On September 6, 2018, the Alberta Court of Queen’s Bench released its decision in TD Waterhouse Canada Inc. v Ghebrezghi, 2018 ABQB 646 (“Ghebrezghi”). This case was highly relevant to one of our cases due to the similar factual matrix. In Ghebrezghi, the investor rolled the dice in a trial against TD Waterhouse and had his entire case dismissed with costs to be ordered against him.  In our case, the investor took a more conservative approach and obtained a settlement through mediation that was approximately four times what he spent on legal and expert costs.

The result obtained by our client is subject to confidentiality terms in the settlement documents, and accordingly the terms of settlement are not discussed. What we can say for the purposes of this blog is that the same legal and expert witness issues were addressed. The fortunate result for our client is that this blog has relieved some of his post settlement regret – an experience common to many investors involved in litigation. As the Ghebrezghi case demonstrates, litigating against a financial institution can be a high risk and high cost venture, and investors are well advised to assess their litigation risks before embarking on a trial similar to that of Ghebrezghi.

The Decision to Embark on High Risk Investing

Mulugeta Ghebrezghi (“Ghebrezghi”) and his wife were at all material times clients of TD Waterhouse Canada Inc. (“TD Waterhouse”). Prior to 2007, the Ghebrezghis held their investments with Blackmont Capital Inc. (“Blackmont”), and conducted their regular banking through TD Canada Trust.

Leading up to 2007, the Ghebrezghis were disappointed with the investment returns being generated by Blackmont. Ghebrezghi discussed his concerns with a representative of TD Canada Trust, and was referred to TD Waterhouse licenced investment representative Darren Snyder (“Snyder”). Snyder convinced Ghebrezghi that he should transfer his investments from Blackmont to TD Waterhouse.

The TD Waterhouse accounts that were set up for Ghebrezghi were non-discretionary, meaning that Snyder required the authorization of Ghebrezghi to make any trades. Ghebrezghi also requested a margin account to permit him to borrow against the value of his portfolio to purchase more securities to potentially and in theory increase the value of his investments.

In order to open a new investment account for Ghebrezghi, Snyder had to complete a New Account Application Form with him. The application required income and asset information from the Ghebrezghis, as well information about their liabilities, risk tolerance and investment objectives. Completion of application forms of this nature are standard operating procedure in the securities industry.

The application form for Ghebrezghi indicated that he and his wife had a high risk investment tolerance and that they wanted a 100% stock portfolio. In his litigation, Ghebrezghi denied informing Snyder that they had a high risk tolerance and would accept a 100% stock portfolio. Ghebrezghi further denied signing the application form. Snyder testified that Ghebrezghi did sign the application form, and did instruct him to have the application reflect a high risk investment tolerance comprised of a 100% stock portfolio.

From June 2007 to the fall of 2008, the Ghebrezghi portfolio performed well. Ghebrezghi authorized all trades and received all of TD Waterhouse’s monthly investment statements. In the fall of 2008, the market crashed and the Ghebrezghi portfolio was wiped out leaving Ghebrezghi owing a debt to TD Waterhouse on their margin account. The Ghebrezghi claim against TD Waterhouse was designed to set-off their debt related to the margin account, and hopefully have the Court order TD Waterhouse pay them something.

The Ghebrezghi claim was based in negligence. Ghebrezghi alleged that TD Waterhouse breached their standard of care by not following certain industry rules governing investment advisors. Ghebrezghi alleged that Snyder did not properly comply with the Know Your Client Rule by appropriately ascertaining their risk tolerance and did not comply with the Suitability Rule by advising of appropriate investments for their portfolio. Ghebrezghi further alleged that TD Waterhouse did not properly supervise Snyder.

In addition to the negligence allegation, Ghebrezghi alleged breach of fiduciary duty and fraudulent misrepresentation related to the forged signatures on the application form. During the trial Ghebrezghi abandoned these two claims. The trial was adjudicated on the negligence action.

The Negligence Action

The Court held that the applicable standard of care depends on a variety of factors including the nature of the relationship between the parties, the expertise represented and relied upon, industry standards, regulatory provisions, and jurisprudence from cases with similar fact scenarios.

The Court noted that effective June 1, 2008, the investment industry was regulated by the Investment Industry Regulatory Organization of Canada (“IIROC”). IIROC publishes a Rule Book for its members, and its members, such as Snyder, are required to comply with its rules. The rules include the Know Your Client Rule and the Suitability Rule that were the focus of this litigation. The Court heard from expert witnesses for Ghebrezghi and TD Waterhouse on the application of IIROC’s rules to the contested fact scenario before the Court.

The Court held that what constitutes proper management of an investment account necessarily involves frequent reference by an advisor to the client’s clearly stated and expressed investment objectives and risk tolerance. Determining whether investment objectives and risk tolerance were properly inserted into an application is necessarily the focus of negligence actions against investment advisors.

