CITATION: Fischer v. IG Investment, 2010 ONSC 296
COURT FILE NO.: 06-CV-307599CP
DATE: 20100112
SUPERIOR COURT OF JUSTICE
)
BETWEEN:
)
DENNIS FISCHER, SHEILA SNYDER, )
)
LAWRENCE DYKUN, RAY SHUGAR
)
and WAYNE DZEOBA
)
Plaintiffs ) J.P. Rochon, S. Tambakos, and S.
) Diesberger
)
- and )
)
IG INVESTMENT MANAGEMENT
)
LTD., CI MUTUAL FUNDS INC.,
)
FRANKLIN TEMPLETON
)
INVESTMENT CORP., AGF FUNDS
)
INC and AIC LIMITED
)
Defendants ) J. Galway and A. McLachlin
) for the Investment Management Inc.
) J.Kimmel and M. Ouanounou
) for CI Mutual Funds Inc.
) T. Heintzman and C. Zayid
) for Franklin Templeton Investment Corp.
) D. Roebuck and W. Berman
) for AGF Funds
) J. Douglas, D. DiPaolo and M. Finley
) for Limited
)
)
)
)
) HEARD: December 1-4, 2009
PERELL, J.
Introduction and Overview
[1]
The Plaintiffs Dennis Fischer, Sheila Snyder, Lawrence Dykun, Ray Shugar, and Wayne
Dzeoba make a motion to certify a class action under the Class Proceedings Act, 1992, S.O.
1992, c. C.6. The law firm of Rochon Genova LLP is the proposed class counsel.
2010 ONSC 296 (CanLII)
ONTARIO
Page: 2
[3]
Although the Defendants deny liability, their involvement in market timing was admitted
for the purpose of enforcement proceedings before the Ontario Securities Commission (“OSC”).
After negotiations with OSC Staff, the Defendants signed settlement agreements, and in these
agreements, the Defendants admitted that they had entered into arrangements with 18 “market
timers” and that market timing events had occurred. For the purpose of the OSC enforcement
proceedings, it was admitted that the market timers had made profits that adversely affected
investors in the mutual funds and that the Defendants earned commissions from their
arrangements with the 18 market timers.
[4]
Under the settlement agreements with the OSC, the Defendants collectively paid $205.6
million to the investors (who would constitute most of the members of the several classes in the
proposed class action). The Defendants also paid for the expense of distributing the
compensatory payments to the investors.
[5]
However, the Plaintiffs, Messrs. Fischer, Dykun, Shugar, and Dzebo and Ms. Synder,
relying primarily on the evidence of one economist, Dr. Zitzewitz, submit that the actual losses
suffered by the investors could be as high as $832 million and the investors have not had their
day in court to recover these losses. The Plaintiffs submit that their action should be certified as a
class action so that the balance of the investors’ losses can be recovered. They submit that: they
did not participate in the settlement negotiations; they were not signatories to the settlement
agreements with the OSC; and they were not parties to any enforcement proceedings against the
Defendants; and, therefore, they should have access to justice by a class action.
[6]
The Defendants submit, however, that the action does not satisfy the criteria for
certification found in s. 5 (1) of the Class Proceedings Act, S.O. 1992, c. 6. The Defendants’
major argument is that the action does not satisfy the preferable procedure criterion. They submit
that the preferable procedure was the already completed proceeding that saw the OSC approve
the settlement agreements and order the payment of $205.6 million to be distributed to the
investors at the considerable expense of the Defendants. The Defendants submit that the court
should not ignore but also not second-guess the access to justice, behaviour modification, and
judicial economy already achieved by the OSC for the investors.
[7]
The Defendants challenge the Plaintiffs’ argument that access to justice has yet to be
achieved for those investors who were harmed by the market timing. To quote from the
Defendants’ joint factum:
The access to justice accomplished by the OSC Resolution resulted in a procedure
which allowed millions of claimants, including millions having claims of $50 or
less, to be compensated. It would have been uneconomic, and practically
2010 ONSC 296 (CanLII)
[2]
The main allegation in their action is that the Defendants IG Investment Management
Ltd. (“IG”), CI Mutual Funds (“CI”), Franklin Templeton Investment Corp. (“Templeton”), AGF
Funds Inc. (“AGF”), and AIC Limited (“AIC”) permitted “market timing” to occur in the mutual
funds that they managed.
Page: 3
[8]
The Defendants point out the expertise of the OSC and its purpose of protecting the
integrity of the capital markets and the OSC’s vigorous enforcement that led to the settlement
agreements. The Defendants submit that the purposes of class proceedings; namely, access to
justice, behaviour modification, and judicial economy have already been achieved by the OSC
proceedings. The Defendants submit that a class proceeding is redundant, inefficient, unfair, and
a waste of judicial resources. The Defendants submit that the completed proceeding before the
OSC in which the class members did not have to prove the Defendants’ fault was the preferable
procedure. They state in paragraph 178 of their factum:
In the OSC Proceeding, for the purposes of that proceeding only, the [Defendants]
acknowledged that their conduct was contrary to the public interest. In the event the
Plaintiffs’ proposed claims proceed further, any liability will be strongly contested
by the Defendants, thereby increasing the length, costs and complexity of an
otherwise efficient, fair and reasonable OSC Proceeding.
[9]
Further, the Defendants submit that the motion for certification as a class proceeding
should be dismissed because the class definition is unsatisfactory because it is merits-based,
over-inclusive, and unworkable. The Defendants also challenge the appropriateness of the
common questions, the litigation plan, and the representative plaintiffs.
[10] Having reviewed the evidentiary record and considered the competing arguments, my
conclusions are: (a) the Plaintiffs’ pleading discloses two causes of action that may be certified
for a class proceeding; (b) there is an identifiable class, although somewhat different than the
class originally proposed by the Plaintiffs; (c) the claims of the class members raise four (out of
the nine proposed) common issues of fact or law that may be certified for a class proceeding; (d)
a class proceeding would not be the preferable procedure; and (e) there is a representative
plaintiff who would adequately represent the interests of the class without conflict of interest and
who could produce a workable litigation plan if some changes were made to the current plan.
[11] As appears, but for their failure to satisfy the preferable procedure criterion, the
Plaintiffs’ action should be certified as a class proceeding. However, for certification, the
Plaintiffs must satisfy all the criteria and their failure to satisfy the preferable procedure criteria
is fatal to their motion for certification. Accordingly, my decision is to dismiss the motion for
certification.
[12] To explain my conclusions, after this introduction, I shall first describe the evidentiary
and factual background. Then, I shall discuss aspects of three largely factual issues that played
prominent roles in the arguments of the parties and that require careful analysis because of their
importance to the major arguments of the parties. Those three issues are: (1) the non-
2010 ONSC 296 (CanLII)
impossible, to prosecute those claims in court. Access to justice does not mean that
every claim must end up in a courtroom. In the OSC proceeding, real access to
justice was achieved through the use of the expertise of the OSC Staff and its expert
advisors and was achieved at the expense of the fund companies [the Defendants].
Page: 4
Evidentiary Background
[13] In support of their motion for certification, the Plaintiffs provided the following affidavit
evidence:
•
Affidavits from the proposed representative plaintiffs; namely, Ms. Synder and Messrs
Fischer, Dykun, Shugar, and Dzebo.
•
An affidavit from Dr. Eric W. Zitzewitz, an Associate Professor of Economics at
Dartmouth College in Hanover, New Hampshire, in the United States.
•
Affidavits from Mr. Robert W. Chambers, who is a chartered accountant, a business
valuator, a specialist in investigative and forensic accounting, the President of AssetRisk
Advisory Inc., and a former partner at KPMG LLP.
•
An affidavit from Ms. Poonam Puri, an Associate Professor of Law and Associate
Director of the Hennick Centre for Business and Law at Osgoode Hall Law School of
York University and a visiting professor at the Rotman School of Management,
University of Toronto, the University of Western Ontario, and Cornell Law School.
[14] In support of their opposition to certification, the Defendants provided the following
affidavit evidence:
•
The affidavit of Mr. Stanley Beck, former Dean of Osgoode Hall Law School, former
Commissioner of the OSC; former Chairman of the OSC; and currently the President of
Granville Arbitrators Limited.
•
The affidavit of Mr. Mark L. Berenblut, a chartered accountant, chartered business
evaluator, appraiser, investigative forensic accountant, and certified fraud examiner. He is
the Senior Vice President of NERA Economic Consulting, a division of Oliver, Wyman
Group Limited, which provides economic analysis and advice to, amongst others,
corporations, governments, law firms, and regulatory agencies.
•
The affidavit of Mr. Alan Friedman, who is the Vice President of CRA International and
who described CRA International’s work with respect to the Defendants’ plans of
distribution of the funds that were distributed under the settlement agreements approved
by the OSC.
•
The affidavit of Ms. Gail Oxtoby, a law clerk at Heenan Blaikie, LLP, counsel for the
Defendant AGF, who provided evidence about numerous press releases and media
2010 ONSC 296 (CanLII)
participation of the investors in the OSC proceedings; (2) the matter of identifying disruptive
market timers; and (3) the calculation of the amount of the investors’ losses Next, I shall
discuss each of the certification criteria and the parties’ arguments.
Page: 5
articles regarding the OSC’s investigation of market timing involving the Defendants and
others.
[15] The Ontario Securities Commission (“OSC”) is responsible for the administration of the
Ontario Securities Act, the Commodity Futures Act, and parts of the Business Corporations Act.
Under s. 1.1 of the Ontario Securities Act, R.S.O. 1990, c.S.5, the OSC’s mandate is to provide
protection to investors from unfair, improper, or fraudulent practices and to foster fair and
efficient capital markets and confidence in capital markets. The OSC has administrative,
investigatory, quasi-judicial, and enforcement powers that it exercises in the public interest.
[16] Section 127 of the Ontario Securities Act provides the OSC with a broad range of
enforcement powers to remedy breaches of Ontario’s securities laws. The OSC has the power to
impose sanctions for conduct in the financial marketplace that is contrary to the public interest.
The OSC may, amongst other things: (a) order that a market participant submit to a review of its
practices and procedures and institute such changes as may be ordered by the Commission; (b)
suspend or terminate the registration granted under Ontario securities law; (c) impose
administrative penalties up to $1 million where a person has admitted a contravention or has
contravened the Act; (d) order disgorgement of any amounts obtained as a result of noncompliance with the Act; (e) order costs; and (f) approve settlement payments, including
compensatory payments.
[17] Where the Staff of the OSC alleges a breach of Ontario securities law, the OSC may
initiate proceedings under s. 127. The OSC may make an order under s. 127 only after a
contested hearing or a settlement approval hearing.
[18] A settlement under s. 127 is documented by a written settlement agreement between OSC
Staff and the person alleged to have contravened Ontario’s securities law. Typically, a settlement
agreement includes, among other things: (a) a full and accurate statement of the relevant facts;
(b) an admission of any breaches of the Ontario Securities Act; (c) the terms of the settlement;
and (d) a consent to the order being sought.
[19]
The OSC may accept or reject a settlement agreement negotiated by OSC Staff.
[20] In November 2003, the OSC launched an investigation into the mutual fund industry.
This investigation was a response to concerns that “market timing” was occurring in Canada. In
the case at bar, the parties referred to this investigation as the OSC’s “Mutual Fund Probe.” The
Probe was an unprecedented, intensive, and intrusive investigation by the OSC into market
timing.
[21] Market timing is a legal investment technique. It involves short-term “in and out” trading
of mutual funds. The technique capitalizes on the fact that unlike other types of traded securities,
whose value can be determined during the trading day, the value of a mutual fund (known as the
Net Asset Value or “NAV”) is calculated only once per day, at 4:00 p.m. EST. As a result, some
2010 ONSC 296 (CanLII)
Factual Background
Page: 6
[22] Investors using a market timing strategy will trade units of mutual funds that hold foreign
equities when they believe that the price of the units in the fund on a given day may not reflect
possible price movements on foreign markets the following day. The market timers trade in
anticipation of those price movements. Effective market timing captures an arbitrage profit that
capture adversely effects the long-term investors who hold on to their units in the mutual fund.
This wealth transfer from arbitrage is known as “dilution.” Market timing activity also impedes
the fund manager’s flexibility in buying and selling stocks for the benefit of the fund and it
disrupts the management of the mutual funds.
[23] Pausing here, it is helpful to make several observations that are important to keep in mind
for what follows later in the analysis, particularly the discussions of class definition and
preferable procedure:
•
The first observation is that market timing is not illegal.
•
The second related observation is that any investor may unintentionally or inadvertently
engage in market timing and fortuitously and lawfully capture a profit when he or she
propitiously purchases and promptly sells units.
•
Third, even a notorious market timer may have reasons for making trades that would
otherwise seem to be an incident of market timing.
•
Fourth, the liability of the Defendants, if any, would not be for being a market timer;
rather, the Defendants are accused as a matter of the law of negligence or the law of
fiduciary obligations of not doing more to stop market timing in the management of their
mutual funds. Metaphorically, their liability, if any, is akin to the liability of a
commercial host who does not control its clientele. Or, to use another metaphor, on the
investment train that is a mutual fund, the driver of the train did not stop certain
passengers from getting on and off the train in a way that would not harm the other
passengers on the train.
•
Fifth, the quantification of the harm caused by disruptive market timing is a matter of
opinion within a matter of opinion. Quantification of the harm depends upon opining a
formula to identify a disruptive market timer and then opining a formula to measure the
harmful effect of the disruptive market timer.
[24] Returning to the factual narrative, the Defendants are mutual fund managers. IG manages
more than 140 mutual funds. CI manages more than 100 mutual funds. Templeton manages
approximately 80 mutual funds. AGF manages approximately 50 mutual funds. At the material
time, AIC managed approximately 50 mutual funds.
2010 ONSC 296 (CanLII)
funds use outdated or stale prices to value securities held in their portfolio, and the prices do not
necessarily reflect the “fair value” of the securities at the time the NAV is calculated.
Page: 7
[26] The OSC decided to take enforcement measures against the Defendants. The referral for
enforcement action and the subsequent commencement of enforcement proceedings against the
Defendants were the subject of widespread newspaper coverage across Canada.
[27]
The OSC’s statement of allegations against the Defendants stated:
A mutual fund manager is required by Ontario securities law to exercise the powers
and discharge the duties of its office honestly and in good faith and in the best
interests of the mutual fund and, in connection therewith to exercise the degree of
care, diligence and skill that a reasonably prudent person would exercise in the
circumstances. Compliance with this duty requires that a mutual fund manager have
regard to the potential for harm to a fund from an investor seeking to employ a
frequent trading market timing strategy and take reasonable steps to protect a
mutual fund from such harm to the extent that a reasonably prudent person would
have done in the circumstances.
[28] As a part of the enforcement measures, OSC Staff and the Defendants engaged in
negotiations towards a settlement agreement that would be an alternative to the other measures
available to the OSC under s. 127 of the Securities Act.
[29] In these negotiations, the OSC Staff had the objective of obtaining compensation for
investors who suffered harm from frequent market timing activities.
[30] During the discussions between OSC Staff and the Defendants, the OSC Staff focused on
determining the amount of the harm to investors caused by market timing, and various
approaches to quantifying harm were considered, debated and evaluated. The OSC Staff
reviewed voluminous trading data of the Defendants, sought expert guidance from both internal
and external experts, reviewed academic literature concerning methodologies for quantifying
harm to investors from frequent market timing activity, and sought guidance from the US
experience in respect of market timing.
