Spring 2016 Newsletter

Babin Bessner Spry Newsletter

BBS Favourite Vacation Destinations

Ed's Pick:

Hawaii (aka paradise).  So beautiful and warm.  So much to do (or not if that's what you like).  If it wasn't so far, I'd lobby for an office there!

Ellen's Pick:

Barbados.  Sun and white sand.  The best rum and raisin ice cream even if that is not your favorite flavour.  And the best "dolphin" fish barbeque … but don't worry, not Flipper!

Cynthia's Pick:

Playa Conchal, Costa Rica.  This is the perfect sun destination.  You can spend your days relaxing by the pool (where you may be visited by families of Howler monkeys), or if you're feeling active, there are so many activities to choose from.  I loved zip-lining (kilometres of ziplines high above a jungle river valley), surfing (with the fabulous instructors at Iguana Surf Club), and scuba diving (it's volcanic … take the longer boat trip to the better areas).  My favourite was an early morning riverboat tour, complete with a family of monkeys that climbed aboard our boat for bananas, tiny brown bats swaying gently in the breeze, and giant crocodiles (within touching distance) eating raw chicken from a big stick our driver trailed behind the boat!

Jacqueline's Pick:

Like anyone who gets asked this question at this time of year, my answer is going to be somewhere warm and sunny. In fact, I'm going to go with the multiple warm and sunny destinations that come with a Southern Caribbean cruise.  A different beach every day, along with zip lining, snorkeling, scuba diving, rainforest hiking, and horseback riding – what's not to love?

Tim's Pick:

Winnipeg, Manitoba.Most winters I spend the holidays in Winnipeg with my family.  The city embraces the winter; the entire downtown is decorated with lights and the Red River skating trail is the Guinness World Record Holder for longest naturally frozen skating trail in the world!  I always attend a Jets game while I am visiting and sometimes they even win.  My family spends New Year's at our cottage on Brereton Lake (close to Kenora), which involves a ton of outdoor activities including bonfires and fireworks.  So, if you don't mind spending two weeks between -20°C and -30 °C, Winnipeg is the place for you!

Marc's Pick:

Chiang Mai, Thailand.  While many head to Thailand for its fantastic beaches and party islands, if you're looking to see a different side of the country head north to Chiang Mai which is arguably its cultural epicentre.  A typical day in Chiang Mai might include taking a Thai cookery course in the morning followed by an elephant ride in the afternoon, then a trek into a hilltop village where you can spend the night in a rustic wooden hut.  The local villagers might even come and sing to you.  Chiang Mai also has fantastic markets where you can pick up just about any food or trinket you could want.  Throw in temples, tuk tuks and some fantastically friendly locals and a winter trip to Chiang Mai is un-missable.

Eden's Pick:

Franklyn D. Resort, Jamaica.  First of all, I'm a big fan of any resort with a hilarious name.  The biggest selling point of FDR, though, is how incredibly kid-friendly it is.  The beach is tiny, but secluded, safe, and shallow.  The pool has a huge shallow section and a small waterslide, and there is a specific kids' restaurant (with ice cream available at any time of day!)  The finishing touch is that they provide every family with a one-on-one vacation nanny.  Our nanny, Chanay, was amazing with my daughter, and being able to bask in the sun without keeping one eye open and one ear attuned for "Mommy!  Mommy!" made the experience grownup-friendly, too.

Kim's Pick:

Universal Studios, Florida.  Universal lets you experience childhood all over again.  It has all of the fun, blow-back-your-hair roller coasters, and great restaurants.  Each part of the park has a little theme so it's like you're in a different world in each corner.

Livent Inc. v. Deloitte & Touche: Scope of Auditor Negligence

In Livent Inc. v. Deloitte & Touche, 2016 ONCA 11, the Ontario Court of Appeal affirmed the Superior Court’s ruling that found Deloitte liable in negligence to Livent Inc. for $85 million.  The result is interesting in that it orders an auditor to pay damages to a corporation for failing to discover accounting fraud committed by the corporation’s own directing minds. 


