Will courts give weight to regulatory findings and sanctions when considering an advisor’s claim that they have been wrongfully dismissed in the face of a dealer’s attempt to enforce repayment of a forgivable loan?
Noronha (IA) was an advisor with Raymond James (Dealer). His relationship was governed by an agency agreement which included the provision of a forgivable loan. The loan was to be forgiven over the course of seven years, provided no events of default occurred. Events of default were broadly defined as including termination of the agency agreement “for any reason” and termination of the IA’s registration “with or without cause.” The agency agreement also included an obligation to abide by IIROC rules, and to indemnify the Dealer for any legal costs the Dealer incurred as a result of the IA’s (or his associates’) breach of legal duties.
As a result of a tip from a whistleblower, the Dealer became concerned that the IA was engaging in off-book transactions and taking secret commissions from his clients. The Dealer commenced an investigation. The IA refused to cooperate with some aspects of the investigation. As a result of the investigation, the Dealer concluded that it had no choice but to terminate the agency agreement, which it did. In its termination letter, the Dealer committed to cooperating with the IA to allow for an orderly transition of his business and, to that end, continuing to support his registration for another 60 days.
After being advised by the Dealer that it was no longer sponsoring the IA’s registration, IIROC undertook an investigation. A disciplinary panel held a hearing (at which the IA did not participate) and concluded he had breached a number of IIROC rules as a result of his off-book transactions, and that he had deprived the Dealer of the ability to properly supervise him by conducting business over personal email. The Dealer then sued the IA for the outstanding balance of his forgivable loan. The IA defended on the basis that he had been wrongfully dismissed. The Dealer brought a motion for summary judgment, and won.
Key admissions and settlement
Justice Perell accepted that the Dealer had proven the IA had breached the agency agreement (by refusing to re-pay the loan) without regard for the IIROC decision. However, he also held that if regard was had for the panel’s findings, “Mr. Noronha cannot possibly prove that he was wrongfully dismissed” either because of issue estoppel, or because the panel’s findings confirmed the Dealer’s own internal investigation findings. Justice Perell also rejected the IA’s arguments that there was no consideration for the agency agreement or that the loan was in fact a gift or signing bonus. He ordered the IA to pay the full amount claimed by the Dealer.
What you need to know
- Though the IA conduct in this case was egregious, courts are willing to enforce clear loan agreements, even in the face of claims for wrongful or constructive dismissal or that the agreement should fail for want of consideration.
- A court may find an IIROC disciplinary panel’s decision persuasive, and give it weight in reaching a decision about the conduct of an advisor.
- Well-documented, fair and neutral investigations into an advisor’s conduct can be useful to both respond to subsequent regulatory proceedings and support claims for unpaid and outstanding loans.
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