[31] The outcome of the enforcement measures launched by the OSC investigation was a
series of negotiated settlement agreements between OSC Staff and the Defendants. The
settlement agreements provided for compensation in the amount of $205.6 million being paid
directly to investors and former investors in the Defendants’ mutual funds.
[32] Each settlement agreement sets out the facts agreed upon by the OSC and the Defendant
including: (a) the number of investors who were found to have pursued market timing in the
relevant funds; (b) the period of time in which market timing occurred; (c) where the fund
company had made specific arrangements with disruptive market timers, the nature of those
2010 ONSC 296 (CanLII)
[25] The Defendants were included as subjects of the OSC’s Mutual Fund Probe about market
timing. As a result of its investigation, the OSC concluded that the Defendants had failed to
implement appropriate measures to protect their funds and their investors against market timing
activity by disruptive market timers as defined by the OSC.
Page: 8
[33] Each settlement agreement contained a reservation of rights and limited use provision. As
an example, paragraph 4 of the AGF settlement agreement stated:
Staff and the Respondent [AGF] agree with the facts set out in Part IV herein for
the purposes of this Settlement Agreement only and further agree that this
agreement of facts is without prejudice to the Respondent or Staff in any other
proceeding of any kind including, but without limiting the generality of the
foregoing, any proceeding brought by the Commission under the Act (subject to
paragraph 29) or any civil or other proceeding which may be brought by any other
person or agency. No other person or agency may raise or rely upon the terms of
this Settlement Agreement or any agreement to the facts stated herein whether or
not this Settlement Agreement is approved by the Commission.
[34] As appears, the reservation of rights provision anticipates and does not preclude the
possibility of other proceedings against the Defendants but specifies that no person or agency
may rely on the terms of the settlement agreement. This anticipation of other proceedings is also
reflected in a provision in the agreements governing statements to the public. For example,
paragraph 28 of the AGF settlement agreement stated:
Staff and AGF agree that if this Settlement Agreement is approved by the
Commission, neither Staff nor AGF will make any public statement inconsistent
with this Settlement Agreement. Nothing in this section is intended to restrict AGF
from making full answer and defence to any civil proceeding against it.
[35] The settlement agreements between the OSC and the Fund Managers acknowledged the
harm caused by market timing in mutual funds. Each agreement states:
When certain investors engage in frequent trading market timing in foreign funds,
and when those investors are not required to pay a proportionate fee to the fund, the
economic interest of long-term unitholders of these foreign funds is adversely
affected. Significant harm may be incurred by a fund in which frequent trading
market timing occurs. Any such harm would be borne by all investors in the fund.
In addition to dilution, market timing in a fund also may result in certain
inefficiencies in that fund. Those inefficiencies, which will vary depending upon the
particular fund, may involve increased transaction costs and disruption of a fund’s
portfolio management strategy (including the maintenance of cash or cash
equivalents and/or monetization of investments to meet redemption requirements)
and may impair a fund’s long-term performance.
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arrangements; (d) the total profit realized by the disruptive market timers and the funds (not all
of which was from market timing transactions); (e) the fees earned by the fund company in
connection with the market timer’s trades; and (f) any additional fees paid by the market timers
to the mutual funds.
Page: 9
[37] Although the Defendants admit for the purposes of the settlement agreement that their
conduct was not in the public interest and though they agree to make payments to investors,
including former investors, the Defendants never admit any harm to investors was caused by any
alleged breach of duty.
[38] Each settlement agreement contains an agreement from the Defendant to make a payment
to “Affected Investors.” For example, paragraph 24 of the AGF agreement states:
AGF agrees that, as a term of settlement, it will make a payment in the amount of $29.2
million to Affected Investors (as defined in Schedule “A” to this agreement) through the
distribution mechanism referred to in Schedule “A” to this agreement, and in accordance
with the terms and conditions specified in Schedule A to this agreement.
[39] Important features of the plans of distribution that are described in Schedule A to the
respective settlement agreements and that were actually implemented by written plans or
distribution were:
•
the payments under the plan of distribution are to be made to “affected investors”
•
affected investors include current and former investors
•
affected investors were to be identified in respect of a position within a specific fund and
each position in the same or different fund was to be considered separately
•
the plan of distribution was to include provisions to deal with the circumstance that the
registered unitholders were not the beneficial owners of the units in question
•
where the mutual fund units were registered in the name of an investment dealer on
behalf of beneficial owners, the defendant would “look through” the registered holder to
treat the beneficial owner as the “affected investor”
•
in certain instances, the Defendant would “look through” a collective investor to identify
each investor in the collective investor
•
affected investors exclude the disruptive market timer(s) with whom the Defendant had a
relationship and who had been identified in the settlement agreement
•
the plan of distribution had the aim of accomplishing a fair allocation of funds among the
affected investors in a timely manner
2010 ONSC 296 (CanLII)
[36] Each of the settlement agreements contains a statement that the Defendant’s conduct “in
failing to protect fully the best interests of the Relevant Funds in respect of the frequent trading
market timing was contrary to the public interest.”
Page: 10
following the Defendant’s determination of the affected investors, the Defendant would
calculate the effect of each relevant trade on each affected investor in each relevant fund
•
the plan of distribution included the following rule of calculation:
2010 ONSC 296 (CanLII)
•
The Settlement Amount will be allocated amongst Affected Investors
(“Adversely Impacted Investors”) that have been determined to have
experienced, in aggregate, an overall adverse effect (“Overall Adverse
Effect”) in a Relevant Fund when all relevant trades in the Relevant Fund are
considered. The allocation to each Adversely Impacted Investor of the
Settlement Amount will be proportionate to that investor’s Overall Adverse
Effect in relation to the Overall Adverse Effect of all other Adversely
Impacted Investors in all Relevant Funds. An Affected Investor that has been
determined to have experienced an overall benefit from the relevant trades in a
Relevant Fund will receive none of the Settlement Amount.
•
the defendant would make payments either by delivering units of mutual funds to the
account of the Affected Investor or by sending a cheque to the last address of the
Affected Investor maintained in the Defendant’s records
•
the plan of distribution was subject to OSC Staff and OSC approval.
[40] As already noted, under the settlement agreements, each Defendant was required to pay
compensation directly to the investors. The chart below sets out: the fund; the relevant time
period; number of disruptive market timers; the disruptive market timers’ profits, the OSC
settlement amount; and the Defendants’ revenues:
Fund
Manager
Relevant
Time Period
Number
of
Market
Timers
Profits of
Market
Timers
($millions)
OSC
Settlement
Amount
($millions)
Gross (Net)
Management
Fees
($millions)
Redemption
Fees
Charged
($millions)
AGF
August 2000
to June 2003
6
$47.9
$29.2
$2.1 ($0.7)
$0
AIC
January 1999
to September
2003
3
$127.0
$58.8
$3.1($0.9)
$0.5
CI
September
1998
September
2003
5
$90.2
$49.3
$7.9($2.2)
$9.4
to
IG
October 2000
to November
2002
1
$36.0
$19.2
$4.2($0.5)
$0
Templeton
February 1999
to
February
2003
3
$120.8
$49.1
$4.6($1.5)
$0
Totals:
18
$421.9
$205.6
$21.9($5.8)
$9.9
[41] On December 12, 2004, the OSC announced that it would hold a hearing on December
16, 2004 to consider whether it was in the public interest to make an order approving the AGF,
AIC, CI, and IG settlement agreements.
[42] The AGF, AIC, CI, and IG settlement agreements hearing proceeded on December 16,
2004 before a full panel of the OSC.
[43] On December 17, 2004, one day after the OSC had approved four settlement agreements,
the Merchant law firm commenced a proposed class proceeding against the Defendants. The
action now before the court was commenced on March 9, 2006, and the Merchant law firm’s
action was discontinued after an arrangement was reached between that firm and Rochon
Genova LLP, lawyers for the Plaintiffs.
[44] On February 28, 2005, the OSC announced that it would hold a hearing on March 3, 2005
to consider whether it was in the public interest to make an order approving the Templeton
settlement agreement.
[45] The Templeton settlement agreement hearing proceeded on March 3, 2005 before a full
panel of the OSC.
[46] Members of the public were entitled to appear at the approval hearings but no investors
attended. No investors appealed the decision of the OSC pursuant to s. 9 (1) of the Ontario
Securities Act.
[47] In their submissions supporting approval of the settlement agreements, OSC Staff
indicated that they had focused on determining the amount of the harm caused by market timing
and that as there were a number of purely theoretical ways to calculate harm. The OSC Staff
indicated that it had chosen a method that related to compensable harm, as opposed to focusing
on the benefits to the Defendants in the form of management fees earned.
[48] The OSC approved the settlement agreements as being in the public interest. The OSC
was satisfied that the imposition of further or different relief would not better serve the purposes
of the Ontario Securities Act.
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Page: 11
Page: 12
In paragraphs 29 to 31 of its Reasons for Decision, the OSC stated:
29.
The settlement payments represent a theoretical quantification of harm
caused to the relevant funds and the unitholders of those funds that would have
been prevented had the respondents fully protected the best interests of the relevant
funds in respect of the frequent trading market timing activity at issue. The
payments are also substantially greater than the profits that the respondents earned
by way of management fees received in respect of the frequent trading market
timing activity.
30.
In the cases before us the appropriate action is restitution to those who
were harmed.
31.
The appropriate persons to make restitution are those companies who may
not have profited to the same extent as those engaging in market timing but,
nevertheless, on whose watch the harm was allowed to occur.
[50] In March 2005, the OSC issued a report on the Mutual Fund Probe, entitled Report on
Mutual Fund Trading Practices Probe. In its report about its investigation, the OSC states that
the settlement payments resulted from “lengthy negotiations” and represented “a theoretical
quantification of the harm caused to the relevant funds and the security holders of those funds
arising from market timing activity”.
[51] On March 17, 2005, in a speech to the Economic Club of Toronto, Mr. David Brown,
Q.C., the Chair of the OSC, described the Probe and he concluded his speech by saying: “We
found some market timing had occurred, but it had been shut down. We ensured that investors
will be reimbursed for losses. The case is closed with a fair result, and a clear message. ….
Mutual funds have been an important element of this process. To ensure their ability to grow,
those who participate must be assured of a fair shake. They are entitled to that. The mutual fund
probe and settlements demonstrate they will get it.”
[52] The settlements were unique. Normally, settlement funds are paid to the province’s
Consolidated Revenue Fund or to a not-for-profit investor education fund established by the
OSC. In contrast, in these OSC settlements, the settlement funds were paid directly to the
investors and former investors. The costs of distributing the settlements funds did not come out
of the settlement funds. And, unlike a class action settlement, the investors did not have to pay
any legal fees, contingent or otherwise, on receiving their share of the settlement proceeds.
[53] In accordance with the OSC’s calculation of restitutionary compensation, the settlement
proceeds were distributed to investors who had been adversely affected by the market timing
activities. In addition to the $205.6 million, an additional $9.6 million was contributed under
agreements between the Investment Dealers Association of Canada and or the Mutual Fund
Dealers Association and the dealers who had acted for the disruptive market timers.
2010 ONSC 296 (CanLII)
[49]
[54] The development of each plan of distribution was overseen, and its implementation was
reviewed by an independent consultant (Charles River Associates) and the distribution plan was
approved by the OSC. Each distribution plan provided that the total settlement amount was
allocated among adversely impacted investors, proportionate to that investor’s share of the
overall adverse effect in all relevant funds.
[55] As of October 2008, the Defendants had issued over 3 million cheques, totaling almost
$199 million. In addition, IG distributed electronic payments to an additional 379,352 investors,
totaling over $15 million. The overwhelming majority of payments, approximately $2.5 million,
were for amounts between $2 and $50. As of October 2008, cheques totaling approximately $13
million remained uncashed, 37% of which were for amounts less than $50.
[56] An estimate as to the size of the proposed classes is available from the number of
settlement payments issued by each Defendant pursuant to the OSC settlements; visualize: (a)
AGF, 619,705; (b) AIC, 264,036; (c) CI, 803,903; (d) IG, 193,299; and (e) Templeton,
1,259,214. This suggests a class of several millions of investors.
Access to Justice and the Non-Participation of the Investors in the OSC Proceedings
[57] The most contentious issue in this certification motion was the issue of whether a class
proceeding was the preferable procedure for the investors when there has already been a
proceeding before the OSC, settlement agreements with the OSC, and the distribution of
compensatory payments to millions of investors. At the heart of this controversy is the issue of
access to justice. I shall discuss this issue later, however, it is convenient to discuss closer to the
above description of the factual background, one of the Plaintiffs’ counterarguments to the
Defendants’ argument that there already has been access to justice. It is a due process or
procedural fairness argument.
[58]
her:
Relying primarily on the opinion evidence of Professor Puri, the Plaintiffs argue, to quote
Principles of procedural fairness require that enforcement proceedings resulting in
negotiated settlement agreements involving voluntary partial compensation to
investors should not limit an investor’s ability to seek private recourse through the
court system to obtain full compensation unless the investors have had notice of the
investigation and settlement negotiations/terms, a fair and reasonable opportunity to
participate in the proceedings and consented to extinguishing their private rights of
action.
[59] The Defendants responded to Professor Puri’s criticism of the OSC proceeding as lacking
procedural fairness by providing voluminous evidence of the notoriety of those proceedings in
press releases, speeches, reports and news articles, and the Defendants point to the fact that no
investor attended the hearings and no investor appealed the order of the OSC, although they had
standing to do so.
2010 ONSC 296 (CanLII)
Page: 13
Page: 14
[61] First of all, on an objective level, the OSC proceedings did not bind the investors, who
were and are free to commence a proposed class proceeding and seek its certification. The
Defendants are not suggesting that the settlement agreements and the OSC proceedings are
binding on the investors. Indeed, for the purposes of the proposed class action, the Defendants’
position is that no party is bound by the findings and statements made in the settlement
agreement or in the OSC proceedings. Thus, the Defendants are not denying an investor’s ability
to seek private recourse through the court system.
[62] Second, while it is true that investors did not have the right to opt out of a OSC
proceedings (that did not bind them) and they would have the right to opt out of class
proceedings (that would bind them), they are highly unlikely to exercise that right to opt out
precisely because given the small size of the individual claims and the difficulties of forensic
proof, a class proceeding would be the only viable means for them to exercise their private
rights. In any event, in the circumstances of the case at bar, it would be a pointless argument to
suggest on behalf of the investors that a class proceeding provides procedural fairness and is the
preferable procedure because one has the opportunity to opt out of it.
[63] Third, on an objective level, this debate about the procedural fairness afforded investors
in the OSC proceedings must take into account the comparable procedural fairness that would be
available to the investors in the context of a class proceeding.
[64] A class proceeding is a representative action. It is the successor to Rule 75 of the old
Rules of Practice. The idea behind any representative action is that the persons represented do
not participate in the action save when individual trials are required or when the court permits
greater participation.
[65] Under the application of the old Rule 75, if individual damage assessments were
necessary, then a representative action would not have been authorized at all. (See the discussion
by the Ontario Law Reform Commission in its Report on Class Actions (Toronto: Ministry of the
Attorney General, 1982) at pp. 23-33). It was precisely to remove this bar to a representative
action that the Legislature enacted para. 1 of s.6 of the Class Proceedings Act, 1992, which
provides that the court shall not refuse to certify a proceeding on the ground that the relief
claimed includes a claim for damages that would require individual assessment after the
determination of the common issues.
