excessive concentration of “shares” and an overly high concentration in the financial sector.

[289]     Mr. Zimbresteanu goes on to analyze the recovery of the portfolio starting in August 2007 and the evolution of the asset allocation by asset class and industrial sector following Mr. Shinoff’s reaction to the fluctuations in the value of his Preferreds.

[290]     He states that between August 2007 and March 2008, the changes in Mr. Shinoff’s portfolio were minor and insufficient in light of his risk tolerance.

[291]     He affirms that BSZ did not apply the know-your-client rule in a continuous manner, because she did not reassess his risk tolerance as she should have.

[292]     In the same manner, he comments as follows on the diversification of foreign currency :

Ce graphique illustre qu’en l’absence d’opérations de protection contre le taux de change, la “diversification en devises” n’était pas justifiée pour un portefeuille censé préserver le capital investi. Également, il permet de faire ressortir que le risque de taux de change auquel était assujetti le portefeuille de M. Shinoff était démesuré et injustifié par rapport à l’intérêt obtenu en investissant dans des titres U.S.^[280]

[The Court’s emphasis]

[293]     Overall, he opines that Mr. Shinoff’s portfolio did not have an adequate diversification for a portfolio that was supposed to preserve the capital invested and that the “diversification in foreign currency” was not justified.

[294]     He explains that BMONB’s statements of account and portfolio management reports contained inadequate information and suggested that the risks were lower than they were in reality.

[295]     He also evaluated the damages suffered by Plaintiffs.  To do so, he used the account statements for the period from December 2006 to December 2008 for the Steven Shinoff Personal Account and the two 701 Inc. accounts.

[296]     Mr. Zimbresteanu constructed a reference portfolio based solely on Mr. Shinoff’s version of his investment characteristics, i.e. his time horizon, his constraints, his risk tolerance and his investment objectives. 

[297]     For the purpose of his evaluation, he created two sub-portfolios[281]:

·           One with a fixed income mandate, that respected Mr. Shinoff’s preservation of capital objective and which generated an income, in which he deposited $8M in December 2006;

·           One with a “Dépôt à vue” mandate, that respected Mr. Shinoff’s liquidity needs and time horizon, in which he deposited between December 2006 and March 2007 the balance of $19,336,955 and where all Mr. Shinoff’s withdrawals were made from December 2006.

[298]     As for the return objectives, he evaluated that both his sub-portfolios had to generate together an income of $700k before taxes, based on Mr. Shinoff’s withdrawals in 2007-2008.

[299]     He concluded that his reference portfolio would have performed better than the actual portfolio and he evaluated Mr. Shinoff’s loss at $5,346,062 due to BMONB’s and BSZ’s fault.

[300]    On the question of whether the preservation of capital and income objectives would have been met.  He writes:

Observations

Les résultats de cette simulation permettent de démontrer qu’il était possible en tout temps durant la période de gestion de respecter tant l’objectif de sécurité que celui de revenue sans nécessité de rechercher un rendement plus soutenu par le biais d’instruments plus risqués.^[282]

[301]     Upon receipt of the expertise report of Defendant’s expert, Mr. Perreault, he prepared a complementary report dated August 29, 2012^[283].  In it, he evaluated the transactions in the 655 Inc. Account for the period between June 2006 and January 2009 and concludes that his reference portfolio would have also attained a better result. 

[302]     At trial, Mr. Zimbresteanu produced a comparative of the evolution of the assets in Mr. Shinoff’s accounts with BMONB, including this time, an evaluation of all the transactions in Mr. Shinoff’s A-1 Account. On this basis, he evaluated Mr. Shinoff’s overall loss at $5,577,185^[284].

[303]     For the reasons that follow, the Court cannot give any weight to Mr. Zimbresteanu’s expert report.  He failed to respect the general mission of an expert, i.e., to enlighten the Court and to fulfill his mandate objectively, impartially and thoroughly.^[285]

[304]     First, in his first report, Mr. Zimbresteanu did not consult the Defence or all the exhibits and evidence in the Court file^[286].

[305]     As well, in his second report he did not consider the second day of Mr. Shinoff’s examination out of Court or the Defendants’ examination out of Court^[287].  In Section 1.2, he simply accepted Mr. Shinoff’s explanation of his objectives.  Accordingly, his description of Mr. Shinoff’s preservation of capital and income objectives, at the beginning, was not accurate^[288].

[306]     Second, although Mr. Zimbresteanu knew that the proceeds from the sale of the company were deposited in May 2006 in the 655 Inc. Account and that the purchases of many of the Preferreds were made in that account, his first report completely ignored that account, as well as all transactions made in any of the accounts between May and December 2006^[289].  It is limited to transactions in Mr. Shinoff’s Personal Account and the 701 Inc. accounts starting in December 2006, although the first transactions occurred in May 2006. 

[307]     Although he eventually produced a complementary expert report on August 29, 2012 that considers the 655 Inc. Account, it was only on May 18, 2016 that he finally produced a report that considers all the BMONB accounts from May 2006 to December 2008. At trial, Mr. Zimbresteanu did not offer any credible explanation as to why his first analysis ignored the first seven months of that history.

[308]     Third, Mr. Zimbresteanu’s conclusion that BMONB used account forms that were not compliant, because they did not contain a precise description of the client’s objectives, risk tolerance, and time horizon, is unfounded.

[309]     The evidence adduced through the Defendants’ experts and the IIROC rule, as well as a comparison with the account forms used by the other brokerage firms, establish the contrary.

[310]     At the time relevant to the present matter, namely 2006-2008, the BMONB account forms contained all required information.  Moreover, in reaching his conclusion on the BMONB account forms, the expert assumes^[290] that BSZ failed to complete the alleged deficiencies in the forms by discussing Mr. Shinoff’s objectives and risk tolerance with him.  Unfortunately, Mr. Zimbresteanu’s opinion is not based on the evidence adduced, but only on the incomplete and inexact information provided to him by Mr. Shinoff.

[311]     Fourth, Mr. Zimbresteanu did not succeed in convincing the Court that there was an excessive concentration of equity in the portfolio and an inappropriate diversification of asset classes because of an overly high concentration in the financial sector.  The Court prefers Mr. Perreault’s position on those issues^[291].

[312]     Mr. Zimbresteanu’s conclusions is based on a reclassification of some of the Preferreds into what BMONB designates as the “equity” category” which includes common shares, instead of into the “fixed income” category.  To do this, he reviewed the financial statements of the issuers of the Preferreds to examine whether the issue was retractable or not^[292].

[313]     However, Mr. Zimbresteanu could not provide any reliable explanation to justify reclassifying the Preferreds into the “equity” category, or that such a reclassification exercise was appropriate.  In fact, he was not even able to identify in a detailed manner which Preferreds he reclassified.

[314]     As such, this expert failed to establish the basis of his opinion^[293].

