SCC ruling favours class actions for restitution, but allows for alternatives
By David Dias
The Supreme Court's ruling last December in AIC Ltd. v. Fischer would seem to have put an end to the notion that a regulatory settlement, redistributed to victims of misconduct, could somehow stave off a class action. But a close reading of the judgment may have left a crack open for public issuers looking to avoid a second round of tense negotiations.
The case stems from an OSC investigation into a number of mutual fund companies, which were alleged to have condoned “market timing,” a practice involving quick end-of-day trades that hurts long-term investors by generating transaction costs.
Having found that the misconduct enriched fund companies at the expense of investors, the securities commission entered into settlement negotiations, eventually extracting $200 million from the fund companies.
That figure, however, didn't cover the losses of investors, according to lawyers at class action firm Rochon Genova LLP, and the firm promptly filed a motion to certify a class action. The fund companies appealed, arguing that a significant settlement had already been reached. Those appeals were dismissed, and the dismissals upheld by the Supreme Court.
Peter Jervis, senior counsel at Rochon Genova, represented potential class members before the court. He says that participation and transparency were key factors in the ruling. “The investors were not at the table at these private negotiations,” he says. “They didn't even know about them. They were done privately, in camera, with counsel for the mutual funds and counsel for the securities commission.”
That being said, Justice Thomas Cromwell's decision was tightly focused on principles of justice – not legislative jurisdiction – so the ruling leaves an opening whereby issuers might avoid a class action. The decision states: “The substantive outcome of the OSC proceeding cannot be dismissed as irrelevant to the question of whether the OSC proceedings addressed the access to justice barrier …”
In other words, while the process in this case didn't provide sufficient access to justice, there's nothing precluding the possibility that another settlement process – perhaps one where victims of misconduct are allowed some form of participation – will be deemed preferable to a class action.
That's a significant departure from the ruling handed down at the Ontario Court of Appeal level by former Chief Justice Warren Winkler, who accepted the respondents' argument that the outcome of the securities commission proceeding was irrelevant – whatever the process or the settlement figure – because the commission had no legal mandate to offer restitution to victims of misconduct.
It's a point that Benjamin Zarnett, the Goodmans LLP partner who represented CI Mutual Funds Inc., is ready to jump all over. “They're very clear in saying that the suggestion that the OSC proceeding here was irrelevant — that that was incorrect. It had to be considered and weighed. … For a process to be the preferable procedure process, it will have to meet the standard of the SCC. We now have the guideline.”
Jervis allows that there's a possibility, if only a remote one: “If there was virtually full compensation in a process where there had been some access to procedural rights for class members, the court could say, ‘Looking back at the dollar amounts and looking at the procedural rights afforded in the entire context, that's sufficient. We don't need a class proceeding.”
By David Dias
The Supreme Court's ruling last December in AIC Ltd. v. Fischer would seem to have put an end to the notion that a regulatory settlement, redistributed to victims of misconduct, could somehow stave off a class action. But a close reading of the judgment may have left a crack open for public issuers looking to avoid a second round of tense negotiations.
The case stems from an OSC investigation into a number of mutual fund companies, which were alleged to have condoned “market timing,” a practice involving quick end-of-day trades that hurts long-term investors by generating transaction costs.
Having found that the misconduct enriched fund companies at the expense of investors, the securities commission entered into settlement negotiations, eventually extracting $200 million from the fund companies.
That figure, however, didn't cover the losses of investors, according to lawyers at class action firm Rochon Genova LLP, and the firm promptly filed a motion to certify a class action. The fund companies appealed, arguing that a significant settlement had already been reached. Those appeals were dismissed, and the dismissals upheld by the Supreme Court.
Peter Jervis, senior counsel at Rochon Genova, represented potential class members before the court. He says that participation and transparency were key factors in the ruling. “The investors were not at the table at these private negotiations,” he says. “They didn't even know about them. They were done privately, in camera, with counsel for the mutual funds and counsel for the securities commission.”
That being said, Justice Thomas Cromwell's decision was tightly focused on principles of justice – not legislative jurisdiction – so the ruling leaves an opening whereby issuers might avoid a class action. The decision states: “The substantive outcome of the OSC proceeding cannot be dismissed as irrelevant to the question of whether the OSC proceedings addressed the access to justice barrier …”
In other words, while the process in this case didn't provide sufficient access to justice, there's nothing precluding the possibility that another settlement process – perhaps one where victims of misconduct are allowed some form of participation – will be deemed preferable to a class action.
That's a significant departure from the ruling handed down at the Ontario Court of Appeal level by former Chief Justice Warren Winkler, who accepted the respondents' argument that the outcome of the securities commission proceeding was irrelevant – whatever the process or the settlement figure – because the commission had no legal mandate to offer restitution to victims of misconduct.
It's a point that Benjamin Zarnett, the Goodmans LLP partner who represented CI Mutual Funds Inc., is ready to jump all over. “They're very clear in saying that the suggestion that the OSC proceeding here was irrelevant — that that was incorrect. It had to be considered and weighed. … For a process to be the preferable procedure process, it will have to meet the standard of the SCC. We now have the guideline.”
Jervis allows that there's a possibility, if only a remote one: “If there was virtually full compensation in a process where there had been some access to procedural rights for class members, the court could say, ‘Looking back at the dollar amounts and looking at the procedural rights afforded in the entire context, that's sufficient. We don't need a class proceeding.”
Lawyer(s)
Benjamin Zarnett
Peter R. Jervis
Firm(s)
Goodmans LLP
Rochon Genova