Not an advisor, but still a fiduciary, court finds

You don’t have to be registered as an investment advisor to be in a fiduciary relationship with a client, the Supreme Court of British Columbia has concluded.

The finding, released Oct. 5, comes in a decision that saw an investor sue her “advisor” and his firm, Superoptionforex Consulting Inc., after they lost almost $1 million of her money by investing almost all of it into a single stock, DryShips Inc., which soon went bankrupt.

The investor, Hong Fang Wu, sued Superoptionforex and its owner, Zhi Yong Ma, seeking to hold them responsible for her losses, alleging breach of contract, negligence and breach of fiduciary duty.

Among other things, the court concluded that Ma acted as Wu’s investment advisor, without being properly qualified and registered. It also found that his lack of training and licensing was not disclosed to his client, and that he should nevertheless be held to the same standards as regulated advisors.

“I have concluded that Mr. Ma’s conduct must be measured against a standard applicable to those operating in the securities industry. To conclude otherwise would hold those unlicensed to a lesser standard than those who have done what is required of them to engage with the public when it comes to their financial affairs,” Justice Janet Winteringham wrote in Wu v. Ma. “Individuals such as Mr. Ma cannot operate in a vacuum independent of any oversight.”

Additionally, the court found that Ma was in a fiduciary relationship with Wu, as she was a novice investor, who completely trusted Ma (who held himself out as a experienced trader) with her money, and was utterly reliant on him, given that she didn’t speak English, had little investment knowledge or experience, and had no way to verify what she was being told.

“What places this relationship at the high‑end of the investment advisor spectrum is the discretion Mr. Ma had to trade in her account without Ms. Wu’s input — at all,” the court said.

The court also found that Ma was liable for breaching his fiduciary obligations to Wu, and that his firm was vicariously liable for his conduct.

“In sum, the defendants owed Ms. Wu a duty of care and they breached the standard of care expected of someone in Mr. Ma’s position — that is, someone holding himself out to be an investment adviser,” it said, adding that the “evidence establishes overwhelmingly that Mr. Ma’s negligence caused Ms. Wu’s damages.”

The court rejected defence claims that Wu contributed to her losses, and ruled that she was entitled for US$840,000 in damages — the amount she invested with Ma — plus interest on that amount.

It denied her request for damages reflecting the opportunity cost of investing with Ma. Wu sought damages assuming that she would have otherwise enjoyed a 10% return on her money.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.