Toronto lawyer files class-action suit over market timing
A Toronto law firm has launched a class-action lawsuit against four mutual fund companies that allowed their traders to participate in the controversial practice of market timing.
Joel Rochon, a partner at Rochon Genova LLP, filed the action in Ontario Superior Court of Justice on Wednesday, claiming damages that he said would total "hundreds of millions of dollars."
The lawsuit names four prominent mutual fund companies: IG Investment Management Ltd., CI Mutual Funds Inc., Franklin Templeton Investments Corp. and AGF Funds Inc. Rochon said 17 Canadian mutual funds were implicated in the market-timing scandal between 1998 and 2003. He said he may add AIC Inc. to the list of defendants later.
At least one of the defendants poured scorn on the lawsuit Wednesday. "It's a bit of a joke," Stephen MacPhail, president of CI Financial, told CBC.ca.
"There is absolutely no merit in it. I'm guessing they hope to stir up some small settlement. It's an absolutely, ludicrous claim."
IG, CI and AGF settled with the Ontario Securities Commission last December in a deal which saw $97.7 million go to investors who were hurt by the market-timing actions. AIC settled for $58.8 million at that time and Franklin Templeton followed four months later with a pay-out of $49.1 million.
- FROM DEC. 16, 2004: Regulators assess $203.2 million in penalties over market timing
The settlement was the largest ever reached by market regulators in Canada. But Rochon claims these settlements drastically understate the losses suffered by long-term unit holders. He also alleges that the four mutual funds breached their fiduciary duties to unit-holders and were negligent in allowing market timing.
Market timing occurs when mutual fund securities are bought and sold quickly to take advantage of short-term discrepancies between the current price of a security that may be trading in overseas markets and the stated value of the security as held by the fund.
While market timing is not contrary to securities laws, the OSC sees several problems with the practice.
The fund companies all had policies designed to discourage short-term trading. The funds were supposed to charge unit-holders fees of two to three per cent if they held their units for less than 90 days. That was meant to compensate the funds for the extra costs incurred by rapid trading. But those fees were usually not levied.
As a result, the OSC said some institutional traders in the funds were able to ring up huge profits.
"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 unit-holders of these foreign funds is adversely affected," the OSC said at the time of the settlement.