[66] If a class action were certified in the case at bar, the individual investors would not
participate in the carriage of the action. Nevertheless, they would be bound by the outcome of the
common issues trial and they would formally find out about the common issues trial only after it
was completed. The class members would formally find out about a proposed settlement only
2010 ONSC 296 (CanLII)
[60] In my opinion, all of this evidence is largely irrelevant to the objective issues that I must
decide, although the evidence and argument has an emotive or subjective appeal that must be
addressed. There are three reasons why the debate about procedural fairness is not material or is
subsumed by the debate about access to justice.
Page: 15
[67] I do appreciate that there is a emotional or subjective force to the Plaintiffs’ argument
that they would be denied procedural fairness if the court took into account what happened in the
OSC proceedings in determining whether there should be a class proceeding. The Plaintiffs plead
that the investors have never had their day in court. The above analysis, however, reveals that if a
class is formed, the class members do not have a day in court in the conventional sense unless
there were individual assessment trials and would be bound nevertheless. Under the Class
Proceedings Act, 1992, it is not participation but rather it is the role and responsibility of the
representative plaintiff and class counsel that provides the procedural fairness that justifies
binding the class members to the outcome of the common issues trial or a negotiated settlement.
[68] As I understand it, the Defendants’ argument is not that the OSC proceeding bars the
class proceeding but rather that in the circumstances of the case, the OSC proceeding, even
thought it has already occurred, may be relied on to establish that a class proceeding is not the
preferable procedure for the resolution of the class members’ claims. This is an access to justice
issue not a due process issue. Thus, I do not see procedural fairness being an objective factor in
determining the case at bar. There is no issue estoppel or res judicata arising from the OSC
proceedings and from the perspective of investors, they would be a non-participating party in any
event.
[69] In my opinion, the issue in this case is not whether the investors who were nonparticipants in the OSC proceedings and who would be non-participants in the resolution of the
common issues had or would have procedural fairness. The issue is whether they have had access
to justice and whether the other important values of the Class Proceedings Act, 1992 have been
satisfied. The considerable power of the subjective and emotive plea that the investors have not
had their day in court misdirects the analysis from the access to justice and other policy issues
that inform the preferable procedure debate that will decide this case and that I will discuss later.
The Matter of Identifying Disruptive Market Timers
[70] Another contentious issue in this certification motion was the issue of the class definition.
Connected to this issue is the matter of identifying disruptive market timers. It is necessary to
identify the disruptive market timers because by their exclusion membership in the class of
investors is determined. To return to my analogy earlier, the passengers (the investors) on the
(mutual fund) train are known and membership in the class of plaintiffs will be determined by
who is not a defendant and who is not a disruptive market timer.
[71] I shall discuss the class definition issues later; however, it is convenient to discuss now
another related reason why it is important to identify the disruptive market timers. The
2010 ONSC 296 (CanLII)
after it was negotiated by their representative plaintiff and class counsel. And, although the class
members would have the right to object to the settlement at a settlement approval hearing, they
have no veto, and the court has the jurisdiction to bind them to the settlement if it is in the best
interests of the class to do so.
Page: 16
[72] As noted by the OSC in its Report on Mutual Fund Trading Practices Probe, while all
market timing involves short-term trading, not all short term trading constitutes market timing.
However, frequent short-term trading for the purposes of market timing can cause harm to the
fund.
[73] In order to carry out its Probe, the OSC had to identify the disruptive short-term traders.
The identification of the disruptive short-term traders was an aspect of the second phase of the
Probe. What the OSC did is described on p.7 of its Report as follows:
Firms included in Phase Two were asked to submit a significant amount of detailed
trading data for a two-year period ending on December 31, 2003 (review period).
The most significant component of the data requested for frequent trading market
timing was a list of all “round trip” trades exceeding $50,000 during the review
period. A “round trip” was defined as a purchase or a switch into a fund followed
by a redemption or switch out of the fund within five business days. This data was
requested for all categories of funds except money market funds, which by their
nature, are intended to accommodate short term trading. A cutoff threshold of
$50,000 was chosen to yield sufficient data to enable us to perform a meaningful
analysis using a risk based approach. A five-day time period was chosen because
trading within this short duration of time was a reasonable indicator of potentially
disruptive trading.
[74] Thus, the OSC staff exercised its expertise and professional judgment to define the
disruptive market timers by setting: (a) a time period for the inquiry; (b) a threshold of $50,000
in trading; and (c) a five-day duration (in-and-out) for the investment.
[75] Having set the parameters for the definition of a disruptive market trader, the OSC Staff
identified 18 market timers across the funds of the five defendants, and it is with respect to the
harm caused by these particular traders that the settlement agreements provided compensation.
[76] The identified 18 market timers (whose activities were legal but harmful to their fellow
investors) were excluded from those who received compensation under the plans of distribution.
[77] During the argument of the certification motion, the Plaintiffs indicated that they wished
to reserve the right to identify additional disruptive market timers beyond those identified by the
OSC and this aspiration was a factor in their class definition and a factor in demonstrating that a
class proceeding was preferable to the OSC proceeding. As it turns out, this aspiration was not
manifested in the class definitions eventually proposed, but the aspiration to identify more
market timers was not abandoned by the Plaintiffs.
[78] As the discussion below will reveal, the Plaintiffs’ aspiration to identify additional
disruptive market timers is problematic, but without discussing the problems now, it is
2010 ONSC 296 (CanLII)
identification of these market timers not only determines class membership but it is also a factor
in the calculation of the class members’ alleged damages.
Page: 17
[79] As a matter of means, in order to identify more disruptive market timers, it would be
necessary to change the parameters of identification used by the OSC. For instance, lowering the
threshold of $50,000 might identify more disruptive market timers. Enlarging the inquiry period
or expanding the in-and-out time period might identify more disruptive market timers.
[80]
The implications of adding more market timers is that it would reduce the class size and
increase the measurement of the overall harm caused to the remaining class members by adding
the harm caused by the newly identified disruptive market timers.
[81] Thus, the remaining members would benefit because assuming they were successful in
their action against the Defendants, then the amount of the damages awarded would be increased
and their individual damages claim could be greater depending on the investment history of their
own investments. The calculation of an individual investor’s damages would still depend upon
when he or she was invested in the fund and the corresponding timing of the instance of market
timing.
[82] An implication of changing the parameters from those chosen by the OSC is that by
mathematical manipulation it becomes possible to argue that the OSC settlements did not
calculate the losses correctly. Thus, the class identification issue has bearing on the access to
justice issues discussed below.
[83] This last comment bring me to the next matter, which is the issue of the amount of the
investors’ losses, another contentious matter that is relevant to the access to justice issues.
The Amount of the Investors’ Losses
[84] This issue of the amount of the investors’ losses is arguably relevant to the matter of
access to justice and to the discussion later in this judgment about the common issues and most
particularly about whether a class action would be the preferable procedure to resolve those
common issues or the Plaintiffs’ claims.
[85] It is convenient to discuss several aspects of this issue about the amount of the investors’
losses as a part of describing the background facts to the certification motion and to return to the
issue of the amount of the investors’ losses and its relevance to the class identification, the
common issues and the preferable procedure criteria again later.
[86] The Plaintiffs argue that the proposed class members were not fully compensated by the
$205.6 million paid by the Defendants and by the $9.6 million paid by the dealers who
contributed to the settlement of the OSC’s Mutual Fund Probe. To put it colloquially, the
Plaintiffs submit that the OSC settlement left the investors’ money on the table and that a class
proceeding on their behalf is both necessary and fair.
2010 ONSC 296 (CanLII)
convenient to discuss the means and consequences of identifying additional disruptive market
timers to the damages assessment, and that analysis is my purpose here.
Page: 18
[88] I agree with the Defendants that this strong evidence does exist. For example, the OSC at
p.17 of its Report states “through the settlement agreements, we were able to secure
reimbursement for the affected investors of the amounts lost by them as a result of the market
timers’ activities.” And thus, it may be true that the investors have already received all and
possibly more compensation than they are entitled.
[89] While more a matter of argument than evidence, the Defendants also have a reasonable
argument that the investors were overcompensated. This argument follows because they have a
reasonable defence that they acted in accordance with the standard of a reasonably competent
trust fund manager at the time, breached no fiduciary duty, and if there was harm it was less than
$205.6 million, which is a theoretical construct of economists not the law.
[90] The difficulty for the Defendants, however, is that, for present purposes, the strength of
their evidence that the investors have been fully compensated or their argument that the investors
have been overcompensated would not counter the Plaintiffs’ evidence that there is
uncompensated losses, unless the Defendants’ evidence was so powerful that it totally overcame
the evidence of the Plaintiffs, which, at this juncture, is measured by a very low standard of
proof.
[91] In this last regard, the Plaintiffs supported their position that there were uncompensated
losses beyond the $205.6 million with the evidence of Mr. Chambers and Dr. Zitzewitz.
[92] Mr. Chambers’ opinion for the Plaintiffs was that the profits of the identified market
timers ($421.9 million) represented a useful preliminary estimate of dilution harm, and he
concluded that the harm to investors greatly exceeds the $205.6 million in settlement payments.
Mr. Chambers admitted relying mainly on Dr. Zitzewitz’s work in arriving at this opinion.
[93] The Defendants attack Mr. Chambers’ opinion on a variety of grounds. For present
purposes, I need not recount these criticisms because I have decided to give no weight to Mr.
Chambers’ opinion on the calculation of the harm issue, because on this issue, his evidence
amounts to little more than oath helping for Dr. Zitzewitz.
[94] In his affidavit, Dr. Zitzewitz set out five different methods of estimating the harm caused
to shareholders from dilution, which is a harm caused to a mutual fund by market timers. The
following chart sets out Dr. Zitzewitz’s estimate of shareholder [i.e., investor] harm. Dr.
Zitzewitz identifies the results of the “top-down” spline method (Method C) to be the most
accurate.
2010 ONSC 296 (CanLII)
[87] The Defendants argue, however, that there is strong evidence on the record that the OSC
was: (a) competent to assess the investors’ losses; (b) on a declared mission to obtain for the
investors full compensation for their losses; and (c) publicly (in its reports, reasons for decision,
orders, and announcements) satisfied that it had achieved its restitutionary aims.
Page: 19
OSC
Settlement
($millions)
Arbitrageur
profits
calculated
by OSC
($millions)
Estimate shareholder harm by method
($millions)
A
B
C
D
E
Restitution
ratio
(Settlement/
Method C)
AGF
29.2
47.9
87.0
42.1 121.4
62.7
94.6
24%
AIC
58.8
127.0
11.4
6.5 192.6
59.6
251.0
31%
CI
49.3
90.2
108.3
72.1 349.3
143.0
162.1
10%
FT
49.1
120.8
204.0
103.9
56.4
76.3
254.0
87%
IG
19.2
36.0
157.5
76.5
40.3
26.5
70.2
48%
205.6
421.9
568.2
301.1 760.0
368.1
831.9
27%
Total
[95] The Defendants criticize Dr. Zitzewitz’s estimates of harm on a variety of grounds. The
Defendants say that his calculations are based upon assumptions and models using a sample of
US mutual funds and that Dr. Zitzewitz incorrectly measures dilution based upon all trades in the
funds, but they submit that to assess the actual harm one does not measure against all trades but
one measures the impact of market timers trades on other investors in the affected funds.
Because his models included all net trades on each day, the Defendants criticize Dr. Zitzewitz for
including in his calculation of harm the affect of trades from ordinary investors who
coincidentally or inadvertently pulled off a market timed gain.
[96] Further, the Defendants submitted that Dr. Zitzewitz’s approach is flawed because: (a) he
does not validate whether his sample of US mutual funds is representative of the Defendants’
Canadian mutual funds; (b) he assumes, contrary to reality, that all funds within a similar fund
category have the same extent of stale priced securities; (c) he assumes that funds with a given
level of turnover in a given fund category have a certain level of dilution; (d) his approach may
find dilution simply as a result of having a specified level of turnover without regard to whether
the turnover related to trades designed to exploit stale pricing or the extent of any such turnover;
(e) his analysis is open to error because he may have misclassified a fund as whether it was
comprised of international, regional, or global equities; (f) his estimates under Method E do not
reflect the actual facts; and (g) his approach establishes dilution based upon the expected next
day fund price change resulting from stale-pricing of non-North American equities as opposed to
the actual next day fund price change and thus his approach is speculative.
[97] One notable aspect of all this criticism of Dr. Zitzewitz is that the Defendants did not
help Dr. Zitzewitz by providing him with the trading data. At this juncture, however, the
Defendants were under no obligation to do so, and it is understandable why they would not
provide the data.
2010 ONSC 296 (CanLII)
Firm
[98] As a matter of disclosure, the Defendants were in a lose-lose situation. On the one hand,
if the trading data did disclose a deficiency, then the Plaintiffs would have proved their point that
there was money left on the table, but on the other hand, if the data disclosed that the investors
had been fully compensated or over-compensated, then it would be open for the Plaintiffs to use
the data and pick a theory that complemented their thesis that there was money left on the table.
[99] In any event, at this juncture, how the OSC came to its calculation is not actually known.
The method or approach used to arrive at the settlement payments is not described in the OSC’s
Report. The Report states that “various approaches to quantifying harm to investors were
considered, debated and evaluated.” As I have already said, for understandable reasons, the
Defendants have refused the Plaintiffs’ request to be informed as to the methodology used to
calculate the amount of the settlement.
[100] Also, in any event, the Defendants attack on Dr. Zitzewitz’s evidence has to be put into
the context of this motion for certification. In this context, his evidence had a very limited
purpose. He used models and theories because he did not have the trading data to do a more factbased analysis. But Dr. Zitzewitz’s task was quite modest, because he was not charged with the
responsibility of opining about the actual value of the Plaintiffs’ losses. Rather, he had the much
lesser task of showing that there was some basis in fact for saying that the Plaintiffs’ losses
exceeded the $205.6 compensation paid by the Defendants. I conclude that he accomplished that
task.
[101] Thus, Dr. Zitzewitz’s evidence satisfies me that there is some basis in fact for the
Plaintiffs’ submission that the investors may not have been fully compensated as a result of the
OSC settlement agreements.
[102] However, as I will explain later, this last conclusion does not resolve the debate about
whether the preferable procedure criterion has been satisfied, to which debate I will return.
[103] Before finally moving on to those criteria for certification, there is one additional aspect
of the issue about the calculation of the investors’ damages that needs to be mentioned.
[104] Although I have said that there is strong evidence that the investors may have received
complete compensation for their damages, that strong evidence is not found in the evidence
about the plans of distribution or in the evidence about the calculation of the payments made to
allocate the settlement proceeds under the OSC settlement agreements. The cross-examination of
Mr. Friedman revealed that the calculations of “Overall Adverse Effect” were not intended to be
a measure of the investors’ losses but rather was a calculation used to distribute the $205.6
million paid under the settlement agreements.
The Criteria for Certification
[105] I turn now to an analysis of whether the proposed class action satisfies the criteria for
certification set out in the Act.
2010 ONSC 296 (CanLII)
Page: 20
[106] Pursuant to s. 5(1) of the Class Proceedings Act, 1992, the court shall certify a
proceeding as a class proceeding if: (a) the pleadings disclose a cause of action; (b) there is an
identifiable class; (c) the claims of the class members raise common issues of fact or law; (d) a
class proceeding would be the preferable procedure; and (e) there is a representative plaintiff
who would adequately represent the interests of the class without conflict of interest and who has
produced a workable litigation plan.
