At our firm, we have handled cases and have ongoing cases wherein the allegations of fraud, breach of fiduciary duty and / or negligence were made or have been made against investment advisors who were registered with a professional body such as the OSC, MFDA or IRROC when they first met their clients, but were disciplined and / or became unlicenced at some point when dealing with their clients. In almost all cases the unlicensed investment advisors failed to disclose this event to their clients, and then went on to continue providing investment advice to them. Most such cases settle or proceed to judgment on a default basis. We have not had a case against a defrocked investment advisor go to trial.

On November 21, 2019, the Alberta courts released the judgment in Agar Corporation Ltd. v. Lee, 2019 ABQB 886. This case provides a good summary of the process the Court will follow in determining liability and damages in defrocked investment advisor fraud scenarios. The plaintiff, Agar Corporation Ltd. (“ACL”), through its operating mind Joram Agar, sued Canada Monetary Corp. (“CMC”) and its operating mind, Chun Him Laurence Lee, for fraud, breach of fiduciary duty, and negligence relating to two investments: a $2M investment with Lee’s company CMC, and a $100,000 investment into a company known as Groundstar Resources Inc. (“Groundstar”).

The Claim of ACL

ACL alleged that in April 2012 Mr. Lee abused his position of trust as ACL’s investment advisor when he recommended a $2 M investment in CMC, a company in which Mr. Lee was an officer and director, without disclosing his involvement and without disclosing the risks associated with the investment. ACL further alleged that Mr. Lee recommend the investment despite knowing it was not suitable to ACL’s investment objectives. ACL also alleged that Mr. Lee breached his fiduciary duties as ACL’s investment advisor, or was negligent, when he directed ACL’s investment in Groundstar, a company that he later became a director of. ACL alleged that Mr. Lee knew this also was not a suitable investment at the time it was made.

Mr. Lee’s defence was that he ceased to be ACL’s advisor in February 2012 – before the impugned investments were made – as he had resigned his position with HSBC. Mr. Lee denied owing ACL any of the duties of an investment advisor then or thereafter. With respect to the Groundstar investment, Mr. Lee submitted that he merely recommended the securities to ACL’s investment advisor for consideration. In the alternative, Mr. Lee alleged that ACL was fully informed of the risks associated with the CMC and Groundstar investments and of his interest in those companies at the time of the investment. Finally, Mr. Lee denied that the CMC and Groundstar investments were unsuitable given ACL’s investment objectives.

As will be seen below, a relevant issue in this action was that ACL also sued National Bank Financial Ltd. and National Bank Financial Inc. (“National Bank”) in respect of these same investments losses. ACL’s claims against National Bank were resolved prior to the trial of Mr. Lee and CMC. That resolution was memorialized in a Pierringer Agreement which was approved by the Court. As a result, the trial proceeded solely against the defendants Mr. Lee and CMC. The defendant CMC was defunct by the time of trial.


With respect to ACL’s fraud allegation, the Court summarized the elements of the tort of civil fraud as found in the Supreme Court decision of Bruno Appliance and Furniture, Inc. v Hryniak, 2014 SCC 8:

  1. false representations made by the defendant;
  2. some level of knowledge of the falsehoods by the defendant (direct knowledge or recklessness);
  3. the false representations caused the plaintiff to act; and
  4. the plaintiff incurred a loss.

The Court held that while the standard of proof is the civil balance of probabilities, evidence of fraud must be clear and convincing: TWT Enterprises Ltd v Westgreen Developments Ltd, 1992 ABCA 211, at para 40.

  1. The Findings of False Representation and Omissions by the Investment Professional

The Court held that a false representation includes express dishonesty, like deceitful or false statements, and / or the deliberate non-disclosure of material facts: Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd., 2017 ABCA 378 at para 24. It also includes incomplete disclosure or active concealment: Village on the Park (Re), 2009 ABQB 497 at para 58.

Fraud can also be found even where there is no intention to injure the person to whom the statement is made: Bruno Appliance at para 18. The fact that rogue did not believe he was doing anything wrong or had no intention to harm the recipient is irrelevant to a determination of whether his conduct amounts to a false representation. The intention to deceive is distinct from an intention to harm: Village on the Park at para 89.

