Court certifies $1-billion class action against Manulife

The Ontario Superior Court of Justice has certified a class action lawsuit by investors against Manulife Financial Corp.

Trustees of the Ironworkers Ontario Pension Fund and Leonard Schwartz launched the class action against Manulife and former CEO Dominic D’Alessandro and CFO Peter Rubenovitch after Manulife’s share prices dropped in February 2009. They accuse Manulife of failing to disclose the seriousness of the company’s exposure to equity market risk over a five-year period, which resulted in its shares plummeting.

Michael Wright, of Cavalluzzo Shilton McIntyre Cornish LLP and co-counsel for the trustees, says shareholders suffered damages as a result of a “corrective disclosure” by Manulife.

Manulife’s financial statements for year-end 2008 revealed that profits had fallen by almost $3.8 billion and earnings per share had dropped to 32 cents from $2.78 one year earlier. It was also clear that Manulife had to increase its reserves by more than 10 times due to its unhedged exposure to the equity market.

As a result, Manulife’s share price dropped by almost 77 per cent by the end of the first quarter of 2009. In July 2009, Siskinds LLP launched the more than $1-billion class action.

The trustees argue that Manulife was lawfully obligated to disclose its decision not to hedge or reinsure its equity market risk to investors. They said Manulife had “bet the farm” that equity markets would continue to go up. Instead, the markets plummeted and Manulife was heavily exposed due to its risk management decisions that it had not disclosed to the market, they claim.

The defendants point to the financial crisis of 2008 for the unprecedented equity market collapse. They also claim there were no misrepresentations and that Manulife disclosed everything that was required.

In certifying the class action, Justice Edward Belobaba outlined the four questions at the heart of the case:
1. Did MFC materially misrepresent the nature and extent of its exposure to the equity market or was this already known in the market?
2. Was MFC required to disclose the impact on net income of a 20 or 30 per cent equity market decline or was the 10 per cent disclosure sufficient?
3. Was the financial crisis of 2008 so unprecedented and unforeseeable that no disclosure obligations could arise therefrom?
4. Was any ‘truth revealed’ on February 12, 2009 that could reasonably be viewed as a ‘correction’ of earlier misrepresentations?

In addition, in order to obtain leave to pursue a claim of this kind under the Securities Act, you need to satisfy the court that you have a reasonable possibility of success at trial, which we were able to do, says Wright.

“I am satisfied on the material before me that the action is being brought in good faith and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiffs,” wrote Belobaba.

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