Saturley v. CIBC World Markets Inc., 2013 NSSC 300

SUPREME COURT OF NOVA SCOTIA Citation: Saturley v. CIBC World Markets Inc., 2013 NSSC 300 Date: 20130926 Docket: Hfx No. 305635 Registry: Halifax Between: Fredrick Thomas Saturley Plaintiff v. CIBC World Markets Inc. Defendant LIBRARY HEADING Judge : The Honourable Justice Michael J. Wood Heard: April 4-5, 10, 12, 16-17, 19-20, 23-26, 30, 2012 May 1-4, 7-9, 14-16, 2012 October 1-4, 9-11, 15-18, 22-25, 29-31, 2012 November 1, 20-21, 2012 December 17-18, 2012, in Halifax, Nova Scotia Final Written Submissions: March 31, 2013 Written Decision: September 26, 2013

Subject: Employment - Wrongful Dismissal - Just Cause - Condoning Conduct - Post Termination Evidence of Cause Evidence - Witness Credibility - Adverse Inference Torts - Intentional Interference in Economic Relations

Summary: The plaintiff was employed as an investment advisor by the defendant. Many of his clients were involved in trading options on margin. As a result of an error in the defendant ’ s margin calculations, many clients suffered significant losses in their accounts. While investigating the margin error, the defendant became aware of evidence suggesting that the plaintiff was engaged in unauthorized discretionary trading and terminated his employment for cause. Issue: Was the defendant able to satisfy the onus of proving discretionary trading which would justify termination of the plaintiff ’ s employment?

Was the defendant ’ s investigation of the plaintiff ’ s trading activities unfair or biased? Did the defendant engage in conduct which amounted to intentional interference in the plaintiff ’ s economic relations with his clients? Result: The Court was required to consider witness credibility and the proper inferences to be drawn from documentary evidence in order to determine whether discretionary trading took place. An adverse inference was drawn from the plaintiff ’ s failure to call an employee witness who was alleged to be receiving client instructions and processing trades.

The Court was satisfied that the defendant met the evidentiary burden of proving that discretionary trading occurred. It rejected arguments by the plaintiff that the conduct was condoned or should result in discipline short of termination. The Court permitted the defendant to rely on post-termination evidence of discretionary trading in support of the allegation of just cause. There is no evidence that the defendant ’ s investigation was improper or that it acted with any intent to harm the plaintiff ’ s economic relationship with his clients.

The plaintiff ’ s action was dismissed, with the exception of a small claim for outstanding disability benefits. THIS INFORMATION SHEET DOES NOT FORM PART OF THE COURT'S DECISION. QUOTES MUST BE FROM THE DECISION, NOT THIS LIBRARY SHEET .

SUPREME COURT OF NOVA SCOTIA Citation: Saturley v. CIBC World Markets Inc., 2013 NSSC 300 Date: 20130926 Docket: Hfx No. 305635 Registry: Halifax Between: Fredrick Thomas Saturley Plaintiff v. CIBC World Markets Inc. Defendant Judge: The Honourable Justice Michael J. Wood Heard: April 4-5, 10, 12, 16-17, 19-20, 23-26, 30, 2012 May 1-4, 7-9, 14-16, 2012 October 1-4, 9-11, 15-18, 22-25, 29-31, 2012 November 1, 20-21, 2012 December 17-18, 2012, in Halifax, Nova Scotia Final Written Submissions: March 31, 2013 Written Decision: September 26, 2013 Counsel: George W. MacDonald, Q.C., Jack Graham, Q.C. and Kiersten Amos, for the plaintiff

Michael S. Ryan, Q.C., John A. Keith, Christy L. Sandles and Jack K. Townsend, for the defendant By the Court : INTRODUCTION [ 1 ] There is a high degree of regulation in the investment industry in Canada; however, its success requires continuing public trust and confidence. Individual advisors and investment firms must always conduct themselves in accordance with the principles of honesty and integrity.

Clients place their financial lives in the hands of their advisor and rely on them to protect their interests and provide recommendations that are appropriate for their circumstances. [ 2 ] Many of the regulations which have developed for the financial services industry are designed to protect clients and ensure that advisors act within carefully delineated limits. [ 3 ] For most investment clients, advisors are required to have clear instructions on quantity and price before entering an order for the purchase or sale of a security on their behalf.

The order must be entered as soon as possible after receipt of instructions. It is the client who manages their account based upon recommendations from the advisor. The advisor is not permitted to make decisions with respect to quantity, price or timing of order placement, unless they hold a specific licence permitting this and the client has entered into the necessary account agreement. If the advisor is managing the account without the proper licence or account agreement, they are said to be exercising unauthorized discretion.

Such behaviour may result in an advisor being subject to significant employment or regulatory sanction. [ 4 ] Fredrick Saturley has been an investment advisor for more than 20 years. He joined CIBC Wood Gundy ( “ CIBC WG ” ) in 2001. By 2004, he was the top revenue producer in the Halifax office and one of the highest fee generators in Canada. Through this performance he received significant financial benefits and status. His income grew to more than a million dollars a year. [ 5 ] In the fall of 2008, the world financial markets crashed and so did Mr. Saturley ’ s career at CIBC WG.

He was fired in December, 2008 after CIBC WG concluded that he had engaged in unauthorized discretionary trading. [ 6 ] Mr. Saturley sued for wrongful dismissal shortly after he was fired and CIBC WG defended on the basis that his discretionary trading justified termination for cause. Mr. Saturley also alleged that CIBC WG had intentionally interfered in his economic relationship with his clients because of the manner in which his employment was terminated and the information which was provided to regulatory authorities. [ 7 ] This litigation has been long and difficult for all parties.

It has already generated nine reported decisions on issues such as scope of production and sufficiency of pleadings. The trial encompassed 45 sitting days between April and December, 2012. There were many evidentiary rulings made through the course of the hearing. [ 8 ] After carefully considering all of the evidence, as well as the able submissions of all counsel, I have concluded that I must dismiss essentially all of Mr. Saturley ’ s claims for the reasons which follow.

OVERVIEW OF EVENTS LEADING TO TERMINATION [ 9 ] Frederick Saturley was a very successful investment advisor with a large and profitable portfolio. His clients were happy with the financial performance of their accounts. They were loyal and trusted him to look after their affairs. Many referred family or friends to Mr. Saturley.

[ 10 ] Mr. Saturley ’ s success was due, in part, to a relatively unique investment strategy which he implemented for many of his clients. It involved trading in option contracts to generate cash flow. For some clients, this meant relatively high trade volumes as a result of contracts being bought, sold and closed out. [ 11 ] The large volume of client trades was something CIBC WG was aware of. In the spring of 2007, it prompted a review which was inconclusive with respect to whether there had been discretionary trading by Mr. Saturley.

Concern was expressed by CIBC WG that client orders might not have been entered as promptly as they should have and, as a result, an additional assistant was hired for Mr. Saturley to help with the trade entering process. That individual was Michael Cowan. [ 12 ] Mr. Cowan ultimately obtained a licence which permitted him to receive client instructions and place orders, but not to provide advice. Mr. Saturley was also assisted by Michelle Harris, who was unlicenced. Ms.

Harris could perform administrative functions and interact with clients, however, she was not able to accept client instructions and enter orders. [ 13 ] Mr. Saturley was well aware of the importance of avoiding discretionary trading and knew that it was considered to be a very serious issue by CIBC WG. In the spring of 2008, Mr. Saturley initiated the application process to obtain a licence which would permit him to operate portfolio management accounts. This would allow him to trade on a discretionary basis in accordance with client instructions and a managed account agreement.

This application process was never completed with CIBC WG as a result of the problems which arose in the fall of 2008. [ 14 ] Many of Mr. Saturley ’ s clients traded in option contracts. An option contract can be either a “ put ” or a “ call ” . The seller of the option contract is paid a premium, which is determined by market demand. The contract will include a price at which the underlying security is to be bought or sold, which is referred to as the strike price. The contract will also have a specified expiry date.