[107] For an action to be certified as a class proceeding, there must be a cause of action, shared
by an identifiable class from which common issues arise that can be resolved in a fair, efficient,
and manageable way that will advance the proceeding and achieve access to justice, judicial
economy, and the modification of behaviour of wrongdoers: Sauer v. Canada (Attorney
General), [2008] O.J. No. 3419 (S.C.J.) at para. 14, leave to appeal to Div. Ct. refused, [2009]
O.J. No. 402 (Div. Ct.).
[108] On a certification motion, the question is not whether the plaintiff’s claims are likely to
succeed on the merits but whether the claims can appropriately be prosecuted as a class
proceeding: Hollick v. Toronto (City), [2001] 3 S.C.R. 158 at para. 16.
[109] The purpose of a certification motion is to determine how the litigation is to proceed and
not to address the merits of the plaintiff’s claim; there is to be no preliminary review of the
merits of the claim: Hollick v. Toronto (City), [2001] 3 S.C.R. 158 at paras. 28-9.
[110] Motions for certification are procedural in nature and are not intended to provide the
occasion for an exhaustive inquiry into factual questions that would be determined at a trial when
the merits of the claims of class members are in issue: Lambert v. Guidant Corp., [2009] O.J.
No. 1910 (S.C.J.) at para. 82.
[111] For certification, the plaintiff in a proposed class proceeding must show “some basis in
fact” for each of the certification requirements, other than the requirement that the pleading
discloses a cause of action: Hollick v. Toronto (City), [2001] 3 S.C.R. 158 at para. 25; Taub v.
Manufacturers Life Insurance Co., (1998) 40 O.R. (3d) 379 (Gen. Div.), aff’d (1999), 42 O.R.
(3d) 576 (Div. Ct.).
Disclose Cause of Action: Introduction
[112] For certification, the Plaintiffs’ statement of claim must disclose a cause of action. The
“plain and obvious” test for disclosing a cause of action from Hunt v. Carey Canada, [1990] 2
S.C.R. 959 is used to determine whether the proposed class proceeding discloses a cause of
action; thus, a claim will be satisfactory unless it has a radical defect or it is plain and obvious
that it could not succeed: Anderson v. Wilson (1999), 44 O.R. (3rd) 673 (C.A.) at p. 679, leave to
appeal to S.C.C. ref’d, [1999] S.C.C.A. No. 476; 176560 Ontario Ltd. v. Great Atlantic &
Pacific Co. of Canada Ltd. (2002), 62 O.R. (3d) 535 (S.C.J.) at para. 19, leave to appeal granted,
64 O.R. (3d) 42 (S.C.J.), aff’d (2004), 70 O.R. (3d) 182 (Div. Ct.).
2010 ONSC 296 (CanLII)
Page: 21
[113] In a proposed class proceeding, in determining whether the pleading discloses a cause of
action, no evidence is admissible, and the material facts pleaded are accepted as true, unless
patently ridiculous or incapable of proof. The pleading is read generously and a pleading will be
struck out or not certified only if it is plain, obvious, and beyond a reasonable doubt that the
plaintiff cannot succeed: Hollick v. Toronto (City), [2001] 3 S.C.R. 158 at para. 25; Cloud v.
Canada (Attorney General) v. Canada (Attorney General) (2004), 73 O.R. (3d) 401 (C.A.) at
para. 41, leave to appeal to the S.C.C. ref’d, [2005] S.C.C.A. No. 50 , rev’g (2003), 65 O.R. (3d)
492 (Div. Ct.); Abdool v. Anaheim Management Ltd., (1995), 21 O.R. (3d) 453 (Div. Ct.) at p.
469.
[114] In the case at bar, the Plaintiffs plead causes of action in breach of fiduciary duty, breach
of trust, negligence, and unjust enrichment. The Plaintiffs also seek an oppression remedy
pursuant to s. 241 of the Canadian Business Corporations Act. Their claims are based on the
Defendants’ alleged failure to prevent or terminate market timing activity in the mutual funds.
[115] For the certification motion, certification was not sought with respect to the claim for an
oppression remedy. The Defendants originally submitted that only the Plaintiffs’ claim for
negligence was open to analysis for the purposes of the certification under s. 5 of the Class
Proceedings Act, 1992. At the hearing, the Defendants abandoned their argument that the
Plaintiffs could not advance a claim for breach of fiduciary duty on behalf of the members of the
class.
The Plaintiffs’ Claim in Negligence
[116] The Plaintiffs plead that the Defendants owed a duty of care to their investors to, among
other things: (a) discharge the duties of their office honestly, in good faith and in the best
interests of the funds; (b) exercise the degree of care, diligence and skill that a reasonably
prudent person would exercise in the circumstances; (c) establish and or maintain internal
controls sufficient to ensure that harmful market timing activity would not take place in the
subject funds; (d) disseminate accurate and truthful information about the funds and the
management of the funds; (e) act in accordance with the stated policies relating to the
management of the funds; (f) not favour one class of investor over another; (g) minimize the risk
of dilution and other increased costs and inefficiencies in the funds; (h) ensure that market timing
activity and the associated financial harm to the funds was not occurring in the funds under their
management.
[117] The Plaintiffs plead that the Defendants breached their duties by, among other things: (a)
failing to establish and/or maintain internal controls sufficient to ensure that harmful market
timing activity would not take place in the subject funds; (b) failing to disseminate accurate and
truthful information about the funds and the management of the funds; (c) failing to act in
accordance with the stated policies relating to the management of the funds; (d) favouring one
class of investor over another; (e) failing to minimize the risk of dilution and other increased
costs and inefficiencies in the funds; (f) failing to ensure that market timing activity and the
associated financial harm to the funds was not occurring in the funds under their management.
2010 ONSC 296 (CanLII)
Page: 22
Page: 23
[119] Apart from observing that there are novel aspects to their negligence claim and although I
will return to discuss the negligence claim in the context of the other criteria for certification, it is
not necessary for me to say anything more about this claim for the purposes of s. 5 (1)(a) of the
Act.
The Plaintiffs’ Claim for Breach of Fiduciary Duty
[120] The Plaintiffs plead that as fund management companies, the Defendants stood in
positions of a fiduciary or trustee toward the investors, and as fiduciaries, it is alleged that the
Defendants owed duties to their investors to, among other things: (a) manage the funds in such a
way as to protect the best interests of the funds and all fund investors; (b) disseminate accurate
and truthful information about the funds and the management of the funds; (c) act in accordance
with the stated policies relating to the management of the funds; (d) not favour one class of
investor over another; (e) minimize the risk of dilution and other increased costs and
inefficiencies in the funds.
[121] The Plaintiffs plead that the Defendants breached their duties by, among other things: (a)
permitting and/or participating in and/or failing to prevent or terminate market timing activity in
the subject funds; (b) failing to establish and or maintain internal controls sufficient to ensure
that harmful market timing activity would not take place in the subject funds; (c) placing their
financial interests ahead of the interests of the Plaintiffs and other Class Members and benefiting
financially from the market timing activity at the expense of the financial best interests of the
funds and their investors; (d) favouring one class of investor over another.
[122] In their factums, the Defendants argued that the Plaintiffs’ assertion that the Defendants
were in a fiduciary relationship with the investors is based on a false premise. The Defendants
argued that the Plaintiffs have based their allegation of a fiduciary relationship based on the
Defendants’ duty under s. 116 of the Ontario Securities Act, which provides that: “(a) every
person or company responsible for the management of a mutual fund shall exercise the powers
and discharge the duties of its office honestly, in good faith and in the best interests of the
investment fund; and (b) shall exercise the degree of care, diligence and skill that a reasonably
prudent person would exercise in the circumstances.” Then, relying on the Supreme Court of
Canada’s decision about corporate directors, in BCE Inc. v. 1976 Debentureholders, [2008]
S.C.R. 560 at paras. 36-38, the Defendants argued that their fiduciary duties under s. 116 are
owed only to the mutual fund and not to the investors in the mutual fund.
[123] At the hearing, without abandoning the above argument, the Defendants abandoned their
argument that the Plaintiffs’ breach of fiduciary duty claim does not satisfy the requirements of s.
5 (1) (a) of the Act, and I find that it does.
2010 ONSC 296 (CanLII)
[118] The Defendants do no suggest that the Plaintiffs’ negligence claim does not satisfy the
requirements of s. 5 (1) of the Act, and I find that it does.
Page: 24
The Plaintiffs’ Claim for Unjust Enrichment and Restitution
[125] The Defendants concede that the Plaintiffs have pleaded certifiable causes of action for
unjust enrichment and restitution but submit that since these causes of action are not the
underpinning for any proposed common issues, therefore, these causes of action cannot be
viewed as independent causes of action for the purposes of s. 5 (1)(a) of the Act.
[126] Having regard to the Defendants’ concessions about the s. 5 (1)(a) criteria and having
regard to my conclusions below that the proposed damage assessment and aggregate damage
questions are not common issues and since I have decided that the Plaintiffs have satisfied s. 5
(1)(a) based on their pleas of negligence and breach of fiduciary duty, it is not necessary for me
to say anything more about the Plaintiffs’ claims for unjust enrichment and restitution.
[127] I note here that during the course of argument, the Plaintiffs stated that they had simply
omitted to include a common question about unjust enrichment. I ruled, however, that without
prejudice to any right they might have to bring a motion to amend the certification order to add
this question, I would not allow this question to be added during argument because this would
not be fair to the Defendants who prepared for this motion without notice that the Plaintiffs
would propose a common issue about unjust enrichment.
Identifiable Class
[128] I turn now to the matter of the class definition. The definition of an identifiable class
serves three purposes: (1) it identifies the persons who have a potential claim against the
defendant; (2) it defines the parameters of the lawsuit to identify those persons bound by the
result of the action; (3) it describes who is entitled to notice: Bywater v. T.T.C., [1998] O.J. No.
4913 (Gen. Div.).
[129] The class must be defined without elements that require a determination of the merits of
the claim: Markson v. MBNA Canada Bank (2007), 85 O.R. (3d) 321 (C.A.) at para. 19 , rev’g
(2005), 78 O.R. (3d) 39 (Div. Ct.) , which aff’d (2004), 71 O.R. (3d) 741, (S.C.J.), leave to
appeal to S.C.C. ref’d, [2007] S.C.C.A. No. 346; Ragoonanan v. Imperial Tobacco Canada Ltd.
(2005), 78 O.R. (3d) 98 (S.C.J.), leave to appeal ref’d [2008] O.J. No. 1644 (S.C.J.).
[130] Class membership identification is not commensurate with the elements of the cause of
action; there simply must be a rational connection between the class member and the common
issue(s): Sauer v. Canada (Attorney General), [2008] O.J. No. 3419 (S.C.J.) at para. 32, leave to
appeal to Div. Ct. refused, [2009] O.J. No. 402 (Div. Ct.).
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[124] Again, apart from mentioning that there are novel aspects to their breach of fiduciary
duty claim and although I will return to discuss the breach of fiduciary duty claim in the context
of the other criteria for certification, it is not necessary for me to say anything more about this
claim for the purposes of s. 5 (1) (a) of the Act.
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[132] The court’s concern about a class definition is that it should support a judgment that
binds the persons who ought to be bound (a concern about under-inclusiveness) and that it does
not bind persons who ought not to be bound (a concern about over-inclusiveness). Viewed from
the court’s perspective, an over-inclusive class definition will bind persons who ought not to be
bound by judgment or by settlement, be that judgment or settlement favourable or unfavourable.
It is to be remembered that until individual trials, if necessary, class members are not direct
participants in the action, but they will be bound by the common issues trial and the settlement if
approved by the court. The court is concerned about a proper class definition both as a matter of
procedural and substantive justice. See Robinson v. Medtronic, [2009] O.J. No. 4366 (S.C.J.) at
paras. 133-37.
[133] The criterion of the class definition is particularly important because the scope of the
class definition has a great influence on the other criteria. For instances, the class definition
affects the commonality of proposed common issues, the manageability of procedures and
whether a class action is preferable, which, in turn, affects the ability of the representative
plaintiffs to represent the class members without conflict and the appropriateness of the litigation
plan.
The Debate about the Class Definition
[134] As already mentioned several times, in the case at bar, a hotly contested issue was the
class definition. This contest had several phases, because the Plaintiffs revised the class
definitions originally presented in their statement of claim. The first set of revisions came in their
factum, and the second set of revisions came during the course of the argument of the motion.
The second set of revisions negated some of the Defendants’ original objections to the class
definition. For the revised definitions, I requested additional written argument, which was
delivered after the hearing of the motion.
[135] As I just noted, in their factum, the Plaintiffs revised their class definitions from those set
out in the statement of claim. In the factum, five classes were proposed, one for the investors of
each defendant. The structure of the five class definitions was identical. The definition for AGF
may be used as an example. It stated:
“AGF Class” means all persons in Canada, except Quebec, who purchased and/or redeemed
and/or held or otherwise acquired shares or other ownership units of one or more of the AGF
Funds during the AGF Class Period [*]. Excluded from the class is AGF, the officers and
directors of AGF, members of their immediate families and their legal representatives, heirs,
successors or assigns, any entity in which AGF has or had a controlling interest and any
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[131] There must be a rational relationship between the class, the causes of action, and the
common issues, and the class must not be unnecessarily broad or over-inclusive: Pearson v. Inco
Ltd. (2006), 78 O.R. (3d) 641 (C.A.) at para. 57, rev’g [2004] O.J. No. 317 (Div. Ct.), which had
aff’d [2002] O.J. No. 2764 (S.C.J.).
Page: 26
[136] The Defendants argued that the class definitions proposed in the statement of claim and
revised in the Plaintiffs’ factum were unworkable because: (1) the definitions are merits-based;
(2) the interests of current and former investors in the defined classes conflict; and (3) the
definitions were overbroad as they included individuals who had not been affected by market
timing.
[137] A thrust of the Defendants’ argument was that the class definitions must necessarily
exclude investors who were disruptive market timers, but market timing is an intentional act and
intention is a subjective not an objective phenomenon and, therefore, the class definition wanted
for objective classifiers. Further, the Defendants submitted that the proposed class definitions in
the Plaintiffs’ factum, which link the identification of the market timers to the Defendants’ also
wants for objectivity and would postpone identification until the trial, which means that putative
class members will be unable to determine whether they are within the class, and this, in turn,
means the proposed definition failed the test for certification. Further still, the Defendants
submitted that postponing identification could create a conflict among class members because
some class members might wish to exclude others by labeling them as disruptive harm-causing
market timers.
[138] The Defendants also argued that the class definitions were overbroad. This argument was
set out at paras. 109 and 111 of their factum, which stated:
109. The proposed definition of each Class is too broad because it includes
investors in funds that have not been affected by market timing activity. The
plaintiffs state that the Classes are “composed solely of persons who were invested
in specific funds known to have been the subject of market timing”. In fact, the
definition refers to a definition of the Funds that appears to be based solely on a
newspaper article. In relation to several of the funds listed, the plaintiffs have
provided no evidentiary basis whatsoever to suggest that market timing occurred in
those funds. As such, persons who held units in those latter funds should not be
included in the class.
111. The proposed class definitions are also overly broad because they include all
persons who purchased, held, and sold units in the Funds over the Class Period.