The Court held that the investment advice given by Mr. Lee on April 12, 2012, was misleading and omitted material facts regarding the nature of the CMC investment and the status of Mr. Lee’s license. Mr. Lee’s representations were designed to ensure that ACL believed that CMC was funded to undertake the business that Mr. Lee hoped it was.

Based on Mr. Lee’s own admissions, he had not disclosed to ACL material information regarding the risks associated with the CMC investment, including that CMC’s liabilities exceeded its assets, that CMC had a going concern note in its financial statements, and that there was little or no liquidity in the debentures. The Court held that it was not sufficient that Mr. Lee talked optimistically about CMC’s business plans. He failed to fully disclose the risk of participating in the debenture offering.

  • The Findings of Knowledge of False Representations by the Investment Professional

For the second part of the test, the Court held that whether Mr. Lee had the requisite level of knowledge of the falseness of his representation required either that he knew the representation was false, or that he was reckless as to its truthfulness. Recklessness is a legitimate pathway to fraud: Precision Drilling at para 33. A false representation is made with recklessness sufficient to draw an inference of fraud where it is made without regard to whether it is true, or where it is made with no reasonable basis for believing that it is true. Blind optimism that all will turn out well will not protect a person from liability where he shut his eyes to the facts or purposely did not make inquiries: Precision Drilling at para 35.

The Court further held that an intention to deceive may be inferred from a lack of evidence of a credible explanation for the concealment. A Court is permitted to make inferences with respect to recklessness where there is a sufficient evidentiary basis that the defendant closed his or her eyes to the potential consequences of their statements: Precision Drilling at paras 32 and 38.

The Court found that Mr. Lee may have honestly believed in his ability to deliver value through CMC given the magnitude of his personal investment in the company relative to his personal wealth. However, viewed objectively, Mr. Lee had no reasonable basis to believe that an investment in CMC would allow an investor to “avoid risk in the near term” or that CMC was a secure, yield-paying security.

The Court found that the Preliminary Prospectus of CMC reflected the true nature of the risks associated with its debentures. In making representations that did not align with the risks as disclosed in the Preliminary Prospectus, Mr. Lee encouraged investment in CMC without concern as to whether his statements were reasonable or honest. Mr. Lee also encouraged ACL’s investment knowing that CMC had only two subscribers and that ACL’s investment would make up nearly two thirds of the assets of the company.

  • The Finding of Reliance by the Investor on the Investment Professional

The third part of the test for civil fraud is whether the plaintiff relied on the false representations of the defendant. The Court held that ACL was unaware of the level of risk associated with the CMC investment when it purchased CMC’s debentures, and that it relied on Mr. Lee’s representations in making the decision to invest. Mr. Lee did not inform ACL of his involvement with CMC until after it suffered its loss. That ACL did not conduct further due diligence or research did not excuse Mr. Lee or provide him a defence to the reliance part of the test for civil fraud.

  • The Finding of Loss Where Other Contributing Factors Existed

To avoid the consequences of a finding of civil fraud, Mr. Lee’s submitted to the Court that the National Bank was ACL’s last line of defence against an imprudent investment, and that the National Bank should not have approved the CMC investment if it was not suitable given ACL’s investment objectives and risk tolerance. The Court rejected the argument that National Bank contributed to the quantum of the loss. The Court held that whether the National Bank breached a duty it owed to ACL did not excuse Mr. Lee’s conduct as ACL’s investment advisor. Mr. Lee could not avoid the consequence of his misrepresentations by suggesting that the National Bank could have, or should have, prevented ACL’s loss. The Court held Mr. Lee to be liable in civil fraud in respect of the investment to CMC.

Breach of Fiduciary Duty

Based on the Court of Appeal decision of Abt Estate v. Cold Lake Industrial Park GP Ltd., 2019 ABCA 16, at para 73, the Court held the applicable test for breach of fiduciary duty for an investment advisor as:

  1. the fiduciary has scope for the exercise of some discretion or power;
  2. the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests;
  3. the beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power; and
  4. the existence of an undertaking by the alleged fiduciary to act in the best interest of the alleged beneficiary or beneficiaries.

Mere vulnerability or reliance is not sufficient to create a fiduciary relationship: Elder Advocates at para. 28

The Court held that whether a fiduciary relationship exists between an investment advisor and client must be determined in reference to the particular relationship in question; and that the circumstances can cover a broad spectrum of relatedness from total reliance on advice to total independence: Cunningham v. Wiltzen, 2017 ABCA 185 at para 70.

