



COURT OF APPEAL FOR ONTARIO

CITATION:
Straus
    Estate v. Decaire, 2012 ONCA 918

DATE: 20121224

DOCKET: C53471

Goudge, Simmons and Gillese JJ.A.

BETWEEN

Estate of Joseph Straus by its Executor, Angela
    Straus and Angela Straus

Plaintiffs (Respondents)

and

Roy Decaire, RCB Investors Choice Inc., IPC
    Investment Corporation,
FundEX Investments Inc.
,
    Pacific International Securities Inc., Orion Securities Inc., Spectrum Meditech
    Inc., IRG Services Ltd., Cyclone Investments Inc., Northgate Holdings Inc.,
    Millenium Medical Supply Inc., Millenium Medical Supply Corp., Kelly Fielder,
    Richard Savage and Nicola More

Defendants (
Appellant
)

Ross F. Earnshaw, for the appellant FundEX Investments
    Inc.

Gary L. Petker, for the respondents

Heard: September 19, 2012

On appeal from the judgment of Justice David S. Crane of
    the Superior Court of Justice, dated February 18, 2011, with reasons reported
    at 2011 ONSC 1157.

Gillese
    J.A.:


OVERVIEW

[1]

Joseph Straus (now deceased) and his wife, Angela Straus, (together the
    Strauses or the plaintiffs) lived with their six young children in Waterloo,
    Ontario.  Joe was a millwright with a grade 12 education.  Angela was a
    homemaker with some part-time employment as a bookkeeper.  At the relevant
    time, their youngest child was four years old.  The children are approximately
    two years apart in age.

[2]

Roy Decaire (Decaire) was Joes brother-in-law.  He was also Joe and
    Angelas financial advisor.

[3]

Decaire was registered with the Ontario Securities Commission (OSC) as
    a salesperson.  By virtue of his registered status, at the relevant time for
    this appeal, he was allowed to sell mutual funds and other financial products,
    but only for so long as he was employed by FundEx Investments Inc. (FundEX). 
    Decaire had been previously employed by Associated Financial Planners Inc. (AFP/IPC)
[1]
on a similar condition.  Both FundEX and AFP/IPC were registered mutual fund
    dealers (dealers), regulated by the
Securities Act
, R.S.O. 1990, c.
    S.5.

[4]

Decaire became associated with Kelly Fielder (Fielder), a stock
    promoter who was pursuing investment in needle incineration technology
    (Needle-Ease).  Decaire was not legally permitted to promote or sell this
    investment.  In promoting it, Decaire was acting off the books.

[5]

Decaire convinced Joe and Angela to invest in start-up companies
    associated with Needle-Ease.  The investment turned out to be worthless and
    they lost all that they had invested in it.

[6]

The Strauses brought a lawsuit in which they sought to recover their
    losses from not only Decaire but also the financial firms with which he was
    affiliated during the relevant times.

[7]

They were successful.

[8]

In a judgment dated February 18, 2011 (the Judgment), the trial judge ordered
    that Decaire pay damages for the full amount of their investment of $277,471,
    plus interest and costs; that AFP/IPC pay damages of $154,471,
[2]
the amount they invested while Decaire was its representative; and, that FundEX
    pay damages of $100,000, the amount they invested while Decaire was its
    representative.

[9]

In addition, the trial judge awarded the Strauses costs payable by Decaire,
    AFP/IPC and FundEX, jointly and severally, with indemnity rights against one
    another in approximate proportion to the principal amounts awarded against
    each.

[10]

FundEX
    appeals.  It contends that the trial judge erred in finding it liable for Decaires
    actions during the period that he worked for it.

[11]

For
    the reasons that follow, I would dismiss the appeal.

BACKGROUND IN BRIEF



Decaire

[12]

Decaire
    played a central role in this matter.  His employment history is a critical
    component of the saga.  Thus, I begin there.

[13]

Decaire
    was both a licensed life insurance agent and a licensed mutual fund sales
    representative.  He was associated with Royal Sun Alliance, a life insurance
    company, at all material times.