It was an uncontested fact that when Ghebrezghi completed his application form with Snyder, he advised Snyder that he had 20 years of investment experience, and that he was unhappy with the return on bank stocks – stocks he considered too conservative to meet the investment objectives that he had. The contested facts included that Snyder interviewed Ghebrezghi about his knowledge of trading experience, diversification, and what constituted high risk investment. Snyder testified that he interviewed Ghebrezghi on the three conceptual types of investments, being cash, income-producing assets, and stocks, and that he was convinced Ghebrezghi was competent to hold a high risk investment portfolio.

The problem with Snyder’s evidence was that even if Ghebrezghi convinced him that he understood investment risk and the basics of the types of securities, on an objective standard Ghebrezghi was not suitable for a high risk portfolio. This was because Ghebrezghi did not have sufficient income or assets to protect himself from his lack of diversification, and because he was of advanced age with four children who required funding for their education, imply that Ghebrezghi could not take the risk of sustaining a loss. Hence, an issue at trial was that even if Ghebrezghi convinced Snyder that he adequately understood basic investment concepts, it was not appropriate to permit Ghebrezghi to have a high risk portfolio.

Against this problematic objective analysis, the Court found as fact that Snyder did what Ghebrezghi asked him to do. Snyder advised Ghebrezghi of market volatility as it arose. Snyder advised Ghebrezghi against the purchase of various stocks which Ghebrezghi instructed him to purchase anyway. And Snyder kept Ghebrezghi informed as to how his portfolio was performing. On any issues of credibility, the Court preferred the evidence of Snyder over that of Ghebrezghi. We also note that it is somewhat common for investors to blame advisors for their losses to avoid debts that they incur on margin accounts.

The Request for Judicial Notice that Fraud is Rampant in the Financial Services Industry

One of the ways that Ghebrezghi undermined his own credibility is that he asked the Court to make a declaration by way of Judicial Notice that fraud is rampant in Canada’s financial services industry. Ghebrezghi wanted this declaration made as a precursor to the Court deciding the issue of whether Snyder forged his signature and fraudulent indicated a high risk 100% stock portfolio on his application form.

The Court held that such a declaration of Judicial Notice is only appropriate where a fact is so notorious – meaning known and accepted by reasonable citizens without debate — that the Court may assume the fact without requiring proof of its truthfulness. The Court held that judicial notice does not mean that where a fact is central to a case but impossible or difficult to prove that a party can simply ask a Court to dispense with proof on the basis that something similar happened to someone else at some other time. On this basis, the Court dismissed the request of Ghebrezghi for judicial notice that fraud is rampant in the securities industry. As mentioned, the absurdity of Ghebrezghi’s request went some ways to undermining his credibility.

The Credibility of the Expert Witnesses and the Determinative Issues

Another way by which Ghebrezghi undermined his credibility was through the positions taken by his expert. The Court held that other cases had determined that merely completing an application form is not sufficient to meet the standard of care required by advisors to meet the Know Your Client Rule. Rather, the Court was looking to the experts for their opinion on what steps an advisor should take to validate whether the IIROC rules were complied with.

Ghebrezghi’s expert took the position that Snyder should have been alerted by the type of employment and limited investment knowledge of Ghebrezghi, and that it was not objectively reasonable to permit him to be considered to have a high risk tolerance. The Court rejected the evidence of Ghebrezghi’s expert, however, because Ghebrezghi’s expert himself had not obtained documentation upon which to satisfy himself of the underlying facts that he relied upon to form his opinion.

The Court further held that the role of Ghebrezghi’s expert was to assist the Court understand the parameters of an investment advisor’s standard of care in this situation, not to make findings of fact, or worse yet, to advocate inferences based on his own assessment of the credibility of Ghebrezghi and Snyder. The Court noted that TD Waterhouse’s expert did not, in his report or his testimony, offer an opinion as to whether Snyder complied with the Know Your Client and Suitability Rules.

The essential opinion that Ghebrezghi’s expert opined on was the necessity of Snyder to review the trading history of Ghebrezghi at Blackmont and to interview Ghebrezghi’s spouse before completing application forms and accepting Ghebrezghi as a high risk investor. The Court held that while taking such steps would have been prudent, it was not an industry standard to analyze past investment reports or to interview spouses, and that failing to do so did not reach the threshold of a breach of the standard of care necessary to find that Snyder had been negligent.

Another essential opinion that Ghebrezghi’s expert opined on was the necessity of Snyder to refuse to execute trades after the margin account increased dramatically as the market began to crash in 2008. TD Waterhouse’s expert opined that an investment advisor cannot be expected to refuse to execute a trade when instructed to do so. TD’s expert did concede that an advisor could be expected to warn against trades in such circumstances. By making such a concession, TD’s expert gained credibility with the Court.

