Andriuk v. Merrill Lynch Canada Inc., 2013 ABQB 422

Court of Queen ’ s Bench of Alberta Citation: Andriuk v. Merrill Lynch Canada Inc., 2013 ABQB 422 Date: 20130725 Docket: 1001 04055 Registry: Calgary Between: John Andriuk, John Andriuk Investments Ltd., and John Andriuk as Representative Plaintiff Plaintiffs - and - Merrill Lynch Canada Inc. Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice S.L. Martin _______________________________________________________ I.

Introduction [ 1 ] The Plaintiffs, John Andriuk and Andriuk Investments Ltd. ( “ AIL ” ), seek certification of a class action against Merrill Lynch Canada ( “ Merrill ” ) for how it conducted itself in relation to its clients ’ investments in a speculative biotech stock known as Oncolytics Biotech Inc. ( “ ONC ” ). The Plaintiffs allege that Merrill breached a variety of duties owed to its clients, including statutory, contractual, tort, and fiduciary duties when it found that its clients collectively held too much ONC stock at its Calgary branch.

Instead of complying with regulatory standards and acting in the best interests of its client investors, the Plaintiffs allege that Merrill embarked on a multi-pronged course of conduct that preferred its own interests to those of its clients. The Plaintiffs allege that this course of

conduct lead to, among other damages, the artificial depression of ONC ’ s share price. [ 2 ] An application for certification involves a determination about procedure and is not a merits based inquiry. Its purpose is to select the most appropriate manner for the filed action to proceed. The Court is asked to decide whether a class proceeding is the preferable procedure based on a review of the statutory criteria and the underlying policy goals of class-based proceedings: judicial economy, access to justice, and behaviour modification.

In cases where certification is denied, the action may proceed nevertheless as filed and/or amended. [ 3 ] The proposed class action herein arises from a complex factual matrix and raises certain novel legal issues. The subject matter of the dispute is a thinly traded and volatile technology- based stock. The proposed class members held various numbers of shares which were bought and sold at different times; some class members bought shares after the class period began.

The proposed class includes investors who held the stock in different ways; some paid cash for their shares while others held their shares in margin or credit- based accounts. Some class members sold the stock during the proposed class period whereas others continued to hold it for varying lengths of time thereafter. Of those who crystallized their positions through a form of disposition during the class period, some appeared to make a profit, whereas others suffered more conventionally recognized forms of loss.

Still others moved their ONC stock to other brokerages in response to Merrill ’ s alleged mandate to remove the stock from its Calgary branch. The Plaintiffs claim damages for many types of losses including the depreciated market value of the shares, losses crystallized through disposition, as well as the repayment of transaction fees and interest charged. II. Procedural History [ 4 ] This application for certification has evolved over time. The Plaintiffs filed a Statement of Claim on 16 th March 2010 and an Amended Statement of Claim on December 1, 2011.

They put forward an unfiled Amended Amended Statement of Claim as part of the certification brief. For the most part, it is the same as the Amended Statement of Claim, except that it adds claims based in negligence for failing to meet professional standards, negligent misstatement and negligent misrepresentation. While sometimes a plaintiff may put forward proposed amended pleadings at a certification application, with the intention to file either those pleadings or one that reflects the court ’ s findings on certification, the practice can be problematic if it forces the defendant to face shifting claims.

Nevertheless, the Plaintiffs ’ argument was based on this proposed Amended Amended Statement of Claim and it has been the focus of the parties ’ and the Court ’ s analysis. [ 5 ] Similarly, the common issues proposed by the Plaintiffs have been stated differently in the application for certification and in Appendix B to the Plaintiffs ’ brief. During the hearing, a further set of common issue questions was put forward. In addition, the Plaintiffs have proposed different

definitions of the putative class and have submitted three separate affidavits from the proposed representative plaintiff, largely to respond to arguments advanced by Merrill or to counter points canvassed by Merrill in cross- examination. [ 6 ] Merrill has chosen not to file a statement of defence until after the application for certification is decided. [ 7 ] A prior lawsuit between Mr. Kurt Soost ( “ Mr. Soost ” ) and Merrill has some bearing on the case at bar. Mr. Soost was a broker at Merrill who successfully sued Merrill for wrongful dismissal. When Mr.

Soost left Merrill, he took certain people and accounts with him, including Mr. Andriuk ’ s son, a former Merrill employee, and the account belonging to Mr. Andriuk and his son. After a lengthy trial in which many documents were placed on the public record, the trial judge found that Mr. Soost was wrongfully dismissed; this finding was upheld on appeal, although damages were reduced. Proposed class counsel in the case at bar, the McGuigan firm, represented Mr. Soost in that action.

The Plaintiffs aver that they learned of Merrill ’ s concentrated or control position in ONC and its response only during the Soost lawsuit. There was a previous application in the case at bar to remove the McGuigan firm and to ensure that any discovery privilege is respected. This procedural history helps explain why Mr. Andriuk ’ s first affidavit contains answers Merrill provided in a Notice to Admit in the Soost action and other information related to that suit. III. Overview of the Pleadings and Application for Certification (

A) The Plaintiffs ’ Claim

[ 8 ] The Plaintiffs seek certification of this action as a class action under the Class Proceedings Act , SA 2003, c C-16.5 (the “ CPA ” ). [ 9 ] The Plaintiff, Mr. Andriuk, is a businessperson resident in the City of Calgary. The corporate Plaintiff, AIL, is an Alberta registered corporation used by Mr.

Andriuk for investment purposes. [ 10 ] The individual and corporate Plaintiffs bring this action as representative Plaintiffs on behalf of all persons and corporations who held investment accounts at the Defendant Merrill, a national investment brokerage, and who were invested in the publicly traded stock known as ONC. ONC was a junior biotech company engaged in cancer research using a “ reovirus ” ; it was a highly speculative, thinly traded stock listed on the Toronto Venture Exchange.

The value ascribed to such a research based company is derived not from its assets but from the success of its scientific and clinical trials. As stated in the evidence, such a company essentially trades on its future. [ 11 ] The Plaintiffs allege that leading up to December 2000, Merrill was not properly monitoring the development of concentration in securities at its Calgary office. As a result of this monitoring failure, the clients of the Calgary Merrill office accumulated holdings of 22% of the issued and outstanding trading shares in ONC.

Some of the ONC position was held by Merrill ’ s clients in margin accounts. [ 12 ] The Plaintiffs allege that the 22% holdings position amounted to a concentrated position or a control block position, either of which they allege violated the securities rules and regulations applicable at the time. The Plaintiffs allege that to remedy the problem, Merrill took three distinct actions that were clearly intended to limit the amount of ONC held by its clients at the Calgary branch. First, it mandated its financial advisors to solicit sales of some or all of their clients ’ ONC holdings.

Second, it encouraged those clients who wished to retain the stock to move it to another brokerage. Third, Merrill twice reduced the margin percentage previously extended on ONC shares, first from 50% to 30%, then from 30% to 25%.

From Merrill ’ s perspective it was particularly important to reduce the holdings in margin accounts, as Merrill carried greater risk on these accounts since it played the dual role of both agent and lender. [ 13 ] The Plaintiffs seek certification to enable the proposed class members to demonstrate that Merrill ’ s actions were in breach of the duties owed to Merrill clients and in conflict with the best interests of Merrill ’ s clients, in violation of industry regulations and policies.

The Amended Amended Statement of Claim includes a long list of the breaches of duties and obligations owed by the Defendant to the Plaintiffs.

In sum, the Plaintiffs argue that their claims raise the common issues of whether the manner in which Merrill responded to the ONC position resulted in an artificial reduction in the market price of ONC, which had the further result of causing damages to Merrill clients who held ONC in various types of accounts at the material times. [ 14 ] The Plaintiffs argue that the solicitation of sales, the transfer of accounts and/or shares to other brokerages, and the reduction of margin credit were actions in Merrill ’ s best interests but contrary to the interests of its clients holding ONC.

The Plaintiffs allege that Merrill did not advise its clients of the reasons behind the sales solicitation or share transfer, nor did Merrill explain the margin reduction.