[14]

In
    1997, Decaire was hired and fired by Regal Capital Planners.
[3]


[15]

That
    same year, he went to work with Financial Concepts, where he lasted one month.

[16]

From
    January 1998 to May 1999, Decaire worked at AFP/IPC.

[17]

In
    May 1999, Decaire left AFP/IPC and joined FundEX.

[18]

In
    the contract between Decaire and FundEX, Decaire agreed to operate as an
    independent contractor, not an employee, and that he would not hold himself out
    as a FundEX employee.  He further agreed that he would comply with all industry
    standards relating to trading in financial products offered by FundEX, and all compliance
    and supervisory procedures.

[19]

In
    order to sell mutual funds and other such financial products, Decaire had to be
    licensed by the OSC.  Each of his employers, including FundEX, had to sponsor
    his application and his registration was conditional on him remaining employed
    by his sponsoring employer.

[20]

Decaire
    remained with FundEX until 2002.  On leaving, Decaire transferred his book of
    business to Gordon Stoll.  Mr. Stoll completed the first and only Straus
    investment application on record at FundEX, albeit only for Joe Straus.  This
    application showed that Joes investment objectives were tax savings,
    retirement planning and growth.  His risk tolerance was rated at medium.

Decaires Relationship
    with Millenium

[21]

In
    1998, Decaire became associated with Fielder.  At all material times, Fielder
    was an insider of, and a fund raiser for, the defendants Millenium Medical
    Supply Inc., Millenium Medical Supply Corp., and Spectrum Meditech Inc.  These
    companies are insolvent; no claim was advanced against them at trial.  Fielder
    was also the principal and guiding mind of the defendant corporations Spectrum
    Meditech Inc., IRG Services Ltd., Cyclone Investments Inc. and Northgate
    Holdings Inc. Neither Fielder nor these corporations defended the action at
    trial.  For ease of reference, I will refer to all of these companies as
    Millenium.

[22]

From
    1998 onward, Decaire was a vigorous proponent of investment in Millenium.  The
    trial judge found that his commitment to Millenium and Needle-Ease was beyond
    reason and objectivity and that it continued well after their insolvency.

[23]

Decaire
    introduced, promoted and assisted the sale of Millenium shares to his mutual
    fund clients.  He was rewarded for his efforts by Millenium, a fact hidden from
    the plaintiffs and his other clients.  For example, he signed a contract with
    Millenium under the terms of which he was to receive 1.5 million shares plus
    $5,000 (USD) per month for promoting Millenium.  At other points during this
    sad saga, he was gifted 107,500 shares

for his participation in the development and design of the Canadian
    marketing effort

and later received a further gift of 550,000
    shares in Spectrum Meditech Inc.

The Strauses Invest in
    Millenium

[24]

Decaire
    was Joe and Angelas sole source of investment advice and information.  Angela
    did not know the difference between segregated funds, mutual funds or stocks.
    She did not know the difference between a stockbroker and those who could only
    sell mutual funds. Even at trial she was still unsure of what a segregated fund
    is.  It was only during the course of the lawsuit that she had learned that it
    was an insurance product.

[25]

In
    1998, the Strauses bought four Royal Sun Alliance segregated funds, a life
    insurance product, for $80,000.

[26]

After
    Decaire got involved with Fielder, he advised Joe and Angela to invest in
    Millenium to the full extent of their financial resources.  As previously
    noted, he never disclosed to them that he was reaping financial gains for his
    promotional efforts in respect of Millenium.  He did not give Joe and Angela
    any documentation or disclose the risks associated with the investment.  He led
    the Strauses to believe that they would not lose their money  that the
    investment was as safe and secure as if it had been invested in a Canada
    Savings Bond or GIC.

[27]

While
    Decaire was at AFP/IPC and on his advice, the Strauses invested approximately
    $170,000 in Millenium.

[28]

When
    Decaire joined FundEX, he transferred the Straus investments to it.

[29]

While
    at FundEX, Decaire maintained unfounded faith in the business viability of
    Needle-Ease
[4]
and continued to vigorously promote Millenium, even though by that time he knew
    it was worthless.  He made no secret of his involvement with Millenium and
    Needle-Ease.  He kept its promotional material on his desk in his FundEX
    office.  He talked with anyone and everyone about Needle-Ease as an
    investment.