One contract represents 100 shares of the underlying security. [ 15 ] A “ put ” option gives the purchaser the right to sell the underlying security to the seller at the strike price within the contract term. If the market price of the security falls below the strike price, the holder will exercise the option and require the seller to buy the shares at that price (which will be higher than the current market price). [ 16 ] The seller of a “ put ” option may decide to buy the contract back and thereby “ close out ” their obligations prior to the expiry date.

The cost of doing so will be determined by market demand. [ 17 ] A “ call ” option is the opposite of a “ put ” . It gives the buyer the right to purchase the underlying security from the seller at the strike price within the specified time. A “ call ” contract will be exercised when the market price rises above the strike price (at which time the seller is required to sell the shares at a price which is below the current market). [ 18 ] It is not necessary that the potential seller of the security under an option contract actually own it at the time the option is entered into.

If they do own the security, then the contract is referred to as a “ covered ” option. If the shares are not owned by the potential seller, then it is a “ uncovered ” option. Mr. Saturley ’ s clients sold both covered and uncovered option contracts. [ 19 ] Mr. Saturley utilized a unique and complex option strategy for many of his clients. He referred to it as a “ strangle ” . It involved selling both “ put ” and “ call ” options on the same security, with the same expiry date and strike prices that bracketed the current market price for the shares.

Ideally, the market price would stay within the bracketed range and neither option contract would be exercised before their expiry. This would result in the client keeping the premium for both options without incurring any liability to buy or sell the underlying shares. It was not unusual for Mr. Saturley ’ s clients to have multiple strangles in their portfolio at any given time. [ 20 ] Mr.

Saturley would monitor the market price for the underlying security and would manage his client ’ s risk by recommending the buyout of one side of the strangle, if the market price seemed to be moving in a direction where the option might be exercised. Ideally, the cost of the buyout and closing of the contract would be less than the total premiums received by the client on the initial strangle so there would still be an overall profit on the combined transactions. [ 21 ] With uncovered “ call ” options and with “ put ” contracts, there is always a risk that the client might be required to complete the

contract if the option is exercised. With a “ put ” contract, this could oblige the client to buy a significant amount of the subject security at a price greater than the current market price. With an uncovered “ call ” , they could be forced to purchase the stock at the current market price in order to complete their obligations under the option contract to sell it at the lower strike price. This would trigger an immediate loss. [ 22 ] Brokerage firms, such as CIBC WG, require that clients have sufficient assets in their account to cover the potential liability should option contracts be exercised.

The clients can provide coverage for these liabilities by having adequate cash or share value in their account. With shares, a formula is used to determine what value should be attributed to them for purposes of covering the potential future liability. The amount calculated for the value of the account is referred to as “ margin ” . Since margin depends upon the value of the client portfolio, it will change as the market prices of securities in the portfolio change. [ 23 ] Margin is a very important component of Mr. Saturley ’ s strangle strategy.

The more margin that a client has, the larger the number of option contracts that can be sold, and premium revenue generated. Mr. Saturley was able to calculate available margin for client accounts and would do so from time to time, particularly when looking at the potential impact of transactions that he was recommending. CIBC WG retained a third party for purposes of performing margin calculations which was referred to at trial as “ ADP ” . The ADP margin calculation was available to Mr. Saturley online when he was reviewing client accounts. It was recalculated on a daily basis.

The ADP figure was the one used by CIBC WG for determining a client ’ s margin position. [ 24 ] In 2008, Mr. Saturley ’ s strangle strategy focused primarily on selling options for an emerging markets fund which traded under the symbol “ EEM ” . He selected this because it was a diversified fund which he believed would not have a high degree of volatility.

This is an important criteria for his strangle strategy because he wanted to minimize the risk that the market price would move outside of the bracketed range resulting in the exercise of either the “ put ” or “ call ” option contract. [ 25 ] In late July, 2008, EEM shares underwent a three for one stock split, which meant that the holders of each EEM share received three of the new shares. The value of each of these new shares was one-third of the old share value. This was significant because ADP did not take the stock split into account when calculating margin availability for CIBC WG clients.

The overall result was that clients who held EEM option contracts had an inflated calculation of available margin. For CIBC WG, this issue primarily affected clients of Mr. Saturley, as they were the only ones trading in EEM options. [ 26 ] The EEM margin calculation error had two practical impacts on Mr. Saturley ’ s clients. First, since the available margin was overstated, they were able to acquire a greater number of option contracts than if the proper amount had been reported.

The second was that as markets declined in the fall of 2008, the shrinking margin did not trigger a response by CIBC WG as early as it would have if the correct calculation had been done. When an account falls offside on its margin calculation, the brokerage will ask the client to correct the imbalance. This request is referred to as a margin call. When a client receives a margin call, they are required to cover the deficiency by injection of cash or liquidation of securities. [ 27 ] The 2008 market decline had a disastrous effect on Mr. Saturley ’ s clients who were engaged in the EEM strangle strategy.

As an illustration, Marie Aisthorpe sold 20 EEM “ put ” contracts on May 21, 2008, with an expiry date of December 20, 2008 and a strike price of $110.00. This generated a premium of $4,879.97. On the other side of the strangle, she sold 20 EEM “ call ” contracts on the same date, expiring on December 20, 2008, at a strike price of $190.00. The premium generated on that transaction was $3,859.97. According to Ms. Aisthorpe ’ s month end financial statements, the value shown for the put contracts was as follows: Date “Put ” Contract May 30, 2008 ($ 4,480.00) June 30, 2008 ($ 6,900.00) July 31, 2008 ($ 6,900.00)

August 31, 2008 ($ 8,600.00) September 30, 2008 ($ 30,200.00) [ 28 ] For reasons that will be discussed further, on October 14, 2008, the 20 EEM “ put ” contracts were closed out at a cost to Ms. Aisthorpe of $85,850.00. This illustrates the problems experienced by many of Mr. Saturley ’ s clients, some of whom saw most, if not all, of their investments wiped out over the space of a few weeks. Mr. and Mrs. Saturley were similarly affected. They lost more than $1.7 million in their personal accounts. [ 29 ] During the week of October 6, 2008, the magnitude of the problems for Mr.

Saturley ’ s clients were becoming apparent. Because of the downswing in the markets, the CIBC WG credit office began issuing margin calls to some clients. When this happens, the investment advisor is notified and asked to make arrangements with the client to bring the account back into compliance with the firm ’ s requirements. On October 8, 2008, Mr. Saturley received an e-mail notification from the credit office advising him that there were margin calls on 54 client accounts. This was unusual and Mr. Saturley began to panic.

He calculated margin requirements for a number of clients and concluded that ADP had failed to properly account for the EEM stock split which had taken place in July, 2008. Mr. Saturley recognized that this meant that the available margin for clients had been overstated. [ 30 ] Also on October 8, Mr. Saturley spoke with Mr. John Sawler, who was the son of one of his largest clients. He told Mr. Sawler that their family investments were not doing well. He sent information to Mr. Sawler showing that the account was down by about $4.7 million. Mr. Sawler testified that he was shocked and demanded that Mr.

Saturley develop a strategy to mitigate the losses. [ 31 ] On October 9, 2008, Mr. Saturley advised the CIBC WG branch manager, Per Humle, of his conclusion that the ADP margin calculation was wrong. Mr. Humle passed this information on to CIBC WG head office and, by October 10, 2008, they had confirmed the error. [ 32 ] Per Humle indicated to Mr. Saturley that despite the calculation error, clients were still required to cover the margin call by providing cash or liquidating stock. On the morning of October 10, 2008, Mr. Saturley recommended to Mr.

Humle that the best way to limit the financial damage to clients was to close out all of the EEM “ put ” options. Mr. Humle ’ s response was that if Mr. Saturley felt that this was the right course to take, he should make this recommendation to clients. Mr. Saturley instructed his assistant, Michael Cowan, to close out all of his clients ’ EEM December and January “ put ” contracts. [ 33 ] Mr. Humle and Mr. Saturley had several discussions on October 10 concerning the large number of margin calls for his clients. Mr. Humle felt that Mr. Saturley seemed very stressed and agitated. It was Mr.