Furthermore, the Plaintiffs allege that the mandate was implemented in a non-uniform manner, with different clients being solicited to sell at different times, resulting in different impacts to different clients. [ 15 ] The Plaintiffs claim that Merrill ’ s actions in encouraging and forcing a large volume of sales resulted in a significant downward pressure on the market price of ONC, causing the share price to drop from about $18/share in October 2000 to about $3/share by January 2002.

In essence, the Plaintiffs claim that by issuing its mandate, Merrill intentionally and artificially interfered with the free market system to depress the market value or trading value of ONC in conflict with the interests of its clients.

Merrill ’ s clients suffered damages when their net worth and equity positions were diminished as the market price dropped in response to the large sell volumes resulting from Merrill ’ s attempt to reduce the ONC position in its Calgary office. [ 16 ] In essence, the Plaintiffs submit that all holders of the stock suffered damages as a result of the artificially reduced market price of ONC, whether they chose to sell the stock or not.

The Plaintiffs argue that each client ’ s actions or investment decisions induced by Merrill had an effect upon the market price of ONC, thereby directly affecting other Merrill clients holding ONC. The Plaintiffs submit that the market price of ONC was fluid and dropped to about 15% of its original market price, as compared to the time period before the discovery of the alleged concentrated position. The Plaintiffs claim that the entirety of any one client ’ s loss cannot be adequately or properly assessed by merely looking at the investment decisions made by that client at a particular point in time.

[ 17 ] According to the Plaintiffs ’ theory of loss, a client did not have to sell ONC to be negatively impacted by the Defendant ’ s actions. They argue that one client ’ s decision to sell its holdings would have a correlated negative impact on the remaining clients who continued to hold ONC. The Plaintiffs take the position that when even one Merrill client was induced to sell ONC in a manner that artificially reduced the stock ’ s market price, the negative impact of the artificial price reduction was experienced by each Merrill client holding ONC.

If a client sold its ONC shares at a time when the price was artificially reduced by Merrill ’ s actions, then that client received less for its shares than it would have received but for the mandate. A client who made a notional profit may have still lost potentially greater profits, while a client who sold at a loss suffered a more conventionally recognized form of injury.

The allegation is that Merrill reduced the value of ONC stock by orchestrating sales that were intended to reduce its own concentration of holdings and risk position, without regard to the personal risk tolerance or priorities of individual clients. All clients who held ONC stock lost value and those who held the stock in margin accounts would have felt the impact of that loss through margin calls.

Margin clients would have been required to put in more cash or other stocks or sell ONC or other stocks, to cover the increased indebtedness caused by the devaluation of ONC, all the while paying Merrill interest charges and transaction fees. [ 18 ] The Plaintiffs also claim for losses suffered by Merrill clients who held ONC at other brokerages since Merrill encouraged and arranged for its clients to move their ONC holdings out of its Calgary branch and into other brokerages. [ 19 ] The Plaintiffs have proposed several different class

definitions in their materials. The Statement of Claim limits the proposed class to all individuals or corporate entities with investment accounts at Merrill ’ s Calgary office holding shares in ONC prior to October 2001. The class definition in the application for certification includes clients of Merrill ’ s Calgary office who owned ONC shares on or after December 1, 2000. In Mr. Andriuk ’ s second affidavit he proposes that the class be expanded to include any person or corporation who held ONC stock in a client account at any of Merrill ’ s offices in Canada.

The class definition relied upon in argument was set out in the Plaintiffs ’ brief: All clients of Merrill that held ONC in accounts at Merrill between December 1, 2000 and December 31, 2001 (the “ Class Period ” ).

This will be divided into 2 subclasses, comprised of those that held ONC in margin accounts and those that held ONC in cash accounts; Margin accounts shall have a further common issue to demonstrate and quantify unjust enrichment on interest earned on margin accounts; and Those participants that held ONC shares at Merrill and outside Merrill will have the further common issue of demonstrating that it was foreseeable that they would experience damage to ONC investments held outside of Merrill. [ 20 ] The proposed class period begins with the discovery of the concentrated or control position and the issuance of the mandate to address the position and ends with the sale of Merrill ’ s Calgary brokerage.

This class definition appears to include anyone who owned ONC at Merrill at any time during the class period, whether or not it was purchased before the start of the class period. [ 21 ] The Plaintiffs propose that financial advisors holding ONC be included as class members in either of the two sub-classes, as appropriate. The Plaintiffs argue that the mandate was issued by Merrill ’ s national and regional legal, credit and compliance departments and that individual financial advisors were in no better position than Merrill clients to avoid losses from the downward price pressure.

Also, the Plaintiffs propose that clients of Merrill who were directed to transfer their ONC positions to other brokerages be included in the class. Finally, the Plaintiffs propose that clients who did not sell their ONC position during the class period, thereby never crystallizing their positions during the class period, nonetheless be included as class members. [ 22 ] The Plaintiffs claim for stock losses, damages, damages for breach of duties and breach of fiduciary duties, damages for conflicts of interest, damages in tort, damages for unjust enrichment, damages for fraudulent concealment and punitive relief.

The Plaintiffs anticipate that the class action will involve approximately 500 participants seeking total damages in the range of $50 million. (

B) Merrill ’ s Position [ 23 ] The Defendant counters the application for certification on the basis that the Plaintiffs have failed to discharge their burden of establishing each of the CPA ’ s various statutory requirements. Merrill ’ s many arguments will be presented in relation to each of the required statutory conditions.

IV. Statutory Framework and General Principles [ 24 ]

Section 5 of the CPA sets out the requirements that must be satisfied to certify class action proceedings: 5(1) In order for a proceeding to be certified as a class proceeding on an application made under

section 2 or 3, the Court must be satisfied as to each of the following: (

a) the pleadings disclose a cause of action; (

b) there is an identifiable class of 2 or more persons; (

c) the claims of the prospective class members raise a common issue, whether or not the common issue predominates over issues affecting only individual prospective class members; (

d) a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues; (

e) there is a person eligible to be appointed as a representative plaintiff who, in the opinion of the Court, (

i) will fairly and adequately represent the interests of the class, (ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and (iii) does not have, in respect of the common issues, an interest that is in conflict with the interests of other prospective class members. [ 25 ] The CPA specifies what must be considered as part of the preferable procedure analysis: 5(2) In determining whether a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues, the Court may consider any matter that the Court considers relevant to making that determination, but in making that determination the Court must consider at least the following: (

a) whether questions of fact or law common to the prospective class members predominate over any questions affecting only individual prospective class members; (

b) whether a significant number of the prospective class members have a valid interest in individually controlling the prosecution of separate actions; (

c) whether the class proceeding would involve claims that are or have been the subject of any other proceedings; (

d) whether other means of resolving the claims are less practical or less efficient; and,

(

e) whether the administration of the class proceeding would create greater difficulties than those likely to be experienced if relief weresought by other means. [26] The Court must certify the proceeding as a class proceeding where all the requirements of subsections (1)(

a) to (

e) aresatisfied; conversely, the Court may not certify a proceeding as a class proceeding if these requirements are not satisfied: CPA, ss 6(3)and (4). [27] There are certain distinctive features of class action legislation and applications for certification which inform the overallanalysis and the consideration of each statutory factor. [28] Class action legislation is procedural; it does not create new substantive rights.

The purpose of class action proceedings is toprovide a clear procedural mechanism to enable the courts to deal efficiently with a large number of claims being made by manyaggrieved persons who have all suffered injuries from the same event: Condominium Plan No 0020701 v Investplan Properties Inc, 2006 ABQB 224 at para 83, 57 Alta LR (4th) 310 (“Investplan Properties”).

The mechanism at the heart of the CPA is the certification ofcommon issues that, for reasons of fairness and efficiency, should be determined in a single proceeding that binds every member of theclass or subclass who has not opted out: Harrington v Dow Corning Corp, 2000 BCCA 605 at para 8, 82 BCLR (3d) 1. [29] The purpose of class actions is to serve as an alternative to multiple individual proceedings involving one or more commonissues; the core of a class proceeding is the element of commonality: Frohlinger v Nortel Networks Corp (2007), (ONSC), 40 CPC (6th) 62 at para 25 (ONSC).

