The Supreme Court has given the go-ahead for investors to launch a class-action suit against fund companies involved in market timing in the early 2000s.
That’s despite the fact those companies settled with the Ontario Securities Commission in 2004 and 2005 for a total of $205 million (the OSC declined to comment on this case). Investors argue they’re owed $450 million, and are organizing class action to get the remaining $245 million.
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Some could argue this ruling diminishes the perceived power of the regulator: if a class action is possible regardless of a regulatory settlement, why should the securities commission bother?
But it’s important to realize regulatory proceedings and class actions are different, says Michael Feder, a partner at McCarthy Tétrault in Vancouver.
“A regulator’s purpose is to determine the public interest, whereas the purpose of a class action is compensation,” he says. “While a regulator may consider the fact that investors can bring a class action [when weighing whether to order disgorgement by a firm or company], they’ve always been able to do so.”
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In fact, this ruling could strengthen the regulator’s position.
“I think this will actually leave regulators less deterred, because now they don’t have to worry that they’re foreclosing a class action – to the extent they were ever worried about it. Now you know that even if you enter into a settlement agreement with a fund company, you’re not preventing investors from bringing their own claims.”
Going forward, Feder says people and companies that settle with securities regulators must realize investors can also bring class actions against them, and to earmark investor compensation funds accordingly.
As well, respondents should be careful about admissions of guilt in such settlements: “anytime you admit guilt, you potentially have a problem in litigation. People will use the admission to sue you, including in a class action,” he says.
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Given the $245-million discrepancy between the OSC settlement and the investor estimation, would it make sense for respondents to settle in larger amounts up front to prevent future claims? Feder says that would be unwise. “I don’t think that’s going to deter plaintiff’s counsel from bringing claims. You’ll just end up paying more.”
He adds we’ll probably see more securities-related class actions in future.
“This case, which comes on the heels of other class-action certification rulings in October by the Supreme Court, sets a certification-friendly tone in Canada,” warns Feder.
“Anybody who faces the prospect of class action should be worried. The court is concerned with access to justice, and sees class action as being a solution in that regard. For the time being, the threat to Canadian businesses is very real.”