An Ontario court has upheld a brokerage firm’s decision to liquidate a client’s portfolio and to cover her naked short positions to prevent heavy losses for the company.

The Ontario Superior Court of Justice has ruled in the favour of Toronto-based discount brokerage Questrade Inc., which sued former client Carol Chow as the firm sought to recover the $88,000 it spent on trades to cover her short positions after it liquidated her account in 2013.

“[As Chow’s] positions were largely short sales, continued rises in the price of the underlying stock could not only wipe out her equity, but expose the [firm] to losses of unlimited value if it closed out the defendant’s position that she could not or would not pay,” the decision notes.

Chow defended the firm’s claim and filed her own counter claim, arguing that she was not out of equity when the firm decided to cover her shorts and: that the she should have been given the chance to post more cash; that she received insufficient notice of the firm’s decision; and that by quickly closing out illiquid positions, the firm paid excessive prices to cover the shorts. She countersued for the amount she says her portfolio would have made had she held her positions for several months longer.

However, the court sided with Questrade, saying, “The law is very clear that a broker, especially a mere order-taker, is not required to become a co-speculator with the customer. Nor is the broker required to wait for the customer’s position to go negative. Nor must it understand the customer’s strategy and work with the customer on that basis.”

The court granted summary judgment to Questrade, saying there is no serious issue requiring a trial in the case: “Shorting naked puts and calls is about as risky as it gets. The defendant was not perfectly hedged and the market moved against her, putting the plaintiff at risk of significant liability. [Questrade] was entitled to act under the contract.”

The court ordered that the firm is entitled to judgment against the client for $88,111 plus prejudgment interest and costs of $1,200.The decision can be found here.