The statutory requirements are linked. “There must be a cause of action, shared by anidentifiable class, from which common issues arise that can be resolved in a fair, efficient and manageable way that will advance theproceeding and achieve access to justice, judicial economy and the modification of behaviour of wrongdoers”: Sauer v Canada (AttorneyGeneral), (ON SC), [2008] OJ no 3419 (QL) at para 14 (SC). [30]

Section 8 of the CPA provides that certification of a class action may not be refused solely on the grounds that: the reliefclaimed would require individual damage assessments; the relief claimed relates to separate contracts; there are different remediessought for different class members; the number or identity of class members is not known; or, the identified class includes a sub-classwhose members have claims or defences that raise common issues not shared by all class members.

Many class actions involve a twostage process: first a trial on the common issues, then a separate inquiry into individual issues, often involving individual class members’entitlement to and assessment of damages. [31] The question of certification should be approached in a flexible and liberal manner, seeking a balance between efficiency andfairness. The ultimate question underlying an application for certification is whether the interests of access to justice, judicial economy,and deterrence are best served by certification of the action.

To this end, the legislation must be interpreted liberally and purposively andthe Court is given a broad discretion. There are limits, however, to how far a Court may assist either party. V. Evidence on the Certification Application [32] The proposed representative Plaintiffs bear the burden of establishing that the action should be certified as a class proceedingbased on the legislative criteria. The applicant must come forward with sufficient evidence to support certification and the opposingparty may respond with evidence of its own to challenge certification.

The evidentiary threshold is not onerous; there must simply besome basis in fact for each certification requirement (other than the requirement that the pleadings disclose a cause of action): Hollick vToronto (City), 2001 SCC 68 at para 25, [2001] 3 SCR 158. Certification will be denied if there is an insufficient evidentiary basis forthe facts upon which the claims of the class members depend. (

A) The Plaintiffs’ Evidence [33] The Plaintiffs submitted three affidavits sworn by Mr. Andriuk on August 24, 2011, September 22, 2011 and July 20, 2012;he was cross examined on all three. The Plaintiffs also relied upon an affidavit sworn by Ashley Gregson, which was sworn for adifferent motion and whose affiant refused cross-examination. I have placed no reliance on the Gregson affidavit. [34] The evidence, after cross-examination, is that Mr. Andriuk held shares in ONC through his and his son’s investment vehicle,

AIL. Over the relevant period, AIL held ONC at Merrill in a margin account, at Bank of Montreal in a margin account, and later at Lightyear Technology Research ( “ Lightyear ” ) (the organization where Mr. Soost eventually went after being terminated by Merrill) in a margin account. Mr. Andriuk testified that he lost a fortune on ONC. [ 35 ] Mr. Andriuk appended as exhibits to his first affidavit internal memos from Merrill concerning ONC during the relevant time, including Merrill ’ s admission in the Soost action that in December 2000 it was holding a control position of 22% of outstanding shares of ONC.

This information is advanced to establish that Merrill knew that its holdings in ONC were approximately 22% of the outstanding shares and that this amounted to a control position. Merrill employees were instructed to reduce the overall branch exposure of the ONC position. [ 36 ] The exhibits support the existence of a mandate to refrain from further solicitation of ONC. A “ no solicitation memo ” on ONC was sent out to address concentration issues in ONC at the Calgary branch at the time. There was also concern expressed over Merrill ’ s margin exposure on ONC.

Merrill made the determination on how much margin to extend to each client. Merrill established daily monitoring of a particular margin account that it believed held too much ONC and gave rise to a large debt from those holdings. The documents submitted demonstrate actual knowledge on Merrill ’ s part that some accounts were being transferred to other brokers. The matters were noted to be of some sensitivity and Merrill was looking for ways to “ improve our position ” .

Around June 13, 2001 Merrill acknowledged it would likely take something approaching 50 business days to reduce its substantial exposure to ONC as it would represent the entire sell side of the market. [ 37 ] Mr. Andriuk appended to his affidavit the Investment Dealers Association Policy No. 2 “ Minimum Standards for Retail Account Supervision ” developed by the Joint Industry Compliance Group (now the Compliance and Legal Section). The standards represent the minimum requirements necessary to ensure that a member has procedures in place to properly supervise retail account activity.

The Policy requires branch managers to undertake certain activities to assess compliance with regulatory requirements and with the members ’ own policies. Among the list of matters that are designated for daily review are lack of suitability; undue concentration of securities; excessive trade activity; conflict of interest between registered representative and client trading activity; inappropriate/high risk trading strategies and quality downgrading of client holdings. Monthly reviews in relation to similar matters are required of the monthly statements belonging to client and branch personnel.

The Policy requires head office to conduct monthly reviews in relation to the concentration of securities, among other things. [ 38 ] AIL held ONC in its account at Merrill from March 2000 until about mid-2001. Mr. Andriuk noticed that after December 1, 2000 and particularly in 2001 the value of ONC had diminished, resulting in some interest issues and margin issues in his account. In his affidavit, Mr.

Andriuk explains that the problems were exacerbated when Merrill reduced the amount of margin granted on ONC from 50% to 30%, and later to 25%, requiring him to sell ONC and other investments to cover losses, margin and interest charged and paid. Mr. Andriuk ’ s evidence was challenged in cross-examination and it appears that most of his personal margin and interest issues occurred within his BMO account rather than at Merrill. Even so, the allegation is that other class members suffered margin issues at Merrill because they were asked or pressured to move their accounts to another brokerage. [ 39 ] Mr.

Andriuk was not told that Merrill had issued a mandate to its investment advisors to “ reduce the overall branch exposure to ONC ” in May 2001. He was not told that Merrill was working to sell some of the 4.4 million shareholdings held by the Calgary branch to address what was either a concentrated or control position.

He puts forward his belief that as a result of this mandate there was selling pressure on the public market which artificially reduced the value of ONC and that this caused damage to his account. [ 40 ] The Plaintiffs anticipate obtaining expert evidence to quantify the damage caused to the market price of ONC by Merrill ’ s various actions; however, the Plaintiffs tendered no evidence of any methodology to do so at the certification hearing. [ 41 ] In his second affidavit, Mr.

Andriuk sought to widen the class definition to clients holding ONC at any Merrill branch, yet the appended list of 500 accounts represents a snapshot of Merrill ’ s Calgary branch in April 2001 rather than a national sample. [ 42 ] Mr. Andriuk ’ s third affidavit lists 11 persons or corporations who have retained the McGuigan firm to pursue the class action: Sanders Lee, Dr.

Patrick Lee, Ted Feddema, Richard Soost, Randall Hughes, Wayne Thomson, Owen Gervais, Eugene Fabro Jr., Fabmar Investments Ltd., Richard Habiak, and Resman Holdings Inc. [ 43 ] Merrill takes issue with the evidence put forward in support of the certification application calling it “ a biased collage of

[ 43 ] Merrill takes issue with the evidence put forward in support of the certification application calling it “ a biased collage of exhibits ” and “ bits of hearsay evidence ” taken from Mr. Soost ’ s wrongful dismissal trial. The Defendant submits that the evidence filed in support of a certification application must meet the ordinary criteria of admissibility: Chopik v Mitsubishi Paper Mills Ltd (2002), 26 CPC (5 th ) 104 (ONSC) .

Evidence is inadmissible if it is (1) hearsay that is not admissible through an exception; (2) affidavit evidence that fails to disclose the deponents ’ source of information and belief; (3) opinion that is not properly qualified; or (4) is improper argument: Chopik at para 26. The Defendant states that as a result of the deficiencies in the Plaintiffs ’ evidence there is an insufficient basis to demonstrate that the class members are identifiable and that there are common issues that can be tried on a class-wide basis.