This would include some people who were unaffected by market timing (depending
on when they held and redeemed their units), or people who actually benefited from
the impugned conduct of the Fund Companies. …
[139] I will return to discuss the Defendants’ objections in the context of the revised definitions
where some of the original objections have been satisfactorily addressed, but the Defendants had
another objection to the proposed class definitions that it is convenient to address first. The
Defendants submitted that the proposed class definitions were unworkable because the inclusion
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individual or entity which to AGF’s knowledge engaged in market timing activities in the
AGF Funds;
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[140] Given that: (a) this argument is based on de minimus experience from the distribution of
the funds from the settlement agreements; (b) the action is a long way from a judgment; and (c)
the Defendants also submitted that individual assessments will be necessary in any case, the
Defendants’ argument is totally speculative. Further, the court has ample powers to deal with
distribution problems if and when they may arise. Moreover, in any event, the suggested
conflicts would not make the class definition unworkable for the purposes of the class action.
Thus, I give no weight to this particular objection.
[141] As noted above, to address or neutralize the objections raised by the Defendants and to
address several concerns that I raised during the argument of the certification motion, the
Plaintiffs presented two new alternative versions of a class definition. Those alternatives are as
follows:
Option A: “AGF Class” means all persons in Canada, except Quebec, who
purchased and/or redeemed and/or held or otherwise acquired shares or other
ownership units of one or more of the AGF Funds [as set out in schedule “A”
hereto] during the AGF Class Period (August 1, 2000 to June 1, 2003). Excluded
from the class is AGF, the officers and directors of AGF, members of their
immediate families and their legal representatives, heirs, successors or assigns, any
entity in which AGF has or had a controlling interest, as well as the “Market
Timing Traders” identified by the Ontario Securities Commission (OSC) in the
settlement agreement between the OSC and AGF. [my emphasis added]
Option B: All persons or entities that were sent settlement cheques or payments
pursuant to the settlement agreement between the OSC and AGF
[142] It should be noted that the underlined words in Option A replace the following words
from the version of the class definition found in the Plaintiffs’ factum: “and any individual or
entity which to AGF’s knowledge engaged in market timing activities in the AGF Funds.” A
second change to note is that the attached list of AGF trust funds is a compilation of funds
identified by the OSC in its Probe augmented by a list found in a newspaper article published by
the Globe & Mail.
[143] It should also be noted that with the exception of the affect of the addition of more funds
(i.e., those noted in the Globe & Mail article) in Option A, both Option A and B accept the
OSC’s parameters for defining disruptive market timers and Option B accepts the OSC’s
determination of who were the affected investors. As will soon become apparent, these features
are problematic and matters of serious disagreement between the parties.
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of both current and former unitholders would entail conflicts between class members if there is a
judgment award to distribute. The main alleged conflict was that funds that were not taken up
because of possible de minimus thresholds in the court’s distribution plan might revert to the
mutual fund to the benefit of current but not former unitholders.
[144] As I read their written submissions, with three provisos, the Defendants concede that
Option A creates a satisfactory class definition. The provisos are: (1) the class definition must be
understood as permanently settling who are the market timers excluded from being class
members; (2) the definition should not include any additional mutual funds noted in the Globe &
Mail article; and (3) the definition should be qualified by stipulating that the persons to be
included in the class were those who were found to be adversely affected under the plan of
distribution approved by the OSC.
[145] As I read their written submissions, with two provisos, the Defendants concede that
Option B creates a satisfactory class definition. The first proviso is to repeat the reservation that
the class definition must be understood as permanently settling who are the market timers
excluded from being class members. The second proviso is that Option B should be qualified to
refer to the class period set out in the Plaintiffs’ statement of claim and factum.
[146] The Plaintiffs strongly resist the Defendants’ proviso to Options A or B that the class
definition must be understood as permanently settling who are the market timers that are
excluded from being class members.
[147] The Plaintiffs wish to reserve the right to identify more disruptive market timers and to
exclude them from the class definition as the action proceeds through the discovery phases. To
quote from their supplementary written argument, the Plaintiffs submitted that “there is nothing
inherently offensive in the notion that some class members, who may be identified during the
discovery stage to have engaged in harmful market timing activities may be excluded.” They say
that: “an otherwise acceptable class definition need not be sacrificed because there may
[Plaintiffs’ emphasis] be some additional market timers (tentatively) included in the class.” And
they say that it would be appropriate to include in the notice to the class the advice that: “if you
are a class member who has engaged in frequent trading activity you may be excluded from the
class by a subsequent court order and will not be able to participate in this class action.”
[148] The Plaintiffs argue that the case law supports a flexible and fluid approach to class
definition, where the definition may be changed as necessary or subclasses created as necessary
to address differences between class members. They argue that including some class members
who might later be excluded does not make the class over-inclusive because it has never been
objectionable that a class may include members who ultimately may be found not to have a
claim. Of the case law, the Plaintiffs state:
While these decisions do not directly address the issue of revising the class
definition to exclude certain class members who may have engaged in the wrongful
conduct in issue in the litigation, they do evidence as an overriding general
principle the courts’ recognition that certification is a fluid process [Plaintiffs’
emphasis] and that the CPA provides the tools and great flexibility to address issues
as they may [Plaintiffs’ emphasis]. The Plaintiffs submit that a similar approach
should be taken in the case at bar to the class definition issue, specifically, and
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[149] Two sets of observations will show that the Defendants’ proviso about the class
definition must be correct and that the Plaintiffs’ position to the contrary is fundamentally
wrong.
[150] The first set of observations begins by recalling that: (1) market timing is not itself
unlawful and must be defined to be so; and (2) based on research, its own expertise, and the
advise of experts, for the purposes of its enforcement process, the OSC defined disruptive market
timers as traders with a threshold of $50,000 of trading and a five-day duration (in-and-out) for
their investment in the mutual fund.
[151] For the Plaintiffs to use the discovery process to identify more disruptive market timers,
they must redefine who is a market timer. In particular, the Plaintiffs must lower the threshold
and or extend the duration of the investment as the parameters in the definition of who is a
disruptive market timer. The Plaintiffs must, however, retain some threshold and duration
because, otherwise, every investor who made a propitiously timed trade would be excluded from
the class.
[152] As I understand the process, a result of this redefining of who is a disruptive market timer
would be to exclude investors from the class, including possibly some who may have received
compensation from the OSC settlement. It would seem that these excluded investors would have
been unjustly enriched and ought not to have benefited from the OSC settlement agreements.
Alternatively, the excluded investors would be denied compensation for the harm caused to them
by the originally identified 18 market timers. This possibility could arise where an excluded
investor’s gain from his or her market timing was less than the adverse impact experienced by
the excluded investor that was caused by the original group of market timers. This possibility is
not a fanciful conjecture if the Plaintiffs’ are correct that the OSC settlement left substantial
money on the table that was associated with harm just caused by the original 18 market timers.
[153] Thus, contrary to the submission of the Plaintiffs, the court cannot take comfort that only
investors who did not suffer harm would be excluded from the class because that is not
necessarily true and this result would depend upon how the definition of a disruptive market
timer was set and on the as yet unarticulated methodology that the court would use to calculate
the adverse impact of the market timing.
[154] As discussed earlier in these Reasons for Decision, another result of redefining the
definition of a disruptive market timer is that it may be in the financial interest of some class
members to have other class members excluded from the class because this exclusion would
have the result of increasing the respective amounts of compensation for the class members who
remained in the class. This result is an obvious conflict of interest amongst the class members.
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certification generally, particularly as the issue of conflict has not arisen beyond the
level of speculation.
[155] It, however, is not a speculative conflict between class members. Rather, it is a
manufactured one that is the product of the Plaintiffs deciding that they can increase the quantum
of the Defendants’ liability by expelling some investors from class membership. In my opinion, a
class definition with this sort of conflict of interest is unacceptable because a representative
plaintiff cannot have a conflict of interest with the class that he or she would represent.
[156] The second set of observations begins by accepting the Plaintiffs’ proposition that a class
may have members who ultimately will not be successful and will be excluded from
compensation.
[157] What this proposition usually means is that after succeeding on the common issues, it is
possible that individual class members may fail in establishing an individual element of the claim
such as causation or damages, but this is no reason to initially exclude them as class members.
However, what the Plaintiffs are proposing in the immediate case is not to include and then
exclude class members whose claims as plaintiffs may fail but, rather, the Plaintiffs propose to
include and then after examinations for discovery, exclude class members because those class
members “engaged in wrongful conduct.”
[158] In other words, the Plaintiffs would submit that a plaintiff class is not overbroad when it
includes putative defendants who will be identified and expelled from the class after
examinations for discovery. In my opinion, the liberality of the courts in allowing adjustments to
class definitions does not extend as far as the Plaintiffs would take it and none of the cases relied
on by the Plaintiffs supports the outcome they seek in the case at bar.
[159] From these two sets of observations, I conclude that the class definition should expressly
specify that there shall be no other exclusions of investors from the class other than the
Defendants and the disruptive market traders identified by the OSC.
[160] I turn now to the Defendants’ proviso or objection that the class definition should not
include additional mutual funds that were identified in a Globe & Mail article. This objection
does not arise under Option B.
[161] Put shortly, I agree with the Defendants’ submission that this article does not satisfy the
evidentiary basis of some basis in fact that would support a class definition. At present, the court
can take comfort that the OSC committed extraordinary resources and expertise to determine
what funds should be included and what investors in those funds should receive compensation,
but, in contrast, all that is known about the list contained in the newspaper article is that the
Globe & Mail article was investigative reporting and not an opinion piece. However, absent
some cross-examinable testimony from the investigators at the Globe & Mail, there is no
evidence to underpin the Plaintiffs’ expanded class definition.
[162] I turn now to the Defendants’ third proviso or objection, which applies only to Option
A. This proviso is that the class definition should be qualified by stipulating that the persons to
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be included in the class were those who were found to be adversely affected under the plan of
distribution approved by the OSC.
[164] If the Plaintiffs’ theory is correct that the Defendants’ liability exceeds the amount paid
under the OSC settlement agreements, that is, if money was left on the table by the OSC
settlement agreements, then there are two explanations for the possible additional liability of the
Defendants: (1) the OSC did not correctly identify the disruptive market timers; (2) the OSC’s
methodology for quantifying the investors’ losses from the disruptive market timers understated
the losses.
[165] For the reasons expressed above, it is my opinion that the Plaintiffs must accept the
OSC’s definition of who is a disruptive market timer, which I may add is a workable, rational,
fair, objective and tested definition that was accepted by the Defendants and that avoids conflicts
of interest for the Representative Plaintiff. However, subject to what I will say below about the
preferable procedure, the Plaintiffs need not accept the OSC’s methodology for calculating the
amount of the loss caused by the identified disruptive market timers, and I see no good reason for
including this qualification into a class definition that is workable, rational, fair, and objective.
[166] Put somewhat differently, assuming that the OSC’s methodology would not be accepted
by the court as the correct methodology to arrive at the compensation for the investors, then there
might be more class members who were adversely affected and entitled to compensation. This
outcome would mean that the compensation of some investors would be topped up from what
they received from the OSC approved plan of distribution while other investors would receive
compensation that they did not receive under the OSC plan of distribution.
[167] It follows that I would not include the qualification to Option A requested by the
Defendants. It further follows that I do not think that Option B is the appropriate class definition,
and I need not say anything more about it.
[168] I conclude that subject to the qualifications mentioned above, the Plaintiffs’ Option A
satisfies the class definition criterion of the test for certification.
Common Issues
[169] I turn now to the matter of the common issues criterion.
[170] Section 1 of the Class Proceedings Act, 1992, defines common issues as: “common but
not necessarily identical issues of fact,” or “common but not necessarily identical issues of law
that arise from common but not necessarily identical facts.” For an issue to be a common issue, it
must be a substantial ingredient of each class member’s claim and its resolution must be
necessary to the resolution of each class member’s claim: Hollick v. Toronto (City), [2001] 3
S.C.R. 158 at para. 18.
2010 ONSC 296 (CanLII)
[163] On this point, I agree with the Plaintiffs and not the Defendants for the following reasons.
[171] The focus of the analysis of whether there is a common issue is not on how many
individual issues there might be but whether there are issues the resolution of which would be
necessary to resolve each class member’s claim and which could be said to be a substantial
ingredient of those claims: Cloud v. Canada (Attorney General) (2004), 73 O.R. (3d) 401 (C.A.)
at para. 55, leave to appeal to the S.C.C. ref’d, [2005] S.C.C.A. No. 50, rev’g, (2003), 65 O.R.
(3d) 492 (Div. Ct.).
[172] The underlying question of a common issue is whether the resolution of the common
issue will avoid duplication of fact-finding or legal analysis: Western Canadian Shopping
Centres Inc. v. Dutton, [2001] 2 S.C.R. 534 at para. 39.
[173] For an issue to be common, it is not essential that the class members be identically
situated vis-à-vis the opposing party or benefit from the successful prosecution of the action to
the same extent: Western Canadian Shopping Centres v. Dutton, [2001] 2 S.C.R. 534 at paras.
39-40.
[174] The comparative extent of individual issues is not a consideration in the commonality
inquiry, although it is a factor in the preferability assessment: Cloud v. Canada (Attorney
General) (2004), 73 O.R. (3d) 401 (C.A.) at para. 65, leave to appeal to the S.C.C. ref’d, [2005]
S.C.C.A. No. 50, rev’g, (2003), 65 O.R. (3d) 492 (Div. Ct.); Rumley v. Britich Columbia (sub.
Nom. L.R. v. British Columbia), [2001] 2 S.C.R. 184 at para. 33.
[175] The Plaintiffs propose the following list of nine common issues:
(1) Did the defendants owe a fiduciary duty to the respective Class Members to take
steps to prevent “market timing” activities in their funds?
(2) If so, did the defendants, or any of them, breach such a fiduciary duty and, if so,
what was the nature of the breach?
(3) Did the defendants owe a duty of care to the respective Class Members to take
steps to prevent “market timing” activities in their funds?
(4) If so, did the defendants, or any of them breach such a duty of care and, if so,
what was the nature of the breach?
(5) What is the appropriate method of quantifying loss or damages as a result of any
of the conduct referred to in issues (2) and (4)?
(6) Does such method allow damages to be assessed in the aggregate and, if so, in
what amount and how should the damages be distributed?
(7) Are Class Members entitled to punitive damages against the respective defendant
and, if so, in what amount?
2010 ONSC 296 (CanLII)
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Page: 33
(9) Should the defendants, or any of them, be ordered to pay prejudgment and postjudgment interest? If so, at what annual rate? Should the interest be simple or
compound?
Common Questions 1 -4 (Duty of Care and Fiduciary Duty)
[176] Questions 1 to 4 concern allegations of breach of duty and the Defendants submit that a
determination of whether a mutual fund manager owed and breached a duty owed the investors is
not necessarily an issue that can be determined on a class-wide basis.
[177] It is undoubtedly true that whether a duty is owed and breached is not necessarily an issue
that can be determined on a class-wide basis. That said, it is also true that whether a duty is owed
and breached is not necessarily an issue that cannot be determined on a class-wide basis.
Moreover, the case at bar appears to be a case where the duty issue is common to the claims of
all investors. And even more to the point, in my opinion, in the circumstances of this case,
questions 1 to 4 qualify as common questions for the case at bar.
[178] In the case at bar, the court will be asked to determine, among other things, whether a
mutual fund manager has a duty of care to prevent market timing by investors in the mutual fund.
That is a question common for all members of the class.
[179] Whether a duty of care or fiduciary duty exists, and whether a defendant has breached its
duty of care have been found to be common issues that would substantially advance the
proceedings, even in cases where complex individual issues remain. See: Rumley v. British
Columbia, [2001] 3 S.C.R. 184; Cloud v. Canada (Attorney General (2004), 73 O.R. (3d) 401
(C.A.); Tiboni v. Merck Frosst Canada Ltd., [2008] O.J. No. 2996 (S.C.J.); Lavier v. MyTravel
Canada Holidays Inc., [2009] O.J. No. 1314 (Div. Ct.).