[315]     Moreover, the evidence shows that in the Canadian Securities Industry^[294] Preferreds either have their own category or are a sub-set of the fixed income category.^[295]  This is supported by one of Mr. Shinoff’s other expert, Mr. Hymas, whose report is based partly on Mr. Zimbresteanu’s conclusions^[296].  He considers Preferreds as being either part of the “fixed income” category or part of a distinct category.

[316]     Fifth, Mr. Zimbresteanu’s reference portfolio for evaluating damages is obviously made with the benefit of hindsight and without taking into account the actual situation faced by the parties at the relevant time.

[317]     As Defendants argued, Mr. Zimbresteanu’s analysis of the damages is not convincing.  As an example, Mr. Shinoff’s needs were analyzed by calculating the withdrawals from the accounts in retrospect.  The expert assumed that Mr. Shinoff’s investments had to generate an income of $700K^[297] pre-tax, which is $200k a year over what Mr. Shinoff claimed at trial that he needed and $300k under the $1M he told BSZ that he needed in June 2006.

[318]     Moreover, by starting his analysis in his first report in December 2006, he failed to consider both the gains made between May and December 2006 and the dividend income derived from his Preferreds over that period.  As said prior, at trial, he did not offer any credible explanation for that.

[319]     He assessed the damages based on the value of the securities in the BMONB portfolio as at December 2008.  This was, as confirmed by Mr. Hymas, the bottom of the market in the global financial crisis^[298].

[320]     In addition, he never dealt with the fact that in December 2008 Mr. Shinoff did not sell his Preferreds purchased at BMONB.  He transferred them to his Scotia McLeod accounts and sold them at a later date, after they, in fact, had recovered partially.  This biases his opinion.

[321]     Also, for the purpose of his damage evaluation, he created two sub-portfolios that respect neither Mr. Shinoff’s objectives, as described in the actual account forms, nor the ones this expert assumed for the purpose of his report.  As well, he never explained the percentages he attributed to each component of his sub-portfolios or the strategy behind his choices.

[322]     In fact, although he assumes that the preservation of capital was Mr. Shinoff’s main objective, even his own reference portfolio, to his admission, does not completely respect that.  It not only includes short-term money market instruments, such as bankers’ acceptances^[299], but it also includes fixed income instruments that are riskier but generated more income.

[323]     There is no need to elaborate further.  For all the above reasons, the Court cannot attribute any weight either to Mr. Zimbresteanu’s expert report or to his testimony. 

6.2.3.1.3      Mr. James Ian Hymas

i.       Mr. Hymas’s qualification

[324]     Plaintiffs relied heavily on the expert testimony of Mr. Hymas, seeking to have him qualified as an expert in 1) fixed income, 2) Preferreds, 3) portfolio construction and management.  While his expertise in Preferreds is not challenged, the Defendants contest the other two proposed fields.

[325]     The Court took their objection under reserve and will rule on it now.

[326]     Like Mr. Zimbresteanu, Mr. Hymas has a long and focused career path and this is also his first experience as an expert before a Court of law.  In addition to taking numerous specialized courses at the Canadian Securities Institute and the Institute of Chartered Financial Analysts, he has the following experience:

·           1984 - graduated from the University of Toronto with an Honours B.Sc. in Chemistry;

·           1985 to 1989 - assistant supervisor at Merrill Lynch Canada Inc. dealing with stock records, reorganization, Canada Savings Bonds and Mutual Funds;

·           1990 to 1992 - bookkeeping control administrator and financial accounting supervisor at Richardson Greensfields with responsibilities relating to banking, retail foreign exchange and Euroclear operations; 

·           1992 to 1999 - employee, then shareholder and chief operating officer at Greydanus, Boeckh & Associates Inc., a private investment counsel specializing in bonds, having responsibility for “all trading, portfolio management and investment analysis”.  While there, he developed a portfolio management software for bonds, Preferreds and common equity;

·           1995 - obtained his CFA Charter[300];

·           2000 - incorporated Hymas Investment Management Inc. as sole shareholder, CEO and sole employee, providing consultation and money management with a specialization in Preferreds;

·           2001 - created “Malachite Aggressive Preferred Fund” and developed a commercial quantitative Preferreds  analytical software tool;

·           November 2004 to March 2005 - vice-president, research & investment at Portus Alternative Asset Management, a “fund of funds” hedge-fund retailer that was investigated by the OSC for securities’ fraud and then collapsed, with its principals being convicted and jailed for matters that pre-dated his employment;

·           2005 to present - operating Hymas Management as well as a private mutual fund and segregated accounts.

[327]     Mr. Hymas has written a number of articles relating to Preferreds and, since 2007, publishes monthly newsletters called “Prefletter” dealing with Preferreds.  He has also given seminars on the topic and completed other courses[301].

[328]     In their contestation of his qualifications, the Defendants argue that Mr. Hymas:

·           has no experience advising retail clients in transactional accounts;

·           has never supervised any investment advisor acting as such;

·           has very limited experience with portfolio construction and management that is mostly focused on Preferreds only;

·           has never been registered with IDA or IIROC and never had to apply or comply with its rules.

[329]     Plaintiffs admit that Mr. Hymas has only managed discretionary accounts and not transactional accounts, wherein the client directs, or at least approves, the assets to be purchased.  They do not see this as having any impact on Mr. Hymas’s ability to provide an expert opinion in this file, since the fundamental principles of finance rules[302] are the same in both.  They add that Mr. Hymas has experience with retail clients.

[330]     They further assert that, in any event, the distinction based on the type of client, whether it be institutional or retail, has no impact on the ability to opine on the type of explanations a client should receive about a particular product and its response to market fluctuations.

[331]     In response to Defendants’ objection, the Court is of the view that Mr. Hymas’s studies, his previous CFA designation and his overall career experience demonstrate that his range of expertise goes well beyond that of the Preferreds alone.  Although he has never worked as an investment advisor to retail clients in connection with transactional accounts and has focused mostly on Preferreds, he clearly possesses special knowledge that gives him a degree of expertise not possessed by the average person or the Court, for that matter.

[332]     In fact, at Greydanus he did do junior portfolio construction and he later managed his own fund, Malachite Aggressive Preferred Fund, as well as eight to ten segregated discretionary accounts.

[333]     The fact that he has never been registered with the IDA or IIROC could have an impact on the probative value of his evidence, but it does not disqualify him from acting as an expert in the present case.  In that regard, the deficiencies raised by the Defendants concerning his experience go to weight and not to admissibility.

[334]     Accordingly, the Court will dismiss the objection and qualify him as an expert on matters relating to Preferreds, including management and portfolio construction, and fixed income.

[335]     As for the criticism that his reports contain legal opinions, even if that could be seen to be the case in some instances, he does not go so far as to usurp the Court’s role.  To opine on the portfolio recommendations, the sufficiency of the information provided, and the risks involved, while taking into consideration Mr. Shinoff’s knowledge, objectives and investor profile, it is necessary to analyse the factual elements of the case and comment on the Defendants’ arguments. 

[336]     This is not a bar to the admissibility of the reports.  The Court is able to disregard what might be opinions on questions of fact[303] and arrive at its own conclusions.

