25 April 2018
By Cynthia SpryIn Cunningham v. Wiltzen, the Alberta Court of Appeal recently dealt with an appeal of a trial judge’s findings regarding an investment adviser’s liability for breach of his duty of care.
Background: The evidence at trial was that Alan and Alayne Cunningham (the “Cunninghams”) had made a number of high risk investments in two specific stocks, primarily through their adviser, Mr. Wiltzen (“Wiltzen”). The Cunninghams argued they were unsophisticated investors, who were not made aware of the risks of the two investments, nor were they told to diversify, and they did not find out until years after making the investments that their adviser had been negligent.
Wiltzen, on the other hand, argued he was a mere order-taker, and had not breached any duty of care.
On appeal, Wiltzen argued that the trial judge had erred in his findings regarding the following: whether the claim was statute-barred; the terms of the contract between the parties; whether Wiltzen had breached his duty to warn the Cunninghams; whether expert evidence was required; the availability of a number of defences, including causation, ratification, mitigation and contributory negligence; and, damages.
The Cunninghams cross-appealed the finding that Wiltzen was a mere order-taker in respect of the second investment, and on damages.
The Court of Appeal held that the trial judge had not erred in any respect.
Expert Evidence May Not Be Required: Of particular interest were the Court’s findings that expert evidence was not required, including on standard of care, sophistication of the investors, and the suitability of the investments (including concentration).
The trial judge held that where there is evidence of professional rules or codes of conduct, expert evidence is not needed to establish those standards, or uncontested facts (e.g., that the investment was high risk). Further, where (as here), the impugned actions were so egregious as to have fallen (far) short of the requisite standard of care, expert evidence was not required to precisely demonstrate the boundaries of the applicable standard of care. The trial judge also found that the adviser’s own evidence established that the Cunninghams were unsophisticated and the investments were not suitable where the stock engaged the majority of their holdings.
In its ruling, the Court of Appeal cited the Ontario Superior Court of Justice decision in Stradiotto v. BMO Nesbitt Burns Inc., which found that expert evidence may not be necessary to determine, among other things, whether an investment adviser has exercised reasonable care in warning clients about the risks of investing. The court in Stradiotto also held that expert evidence may not only be unnecessary, but in fact imprudent, where it is obvious that the professional conduct has fallen short of the standard of care.
The Takeaway: This appears to be the first appellate-level case in Canada finding that expert evidence is not required in an investor loss case. It remains to be seen whether this ruling will be applied only in those cases where it is obvious that the conduct of the adviser has fallen far short of the standard of care, or whether it marks the beginning of a trend away from expert evidence on investor loss.
Readers may be wondering why the adviser and his firm would proceed to trial, rather than settle, in circumstances where it appeared obvious that the adviser had fallen below the standard of care. Interestingly, there were two high risk investments at issue, and the adviser was found liable for only one. Despite holding that “[i]t is no answer to legal liability for an investment adviser to say that the client wanted to invest in a particular riskier investment”, because a “person’s risk tolerance and investments objectives do not . . . change simply because he or she wishes to invest in a riskier product”, the court held that Wiltzen was liable for the first investment, but a mere order taker (and therefore not liable) in respect of the second.