Where the relationship between the parties includes elements of trust and confidence and there is reliance on the advisor’s skill, knowledge and advice, the relationship is a fiduciary one: Hodgkinson v Simms, [1994] 3 SCR 377 at para 44, citing Varcoe v Sterling (1992), 7 OR (3d) 204 (Gen Div) at paras 234-236:

The relationship of the broker and client is elevated to a fiduciary level when the client reposes trust and confidence in the broker and relies on the broker’s advice in making business decisions. When the broker seeks or accepts the client’s trust and confidence and undertakes to advise, the broker must do so fully, honestly and in good faith . . . It is the trust and reliance placed by the client which gives to the broker the power and in some cases, discretion, to make a business decision for the client. Because the client has reposed that trust and confidence and has given over that power to the broker, the law imposes a duty on the broker to honour that trust and respond accordingly.

A determination of a fiduciary relationship involves an examination of the relationship between the parties:

. . . where a fiduciary duty is claimed in the context of a financial advisory relationship, it is a question of fact as to whether the parties’ relationship was such as to give rise to a fiduciary duty on the part of the adviser: Hodgkinson v Simms at para 44, cited in Cunningham at para 71

Mr. Lee argued that he did not have a fiduciary relationship with ACL because he held no unilateral authority or discretion over ACL’s accounts. He also submitted that ACL was not vulnerable to his advice. He argued that Mr. Agar was a sophisticated businessman who had the freedom to consult and the ability to inquire with respect to the proposed investments in CMC and Groundstar. He pointed to the fact that ACL was a multi-million dollar company, supported by investment advisors at the National Bank.

The Court held that the question of the scope of Mr. Lee’s authority and the discretion he held over ACL accounts was answered by looking at the relationship he had with Mr. Agar and the actual discretion he exercised when he executed the CMC and Groundstar transactions. The Court held that there was clear evidence that Mr. Agar placed his trust wholly in Mr. Lee and did no independent diligence into his recommendations, and that there was clear evidence that Mr. Lee not only gave advice but directed the purchases of both CMC and Groundstar. Mr. Lee was extended the authority to manage ACL’s accounts and he exercised that authority. Mr. Lee’s knowledge that Mr. Agar did not have the time to investigate particular investments obligated Mr. Lee to disclose all he know about the investments. He failed to do so.

Expert Opinion on Loss of Registered Status of the Investment Advisor

ACL’s expert opinion was that Mr. Lee breached the duties he owed to ACL as an investment advisor by recommending an investment in CMC. The Court accepted that opinion in this regard.

The Court also accepted that, despite not being registered under the Alberta Securities Act, RSA 2000, c S-4 (the “Act”) as an investment advisor to ACL in April 2012 and thereafter, Mr. Lee was a “registrant” under the Act and subject to the standards of conduct that apply to all registrants. Therefore, the duties he owed to ACL were informed by the standards of conduct for investment advisors established by the Act and NI 31-103. Those duties include the obligation to act in good faith, to provide appropriate caution, and to ensure that the recommended investments were suitable given ACL’s investment objectives.

The Court held that Mr. Lee’s failure to perform to the standard of care set by securities regulators is relevant to whether he failed to discharge his common law duty of care owed to Mr. Agar: TD Waterhouse Canada Inc v Ghebrezghi, 2018 ABQB 646 at para 24, aff’d 2019 ABCA 319.

The Court held that Mr. Lee breached his duty to deal with Mr. Agar fairly, honestly and in good faith in recommending the CMC investment without fully disclosing material information relating to the risks associated with that investment. Mr. Lee sought to capitalize on the relationship he had with Mr. Agar in which he knew Mr. Agar viewed him as ACL’s investment advisor and relied on his advice and recommendations. The same findings applied to the Groundstar shares. By his own evidence, Mr. Lee exceeded his authority when he directed the purchase of the Groundstar shares knowing there was no executed instrumentation contract.

