The Supreme Court of Canada today drew a starkly defined line between the power of the courts and the mandate of regulators when it comes to restitution in a potential securities class action.
, the court explored whether a class action was the “preferable procedure” for providing restitution to victims where a settlement had already been achieved by the regulator — and where victims had already received disbursements from the settlement.
The appeal stems from an Ontario Securities Commission investigation into five mutual fund companies — including AIC Ltd. and CI Mutual Funds — that were alleged to have condoned “market timing” activities. The practice involves quick end-of-day trades that hurt long-term investors by generating transaction costs.
The OSC found the alleged misconduct enriched fund managers and the fund companies at the expense of long-term investors. The commission entered into negotiations, and mutual fund companies eventually settled for $200 million — a number that, according to lawyers at class action firm Rochon Genova LLP, didn’t cover the losses of investors.
The firm filed a motion to certify a class action, which was initially denied by the motions judge, but eventually approved by Ontario’s Divisional Court.
The mutual fund companies, however, appealed, arguing a significant settlement had already been reached, and the OSC proceeding was the preferable venue for achieving restitution. Those appeals were dismissed, and the dismissals upheld today by the Supreme Court.
Justice Thomas Cromwell writes in the decision that the OSC proceeding could not afford class members with appropriate access to justice:
“First, an economic barrier arises from the nature of the claim. The individual claims are not large enough to support viable individual actions. The second barrier is related to the first. As a result of the nature of the claim, there is potentially no access to a fair process, geared towards protecting the rights of class members, to seek a resolution of the common issues for what could potentially be a class of over a million members.”
Peter Jervis, senior counsel at Rochon Genova LLP, represented potential class members before the court. He says a lack of investor participation was a key factor in the ruling.
“The investors were not at the table at these private negotiations,” he says. “They didn’t even know about them. They were done privately, in camera, with counsel for the mutual funds and counsel for the securities commission.”
Jervis argued because investors lacked any participation in the settlement process, their access to justice had been gravely impeded. The Supreme Court agreed.
Jervis says the argument from the appellant — that a significant settlement had already been reached — missed the point entirely.
“Their argument was, ‘Well, $200 million is a big number; that should be good enough.’ Our argument was, ‘The number isn’t the issue. The issue is whether they’ve had access to justice,’” he says.
Benjamin Zarnett, a partner in the litigation group at Goodmans LLP, represented CI Mutual Funds. He says the ruling is important because “It allows everyone to now refocus on exactly how an alternative procedure will be assessed and against which standards.”
While the settlement process in this case was not deemed to provide sufficient access to justice, Zarnett points out the judgment explicitly states each settlement must be evaluated in context, on a case-by-case basis.
That leaves open the possibility another settlement — perhaps one that provides satisfactory restitution, or where victims of misconduct are allowed some form of participation — will deem it preferable and preclude the need for a class action.
“They’re very clear in saying that the suggestion that the OSC proceeding here was irrelevant — that that was incorrect. It had to be considered and weighed.”
Zarnett also stresses the ruling involves the class certification only, and makes no comment on the merits of the case or whether any additional payment will have to be made to investors.