Court of Appeal for Ontario says Securities Commission proceeding not preferable to class action for resolution of investor issues in market timing case

February 3, 2012

In its decision in Fisher v. IG Investment Management Ltd. (released January 27, 2012), the Court of Appeal for Ontario held that capital-markets participants that settle complaints with the Ontario Securities Commission (OSC) may still be subject to class action lawsuits, as the OSC’s regulatory proceedings may not be the preferable procedure for resolving the issues of investors.

The defendants in the proceeding are five mutual fund managers accused of participating in improper mutual fund market-timing.  Prior to the commencement of the class action, the defendants entered into settlement agreements with the OSC pursuant to which they paid $205.6 million in compensation directly to the aggrieved investors. The settlement agreements were without prejudice to the rights of any person to bring civil or other proceedings against the defendants with respect to the same subject matter.  Shortly after the settlements were approved by the OSC, the plaintiffs commenced a putative class action seeking to recover the difference between the OSC settlements and the additional monies the plaintiffs allege are necessary to fully compensate them for their losses.

The central issue on the certification motion, and on appeal, was whether the proposed class action met the preferable procedure criterion in s. 5(1)(d) of the Class Proceedings Act, 1992 (CPA). The motion judge denied certification because, in his view, the completed OSC proceedings and settlement agreements fulfilled the purposes of the CPA, namely judicial economy, access to justice and behaviour modification.  The Divisional Court disagreed and held the OSC proceedings could not have been the preferable procedure for recovering damages because the investors’ action was for significant monetary damages beyond the amount that had been recovered through the OSC proceedings. The mutual fund managers appealed the Divisional Court’s decision.

The Divisional Court’s order granting certification was upheld by the Court of Appeal, but for different reasons. Writing for a unanimous court, Winkler C.J.O., held that in considering whether an alternative proceeding is preferable to a class proceeding, the court must examine the fundamental characteristics of the alternative proceeding and compare those characteristics to those of a class proceeding in order to determine which is the preferable means of fulfilling the purposes of the CPA.

In its analysis, the Court of Appeal considered the following characteristics: the impartiality and independence of the forum; the scope and nature of the alternative forum’s jurisdiction and remedial powers; the procedural safeguards that apply in the alternative proceeding, including the right to participate either in person or through counsel and the transparency of the decision making process; and the accessibility of the alternative proceeding, including such factors as the costs associated with accessing the process and the convenience of doing so.  The Court noted that not all these characteristics will be material in a given case and that each case will turn on its own facts. 

The Court of Appeal found two important differences between the OSC proceedings and the class action, which made a class proceeding preferable.  The court noted that the scope and nature of the OSC’s jurisdiction and remedial powers, and the lack of participatory rights provided to investors in the OSC proceedings were found to favour a class proceeding.

After reviewing the Supreme Court of Canada’s decision in Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), the Court of Appeal held that section 127 of the Securities Act, “Orders in the Public Interest”, is not intended to serve as a compensatory or remedial provision with respect to harm done to individual investors. Rather, the provision empowers the OSC to regulate capital markets in a way that protects both investors and efficiency.  In contrast, the purpose of a class action is to assess civil liability issues such as breaches of a fiduciary duty, a duty of care owed to investors or to quantify the harm allegedly caused by such breaches.   In other words, to obtain relief for investors (monetary or otherwise) who have suffered losses as a result of the defendants’ alleged conduct.

As well, the Court of Appeal found that the OSC proceedings did not provide comparable procedural rights to that of a class action.  In particular, there was no attempt to notify the affected investors of the OSC settlement hearings and neither the investors nor their counsel attended or made submissions.  Moreover, the substantive portions of the hearing took place in camera and the amount of compensation the defendants agreed to pay as part of the OSC settlements was calculated without any opportunity for the investors to participate and without any details in the record of the OSC proceedings as to how the amount was calculated.  The investors were not intended to be parties to the OSC proceedings nor were the proceedings intended or designed to provide the investors with access to justice for purposes of adjudicating the claims advanced in the class action.

The Court of Appeal held that the motion judge incorrectly viewed the OSC proceedings as if they were a reasonable alternative to a class proceeding, by ignoring the essential differences between the scope of the OSC’s jurisdiction and remedial powers and a class proceeding and by failing to consider the participation of the investors in the OSC proceedings.  As the issue of whether a class proceeding was the preferable procedure was the only bar to certification in the court below, the Court of Appeal dismissed the mutual fund managers’ appeal and upheld the Divisional Court’s decision to certify the proceeding.

In this decision, the Court of Appeal makes it clear that the analysis of whether an alternative proceeding is preferable to a class proceeding requires a thorough consideration of the central characteristics of the alternative proceeding as compared to the class proceeding, and provides an analytical framework for that determination.

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