Lawyer Found Liable for Bad Financial Referral by Supreme Court of Canada
The Supreme Court of Canada recently decided a case concerning the professional liability of a lawyer who had referred clients to a financial advisor. The advisor turned out to be a fraudster and, in addition to the referral, the lawyer had been recommending and endorsing the advisor’s investments over a number of years.
The client and her husband were business people who operated restaurant franchises in Ontario and Quebec. The husband passed away in 2003 and she became sole director of their companies.
The lawyer had been the couple’s lawyer for their business operations in Quebec since 1989. Following her husband’s death, the client regularly consulted the lawyer for advice regarding the interpretation and implementation of the wills. She was an educated and experienced businesswoman, but did not have sophisticated knowledge of the investment world.
The lawyer introduced the client to a financial advisor, who was the lawyer’s personal financial advisor and the directing mind of an investment firm. The lawyer had met the financial advisor in 2001 when he himself was looking for a personal financial advisor; the two had subsequently become close friends. The lawyer had personally invested in three funds promoted by the investment firm.
The lawyer recommended the investment firm to the client. Relying on that advice, the client decided to invest some of her personal savings with the investment firm in early 2004. She made an initial investment of $100,000 in and a second one of over a $1 million. In 2006, after the sale of the client’s company’s assets, a further amount of almost $7 million dollars was also invested with the investment firm’s funds.
However, beginning in April 2006, the client expressed concern to the lawyer regarding the investments. She wanted more information on the nature of the investments and had been having difficulty communicating with the investment firm. Each time she expressed concern, the lawyer either promptly reassured her or informed the financial advisor, who would himself reassure her.
Then, in 2007, it was revealed that two of the investment funds of the investment firm were Ponzi schemes. The financial advisor and his partner disappeared and almost $100 million was lost in the fraud by approximately 100 investors, which included the client’s money. Even though she had redeemed some money, the client lost over $5 million. Sometime after, the client also learned that the lawyer had received payments from the financial advisory totalling $38,000 in 2006 and 2007.
In 2008, the client and her company sued the lawyer and his law firm, alleging that the lawyer had failed in his duty to advise because he recommended, endorsed, and encouraged inappropriate investments. She also claimed he disregarded his duty of loyalty because he put himself in a conflict of interest, which caused him to ignore the risks of the investments.
Lower Court Decisions
The trial judge found the financial advisor and his partner responsible for the losses, but did not find the lawyer responsible.
The Quebec Court of Appeal said the trial judge made important mistakes and found the lawyer responsible, reversing the trial judge’s decision.
Supreme Court of Canada Decision
The court first looked at the professional obligations of lawyers who refer their clients to independent advisors. It referred to case law and summarized a referring lawyer’s standard of conduct as follows:
“Lawyers who refer clients to other professionals or advisors have an obligation of means, not one of result. Although lawyers do not guarantee the services rendered by professionals or advisors to whom they refer their clients, they must nevertheless act competently, prudently and diligently in making such referrals, which must be based on reasonable knowledge of the professionals or advisors in question. Referring lawyers must be convinced that the professionals or advisors to whom they refer clients are sufficiently competent to fulfill the contemplated mandates.”
The court then explained that a lawyer’s duty to advise is threefold, encompassing duties (1) to inform, (2) to explain, and (3) to advise in the strict sense. It explained that the duty to inform pertains to the disclosure of relevant facts; the duty to explain requires that the legal and economic consequences of a course of action be presented; and the duty to advise in the strict sense requires that a course of action be recommended.
Finally, the court set out lawyers’ duty of loyalty, which covers the duty to avoid placing themselves in situations in which their personal interests are in conflict with those of their clients. The duty to avoid conflicts of interest is a salient aspect of the duty of loyalty they owe to their clients.
After reviewing these principles and their application to the case at bar, the Supreme Court of Canada did not find error in the Court of Appeal’s decision that found the lawyer responsible. It concluded:
“This is not a case about a mere referral. It concerns a referring lawyer who, over the course of several years, recommended and endorsed a financial advisor and financial products, and encouraged his clients to retain their investments with that advisor. Further, in doing this, he failed to perform adequate due diligence, misrepresented investment information, committed breaches of confidentiality and acted despite being in a conflict of interest. In such a context, a lawyer cannot avoid liability by hiding behind the high threshold for establishing liability that applies in a case in which a lawyer has merely referred a client.”
The appeal was dismissed.
If you are not getting answers about your professional negligence issue or you have questions about whether a certain professional has properly met his or her standard of care, the Waterloo-based lawyers at Petker Campbell Postnikoff can help. We have decades of experience dealing with negligence, breach of contract and breach of fiduciary obligations by trusted professionals, including lawyers and financial advisors. Whether the loss is financial or the injury is physical, we assist victims in achieving fair negotiated settlements and trial verdicts. To speak with a member of our firm, call us at 519-886-1204 or contact us online.