Humle ’ s impression that Mr. Saturley was looking for someone to give him advice about what to do. Mr. Humle says that he told Mr. Saturley to contact clients and advise them of the margin call which needed to be addressed. Mr. Humle also spoke to another CIBC WG employee, Herb Levine, about Mr. Saturley and the large number of margin calls which had to be handled. Mr. Levine expressed the view that Mr. Saturley was not doing well and was mentally unable to continue on. Mr. Humle made notes of a number of discussions he had that day, including the one with Mr. Levine. [ 34 ] Also on October 10, Mr.

Saturley told Mr. Humle that if the margin calculation had been done correctly, his clients would have been subject to margin calls much earlier and would have moved their investments out of the market before the disastrous drop in value. [ 35 ] Mr. Saturley spoke with Mr. Sawler early on the morning of October 10. He told him about the margin error and said that if it had not occurred the Sawlers would have been out of the market sooner and avoided their huge losses.

He went on to advise that they had a claim for compensation against CIBC WG and that he would provide evidence to support them if needed. [ 36 ] At 11:00 a.m. on October 10, Mr. Saturley went to the premises of Oakwood Terrace in Dartmouth. Oakwood Terrace Foundation was one of his most significant clients. Their account had plummeted in value and was the subject of a margin call. [ 37 ] Mr. Saturley was extremely emotional at the Oakwood Terrace meeting and broke down in tears.

He told the executive committee members that there had been an error in calculating the amount of available margin, which resulted in them having more leverage than they should have. He said that he had discovered the problem on October 8 and if there had been no error, Oakwood

would have been out of the market in early September. Mr. Saturley offered to calculate the cost of the error and said that he was prepared to testify against CIBC WG if requested. The possibility of a class action against CIBC WG was discussed at the meeting. [ 38 ] On Saturday, October 11, Mr. Saturley and his wife went into the CIBC WG office. Mr. Saturley said the purpose of the visit was to get some client files for his review. While he was in his office, his wife went into Mr. Humle ’ s office and found his handwritten notes made the previous day. The reference to the conversation with Mr.

Levine indicated that Mr. Saturley “ was done ” . Mrs. Saturley showed the document to her husband and both interpreted it to mean that Mr. Saturley was finished as an investment advisor at CIBC WG. They took a photocopy of the notes before they left the office. [ 39 ] On Sunday, October 12, Mr. Saturley sent a detailed e-mail to Mr. Humle, which he copied to senior management of CIBC WG, as well as the president of CIBC.

In that e-mail he reviewed the margin error and said that if proper calculations had been done the accounts would have been subject to margin deficit in early September, at which time the option positions would have been closed out, rather than in October when the market was lower. He advised that his clients wanted to hold their positions until CIBC WG made a decision on compensation, and that if they were not compensated in full, they would go public with their concerns. Mr.

Saturley recommended full restitution to the clients and that all positions which had been closed out on Friday be reopened. [ 40 ] On Thanksgiving Monday, October 13, Mr. Saturley began recording telephone calls and meetings with CIBC WG representatives because of concerns that he was being set up to take responsibility for the losses which had been suffered. On that day he was not feeling well and went to the hospital emergency department where he was diagnosed as suffering from exhaustion and stress. Mr.

Saturley was put off work by his doctor for the balance of the month of October due to illness. [ 41 ] On the evening of October 13, Mr. Saturley spoke to Mr. Sawler again. He told him that he expected to be fired but did not explain why. They discussed the compensation issue and Mr. Saturley said that he was looking out for the interests of his clients. The next day Mr. Saturley told Mr. Sawler that another client, Gayle Crooks, was leading a client group to deal with CIBC WG concerning the losses. [ 42 ] During the week of October 14 - 18, 2008, Mr. Humle and Mr. Levine contacted Mr.

Saturley ’ s clients to recommend closing out their option contracts. During this period, clients contacted Mr. Saturley at home. In some cases, they questioned Mr. Saturley about the advice they were receiving from CIBC WG to close out their option positions. There were discussions between Mr. Saturley and clients with respect to the margin calculation error and the implications. By the end of that week, CIBC WG had decided that it did not want clients to receive mixed messages and directed Mr. Saturley not to have any further client contact. If any clients called him, he was told to have them contact Mr. Humle.

Mr. Saturley ’ s remote access to the CIBC WG office systems was suspended during his medical leave. [ 43 ] During the week of October 14-18, 2008, CIBC WG established a working group of senior management employees to oversee the margin calculation error and determine the course of action to be followed with respect to potential compensation. [ 44 ] In mid-October, formal written complaints were received from three clients (Pace, Sceles and Sawler). On October 15 th , a group of clients led by Gayle Crooks met with representatives of CIBC WG and demanded compensation for losses arising from the EEM error.

There were ongoing communications with Ms. Crooks on the compensation issues and, ultimately, a class action was commenced against CIBC WG seeking compensation for the EEM margin error, with Ms. Crooks as the representative plaintiff. [ 45 ] During the latter half of October, 2008, Mr. Humle had many conversations with clients concerning their accounts, some of whom asked about the margin calculation error. Many were concerned with the losses in their accounts and had questions about what should be done. The nature of the working relationship between the clients and Mr.

Saturley was often discussed. [ 46 ] The CIBC working group had regular meetings by telephone starting around October 16, 2008. The initial focus was to deal with Mr. Saturley ’ s clients who were affected by the margin calculation error. Mr. Humle participated in the meetings and provided an update with respect to his discussions with clients.

[ 47 ] On October 28, 2008, Mr. Saturley presented a note from his doctor indicating that he was able to return to work for up to two hours per day until November 21, 2008. He was advised by CIBC WG that the investigation into EEM option activity was ongoing and that he should remain on leave until this was completed. As of October 29, the items being considered by the working group included the possibility of a class action by investors, risk to the firm ’ s reputation and suitability of the EEM option trading strategy for Mr.

Saturley ’ s clients. [ 48 ] As of the end of October, 2008, CIBC WG had decided to address the margin calculation issue by reversing all EEM option trades in client accounts which had taken place after the stock split in July 2008. Clients were informed of this decision, and the process of reviewing accounts and cancelling the individual trades took place through the month of November, 2008. This resulted in a total cost to CIBC WG of approximately $38 million. [ 49 ] As part of the investigation, CIBC WG examined Mr. Saturley ’ s strangle strategy for EEM option trading.

They considered whether clients were aware of the associated risks as well as the suitability of the investments for them. They assessed Mr. Saturley ’ s monitoring of the strategy and whether it was adequate. Mr. Humle reported that in some of his discussions with clients, there were “ red flags ” that suggested Mr. Saturley might have been exercising discretion with respect to the option trading. [ 50 ] In November, 2008, the Compliance Department of CIBC WG became involved to investigate Mr. Saturley ’ s dealings with the three clients who had made written complaints.

They also considered other clients where Mr. Humle had reported indications of possible discretionary trading. William Lyons and Lee Morita were the representatives of the Compliance Department most directly involved in this investigation. The Compliance review included specific transaction records for the clients in question, as well as a broader examination of Mr. Saturley ’ s trading practices. Mr. Saturley ’ s telephone and e-mail records were also reviewed. [ 51 ] Mr. Saturley was requested to attend an interview in Toronto with Compliance Department representatives on November 14, 2008.

He was advised that the interview would cover the three written complaints, as well as his general business and trading practices. At his request, he was allowed to read the complaint letters in advance of the meeting, but was not given copies. He was not given access to any other CIBC WG files or records, despite his request for this. [ 52 ] By this time, the CIBC WG working group had obtained Mr. Saturley ’ s employment file from the human resources department, and had asked the Compliance Department to determine if there was any evidence of discretionary trading.