In my view the evidence put forward is admissible at the certification hearing where the burden is to establish some basis in fact. The memos are business records that were authenticated by Merrill in the Soost action and Merrill ’ s admissions, albeit from another proceeding, nevertheless enjoy the hallmarks of threshold reliability. [ 44 ] The Defendant also raises concerns related to the Plaintiffs ’ failure to put forward any methodology to prove how Merrill ’ s alleged wrongdoing caused loss to all class members.

The Defendant argues that the Plaintiffs provide no evidence that an expert has been secured and provide no description as to what such an expert ’ s analysis would entail. The Defendant characterizes the Plaintiffs ’ theory regarding the effect of Merrill ’ s mandate on the share price to be “ devoid of support in fact, evidence, and logic. ” (

B) Merrill ’ s Evidence [ 45 ] Merrill put forward two affidavits by Mr. Michael J. Horgan, sworn December 21, 2011 and October 18, 2012. Mr. Horgan held many positions in the investment industry and has been an independent consultant for the past 18 years. [ 46 ] Mr. Horgan initially was retained to provide expert evidence on four issues. First, he explained certain investment industry terms used in the Plaintiffs ’ allegations and affidavits including “ concentration ” , “ concentrated position ” , “ risk adjusted capital ” , “ control blocks ” , the “ know your client rule ” and “ margin ” .

In his view, the Plaintiffs ’ claim discloses no breach of investment rules or regulations and no breach of any duties a dealer owes its client. He stated that what a dealer may do when its clients hold a concentrated position in a particular security is a business decision informed primarily by its assessment of its own risk factors. [ 47 ] Second, Mr. Horgan reviewed statements for accounts belonging to AIL that held ONC shares: the Merrill account, the BMO account and the Lightyear account.

In his opinion, based on a pure market value determination, AIL did not lose money in its Merrill account. [ 48 ] Third, Mr. Horgan addressed the proposed class definition, offering the opinion that the class is too broad because it includes account holders who were also professional dealers at Merrill. [ 49 ] Fourth, Mr. Horgan considered whether harm could be established on a class-wide basis.

In his opinion, there is no methodology to establish class-wide harm and there are too many individual circumstances, factors and considerations for each potential claimant to assess causation and damages on a class-wide basis. He opined that an individual assessment of damages would be both necessary and complex. [ 50 ] In more detail, Mr. Horgan explained in his first affidavit that concentration is the notion that comes into play when a dealer is assessing its own risk exposure.

He stated that there is no law or regulation that prohibits a dealer from holding a concentrated position; a concentrated position simply means that a dealer believes it has too much of something, whether a particular security, type of security or industry. The concentrated position exposes the dealer to greater risk and there are many ways this can be bad for business. For example, if there is too high a concentration in a particular stock it raises concerns that the investment may not be suitable for at least some of the clients holding the security.

Further, if a dealer ’ s clients hold the security on margin, the concentrated position also creates a credit risk for the dealer. [ 51 ] In margin accounts the dealer can choose to extend credit to the investor within limits set by regulation. The lender charges interest and fees on debit balances. A written contract governs these transactions (a sample contract is in evidence as an exhibit to Mr. Horgan ’ s Affidavit).

The dealer has very broad discretionary powers to call the margin, refuse orders, require the client to put up more cash or securities or even sell out the client ’ s position with little or no notice. A client ’ s margin position depends upon the client ’ s entire portfolio mix and dealers may take different actions with differently situated clients. In Mr. Horgan ’ s view, a reduction in the available margin on a particular security is an acceptable means by which a dealer can manage the risks associated with a concentrated position.

[ 52 ] Mr. Horgan testified that even if it could be proven that Merrill held a concentrated position, it did not breach any industry rule or regulation in how it responded and dealt with it. Mr. Horgan denied Merrill was required to review concentration reports on a daily, weekly or monthly basis. He opined that the Plaintiffs are confusing a concentrated position with a control person under the Securities Act because there is no requirement for a dealer to publicly disclose that it holds 20% or more of a security. He explained the normal procedures that would apply when a dealer discovers a concentrated position:

a) conduct a suitability review to determine whether the investment is suited to the particular client;

b) reduce the margin allowance in respect of a concentrated security; and

c) ensure investment advisors have a proper basis to recommend to clients the purchase of the concentrated security. [ 53 ] Mr. Horgan was of the view that even if Merrill reduced the available margin on ONC, the proposed class members would not have suffered any loss as a result of additional interest charges.

This statement appears to be based on the assumption that when margin is reduced the client will pay down the difference from some other source so that the level of indebtedness would not remain at the higher level. [ 54 ] The Plaintiffs also allege that Merrill failed to follow industry regulations and keep its “ Risk Adjusted Capital ” ( “ RAC ” ) at greater than zero with respect to ONC. The RAC is a measure of the capital, profitability and liquidity of investment dealers allowing them to monitor their financial health.

In some cases firms must put up capital to cover margin deficiencies in their clients ’ accounts; firms also may be required to report certain matters to the regulatory authorities. Mr. Horgan is of the view that even if Merrill failed to adjust its RAC, this failure would not have been publicly reported and would have had no impact on the market price of ONC. [ 55 ] In his second affidavit, Mr. Horgan reviewed the Merrill accounts for the 11 individuals identified by Mr. Andriuk as being prepared to go forward with this litigation. From Merrill ’ s own records of these clients ’ monthly statements, Mr.

Horgan set out to calculate their notional profit or loss positions on ONC stock held at Merrill. He found that they each acquired ONC shares at different times, as would be expected. Seven investors transferred stock to Lightyear in mid-2001 (S. Lee, P. Lee, Feddema, Soost, Hughes, Thomson and Gervais). The remaining four kept their accounts at Merrill to the end of the proposed class period (Fabro Jr., Fabmar Investments, Habiak and Resman Holdings Inc.). [ 56 ] In calculating the notional gains or losses, Mr.

Horgan used the stock price at the end of the month in which the transactions occurred rather than the market price on the day the stock was sold or transferred. Using this formula, he found that six investors held a profit position based on the published values for ONC measured from the point at which they first held the stock until the time of transfer (Gervais, P. Lee, S. Lee and Soost) or to the end of the class period (Habiak and Resman Holdings). [ 57 ] Mr.

Horgan found that five investors were in a negative position from the point they first invested in ONC until they made a transfer or to the end of the class period (Fabro Jr., Fabmar Investments, Feddema, Hughes and Thomson). Mr.

Horgan noted that none of these individuals sold ONC on the open market and opined that “ none actually realized a loss. ” In cross-examination, however, he conceded that these same investors with a negative position actually experienced a loss: Q: When you say “ negative position ” , you ’ re saying that the individuals, then in Paragraph 9, you did calculate actually experienced a loss? A: Correct [ 58 ] He also admitted that he made no assumptions about why ONC was held, transferred, or sold.

These 11 individuals are only some of the investors in the putative class. [ 59 ] With respect to the representative Plaintiffs, Mr. Horgan analyzed their ONC shareholdings at Merrill (March 2000 to August 2001), BMO (January 2000 to April 2002), and Lightyear (July 2001 to March 2002). He concluded that the Plaintiffs did not lose money on ONC while at Merrill. Indeed, he found that AIL made a profit on its ONC holdings at Merrill despite significant losses in other accounts. This profit was assessed based on published share values and did not account for any claimed depreciation in market value. [ 60 ] Mr.

Horgan reviewed the market price of ONC and noted an increase in its price in the month after the mandate was allegedly implemented. The evidence also shows, however, that after the time frame of the alleged mandate there were subsequent reductions in the share price and larger trading volumes.

[61] Mr. Horgan opined that the transfer of a client’s portfolio from one dealer to another would not have led to a loss for theparticular client because there was no open market sale in such circumstances. He focussed only on losses crystallized through anoutright sale; he did not consider the transaction costs paid by the client when transferring out of Merrill or share price depreciation. [62] Mr. Horgan also addressed the proposed class definition and opined that employees who held professional accounts hadinterests in conflict with other class members.

In his opinion, Merrill employees presumably would have knowledge of the allegedmandate and would not have solicited themselves to sell ONC. He also thought those investors with a “special relationship” to ONC, asdefined under the Securities Act, should be excluded from the class as they may have made trading decisions based on their superiorknowledge. [63] Mr. Horgan outlined how he would apply the “but for” test in addressing causation.