Livent was a live entertainment company that developed and produced high-profile theatre shows, such as Phantom of the Opera and Show Boat.  For years, the company’s co-founders, Garth Drabinsky and Myron Gottlieb, along with other executives at Livent, were engaged in fraudulent accounting practices that were misleading shareholders, creditors and the general public about the company’s profitability.  

Deloitte was Livent’s auditor from 1989 to 1998, and never discovered or reported the material misstatements in Livent’s books.  The complex fraud was eventually discovered in June 1998 after a different management team was put in place by new equity investors at Livent. 

Livent sued Deloitte for damages in contract and negligence.  After a 68-day trial, the Superior Court found Deloitte liable in negligence.

The Court of Appeal Decision

Deloitte’s central argument on appeal was premised on the idea that the frauds were not committed against Livent, but rather committed by Livent.  It argued that the doctrines of corporate identification and ex turpi causa work in harmony to defeat Livent’s claim. 

More specifically, Deloitte argued that the fraud perpetrated by Drabinsky and Gottlieb was really the fraud of Livent under the corporate identification doctrine, and Livent could not therefore sue Deloitte for damages caused by its own illegal acts (ex turpi causa).

The Court conducted a detailed analysis of both doctrines before rejecting the defence.  It found that attributing the fraud to Livent and barring the corporation from recovering damages would be inconsistent with the public policy objectives of both doctrines. 

Corporate Identification Doctrine & Ex Turpi Causa

The corporate identification doctrine is a means of attributing the wrongs of the directing minds of a corporation to the corporation itself.  The doctrine was first applied in criminal law to determine whether a corporation could be the subject of criminal liability for a mens rea offence, but has since been applied in the civil context.

The leading case, R. v. Canadian Dredge & Dock Co., [1985] 1 S.C.R. 662, sets out the test for determining when the corporate identification doctrine operates.  According to the Court in Canadian Dredge, the doctrine only applies where the party alleging corporate attribution can show that the action taken by the directing mind: (a) was within the field of operation assigned to him or her; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company.

The Court of Appeal agreed with the trial judge that the question was not whether the fraud of Gottlieb and Drabinksy should be applied to the corporation, but whether it should be applied to the corporation for the purpose of applying the ex turpi causa doctrine.  

The ex turpi causa defence states that a court should not aid a claimant who bases his or her cause of action upon an immoral or illegal act. The Latin phrase is translated to mean: “from a dishonourable cause an action does not arise.”  The Court of Appeal made it clear that the policy underlying ex turpi causa is to maintain the integrity of the justice system, by preventing a wrongdoer from profiting from his or her wrongdoing. 

The Court of Appeal was not satisfied that the Canadian Dredge test provided a complete answer as to whether the wrongs of a directing mind should be attributed to a corporate plaintiff in the civil context.  The Court stated that even if the test from Canadian Dredge was met, at least two further factors are relevant to the inquiry: (a) whether such attribution is consistent with the contract or relationship between the plaintiff and the defendant; and (b) whether the use of the doctrine is necessary to preserve the integrity of the justice system. 

The Court of Appeal held that even if the Canadian Dredge test were successfully applied in the context of this case, there would be no basis for invoking the ex turpi causa defence, because invoking the defence was not required to maintain the integrity of the justice system. 

None of the wrongdoers would benefit from an award of damages.  In fact, the culprits of the fraud were no longer with the company and had been convicted of crimes.  Livent was the victim of the fraud, not the perpetrator.  Its shareholders, employees, and creditors had nothing to do with the fraud, and suffered losses because of the fraud. Livent did not profit, but instead became insolvent. 

The Court concluded that it would defeat the very concept of an audit and undermine the integrity of the public audit process if the auditor could, by reference to ex turpi causa, defeat a claim for negligence by attributing to the company the very fraud that the auditor should have detected. 