The working group was considering the possibility of Mr. Saturley returning to work under strict supervision. This would include the requirement for branch management to approve all trades in advance and the recording of his client telephone calls. [ 53 ] After the November 14 meeting, Mr. Saturley followed up by e-mail on several issues, including the client complaints and transactions which had taken place on July 25 and August 20, 2008. These trading dates had been raised during the interview because they had high transaction volumes. Mr.

Saturley had been asked how he was able to obtain the necessary client instructions and still process the orders in the required time. On July 25 trades were entered in over 100 client accounts and on August 20 it was more than 40. Mr. Saturley ’ s e-mail also responded to the suggestion made at the meeting that Mr. Bennett of Oakwood Terrace had reported that Mr. Saturley was given discretionary authority over their account. [ 54 ] Following the e-mail exchange with Mr. Saturley, Mr. Humle was asked to meet with Mr. Cowan to discuss his role on the high volume trading days. Mr.

Humle reported back to the working group that he has spoken to Mr. Cowan, who advised that he did not remember any days on which he contacted a large number of clients on Mr. Saturley ’ s behalf. At most, it would have been 10 - 20 clients. [ 55 ] By November 21, 2008, the Compliance Department had prepared an initial version of their investigation report. According to this draft, five clients had indicated to the branch manager that Mr.

Saturley exercised discretion in their accounts. [ 56 ] The CIBC WG Working group decided to have further client interviews carried out by representatives of the Compliance Department. Mr. Morita conducted these interviews by telephone in late November. At this stage, the working group was considering their options with respect to Mr. Saturley. They felt that their two primary choices were to have him return on strict supervision, or terminate his employment. The ultimate decision would depend upon the further client interviews by Mr. Morita and a final interview

with Mr. Saturley. [ 57 ] Mr. Morita ’ s telephone interviews with six clients were completed by the end of November. On December 3, a further interview of Mr. Saturley took place. It was conducted by Mr. Morita and Mr. Humle was in attendance. Mr. Saturley was advised of the information obtained from the client interviews and asked about how trades in these client accounts were handled. Mr. Saturley flatly denied taking discretion in any of the client accounts and disagreed with some of the information provided to Mr. Morita by the clients. Mr. Morita and Mr.

Saturley discussed the 2007 practice review and its outcome. Mr. Saturley maintained that he had specific client approval prior to entering every trade. [ 58 ] Shortly after the interview with Mr. Saturley, the CIBC WG working group convened a conference call. At that time, Mr. Morita summarize the information obtained from the investigation including the client calls and the interview with Mr. Saturley. He did not express an opinion on whether Mr. Saturley had engaged in discretionary trading. [ 59 ] After discussing the information from the Compliance Department investigation and Mr.

Saturley ’ s trading practices, the working group unanimously decided to terminate his employment for cause because of discretionary trading in client accounts. Shortly after the call was concluded, Mr. Morita and Mr. Humle met with Mr. Saturley and informed him that he was being fired because of discretionary trading. EVIDENTIARY ISSUES [ 60 ] There were many evidentiary disputes which arose through this proceeding. Most were dealt with by way of direction or decision from the bench during the trial.

A few required more reflection and resulted in formal decisions. (See for example, 2012 NSSC 226 and 2012 NSSC 389 ). Several evidentiary issues merit specific comment in my decision. [ 61 ] Both parties produced extensive document books which were marked as exhibits.

The agreement reached with counsel was that any document referred to by a witness would be considered to have been proven for admissibility purposes unless the other party objected at or immediately after that witness ’ s testimony. [ 62 ] Following the trial, counsel identified several hundred documents in the exhibit books which had not been proven and; therefore, were not to be considered as part of the trial evidence. I have ignored all of those documents for purposes of this decision. [ 63 ] There was significant hearsay evidence introduced by both parties. Most of it involved what clients of Mr.

Saturley said to CIBC WG during their investigation. It was agreed that none of this evidence was being entered for its truth, but only to explain what actions were taken as a result. [ 64 ] For example, testimony from Mr. Humle that a client of Mr. Saturley ’ s had explained to him how their account was handled is not admissible to show whether there was discretionary trading in that account. It could be used to explain the rationale for CIBC WG ’ s subsequent decisions. [ 65 ] I have ignored all such hearsay evidence for purposes of determining whether discretionary trading occurred.

My decision is based upon the witnesses ’ trial testimony and the admissible exhibits. FIS and Avotus Records [ 66 ] During the trial, I determined that the FIS trading records tendered by CIBC WG should be admitted as real evidence. In my

decision on that issue, I indicated that the weight to be given to the evidence would be determined at the end of the trial after considering all of the other trial evidence, as well the submissions of counsel ( 2012 NSSC 226 ). [ 67 ] CIBC WG also tendered telephone records for their Halifax office for the period from January, 2007 through October, 2008. During trial, I concluded that the records had been adequately authenticated to be admitted as evidence.

As with the FIS records their reliability and the inferences, if any, to be drawn from them was left for my determination at the conclusion of the trial ( 2012 NSSC 389 ). [ 68 ] With respect to the FIS records, these were used by counsel for both parties in their examination of witnesses. The witnesses who authenticated the document and in particular, Mr. Archer, testified about the changes in some of the data which was imported. He also explained which information was omitted from the data incorporated in the trial exhibits.

For purposes of this litigation, the client name, user identification, security particulars and date of the order entry are the most significant fields. I am satisfied that the exhibits accurately record this data for the relevant trades. [ 69 ] In determining whether Mr. Saturley had instructions for a given trade, I have considered whether there is evidence of client contact at, or shortly before, the time that the trade was entered. Counsel for Mr. Saturley argued that if an order was amended after entry, the original details would not appear in the court exhibit.

While that may be so, the entry time and date, client name, user name and security details would be accurate. There was no evidence to suggest that any relevant orders were, in fact, amended after being entered. [ 70 ] Although I have not done a comparison of all trades in all accounts, I note that the FIS records appear to correspond with the entries in the client account records which were admitted by agreement. Neither counsel raised any apparent inconsistencies between these documents.

I am satisfied that the FIS records, which were entered as exhibits, contain accurate information with respect to the orders which were entered in the client accounts identified in those exhibits. [ 71 ] The CIBC WG telephone records were entered in electronic format. Like the FIS data, they were provided by a third party which had been retained by CIBC WG to record and archive the information. Unlike the FIS records, the evidence indicated an increased chance of inaccuracy as a result of human intervention. For example, in the initial version of the report provided to CIBC WG, a gap in the data was identified.

Once this was brought to the attention of the third party provider, a further review was done, and the missing information located. In addition, during the cross-examination of the authenticating witness, counsel for Mr. Saturley pointed out several other small inconsistencies between the initial report provided and the final version. [ 72 ] CIBC WG tendered the telephone records to establish if phone calls were made to or from Mr. Saturley ’ s clients at the times trades were entered.

In order to draw an inference that a call was not made because of the absence of a telephone record, I need to be satisfied with respect to the reliability of these exhibits.

There were a number of instances where other documents made reference to phone calls being made to clients, which in turn, were reflected in these trial exhibits. [ 73 ] Based upon the testimony of the authenticating witnesses and a comparison with other trial exhibits, I am satisfied that these records accurately capture information with respect to telephone calls being made from or received at various extensions in the CIBC WG Halifax office. [ 74 ] Counsel for Mr.

Saturley made a number of arguments with respect to why these exhibits may not refer to a specific client telephone call, such as the use of toll free numbers and the absence of identifying information on incoming calls. I will deal with these arguments when I consider the specific allegations of discretionary trading for the identified clients. Witness ’ Credibility [ 75 ] Both parties submitted that some of the witnesses called by the other were not credible. Assessing the reliability and credibility of witness ’ testimony can be a complex process.

It involves examining the witnesses ’ evidence in light of the testimony of other witnesses and the documentary exhibits. A judge should also consider whether explanations offered make sense in all of the circumstances.

[ 76 ] The witnesses ’ demeanour while they are testifying is relevant, but a judge must be cautious not to attach undo weight to it. Testimony in court is usually an extremely stressful experience that is foreign to the witness. As a result, they may exhibit behaviour that could be interpreted as being evasive or an indication of a lack of candour. [ 77 ] The employees of CIBC WG who testified had their credibility challenged primarily in relation to their objectivity during the investigation of Mr.

