2012 QCCQ 312, 2012 QCCQ 312

Saliany c. RBC Direct Investing Inc. 2012 QCCQ 312 COURT OF QUEBEC Small Claims Division CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL TOWN OF MONTREAL Civil Division No: 500-32-118226-093 DATE: January 20, 2012 ______________________________________________________________________ BY THE HONOURABLE DAVID L. CAMERON, J.C.Q. ______________________________________________________________________ REZA SALIANY […] St-Laurent, Quebec […] Plaintiff v.

RBC DIRECT INVESTING INC. 1 Place Ville-Marie 2 nd floor, West wing Montreal, Quebec H3C 3A9 Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ THE CLAIM [ 1 ] The Plaintiff, Raza Saliany, sues the Defendant RBC Direct Investing Inc. ("RBC"), for $7,000, the maximum allowable in the Small Claims Division, in connection with an alleged loss of $8,086 U.S., resulting from the purchase on his behalf of 2,000 shares in Washington Mutual Inc. ("Washington Mutual") at unit price of $4.00 as of September 19, 2008. [ 2 ] The shares were purchased by RBC on behalf of the Plaintiff as a result of the automatic exercise of the Plaintiff's options to acquire the shares on that date at that price. [ 3 ] The Plaintiff held these options in his account with RBC.

The options were exercised as a result of the "auto-exercise rule" according to which the shares underlying an option held by a customer will be automatically purchased on his behalf by RBC when the shares are traded at a value that is at least 1¢ greater than the option exercise price. [ 4 ] The Plaintiff complains that he was not aware of this rule and intended not to exercise the option because the shares were trading on the market at a price less than the exercise price of $4.00. [ 5 ] He asserts that he checked the market at 3:59 p.m., saw that the shares were trading at $3.69, decided to not exercise the option at $4.00 and believed that, because he did nothing to exercise the option, it would simply lapse. [ 6 ] Unfortunately for Mr Saliany, when he became aware, at noon, the following Tuesday September 23 rd , that the options had been exercised at $4.00, the shares, for which $8,119 U.S. had been paid out of his account, were already "down" approximately $2,000 U.S. [ 7 ] On the 25 th of September, Washington Mutual was put into receivership and the shares became worthless shortly thereafter.

This collapse occurred as part of the banking troubles that occurred in the market in 2008 related to problems associated with asset- backed securities. [ 8 ] Mr Saliany asserts that RBC should have made him aware of the auto-exercise rule, which would have permitted him to give instructions not to exercise the option as was his intention on September 19 th , the day at the end of which the option could be exercised.

The Contestation [ 9 ] RBC admits that Mr Saliany did not understand the working of the rule but denies any liability, relying upon the OPTIONS TRADING AND MARGIN AGREEMENT entered into with the Plaintiff and the applicable rules of the options clearing corporation (OCC) which are referred to in the agreement. [ 10 ] RBC also denies any discriminatory conduct affirming that, if it communicates with certain customers the day on which an option will be auto-exercised, it does only when a trade will be made which will require a payment exceeding the moneys available in a customer's cash account or when such a payment would result in the customer requiring additional credit in the form of a margin. [ 11 ] In other words, RBC states that it makes the phone call not on the basis of the size of the position but on the basis that necessary funding has to be arranged if the trade is to take place. [ 12 ] Subsidiarily, RBC pleads that if it is liable, its liability should be limited to the loss that the Plaintiff would have incurred if he had immediately sold the shares on the day that he realised they had been purchased contrary to his intentions. [ 13 ] On September 23 rd , the shares traded between an opening price of $3.00, a high of $3.49 a low of $2.95 and a close of $3.20 (D-4).

At the lowest price, Mr Saliany would have sold them at $5,900 U.S. a loss of $2,219 U.S. [ 14 ] His loss would have included two commission fees of approximately $100 each. [ 15 ] In round numbers Mr Saliany's loss would have been in the neighbourhood of $2,500. The answer to the Contestation [ 16 ] Mr Saliany answers the subsidiary defence by stating that he had no idea that the market in securities of U.S. banking institutions would collapse and this is why he decided to hold the stocks for the time being, once he understood that RBC would not reverse the transaction.

ISSUES [ 17 ] The Court must determine whether RBC is to blame for the Plaintiff's ignorance of the auto-exercise rule and, if so, determine the amount of damages that the Plaintiff is entitled to.

ANALYSIS [ 18 ] Mr Saliany's argument is that the auto-exercise rule is not spelt out in the documents he signed when he opened his investment account. [ 19 ] He says that it is a very confusing rule that few people are aware of because the situation rarely happens that the auto- exercise rule is applied. [ 20 ] In his own experience, in every case that he had held options that were not "in-the-money" , they had simply lapsed.