His chief complaint was that Mr.Andriuk’s affidavit did not propose any methodology for assessing causation of loss on a class-wide basis for cash clients or for holdersof margin accounts. He was not aware of any methodology to establish class-wide loss; the multitude of different inquiries that would benecessary suggested that individual damage assessments would be required in all cases. [64] Mr.

Horgan identified the factors that would require consideration to determine losses for cash account clients: how theywere solicited to sell and whether they incurred a loss; the price at which they bought and sold; an inquiry into what the client wouldhave done but for the alleged wrongdoing, especially given the volatility of this stock in a technology sector that was experiencingdifficulties; and whether the client experienced ONC related losses or any offsetting gains in an account held elsewhere.

Clients holdingONC in margin accounts would be subject to further inquiries, namely, in what manner did the client respond to a margin call: putting upcash or collateral, selling ONC, selling other securities to obtain capital or transferring ONC to another dealer offering more favourablemargin rates. Mr. Horgan further suggested that since Merrill took various actions at different times it is impossible to discern anyuniform effect on the share price of ONC. [65] On cross-examination, Mr.

Horgan admitted in response to a hypothetical question from Plaintiffs’ counsel that a sell-off ofany given stock would likely put downward pressure on that stock’s price. He also conceded that investment industry rules andregulations exist in part to ensure dealers do not act in conflict with their clients’ interests and that when a dealer seeks to reduce itsexposure to a stock it must do so in a manner that keeps its clients’ interests at the forefront. VI.

Issues [66] There is just one principal issue in this application: have the Plaintiffs demonstrated that this is an appropriate case forcertification as a class proceeding? VII. Discussion: Certification Requirements (

A) Do the Pleadings Disclose a Cause of Action? [67] Section 5(1)(

a) of the CPA requires that the plaintiffs’ pleadings disclose a cause of action. At this stage of the analysis, noevidence is required to prove a cause of action; nonetheless, the plaintiff must plead all of the material facts on which he or she relies andwhich must be proven to establish a cause of action in law: Ragoonanan Estate v Imperial Tobacco Canada Ltd (2000), (ON SC), 51 OR (3d) 603 (SC). Rule 13.6 of the Alberta Rules of Court requires that a statement of claim contain a succinctstatement of the facts upon which the party relies.

The Rule directs a recitation of the material facts, including those that establish theconstituent elements of the claim: Martin v AstraZeneca Pharmaceuticals PLC, 2012 ONSC 2744 at para 131 discussing the similarlyworded Ontario Rule. Every fact that is material to be proved to entitle a plaintiff to succeed forms an essential part of the cause ofaction: Halsbury's Laws of England, (5th ed), vol 11, para 21.

[68] The test for certification is not predicated on the assumption that the pleadings may not be amended; rather, they must beconstrued generously and liberally with allowances for drafting deficiencies that do not disclose radical defects: Healey v Lakeridge Health Corp (2006), 38 CPC (6th) 145 (ONSC) at para 26; Fakhri v Alfalfa's Canada (cob Caper's Community Market), 2003 BCSC 1717 at para 42, 26 BCLR (4th) 152, affirmed 2004 BCCA 549, 34 BCLR (4th) 201; Cerqueira v Ontario, 2010 ONSC 3954 at para 12.The question is whether the pleadings disclose a supportable cause of action assuming the facts pleaded to be true: Alberta v ElderAdvocates of Alberta Society, 2011 SCC 24 at para 4, [2011] 2 SCR 261.

A cause of action will be disclosed if the facts pleaded couldpossibly be considered to entitle the plaintiff to a legal remedy; conversely, if it is plain and obvious that the facts are incompatible withan entitlement to a remedy, or insufficient for that purpose so that the plaintiff has no chance of success, then a cause of action will notbe disclosed: Healey at para 27. [69] The novelty of the cause of action will not militate against the plaintiff: Hunt v T & N plc, (SCC), [1990] 2SCR 959.

In Hunt, the Supreme Court of Canada considered the novel claim of extending the tort of civil conspiracy beyond thecommercial context. Wilson J, writing for the Court, concluded that it is critical to allow pleadings to proceed which reveal an arguable,difficult or important point of law because it is only in this way that the common law “will continue to evolve to meet the legalchallenges that arise in our modern society”: Hunt at para 55. [70] To assess whether a cause of action exists it is important to focus on the claims being asserted in the pleadings and who isasserting them.

In this case, the proposed class is very widely drawn.

It purports to claim on behalf of all holders of ONC throughoutCanada; whether they held ONC in a cash or margin account; whether they bought ONC before or during the class period; whether theyretained ONC, transferred it out of Merrill to another brokerage, or disposed of it during the class period, and if so disposed, whetherthey made a loss or gain based on published market values; and whether or not they worked as a broker at Merrill. [71] The Plaintiffs claim Merrill breached various duties arising under contract and in tort and seek remedies pursuant to fiduciaryand restitutionary principles.

The evidence establishes that there was a large trading volume and a significant drop in the value of ONCshares over the relevant time. The Plaintiffs claim for injury and losses related to the reduced share price allegedly caused by Merrill’sactions.

The loss calculation is not based on simple market value comparisons but requires a determination of the extent to which Merrillartificially depressed the published market rate. [72] Much of Merrill’s argument against certification centred on the cause of action requirement, arguing that the Plaintiffs’claims are complaints in search of a cause of action and that even if the facts alleged are proven, the Defendant’s actions give rise to alegally cognizable claim.

Merrill contends that the Plaintiffs’ pleadings make only general allegations of breaches of duties withoutgrounding the duties in any particular area of law.

The Defendant argues that while various breaches of duties have been alleged, thespecific elements of these potential causes of action have not been particularized and the facts needed to establish the constituentelements of each cause of action have not been set out with the required precision and clarity. [73] The Defendant refers to Martin v AstraZeneca in which Horkins J concluded that the pleadings were deficient and that it wasplain and obvious that the cause of action as framed would fail.

The plaintiffs in that case made general allegations of negligence andbreach of the duty to warn, but the judge found that the negligence cause of action actually fell into three categories: negligent design,development and testing; negligent manufacturing; and negligent distribution, marketing and sale. The pleadings failed to acknowledgethe differences between the various types of negligent activity; instead of precision and clarity, the pleadings were muddled and vague:Martin at para 132. [74] There is some merit to the Defendant’s argument that there are similar flaws with the pleadings in the case at bar.

In readingthe pleadings generously, however, they do “tell a story,” even if they are unclear as to the specific causes of action asserted. Afterspending a great deal of time trying to sort out the pleadings, the various class

definitions, the changing proposed common issues and thelimited evidence submitted by the Plaintiffs, there appear to be three planks to the Plaintiffs’ claims. First, the Plaintiffs say that Merrillfound itself with too much ONC at the Calgary branch. Second, when Merrill found itself with too much ONC it took steps to protect itsbusiness and legal interests and these steps were not in the best interests of its clients.

Third, by these actions Merrill caused varioustypes of losses to its clients, including the class-wide harm of artificially depressing the market value of ONC shares and potentialindividual losses (depending on each client’s response to the mandate), interest charges on margin accounts and transaction feesgenerally. While there are other ways to structure the analysis, these three planks help put the cause of action issues, as well as thecommon issues, in an appropriate analytical framework. 1.

Merrill held too much ONC stock at the Calgary Branch [75] First, the Plaintiffs say that Merrill found itself in a control or concentrated position with respect to its excessive ONC

holdings at the Calgary branch. The Plaintiffs claim that Merrill found itself in this position because it breached its duty to adequatelyand properly monitor its ONC holdings at the branch level. More specifically, the Plaintiffs allege that Merrill contravened certain lawsand regulations by failing to properly monitor and control the concentration of ONC at its Calgary office; failed to report concentrationand control block issues to the appropriate regulatory authorities; and failed to make the necessary adjustments to its RAC in compliancewith regulations. [76] Merrill put forward evidence in Mr.