[337]     As for the probative value of his evidence, the Court will deal with that in the following section.

ii.      Mr. Hymas’s expert report

[338]     In his report, Mr. Hymas provided a lengthy, detailed and highly technical analysis of the typical contractual and investment characteristics of Preferreds that existed at the relevant period.

[339]     In reviewing the adequacy of the risks disclosed by BSZ, the expert evaluated Mr. Shinoff’s investment knowledge as reported in the client account forms.  Commenting on the Defendant’s argument with respect to Mr. Shinoff’s experience^[304], he writes:

From my review of the evidence and despite the Defendants’ claim to the contrary, I conclude that Mr. Shinoff is an unsophisticated investor who requires a thorough review of investment characteristics prior to making an informed decision and who will be inclined to follow the advice of a trusted advisor blindly.^[305]

[The Court’s emphasis]

[340]     It appears that Mr. Hymas considers the use of the investment terms by Mr. Shinoff in his emails as an indicator of investment ignorance rather than investment sophistication.

[341]     Mr. Hymas affirms that BSZ and Mr. Zukor “display a highly imperfect understanding of the relationship between the yield and the price as applicable to Preferreds”.  As such, he opines that Mr. Shinoff “was not adequately informed of the risk associated with the Preferreds because (BSZ) did not understand these risks herself”^[306].

[342]     After reviewing Mr. Shinoff’s objectives, Mr. Hymas created what he opines would have been a more suitable asset allocation for Mr. Shinoff, stating:

Given Mr. Shinoff’s extreme risk aversion, lack of sophistication and modest income requirements relative to the size of the permanent portfolio, I suggest that portfolio comprised primarily of short term corporative bonds is most suitable. ^[307]

[The Court’s emphasis]

[343]     While Mr. Hymas accepted the hypotheses used by Mr. Zimbresteanu^[308] for the purpose of creating a portfolio, he recommended a different composition of assets.  His conclusions with respect to the make-up of Mr. Shinoff’s portfolio at BMONB as of March 2007 are:

·           the approach to constructing Mr. Shinoff’s portfolio was negligent;

·           there was no plan prepared to put together a portfolio and there was an emphasis on yield with little regard to many types of risk;

·           Mr. Shinoff’s portfolio was unsuitable for his objectives;

·           the risk and characteristics related to the Preferreds were inadequately explained to him, as they were inadequately understood by BSZ.

[344]     Then, the expert explained in a detailed manner, after reviewing the transactions, why BSZ’s contention that she suggested to rebalance the portfolio in March 2007 is “implausible”[309].

[345]     Finally, Mr. Hymas reviewed the recommendations made following Mr. Shinoff’s August 1, 2007 email, and states:

It is very difficult to assess what a prudent and diligent investment advisor should have done following receipt of Mr. Shinoff’s eMails since a prudent and diligent investment advisor would never have arrived at this situation.  It should have been possible to refer to the investment plan - but as I concluded in the section “Analysis of Mr. Shinoff’s Portfolio at 2007-3-8” no adequate investment plan was ever prepared.

Had there been an investment plan prepared, and had Mr. Shinoff understood it and agreed to it, and had this notional investment plan been adhered to, then it would have been possible to refer to this plan and show how the preferred shares that were the subject of Mr. Shinoff’s complaint fit into the plan.  This would have either assisted Mr. Shinoff to accept the situation, or have led to amendments such that the plan would more closely reflect Mr. Shinoff’s investment goals.

However, having arrived at this situation, I believe that it was critical that Mrs. Zukor formulate a coherent investment plan and present it to Mr. Shinoff as a basis for discussion, amendment and approval.  This was not done and there is no evidence that suggest to me that such a step was contemplated.^[310]

[346]     In short, Mr. Hymas is of the view that Mr. Shinoff assumed a risk that was unnecessary in light of his return objectives.  He then presented the asset allocation that he feels would have been suitable for Mr. Shinoff’s investment objectives and constraints.

[347]     At the end of his report, Mr. Hymas proceeded with a detailed analysis of the Scotia McLeod accounts, comparing them with the BMONB accounts.  He writes:

As indicated by the trend in the type of preferred shares held, there was a determined and long-standing effort to rebalance the portfolio at Scotia McLeod to reduce Interest Rate Risk and concentration on the financial sector.  This effort necessarily led to the purchase of issues with a formally higher credit risk, but this is mitigated by the higher Recovery Given Default on the Split Share Issues and the greater diversification by sector in the portfolio.

In short, the portfolio at Scotia McLeod shows a willingness to accept a modest decline in credit quality in exchange for sharply reduced interest rate sensitivity and increased diversification relative to the portfolio at BMO-NB.  There was a significant increase in the degree to which capital preservation was pursued as an investment objective subsequent to the transfer to Scotia McLeod. ^[311]

[The Court’s emphasis]

[348]     At trial, Mr. Hymas testified at great length and his evidence is the perfect example of how distracting and time consuming expert testimony can become.  Although he offered a highly technical briefing of the characteristics of Preferreds, the weakness of his evidence became obvious during the course of cross-examination.

[349]     As previously mentioned, Mr. Hymas is specialized in Preferreds, a niche market, as he described it himself.  Clearly, he possesses an expertise on what he calls his “beloved preferred shares” that is superior to that possessed by most investment advisors^[312]. This said, as mentioned prior, his qualification in the portfolio construction and management field was vigorously contested by the Defendants.

[350]     Mr. Hymas’s portfolio construction and management experience at his one-man firm, Hymas Investment Management, is focused on Preferreds and is either in connection with his own fund, Aggressive Preferred Fund^[313], or with a small number of segregated accounts that he manages on a discretionary basis. In fact, his experience as an investment advisor is limited to dealing with sophisticated clients with managed accounts^[314].

[351]     Although the Court already concluded that Mr. Hymas is qualified to testify as an expert in portfolio management and construction and fixed income, his lack of experience in these fields can nevertheless be considered in the weight to be given to his opinion.

[352]     In the present matter, Defendants succeeded in convincing the Court of Mr. Hymas’s lack of rigor, seriousness and professionalism and that he failed to provide his evidence without bias.  Here are the reasons why.

[353]     As was the case for Mr. Zimbresteanu, Mr. Hymas admitted at trial that the exhibits and emails that he consulted were the ones provided to him by Plaintiffs’ counsel.  Even though these documents constitute only a small part of the evidence presented to the Court[315], he admitted that he did not review them in their entirety.^[316]

[354]     For example, despite being aware of Mr. Shinoff’s previous investment in private placements from his reading of the defence[317], he did not ask for a copy of the exhibit that would have shown the amount of said placements. At trial, he denies that such information could have had an effect on his appreciation of Mr. Shinoff’s risk tolerance.

[355]     When cross-examined on these speculative investments, he added that it does not alter his opinion, since this only shows that Mr. Shinoff is not “doctrinaire or compulsive about his risk aversion”. He even said that “I regard such things [speculative investments] as being in the nature of just letting off a little steam”.