[30]

In
    August 1998, on Decaire's advice, Joe and Angela liquidated their Royal Sun
    Alliance
segregated funds and used
the
    proceeds of approximately $95,000, supplemented by other personal funds, to
    make a further investment of $100,000 in Millenium.

[31]

FundEX
    called no witnesses at trial.

Expert Evidence at
    Trial

[32]

Sergio
    Cechetto was the only expert at trial qualified to testify on matters relating
    to mutual fund dealers including mutual fund industry practice, compliance practices
    and the compliance duties of dealers during the relevant time period.

[33]

Mr.
    Cechetto testified that the Mutual Fund Dealers Association (MFDA) was formed
    in June 1998 but it was not until 2000-2001 that it was fully established as a
    self-regulatory organization.  However, by 1999, all dealers were aware that
    the MFDA was in place or about to be in place and become effective. He said that
    every dealer had to come up with a compliance plan consistent with the minimum
    standards contained in the regulations.

[34]

The
    trial judge accepted Mr. Cechettos evidence that as part of compliance,
    dealers are obliged to oversee the activities of their sales representatives so
    that clients are not put into products that are inappropriate for them.  He
    also accepted Mr. Cechettos testimony that dealers have a duty to have in
    place a robust compliance plan and they also have a duty to their clients to
    ensure compliance with codes of conduct, which provide protection to investors
    from unfair, improper or fraudulent practices.

THE TRIAL JUDGMENT

[35]

The
    trial judge found that Joe and Angela were simple people in financial and
    business matters  unsophisticated investors with a moderate tolerance for
    risk.  They had a very minimal knowledge and understanding of investments in
    securities regulated under the
Securities Act
. Their purchase of Millennium
    shares was their first corporate share transaction, a transaction that the
    trial judge found was suitable only for sophisticated investors with a high
    risk tolerance.  He found the purchase to be clearly unsuitable for the
    Strauses.

[36]

In
    respect of Decaire, the trial judge found that he acted unlawfully in his off the
    books activity with Millenium and that he violated the fundamental obligation
    of honest dealing in his promotion and misrepresentation of Millenium to FundEX
    mutual fund customers.  Further and significantly, the trial judge found that
    in so doing, Decaire acted in an open and readily discoverable manner.

[37]

The
    trial judge concluded that FundEX had failed in its duty to protect the
    plaintiffs from Decaires off the books activity.  He found that FundEX,
    through its corporate policy and practices, placed Decaire into the community
    so as to obtain the plaintiffs trust and confidence as their financial advisor,
    all without proper supervision or governance of his activities and while
    knowing that there was a reasonable risk that Decaire would abuse that
    confidence by putting clients into inappropriate products.

[38]

And,
    the trial judge found at para. 25 of his reasons,

Decaire at the direction of [AFP/IPC] and subsequently FundEX,
    jointly and severally for their respective profit, adopted a model for the sale
    of mutual funds by creating a fiction that their sales representatives were
    financial advisors.

[39]

The
    business model AFP/IPC and FundEX employed was to have Decaire solicit his
    family members, relatives and friends, all on the basis that he was an
    officially registered financial advisor employed by a large mutual fund company
    to perform these services.  The mandate and instruction of the two defendants
    was for Decaire to obtain his clients confidence and trust both for immediate
    purchases and for the development of long term loyalty to the defendant
    dealer.