Saturley and the ADP margin error, as well as with respect to whether relevant documents had been withheld from disclosure. Much of these witnesses ’ activities during the investigation were at least partially documented in e-mail communication and minutes of meetings. In addition, Mr. Saturley recorded most significant interviews and phone calls that he was involved in. I found the evidence of all of these witnesses to be reliable and credible. Their testimony remained consistent despite vigorous cross-examination and was in accord with the documentary record.

The CIBC WG actions during the investigation appeared quite reasonable given the volatile situation which was unfolding. [ 78 ] Mr. Saturley ’ s credibility is crucial to the central issue which I must decide and that is, whether he exercised discretion with respect to client accounts. All instructions were verbally given by clients with a few minor exceptions when e-mail was used. Mr. Saturley said that he had instructions from all clients prior to placing every trade. A number of clients could not recall providing such instructions to Mr.

Saturley and others said that it did not happen. [ 79 ] I do not believe that Mr. Saturley was a credible witness. His testimony was contradicted by multiple clients and he offered explanations which were not believable. I will provide a number of illustrations. [ 80 ] Mr. And Mrs. Saturley went to the CIBC WG office on Saturday, October 11, 2008 and took some handwritten notes from Mr. Humle ’ s office. Mr. Saturley said that his wife had gone into Mr.

Humle ’ s office to look out the window at a condominium project which was being built on Barrington Street and that the notes caught her eye because they apparently referred to him. The reference in the notes to him is relatively obscure and would not have been apparent if one glanced quickly at the document. In addition, Mr. Humle ’ s office was right next to Mr. Saturley ’ s and would not have afforded any better view of the condominium site. It is far more likely that Mr. and Mrs.

Saturley had decided to look in the branch manager ’ s office to see what they could find, given the margin error issue which had blown up the previous week. [ 81 ] In his cross-examination, Mr. Saturley denied telling clients that the margin error was CIBC WG ’ s responsibility and that he would provide evidence to support their claims. The minutes prepared by Oakwood Terrace for the meeting with Mr. Saturley on October 10 indicate that this is precisely what he said to them. In addition, Mr. John Sawler testified that Mr. Saturley told him the same thing earlier that morning and in a second call on October 12.

Mr. Sawler made notes with respect to both of those conversations shortly after they took place. [ 82 ] There were a significant number of telephone records entered in evidence for the purpose of showing that there was no contact between Mr. Saturley and particular clients before trades were entered. When there was no record to establish a call which should have taken place Mr. Saturley offered implausible explanations. One was that he might have called the client from a hotel room phone to set up meetings even though he had his cell phone with him and was using it to call other people.

He also suggested that he might have called clients from friends ’ houses when he was socializing with them. [ 83 ] The exhibits included many spreadsheets which were prepared by Mr. Saturley or Mr. Cowan. These set out particulars of option and share transactions which correspond very closely with actual trades entered in client accounts. Mr. Saturley said that these were recommendation documents which were reviewed with clients and formed the basis of their instructions.

The CIBC WG theory is that these documents were never shown to or discussed with clients and were simply internal summaries of trades to be entered in client accounts. Mr. Saturley said that in most cases these recommendation documents were mailed to clients. Mr. Saturley ’ s testimony about what happened next was inconsistent. He said that clients would call he or Michelle Harris to confirm that they wished to enter the trades shown on the recommendation sheet.

When it was pointed out to him that the markets would have changed in the time period when the recommendations were in the mail, he said that he would speak with clients and update them on what had happened before entering the orders. This evidence seemed tailored to reflect the fact that Ms. Harris was not authorized to give advice to clients which would have been necessary if the information in the spreadsheets had changed. [ 84 ] There are several problems with Mr. Saturley ’ s evidence concerning the spreadsheets. The first is that the assistant branch

manager, Ms. Chantegreil, said that she reviewed all outgoing mail to ensure it met corporate standards and never saw any such documents. None of the client witnesses remembered getting these in the mail from Mr. Saturley, and most said that they had never seen them before. Several clients kept copies of all documents received from CIBC WG in a file at home and brought their entire original file to court. None of these files included copies of the recommendation documents. [ 85 ] Mr. Saturley ’ s description of the use of the spreadsheets is not consistent with the bulk of the trial evidence.

It is far more likely that these were internal documents prepared by Mr. Saturley and his team for purpose of tracking trades to be entered. [ 86 ] Mr. Saturley said that he obtained verbal instructions from all clients prior to entering trades. Mr. Levy and Mr. Sceles both testified that they provided e-mail instructions and the exhibits confirm this. Mr.

Saturley was not disciplined or fired for accepting e- mail instructions contrary to CIBC WG policy, but this calls into question the veracity of his testimony that he always had verbal instructions from clients. [ 87 ] CIBC WG had a clear written policy prohibiting the sharing of user ID ’ s and passwords. Mr. Saturley ’ s evidence was that he interpreted the policy to permit sharing with other staff members such as Ms. Harris and Mr. Cowan. He said that when orders were placed under his code, but there was no record of client communication with him, it was probably done by Ms. Harris or Mr. Cowan.

This explanation cannot be reconciled with the clear language of the written policy. It appears as if Mr. Saturley is again trying to explain how client trades were made without any apparent client contact with him. [ 88 ] In addition to the substantive problems with Mr. Saturley ’ s evidence, his demeanour on the witness stand also caused me concern. On multiple occasions he paused for an inordinately long period of time before answering what seemed to be a very simple question.

In cross-examination, he would occasionally ask for a question to be repeated because he did not understand it or ask for an explanation of what was meant. In some of these cases, it was difficult to believe that Mr. Saturley did not comprehend what was being asked. I accept that Mr. Saturley was being careful in providing his answers but, in my view, his behaviour went beyond what seemed reasonable in the circumstances.

It appeared as if he was not trying to recall particular events, but rather was thinking about what his answers should be in light of the issues in the litigation. [ 89 ] On the issue of discretionary trading, to the extent that Mr. Saturley ’ s evidence is in conflict with the client witnesses, I accept the clients ’ evidence over his. The clients ’ description of the interactions with Mr. Saturley were reasonable and consistent with the documentary evidence including telephone records and e-mails. Mr. Saturley ’ s evidence that he always had verbal instructions was simply not believable in the circumstances.

Adverse Inferences [ 90 ] Michael Cowan was the subject of much testimony during the trial, but he was never called as a witness. He was initially hired in the spring of 2007 to assist Mr. Saturley in processing the trading volumes. Mr. Saturley testified that Mr. Cowan was probably involved in communicating with clients for purposes of obtaining the necessary instructions in advance of trades being entered. He also said that many of the trades shown on the FIS records under his user name were probably entered by Mr. Cowan using Mr. Saturley ’ s password. [ 91 ] Mr.

Saturley ’ s testimony left the impression that a reasonably significant portion of the required client contact may have been through Mr. Cowan. The client witnesses who were called by CIBC WG were questioned about their knowledge of and interaction with Mr. Cowan. [ 92 ] Mr. Cowan left his employment with CIBC WG after Mr. Saturley was fired. He resumed work with Mr. Saturley in the fall of 2010 when Mr. Saturley established his new investment advisory business, TurnPointe Wealth Management Inc. and has been employed there since that time. He was initially included on Mr.

Saturley ’ s witness list, but was not called by either party at trial. [ 93 ] CIBC WG argues that an adverse inference should be raised against Mr. Saturley due to his failure to call Mr. Cowan as a witness to explain his role in obtaining client instructions and entering trades. The response of Mr. Saturley is that there was no need for him to call Mr. Cowan, as there was no burden on him to disprove discretionary trading. As the employer, the burden was on CIBC WG

to prove its allegation of cause. Counsel for Mr. Saturley says that this required them to call evidence with respect to any potentialsource of client instructions, including Mr. Cowan. [94] The circumstances in which a court might draw an adverse interest from failure to call a witness were considered by Saunders,J., as he then was, in Scotia Fuels Limited v. Lewis (NS SC), 102 N.S.R. (2d) 12. Justice Saunders summarized theapplicable principles at paras. 23-25: 23 For reasons known only to himself, Lewis did not visit his apartment to either personally inspect the furnace or confer with theworkmen.