[356]     Also, it was only at trial that he learned that the “reward for an old associate” was in excess of $5M.

[357]     In his report, Mr. Hymas reviewed the BMONB client account documentation to evaluate Mr. Shinoff’s investment knowledge but never noticed that Mr. Shinoff affirmed both in his discovery and at trial that he did not really pay attention to the client account forms.

[358]     As well, he never compared Mr. Shinoff’s annotations in the 701 Inc. account forms^[318] to the information in the other brokerage firms’ client account documentation^[319] or to the executed client account form for the of 701 Inc. account with BMONB.

[359]     Moreover, the fact that he refused to consider the investment terms used by Mr. Shinoff as an indication of a certain level of investment acumen appears to the Court to reflect bias in his opinion.  While it is true that Mr. Shinoff’s use of such terminology does not necessarily establish that he is particularly sophisticated, it certainly shows that he has some experience and ability in the area. 

 

[360]     In addition, his refusal in this regard comes in spite of his admission at trial that Mr. Shinoff had some previous experience with Preferreds^[320], that he was familiar with the different investment products available, that he was aware of the cumulative attributes of some Preferreds, that he was familiar with quotations of bankers’ acceptances in the financial press and that he can read a brokerage statement.

[361]     In the same manner, his refusal to admit that Mr. Shinoff’s decision to invest up to $8M in an equity-based portfolio with Bruce Kent[321] could have an impact on his assessment of Mr. Shinoff’s risk tolerance is simply not convincing[322].

[362]     Mr. Hymas admitted that March 2007 was the high point of the Canadian Preferreds market and the date at which it started to decline, with 2008 being the worst year for Preferreds since 1993^[323]. He also acknowledged that the end of 2008 marked the worst part of the financial crisis^[324], as he recognized, the recovery of the Preferreds began in 2010.

[363]     Yet, he started his account analysis as of March 2007, and his comparative analysis of the performance of BMONB’s portfolio^[325] covers only the period of June 2007 to December 2008.  Like Mr. Zimbresteanu, he chose not to consider the positive returns for the earlier period.

[364]     In the same manner, when addressing Mr. Shinoff’s investments, he used the period of September 30, 2008, to November 28, 2008, as a comparator of Preferreds with other asset classes[326] but fails to mention that this was the worst period for Preferreds[327].

[365]     When comparing BMONB’s accounts to the Scotia McLeod accounts, he fails to mention that the new fixed reset issues bought by Mr. Shinoff at Scotia McLeod did not exist when BSZ constructed Mr. Shinoff’s portfolio.

[366]     Mr. Hymas also admitted at trial that, when analyzing the Scotia McLeod accounts, he failed to review the US component of same, which is why he erroneously affirmed that Mr. Shinoff did not purchase Preferreds at Scotia McLeod^[328].

[367]     Moreover, in chief, he explained that, in an effort to rebalance Mr. Shinoff’s portfolio at Scotia McLeod, there was a “drop” in the Preferreds, but recognized that in order to reduce interest rate sensitivity and increase diversification, there had been a “modest” decline in their credit quality. He, however, had to admit in cross-examination, that it took 9 to 14 months for Mr. Shinoff to start selling Preferreds and that the decline in the credit quality could be qualified as being more “significant” than “modest”, which makes it all the more difficult to adhere to Mr. Shinoff’s version that he is totally risk-averse.

[368]     But there is more.  In the Court’s view, what is highly questionable is the fact that, although very proud of his publications and the newsletter that he writes about Preferreds, Mr. Hymas did not deem appropriate to refer to his contemporary writings^[329].  These publications, however, tend to weaken the position he adopted in support of Mr. Shinoff’s claim and cast a pall over the reliability and credibility of his report.

[369]     When cross-examined on certain of his writings that are either not helpful to Mr. Shinoff’s case or tend to support BSZ’s recommendations to Mr. Shinoff, Mr. Hymas tried to distance himself from them.  It is with reason that the Defendants argue that this is a clear demonstration of his bias in favour of Mr. Shinoff’s position.

[370]     Suffice it to say that the sampling of contradictions provided by Defendants in their Outline of arguments^[330] provides eloquent confirmation that Mr. Hymas failed to fulfill his mission objectively, impartially and thoroughly.^[331]

[371]     Without summarizing all the contradictions noticed during the course of his testimony, the most striking examples are:

·           Mr. Hymas testified that there is a debate on whether preferred shares can be qualified as fixed income.  He used this as an excuse not to contradict or criticize Mr. Zimbresteanu’s reclassification exercise of some Preferreds as “equity”^[332] .

In doing so, he decided to ignore his own statements of January 2009.  In the column of Ellen Roseman in The Value of Financial Advisors^[333], when he addressed the specific question of whether preferred shares can qualify as “fixed income”, he answered:

“(...) As far as calling them ‘fixed income’ is concerned, I’m not sure what else one might call them.”

·          Although Mr. Hymas recognizes that Preferreds are a wonderful addition to a portfolio because of the tax advantages of Canadian Preferreds with a dividend income, he affirmed that Mr. Shinoff should not have had 50% of his fixed income portfolio in Preferreds, and even stated that he should have had none.  Again, he chose not to mention that in the column of Ellen Roseman^[334] he previously answered a specific question on the maximum percentage of a fixed income portion of a portfolio that should be in Preferreds as follows:

“(...) my rule of thumb is that no more than 50% of the total fixed income portion of a portfolio should be in preferred shares.”

When confronted with this at trial, he attempted to sidestep it, replying that this reasoning only applied to sophisticated investors and not to someone like Mr. Shinoff.

·          Mr. Hymas insisted in the 2006-2008 period on the importance of credit ratings^[335]. However, in his report and at trial he tried to distinguish the credit rating from the credit quality.  It appears obvious that he wanted to minimize the fact that the credit quality of Mr. Shinoff’s portfolio declined after he moved to Scotia McLeod^[336].

·          Both in 2008 and 2009, despite the poor performance of Preferreds, Mr. Hymas was giving the readers similar advice as the one given by the Defendants in the same period, but he chose not to mention it to the Court. As examples:

§  In January 2008, Mr. Hymas wrote:

Two thousand seven was not a good year for preferred shares and I have received many inquiries asking me to unveil my crystal ball, sacrifice a few chickens and make predictions as to when the pain will stop.^[337]

Investors should maintain an insouciant attitude to the vagaries of the market place and leave market timing to speculators.  Preferred shares, with their unique risk/reward profile, are suitable for inclusion, to a greater or lesser extent, in a majority of taxable fixed-income accounts. Check to see whether your taxable fixed-income portfolio is among the majority and don’t put all your eggs in one basket.^[338]

§  Then, and in an article published by the Globe and Mail on Preferreds in the same period, in reference to Mr. Hymas’s opinion, the author writes:

“The banks are the bluest of the blue chips, even CIBC”, Mr. Hymas said. “CIBC has been hit hard lately, but on a global basis they’re still extremely strong”.