[180] The Defendants submit, however, that the duty of care or breach of fiduciary duty
questions in the case at bar want for commonality because standards of care evolve and would
depend upon changing circumstances. This submission conflates the commonality of the
question with commonality in answers to the question and does not detract from my conclusion
that the court in deciding questions 1 to 4 will substantially advance the litigation for all Class
Members and for the Defendants.
Questions 5 (Damages Assessment) and 6 (Aggregate Damages)
[181] The evidence now before the court is that the activities of market timers may dilute the
value of a long term investor’s investment in a mutual fund. The effect of dilution is to harm the
fund, but how that loss is experienced is an individual experience dependent upon: (a) the timing
and duration of the particular investor’s investment in the particular fund or funds; (b) the
occurrence(s) of disruptive market timing activity in a particular mutual fund during the time of
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(8) Should the defendants, or any of them, pay the costs of administering and
distributing any recovery? If so, in what amount?
Page: 34
[182] In other words, the evidence shows that the quantification of the harm suffered by
investors is an individual and not a common issue. The evidence shows that the calculation of
harm is the summation of the investors’ individual harms. This summing of individual claims is
not amenable to an aggregate assessment in the sense contemplated by s. 24 (1) of the Class
Proceedings Act, 1992.
[183] The case at bar is thus different from Cassano v. Toronto-Dominion Bank (2008), 87
O.R. (3d) 401 (C.A.), where the Court of Appeal held that the motions judge had erred by
concluding that the damages assessment would require individual assessment when that was not
necessarily the case. In the case at bar, no other means of assessing damages was proposed other
than the summation of individual assessments and the approach employed under the OSC
approved plans of distribution involved individual assessments. It was not suggested that in the
circumstances of this case it would be possible to use statistical sampling – as provided for in s.
23 of the Act – to determine the aggregate or part of the Defendants’ liability, and thus the
circumstances of the case at bar are also different from Markson v. MBNA Canada Bank (2007),
85 O.R. (3d) 322 (C.A.) at para. 45.
[184] Section 24(1) of the Act provides that a court may determine the aggregate or a part of a
defendant’s liability to class members if monetary relief is claimed, if no questions of fact or law
other than those relating to the assessment of monetary relief remain to be determined, and if
“the aggregate or a part of the defendant’s liability to some or all class members can reasonably
be determined without proof by individual class members.” [emphasis added]
[185] In the case at bar, it is not reasonably likely that the conditions for an aggregate
assessment could be met. While it might be established that there is a duty of care owed to all the
investors, it remains the case that the breaches of any duty occurred only periodically when a
defined disruptive market timer caused harm and thus an individual damage assessment is
required. In this respect, the case at bar bears some resemblance to Fresco v. Canadian Imperial
Bank of Commerce, [2009] O.J. No. 2531 (S.C.J.), which was a claim for overtime pay, where
Justice Lax concluded that the questions of damages or of an aggregate assessment of damages
could not be certified.
[186] The Defendants submit that the pre-conditions of s. 24(1) will not likely be satisfied in
this case and assuming the Plaintiffs are successful at the common issues trial, the assessment of
the class members’ damages will require individual trials. I agree with this submission, and,
accordingly. I shall not certify questions 5 and 6 as common issues.
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the investor’s investment; (c) the individual investor’s trading activity; (d) the individual
investors’ tax situation; and (e) the extent of compensation already received from the OSCapproved settlement agreements.
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Question 7 (Punitive Damages)
[188] I discuss this issue of punitive damages as a common issue at some length in Robinson v.
Medtronic Inc., [2009] O.J. No. 4366 (S.C.J.) and I rely on that analysis as part of these Reasons
for Decision. For present purposes, it is sufficient to say that the analysis in Robinson shows that
punitive damages are a common issue in some class proceedings but not others.
[189] As I explain in Robinson, an assessment of punitive damages requires an appreciation of:
(a) the degree of misconduct; (b) the amount of harm caused; (c) the availability of other
remedies; (d) the quantification of compensatory damages; and (e) the adequacy of
compensatory damages to achieve the objectives or retribution, deterrence, and denunciation.
These factors must be known to ensure that punitive damages are rational and to ensure that the
amount of punitive damages is not greater than necessary to accomplish its purposes.
[190] In the case at bar, save for one factor, which actually is counter-indicative of punitive
damages being appropriate, it will not be possible to determine punitive damages at the common
issues trial. The counter-indicative factor is the concession by both parties that behaviour
modification was achieved by the OSC settlement agreements that involved compensatory
payments beyond the revenues gained from permitting the activities of the disruptive market
timers.
[191] In these circumstances, in my opinion, this is not a proper case for certifying punitive
damages as a common issue.
Question 8 (Distribution Plan)
[192] Since I have concluded that there will not be a common issue about aggregate damages, it
follows that there cannot be a common issue about the distribution plan.
Question 9 (Pre and Post-judgment Interest)
[193] Since I have concluded that individual issue trials will be required to assess damages, it
follows that there cannot be a common issue about pre and post-judgment interest.
Preferable Procedure- Introduction
[194] I turn now to the preferable procedure criterion, which is the crucial and most contested
issue in this motion for certification. I will begin my analysis by setting out some very general
legal principles about this criterion. Then, I will ignore the significance of the OSC proceedings
and consider whether a class proceeding would be the preferable procedure for the case at bar.
Next, I will consider the significance of the OSC proceedings on the preferable procedure
analysis, and I will do this in several steps, beginning with a discussion of several arguments
2010 ONSC 296 (CanLII)
[187] I agree with the Defendants’ submission that punitive damages is not a common question
in the circumstances of the case at bar.
Page: 36
Preferable Procedure – General Principles
[195] For a class proceeding to be the preferable procedure for the resolution of the claims of a
given class, it must represent a fair, efficient, and manageable procedure that is preferable to any
alternative method of resolving the claims: Cloud v. Canada (Attorney General) (2004), 73 O.R.
(3d) 401 (C.A.) at paras. 73-75, leave to appeal to S.C.C. ref’d, [2005] S.C.C.A. No. 50.
[196] Preferability captures the ideas of whether a class proceeding would be an appropriate
method of advancing the claim and whether it would be better than other methods such as
joinder, test cases, consolidation, and any other means of resolving the dispute: Markson v.
MBNA Canada Bank (2007), 85 O.R. (3d) 321 (C.A.) at para. 69, leave to appeal to S.C.C. ref’d,
[2007] S.C.C.A. No. 346; Hollick v. Toronto (City), [2001] 3 S.C.R. 158.
[197] In considering the preferable procedure criterion, the court should consider: (a) the nature
of the proposed common issue(s); (b) the individual issues which would remain after
determination of the common issue(s); (c) the factors listed in the Act; (d) the complexity and
manageability of the proposed action as a whole; (e) alternative procedures for dealing with the
claims asserted; (f) the extent to which certification furthers the objectives underlying the Act;
and (g) the rights of the plaintiff(s) and defendant(s): Chadha v. Bayer Inc. (2001), 54 O.R. (3d)
520 (Div. Ct.) at para. 16, aff’d (2003), 63 O.R. (3d) 22 (C.A.), leave to appeal to S.C.C. ref’d,
[2003] S.C.C.A. No. 106.
[198] Whether a class proceeding is the preferable procedure is judged by reference to the
purposes of access to justice, behaviour modification, and judicial economy and by taking into
account the importance of the common issues to the claims as a whole, including the individual
issues: Markson v. MBNA Canada Bank (2007), 85 O.R. (3d) 321 (C.A.) at para. 69, leave to
appeal to S.C.C. ref’d, [2007] S.C.C.A. No. 346; Hollick v. Toronto (City), [2001] 3 S.C.R. 158.
[199] In determining whether a class proceeding is the preferable procedure for the resolution
of the common issues, all alternative proceedings put before the court must be considered:
Williams v. Mutual Life Assurance Co. of Canada (2000), 51 O.R. (3d) 54 (S.C.J.) at para. 50,
aff’d [2001] O.J. No. 4952 (Div. Ct.), aff’d [2003] O.J. No. 1160 and 1161 (C.A.).
[200] The defendant must support the proposition that that another procedure is to be preferred
with an evidentiary foundation: 1176560 Ontario Ltd. v. Great Atlantic & Pacific Company of
Canada Ltd. (2002), 62 O.R. (3d) 535 (S.C.J.), leave to appeal granted, 64 O.R. (3d) 42 (S.C.J.) ,
aff’d (2004), 70 O.R. (3d) 182 (Div. Ct.).
2010 ONSC 296 (CanLII)
advanced by the Defendants that I reject. My next step is a discussion of the Defendants’
arguments that I accept and that led me to my conclusion that the OSC proceeding was the
preferable procedure. In that discussion, I will resume the description and analysis of the case
law about preferable procedure.
Page: 37
[201] As I will now discuss, but for the circumstances of the OSC proceedings, I would have
concluded that a class proceeding was the preferable procedure for the case at bar. Indeed, but
for the OSC proceedings, there would be no rival to a class proceeding.
[202] The Defendants argue that a class proceeding would not be a fair, efficient and
manageable proceeding given the number and complexity of the causes of action and common
issues that the Plaintiffs seek to certify. They submit that numerous individual issues will still
require determination and the common issues trial will only be the beginning of the matters
requiring adjudication before the class members can obtain relief. In this regard, the Defendants
submit that each individual investor will have to prove his or her individual loss and also
causation before there would be an entitlement to relief. They submit that the resolution of the
common issues will have a negligible impact on the claim as a whole.
[203] I disagree with these arguments, which in fairness, it should be noted were made without
knowing what causes of action and common issues the court would certify for a class proceeding
and without the squirming class definition having been pinned down.
[204] In my opinion, although this is a case where the extent of liability will not be determined
at the common issues trial and individual trials will be necessary to determine whether there are
damages and, if so, the quantum of them, nevertheless, sufficient progress will be made by the
common issues trial to justify a class proceeding.
[205] Liability cannot be determined at trial because the constituent element of damages
requires individual treatment. However, I do not see causation of harm as being an issue for an
individual trial. If the court determines at the common issues trial that market timing occurred
and that the Defendants breached a duty to prevent its occurrence, then causation will have been
established and what will remain is the assessment of damages.
[206] The Class Proceedings Act, 1992, is designed to accommodate the type of case presented
by the case at bar. The structure of the Act envisions a bifurcated procedure in which there will
be common issue trials and sometimes trials of individual issues.
[207] In Cassano v. The Toronto-Dominion Bank, [2007] O.J. No. 4406 (C.A.), Chief Justice
Winkler, noted that the Act contains robust provisions for modified procedures to resolve
individual issues following the common issues trial, and the Chief Justice noted that it was not
fatal to certifying a class that an individual issues trial would be necessary. Section 25 arms the
court with considerable authority to determine a fair and efficient approach to determining the
individual issues that are outstanding after a common issues trial. Sections 25 (1) – (3) state:
Individual issues
25 (1) When the court determines common issues in favour of a class and considers
that the participation of individual class members is required to determine
2010 ONSC 296 (CanLII)
The Preferable Procedure Analysis Ignoring the Significance of the OSC Proceedings
Page: 38
(a) determine the issues in further hearings presided over by the judge who
determined the common issues or by another judge of the court;
(b) appoint one or more persons to conduct a reference under the rules of
court and report back to the court; and
(c) with the consent of the parties, direct that the issues be determined in any
other manner.
Directions as to procedure
(2) The court shall give any necessary directions relating to the procedures to be
followed in conducting hearings, inquiries and determinations under subsection (1),
including directions for the purpose of achieving procedural conformity.
Idem
(3) In giving directions under subsection (2), the court shall choose the least
expensive and most expeditious method of determining the issues that is consistent
with justice to class members and the parties and, in so doing, the court may,
(a) dispense with any procedural step that it considers unnecessary; and
(b) authorize any special procedural steps, including steps relating to
discovery, and any special rules, including rules relating to admission of
evidence and means of proof, that it considers appropriate.
[208] It should also be recalled that the Defendants were able to distribute $205.6 million by
reviewing their own records to make decisions about entitlement, causation, and quantification.
The OSC Plans of Distribution show that there is at least a realistic possibility that acceptable
procedures could be fashioned by the common issues trial judge to address quantification and
distribution issues in a fair, manageable and efficient manner. Assuming that the Representative
Plaintiffs are able to prove negligence or breach of fiduciary duty, and given the powers that the
court has under the Class Proceeding Act, 1992, it should be possible to find feasible and
efficient means to adjudicate the individual claims.
[209] Of course, if the Defendants were the successful ones at the common issues trial, there
would be no need to have individual issue trials assessing damages.
[210] Sometimes, it is not an overstatement for a defendant to submit that certification is
pointless because the difficulties to be confronted by the class in proving individual claims
would mean that no efficiencies or access to justice would be achieved from common issues
2010 ONSC 296 (CanLII)
individual issues, other than those that may be determined under section 24, the
court may,
Page: 39
The Preferable Procedure, Access to Justice, the OSC Proceedings and the Rejected Arguments.
[211] The Defendants submit that a class proceeding would not be the preferable procedure
because of the OSC proceedings. This argument is not a matter of res judicata or issue estoppel.
The Defendants do not submit that the proceedings before the OSC preclude a class action, but
they submit that the settlement agreements and the OSC proceedings are relevant to the
determination of whether the preferable procedure criterion has been satisfied.
[212] The Defendants submit a plethora of arguments about preferable procedure associated
with the OSC proceedings. They make the following arguments:
•
The Defendants submit that the OSC Proceeding was the preferable procedure because:
(a) the investors’ claims have already been addressed by an expert tribunal and a class
proceeding is not preferable because it re-litigates the issues already addressed by the
OSC; (b) the objectives of the Class Proceedings Act, 1992, were achieved in the OSC
Proceeding; (c) the investors have already taken the benefits of the OSC Proceeding; (d)
the OSC’s public interest mandate and regulatory powers provided an efficiency that
could not have been achieved in a court proceeding; and (e) a class proceeding is not a
fair, efficient or manageable procedure in which to address the investors’ claims.
•
The Defendants submit that the access to justice accomplished by the OSC provided
millions of claimants with claims of $50 or less, to be compensated and it would have
been uneconomic, and practically impossible, for the Superior Court to prosecute those
claims.
•
The Defendants submit that access to justice is about ensuring that claimants who have
small claims that might not otherwise be pursued due to the costs of litigating in the
courts have an avenue of redress. They submit that access to justice is not about access to
a specific form of procedural justice.
•
The Defendants argue that a class proceeding would not be as efficient as the OSC
proceeding and accordingly a class action is not the preferable proceeding. In this regard,
based on Mr. Berenblut’s evidence, they point out that the OSC settlement agreements
generated $205.6 million without any deduction for the contingency fee of class counsel
while, historically, class actions recover only 15-20% of the amount claimed and any
recovery is shared with class counsel.
•
The Defendants submit that certifying a class proceeding would be unfair. They state in
paragraph 15 of their factum:
2010 ONSC 296 (CanLII)
trials. Numerous class actions have failed to be certified because of this concern. However, in my
opinion, the case at bar is not one of those cases, and but for the matter of the OSC proceedings,
this action passes the preferable procedure criterion for a class proceeding.
