Two of Canada’s best known mutual fund companies are a big step closer to facing a class action from disgruntled investors. In late January, the Ontario Divisional Court ruled that a 2004 Ontario Securities Commission settlement of the plaintiffs’ claims doesn’t bar them from going after the fund companies for more compensation. According to expert testimony, those claims could total as high as $333.8 million.

The Divisional Court decision, says Joel Rochon, partner at Toronto-based Rochon Genova LLP, which represents plaintiffs, “gives us the green light to take it to trial.”

The OSC first launched an investigation into allegations of market-timing in November 2003 against five major Toronto-based mutual fund companies: I.G. Investment Management Ltd., CI Mutual Funds Inc., Franklin Templeton Investments Corp. AGF Funds Inc. and AIC Ltd. Long-term investors had complained that market-timers at these firms were taking advantage of time zones and the daily pricing of mutual funds to buy funds they knew would rise at the time of daily pricing because prices of the investments in the funds had already risen in foreign stock markets. All five firms paid a total of $205.6 million to investors to settle the OSC charges.

However, the OSC specifically ruled that the settlement did not stop investors from pursuing the fund companies for more compensation, based on each investor’s actual losses. Three of the companies subsequently settled those claims and are no longer involved in the litigation; two did not — CI and AIC, the latter of which was acquired by Manulife Financial Corp. in 2009.

With the increasing frequency of class actions in Canada — including several against the major banks — and the growing number of law firms willing to take such cases on a contingency basis, more financial services companies could find themselves facing potentially enormous claims for damages.

Ward Branch, partner at Vancouver-based Branch Mac-Master LLP and author of a leading text on class actions, says Canadian corporations could face more class actions. “In the bad old days,” Branch says, “a company would say, ‘If we can screw everybody for $10, we can get away with it because nobody will sue us for $10.’ Now, some class-action lawyer will sue them.”

SETTLEMENT IS POSSIBLE

If CI and AIC are unsuccessful in getting the decision overturned and decline to settle, the case will proceed to the discovery stage. As a result, Rochon says, the plaintiffs will receive information that they have been seeking for many years.

Lawyers for AIC and CI have declined to comment on the case.@page_break@Rochon says his clients are looking for restitution for amounts that mutual fund managers “allowed” to be taken out of their funds through market-timing practices. “Our allegation is that everyone knew what was going on,” Rochon says, adding that while he is prepared to go to trial, he would prefer to come up with an agreeable solution. “Anything can happen at trial, but it always helps to have great facts.”

Rochon admits the case is taking a long time to develop but says that his firm is prepared to “go the distance. You have to be bound and determined to see these things through. We’re hoping to see a relatively quick resolution, either through trial or settlement.”

The Divisional Court’s decision had turned on the role played by the OSC and whether or not its settlement with the plaintiffs satisfied one of five basic criteria that must be met to launch a class action in Ontario. The criteria in question is whether or not a class action is the “preferable procedure” for compensating the plaintiffs.

A lower court judge had held that the OSC settlement satisfied the plaintiffs’ claims and so no alternative procedure was required, even though there was evidence before that judge that substantially greater sums were owed to the plaintiffs. The lower court judge also found that the OSC settlement was sufficient to meet the goal of “behaviour modification,” a typical regulatory goal.

But the Divisional Court ruled that, as the plaintiffs’ full claims had not been met by the OSC settlement, they were entitled to pursue a class action: “It cannot be said that the OSC process is a preferable procedure for damages it failed to recover in the first place.”

Branch says that this case is truly a situation in which it’s easy to see both sides. From the mutual fund companies’ point of view, they’ve already paid “a barrel” of money following an investigation by the OSC and think that should be the end of it. The investors, however, weren’t asked by the OSC how much the companies should have been required to pay and think they should be able to sue for the shortfall.

Branch says there are plenty of cases in which companies have expressed a desire to do the right thing or have been advised by their regulator to do so but still get sued in a class action.

“I’m sure the mutual fund companies thought they were free and clear of being sued,” Branch says. “The regulators have a different focus than the customers. They want the sting to be a punishment. The class-action lawyer wants to make sure customers get the last dollar that they’re entitled to.”

Branch adds that, if the class action is successful, the penalty will be at least seven figures: “Class-action lawyers don’t get out of bed for a claim that’s less than $2 million.”

Canadian courts and lawyers are generally becoming more comfortable with the concept of class-action lawsuits, says Branch, as well as with specific kinds of class actions: “People are starting to understand that class actions work very well in this [market timing] area.” IE