The only technician who both saw the unit and testified about his inspection was the plaintiff’s burner mechanic, DavidJacobs. It is telling that no employee from Bremners was called to testify on behalf of the defendant. Surely if the defendant would havethe court believe that a plumber told him on December 9, 1989 that the source of the problem was the furnace and not the plumbing thenthe person who actually came to such a conclusion ought be called. 24 Such a failure leads me to draw an adverse inference against the defendant.

It is well recognized that where a party or a witnessfails to present evidence, which was in the power of the party or witness to give, then such failure justifies the court in drawing theinference that the evidence would have been unfavourable to the party to whom the failure was attributed. (See for example Murray v.Saskatoon, (SK CA), [1952] 2 D.L.R. 499, at pp. 505-506).

In particular the learned author in Wigmore on Evidence,3rd edition, Volume 2, pp. 162ff: The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claimsthat the facts would thereby by elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear issome evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. 25 In Levesque v.

Comeau et al, (SCC), [1970] S.C.R. 1010, the plaintiff sued for damages allegedly suffered while apassenger in her husband’s car while it was stationary at an intersection and rearended by the defendants’ vehicle. The plaintiff allegedshe suffered from deafness as a result of her injuries. She only called the physician who had examined her one year after the accident. The evidence disclosed that she had been examined by several other doctors who saw her prior to the examination by the physician whowas called to testify.

In delivering the majority judgment, Pigeon, J. concluded that only the plaintiff could have produced this evidencebefore the court and its absence meant that the court could draw an adverse inference. In my opinion, the rule to be applied in such circumstances is that a Court must presume that such evidence would adversely affect hercase...

Under the circumstances, her testimony and that of her husband respecting her good state of health before the accident couldproperly be considered insufficient evidence for the purpose of excluding the other possible causes of the deafness. [95] Before considering whether an adverse inference should be drawn from the failure of Mr. Cowan to testify, I will comment onMr. Saturley’s position with respect to the burden on CIBC WG. I do not agree that the defendant must call evidence to exclude everypossible method by which client instructions might have been communicated through other employees of the branch.

If trades areentered by Mr. Saturley, and there is no evidence that he spoke with the client, that is sufficient to raise an inference that he did not haveinstructions and was, therefore, exercising discretion. In that situation, Mr. Saturley has a practical burden of providing someexplanation for why this inference should not be drawn. Failure to do so is at his peril. [96] In this case, Mr. Saturley offered a number of explanations, including that Mr. Cowan might have been obtaining clientinstructions and entering trades. Posing this as a possibility, of course, does not prove that Mr.

Cowan was doing so for any particulartrade. To the extent that Mr. Saturley argues that there is evidence to support the theory that instructions were coming through Mr.Cowan, I think that an adverse inference should be drawn from his failure to have his employee testify to this effect. I can infer that Mr.Cowan would not have provided this corroboration had he been called as a witness. [97] To put it colloquially, Mr. Saturley cannot have his cake and eat it too. To the extent that he says that Mr. Cowan took clientinstructions and entered orders under Mr.

Saturley’s name, he should have called him to provide that evidence. Disclosure

[ 98 ] This litigation has involved disputes over the sufficiency of disclosure by both parties from the very beginning. There have been multiple pre-trial motions dealing with these issues. This continued throughout the trial,with counsel for Mr. Saturley cross- examining each CIBC WG witness about what documents they may have had, who they were provided to and when. [ 99 ] There are examples where both parties did not include materials in their initial litigation disclosure which were subsequently disclosed. In some cases they had not been found and, in others, they were incorrectly categorized as irrelevant.

None of this strikes me as particularly unusual given the wide ranging issues in this litigation and the huge volume of potential documents. [ 100 ] I am not satisfied that there are any remaining undisclosed documents relevant to the central issues in this case. There have been extensive motions and discovery examinations which should have unearthed these materials if they had existed. [ 101 ] Some of the questions put to CIBC WG witnesses by counsel for Mr. Saturley may have implied that documents helpful to Mr. Saturley ’ s defence had been intentionally destroyed or withheld.

I do not believe there is any basis for such a suggestion. The Regional Director for Eastern Canada for CIBC WG, Wilhelmina Ditchfield, was aggressively cross-examined on the disclosure issue and I found her evidence to be truthful. She candidly acknowledged some disclosure problems which were subsequently rectified. [ 102 ] None of the disclosure issues which arose during trial have any impact on the factual and legal issues which needed to be determined. ADEQUACY OF THE INVESTIGATION AND BIAS [ 103 ] Mr.

Saturley argues that the investigation carried out by CIBC WG in October and November, 2008 was unfair and the outcome was predetermined. He says that CIBC WG had decided early on to fire him because of his role in identifying the EEM margin error. There are many aspects to this allegation and, as a result, the events unfolding during that time frame need to be examined. [ 104 ] Once the EEM error came to light in mid October, CIBC WG immediately began an investigation in order to determine what had happened and deal with the large number of clients whose savings had been decimated.

The general approach was to recommend that clients close out all of their option positions in order to stop the bleeding. CIBC WG then needed to consider the impact of the EEM error and whether the losses were the result of poor investment advice from Mr. Saturley, inadequate supervision by CIBC WG, or decisions made by the clients themselves. During the early stages of this process, CIBC WG management did not consider Mr. Saturley ’ s employment status beyond recognizing that he was out of the office on medical leave. [ 105 ] As of October 10, 2008, it was quite reasonable for Mr.

Saturley to be concerned about whether his employment with CIBC was in jeopardy. His clients who were engaged in the strangle strategy using EEM option contracts had suffered millions of dollars in losses over the space of several weeks. Many were subject to margin calls which required them to inject further cash or liquidate investments. As their investment advisor, Mr. Saturley should have been worried about his clients and how they might react. [ 106 ] Within a few hours of being advised of the margin calls by the credit department, Mr. Saturley had carried out calculations and identified the ADP error.

He also concluded that if margin had been properly calculated, many of his clients would have been subject to margin calls before the catastrophic decline in the markets. He took the position with clients and CIBC WG that if he had received earlier margin calls, he would have recommended that clients get out of the EEM strangle strategy completely, which meant that they would have avoided the disastrous market drop in September and October 2008. [ 107 ] When Mr. Saturley first notified Mr. Humle of the ADP error, it was Thursday, October 9, 2008. Mr. Humle passed this information on to CIBC WG management.

On the morning of Friday, October 10, 2008, Mr. Saturley sent an e-mail to Mr. Humle which recommended closing out all client EEM “ put ” contracts in order to limit the financial damage. This makes perfect sense when the market is falling, as a decline in the price of EEM increases the potential exposure to clients on these contracts. Mr. Humle concurred with that advice and Mr. Saturley began closing out contracts that day with the assistance of Mr. Cowan.

[ 108 ] Later in the morning of October 10, Mr. Saturley met with the executive of Oakwood Terrace Foundation, which was one of his largest clients. In an emotional meeting, Mr. Saturley informed them of the margin calculation error. He also explained that if the margin had been properly calculated, there would have been a margin call in September and he would have recommended that Oakwood close out the EEM option contracts at that time, thereby avoiding the loss of $2.6 million.

He indicated that he had documentation to illustrate the error and CIBC WG ’ s responsibility for it, and said he would calculate the exact cost to them. Mr. Saturley advised that he and his assistants would provide any support that Oakwood needed, including testifying against CIBC WG. The possibility of a class action was discussed. With the exception of the reference to the class action, this is essentially the same offer which Mr. Saturley had made to John Sawler earlier that morning. [ 109 ] On October 11, 2008, which was the Saturday of the Thanksgiving weekend, Mr.