15. The Plaintiffs’ assertions amount, in effect, to a “heads I win, tails you
lose” proposition. The plaintiffs want to keep the financial benefit received
through the OSC Resolution and yet now seek to second guess that Resolution
to obtain more money. The plaintiffs benefited from the procedural
mechanism leading to the OSC Resolution and yet now seek to avoid the
conclusion of that Proceeding. This approach should be rejected on the basis
that it is contrary to fair and efficient resolution of disputes.
•
During oral argument, the Defendants submitted that from a public policy perspective, a
decision not to give full faith and credit to the work of the OSC would discourage other
efforts by the OSC to exercise its public interest mandate in a way that would benefit a
group of investors.
•
The Defendants submit that a class proceeding cannot be justified as the preferable
procedure on the basis of behaviour modification because behaviour modification was
already achieved by the OSC settlement agreements. (The Plaintiffs agree with the
submission that behaviour modification has been achieved.)
[213] I do not agree with many of the Defendants’ arguments.
[214] I do not agree with their arguments that presuppose that the Superior Court is not as
capable as the OSC to calculate the investors’ losses or that the court should be unwilling to
provide access to justice because the OSC has already dealt efficiently with the matter and
therefore judicial resources need not be expended. I do not agree with any arguments that lead to
justice being sacrificed on the alter of expediency.
[215] I do not agree that from a public policy perspective it would set a bad precedent and
discourage future efforts by the OSC to obtain compensation from investors. I have no reason to
believe that this decision will have any effect whatsoever on what the OSC does or what future
targets of OSC investigations will do. More to the point, the OSC settlement agreements
expressly did not interfere with the rights of the parties to bring court proceedings.
[216] I do not agree with the Defendants’ efficiency arguments, which I understand to be
fashioned by contrasting the known outcome of the OSC proceeding with the predicted outcome
of a class proceeding based on statistical evidence from other class actions. Thus, to do the math,
Mr. Berenblut, apparently, would contrast the $205.6 recovered by the OSC plus the $9.6 million
recovered by the Investment Dealers Association of Canada and the Mutual Fund Dealers
Association against a $116.3 million anticipated recovery in a class action; namely, 70% (30% is
for a contingency fee) of 20% of Dr. Zitzewitz’s largest estimate of the losses ($831 million).
[217] One quick answer to this slugging-percentage approach to preferable procedure is for
class counsel to simply predict a MVP award and career year for his class action, and who is to
doubt him.
2010 ONSC 296 (CanLII)
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[218] I do not agree with any arguments that suggest that the Plaintiffs and the investors are
being unfair, or perhaps piggish, in eating the cake of the OSC compensation and also having a
class action. The investors are not playing “heads I win, tails you lose.” They did not ask the
OSC to be their champion, and they did not do anything wrong in accepting the spoils secured by
the OSC’s campaign. The putative representative plaintiffs do no wrong in attempting to certify
their action as a class proceeding, and I have no reason to believe that they do not genuinely
believe that they were under-compensated.
Why the OSC Proceeding was the Preferable Procedure for the Circumstances of the Case at
Bar
[219] Where I do agree with the Defendants is that the OSC proceedings and settlement
agreements should not be ignored as a part of the preferable procedure analysis. And I also agree
that if regard is appropriately given to the OSC proceedings and settlement agreements and to
what is presently known about a class action to recover compensation for claims that would not
otherwise be economically feasible to pursue, then it is fair to conclude that a class action is not
the preferable procedure for the resolution of the claims of the investors.
[220] I will begin by explaining why the OSC proceedings and the settlement agreements ought
not to be ignored.
[221] The determination of preferable procedure involves two major tests. The first test is
whether a class proceeding would be a fair, efficient, and manageable procedure. In the case at
bar, for the reasons set out above, I have decided that the Plaintiffs have passed the first test. The
second test is whether a class proceeding is preferable to any alternative method of resolving the
class members’ claims, and it is this test that requires further inquiry, and the first step of the
inquiry is to ask whether the court should consider the OSC proceedings as part of the preferable
procedure analysis. My review of the case law indicates that the answer to this question is yes.
[222] In Hollick v. City of Toronto, [2001] 3 S.C.R. 158 at para. 31, Chief Justice McLachlin
stated that “the court cannot ignore the availability of avenues of redress apart from individual
actions” and that “the preferability analysis requires the court to look at all reasonable available
means of resolving the class members’ claims, and not just at the possibility of individual
actions.”
[223] Hollick was a proposed class action on behalf of residents in the vicinity of a landfill
operated by the City of Toronto who allegedly suffered from pollution. The landfill site was
operated under a certificate of approval that required the City to provide a trust fund for
individual claims of up to $5,000 for off-site impact. The action was not certified because,
among others, a class action was not the preferable procedure. The proposed class action failed
the preferability test because it was not a fair, efficient, and manageable procedure and
apparently it also failed the second test because Chief Justice McLachlin noted at para. 33 that
“since the Small Claims Trust Fund establishes a no-fault scheme, it is likely to provide redress
far more quickly than would the judicial system.”
2010 ONSC 296 (CanLII)
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[224] For present purposes, four points may be noted from the Hollick decision: (1) like the
situation in the case at bar, the alternative procedure was in place before the commencement of
the class action; (2) like the situation in the case at bar, the alternative procedure was a no-fault
scheme, while a class action would require proof of fault; (3) like the situation in the case at bar,
the alternative procedure and the remedy of the class proceeding were designed to provide
redress for an identical harm; and (4) the court did not ignore the alternative procedure in its
determination of the preferable procedure tests.
[225] The Hollick decision was mentioned by the Supreme Court of Canada in its
contemporaneously released judgment in Rumley v. British Columbia, [2001] 3 S.C.R. 184, in
which the Court dismissed an appeal of a decision of the British Columbia Court of Appeal that
had certified a class action on behalf of students of a residential school for deaf children who had
been victims of physical and sexual assaults. In this case, all the courts agreed that a
compensation program, known as the JICP, that had been established by the province was not a
suitable alternative to a class proceeding. Chief Justice McLachlin at para. 38 of her judgments
identified inadequacies in the JICP including the fact that it capped recovery to $60,000 per
complainant and it did not permit complainants to be represented by counsel before the
adjudicative panel. The Chief Justice stated: “The JICP simply cannot be said to be an adequate
alternative to a class proceeding.”
[226] The Hollick decision was applied by the Court of Appeal in Cloud v. Canada (Attorney
General) (2004), 73 O.R. (3d) 401 (C.A.). In Cloud, the Court of Appeal certified a class action
on behalf of former students of an aboriginal residential school for negligence against defendants
who were responsible for running the school. On the hearing of the appeal, the defendants sought
to file fresh evidence of an alternative dispute resolution system. Without ruling on whether the
fresh evidence should be admitted, Justice Goudge considered it and decided that it did not stand
in the way of certifying the class action as the preferable procedure. He rejected the alternative
dispute resolution system because: it had been unilaterally created by the defendants and could
be unilaterally withdrawn; it ignored certain heads of damages altogether; it capped recovery;
and it shared the access to justice problems of individual actions that were not preferable to a
representative proceeding.
[227] For present purposes, Cloud, demonstrates again that the court will consider all
alternatives to a class proceeding, and it demonstrates that the court will carefully analyze the
alternatives to determine whether they are genuinely preferable to a class proceeding. The
deficiencies identified in the Cloud case about the alternative procedure are not present in the
case at bar.
[228] The Hollick decision was applied by the Court of Appeal in Pearson v. Inco Limited
(2006), 78 O.R. (3d) 641 (C.A.). Pearson was a proposed class action against Inco for
environmental harm, and Justice Nordheimer refused certification. The plaintiffs, however,
substantially recast their claim, and when the appeal was argued, instead of seeking certification
of problematic physical and emotional harm claims, the proposed class action took aim at the
harm caused to land values by Inco’s alleged environmental contamination. The Court of Appeal
2010 ONSC 296 (CanLII)
Page: 42
certified the action and in doing so rejected Inco’s argument that its unilateral agreement to
participate in a remediation project provided a preferable procedure. Under this alternative
procedure, the class member’s property would be tested, and if an expert identified harm, then on
a no questions asked, no-fault basis, Inco would perform the necessary remediation. At para. 80
of his judgment in Pearson, Justice Rosenberger said that the defendants’ argument was a strong
argument; however, he said that the alternative remediation project did not address the core issue
of the lawsuit, which was the widespread damage to land values caused by past pollution. Thus,
after considering the defendant’s alternative procedure, which was viewed as a strong alternative
notwithstanding that it was a unilateral offering from the defendant, Justice Rosenberger decided
that it was not a preferable procedure.
[229] In Webb v. K-Mart Canada Ltd., (1999), 45 O.R. (3d) 389 (S.C.J.), a proposed class
action for wrongful dismissal was brought on behalf of 3,000 to 4,000 former employees. The
Defendant employer argued that the complaints procedure under employment standards
legislation was the preferable procedure. Justice Brockenshire rejected this argument because the
employees had already received their statutory entitlements and the statutory tribunal could not
offer them the remedy being sought, which was common law damages. He stated that the
investigative and adjudicative process under the statutory scheme would not be available to the
employees.
[230] The Webb case can be contrasted with Halabi v. Becker Milk Co. (1998), 39 O.R. (3d)
2662 (Gen. Div.), which was a proposed class action for the recovery of wages due under the
Employment Standards Act. In a very short judgment, Justice Southey concluded that
certification should not be granted where there is a procedure other than a class action that would
be preferable for the resolution of the common issues. He said that the complaints procedure
under the Employment Standards Act was quick and without cost to the employees and was
clearly preferable to a class action.
[231] In Bellaire v. Independent Order of Foresters, [2004] O.J. No. 2242 (S.C.J.), a proposed
class action was brought on behalf of life insurance policyholders who alleged that the insurer
had misrepresented that the price of the premiums would be constant. Before the commencement
of the proposed class action and possibly for the purpose of pre-empting it, the insurer had
introduced a program in which any policy holder with a complaint could apply for a policy
adjustment. The complaint would be assessed and the policy might then be adjusted. There was
an inexpensive appeal to an independent third-party adjudicator. Without deciding that the
complaints program was a preferable procedure, Justice Nordheimer held that it was relevant to
his decision that a class proceeding was not the preferable procedure. Justice Nordheimer stated
at para. 49 of his judgment:
In any event, it remains the fact that the MVP is a legitimate alternative form of
relief available to members of the proposed class. The MVP is easy to access and is
inexpensive to pursue. It appears to be procedurally and substantively fair. It does
not require the claimant to renounce his or her right to institute legal proceedings.
2010 ONSC 296 (CanLII)
Page: 43
Page: 44
[232] The British Columbia case of Bittner v. Louisiana-Pacific Corp., [1997] B.C.J. No.
2281 (S.C.), which was a products liability action, is similar to Bellaire in as much as the court
took into consideration that the defendant had established a complaints program that provided
compensation and waived several defences in deciding that a class action would not be the
preferable procedure. See also: Grace v. Fort Erie (Town), [2003] O.J. No. 3475 (S.C.J.), where
a complaints program was taken into account in the preferable procedure analysis in an action
with respect to a municipality’s supply of water contaminated by iron rust, and Williams v.
Mutual Life Assurance Co. (2003), 226 D.L.R. (4th) 112 (Ont. C.A.) at para. 42, an action with
respect to insurance premiums, where the Court of Appeal regarded the fact that the defendant
had established an alternative dispute program to deal with policyholder’s complaints as a
relevant although minor consideration in determining whether a class proceeding was needed in
order for the policyholders to have access to justice.
[233] In Brimner v. Via Rail Canada Inc. (2000), 50 O.R. (3d) 114 (S.C.J.), a proposed class
action was brought on behalf of passengers on a Via Rail train that were injured when the train
derailed. Via Rail opposed certification, and the major issue on the certification motion was
whether a settlement scheme proposed by Via Rail was the preferable procedure. Under the
scheme, Via Rail proposed a voluntary payment of $1,000 and, if the passenger wished more,
then there would be binding arbitration of the claims of the passenger and his or her family.
Justice Brockenshire decided that the settlement scheme was not the preferable procedure for a
variety of reasons, including the facts that how the scheme would operate was uncertain and the
scheme did not address the common issues raised by the passengers. However, Justice
Brockenshire was not categorical in dismissing settlement schemes as an alternative to class
actions. At para. 21 of his judgment he stated:
This is not to say that in all cases private attempts at resolution will be turned away
in a class action setting. Our courts frequently adjourn or delay steps in actions
because settlement is being discussed. It is indeed a policy of our courts to
encourage the private resolution of disputes. It may well be that in some future case,
a court sees a settlement system that is working or clearly will work so fairly,
efficiently and expeditiously that it would appear preferable to hold back on
certification or even refuse certification to allow the other process to continue.
[234] From this review of the case law, I draw two modest conclusions. First, it is appropriate
to consider the OSC proceedings and settlement agreements as part of the analysis of whether a
class proceeding to resolve the investors’ claims would be the preferable procedure. Second, in
considering any alternative procedure, the court should consider a variety of open-ended factors
to determine whether it is a genuine alternative that serves the purposes of a class proceeding;
namely, access to justice, behaviour modification, and judicial economy.
2010 ONSC 296 (CanLII)
And for those persons who did not avail themselves of the MVP, there remains an
ongoing complaints process which they can utilize.
[235] These conclusions bring me to the next two steps of the second part of the preferable
procedure analysis, which are to consider whether the OSC proceedings and settlement
agreements genuinely address the purposes of a class proceeding and to compare and contrast the
choices of the OSC proceedings and settlement agreements on the one hand and a class
proceeding on the other.
[236] I begin this analysis with the purpose of behaviour modification. It is acknowledged by
both parties that the OSC proceedings and the payment of $205.6 million under the settlement
agreements have accomplished this purpose of the Class Proceedings Act, 1992, not only for the
Defendants but for fund managers of other mutual funds. If the mutual fund industry did not
know before the OSC’s Probe, which culminated in a $205.6 million payment from fund
managers to their investors, that market timing required a response from fund managers, the
industry has acquired that knowledge as a result of the OSC proceedings and the settlement
agreements.
[237] Turning to the purpose of judicial economy, this goal of the of the Class Proceedings Act,
1992 needs to be properly understood and put into the context of the case at bar. The idea behind
judicial economy is not to spare the courts from their job of dispensing justice. The idea behind
judicial economy is the desirability of avoiding a multiplicity of proceedings, the duplication of
effort, and the disrepute of inconsistent results when courts or tribunals might decide similar
matters differently.
[238] In the case at bar, standing alone, the OSC proceedings and settlement agreement
provided judicial economy because the settlement agreements and the plans of distribution
provided compensation to all of the investors for the harm they suffered in an efficient,
principled, and consistent way. In this regard, it should be noted that under the plans of
distribution the $205.6 million, which was the OSC’s measure of the harm suffered by the
investors, was allocated proportionately amongst the adversely affected investors under a rule of
calculation that determined individual adverse affects and then totaled the adverse affects for all
investors excluding those who were disruptive market timers. The OSC proceedings provided
compensation for a group of individual claims.
[239] In the case at bar, a class action would also provide judicial economy for the resolution of
the investors’ claims.
[240] These conclusions lead to the next question of whether from the more global perspective
of combining the OSC’s jurisdiction and the court’s jurisdiction, judicial economy would be
achieved if a class action were now certified. At first blush, the answer to this question would
appear to be no because it must be a waste of resources to have a second resolution of a matter
that has already been resolved. That answer then feeds the Defendants’ argument that a class
proceeding would be redundant and a waste of judicial resources and thus not satisfy the purpose
of judicial economy.