According to Justice Blair, Deloitte failed to exercise the skill and care that a reasonably competent and cautious auditor would exercise in the circumstances.  Deloitte was negligent in its conduct of audits in both 1997 and 1998, and that negligence directly caused Livent to suffer losses. 

Main Takeaway

The Court of Appeal’s decision clarified that the ex turpi causa defence does not automatically apply if the Canadian Dredge corporate identification test is met.  Furthermore, for the corporate identification doctrine to operate as a shield to an outside party (in this case, Deloitte) in the civil context, there are additional requirements to those laid out in Canadian Dredge.  The analysis must be contextualized and nuanced.  The Court must first determine the purpose for which it is being asked to attribute wrongful acts to a corporation.  The true purpose behind both the corporate identification doctrine and ex turpi causa is to maintain the integrity of the justice system, by ensuring that guilty parties are not rewarded for their wrongful acts, and that aggrieved parties have an avenue to recover damages.

Lau v. Royal Bank of Canada: RBC wrongful dismissal Canadian case highlights need for thorough investigations, complaint-handling

A recent investment industry wrongful dismissal case in British Columbia highlighted the importance of rigorous complaint handling and investigations when banks/dealers sanction errant employees.

In September, the Supreme Court of British Columbia ruled that the Royal Bank of Canada (RBC) terminated mutual fund salesman Marco Lau based on inconclusive evidence and that the contents of Lau's registered termination notice destroyed his career, preventing him from attaining gainful employment in the financial services industry to mitigate his damages.


Lau was an RBC employee from 2007 to 2012, but was terminated by the bank for alleged dishonesty and falsification of bank records. Lau was registered and licensed to sell mutual funds with RBC subsidiary Royal Mutual Funds Inc. (RMFI) in 2011, after working as a customer service representative and account manager at RBC.

Lau claimed damages for wrongful dismissal and alleged that his notice of termination contained false and unsubstantiated allegations that restricted his ability to obtain employment elsewhere in the industry. He also claimed aggravated and punitive damages against RBC.

Lau worked at RBC's Chinatown branch in downtown Vancouver. In January 2012, he met with a 66-year old Cantonese-speaking client, designated with the initials MW, to review her retirement savings plan (RSP) investments. According to Lau, another RMFI investment planner, Anson Tse, also attended the meeting. The purpose of the meeting was to discuss the client's three guaranteed-investment certificates (GICs) that were maturing at the end of the month, and one GIC that was in a non-registered investment.

During this meeting, the woman signed documents permitting RMFI to invest her non-registered GIC into a new one-year certificate and to transfer her registered GICs into a short-term income fund in a registered RSP (RRSP) and a short-term income fund in a tax-free savings account.

The meeting took place during RRSP season, and Lau was busy with back-to-back appointments. When reinvesting MW's funds, Lau thought that the RMFI sales portal would automatically reflect that the funds were retained money and not new money.

A few days later, the client complained about the GIC transactions. The branch manager met MW and informed the firm's compliance department of the dispute. This was the only record of the complaint, because the client did not submit a complaint in writing. The branch manager's notice to compliance staff stated that MW asked Lau not to process the trades until she discussed it with her family and that the English-language investment documents were not explained to her. She claimed that Lau attended the meeting alone and that she was instructed to sign know-your-client (KYC) forms prior to knowing their purpose.

Although the complaint was escalated to corporate investigative services, the regional compliance officer determined the matter was an informal complaint to be resolved at branch level by redeeming the client's shares.

An investigation by Lau's branch managers, however, indicated that he and other account managers were tracking sales incorrectly (the sales portal identified retained money as new money) and that they were coached to do so by Tse. This was reported to corporate investigators, who conducted a detailed investigation that included a review of video surveillance, sales portal access logs, account notes and various interviews with RFMI personnel.

The investigation determined that Tse was not with Lau during the meeting with MW, based on available video surveillance. It also concluded that Lau was dishonest about the MW meeting, and that he failed to maintain the bank's records with scrupulous integrity.