[40]

In
    holding FundEX liable in negligence, the trial judge made these further findings:

1.  Decaire
    came to FundEX with bad judgment and little knowledge, ability or training to
    be a financial planner or advisor.  He was a persuasive salesperson qualified
    to sell mutual funds, provided he was given instruction and supervision;

2.  FundEX
    failed to inquire into Decaires activities at AFP/IPC and his potential for
    continuing those activities while at FundEX;

3.  FundEX
    failed to train Decaire for the purpose of committing him to the compliance
    requirements of the mutual fund industry;

4.  FundEXs
    governance officer failed to make even a superficial inquiry into Decaires
    activities and any reasonable inquiry would have revealed Decaires off the books
    activity;

5.  FundEX failed
    to monitor and supervise Decaires daily activities after he began working for
    it.  In so doing, it failed to meet its legal responsibilities under the
Securities
    Act
;

6.  FundEX failed
    to examine Decaires books;

7.  In light
    of Decaires employment history in the financial industry, FundEX failed to
    make reasonable inquiries that would have disclosed Decaires off the books activity;

8.  FundEx
    failed in its obligation to the plaintiffs to ensure that it met its compliance
    requirements of oversight and that codes of conduct were followed.

[41]

The
    trial judge also found FundEX liable on the basis that it was vicariously
    liable for Decaires activities during that period.

THE ISSUES

[42]

FundEX
    submits that the trial judge erred in finding that it:

(1)  owed a duty of care to
    the plaintiffs; and

(2)  was vicariously liable
    for Decaires activities.

[43]

FundEx
    also sought to appeal the cost order below. However, at the oral hearing of the
    appeal, counsel for FundEx indicated this ground would be pursued only if the
    appeal were successful.  As I would dismiss the appeal, it is unnecessary to
    deal with this issue.

ANALYSIS

Did FundEX owe the
    plaintiffs a duty of care?

[44]

FundEXs
    submission on this ground rests on the different regulatory regimes for life
    insurance agents and mutual fund sales representatives. FundEX complains that
    the trial judge imposed liability on it based upon a duty to supervise the
    liquidation of life insurance products. It points to the fact that the Royal
    Sun Alliance segregated funds were liquidated by Decaire, through Royal Sun
    Alliance, under the authority of his life insurance designation.  FundEX contends
    that as a mutual fund dealer it cannot be held responsible for Decaires
    actions as a life insurance agent in the sale and liquidation of life insurance
    products.

[45]

This
    submission, in my view, completely misses the point.  The trial judge held
    FundEX liable in negligence based not on a duty to supervise the liquidation of
    life insurance products, as FundEX contends, but based on the breach of its
    duty to supervise Decaire in his role as a mutual fund sales agent.  The source
    of the plaintiffs funds (i.e. their life insurance investments) for the
    additional $100,000 investment in Millenium during the time that Decaire
    worked for FundEX is not legally significant in the circumstances of this case. 
    What is significant is that the investment was made at Decaires urging, while
    he was a licenced mutual fund agent working for FundEX, a registered mutual
    fund dealer.  The trial judge held FundEX liable in negligence because, after
    enabling Decaire to hold himself out as a registered financial advisor working
    with a registered mutual fund dealer, it failed to adequately (or at all) train,
    monitor or supervise Decaire while he worked for it, contrary to its regulatory
    and industry obligations.

[46]

FundEX
    made a related argument based on
Doiron v. Devon Capital Corp
., 2002
    ABQB 664, 319 A.R. 387.  In
Doiron
, Forsyth J. of the Alberta Queens
    Bench found Manufacturers Life Insurance Company, functioning as Manulife, was
    not liable for off the books activity by one of its agents.  At para. 21, the
    court stated that Manulife had a duty to supervise the agent but that duty only
    extended to his Manulife-related activities.  Therefore, while Manulife had a
    duty to ensure that the life insurance policies and annuities that the agent
    solicited were appropriate for the particular client, that duty did not extend
    to the agents collateral investment projects.

[47]

The
    trial judges findings of fact in the present case make it clear that
Doiron
is a very different case.  Decaire did not promote Millenium completely
    independently of FundEX.  On the contrary, he did so openly and vigorously
    while at his FundEX office and to anyone who would listen, including FundEX
    colleagues.  Indeed, when Decaire left FundEX in 2002, he transferred his book
    of business to Gordon Stoll, a mutual fund salesperson at FundEX whom he had
    convinced to invest in Needle-Ease.

[48]

The
    trial judge held FundEX liable in negligence based on extensive findings of
    fact.  On the record, those findings were fully available to him.  I see no
    basis for appellate intervention.

[49]

Accordingly,
    I would dismiss this ground of appeal.