2010 ONSC 296 (CanLII)
Page: 45
Page: 46
[242] The Plaintiffs argue that access to justice was not achieved because the OSC proceedings
and settlement agreements provided under-compensation for the harm the investors suffered.
While reserving the right to submit that there should have been no compensation because they
committed no civil wrong, the Defendants argue that regardless of whether the $205.6 million is
high or low, the investors have had access to justice and, accordingly, a class action is not the
preferable procedure. Thus, the real issue in this case is not judicial economy but access to
justice. In other words, if there was access to justice then it was accompanied by judicial
economy, but, if there was not access to justice, then a class proceeding would provide it along
with judicial economy.
[243] Thus, the ultimate question is did the OSC proceedings and settlement agreements
provide access to justice for the investors. For the reasons that follow, I conclude that the answer
to this question is yes.
[244] I begin here by noting that access to justice is not limited to access to a judgment. If
access to justice were defined to only mean access to an adjudication, then by this definition,
most class actions would not provide access to justice because most class actions, and indeed
most actions of any sort, settle. Courts are dispensing justice when they approve a settlement,
and the facilitation and encouragement of settlements is a high value in the administration of
justice where the modern rules of procedure (the vehicle for access to justice) include such
procedures as pre-trial conferences, settlement conferences, and mandatory mediation. The
settlement of complex litigation is encouraged by the courts and favoured by public policy:
Ontario New Home Warranty Program v. Chevron Chemical Co. (1999), 46 O.R. (3d) 130
(S.C.J.); Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd. (2005), 74 O.R. (3d) 758 (S.C.J.)
at para. 111; Amoco Canada Petroleum Co. v. Propak Systems Ltd. (2000), 200 D.L.R. (4th) 667
(Alta. C.A.) at p. 677; J.M. v. W.B., [2004] O.J. No. 2312 (C.A.) at para. 65; Sparling v. Southam
Inc. (1988), 66 O.R. (2d) 225 (H.C.J.) at p. 230.
[245] In the cases that I reviewed above, the courts did not regard settlements or compensation
schemes that did not include adjudication in whole or in part as irrelevant to the consideration of
whether access to justice had been achieved by the proposed alternative to a class action. Rather,
the courts scrutinized the alternative closely against a variety of open-ended factors.
[246] If I make that analysis in the case at bar and examine the OSC proceedings and settlement
agreements, I observe that the OSC Staff and the OSC gave itself the mission of obtaining
restitutionary compensation for the harm suffered by the investors. The Plaintiffs in the case at
bar do not have the argument raised in some of the cases that I discussed above that the proposed
alternative to a class action would give the claimant a substitute (for example, remediation of
environmental harm) rather than the actual remedy that they sought (for example, damages for
the diminishment in property value caused by the economic harm.) During argument, the
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[241] However, in my opinion, the answer to the question is not that simple and the correct
answer is that judicial economy is not the determinative factor in the case at bar.
Page: 47
[247] If the case at bar were certified as a class action, practically speaking, the Defendants’
$205.6 million payment would be like the former payment into court procedure, which existed
before the current offer to settlement regime, and the payment would exert considerable
settlement pressure, which, in turn, suggests that the investors have had access to justice and
might not press this matter on to an adjudication.
[248] I next observe that in the pursuit of compensation for the investors, the OSC Staff played
much the same role as would be played by class counsel in a class proceeding. Like Class
Counsel, the OSC Staff took an adversarial stance (backed by the weapons provided by the
OSC’s enforcement jurisdiction) and demanded concessions and the payment of compensation
for the investors from the Defendants.
[249] Further, the OSC Staff had the expertise and it committed the human resources to
vigorously and diligently pursue obtaining compensation for the harm suffered by the investors.
Indeed, it appears that the Mutual Fund Probe was an unprecedented commitment by the OSC.
[250] Further, whatever criticism may be made of the quantum of the compensation provided
by the OSC’s settlement agreements, those agreements left nothing on the table about the
Defendants’ responsibility (liability) to the investors. In this regard, it may be noted that in some
of the cases reviewed above the court took into consideration whether or not the alternative to a
class action involved a no-fault scheme in the sense that the defendant’s liability was assumed.
[251] My next observation about access to justice is that some of the factors that a court
considers when it approves a settlement in a class proceeding may be relevant to the preferable
procedure analysis of whether an alternative procedure is preferable.
[252] During the oral argument, the relevance of the court’s approach to settlement approval in
the context of a preferable procedure analysis was much debated. The Plaintiffs took the position
that the debate over whether the OSC proceeding was the preferable procedure could not and
should not be converted into a settlement approval hearing where the court considers whether a
settlement is in the best interests of the class members. On this point, I agree with the Plaintiffs.
However, while I agree that it is not now for this court to opine on whether the OSC’s settlement
agreements would have been approved under the Class Proceedings Act, 1992, it does not follow
that when a court considers the issue of preferable procedure and the issues of behaviour
modification, judicial economy and access to justice, it should not consider the criteria that a
court considers when it approves or refuses to approve a settlement.
[253] When considering the approval of negotiated settlements, the court may consider, among
other things: (a) likelihood of recovery or likelihood of success; (b) amount and nature of
discovery, evidence or investigation; (c) settlement terms and conditions; (d) recommendation
and experience of counsel; (d) future expense and likely duration of litigation and risk; (e)
2010 ONSC 296 (CanLII)
Plaintiffs said that the $205.6 million was just a good start, but they did not argue that OSC had
provided a remedy different than the one they would be pursuing in a class action.
recommendation of neutral parties, if any; (f) number of objectors and nature of objections; (g)
the presence of good faith, arms length bargaining and the absence of collusion; (h) the degree
and nature of communications by counsel and the representative plaintiffs with class members
during the litigation; and (i) information conveying to the court the dynamics of and the positions
taken by the parties during the negotiation: Dabbs v. Sun Life Assurance Company of Canada
(1998), 40 O.R. (3d) 429 (Gen. Div.) at 440-44, aff’d (1998), 41 O.R. (3d) 97 (C.A.), leave to
appeal to the S.C.C. ref’d, [1998] S.C.C.A. No. 372; Parsons v. The Canadian Red Cross
Society, [1999] O.J. No. 3572 (S.C.J.) at paras. 71-72; Frohlinger v. Nortel Networks Corp.,
[2007] O.J. No. 148 (S.C.J.) at para. 8; Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd.
(2005), 74 O.R. (3d) 758 (S.C.J.) at para. 117; Sutherland v. Boots Pharmaceutical plc, [2002]
O.J. No. 1361 (S.C.J.) at para. 10.
[254] To the extent that these criteria can be applied to the circumstances of the case at bar with
the exception of communication to class members during the OSC proceedings, they favour the
conclusion that the OSC proceeding was the preferable procedure.
[255] These observations taken separately or taken together provide sufficient reasons for
concluding that the OSC proceedings and the settlement agreements satisfied the access to
justice purposes of the Class Proceedings Act, 1992. However, the Plaintiffs still have their
argument that the quality of the access to justice is in doubt because the OSC may have left the
investors’ money on the table.
[256] The Defendants response or counter to this argument was to make two arguments. First,
the Defendants argue that this court should not second-guess the access to justice provided by the
OSC once the court was satisfied that the OSC’s purpose was to obtain restitutionary
compensation for the harm suffered by the investors and the process to do so was adequate.
Second, in an argument advanced during the hearing mainly by Templeton’s counsel, the
Defendants argued that qualitatively the settlement agreements fully compensated the investors
for their losses and that there was no compromise in this regard.
[257] I agree with the Defendants’ first argument and it provides another separate reason in
support of my conclusion that concluding that the OSC proceedings and the settlement
agreements satisfied the access to justice purposes of the Class Proceedings Act, 1992.
[258] I, however, do not agree with the Defendants’ second argument. With respect to the
second argument, it is neither possible nor permissible to determine on this certification motion
whether the settlement agreements fully compensated the investors because to do so the court
would have to decide the merits of the investors’ action and actually to quantify their damages.
[259] In my opinion, both parties’ money or no money left on the table arguments are
problematic as a measure of access to justice because the Plaintiffs’ argument assumes the
Defendants are liable and the Defendants’ counterargument about the quality of the recovery
assumes that the quantum closely approached the correct sum payable. In any event, I do not rely
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Page: 48
Page: 49
[260] Based on the arguments that I do rely on, I conclude, therefore, that the Plaintiffs have
not satisfied the second branch of the preferable procedure criteria of the test for certification.
Representative Plaintiffs
[261] The fifth criterion for certification is that there is a representative plaintiff who would
adequately represent the interests of the class without conflict of interest and who has produced a
workable litigation plan.
[262] The representative plaintiff must be a member of the class asserting claims against the
defendant, which is to say that the representative plaintiff must have a claim that is a genuine
representation of the claims of the members of the class to be represented or that the
representative plaintiff must be capable of asserting a claim on behalf of all of the class members
as against the defendant: Drady v. Canada (Minister of Health) [2007] O.J. No. 2812 (S.C.J.) at
paras. 36-45; Attis v. Canada (Minister of Health), [2003] O.J. No. 344 (S.C.J.) at para. 40, aff’d
[2003] O.J. No. 4708 (C.A.).
[263] Provided that the Representative Plaintiff has his or her own cause of action, the
Representative Plaintiff can assert a cause of action against a defendant on behalf of other class
members that he or she does not assert personally, provided that the causes of action all share a
common issue of law or of fact: Boulanger v. Johnson & Johnson Corp., [2002] O.J. No. 1075
(S.C.J.) at para. 22, leave to appeal granted, [2002] O.J. No. 2135 (S.C.J.), varied (2003), 64
O.R. (3d) 208 (Div. Ct.) at paras. 41, 48, varied [2003] O.J. No. 2218 (C.A.); Matoni v. C.B.S.
Interactive Multimedia Inc., [2008] O.J. No. 197 (S.C.J.) at paras. 71-77; Voutour v. Pfizer
Canada Inc., [2008] O.J. No. 3070 (S.C.J.); LeFrancois v. Guidant Corp, [2008] O.J. 1397
(S.C.J.) at para. 55.
[264] Whether the representative plaintiff can provide adequate representation depends on such
factors as: his or her motivation to prosecute the claim; his or her ability to bear the costs of the
litigation; and the competence of his or her counsel to prosecute the claim: Western Canadian
Shopping Centres Inc. v. Dutton, [2001] 2 S.C.R. 534 at para. 41.
[265] The production of a workable litigation assists the court in determining whether the class
proceeding is the preferable procedure and it allows the court to determine whether the litigation
itself is manageable in its constituted form: Carom v. Bre-X Minerals Ltd. (1999), 44 O.R. (3d)
173 (S.C.J.) at p. 203, aff’d (1999) 46 O.R. (3d) 315 (Div. Ct.), varied on other grounds (2000),
51 O.R. (3d) 236 (C.A.), application for leave to appeal to the S.C.C. refused October 18, 2001.
[266] The litigation plan must provide sufficient detail that corresponds to the complexity of
the litigation: Carom v. Bre-X Minerals Ltd. (1999), 44 O.R. (3d) 173 (S.C.J.) at p. 203.), aff’d
(1999) 46 O.R. (3d) 315 (Div. Ct.), rev’d. on other grounds (2000), 51 O.R. (3d) 236 (C.A.),
application for leave to appeal to the S.C.C. refused October 18, 2001; Price v. Panasonic
2010 ONSC 296 (CanLII)
on any of these qualitative arguments because there is no way to test their soundness or truth
short of an actual adjudication.
Page: 50
[267] Litigation plans are something of a work in progress and may have to be amended during
the course of the proceedings: Cloud v. Canada (Attorney General) (2004), 73 O.R. (3d) 401
(C.A.) at para. 95, leave to appeal to the S.C.C. refused, [2005] S.C.C.A. No. 50, rev’g (2003),
65 O.R. (3d) 492 (Div. Ct.).
[268] In the case at bar, the Defendants challenge the qualifications of the Plaintiffs to be
Representative Plaintiffs. The basis of this challenge is the submission that the interests of the
Representative Plaintiffs conflicts with the interests of other class members on the common
issues.
[269] For example, it is submitted that four of the five proposed Representative Plaintiffs
invested in RSP accounts and therefore cannot fairly represent class members in non-RSP
accounts. For other examples, it is submitted that a Representative Plaintiff who still holds units
could not represent class members who do not and a Representative Plaintiff who would not
meet a newly proposed de minimis threshold in the litigation plan could not represent those who
could meet the new threshold.
[270] In my opinion, this argument is without merit for at least four reasons. First, given that
for the reasons set out above, there would be no common issues about the assessment of
damages, therefore, there cannot be any conflict among class members about the distribution of
the judgment and in any event, as noted earlier in this judgment, the court has powers to deal
with problems of judgment distribution. Second, the supposed conflicts do not affect the
common issues that remain, for which the Representative Plaintiffs have common cause with
their class. Third, the supposed conflicts are entirely speculative. Fourth, the Representative
Plaintiffs do not have to have the identical cause of action as class members and, therefore, a
Representative Plaintiff for one of a Defendant’s mutual funds can be a Representative Plaintiff
for others who invested in another of that Defendant’s mutual funds.
[271] The Defendants also challenge the adequacy of the Plaintiffs’ proposed litigation plan,
particularly its proposals for a plan of distribution and its treatment of the resolution of the
common issues. There is merit to this challenge, but the Plaintiffs have not had an opportunity to
revise the litigation plan in light of the common issues that would actually be proceeding. Thus,
for instance, it is premature to criticize the details of a distribution plan that would come after the
resolution of the common issues.
[272] The class action that might have proceeded is similar to those in which the court is asked
to resolve some complex questions about duty of care or fiduciary duties and about whether
those duties have been breached but with individual trials to follow. Litigation plans for
comparable cases have been approved, and all litigation plans are subject to revision and
adjustment as the litigation progresses. The OSC proceedings demonstrate that a bifurcated
2010 ONSC 296 (CanLII)
Canada Inc., [2002] O.J. No. 2362 (S.C.J.); Public Service Alliance of Canada Pension Plan
Members v. Public Service Alliance of Canada, [2005] O.J. No. 2693 (S.C.J.).
Page: 51
[273] In these circumstances, for the case at bar, in my opinion, had the action been the
preferable procedure, the appropriate thing to do would have been to certify the class action
conditionally on the court approving a revised litigation plan.
Conclusion
[274] In the result, I dismiss the Plaintiffs’ motion.
[275] If the parties cannot agree about costs, they may make submissions in writing beginning
with the Defendants’ submissions within 20 days after the release of these Reasons for Decision,
with the Plaintiffs’ submissions to follow within a further 20 days.
[276] Order accordingly.
____________________
Perell, J.
Released: January 12, 2010
2010 ONSC 296 (CanLII)
process can productively advance the resolution of the claims and the same would be expected of
a class action.
2010 ONSC 296 (CanLII)
CITATION: Fischer v. IG Investment, 2010 ONSC 296
COURT FILE NO.: 06-CV-307599CP
DATE: 20100112
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DENNIS FISCHER, SHEILA SNYDER,
LAWRENCE DYKUN, RAY SHUGAR and
WAYNE DZEOBA
Plaintiffs
- and IG INVESTMENT MANAGEMENT LTD., CI
MUTUAL FUNDS INC., FRANKLIN
TEMPLETON INVESTMENT CORP., AGF
FUNDS INC and AIC LIMITED
Defendants
REASONS FOR JUDGMENT
Perell, J.
Released: January 12, 2010