ONCA Dismisses Market Timing Appeal

The Court of Appeal for Ontario released its decision in Fischer v. IG Investment Management Ltd., 2012 ONCA 47, an appeal from a certification decision involving “market timing” in certain mutual funds managed by CI Mutual Funds Inc. (“CI”) and AIC Limited (“AIC”). Market timing is alleged to have caused long-term investors in the affected mutual funds to suffer losses in the value of their investments of several hundred million dollars.

Before the class action was commenced, the Ontario Securities Commission (“OSC”) conducted an investigation into the practice of market timing in the mutual fund industry. The investigation led the OSC to bring enforcement proceedings against AIC and CI, as well as three other mutual fund managers who were named as defendants in the proposed class action. (The class action against these other three defendants settled following the denial of certification, prior to the hearing of the appeal before the Divisional Court.)

All of the defendant fund managers entered into settlement agreements with the OSC staff. The terms of the settlements required the five defendants to pay $205.6 million to investors in the relevant mutual funds. For purposes of the OSC settlement agreements, the defendants admitted that: they entered into arrangements with third-party investors who engaged in market timing; the market timers made profits that adversely affected investors in the relevant mutual funds; and the defendants earned commissions from their arrangements with the market timers. These factual admissions were made on the basis that they were “without prejudice” to the defendants in “any civil or other proceedings which may be brought.”

Hearings, which were conducted in camera, were then held before a panel of the OSC which approved the settlement agreements as being in the public interest pursuant to s. 127 of the Securities Act.

After the settlements were approved, the plaintiffs brought a motion for certification of a class action. The central contentious issue on the motion was whether the proposed class action met the preferable procedure criterion in s. 5(1)(d) of the Class Proceedings Act, 1992 (“CPA”). The motion judge concluded that although the action otherwise satisfied the criteria for certification, it did not satisfy the preferable procedure requirement. In the motion judge's view, the completed OSC proceedings and settlement agreements fulfilled the judicial economy, access to justice and behaviour modification objectives of the CPA.

On appeal, the Divisional Court disagreed and granted the motion for certification subject to certain specified conditions. Writing for the court, Justice Anne Molloy held that the OSC proceedings could not be the preferable procedure for recovering damages because the investors' action was for significant monetary damages beyond the amount that had been recovered through the OSC proceedings. The Court was satisfied that the class action was the only viable procedure for recovering these substantial additional damages.

The appellant fund managers, AIC and CI, appealed, with leave of the Court of Appeal, from the Divisional Court's order granting certification of the class action. The Court of Appeal heard the appeal on December 6, 2011.

In dismissing the appeal, a unanimous panel of the Court of Appeal rejected the appellants' submission that the Divisional Court erred in concluding that the class action was a preferable procedure to the OSC proceedings. Chief Justice Warren Winkler, writing for the Court, set out the following two-stage approach in considering whether an alternative procedure for resolving class members' claims can be said to be preferable to a class action. First, the court must examine the fundamental characteristics of the proposed alternative proceeding, such as the scope and nature of the jurisdiction and remedial powers of the alternative forum, the procedural safeguards that apply, as well as the accessibility and transparency of the alternative proceeding. Second, it was held that the court must then compare these characteristics to those of a class proceeding in order to determine which is the preferable means of fulfilling the three policy objectives of the CPA.

Further, in considering the alternative procedure, the Court of Appeal held that the courts below erred by focusing on the substantive outcome of the OSC proceedings, which was held not to be a relevant factor in the comparative analysis under s. 5(1)(d) of the CPA. It was noted that the courts ought instead to have considered the regulatory nature of the OSC's jurisdiction and its remedial powers, as well as the lack of participatory rights afforded to affected investors by the OSC proceedings. In the Court's view, a consideration of these two particular characteristics compelled the conclusion that the OSC proceedings would not fulfill the CPA goal of providing class members with access to justice in relation to their claims.

In terms of the regulatory nature of the OSC proceedings, the Court of Appeal noted that the purpose of the OSC's public interest jurisdiction under s. 127 of the Securities Act is not intended to serve as a compensatory or remedial provision with respect to harm suffered by individual investors; rather, this provision is protective and preventative, intended to be exercised to prevent likely future harm to Ontario's capital markets.

With respect to the participatory rights of investors, the Court of Appeal recognized that investors did not participate in the OSC proceedings and were not parties to the OSC process. As a result, the OSC in approving the settlements did not – and could not – bar the claims of the investors.

The Court then contrasted the procedure under class actions noting that the representative plaintiff conducts the litigation on behalf of class members under court supervision and within the presumptive principle of an open court. While it was recognized that class members do not directly participate in common issues trials, the representative nature of the class action procedural vehicle was contrasted as a “very far cry” from the complete absence of participation by investors in the proceedings of the OSC.

Finally, the Court rejected the distinction made by the motion judge between procedural fairness and access to justice, holding that “access to justice by the investors surely could not be achieved through the completion of a process that was not made accessible to them.”

Joel Rochon, Peter Jervis and Sakie Tambakos of Rochon Genova LLP represented the plaintiffs/respondents.

Benjamin Zarnett, Jessica Kimmel and Melanie Ouanounou of Goodmans LLP represented the appellant, CI Mutual Funds Inc.

James Douglas, David Di Paolo and Heather Pessione of Borden Ladner Gervais LLP (BLG) represented the appellant, AIC Limited.


Joel P. Rochon Heather Pessione Benjamin Zarnett James D.G. Douglas David Di Paolo Sakie Tambakos Jessica A. Kimmel Melanie Ouanounou Peter R. Jervis