Regulators are not responsible to investors when the professionals they regulate fail their clients, the Supreme Court of Canada has ruled in two separate, companion cases.

One case originating in British Columbia, involved the massive collapse of Eron Mortgage Corp. in October 1997. About 3,350 investors lost money when the B.C. Securities Commission lifted Eron’s licence and froze its assets after a year-long investigation.

Investors lost almost $200 million. The investigation found that money intended for mortgages was used to pay high interest rates on other investments. Some of the money was also diverted for private use.

In its argument against the registrar of mortgage brokers, the lawyers for the investors argued that the registrar knew Eron was in trouble for a year before he acted, and that he had a duty to warn them. But the Supreme Court did not agree.

“In this case, the statute does not impose a duty of care on the registrar,” said the court in its unanimous decision. “The registrar’s duty is rather to the public as a whole.”

Unfortunately for the Eron investors the court said that the duty to individuals could potentially “conflict with the registrar’s overarching duty to the public.” Specifically, the registrar has no control over the number of investors nor the amount invested. Furthermore, taxpayers did not agree to assume the risk of private loss in such cases.

“To impose a duty of care in these circumstances would be to effectively create an insurance scheme for investors at great cost to the taxpaying public. There is no indication that the legislature intended that result.”

The investors had filed a class-action suit and won in B.C. Supreme Court, but the B.C. Court of Appeal overturned that decision and said the registrar’s duty to individual investors did not extend beyond ensuring Eron’s mortgage brokers were properly accredited and registered.

In the companion case, the Supreme Court ruled unanimously that the Ontario Law Society was not responsible to individual investors for a fraud involving the delivery of $9 million worth of gold to 260 investors. In that case, no mine existed and no gold was ever produced by the supplier, Sisto Consultants Inc. Meanwhile, $8.9 million that was placed in a trust account by lawyer John Mills between May 1989 and July 1990 disappeared.

The lawyers for investors, John and Nancy Edwards, argued that the law society failed to ensure that Mills was operating the trust account properly.

Again the Supreme Court reasoned that the law society — lawyers are self-regulated — is geared for the protection of clients and the public as a whole. But that “does not mean that the law society owes a private law duty of care to a member of the public who deposits money into a solicitor’s trust account.”

Instead, reasoned the court, the responsibility ends with the errant professional not the regulator.