Financial Post, Jonathan Chevreau, 2 August 2007
The hazards of using discount brokers to buy stocks on margin are well illustrated in a "landmark" court ruling involving TD Waterhouse.
The Ontario Superior Court of Justice has ruled TD was in its rights when it sold out a client's positions in some blue-chip U.S. stocks during the 2002 bear market. The judgement was released July 24 and flagged online in yesterday's FP Trading Desk.
Retired investor Bruce Paciorka, 55, alleged the sell-outs were premature and excessive. He claimed TD Waterhouse breached its statutory duty and fiduciary obligations to him as an investor.
This was all rejected by Justice Mary Jo Nolan. She ruled "the very nature of a discount brokerage business implies a lower standard of care and does not create any fidiciary obligation between the client and the discount brokerage."
TD's lawyer, Gavin Tighe, a partner with Gardiner-Roberts LLP, says the ruling "erases the debate over whether reasonable notice is needed for margin calls." It also underscores a client's "responsibility to mitigate losses from margin calls," he added.
In an interview, Tighe said "you get what you pay for" in brokerage services. He says Paciorka's margin was 70/30: that is, he put up $30 and borrowed $70 for each $100 of stock in the account.
According to the judgement, Paciorka had invested in stocks since 1981, initially with full-service RBC Dominion Securities. He had margin accounts there and with other firms.
Paciorka opened a margin account in 1992 with what was then Green Line Investor Services. He considered himself a "sophisticated" investor. He experienced credit sell-outs in 1993, 1995 and 2001 when he failed to cover margin calls.
Windsor-based Paciorka retired in May, 2000, and invested in solid blue chips for long-term growth and income.
On margin, he bought hundreds of thousands of dollars worth of Home Depot, Office Depot and Ford Motor Co. His statement of claim says he was in a financial position to cover any margin calls because he had a line of credit for that purpose. As of June, 2002, his U.S. portfolio was worth $1.58-million, with margin debt of $1.03-million.
From July to October, 2002, TD sold out some positions when the stocks began to fall. Paciorka complained the sales were made before deadlines he was given in letters demanding he correct the deficiencies.
Paciorka was upset when those stocks soon recovered in value. TD's position is they had to mitigate any further losses and that if he was so sure the stocks would recover, he could have repurchased them on the open market.
Stan Buell, president of the Small Investor Protection Assocation (SIPA), does not recommend small investors use leverage, especially if they're near retirement.
But he says the financial industry encourages leverage to increase assets and generate commissions. He agrees discount brokers have no fiduciary duty to clients, but full-service brokers, mutual fund dealers and other "advisors" selling financial products do have such a duty.
B.C.-based certified financial planner Fred Kirby says discount brokers are in the transaction rather than relationship business. They serve sophisticated investors who do not need advice.
"This is far different from an advisor/client relationship which ideally should be fiduciary in nature where the client's interests are placed first."
Kirby says it's fair for brokerage firms to take action to protect their interests. "Margin calls are not made arbitrarily." Funds provided by brokers are based on strictly regulated and enforced formulae.
Investors need margin accounts to sell stocks short or trade options. But Kirby warns trouble can ensue if they use margin to leverage positions they can ill afford to take.
Adrian Mastracci, of Vancouver's KCM Wealth Management Inc., says there are better ways to borrow to buy stocks and still retain control.
"I'd counsel clients not to borrow from brokers. When you relinquish control, someone else can pull the trigger.".
The hazards of using discount brokers to buy stocks on margin are well illustrated in a "landmark" court ruling involving TD Waterhouse.
The Ontario Superior Court of Justice has ruled TD was in its rights when it sold out a client's positions in some blue-chip U.S. stocks during the 2002 bear market. The judgement was released July 24 and flagged online in yesterday's FP Trading Desk.
Retired investor Bruce Paciorka, 55, alleged the sell-outs were premature and excessive. He claimed TD Waterhouse breached its statutory duty and fiduciary obligations to him as an investor.