If you buy preferred shares now, you have to be prepared for further price declines.  The correct response if this happens?  “You ignore it”, Mr. Hymas said. You’re buying these shares for the income stream.^[339]

[The Court’s emphasis]

§  Again, in January 2009, Mr. Hymas writes in the column of Ellen Roseman:

I’ve been receiving queries like this for the past year - interestingly, most of these have been from brokers asking me what to tell their clients.

In the case of, for instance, bank perpetuals^[340], I tell them to tell their clients: “ Hey - you bought the things for a (say) $1.15 p.a. dividend; they continue to pay a $1.15 p.a. dividend, there is no current indication they will ever fail to pay a $1.15 p.a. dividend… shut up and clip your coupons. ^[341]

[The Court’s emphasis]

[372]     There is no need to elaborate further as, aside from his detailed expertise on the characteristics of the different Preferreds, the Court does not give any weight to Mr. Hymas’s opinion and will set aside his expert report.

[373]     In support of their arguments, the Defendants produced expert Perreault’s report.

6.2.3.1.4      Mr. Sylvain Perreault

i.       Mr. Perreault’s qualification

[374]     Defendants seek to have Mr. Perreault recognized as an expert in “commerce des valeurs mobilières”, “produits financiers” and “conformité”, which we translate as “securities trading”, “financial products” and “compliance”.  While Plaintiffs recognize Mr. Perreault’s expertise in compliance, they are opposed to his qualification as an expert in securities trading and financial products and asks the Court to strike the sections of his report dealing with:

·           the analysis of the accounts of Mr. Shinoff, of 655 Inc. and of 701 Inc.^[342];

·           the analysis of the transactions that occurred at TD Waterhouse Inc., RBCDS and Scotia McLeod^[343];

·           the report of Finance Risk Expert^[344].

[375]     The Court took his objection under reserve and will rule on it now.

[376]     Mr. Perreault is currently the Chief of Compliance at Mouvement Desjardins, and this since 2011.  He obtained his law degree in 1983 and in 1993, he graduated from McGill in Management. He has both taken numerous courses related to corporate finance and securities law and worked in related areas for major companies: the Montreal Stock Exchange, PriceWaterhouseCoopers, Groupe Jitney Inc. and Valeur Mobilières Desjardins. 

[377]     He has been recognized as an expert by courts in financial instruments and compliance and as an expert by securities commissions in Quebec, Canada and abroad many times over the last 20 years.  Throughout those years, he has been registered with the Commission des valeurs mobilières du Québec, the Investment Dealers Association, IIROC, the Autorité des marchés financiers and the Office of the Superintendant of Financial Institutions.

[378]     Here, although the Plaintiffs opposed the qualification of Mr. Perreault during the voir dire, in their written arguments, they make almost no representations on the objection taken under reserve^[345].

[379]     This said, there is no need to elaborate further.  The Court is of the view that Mr. Perreault has the requisite experience and expertise not only in compliance but also in security trading and financial products, that his expertise is relevant to the issues at hand and that he can be of assistance to the Court when examining those issues.

[380]     The Plaintiffs also asked the Court to strike paragraphs 14 to 19, 69, 79, 129, 164, 175, 180, 183, 187 and 188 of his report on the basis that they express a legal opinion.  It is true that his report contains comments that could be seen as usurping the Court’s role but it appears to us that his analysis is based solely on the financial industry’s standards and not on applicable legal rules.  His occasional use of legal terms, his comments on the proof or his conclusions on his own apprecitation of it does not bar the admissibility of the report. On that basis, there is no need to strike any portion of his report.

ii.      Mr. Perreault’s expert report

[381]      Mr. Perreault’s expert report is dated March 8, 2012.

[382]     Contrary to Plaintiffs’ experts, to fulfill his mandate to express an opinion on BMONB and BSZ’s professional conduct, Mr. Perreault proceeded with a thorough review of all the exhibits, procedures and expert reports produced in the Court file.

[383]     In his report, he starts by outlining the general ethical principles that govern the securities industry in Canada^[346] and explains the difference between portfolio management^[347] and discretionary management.^[348]  As noted above, in a managed account, the portfolio manager makes the investment decisions on behalf of the clients, whereas the investment advisor does not have discretionary powers in a non-managed account, like those of Mr. Shinoff at BMONB.

[384]     Mr. Perreault states that, contrary to what Plaintiffs’ experts indicate, in a non-discretionary account there is no regulatory requirement to document an investment strategy in the client’s file.

[385]     Taking into account Mr. Shinoff’s investment profile, knowledge, experience, professional relationship with BSZ throughout the years and his objectives, as stated in the different client account agreements for all his accounts^[349], he opines that the transactions were made according to Mr. Shinoff’s instructions and, with a few exceptions, were consistent with his investment objectives.

[386]     He concludes that there was no misconduct by the Defendants in the execution of the instructions received from Mr. Shinoff.

[387]     With respect to account monitoring, Mr. Perreault examined the quality of the monitoring performed by BMONB and Ms. Kristiane Béland, the BMONB branch manager and BSZ’s supervisor^[350], during the events at issue.  He concludes that the monitoring of Mr. Shinoff’s account by BMO and Béland was adequate and thorough^[351].

[388]     Mr. Perreault also performed a detailed analysis of the accounts held with BMONB by Mr. Shinoff, 655 Inc. and 701 Inc. and concludes that the overall makeup of Mr. Shinoff’s portfolio was always consistent with the investment objectives as stated in the account opening forms. He also performed the same analysis for the accounts held by Mr. Shinoff with TD Waterhouse, RBCDS and Scotia McLeod at the time of, or subsequent to, the events at issue.

[389]     In his tables, he summarizes the makeup of the portfolios held with each of the these brokerage firms and, more precisely, the holdings of Preferreds in these accounts, with percentages ranging from 16% to 19%^[352] with TD Waterhouse and from 17% to 36% with Scotia McLeod^[353].  He observed that these accounts had a similar portfolio makeup to the one with BMONB.

[390]     With respect to the RBCDS managed accounts, since the strategy selected was growth, they included almost no Preferreds, and the percentage of common equity ranged from 13 % to 95 %.  This involved higher risks.

[391]    He notes that BMONB and Scotia McLeod had a similar weight in Preferreds, but that the credit quality of the Preferreds in the Scotia McLeod accounts decreased.

[392]    Then, Mr. Perreault describes the characteristics of Preferreds and explains that Preferreds are considered as fixed income by the Canadian Securities Industry.

[393]    Also, Mr. Perreault comments in great detail on Mr. Zimbresteanu’s expert report.

[394]     As the Court mentioned when analyzing the weight to be given to Mr. Zimbresteanu’s expert report, Mr. Perreault’s notes on the omissions and inaccuracies found in said analysis[354] are quite convincing.

[395]     At trial, Mr. Perreault added that Mr. Shinoff’s knowledge can be qualified as “fair to good”. As opposed to Mr. Hymas, he opines that the language used by Mr. Shinoff in his exchanges with the Defendants shows that he has a greater investment knowledge than what he admits and he is not as risk-averse as he describes himself.

