After a twisting journey through the court system, a proposed class action against a mutual fund dealer has again been rejected.
The Ontario Superior Court of Justice dismissed a motion from a retail investor Rebecca Lee Boal seeking to certify a class action against former fund dealer International Capital Management Inc. and its founders, John and Javier Sanchez.
She alleges that they breached their fiduciary duty to a group of investors that were sold promissory notes in a related company, Invoice Payment System Corp. (IPS).
In 2018, the firm and the Sanchez brothers agreed to be permanently banned from the industry in a settlement with the Mutual Fund Dealers Association of Canada (MFDA) — amid findings that they violated MFDA rules by selling over $25 million in promissory notes to clients in an outside business in which they (and their family members) had a significant ownership stake. The sale of those notes generated approximately $3 million in commissions for the firm and the reps.
Since then, a proposed class action was brought on behalf of investors who were sold the notes — but, in 2021, the proposed action was dismissed, after a court ruled that a claim based on an alleged breach of a class-wide fiduciary duty was doomed to fail.
That ruling was initially upheld by a majority Divisional Court decision, but was then overturned in 2023 by the Court of Appeal — which found that a claim based on an alleged breach of a common fiduciary wasn’t necessarily doomed, and it sent the case back to the Superior Court of Justice to reconsider whether the claim could be certified as a class action.
Now, the effort has again been denied.
In its latest decision, the Superior Court concluded that “the proposed common issues regarding breach of fiduciary duty do not raise issues common to the class.”
As a result, it ruled that the case can’t be certified as a class action.
The decision followed a closer analysis of the evidence in the case to determine whether it could establish that a fiduciary relationship existed between the dealer and all of the clients that would be covered in a potential class action.
The legal test for establishing a fiduciary duty between investment advisors and their clients includes consideration of factors such as the vulnerability of the investors, the trust and reliance they put in their advisors, the level of discretion that advisors have over client accounts, and the duties established under regulatory standards.
In this case, the court noted that the plaintiff alleges that “the Sanchez defendants controlled all the information about the IPS notes and chose what to reveal to the class members” — which goes to investors’ vulnerability and the advisors’ discretion.
However, the court found that the evidence doesn’t establish that all investors relied on the information provided by the reps.
“IPS had a website that at least some class members reviewed to learn more about IPS’s business. It was plain that IPS was involved in factoring accounts receivable; no one asserts that the Sanchez defendants were the only source of information available to the class members to learn about the factoring business generally. Moreover, some class members were invited to visit IPS personally to learn more about it and its business,” it said.
The court also noted that some investors were told about the Sanchez brothers’ stake in IPS.
“At least some class members thus understood the potential conflict of interest that the Sanchez defendants were in when recommending investments in IPS, and they chose to proceed with the investment,” the court said.
It also found that investors had different understandings of the commission arrangements that the investments involved, and that all investors were at least told about the initial 2% commission.
“The disclosures about the Sanchez defendants’ ownership interest in IPS or the commissions they would earn were not made in writing, and thus were made in breach of the MFDA rules, but that is a separate question from the commonality of the question of whether there is some basis in fact to conclude there is a common issue as to whether there exists a class-wide fiduciary duty that has been breached,” the court said.
In terms of investor vulnerability, the court also found there was no evidence that the investors were all similarly vulnerable.
“Some of them were very sophisticated, while others were less knowledgeable about investing,” it said.
And, there was no evidence that the investors all had the same level of trust and confidence in the Sanchez defendants.
“Some class members deposed that they rarely took the advice offered by the Sanchez defendants, while others considered their recommendations carefully,” it noted.
Additionally, none of the investors had managed accounts, the court said.
“The evidence indicates that the proposed class members made their own investment decisions, and relied to varying degrees (and some, hardly at all), on the recommendations and advice offered by the Sanchez defendants,” it said.
As a result, it concluded that, “there is no basis in fact to find that the existence of a class-wide fiduciary duty, its content, or its breach, can be determined in common across the class.”
Instead, the existence of a fiduciary relationship is something that would have to be determined for each investor individually, it said.