Horgan’s affidavit that he did not believe Merrill had breached any industry regulations.This evidence is not admissible for the purposes of determining whether there is a cause of action since the facts asserted must beaccepted as true. Even if admissible for this criteria, Mr. Horgan suggested a conclusion on a legal issue, something outside his expertise,and there is also contrary evidence on this issue.

The Plaintiffs’ affidavits raise a basis in fact for the allegation that Merrill held 22% ofONC in the Calgary branch, that Policy 2 was engaged and required daily or monthly monitoring of concentration and that the RACrequirements called for Merrill to report its holdings. The Plaintiffs also put in evidence showing that Merrill was concerned with itsholdings and developed a multi-pronged strategy to improve its position and reduce its exposure.

Merrill acknowledged that it held thesupply side of the market and recognized that it would take about 50 days to sell off a sufficient quantity of shares to reduce its risk. Mr.Horgan admitted that sometime after the alleged mandate, the ONC share price dropped and trading volumes increased. [77] The Plaintiffs do not claim a separate and independently enforceable civil claim against Merrill for its alleged breaches of theclaimed statutory duties.

Canada v Saskatchewan Wheat Pool, (SCC), [1983] 1 SCR 205 makes clear that absent rareand exceptional circumstances no civil actions lie for breach of a statutory duty. As I read the pleadings, the alleged breaches of statutoryduties are given as examples of how Merrill failed to fulfill its multiple duties. For example, the statutory obligations may be impliedterms in the contract between Merrill and its clients or they may be part of the standard of care expected in the industry.

Proof that therewere breaches of these statutory obligations may be some proof of negligence or some evidence that Merrill breached its contractualobligations. [78] Nevertheless, even if Mr. Horgan is correct and there were no breaches of industry regulations, Merrill still may have beenholding too much ONC. These are questions of fact common to all class members. Mr. Horgan opined that Merrill would experience toomuch risk exposure if too much of one stock was held at a particular branch, especially if the stock was held by clients in marginaccounts.

Thus, even if Merrill breached no obligations in getting itself in the position of holding too much ONC, how it chose to reducethe amount of ONC held at the Calgary branch and divest itself thereof may be a justiciable issue if, by its conduct, Merrill acted in itsown interests and against the interests of its clients. [79] In conclusion on this point, it is not plain and obvious that the Plaintiff cannot establish that Merrill held too much ONC orthat such holdings did not amount to a breach of duty, contractual, statutory or otherwise. 2.

Merrill acted in its own interests and not those of its clients [80] The second plank of the claim is that when Merrill found itself with too much ONC, it took steps to protect its own businessand legal position that were not in the best interests of its clients. These steps included the mandate to solicit sales of ONC, transfer ONCout of its Calgary branch and the two reductions of the margin allowed on ONC held in margin accounts. Further, the allegation is thatMerrill did not inform its clients of why it took the steps it did.

These steps are alleged to have breached duties held to class members.While there may be several justiciable claims raised by these facts, the pleadings lack clarity and precision. [81] First, the Plaintiffs assert a contractual relationship between the parties and refer to Merrill not acting in the best interest ofits clients. I am prepared to accept that the Plaintiffs claim a relationship based upon the principles of agency: Merrill is the agent for itsclients in their purchase and sale of investments and Merrill earns fees for its work.

An agent’s primary duty is to obey and carry out theprincipal’s instructions. An agent has a recognized obligation to act in the interests of its principal, to avoid conflicts in which it givespreference to its own position over that of its principal and to refrain from making secret profits. In other words, an agent must act in theinterest of the principal and cannot allow its own interests to conflict with the interests of the principal and cannot make a profit in theabsence of full and fair disclosure.

An agent that puts itself in a position where its own interests and duties are in conflict with those of itsprincipal becomes liable to account. The Plaintiffs allege that the Defendant failed to protect the best interests of Merrill clients and actedin conflict with the best interests of clients holding ONC by mandating sales of ONC, doing so in a non-uniform manner, and by makingunilateral reductions in margin credit. [82] While the pleadings refer to contractual duties, none of the contractual terms grounding these duties is referenced or

mentioned therein. The pleadings note only that all Merrill clients signed a variety of agreements to enable their purchase of securities, including Know Your Client forms and Margin Agreements for those clients opening margin accounts. Furthermore, the Plaintiffs did not place any such contracts into evidence for the contract/agency claim and there is similarly no plea or assertion as to the existence of a contract that is common to all class members.

There is no necessity for the purposes of class certification to have identical contracts but it would have been helpful to know about any similarities or differences, both in relation to the cause of action requirement and in relation to the statement of common issues. [ 83 ] The proposed common issues submitted by the Plaintiffs in argument provide some detail about the questions that may be asked by the trial judge in relation to the contract claim, but do not elucidate what actually may be in any such contracts. The questions include: 5.

What are the relevant terms (express, implied or otherwise) of the Class Member ’ s contracts to invest with the Dealer [Merrill], in regard to: a. Compliance with industry policy and regulations; b. Compliance with internal policy and regulations; c. Requirements of disclosure related to non-compliance with any policy and regulation; d. Requirement or responsibility of the Dealer to the Class Members when responding to the ONC concentration or control position, as determined e.

Do the margin agreements executed between the Dealer and Class Members add any further terms (express, implied or otherwise) related to the terms of contractual agreement between the Dealer and those clients also holding margin accounts? 6. Did the Defendant breach any of the contractual terms determined to exist?

And in what manner? [ 84 ] While the agency relationship theoretically raises justiciable issues, the Court does not know the nature of the specific agreements between the parties, who are the parties to any such agreements, and whether the express terms of the agreements augment or modify common law principles. [ 85 ] Contracts also exist between Merrill and its margin account holders. In relation to these members of a possible sub-class, Merrill had the rights and responsibilities of a lender in extending credit and charging interest on monies advanced, as well as those of an agent in earning transaction fees.

The Margin Agreement may allow Merrill to take certain steps as a lender, but it is not plain and obvious that a Court would allow Merrill to use its powers to resolve its concentrated position at the expense of its clients. While the Margin Agreement signed by Mr. Andruik was appended by Merrill as an exhibit to Mr. Horgan ’ s Affidavit, there was no pleading or evidence that this is the same agreement that applies to all class members with margin accounts at Merrill.

Again, this may not be fatal to the application but necessary information is lacking. [ 86 ] A further difficulty arises in that the Plaintiffs seek to establish that Merrill ’ s actions breached contractual obligations owed to all ONC shareholders as a class including those outside the Calgary branch. It is not enough to show that Merrill may have acted in a manner that breached its agency obligations to others; derivative actions are not generally available in contract.

It is incumbent on the Plaintiffs to prove that when Merrill took its actions to reduce the concentration of ONC in its Calgary branch, it was breaching its obligations to all ONC holders across the country. This is a question of establishing a breach of contract, not proving any loss or arising injury.

In my view, this calls into question whether those outside the scope of the mandate at the Calgary branch have a cause of action, even if they can show a contractual agency relationship with Merrill. [ 87 ] The Plaintiffs also pleaded non-disclosure, alleging that Merrill failed to tell its clients that its mandate was intended to cure

its own problem of having too much ONC in Calgary and did not arise from the stock itself or the clients’ needs or risk tolerance.

Thiscould be seen as a breach of contract (an agent’s failure to disclose) or a negligent, fraudulent or deliberate omission. [88] Second, the Plaintiffs make allegations based in tort, for Merrill’s failure to monitor its holdings such that Merrill ended upwith the alleged control or concentrated position of ONC at the Calgary branch and for it subsequent actions in addressing the situation.These allegations are properly pleaded and give rise to a duty of care which may have been breached if the claimed facts are assumed tobe true.

Allen M Linden & Bruce Feldthusen in Canadian Tort Law, 8th ed, (Markham, ON: LexisNexis Canada, 2006) summarize at442-443 the recognized categories of negligence for pure economic loss: 1) negligent misrepresentation, 2) negligent performance of aservice, 3) defective products and/or buildings, 4) relational economic loss (consequent on physical damage to a third party) and 5)independent liability of public authorities. The most fitting category here is negligent performance of a service.