[396]     Mr. Perreault also explained that when securities are of a high quality, such as those in Mr. Shinoff’s portfolio, Preferreds and common shares are not automatically by nature unsuitable to a low risk client.

[397]     In summary, Mr. Perreault opined that:

·           BSZ followed the cardinal know-your-client rule, as she understood Mr. Shinoff’s financial situation, investment objectives and investment knowledge;

·           The investment strategy was suitable;

·           The investment objectives selected by Mr. Shinoff in the account opening documents were generally complied with and there was no fault by the Defendants;

·           The monitoring of Mr. Shinoff’s accounts by BMONB and its branch manager was adequate and complied with securities industry rules;

·           Mr. Shinoff accepted the risk of loss related to his investment decisions. 

[398]     Contrary to Plaintiffs’ experts, he made a lengthy and detailed review of all the evidence given to him prior to writing his report and then reviewed in the same manner the evidence adduced at trial.

[399]     In the Court’s view, his opinion is based on an objective analysis of the case and the information provided to the Court with respect to BNONB’s conduct and Mr. Shinoff’s portfolio and was useful.  His analysis is serious and his conclusions are convincing.

[400]     Mr. Perreault testified in a very credible manner and convinced the Court that the opinion of Plaintiffs’ experts should be set aside.  For these reasons, the Court will accept Mr. Perreault’s opinion that the investment strategy was suitable and that Mr. Shinoff’s objectives were generally complied with.

6.2.3.1.5      Mr. Michael Horgan

i.       Mr. Horgan’s qualification

[401]     Defendants seek to have Mr. Horgan recognized as an expert in securities trading and compliance.  The Plaintiffs argue that securities trading is too broad for his actual expertise and wants him recognized as an expert only on portfolio profit and loss analysis.

[402]     The Court took their objection under reserve and will rule on it now.

[403]     Mr. Horgan has acted as an independent consultant since 1995 and has been accepted as an expert on investment industry standards, suitability, and account supervision by courts in British Columbia, Ontario and Quebec.  He has also been named as an expert on the subject of market manipulation by the Alberta Securities Commission and as an expert in connection with the Arbitration Program of the Investment Dealers Association of Canada. 

[404]     Mr. Horgan was employed by RBC Dominion Securities/Pitfield MacKay Ross from 1963 to 1995, where he held various functions, such as Director of Compliance, and member of the Private Client Division. Mr. Horgan was also a Founding member of the Joint Industry Committee Compliance Group and chairman of various sub-committees including industry standards and discretionary trading.

[405]     A list of his clients and assignments, as well as his business experience, education, and specific accomplishments are enumerated within his CV attached to his expertise report[355].

[406]     Mr. Horgan clearly has extensive knowledge and experience relevant to the issues at hand and can be of assistance to the Court when examining those issues, including securities, trading and compliance[356]. 

[407]    At trial, the parties were invited to fully argue the issues relating to the qualification of the experts during their final arguments, but the Court notes that although Plaintiffs debated Mr. Horgan’s qualifications in Court, they did not address this expert in their Notes and Authorities.

[408]    Hence, the Court dismisses the objection.

ii.      Mr. Horgan’s expert report

[409]    Mr. Horgan conducted a profit and loss analysis of Mr. Shinoff’s complete portfolio at BMONB for two different periods: as at August 1, 2007, and as at the end dates of his different accounts with BMONB. His expert report is comprehensible and serious. This said, his conclusion will be discussed further in the damages section of the present judgment.

6.2.3.2       Conclusions as to the suitability of the investment recommendations

[410]     It is true that the evidence shows that the portfolio may have been a bit riskier than need be at times.  For example, the fact that Preferreds represented some 33% of the total value of the portfolio on occasion[357] does not seem to totally correspond to Mr. Shinoff’s objectives.  Nevertheless, there is no evidence that the Defendants breached their duty to provide suitable recommendations.

[411]     Mr. Shinoff had the burden to establish on the balance of probabilities that the investment recommendations were not suitable in light of his investment objectives.  This he failed to do, in that:

·           He did not establish to the satisfaction of the Court that he communicated his investment objectives and risk tolerance in a clear and consistent way to BSZ over the relevant period;

·           His experts did not present credible and reliable opinions to establish that the transactions recommended by BMONB were not suitable in light of his objectives.

[412]     As a result, Mr. Shinoff fails to convince the Court that the recommended trades were unsuitable.

6.2.4      The duty to monitor 

[413]    Mr. Shinoff also pleads that BMONB breached its obligation to monitor.  He affirms that the compliance department had been informed that his objective of preserving his capital had not been met.  He says that he specifically expressed his dissatisfaction in his first letter of complaint^[358] and requested to be put back in the position where he would have been had the appropriate investments been recommended to him. 

[414]    He points out that even Ms. Béland, in her examination out of Court, admitted that following his complaint, BMONB failed to take any action to ensure:

·           that his portfolio would be rebalanced;

·           that the investments in his different accounts would be suitable;

·           that an update of his accounts was properly done.^[359]

[415]     On this, the proof established that, after his first complain, upon learning that no guarantee on his investment would and could be offered by BMONB, Mr. Shinoff instructed BMONB not to pursue its investigation.  Before it could take action, BMONB had to complete an investigation.  If there was no complaint to investigate and, thus, no investigation, how can he blame BMONB for not taking any action?

[416]     Between the first and second complaints, Mr. Shinoff was in constant communication with BSZ and her team.  The proof showed that he received the appropriate information related to the recommended trades.  He knew as a result by then that the recommended securities were viewed as long-term holdings in order for him to obtain regular income payments.

[417]     He also knew that he could liquidate any of his holdings, and more particularly his Preferreds, at any time.  In spite of the rising interest rates, he chose not to do so and he cannot blame BMONB for that. 

[418]     With respect to the second letter of complaint^[360], Mr. Shinoff asserts that the investigation by BMONB’s compliance department was not serious.  He points out that Cara Hayes’ answer on July 11, 2008^[361] contained some inaccurate information.  For example, she refers to different withdrawals made from his account totalling almost $20M when, in reality, he only withdrew a little over $13M^[362].

[419]     Although Ms. Hayes’s letter does contain certain inaccuracies, it nevertheless addressed Mr. Shinoff’s concerns about Preferreds and his claim that BSZ failed to inform him about their sensitivity to changes in the interest rate, along with his complaints about the commissions charged.

[420]     Contrary to what Mr. Shinoff asserts, the Court is of the view that BMONB’s compliance department addressed Mr. Shinoff’s second complaint adequately and promptly.  His complaint is dated June 30, 2008, was sent to BSZ on July 7, 2008, and Ms. Hayes responded on July 11, providing him with a full and reasonable explanation of BMONB’s actions and position.  There is no fault to be found there.

[421]     Finally, if Mr. Shinoff was unhappy with BMONB’s answer, and if he felt that it did not resolve the concerns he raised in his second complaint, one can only wonder why he chose to open two new accounts for 701 Inc. at BMONB only a few days thereafter.

