An Ontario court has given an investor permission to bring a proposed class action against the Financial Services Regulatory Authority of Ontario (FSRA) for its oversight of the failed PACE Savings & Credit Union Ltd.
Frank Losak had sought leave to file suit against FSRA and its former CEO, Mark White, on behalf of investors who purchased PACE securities while it was under FSRA administration. Ontario’s Superior Court of Justice ruled that he can sue FSRA, but not White.
According to the court, Losak alleges that the regulators are liable for damages for, among other things, “making misrepresentations by not providing an offering statement to him and others.”
The firm was first placed into administration under FSRA predecessor, the Deposit Insurance Corporation of Ontario (DICO), in 2018, amid regulatory and prudential concerns about its operations. FSRA took over as PACE’s administrator in 2019 when FSRA merged with DICO. FSRA continued to oversee the firm until PACE was placed into liquidation in 2022.
Losak allegedly purchased securities in PACE between October 25, 2018, and November 29, 2019, while it was under the regulators’ administration.
“He asserts that [a] PACE employee advised him that his investment was ‘guaranteed and low risk,'” the court noted. Losak further alleges that the securities were sold without a valid prospectus or offering statement.
The proposed class action has not been certified, and the allegations have not proven. However, in granting leave to pursue a class action, the court ruled that Losak has a potentially viable claim.
According to its decision, FSRA had argued that the proposed class action was barred by the regulator’s statutory immunity, which protects government agencies and their employees from liability for exercising their authority in good faith. The court found that FSRA’s former CEO was protected by statutory immunity, but not the regulator itself.
“There is enough evidence before me that I am satisfied that there is a viable cause of action. FSRA clearly made statements to stakeholders that it exercised management authority, and had broad powers of the directors, at the relevant time,” the court said, citing the content of letters and presentations to PACE members, and the transcript of a virtual town hall indicating that FSRA was functioning as the credit union’s board while it was under the regulator’s administration.
The court also rejected FSRA’s argument that the proposed claim is being brought after the expiry of the two-year limitation period for civil actions.
While the shares were bought in 2018 and 2019, the court found that the limitation period didn’t start until after May 2023, when PACE’s receiver informed Losak that his shares were valued at almost $155,000. Losak later discovered they were actually worthless.
“Accordingly, even though he was aware of PACE’s liquidation proceedings, he would not necessarily have known that injury, loss or damage had occurred at that time. It appears that the clock would have started to run sometime after the May 31, 2023 letter.”
The court dismissed the regulator’s argument that allowing the lawsuit to proceed would undermine the liquidation proceeding.
“Among other things, FSRA says that granting leave would threaten to delay the completion of the administration of the liquidation proceeding, including delaying distributions to proven creditors,” the court noted.
However, the court ruled that the proposed claim is against FSRA, not against PACE, and so it’s not clear that this would delay the administration of the failed credit union’s estate.
“I am satisfied that leave should be granted for Mr. Losak to commence his claim as against FSRA,” it concluded, and ordered FSRA to pay him $25,000 for costs.