This was all rejected by Justice Mary Jo Nolan. She ruled "the very nature of a discount brokerage business implies a lower standard of care and does not create any fidiciary obligation between the client and the discount brokerage."
TD's lawyer, Gavin Tighe, a partner with Gardiner-Roberts LLP, says the ruling "erases the debate over whether reasonable notice is needed for margin calls." It also underscores a client's "responsibility to mitigate losses from margin calls," he added.
In an interview, Tighe said "you get what you pay for" in brokerage services. He says Paciorka's margin was 70/30: that is, he put up $30 and borrowed $70 for each $100 of stock in the account.
According to the judgement, Paciorka had invested in stocks since 1981, initially with full-service RBC Dominion Securities. He had margin accounts there and with other firms.
Paciorka opened a margin account in 1992 with what was then Green Line Investor Services. He considered himself a "sophisticated" investor. He experienced credit sell-outs in 1993, 1995 and 2001 when he failed to cover margin calls.
Windsor-based Paciorka retired in May, 2000, and invested in solid blue chips for long-term growth and income.
On margin, he bought hundreds of thousands of dollars worth of Home Depot, Office Depot and Ford Motor Co. His statement of claim says he was in a financial position to cover any margin calls because he had a line of credit for that purpose. As of June, 2002, his U.S. portfolio was worth $1.58-million, with margin debt of $1.03-million.
From July to October, 2002, TD sold out some positions when the stocks began to fall. Paciorka complained the sales were made before deadlines he was given in letters demanding he correct the deficiencies.
Paciorka was upset when those stocks soon recovered in value. TD's position is they had to mitigate any further losses and that if he was so sure the stocks would recover, he could have repurchased them on the open market.
Stan Buell, president of the Small Investor Protection Assocation (SIPA), does not recommend small investors use leverage, especially if they're near retirement.
But he says the financial industry encourages leverage to increase assets and generate commissions. He agrees discount brokers have no fiduciary duty to clients, but full-service brokers, mutual fund dealers and other "advisors" selling financial products do have such a duty.
B.C.-based certified financial planner Fred Kirby says discount brokers are in the transaction rather than relationship business. They serve sophisticated investors who do not need advice.
"This is far different from an advisor/client relationship which ideally should be fiduciary in nature where the client's interests are placed first."
Kirby says it's fair for brokerage firms to take action to protect their interests. "Margin calls are not made arbitrarily." Funds provided by brokers are based on strictly regulated and enforced formulae.
Investors need margin accounts to sell stocks short or trade options. But Kirby warns trouble can ensue if they use margin to leverage positions they can ill afford to take.
Adrian Mastracci, of Vancouver's KCM Wealth Management Inc., says there are better ways to borrow to buy stocks and still retain control.
"I'd counsel clients not to borrow from brokers. When you relinquish control, someone else can pull the trigger.".
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The Globe and Mail, Tara Perkins, 2 August 2007
It's buyer beware when it comes to trading with borrowed money in online discount brokerage accounts, a new court ruling suggests.
TD Waterhouse Group Inc. was within its rights when, three separate times, it sold off hundreds of thousands of dollars worth of stocks held by 55-year-old Bruce Paciorka, a retired employee of Chrysler Corp. That was true even when the selloffs occurred before the deadline the brokerage had given him in a margin call, and even though his account still had more value than his loans, an Ontario Superior Court judge has ruled.
It's an issue that's becoming more important for brokerages and investors as the amount of trading Canadians are doing with borrowed money - or on margin - hits record highs, while the stock markets are jittery.
The court ruling means online discount brokerages can "pull the switch" and liquidate a client's position before the client has nothing but debt, even without the client's permission, said Gavin Tighe, the lawyer who represented TD Waterhouse.
Canadian investors are borrowing more money from brokerage firms these days to place bets on securities. Margin accounts allow investors to trade with borrowed funds as long as they maintain a certain amount of money in the account. If the stocks or securities fall, the brokerage can issue a margin call requiring the investor to put more money in the account. If that doesn't happen promptly, the brokerage will often sell off some of the stocks.