[422]     Based on Mr. Perreault’s expert report[363] and on the evidence, the Court concludes that the Defendants fulfilled their duty to monitor.

7.           causal connection

[423]    In view of the said conclusion, the Court will only address the question of the causal connection and the damages briefly.

[424]     Defendants plead that, in any event, Plaintiffs’ action should be dismissed because of the absence of any causal relationship between the alleged fault and the damages claimed.  For them, the damages supposedly suffered were caused by Mr. Shinoff’s own decision to purchase and hold onto the Preferreds, combined with the significant market downturn that affected the performance of his portfolio.

[425]     Mr. Shinoff explains that he is not faulting Defendants for the decline in the markets in 2008 but, rather, for advising him and his holding company to assume a risk that was not suitable.  In his view, this is the cause of his damages.  

[426]     As for Defendants’ assertion that he is the author of his own misfortune, he asserts that he acted in a manner that a reasonable, prudent and diligent investor faced with similar circumstances would have acted^[364].  When he realized the risk related to the purchase of Preferreds, he was faced with the options of either:

1.      selling the Preferreds and taking the loss; or

2.      holding onto them in the hope that they would go back up in value; or,

3.      transferring the account to another manager.

[427]     He affirms that he chose to hold on to his Preferreds because of the assurances given by the Defendants, whom he still trusted.  Accordingly, after his first complaint, he continued to follow BSZ’s advice and accepted her recommendation to keep his Preferreds.  He adds that he had no other choice in light of the complexity of his situation and the lack of clear advice about the appropriate action to be taken.

[428]     The Court does not agree.

[429]     Mr. Shinoff expressed his dissatisfaction for the first time on August 1, 2007, although he filed no formal complaint at that time.  At that moment, however, the preponderant evidence shows that he had suffered no loss.  That changed during the fall of 2007 when the value of his accounts decreased continually, and he raised his concerns on numerous occasions.

[430]     On November 6, 2007, he sent his first formal letter of complaint, and in January 2008, he expressed his disappointment with how the complaint had been handled by the compliance department.

[431]     The proof thus shows that, as of August 2007, the relationship of trust that had existed for a number of years between him and BSZ had started to erode.  However, by that time, Mr. Shinoff was able to appreciate the risks related to his investments to the point of challenging the recommendations made and refusing to follow them. 

[432]     Moreover, in 2006-2007, BSZ and her son explained to him at great length the characteristics and the risks associated with his Preferreds and, later on, with fixed resets^[365] . When Mr. Shinoff stated that he was all about capital preservation, Mr. Zukor offered to sell his equities and Preferreds, but not only did Mr. Shinoff choose to not follow his recommendation, but he also decided to purchase additional Preferreds.

[433]     In July 2008, after his second complaint letter and the unfavourable response from the compliance department, he opened two new accounts for 701 Inc. at BMONB.  There, he indicated “income” as the investment objective, so as to allow him to keep his equities^[366].  This behavior does not support his assertion that he acted as a reasonable, prudent and diligent risk-averse investor for whom preservation of capital was paramount.  His contention that he had no risk tolerance at that time and no investment knowledge is simply unbelievable.

[434]     In 2006, BSZ might not, strictly speaking, have quantified the risks related to Preferreds but, as opposed to the facts in the case law submitted by the Plaintiffs^[367], in 2007 and 2008, when he decided to keep his Preferreds, Mr. Shinoff was clearly aware of the risks.  Hence, any loss he might have suffered was not caused by anything BSZ might have done or not done but, rather, by his choice to assume the risk related to holding such securities.

[435]     Accordingly, Plaintiffs failed to show a causal link between any alleged fault and any damage that they might have suffered.

8.           DAMAGES

[436]     Financial losses are often assessed by comparing the portfolio held by a plaintiff with the market value of a benchmark portfolio that is consistent with his investor profile and objectives^[368]. The plaintiff has the burden of identifying such a reference portfolio and showing that it would have generated a better outcome than the one he held^[369].  His damages would be the difference between the two results.

[437]     As discussed above, Mr. Zimbresteanu’s reference portfolio, showing losses in the range of $5.5M[370], suffers a number of serious deficiencies.  Among other things, it does not take into account Mr. Shinoff’s real objectives^[371], nor even the ones Mr. Zimbresteanu himself assumed for the purposes of his report^[372]. 

[438]     Moreover, he assessed the value of the securities in the BMONB portfolios as at December 2008, omitting to consider their performance between May and December 2006 and their increase in value and the revenue generated until they were sold in 2009 and 2010.

[439]     Neither his report nor the one submitted by Mr. Hymas is reliable and the Court has rejected them.  Consequently, the Plaintiffs failed to prove that it was possible to comply with Mr. Shinoff’s profile and objectives and not incur the loss he alleges to have suffered, or even the one calculated by Defendants’ expert, which we will discuss below.

[440]     For his part, Mr. Horgan conducted a profit and loss analysis of Mr. Shinoff’s complete portfolio at BMONB for two different periods, namely as at August 1, 2007, and as at the end dates of his different accounts with BMONB^[373]. For the first period, he concluded that the accounts had suffered no loss but, rather, a gain of $167,607.  For the second period, he opined that at the end date of the accounts, the Plaintiffs had suffered a loss attributable to factors other than commissions and fees, of $1,358,303^[374].

[441]     Since Mr. Horgan’s expert report is credible, had the Plaintiffs proven a causal fault on the part of the Defendants, the Court would have adopted his conclusions.

[442]     This said, as mentioned prior, Mr. Shinoff kept his Preferreds when he transferred his accounts to Scotia McLeod. No expert considered the value of the Preferreds at the time they were in fact sold, nor did they calculate the dividend income generated by the securities after their transfer. As such, the value of the Preferreds’ recovery has not been considered in the determination of the Plaintiffs’ damages.

[443]     As the evidence demonstrates, many Preferreds began their recovery in early 2009 and are now offering better returns than when they were initially issued[375]. Also, while some had recovered a significant portion of their capital value, others have fully recovered, as confirmed by Mr. Hymas.

[444]      Consequently, the loss evaluated at the closing of the BMONB accounts does not reflect the Plaintiffs’ actual damages.

[445]     The Court is thus of the view that there is no proof on the real crystallized loss.

9.           conclusions

[446]     Despite the professionalism of Mr. Shinoff’s attorneys and their remarkable effort to establish that BSZ pushed an unnecessarily hazardous strategy, the Plaintiffs did not meet their burden of proving that the composition of the portfolio and the strategy developed by BSZ were not respectful of their objectives and constraints in light of their risk tolerance.

[447]     As said prior, Mr. Shinoff’s experts failed to present credible arguments and reliable proof that BSZ’s general strategy and recommended trades were inadequate or faulty.  Mr. Shinoff’s testimony was not sufficiently convincing to fill that void.

[448]     The Court cannot accept Mr. Shinoff’s assertions and his experts’ theories that, since he was completely risk-averse, he would have been satisfied with the purchase of only safe instruments like bankers’ acceptances.  His allegation that he followed BSZ’s investment recommendations blindly, as he had no investment acumen, is simply not supported by the evidence. 