In cases where his options were "in-the-money" he had prematurely sold the options at a price greater than the price he paid to acquire them, thus taking his profit. [ 21 ] The agreement contains the following provisions relevant to the issue: OPTION TRADING. […] (

b) Customer Obligations. The Customer will: […] (ii) give RBC Direct Investing timely instructions regarding the exercise or disposition of any option position. […] (

f) Absence of Instructions. If the Customer fails to give RBC Direct Investing timely instruction then RBC Direct Investing may, but is not obliged to: (

i) exercise or sell any valuable option on behalf of the Customer in which case the Customer will pay any resulting transaction costs; and (ii) exercise for the account and risk of the Customer or sell or close out any expiring valuable option. [ 22 ] These provisions make it clear that RBC may, but is not obliged, to exercise any "valuable" option. There is also a reference to the "APPLICABLE BY-LAWS, CUSTOMS, ETC." , of exchanges marketing clearing corporations … 1. APPLICABLE BY LAWS, CUSTOMS, ETC.

Each transaction executed for the Account will be subject to, and the customer will abide by the prevailing by-laws, rules, regulations, policies and customs of the Regulatory Authorities. [ 23 ] RBC's representative, Mark Von Eschen, vice-president, also points out that the FAQ's

section of their website spells it out in the following terms: What happens to my option if I do nothing? If you bought an option and do nothing, you lose the premium you paid for the option if the option has expired. If you sold a call and your option is in-the-money, you may be assigned and forced to sell your underlying stock.

If your equity option is in the money by $0.01 or more, the exchange will automatically exercise your option. [ 24 ] The Court questioned Mr Von Eschen to how the options could be considered to be "in-the-money" if the shares were trading below $4.00 one minute before trading stopped on September 19 th . [ 25 ] The answer was that there can be many trades in the last minute that the markets are active and that the closing price was in fact $4.25.

The shares opened at $4.30 traded it a high $4.55, a low of $3.36 and closed at $4.25 (D-4). [ 26 ] The auto-exercise rule is implemented after the fact based on the closing price which is the sale price of the last trade occurring. [ 27 ] But this value can only be known once the market has closed. [ 28 ] It is this particular detail of the functioning of the auto-exercise rule that may not be obvious. [ 29 ] In the Court's view, Mr Saliany's claim does not succeed for two reasons. [ 30 ] Firstly, as a person who has decided to engage in securities transactions online without the benefit of an investment advisor, broker, etc., he was assuming the responsibility of knowing how the markets work and cannot complain that his contract does not contain an exhaustive explanation of these rules. [ 31 ] RBC moreover is protected by its wording which states that in the absence of instructions, RBC may, but is not obliged, to exercise any valuable option. [ 32 ] It is obvious that "valuable" in this context means that the option is "in-the-money" i.e. exercisable at a price that his lower than the market closing price. [ 33 ] Perhaps more fatedly to Mr Saliany's case, he wrote a letter, the text of which he composed himself (D-3) to document his motivations in opening the account as requested by RCB.

It reads: Dear Sir/Madam Since I was instructed to make a brief statement about my investment knowledge and the acknowledgement of risk involved in trading options, I would like to state that due to my personal researches in financial column of major newspapers and internet post services, I'm fully aware of the definition and the rules for Call/put option trading and the possible risks in this kind of investment. On the other side, trading options will allow me to risk with my own money I'm borrowing from your bank through my margin account and this was my main objective to open a margin/option account.

Finally, with a steady job as an engineer in Nortel Networks, I believe I can count on my steady earnings to cover my investment activities, I should mention that without capability of trading options, I might consider using other financial institutions in future to obtain that functionality. [ 34 ] The reference to the storied Nortel Networks is perhaps ironic, but the gist of the letter is that he states: "I'm fully aware of the definition and the rules for Call/put option trading and the possible risks in this kind of investment." [ 35 ] The second basis on which the Court concludes that there can be no recourse is that Mr Saliany, once he became aware that he was the owner of the shares, decided to speculate. [ 36 ] When he became aware that RBC was not inclined to reverse the transaction for his benefit, he had the option of immediately selling in the market, taking his loss, or holding the shares in order to wait and see what would happen. [ 37 ] It was the second course of action that he adopted, much do his detriment as the shares, along with many other values in the market, collapsed fairly rapidly. [ 38 ] This is the essence of market speculation.

Because of the type of account he held, the Plaintiff was operating on his own in the market having chosen to pay a lower transaction cost than he would have paid if he had been teamed up with an advisor who would know him as a client and be able to counsel him adequately as to those risks that he was best advised to incur and those which he was not on a case-by-case basis. [ 39 ] If the events had been different and Mr Saliany had made a profit on the shares that he decided to hold, the litigation would, of course, not have developed. [ 40 ] The point is that Mr Saliany, whatever events led to him becoming a shareholder in this soon-to-collapse bank, voluntarily opted to continue to incur the risk, albeit on a short-term basis.

[ 41 ] There was some debate as to whether the auto-exercise rule is enforced rarely or frequently. [ 42 ] The Court does not feel that this is a major issue in the case but RBC was able to demonstrate in its evidence (Appendix A, email of August 25, 2009) that a substantial number of auto-exercise occurrences took place at the relevant time with its other customers. FOR THESE REASONS, THE COURT: DISMISSES the Plaintiff's action; CONDEMNS the Plaintiff to pay, to the Defendant, judicial costs in the amount of $191. __________________________________ DAVID L. CAMERON, J.C.Q. Date of hearing: January 9, 2012