An Ontario appeal court has upheld a trial judge’s finding of negligence against Sprott Securities Inc. and one of its brokers, rejecting the firm’s appeal of the lower court ruling.

Sprott and its broker, Anne Spork, appealed a judgment of the Superior Court of Justice handed down on February 20, 2001, in which they were ordered to pay a client, Philip Abrams, $150,800, which amounted to 50% of the losses he suffered on his investments, plus interest and costs. The trial judge concluded Spork, breached duties owed to Abrams, to make a balanced presentation regarding the prospective investments and to warn him of the risks associated with the investments. Sprott was held vicariously liable for Spork’s negligence.

The trial judge also determined that Sprott and Spork did not owe Abrams a fiduciary duty and that Sprott had not negligently conducted due diligence reviews of the private companies in whose securities Abrams invested; nor had Sprott breached any duty of disclosure to Abrams. Finally, the trial judge held that Abrams failed to take reasonable care in signing the subscription agreements. As a result, their liability for Abrams’ losses was reduced by 50% due to Abrams’ contributory negligence.

The primary issue in the appeal concerned the duties of a securities broker and brokerage firm to a retail client. The secondary issue was whether a broker and brokerage firm can block the client’s claim based subscription agreements that he signed to participate in the investments. The trial judge ruled that they couldn’t block his claim, because of the broker’s negligence.

The appeal court concluded that the trial judge committed no error in his finding of negligence against the firm and the broker, or in his determination that Spork’s negligence precluded them from relying on Abrams signing the subscription agreements to block his case.

It found that the evidence at trial established that Spork failed to warn Abrams about the risky nature of investments in private companies, and that she failed to tell him that their planned IPOs may never happen.

It also found that the firm and the broker could not rely on the fact that Abrams signed subscription agreements attesting to the fact that he was able to evaluate the merits of the investments and bear the risk of them, even though he apparently deliberately didn’t read the agreements to avoid the legal consequences of the agreements.

The court said that Abrams’ conduct cannot be condoned. But, “That, however, is not the end of the matter. The consequences of his conduct must be considered in light of whether Spork’s own conduct, for which Sprott is also liable, precipitated the representations by Abrams.”

“The fact remains that Ms.Spork failed in her duty to inform Mr. Abrams about the risks. Disclosure of those risks would, in my view, have made Mr. Abrams hesitate or seek further information before signing the subscription agreements.”

The court dismissed the appeal and awarded Abrams $9,500 in costs.