The Court held, based on a review of case law, that there is a legal distinction between trades recommended by an advisor versus trades a client instructs an advisor to make. The Court held that the duty on an advisor in both circumstances is to give advice “fully, carefully and honestly.” Anytime advice is given, an advisor must reference back to the client’s investment strategy, goals and risk tolerance as recorded in the application. The Court held that given what Ghebrezghi advised TD as reflected in his application, that any trading that occurred, even in 2008 when the margin account was escalating, would not support a finding of negligence against Snyder or TD.

Role of Discipline Hearing Findings in Determining Negligence

In addition to credibility issues of both Ghebrezghi and his expert, the Court also took issue with submissions made by Ghebrezghi relating to IIROC discipline cases. Counsel for Ghebrezghi attempted to persuade the Court that prior cases had held that a finding of fault related to compliance with an IIROC rule in a discipline hearing necessarily implied that an advisor had been negligent. The Court held that while there may well be some relationship between a finding of fact in a discipline hearing and the standard of care in a civil negligence case, that to make such a finding possible, the underlying facts relevant to both the discipline hearing and the civil negligence had to be proven.

The Court held that Ghebrezghi did not prove facts necessary to establish negligence. Rather, the findings of fact that Ghebrezghi needed to prove were contested by Snyder, and the Court preferred Snyder’s evidence over that of Ghebrezghi. Ultimately the Court found as fact that Ghebrezghi authorized every single trade that he now complained of, and that this finding made it difficult to say during the litigation that the particular trades were unsuitable for him.

The Supervisory Rule

The final credibility issue that the Court assessed against Ghebrezghi and his expert was the opinion evidence related to the Supervisory Rule. Ghebrezghi’s expert testified that he thought the Supervisory Rule should be based on Ghebrezghi’s own experience and practices, not on the practices of the investment industry itself and the rules that IIROC had published. The Court held that such evidence was not helpful, and that as the finding of fact was that Snyder accurately reflected Ghebrezghi’s risk tolerance and securities portfolio in the application, the supervision of Snyder by TD Waterhouse did not reach the threshold necessary for the Court to make a finding of negligence.

Damages and Opportunity Cost

Notwithstanding that the Court dismissed Ghebrezghi’s claim on liability, the Court still delivered a judgment on damages in the event that its finding on liability was appealed. Ghebrezghi’s expert based his opinion of damages on loss of capital and lost investment income, also referred to as opportunity loss. The loss of capital was quantified based simply on the total amount of capital invested minus the total amount lost before the account was closed.

The Court held that Ghebrezghi’s expert’s loss of capital calculations were unreliable as they did not mention any evidence of any withdrawals that Ghebrezghi made during the life of the account. The Court held that given that Ghebrezghi required funds to support his children’s education, it was unsound to rely on his loss of capital calculations when no evidence had been led on that issue.

To calculate Ghebrezghi’s lost opportunity, his expert conceptually replaced Ghebrezghi’s actual investments with investments that his expert would have determined as suitable. Ghebrezghi’s expert created a portfolio split evenly between stocks and mutual funds. He assumed the same deposits were made into the portfolio on the same dates as they actually happened, and then followed the trading data on three mutual funds. Ghebrezghi’s loss in his actual account was approximately $425,000. Ghebrezghi’s loss in his expert’s model account was approximately $30,000. The Court noted that the model account reflects a portfolio that Ghebrezghi originally had at Blackmont.

The Court rejected Ghebrezghi’s expert’s model account as a basis to determine damages for either opportunity loss or loss of capital. The Court held that when Ghebrezghi left Blackmont he deliberately embarked on an aggressive trading strategy designed to increase his returns. The Court found that Ghebrezghi had to prove the cause of his loss but could not do so as he understood the risk he was taking. In other words, the Court held that Ghebrezghi had to bear responsibility for being the cause of his losses. The Court assessed no damages in favour of Ghebrezghi.

Contingency and Investor Negligence Cases

Investors need to realize that litigating negligence in investor loss cases against financial institutions is risky and costly. Often the outcome of such litigation is speculative and not suitable for contingency retainers where the lawyers bear the risk of a suitable outcome of the litigation. In our firm, we rarely take such cases on a contingency basis, and rarely consider partial contingency or deferred fee retainers until discoveries have been completed and the negative aspects of the investor’s case have been exposed. In cases where investors indicate on their application forms that they are willing to take on a high risk portfolio, it is most often necessary for them to assume the risk of litigation.

Another significant risk that investors must appreciate is that their experts are not infallible. As the Ghebrezghi case demonstrates, an expert should limit their opinion to narrow issues, and not to findings of facts. Experts should also clearly set out the facts they rely upon to base their opinions, and concede that their opinions may change if the underlying facts are proven to be different than those they relied upon. Most importantly, investors should be aware that the financial institution will likely retain their own expert, and the expert of the financial institution may be considerably different than that of the investor’s expert. The difference in opinion often increases the risk of the outcome of the litigation.


At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.