Lau was terminated on May 10, 2012, and RMFI filed a Notice of Termination Information (Form 33-109F1) with the British Columbia Securities Commission (BCSC). Form 33-109F1 requires detailed information regarding the reasons for termination. RMFI recorded the following on Lau's form:

The termination was a result of his falsification of bank records and failing to tell the truth when questioned regarding an alleged joint session with a client. In particular, he claimed existing money as new to bolster his sales, and maintained that he participated in a joint session with a client despite evidence to the contrary.

After termination, Lau was unable to find employment in the financial services sector, or at all.

Decision of the court

The court found that there was insufficient evidence to find that Lau lied about having a joint meeting with MW and Tse.  For example: key individuals who took part in the investigation were unavailable for cross-examination during trial; the investigation and subsequent decision to terminate Lau were flawed, having relied on a manager's e-mail for complaint details and on an insufficiently analyzed investigator's review of surveillance footage; and, MW did not testify at trial. The court held there was insufficient cause to terminate Lau.

The court also found that Lau had indeed tracked retained money as new money 10 times, with Lau testifying that he took a shortcut by failing to record funds as retained instead of existing. He said he assumed the sales portal would accurately reflect the correct status.

In reviewing the law concerning just cause for dismissal, the court concluded that RBC failed to establish that Lau deliberately entered incorrect information to bolster his own sales. Additionally, the court considered that Lau had expressed remorse to his branch manager for the tracking errors. It also found that the improper tracking practice was a systemic problem at RMFI:  other employees had admitted to doing the same thing but were not terminated.

Improperly recording funds did not warrant dismissal for cause, the court ruled, noting that RBC did not give Lau an opportunity to commit to remedial action, that he had an unblemished employment record, and that there must be a balance between the severity of the misconduct and the sanction imposed.


The court held that it was impossible for Lau to defend himself, because the bank automatically believed the client's version of events.  He was therefore terminated on the basis of an unsubstantiated accusation that made it impossible for him to find work at another financial institution or any employment involving a trust relationship. The court also found that RBC's investigation itself was flawed, and that the firm should have retained the video surveillance of the meeting with MW.

The court held that the defendants knew that RMFI was required to file with the regulators the reasons for Mr. Lau's termination and that the reasons would become part of the public domain. The defendants were therefore required to be careful that what they published was accurate and true.

The court awarded Lau aggravated damages of $30,000 and ordered RBC to remove its accusations from his termination form. Lau sought a notice period of ten months, but was awarded nine.

Lessons for advisors and bank employees

If there are language barriers between an advisor and his or her client, make sure that a translator is present and take careful notes of the meeting.

Ensure you understand how internal systems (e.g., sales portals) at your bank/dealer work. If you do not understand how they work, do not make assumptions: get more training.  Being busy is no excuse for improper compliance with bank/dealer policies and procedures. Discipline yourself to slow down, and familiarize yourself with your dealer's compliance manual and the rules and procedures outlined by the regulator (in this case, the Mutual Fund Dealers Association of Canada).

Lessons for banks and dealers

All investigations into employee conduct must be thorough and evidence must be reviewed objectively.  Do not automatically assume complaining clients are telling the truth and that employees are lying.  Think ahead to the trial when assessing evidence concerning cause to terminate: was the evidence reviewed carefully, will it be admissible, will the client attend to give evidence? Consider whether the employee intended to mislead the bank/dealer or whether it was an innocent mistake caused by pressure to move quickly.  Consider whether the infraction was an isolated incident or a systemic issue resulting from software glitches or poor training, and when completing the uniform termination notice (UTN), try to be balanced and report in accordance with the evidence obtained at the time. Understand that the contents will impact an employee's ability to mitigate damages, thereby impacting the damages awarded by a court against the bank/dealer if it is ultimately unsuccessful.  Recall that it is possible to update the evidence after filing a UTN, including after the deadline.