Fund companies could face double jeopardy

In 2004, the OSC found certain funds had been used by institutional investors in the execution of a market timing strategy between 1998 and 2003. AGF Funds, AIC, CI Mutual Funds, and I.G. Investment Management settled with OSC in December 2004, and Franklin Templeton settled with OSC in February 2005. The settlements totalled $205 million, but a group of investors estimated their damages at $450 million.

Similar settlements were executed worldwide with fund companies in 2003 and 2004 by regulators in their respective jurisdictions.

The investor plaintiffs launched a class-action lawsuit after the OSC proceedings ended, seeking to recover the remaining $245 million.

“Investors feel there was money left on the table; they feel they only got partial compensation,” says Thomas Slade, an associate at Supreme Advocacy LLP in Ottawa. (His colleagues were agents in the Supreme Court case for the investors.) “From the perspective of the [fund] companies, they say it’s a settlement, so you’re not going to get full compensation; you had a quicker procedure, and you didn’t have to incur any legal fees. They’re trying to pitch it a win-win. But for people who were out $450 million, they probably don’t feel that way.”

Slade adds the court had to balance judicial economy – trying to encourage settlement – and making sure that plaintiffs can seek compensation where they might not otherwise get it.

As the National Post reported, “In January 2010, Mr. Justice Paul Perell of the Ontario Superior Court of Justice refused to certify the case, but the Divisional Court reversed his ruling. The Court of Appeal upheld the Divisional Court result, but for different reasons.”

Now, the Supreme Court of Canada has ruled in favour of the class action by dismissing the appeal.

In considering the matter, the Supreme Court opinion notes it looked closely at whether the OSC proceedings leading to the $205 million settlement presented any barriers to justice. It concludes this may have been the case. “The regulatory nature of, and the limited participation rights for investors in the OSC proceedings, coupled with the absence of information about how the OSC staff assessed investor compensation support the conclusion that significant procedural access to justice concerns remain which the proposed class action can address,” reads the opinion.

CI Investments, an appellant in the case, released this statement to Advisor.ca: “CI Investments is disappointed that the court dismissed its appeal. Today’s decision is not a finding of liability against CI Investments, but simply allows the class action against CI Investments and one other mutual fund company to proceed. CI Investments intends to vigorously defend this action, in part, on the basis that to the extent that our funds’ investors suffered any harm, they have been fully compensated as a result of the payments that CI Investments made to them eight years ago as a result of the Ontario Securities Commission proceeding.”

Says Slade, “In the long run, this ruling might put pressure on [fund companies] to reach higher settlements that they think will dissuade investors from seeking recourse to civil liability. It also ensures class actions remain a viable tool for investors to turn to where they have suffered a loss.”

He adds the ruling may empower securities commissions further. “It might give regulators a bit more power in coming to settlement,” he says. “They might be able to point to the fact that if they don’t reach a settlement that satisfies the investors, those investors may pursue class actions.”

IG Investment Management Ltd., Franklin Templeton Investments Corp. and AGF Funds were not appellants in this case, because they chose to settle their class-action lawsuits. CI and AIC appealed the lower court’s ruling.