The Court further held that Mr. Lee failed to ensure that the CMC investment and the Groundstar investment were consistent with ACL’s investment needs, objectives and risk tolerance. The Court relied on the expert’s evidence that CMC was an unsuitable investment given ACL’s investment objectives. With respect to Groundstar, the expert’s evidence was that ACL’s purchase of Groundstar increased the risk of ACL’s portfolio, and that at the time of the Groundstar investment, ACL’s portfolio was beyond the prudent and reasonable risk parameters for a client whose primary objective was to preserve its capital while earning some return. The expert’s opinion was that a reasonably prudent advisor would not have recommended an investment in Groundstar in those circumstances. The Court agreed. The Court therefore found that Mr. Lee breached the fiduciary duties he owed to ACL as its investment advisor.


The Court held that the appropriate measure of damages in this case is an amount required to return ACL to the position it would have been in had Mr. Lee’s false representations not been made or had Mr. Lee not breached his fiduciary duties: Royal Bank of Canada v Benchmark Real Estate Appraisals Ltd, 2015 ABQB 288 at para 40. This is an important distinction as a finding of fraud would only result in the damages being ACL’s liquidated loss. In other words, the Court granted judgment on the tort that resulted in a higher damages quantitation.

In calculating damages for breach of fiduciary duty, the Court held that the damages to be awarded must compensate ACL not only for its actual loss but for the lost opportunity had it invested its money elsewhere and in accordance with its investment objectives. Relying on its expert opinion, ACL claimed damages of $2,019,683.11 arising from the CMC investment and $106,830.09 arising from the Groundstar investment. Both amounts include ACL’s actual loss and the lost opportunity had ACL invested in securities more suitable for its objectives and risk tolerance.

With respect to its CMC investment, ACL received four payments on the debentures. Those payments were received January 31, 2013 ($80,354.82), July 31, 2013 ($59,506.85), January 31, 2014 ($60,493.15) and July 31, 2014 ($59,506.85). Altogether, the payments total $259,861.67. ACL’s expert on damages calculated the actual loss relating to the CMC debentures as $1,740,138.33 being the initial investment of $2 million less the payments of $259,861.67.

The expert calculated the loss of the returns ACL might reasonably have expected the CMC investment to earn had it invested the $2 million in an alternate investment consistent with ACL’s objectives and risk tolerance. To do so, the expert modelled ACL’s returns had it invested in one of two possible bond portfolios: the iShares Canadian Universe Bond Index Exchange Traded Fund and the iShares Canadian Short Term Bond Index. Those investments would have been left ACL with units valued at between $2,019,683.11 and $1,892,981.06 as of the date the claim was issued.

With respect to the Groundstar investment, ACL’s purchase of the 675,000 Groundstar shares cost it $135,655.24. ACL sold its shares in Groundstar before the claim was issued for net proceeds of $45,100. The warrants never achieved value. The expert calculated the net loss relating to the Groundstar shares as $90,555.24 and calculated the loss of opportunity as being between $106,830.09 and $99,621.51.

The Effect of the Pierringer Agreement

Under the Pierringer Agreement, ACL settled against the National Bank and retained its right to pursue its claim against Mr. Lee and CMC for their respective several share of liability for ACL’s loss, if any. The settlement was conditional on the Statement of Claim being amended to make clear that ACL only was pursuing Mr. Lee and CMC. ACL also agreed to not collect from Mr. Lee and CMC any sum which would require any further payment by the National Bank to ACL. The Order also provided that ACL’s claims against the National Bank were to be discontinued on a without costs basis.

The implications of a Pierringer Agreement were discussed by the Supreme Court of Canada in Sable Offshore Energy Inc v Ameron International Corp, 2013 SCC 37 at para 26:

As for any concern that the non-settling defendants will be required to pay more than their share of damages, it is inherent in Pierringer Agreements that non-settling defendants can only be held liable for their share of the damages and are severally, and not jointly, liable with the settling defendants.

At trial, Mr. Lee presented no evidence and made no submissions regarding apportionment of liability to the National Bank. His sole position was to deny his own liability. The Court therefore had no basis on which to apportion liability amongst the Defendants. Accordingly, the effect of the Pierringer Agreement was that ACL was entitled to recover what it has been awarded as against Mr. Lee and CMC less the amount paid by the National Bank to ACL: Abt Estate at paras 23-25.


At Investigation Counsel PC, 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.

Norman Groot

Investigation Counsel PC

February 25, 2020