[449]     Mr. Shinoff clearly had a certain comfort level with the Preferreds and appreciated the dividend income derived from them, in that:

·           He had knowledge of and agreed to all trades made in his accounts, and he understood that there was at least some risk related to the Preferreds;

·           Following his first complaint, he chose to keep his Preferreds and even to add more in the account of 655 Inc., whereas, by then, he was certainly aware of the extent of the interest rate sensitivity of such securities;

·           After his second complaint, he again chose to hold on to his Preferreds  when he opened two new accounts;

·           In the same manner, after transferring his assets to Scotia McLeod in December 2008, he held on to his Preferreds from BMONB for a time, and even added more with a lower credit rating.

[450]     Mr. Shinoff appears to be very intelligent and a good businessman, with a strong educational background.  He does not take investment decisions lightly.  He followed his investments closely, showing a constant desire to be informed about all relevant details related to transactions in his accounts.  

[451]     He was obviously not as knowledgeable as an investment advisor, but he was far from being the “yes man” that he tried to portray himself to be.  He asked many questions, criticized his advisors and refused to follow certain recommendations.  During 2008, he was in constant contact with Mr. Zukor, asking many questions relating to proposed transactions and even using his BMO gateway platform that allowed him to follow his trades on a regular basis.

[452]     There is no doubt in the Court’s mind that Mr. Shinoff was able to understand the nature and the consequences of the transactions he chose to make, including his decision to purchase additional Preferreds even after his second complaint.  The fact that he tried to present himself as having no investment acumen discredits his version of the facts and, as already noted, undermines his credibility.

[453]     The Court notes that 701 Inc. is a Plaintiff in the present case, but not 655 Inc., the company that received the proceeds of the sale of Rent-A-Tool in May 2006.  The Court does not see how 701 Inc. can complain about the unsuitability of the strategy implemented in 2006 and 2007 when its accounts with the Defendants were only opened in July 2008, after the second complaint.

[454]     In turn, the Defendants have established, as mentioned, that they did not breach their duty to know the client, to inform and to advise and to provide suitable recommendations in light of Mr. Shinoff’s objectives and risk tolerance, as they were described by Mr. Shinoff, nor their duty to monitor.

[455]    For all the above reasons, the Court concludes that Mr. Shinoff and 701 Inc. did not meet their burden of proof.  They failed to establish that the Defendants committed any of the faults alleged.

[456]    Moreover, they failed to establish that they suffered damages that related directly to the alleged fault.

For theSE reasons, the Court:

[457]     DISMISSES Plaintiffs’ Motion Introductive of Suit;

[458]     THE WHOLE with legal costs, including the experts’ fees.

	__________________________________ FRANCE DULUDE, J.S.C.

Me Serge Létourneau

Me Mihnea Bantoiu

Me Myriam Roussel

Létourneau Gagné Avocats

Attorneys for the Plaintiffs

 

Me Sophie Melchers

Me François-David Paré

Norton Rose Fulbright

Attorneys for the Defendants

TABLE OF CONTENTS

1.   INTRODUCTION AND ISSUES............................................................................................... 1

2.   FACTUAL BACKGROUND....................................................................................................... 2

3.   PARTIES’ POSITION................................................................................................................ 6

3.1     The Plaintiffs...................................................................................................................... 6

3.2     The Defendants................................................................................................................. 7

4.   GOVERNING LAW.................................................................................................................... 8

4.1     General principles............................................................................................................. 8

4.2     Liability of the brokerage firm.......................................................................................... 11

5.   MANDATE GIVEN TO THE DEFENDANTS.......................................................................... 11

5.1     Mr. Shinoff’s accounts..................................................................................................... 11

5.1.1     BMONB................................................................................................................. 12

5.1.2     TD Waterhouse.................................................................................................... 15

5.1.3     RBCDS................................................................................................................. 16

5.1.4     Scotia McLeod...................................................................................................... 18

5.2     Mr. Shinoff’s investment knowledge and experience...................................................... 19

5.3     Mr. Shinoff’s risk tolerance.............................................................................................. 21

5.4     Mr. Shinoff’s instructions when investing the proceeds of the sale................................ 21

5.5     Mr. Shinoff’s future financial obligations and projects..................................................... 23

5.5.1     The taxes, the new house and the future business.............................................. 23

5.5.2     The disposable income........................................................................................ 23

5.5.3     The money to other investment advisors.............................................................. 25

5.5.4     The payment to Frank Heller................................................................................ 25

5.6     Mr. Shinoff’s objectives................................................................................................... 25

6.   FAULT...................................................................................................................................... 27

6.1     Discussion...................................................................................................................... 27

6.1.1     The determination of Mr. Shinoff’s objectives and constraints surrounding
the early investments of 655 Inc. and construction of a portfolio.......................... 27

6.1.2     The development of a strategy and the portfolio as of March 8, 2007................. 30

6.1.3     The portfolio following the transfer to Bruce Kent................................................. 33

6.1.4     The August 1, 2007 exchanges and the recommendations that followed............. 34

6.1.5     The first complaint and the monitoring of Mr. Shinoff’s accounts thereafter......... 37

6.1.6     The second complaint and the monitoring of the accounts thereafter.................. 44

6.1.7     The IIROC’s involvement and the CFA Institute investigation............................... 48

6.2     Analysis........................................................................................................................... 49

6.2.1     The duty to know-your-client................................................................................ 49

6.2.2     The duty to inform and to advise.......................................................................... 49

6.2.3     The duty to provide investment recommendations that correspond
to the client’s investment objectives..................................................................... 51

6.2.3.1     The experts............................................................................................ 52

6.2.3.1.1       The governing law on the qualification of experts................ 52

6.2.3.1.2       Mr. Catalin Zimbresteanu.................................................... 54

                                                                                i.   Mr. Zimbresteanu’s qualification..................................... 54

                                                                                ii.   Mr. Zimbresteanu’s expert report.................................... 56

6.2.3.1.3       Mr. James Ian Hymas........................................................... 61

                                                                                i.    Mr. Hymas’s qualification................................................ 61

                                                                               ii.   Mr. Hymas’s expert report............................................... 64

6.2.3.1.4       Mr. Sylvain Perreault........................................................... 71

                                                                                i.    Mr. Perreault’s qualification............................................ 71

                                                                               ii.   Mr. Perreault’s expert report........................................... 73

6.2.3.1.5       Mr. Michael Horgan............................................................. 75

                                                                                i.    Mr. Horgan’s qualification............................................... 75

                                                                               ii.   Mr. Horgan’s expert report.............................................. 76

6.2.3.2     Conclusions as to the suitability of the investment recommendations.... 76

6.2.4     The duty to monitor.............................................................................................. 77

7.   CAUSAL CONNECTION......................................................................................................... 78

8.   DAMAGES................................................................................................................................ 80

9.   CONCLUSIONS...................................................................................................................... 81

TABLE OF CONTENTS.............................................................................................................. 84