In a decision released late last month, the Ontario Court of Appeal allowed the certification of a class action by investors in mutual funds whose managers had reached a settlement with the Ontario Securities Commission (OSC) for more than $200-million related to the use of “market timing.”
In order for a proposed class action to be certified, Ontario’s Class Proceedings Act (CPA) requires that a class proceeding be the preferable procedure for the resolution of common issues in a proposed class action, and it was this issue on which the appeal in Fischer v IG Investment Management turned and on which the Court provided guidance to lower courts.
The Court of Appeal held that a class proceeding was the preferable procedure for the resolution of the common issues, even though the proposed defendants had already reached a settlement with the OSC.
Chief Justice Winkler, writing for a unanimous three-judge panel, wrote that, in assessing whether a class proceeding is the preferable procedure, a court must examine “the fundamental characteristics of the proposed alternative proceeding, such as the scope and nature of the jurisdiction and remedial powers of the alternative forum, the procedural safeguards that apply, and the accessibility of the alternative proceeding” and compare a class proceeding with the proposed alternative to determine which of the two will better meet the CPA’s goals of judicial economy, access to justice and behaviour-modification
The motions judge had denied the application for certification, holding that a class proceeding would not be the preferable procedure but that all the other requirements for certification were met. Justice Perrell indicated in the absence of OSC proceedings, he would have granted certification, since the other requirements of a cause of action, an identifiable class, the presence of common issues, and the existence of appropriate representative plaintiffs were met, but that “the OSC proceeding was the preferable procedure” in the case.
The appeal to the Divisional Court was allowed, and the certification was granted. The Divisional Court wrote that the motion judge had “lost sight” of the fact that issue in the proposed action was the recovery of damages over and above the amounts recovered through the OSC settlement.
The Court of Appeal dismissed the appeal but criticized the Divisional Court’s reasoning, writing that the “Divisional Court did not ask itself the right question” and that its focus on whether the OSC settlements provided investors with the relief sought by the class proceeding was not properly considered during the preferable procedure analysis.
According to the Court of Appeal, the conclusion that a class proceeding was the preferable procedure was supported by the facts that the OSC’s jurisdiction is protective and preventative rather than compensatory and that the proceedings of the OSC “did not provide comparable rights of participation to the affected investors as the procedural rights enshrined in the CPA” would.
Market timing, the Court of Appeal wrote, is a practice that involves purchasing mutual funds “for short-term turnaround” in the hope of profiting from funds that are undervalued. It is possible because the values of mutual funds are calculated only once a day, and are based on prices that, in the case of foreign securities, can be between 12 and 15 hours old.
