Ontario Divisional Court considers whether an OSC proceeding is a preferable alternative to a class action in a recent "market timing" case

February 4, 2011

Ontario’s Divisional Court recently heard an appeal from a motion judge’s order dismissing the plaintiffs’ motion for certification as a class proceeding in Fischer v. IG Investment Management Inc. Although the case otherwise met the requirements for certification, the motion judge held that it was not the “preferable procedure” because a proceeding of the Ontario Securities Commission (OSC) on the same subject matter was a preferable alternative to a class action in the circumstances. Justice Molloy, writing for a unanimous Divisional Court, certified the proceeding as a class action, overturning the motion judge’s ruling.


The defendants are mutual fund managers.  In 2003, the OSC launched an investigation into the practice of “market timing” in the mutual fund industry.  At the conclusion of its investigation, the OSC commenced enforcement proceedings against the defendants for failing to act in the public interest in relation to market timing activities in their funds.  The defendants entered into settlement agreements with the OSC pursuant to which they paid $205.6 million in compensation directly to their investors. All 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 damages over and above the amount recovered in the OSC settlements.  The motion judge, denied certification of a class proceeding holding that only four out of the five necessary criteria had been met.  The motion judge held that the plaintiffs had not established that a class proceeding would be the “preferable procedure” and that this missing element was fatal to the plaintiffs’ request for certification.  The plaintiffs appealed to the Divisional Court.

The Appeal

In allowing the appeal, the Divisional Court found that the motion judge had erred in law in respect to the test to be applied and the manner in which he applied it. The Divisional Court held that motion judge incorrectly considered the impact of the OSC proceeding in his analysis of whether a class action was a preferable procedure.  In his analysis, the motion judge considered whether the OSC proceedings served the purposes of a class action, namely access to justice, behaviour modification and judicial economy. Judicial economy was found to be a neutral factor and all parties conceded that the OSC settlements accomplished the goal of behaviour modification. The issue of preferable procedure, and thus certification, turned on whether the OSC proceedings provided access to justice for the investors.

In determining whether the investors had access to justice, the motion judge considered, and correctly rejected, the argument that the plaintiffs had already been fully compensated as the plaintiffs had established “some basis in fact” for each of the certification requirements. However, the Divisional Court found that the motion judge erred by accepting the defendants’ argument that once it was established that the purpose of the OSC proceeding was to obtain restitutionary compensation and that the OSC process was adequate, the court ought not to second-guess whether the OSC proceeding constituted access to justice in respect of the full quantum of the plaintiffs’ claim. The Divisional Court held that this determination constituted a legal error with respect to the test to be applied and that it did affect the result as it had the effect of negating the low factual burden on the plaintiffs and replacing it with one that was impossible for the plaintiffs to meet at the certification stage.

Once the plaintiffs established that they were owed some damages over and above what was awarded in the OSC settlements, the Divisional Court held that the purpose of the OSC proceeding or the intention of the OSC staff was irrelevant and, therefore, there was no basis on which the motion judge could have deferred to the OSC by refusing to “second-guess” the OSC decision approving the settlement. It was particularly relevant that the OSC settlement specifically contemplated future civil actions flowing from the conduct and specifically reserved the rights of individuals to pursue those claims notwithstanding the settlement.

Further, as the plaintiffs were seeking damages over and above what was awarded in the OSC proceedings, the Division Court held that it was illogical to characterize the OSC proceeding as a preferable procedure for the recovering money that it failed to recover in the first place. The OSC proceedings were not a bar to certifying the plaintiffs’ action, and no issues of res judicata or issue estoppel arose. 

The Divisional Court also found that the motion judge had further erred by applying the test for approval of a settlement in the context of a certification motion by considering the criteria applied in determining whether to approve or refuse a settlement. The Court held that It was fundamentally wrong in law to take any of the criteria into account at the certification stage.


In the end, the Divisional Court held that, in the circumstances, the OSC proceeding was not relevant to the preferable procedure requirement and should have not been taken into account by the motion judge.  As this was the only obstacle to certification, the Divisional Court granted the appeal and certified the plaintiffs’ action as a class proceeding. Justice Molloy stated, “it cannot be said that the OSC process is a preferable procedure for recovering damages it failed to recover in the first place.  There is no possibility of an OSC proceeding to recover this short-fall on a going forward basis.  The effect of what the motion judge did was to treat the OSC proceeding as a reasonable settlement of the plaintiff’s claims which was an improper consideration in the context of this certification motion.”

Notably, the Divisional Court has expressly left open the question of whether a fully completed prior proceeding or settlement could ever be considered a preferable procedure to a class action.

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