The damages sought inrelation to this negligence claim, however, are novel and exceptional given the traditionally limited recovery in tort for pure economicloss, which is not as wide as under contract or restitutionary principles. As the Supreme Court concluded in Hunt, however, the noveltyof the damages claim is no reason to find that it is plain and obvious that the cause of action will fail. [89] In relation to the allegations of negligent misrepresentation introduced in the Amended Amended Statement of Claim, thePlaintiffs have not specified the negligent misrepresentations in their pleadings.

The Defendant is entitled to know the material factsupon which the Plaintiffs rely to support each area of negligence; generalized allegations of negligence are not sufficient: Khan vCanada (AG), [2009] OJ no 715 (SCJ) at para 19, aff’d 2009 ONCA 737. The Defendant argues and I accept that pleadings must giveparticulars of the alleged misrepresentation: Rule 13.7.

The required elements that must be set out with sufficient particularity include: 1. the alleged misrepresentation itself, 2. when, where, how, by whom and to whom it was made, 3. its falsity, 4. the inducement, 5. the intention that the plaintiff should rely upon it, 6. the alteration by the plaintiff of his or her position relying upon the misrepresentation, 7. the resulting loss or damage to the plaintiff: Murphy v BDO Dunwoody LLP (2006), (ON SC), 32 CPC (6th)358 (ONSC) at para 12. [90] There is also a division of opinion in the authorities over whether claims in negligent misrepresentation can raise commonissues or whether the requirement of a representation made and acted upon to the claimant’s detriment requires an individual assessment in each case.

In Green v Canadian Imperial Bank of Commerce, 2012 ONSC 3637, 29 CPC (7th) 225, Strathy J followed other leadingauthorities to conclude that negligent misrepresentation requires proof of individual reliance such that it could not be resolved on acommon basis.

By contrast, in Eaton v HMS Financial, 2008 ABQB 631 at para 90, 458 AR 282, Rooke J, referring to SamosInvestments Inc v Pattison, 2001 BCSC 1790, affirmed 2003 BCCA 87 and to Carom v Bre-X Minerals Ltd (2000), (ON CA), 51 OR (3d) 236 (CA), found that reliance can be inferred and that claims in misrepresentation can be certified when thecommon question focusses on the conduct and knowledge of the defendants, rather than on the reliance of the plaintiffs.

No finding isrequired on this point at this time due to the inadequacy of the pleadings. [91] Third, the Plaintiffs’ claim for unjust enrichment is likewise not adequately particularized and, while this may be easilyremedied, there is still a gap in the proffered pleadings.

The Plaintiffs merely state that the Defendant has been enriched via fees andinterest collected through the implementation of the alleged mandate, the application of adjustment to credit and application ofadjustment to margin, and that class members have suffered a corresponding deprivation through the payment of such fees and interest.The pleadings do not address the third element of unjust enrichment, the absence of juristic reason for the enrichment.

The Defendant,rightly in my view, points out that even if there is a correlation between the Defendant’s gain and the Plaintiffs’ losses in this regard, thefee agreements and the Margin Agreements likely constitute the juristic reason for these charges. The pleadings make no reference tothese agreements, nor do they reference the absence of juristic reason at all.

While this cause of action may not have been fully pleaded,the requested remedy remains available as a Court may force an agent to disgorge monies earned in breach of duties to act in the bestinterests of clients under principles of unjust enrichment, but can also do so based upon restitutionary principles for breach of contract. [92] Fourth, the pleadings contain only one reference to a claim for breach of fiduciary duty, in a paragraph about limitationperiods. Even if read generously, this brief mention is insufficient in presenting the facts necessary to found a cause of action for breach

of fiduciary duty. The broker-client relationship is not a fiduciary relationship per se, but may only become one depending on thecircumstances. The requirements for establishing a fiduciary relationship in the context of a client-broker relationship were summarizedin Cooper v Merrill Lynch, 2006 BCSC 1905 at para 116, quoting from Varcoe v Sterling (1992), (ON SC), 7 OR (3d)204 (Gen Div): The relationship of broker and client is not per se a fiduciary relationship...

Where the elements of trust and confidence and reliance onskill and knowledge and advice are present, the relationship is fiduciary and the obligations that attach are fiduciary. On the other hand,if those elements are not present, the fiduciary relationship does not exist... the circumstances can cover the whole spectrum from totalreliance to total independence. ... The relationship of the broker and client is elevated to a fiduciary level when the client reposes trust and confidence in the broker andrelies on the broker’s advice in making business decisions.

When the broker seeks or accepts the client’s trust and confidence andundertakes to advise, the broker must do so fully, honestly and in good faith... It is the trust and reliance placed by the client which givesthe broker the power and in some cases, discretion, to make a business decision for the client.

Because the client has reposed that trustand confidence and has given over that power to the broker, the law imposes a duty on the broker to honour that trust and respondaccordingly. [93] With nothing in the pleadings setting out the requisite elements of trust, vulnerability, and discretion in this specific broker-client relationship, particularly in relation to sophisticated investors owning speculative stock in margin accounts, I am unable to find thatthe pleadings, as currently drafted, make out a cause of action for breach of fiduciary duty. 3.

Alleged harm, injury and loss caused by Merrill’s conduct [94] The loss aspect of the cause of action requirement can be satisfied if the Plaintiffs can show recoverable losses that werecaused by the alleged breach or breaches. At one level this can be done rather easily for certain class members and in respect of certainlosses.

For example, if the facts pleaded are taken as true the law would permit recovery of any fees charged on forced sales, interest onmargin accounts and any other commissions charged by Merrill in relation to the transactions that helped reduce the amount of ONCheld at the Calgary branch. [95] In respect of other losses, Mr. Horgan was of the view that the complexity of the damage assessment was such that it requiredindividual assessments.

To find a cause of action, however, the Plaintiffs need not prove that there is a class-wide loss in the sense thatloss is identical or even that damages can be assessed as a common issue: the cause of action requirement is satisfied if there isrecoverable loss caused by the breach, even if assessment of that loss is done individually.

Section 8 of the CPA states that the Courtmust not refuse certification by reason only that the relief claimed includes a claim for damages that would require individual assessmentafter determination of the common issues or that different remedies are sought for different prospective class members. [96] Mr. Horgan’s analysis in his second affidavit shows that Merrill has readily accessible records from which certain types ofindividual loss calculations can be made. While Mr.

Horgan used monthly statements, month-end figures and applied certainassumptions, he was able to determine who was in a negative or positive position from the point at which they first held ONC in theirMerrill accounts until the end of the proposed class period or until they transferred out of Merrill. He found that six individuals wereholding a notional profit, based on the published market values. He further found that five investors were in a negative position duringthis chosen time frame and had experienced concrete losses.

He did not address or parse out the portion of any loss or reduced gain thatmay have been attributable to Merrill’s conduct. [97] Yet the Plaintiffs assert a class-wide loss: they allege that Merrill’s three-pronged mandate artificially and negatively reducedthe value of ONC’s share price across the board for all shareholders. Merrill refers to this as the share price depreciation theory and it isthe cornerstone of the Plaintiffs’ class-wide claim for damages. The Plaintiffs allege that everyone who held ONC shares suffered a lossin value during the claimed class period.

Those who crystallized a loss would need to show what part of that loss was attributable toMerrill’s actions, as opposed to other market forces that may have affected ONC’s value. Similarly, an investor who sold ONC at a profitduring the class period would have to establish that, but for Merrill’s actions, the profit would have been greater. Those who held on toONC would have to show that the mandate depreciated the value of their ONC shareholdings. [98] The Plaintiffs’ pleadings state that the mandate implemented by the Defendant generated a large volume of sell orders whichdrove down the market price of ONC.