Saturley and his wife went into the office so that he could obtain additional client files for review. Mrs. Saturley went into Mr. Humle ’ s office and reviewed some of the personal notes on his desk. One of those included the following: Discussed F.S. margin calls with H.L. - he was concerned about F.S. clients and stuff. Felt F.S. was done. [ 110 ] Mr. Saturley was shown the note by his wife and interpreted it to mean that he was going to be fired. He took a copy but did not discuss this with anyone. The author of the note, Mr. Humle, said it reflected a comment by Mr. Levine that he was concerned about Mr.

Saturley ’ s emotional health based upon the events of Friday, October 10. In light of Mr. Saturley ’ s breakdown at the Oakwood meeting on October 10, I think Mr. Humle ’ s explanation is perfectly reasonable. Two days later, Mr. Saturley was put off work by his doctor for the balance of October as a result of stress and emotional exhaustion. [ 111 ] By October 12, Mr. Saturley had spoken to approximately ten clients, including Oakwood and Mr. Sawler. He reported in his e- mail sent to Mr.

Humle that evening that clients did not want to close out their option positions and wished to continue to hold them until they received a decision from CIBC WG. This was contrary to the position expressed to Mr. Humle on October 10 th that the EEM “ put ” contracts should be closed out to stem the losses. The October 12 e-mail included the following: I have been in contact with a number of very upset and distraught clients. They have informed me that, unless they are compensated in full, they will seek to make public knowledge of the financial damage they have suffered.

I understand that ADP is responsible for the calculation of margin and it is my recommendation that ADP, in combination with CIBC Wood Gundy undertake to provide full restitution to clients. Quick and decisive action is required to minimize any further damage. [ 112 ] The next day, Mr. Humle spoke to Mr. Saturley by telephone and indicated that CIBC WG was not going to reinstate the client positions which had been closed out on Friday. He said that the plan was to limit the client losses and then determine responsibility for those losses. Mr.

Saturley was advised that the entire situation would be considered including the strategy, its suitability, branch supervision, and whether those responsible included Mr. Saturley, the firm and the client. Mr. Saturley said that he had already prepared detailed calculations showing how client losses could have been avoided if they had exited the market on an earlier date. [ 113 ] During the week of October 14-18, 2008, Mr. Humle spent significant time contacting Mr. Saturley ’ s clients and recommending that they close out all of the option contracts and not continue with the strangle strategy.

Client complaint letters appeared that week, and in addition, a group of clients led by Gayle Crooks, met with management representatives of CIBC WG. They demanded that their losses be reversed by reinstatement of their account positions to September 3, 2008. Mrs. Saturley had also sent an e-mail to Mr. Humle enquiring about a resolution for the losses in her account resulting from the margin error. [ 114 ] It is apparent that by this point Mr. Saturley had concluded that a significant dispute between his clients and CIBC WG was a distinct possibility.

He had decided that he would side with the clients and assist them in advancing their claims if needed. That is what he told Oakwood and Mr. Sawler on October 10. Mr. Saturley also felt that he and his wife had a claim against CIBC WG for $1.7 million in losses in their personal accounts.

[ 115 ] While they were trying to sort out the nature and extent of the margin error problem and find a potential solution, CIBC WG management decided that Mr. Saturley should no longer be involved in client communications. They were concerned about mixed messages being presented and also recognized that Mr. Saturley was placed on a medical leave by his doctor. In light of information coming from clients that Mr.

Saturley appeared to be having discussions with them about the margin issue, CIBC WG ’ s responsibility for the losses and potential solutions, that seems like a very reasonable decision. [ 116 ] Through the latter part of October 2008, significant time was spent reviewing individual client files in order to determine how each of them may have been impacted by the margin calculation error. Management assessed branch supervision practices and responded to complaints and concerns from clients.

By the end of October, a decision had been made to reverse transactions in client accounts involving EEM options which had been entered after the stock split in July, 2008. The process of cancelling each of these transactions took time and was completed during November, 2008. Mr. And Mrs. Saturley ’ s account was the last to be adjusted and this took place in December. [ 117 ] Through the course of dealing with clients in October, 2008, Mr. Humle received information which suggested to him that Mr. Saturley may have been engaged in discretionary trading.

He passed this information on to the working group dealing with the EEM issue. Mr. Saturley says that Mr. Humle is biased against him and, as a result, the information which he provided to the working group was not accurate. His argument is that Mr. Humle was attempting to divert responsibility from himself with respect to the EEM error. Another indication of Mr. Humle ’ s alleged bias was his belief that Mr. Saturley probably knew of the EEM margin error somewhat earlier than the date on which he reported it. [ 118 ] Mr. Humle was cross-examined vigorously by Mr. Saturley ’ s counsel.

I listened carefully to his answers, particularly in response to suggestions that he was unfair or biased in the way he approached the investigation of Mr. Saturley ’ s practices. I found Mr. Humle to be forthright in his answers and professional in his demeanor. He continues to believe that Mr. Saturley probably knew of the error prior to October 9, 2008. In light of Mr. Saturley ’ s familiarity with margin calculations and the importance of margin in his option strangle strategy, it is understandable that Mr. Humle might reach this conclusion.

Whether his belief is correct is not a fact in issue in this litigation and I express no comment on it. The important point is that I saw no evidence that this opinion, in any way, undermined Mr. Humle ’ s objectivity in his approach to Mr. Saturley and the investigation. [ 119 ] Mr. and Mrs. Saturley surreptitiously recorded many phone calls and meetings with Mr. Humle. In listening to these recordings, I observed that Mr. Humle was always polite and gave no indication of any animosity towards Mr. or Mrs. Saturley during these interactions. [ 120 ] Mr. Saturley makes the point that Mr.

Humle reported “ red flags ” concerning possible discretionary trading when no clients were complaining about that in any of their correspondence with CIBC WG. The simple answer is that clients were very happy with the returns that Mr. Saturley had achieved for them in the past. They may well have wanted Mr. Saturley to manage their account with little, if any, involvement on their part. The lack of formal client complaints is not of great assistance in determining whether discretionary trading took place. [ 121 ] Mr.

Saturley ’ s theory that he was really being fired for blowing the whistle on the EEM margin error, rather than discretionary trading is not substantiated by any evidence. I have listened to the CIBC WG witnesses who participated in the investigation and the decision to terminate, including their cross-examination by Mr. Saturley ’ s counsel. I have also read their internal e-mails, minutes of meetings and draft investigation reports. I have listened to recordings of Compliance Department interviews with Mr. Saturley.

There is virtually no reference to the EEM error in any of the documents or discussions relating to his performance or the concerns over discretionary trading. To the extent that it comes up at all, it is simply part of the background showing how Mr. Humle came to have telephone calls with so many clients and to provide a context for the complaint letters which were received. [ 122 ] The issue of potential discretionary trading was not some sort of smoke screen designed to impede discovery of the EEM error as the true reason for firing Mr. Saturley.

If that had been the case, I would have expected to find some indication of this amongst the large volume of evidence which was produced at trial. [ 123 ] Around the beginning of November, 2008, the attention of the CIBC WG working group turned to the issue of discretionary trading. Mr. Saturley claims that during this period he was treated improperly because he was not given notice of his employer ’ s

concerns and a fair opportunity to respond. In particular, he focuses on the interviews with representatives of Compliance on November 14, 2008 and December 3, 2008. Despite his requests, he was not given any written materials in advance or access to any of his files, with the exception that he read the three client complaint letters just before the November 14 interview. This lack of notice and access to documents was a specific strategy decision by the Compliance staff at CIBC WG. They wanted to obtain a spontaneous response from Mr.

Saturley rather than give him advance notice and an opportunity to think about his answers. [ 124 ] There was a belief among CIBC WG management that Mr. Saturley had been communicating with clients even though he had been directed not to do so. This was based upon information being received by Mr. Humle from clients. The Compliance interviewers decided not to give Mr. Saturley copies of the complaint letters because they were worried that he might contact those clients to discuss their complaints. [ 125 ] Prior to the November 14 interview, Mr.