Canadians had $14.06-billion worth of margin debt at the end of May. That's up from $12.4-billion one year earlier, and $9.8-billion in May, 2005, according to the Investment Dealers Association of Canada.
The court case involving TD Waterhouse was launched by Mr. Paciorka in 2005. The Windsor, Ont., resident believes he could have made more money by holding on to the shares of companies such as Home Depot.
In his lawsuit, he argued that TD Waterhouse should have honoured the dates it gave him when it issued margin calls. For instance, on July 15, 2002, the brokerage issued a margin call to Mr. Paciorka saying he had 10 days to make a deposit of $231,998. But that same day, it sold off 14,400 of his shares for $405,120.44.
Justice Mary Jo Nolan pointed out in the ruling that the brokerage's letters state that it might be obliged to cover the margin call without notification if the stocks fall further.
In addition, the agreement clients sign with TD Waterhouse for margin accounts says sellouts are allowed without any attempt to notify the client. Every discount brokerage uses that boilerplate clause in their agreements, Mr. Tighe said.
Mr. Paciorka's lawyer, Arthur Barat, could not be reached for comment yesterday.
He had argued that TD Waterhouse had a fiduciary duty to act in Mr. Paciorka's best interest. But Justice Nolan said that's not the case, noting the discount brokerage did not provide investment advice to Mr. Paciorka and was not in a position of trust.
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It's buyer beware when it comes to trading with borrowed money in online discount brokerage accounts, a new court ruling suggests.
TD Waterhouse Group Inc. was within its rights when, three separate times, it sold off hundreds of thousands of dollars worth of stocks held by 55-year-old Bruce Paciorka, a retired employee of Chrysler Corp. That was true even when the selloffs occurred before the deadline the brokerage had given him in a margin call, and even though his account still had more value than his loans, an Ontario Superior Court judge has ruled.
It's an issue that's becoming more important for brokerages and investors as the amount of trading Canadians are doing with borrowed money - or on margin - hits record highs, while the stock markets are jittery.
The court ruling means online discount brokerages can "pull the switch" and liquidate a client's position before the client has nothing but debt, even without the client's permission, said Gavin Tighe, the lawyer who represented TD Waterhouse.
Canadian investors are borrowing more money from brokerage firms these days to place bets on securities. Margin accounts allow investors to trade with borrowed funds as long as they maintain a certain amount of money in the account. If the stocks or securities fall, the brokerage can issue a margin call requiring the investor to put more money in the account. If that doesn't happen promptly, the brokerage will often sell off some of the stocks.
Canadians had $14.06-billion worth of margin debt at the end of May. That's up from $12.4-billion one year earlier, and $9.8-billion in May, 2005, according to the Investment Dealers Association of Canada.
The court case involving TD Waterhouse was launched by Mr. Paciorka in 2005. The Windsor, Ont., resident believes he could have made more money by holding on to the shares of companies such as Home Depot.
In his lawsuit, he argued that TD Waterhouse should have honoured the dates it gave him when it issued margin calls. For instance, on July 15, 2002, the brokerage issued a margin call to Mr. Paciorka saying he had 10 days to make a deposit of $231,998. But that same day, it sold off 14,400 of his shares for $405,120.44.
Justice Mary Jo Nolan pointed out in the ruling that the brokerage's letters state that it might be obliged to cover the margin call without notification if the stocks fall further.
In addition, the agreement clients sign with TD Waterhouse for margin accounts says sellouts are allowed without any attempt to notify the client. Every discount brokerage uses that boilerplate clause in their agreements, Mr. Tighe said.
Mr. Paciorka's lawyer, Arthur Barat, could not be reached for comment yesterday.
He had argued that TD Waterhouse had a fiduciary duty to act in Mr. Paciorka's best interest. But Justice Nolan said that's not the case, noting the discount brokerage did not provide investment advice to Mr. Paciorka and was not in a position of trust.
