Mutual fund class-action lawsuit OK'd by Supreme Court
AIC Ltd. and CI Mutual Funds Inc. have already paid out millions to investors
Canada's highest court will allow a class-action lawsuit involving two of Canada's largest financial companies to go ahead.
In a 7-0 decision, the Supreme Court ruled on Thursday that a class-action suit can proceed against mutual fund firms AIC Ltd. and CI Mutual Funds Inc.
Those two were among five companies that financial regulator the Ontario Securities Commission found to have allowed some investors to have engaged in "market timing" practices that hurt other investors in some of the companies' mutual funds.
Market timing is a term that is sometimes used to describe rapid, short-term trading activity designed take advantage of perceived discrepancies in the price of stocks.
In the case in question, the plaintiffs allege that market timing activity cost them more than $400 million.
The fund companies have already paid more than $200 million to settle the issue, but a number of investors didn't agree with the settlement and pursued an additional class-action lawsuit for more compensation.
A lower court judge initially denied the suit, but that was overturned by other courts and now the Supreme Court has ruled the suit can proceed.
"There is not much question about what the mutual fund companies had done, The questions was should the investors also be permitted to begin a class action, when they’ve already obtained some compensation," said Brian Radnoff, a commercial litigation partner at Lerners LLP in Toronto.
In an interview with CBC's Lang & O'Leary Exchange, he said the companies made an admission of wrongdoing when they settled with the securities commission.
"Market funds – at least in this point in time – were all valued at a particular point in the afternoon – 4 p.m. And the mutual fund companies could go out into the market, knowing what was going to happen and take advantage of that. They would take advantage of that and cause losses for the investors in the mutual funds," he told CBC.
Because the class action has gone ahead, companies might not be so keen to settle with securities regulators in future, Radnoff said.
"This is an important case because it deals with the intersection between provincial securities proceedings and the ability to bring a class action based on the same conduct," Radnoff said. "It will likely have a significant impact on the number of securities class actions in Canada in the future."
Three of the five firms involved have already settled, leaving the suit to go ahead against AIC and CI. The companies have already paid millions of dollars in compensation in the case.
One expert named in the case files says under his one method of calculation, losses endured by investors because of the market timing activities were estimated at $192.6 million for AIC’s investors and $349.3 million for CI’s investors.
The judge estimated that the size of the class could be as high as 264,036 people with AIC and 803,903 people with CI.
Writing for the court, Justice Thomas Cromwell said the original judge was wrong to have barred the class-action suit.
"I agree with the Divisional Court and the Court of Appeal that the motion judge erred in principle in his analysis and that this justified appellate intervention in his exercise of discretion to refuse certification," Cromwell wrote.
"As I see it, the correct legal principles support those courts' decision to certify the proposed class action."
- A previous version of this story contained incorrect information about the definition of market timing and some of the details of this specific case. The story has been updated with the correct information.Dec 12, 2013 3:36 PM ET
With files from CBC News