Saturley was permitted to read the complaint letters, but was not given copies. He was advised that the purpose of the meeting was to discuss the client complaints as well as his general business and trading practices. The interview involved Mr. Saturley, Bill Lyons and Lee Morita and lasted approximately four and a half hours. [ 126 ] In addition to the three client complaints, Mr. Saturley answered questions concerning his understanding of discretionary trading, his discipline history, as well as the risks associated with his option strangle strategy. Mr.

Saturley described how he would receive instructions and confirmed that he would speak with clients before placing an order, through some combination of phone calls, meetings and e-mails. Mr. Saturley indicated that any e-mail instructions would be confirmed by telephone before they were acted upon. He confirmed that he never exercised any discretionary authority for any client, even if the client had requested it.

He said to do so would be to put his “ neck in a noose ” . [ 127 ] The discussion at the November 14 meeting included several days on which there were very large trade volumes in client accounts over a relatively short period of time. Mr. Saturley was asked to describe how he could have managed all of the required client contact and still processed the orders in a timely fashion. He outlined how he and his assistant, Michael Cowan, would coordinate that process. A few days after the interview took place, Mr.

Saturley provided, by e-mail, additional information and explanation concerning the topics discussed at the meeting. With respect to the client complaints and his trading practices, Mr. Saturley indicated that with access to his files, he could likely provide a more detailed response; however, his general position was clear that he never engaged in discretionary trading. [ 128 ] The final interview by Compliance took place on December 3, 2008. Mr. Saturley was told that the meeting would deal with further information that had been obtained by Compliance from interviews with clients. Mr.

Saturley was not given any information, in advance, concerning what the clients may have said. [ 129 ] During the December 3 interview, which was conducted by Mr. Morita, there was a general discussion concerning what constitutes discretionary trading. As in the earlier interview, Mr. Saturley confirmed that he did not engage in discretionary trading for any clients at any time. He was told about the Compliance interviews with Robert Cooke, Oakwood Terrace, Kerry Burgess, John and James Sawler and Steven Pace. Mr.

Saturley provided his response to the information obtained from each of the clients and confirmed that he did not engage in discretionary trading. [ 130 ] It is clear to me that if Mr. Saturley had been provided with additional particulars concerning the information obtained by the Compliance investigation prior to his interviews, he might have been able to give more detailed responses to the questions being asked. CIBC WG adopted a strategy of non-disclosure in order to obtain spontaneous responses from Mr. Saturley.

This practice could mean that an employee is not in a position to give comprehensive answers to specific concerns. In such a situation, the employer may make a disciplinary decision without having all of the facts. If that were to occur, an employee might successfully challenge a termination for cause by providing reasonable explanations for the alleged misconduct. [ 131 ] The approach taken by CIBC WG with Mr. Saturley carried some risks. On the one hand, the employer was concerned that advance notice would give Mr. Saturley an opportunity to talk to clients and provide prepared answers.

On the other hand, it meant that Mr. Saturley might be unable to provide information which could ultimately satisfy the CIBC WG concerns. In my view, either approach is open to an employer, although non-disclosure leaves open the possibility that a fired employee might successfully sue for wrongful dismissal. That is the chance taken by CIBC WG in this case, and I must consider whether they have met the burden of

proving just cause, in light of the more complete information now being provided by Mr. Saturley. For reasons outlined in more detail elsewhere in this decision, I believe that they have. [ 132 ] In my view, there was no bias on the part of the CIBC WG employees who carried out the client interviews and investigation. The failure to provide Mr. Saturley with advance notice of allegations, prior to being interviewed, does not prevent CIBC WG from attempting to prove just cause for his termination.

DISCRETIONARY TRADING [ 133 ] The primary focus of the trial was whether CIBC WG was able to meet the burden of establishing that Mr. Saturley improperly exercised discretion in managing client accounts. Twelve clients were identified as ones where discretion was alleged. CIBC WG claimed that Mr. Saturley generally exercised discretion in these client accounts, which I took to mean that he was managing them with only limited direction from the clients.

In their evidence and submissions, CIBC WG focused on sample transactions, rather than dealing with every single item found in the client account statements. [ 134 ] There was a similar pattern of evidence relied upon by CIBC WG with respect to each client. The FIS trading records and account statements were used to establish when orders were placed. The documentary evidence reliably provides this information. The date and time of placement establishes the window within which client instructions must have been obtained.

Once an investment advisor receives client instructions, they are required to enter the order as quickly as possible. Failing to do so could be an indication of the exercise of time discretion. [ 135 ] CIBC WG produced telephone records for Mr. Saturley ’ s home, his cell phone and his office extension. In addition, they produced records for the office extensions of Ms. Harris and Mr. Cowan and, in some cases, client home and cellular telephones.

The purpose of this evidence was to show an absence of any telephone communication during the period when instructions should have been received. [ 136 ] CIBC WG also called the subject clients as witnesses (with the exception of Dr. Chehil, whose discovery examination transcript was filed, and David Rhind) to describe their dealings with Mr. Saturley. In some cases, they testified about trips or other events which would have precluded them from having a conversation with Mr.

Saturley at the relevant time. [ 137 ] Through this evidence, CIBC WG argued that they had established on a balance of probabilities that each client did not communicate instructions to Mr. Saturley within a reasonable period immediately before the particular trade order was entered. In these circumstances, this would at least amount to the exercise of time discretion on the part of Mr. Saturley since he was the one determining when the order was entered.

For some trades, it might go further and establish that the client never provided instructions on the other details of the order. [ 138 ] Most of the transactions referred to by CIBC WG were option contracts and frequently they were part of the strangle strategy, which meant that there were matching orders placed at the same time. For these securities, it would be necessary for the client to provide instructions with respect to the subject shares, the number of contracts, the strike price for both the put and the call, and the month of expiry.

According to the FIS records, almost all of the transactions in question were identified as “ solicited ” , which means that they were based upon recommendations by Mr. Saturley to the client, which makes sense given the complexity of the strangle strategy. Mr. Saturley confirmed this when he described his normal trading practices. [ 139 ] I will now consider the evidence in relation to each of the clients for whom discretionary trading is alleged: Marie Aisthorpe [ 140 ] Ms. Aisthorpe lived in Newfoundland and in March, 2007 her husband died suddenly, leaving her with two young children to care for.

In June of 2007, she received the proceeds of her husband ’ s insurance policy and, on the recommendation of a friend, decided

to invest it with Mr. Saturley. Her initial deposit to her CIBC WG account was in excess of $600,000.00. [ 141 ] Her first face-to-face meeting with Mr. Saturley was on July 3, 2007, at which time she signed various account documents. The meeting lasted thirty or forty minutes and she was very emotional. She wanted Mr. Saturley to have “ carte blanche ” in everything related to her investments. [ 142 ] She spoke to Mr. Saturley ’ s secretary (Michelle Harris) four or five times a year on administrative issues. She never discussed trades with her.

She did not know who Michael Cowan was and could not recall any contact with him in 2007 or 2008. Over those two years, she believes she met with Mr. Saturley three or four times and spoke to him by telephone three or four times, for a maximum of eight contacts over two years. She said that she never called Mr. Saturley to discuss trades. In cross-examination, Ms. Aisthorpe did not change her evidence concerning the extent of her contact with Mr. Saturley in 2007-2008. [ 143 ] Ms. Aisthorpe described Mr. Saturley as her “ godfather ” who looked after her family. Mr.

Saturley did not bother her and she did not bother him. She had no interest in discussing investments with Mr. Saturley. [ 144 ] On the morning of August 13, 2007, twenty-five trades were entered in Ms. Aisthorpe ’ s account, ten of which were option contracts. The next day, she took her family to Nova Scotia for a two week vacation. She does not recall any telephone calls with Mr. Saturley concerning the trades entered on August 13, 2007. [ 145 ] The Avotus telephone records for August 13 do not show any calls from the extensions for Mr. Saturley or Ms. Harris to Ms. Aisth

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