Adopting the Plaintiffs’ own words: “the Defendant’s actions artificially, intentionally and

deliberately interfered with the free market system to depress the market value or trading value of ONC on the open market ” . Yet the pleadings provide no details about the pre-mandate or post-mandate share price, nor do the pleadings set out the volume of share sales at any given time to support the volume theory. The necessary information to give factual credence to the Plaintiffs ’ claims can be found in the supporting materials and would seem to be a simple matter to remedy. [ 99 ] The challenge is that the share price depreciation claim raises a novel theory of damages.

The Plaintiffs also seek to push the boundaries of foreseeability and remoteness by claiming share price depreciation losses for those class members who moved their accounts to other brokerages. I find that if Merrill ’ s actions were intended in part to force clients to take their holdings elsewhere, it is not plain and obvious that a Court would draw the line at losses incurred only at Merrill.

Losses at other brokerages may have been not only foreseeable or within Merrill ’ s contemplation, but the intended consequence of self-interested action. [ 100 ] Nonetheless, it is unlikely that such a novel claim for overall share price depreciation would be accepted in a tort action given the traditionally limited scope of tort recovery for pure economic loss.

Yet, if the Plaintiffs can establish that Merrill, as agent, acted in its own interests and against those of its clients, thereby establishing a claim for breach of contract, the measure of damages may be assessed on more flexible restitutionary or possibly fiduciary principles. [ 101 ] Regardless of how the claimed losses are characterized, there will be challenges in proving causation. The Defendant argues that the Plaintiffs must plead how and why they would not have suffered loss, but for Merrill ’ s alleged wrongdoing; they cannot rely on mere speculation.

The Defendant submits that the pleadings fail to show how any of the alleged wrongdoings caused a drop in ONC ’ s share price. The Defendant contends that the market price of a security is influenced by a host of factors, one of which is buying/selling pressure, but also other factors including company-specific developments and a myriad of micro and macro-economic factors.

The Plaintiffs acknowledge that they will be obliged to show the share value reduction caused by each of Merrill ’ s impugned actions, either on a per factor basis or in combination. [ 102 ] Merrill argues that the Plaintiffs have not brought forward a methodology for proving either the reduction in share value or that it was caused by Merrill ’ s alleged breaches.

The Plaintiffs acknowledge that they carry the burden of establishing that the drop in ONC share price was caused by Merrill ’ s impugned actions, rather than the result of other forces such as the general state of technology stocks or reports into the market on how the research was progressing. The Plaintiffs state they will secure expert evidence in the future, after discovery has been completed, to quantify the negative impact of each of Merrill ’ s three actions upon the market price of ONC. They also state that Mr.

Horgan admitted in cross-examination in response to a hypothetical question that selling off ONC could create a negative impact on the stock ’ s price. [ 103 ] The absence of evidence related to this novel theory of loss is not fatal at this stage of the certification analysis since on the cause of action requirement the Court is to take the facts pleaded as proven and the Plaintiffs have pleaded that all investors lost value when Merrill acted in its own interests and forced ONC sales in Calgary, depreciating the market value of this thinly traded stock.

Taking matters as proven, however, is subject to an exception when the matter is incapable of proof: Knight v Imperial Tobacco Canada Ltd , 2011 SCC 42 , [2011] 3 SCR 45 at para 22 . I take Merrill ’ s objection to be that, in the absence of some evidence that a methodology exists to prove or quantify the share price depreciation, the Plaintiffs have put forward a claim that is incapable of proof. [ 104 ] I find that any alleged incapacity would be exceptional and would need to be demonstrated. While Mr.

Horgan said he knew of no methodology to establish a class-wide share price depreciation loss, his claimed field of expertise is in the brokerage industry. He is not qualified to opine concerning damage calculations or complex mathematics. He also gave slightly contradictory evidence on this point in his response to Plaintiffs ’ counsel ’ s hypothetical question. In addition and in any event, it is not my function on this application to choose between conflicting opinions: Dumoulin v Ontario (2005), 19 CPC (6 th ) 234 (ONSC) at para 27 .

When and if the time comes, the Court will do its best to assess damages in the presence of uncertainty and competing formulas for assessing loss: Pacific Western Airlines Ltd v BC Federation of Labour (1986), 70 BCLR 108 (CA) at p 116-117 . The failure to adduce evidence of a methodology to establish causation and class-wide damage is not fatal at the cause of action stage of the certification hearing.

For reasons to be explained in more detail below, however, the absence of such evidence raises insurmountable obstacles to the certification of common questions of loss and causation and whether there can be a claim for aggregate damages. [ 105 ] The Plaintiffs also claim aggravated and punitive damages. Punitive damages serve the objectives of retribution, deterrence and denunciation: Whiten v Pilot Insurance Co , 2002 SCC 18 at para 43 , [2002] 1 SCR 595 . These objectives align well with the behaviour modification goals underlying class proceedings.

There are two steps in deciding a punitive damages claim: the first is an assessment of the defendant ’ s behaviour to ascertain whether it is deserving of a punitive response and the second is an examination of the effect of the defendant ’ s behaviour on the plaintiffs. While punitive damages are meant to be the exception, they can be awarded when misconduct would otherwise not be punished or where other penalties, including compensatory damages, are insufficient to

accomplish these objectives: Whiten at para 94. Thus, if the Plaintiffs establish a breach of Merrill’s duties as agent but their novel theoryof share price depreciation is not accepted, the unavailability of compensatory damages may increase the recoverability of punitivedamages. Conclusion on Cause of Action Requirement [106] The difficulty in the case at bar is that, on the facts pleaded, the Plaintiffs have established that a cause of action could begrounded in contract law and agency, negligence and perhaps even unjust enrichment.

Some damages are recoverable under establishedprinciples and may be shown to be caused by Merrill’s actions. Other damages, including the central share price depreciation claim, raisenovel questions of law including issues related to causation and testing the limits of foreseeability and remoteness, whether in contract ortort.

What is most problematic is that the pleadings lack certain essential elements which cannot be filled in even if the Court turns to theevidence or other materials in support of the application. [107] There is some debate in the jurisprudence over the role of the certification judge in “entering the ring” and remedying theclass definition or other aspects of the application for certification.

Winkler J in Caputo v Imperial Tobacco Ltd (2004), (ON SC), 236 DLR (4th) 348 (ONSC) at para 41 rejected the plaintiffs’ request to redefine the class in any way necessary torender the action certifiable: ...What the plaintiffs suggest is akin to having the court perform the role of class counsel by making wholesale changes to arrive at adefinition that the court itself would accept. That goes beyond a simple exercise of discretion and verges into the prohibited territory ofdescending “into the arena” with the parties to the motion. [108] The same principles are relevant here in relation to the cause of action.

While I must take a generous approach to thepleadings in furtherance of the three main goals of class proceedings legislation, there are so many difficulties in the manner in whichthis application has come forward that even a generous approach cannot fill the numerous gaps. While I have found several possiblefoundations for the Plaintiffs’ claims, in which it is not plain and obvious that the cause of action will fail, the pleadings as a whole donot provide properly detailed statements of the materials facts to form the proper basis for these claims.

If all other aspects of thisapplication for certification were in order, the pleadings may have been amenable to amendment. As the discussion on the othercertification requirements will demonstrate, however, I have been unable to work through or beyond the combination of complexities anddeficiencies to find in favour of certification on the record before me. (

B) Identifiable Class of 2 or More Persons [109] Class action legislation is designed to provide an effective means of resolving situations where two or more people have thesame or similar complaints, not to create complaints where none exist. As such, there must be some evidence that two or more people have a complaint that they would wish to see prosecuted: Chartrand v General Motors Corp, 2008 BCSC 1871 at para 53, 75 CPC (6th)221. In the case at bar, there is evidence of 500 account holders in Calgary during the relevant time period and 11 investors have comeforward and retained class action counsel.

It is not known how many of the other investors know about the impugned conduct or wouldbe interested in pursuing a claim but the “two or more persons” requirement is satisfied. The possible size of the class is also a factor toconsider when assessing the policy goals of advancing access to justice and judicial economy. [110] An identifiable class is one which identifies the persons who have a potential claim against the defendant, defines theparameters of the lawsuit so as to identify those persons bound by the results of the action, and describes who is entitled to notice: Bywater v Toronto Transit Commission

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