Is FundEX vicariously liable for Decaires
    activities?

[50]

FundEx
    makes two submissions in arguing that the trial judge improperly found it
    vicariously liable for Decaires off the books activity.

[51]

The
    first submission is based on
671122 Ontario Ltd. v. Sagaz Industries Canada
    Inc
., [2001] 2 S.C.R. 983.  At para. 33 of
Sagaz
, the Supreme Court
    of Canada states that the relationship of an employer and independent
    contractor typically does not give rise to a claim for vicarious liability. 
    FundEX says that the relationship it had with Decaire was that of employer and
    independent contractor, not employee.  Therefore, the trial judge erred in
    fixing it with vicarious liability for the plaintiffs losses arising from the
    August 1999 Investment.

[52]

FundEXs
    second submission is that the trial judge erred by expanding the doctrine of
    vicarious liability to encompass the principal and agent relationship by fixing
    it with liability, as principal, for damages arising from Decaires acts which
    were prohibited by law, performed contrary to FundEX policies and which the
    plaintiffs knew to be completely unrelated to FundEX.

[53]

The
    trial judge was fully alive to the distinction between an employee and an
    independent contractor and the implications of such a determination when
    determining whether vicarious liability was to be imposed.  He thoroughly
    canvassed the relevant legal principles, paying particular attention to the
Sagaz
decision.

[54]

Despite
    the terms of the written contract between Decaire and FundEX, in which Decaire
    agreed he was an independent contractor, the trial judge concluded that Decaire
    was an employee.  He reached this conclusion after a close examination of the
    total relationship between FundEX and Decaire, with particular attention to the
    factors set out in
Sagaz
and informed by the policy considerations of
    fairness and deterrence  as set out in
Bazley v. Curry
, [1999] 2 S.C.R.
    534  that justify the imposition of vicarious liability.  He found that
    Decaire was not performing as if he were a person in business on his own
    accord.  Decaire did not hire employees.  He worked from an office at FundEX,
    in which, parenthetically, he kept promotional material on Needle-Ease.  He was
    not free to choose his method of marketing.  Rather, he followed FundEXs business
    model, one which the trial judge found created a risk that Decaire would place FundEX
    clients in inappropriate products.  His mutual fund agent licence was obtained under
    the auspices of FundEX and his registration with the OSC was conditional on him
    remaining employed by FundEX.  He could not market or promote financial
    products without this registration.  And, the trial judge understood Mr.
    Cechettos evidence as an expert on the structure of the mutual funds industry to
    be that Decaire was more akin to an employee of FundEX.
[5]

[55]

I
    see no basis for appellate intervention with the trial judges determination of
    the character of the employment relationship.  Having found that an
    employer-employee relationship existed, there was no error in holding FundEX
    vicariously liable for Decaires wrongdoing.

[56]

Accordingly,
    it becomes unnecessary to determine whether the trial judge correctly held that
    FundEX, as principal, was vicariously liable for Decaires wrongful acts.

DISPOSITION

[57]

Accordingly,
    I would dismiss the appeal with costs to the respondent fixed at $15,000.00,
    all inclusive.

Released: December 24, 2012 (E.E.G.)

E.E. Gillese
    J.A.

I agree S.T. Goudge J.A.

I agree Janet Simmons J.A.





[1]
Investment Planning Counsel of Canada Limited was the successor to AFP and AFP
    Wealth Management Limited.  In the style of cause, it was named as the
    defendant IPC Investment Corporation.



[2]
In the reasons for decision, AFP/IPC was held liable in damages of $177,471. 
    However, the Judgment shows liability in the amount of $154,471.



[3]
There is some confusion in the record over the precise dates of his employment
    with Regal Capital Planners.  It may be that he worked for it from sometime in
    1996 to sometime in 1997.



[4]
As described by the trial judge at para. 94 of his reasons.



[5]
Mr. Cechetto testified that it was an independent contractor relationship for
    the purposes of the tax treatment of expenses but it was a principal/agent
    relationship in terms of the employee having to comply with the employers way
    of doing business and meeting the legislative requirements.


