ISAAC W C SOLLOWAY Vs. J P MCLAUGHLIN

JUDGEMENT

(1.) These are an appeal and a cross appeal from decisions of the Supreme Court of Canada in an action brought in the High Court of Ontario by the present respondent against two companies named Solloway Mills and Co. Ltd., one registered in Ontario and the other in the Dominion and against the present appellants Mr. Isaac Solloway and Mr. Harvey Mills, two of the directors of the companies. The action was tried before an Assistant Master, Mr. Lennox, who reported that there was due to the plaintiff from the Ontario Company and the appellants the sum of $65,129.92. The Dominion Company had dropped out of the proceedings. On appeal by the present appellants from the Master's report, Kerwin J. confirmed the report with an arithmetical correction of the amount found to be due to $55,922.98. On appeal the Court of Appeal dismissed the action as against the present appellants, Macdonnell J. A. dissenting. On appeal by the plaintiff, the Supreme Court allowed the appeal but reduced the amount of the judgment to $28,281.40 and interest. The two director-defendants appeal and the plaintiff cross appeals.

(2.) The claim of the plaintiff arose out of transactions which he had with the Ontario Company in 1929 and 1930. The Company purported to carry on business as stock-brokers having acquired in 1928 the business of that nature which had been started by the two appellants in 1927. The Company were members of the Standard Stock and Mining Exchange in Toronto. On 16 October 1929 the plaintiff instructed the Company to buy for him 7,000 shares of Sudbury Basin Mines Ltd. on margin at market price, then $7 a share. He at the same time deposited 3,500 shares of Sudbury Basin Mines, Ltd. as margin. He duly received a contract note purporting to show that the transaction had been carried out in accordance with the rules of the appropriate Stock Exchange which in the present case was the Standard Stock and Mining Exchange in Toronto. The shares steadily declined in value : requests were made from time to time by the Company for further margin or cash: the plaintiff duly complied with these requests bo that in the course of the transactions between October a December, inclusive he deposited with the Company a further 10,500 shares of the Sudbury Company and paid $8,000 cash. He received monthly statements showing the shares as being carried for him. On 13 January 1930 the plaintiff decided to close the account. The balance against him on that date appeared to be $42,334.92. He paid that sum and was given delivery of 21,000 shares, i. e. 7,000 originally bought, 3,500 originally deposited and 10,500 subsequently deposited. It now appears that the transactions as far as the Company were concerned were part of a fraudulent system of business and were themselves fraudulent in their inception, continuance and completion. The Company purporting to buy and in fact making valid contracts of purchase for their clients contemporaneously sold shares of the same Company, and used their client's shares to complete these sales. The shares are in the form familiar in American companies and with a blank transfer endorsed pass in a similar manner to bearer shares. A broker is not considered to be under an obligation to retain for his client the specific shares which may be delivered to him under the contract made for his client. But he has, of course, to get into his possession and retain an equivalent number of shares. Under the fraudulent system of the Company, they were throughout the course of this transaction 'short' of these Sudbury Basin shares by about 100,000 shares, involving no doubt similar frauds on other clients. In other words they were bears when their clients were bulls: they correctly anticipated the fall of the market: and when their clients demanded the shares they went into the market and bought them at the fallen price to their own substantial profit. The same course was adopted with the shares deposited as margin. The Company sold them as soon as they were deposited, without any lawful excuse, even if the transaction had been in every other respect regular: when they were claimed by the plaintiff, an equivalent number was bought in the market and delivered to the plaintiff with further profit to the Company. It was disputed that the two appellants were parties to the fraud. Their Lordships agree with the Assistant Master, Kerwin J. and Macdonnell J. A. and the learned Judges of the Supreme Court that it was established that both the appellants were privy to and took part in the fraud throughout. They find it unnecessary for them to discuss this contention.

(3.) What then are the rights of the plaintiff in this state of facts ? The Assistant Master gave him the full amount at which he had been charged for the 7,000 shares bought, and also the price at which the Company had realised the deposited shares, crediting the defendants with the market value of the shares at the time when they were delivered to the plaintiff. The Supreme Court agreed with the claim so far as it related to the 7,000 shares: but as to the deposited shares they took the view that the plaintiff had made his claim in respect of them for secret profits: that he had affirmed the transaction by taking and keeping the shares delivered to him when the account was closed: and that as he had claimed in contract or quasi-contract against the Company, he could not claim against the directors unless he had shown against them some perception of the profits : and this he had failed to establish. They therefore reduced the amount of the judgment to the amount charged to the plaintiff for the 7,000 shares less their value when delivered.