Case Summary: Marlin Investments v. Canaccord

Issues

This case [B.C. Court of Appeal, September 25, 2014] addresses (1) the "know your client" (KYC) standard in the context of KYC forms, (2) off-setting investment gains to reduce losses in damage quantification and (3) contributory negligence of a vulnerable (geriatric) client, all in the context of the market crash of 2008.

Key Facts

This was a civil claim for investment losses brought by an elderly (around age 80 at the relevant time) and long-retired former investment professional. The investment program in issue involved a complex options strategy that was very successful until it fell victim to the market crash of 2008. Prior to the crash the client had earned over $90,000 from the strategy, but in 2008, lost over $300,000. The evidence was that the client signed KYC forms indicating that he had income and substantial assets, whereas he had neither (he was retired and was trying to claw his way back to financial health after past losses).

Key Findings on Key Issues

What is the KYC standard when dealing with KYC forms? The KYC forms were found to be inaccurate and incapable of reliance by the advisors. The court held that "the information-gathering process [must] go well beyond merely accepting at face value information on account opening forms…[an advisor cannot] merely conform to the information recorded on an account opening form."   Here, there were obvious inconsistencies on the face of the forms. As well, the advisors' evidence of probing the client was "too thin." Therefore, in order to properly complete the KYC form and process, an advisor must probe the client on any information that may not make sense, and keep a record of having done so.

When can investment gains offset losses regarding unsuitable investments? When transactions and trades are linked and "part of a systemic approach…over time," then gains can be used to offset losses, and reduce the damages to be paid to an aggrieved investor. The court found this to be such a case, where various options contracts were interrelated and often rolled over pursuant to the pre-determined investment strategy. The court distinguished this case from Zraik (Ontario C.A., 2001), in which losses were not offset against gains because the transactions (trades) in that case were individual and distinct.

Can a vulnerable client be contributory negligent? Yes. In all cases where contributory negligence is argued, the trial judge must consider whether an investor plaintiff, "did not in his own interest take reasonable care of himself and contributed, by his want of care, to his own injury." The court held that determining contributory negligence does not depend on a duty owed by the injured party to the party sued, but depends instead on the plaintiff’s "blameworthiness…the degree of the risk created by each of the parties." The failing health, advanced age and financial instability of the plaintiff gave rise to both the finding of defendants’ liability (80%) and the finding of the plaintiff’s own liability (20%) for knowingly participating in the options strategy, despite knowledge of his personal circumstances.

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