On January 27, the Court of Appeal released its decision in Fischer v. IG Investment Management,1 upholding the decision of the Divisional Court to certify the class action.2 The main issue in this case is whether the class action should be certified in light of a settlement with the Ontario Securities Commission (OSC) which already provided the plaintiffs with a payment of $205.6 million. The motions judge refused to certify the class action on the basis that a class proceeding was not the preferred procedure given that access to justice had already been secured.3 However, this decision was reversed by the Divisional Court, and the Court of Appeal agreed with the conclusion of the Divisional Court but for different reasons.
In Fischer, the plaintiffs alleged that the defendant mutual fund managers permitted market timing to occur in the mutual funds which they managed. Market timers purchase mutual funds they believe are undervalued for a short-term turnaround, using time zone differences and the fact that the daily value of a mutual fund is only calculated once a day. While market timing is not illegal, the profit made by market timers is at the expense of long-term investors. In November 2003, the OSC launched an investigation into these practices and subsequently took enforcement proceedings against the defendant mutual fund managers for failing to act in the public interest. All of the defendants entered into settlement agreements with the OSC, pursuant to which they paid $205.6 million compensation to their investors; those investors constitute the majority of the class members.
The plaintiffs argued that the OSC settlements did not amount to full compensation, as the actual damages suffered could be as high as $831.9 million (based on an expert report filed at the certification hearing). The plaintiffs also relied on the fact that they had not participated in the OSC negotiations, nor were they signatories to the OSC settlement agreements, to argue that they had not yet had their day in court and the action should be certified so the balance of the monies owing could be recovered.
One of the requirements for certification of a class proceeding is that a class action must be the preferable procedure for resolution of the common issues. The defendants argued that the preferred procedure was the already completed OSC proceeding with its $205.6 million settlement.
At first instance, Justice Perell agreed with the defendants and dismissed the motion for certification, finding that the OSC proceeding and settlement agreements had provided access to justice for the investors, and achieved one of the main purposes of class actions: behaviour modification. However, Justice Molloy, writing for the Divisional Court, overturned the decision, finding that Justice Perell's analysis of the impact of the OSC settlement on the issue of preferable procedure was "fundamentally flawed as a question of law". Justice Molloy found that there was some basis to the plaintiffs' position that they were still owed damages in excess of the OSC settlement amount and, once this was established, the Court found that the purpose of the OSC proceeding and its findings were "wholly irrelevant" to the analysis.
The Court of Appeal's Decision
The central issue considered by the Court of Appeal was whether the proposed class action met the preferable procedure criterion. The Court concluded that it did, and since Justice Perell had originally found that the other criteria for certification were met, the proposed class action was certified.
The Court of Appeal provided guidance on how the preferable procedure inquiry should be conducted. The Court stated that in considering whether an alternative process is preferable to a class action, the court must examine not simply the quantum of compensation generated by the alternative proceeding, but rather the fundamental characteristics of the proposed alternative proceeding, such as: (1) the impartiality and independence of the forum; (2) the scope and nature of the jurisdiction and remedial powers of the alternative forum; (3) the procedural safeguards that apply in the alternative proceeding, including the right to participate and the transparency of the decision-making process; and (4) the accessibility of the alternative proceeding, including the costs associated with accessing the process and the convenience of doing so. These characteristics must then be compared to those of a class proceeding in order to determine which is the preferable means of fulfilling the purposes of a class action: judicial economy, access to justice and behaviour modification. Not all of the characteristics will be material in every case; each case will turn on its own facts.
The Court of Appeal found that both courts below erred by focusing on the substantive outcome of the OSC proceeding, and whether the settlements provided investors with all or substantially all of the monetary relief sought. The outcome of the alternative proceeding is not relevant. Rather, the courts should 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.
In following this analysis, the Court of Appeal concluded that a class action is the preferable procedure in this case. It highlighted two important distinctions leading to that conclusion. The first is that the jurisdiction of the OSC is regulatory (i.e., protective and preventative), not compensatory. Therefore, the OSC's jurisdiction over the defendants was exercised in a different context and for a different purpose than the court's jurisdiction to adjudicate claims concerning the defendants' conduct. The OSC is not empowered to make orders requiring a party to make compensation or restitution or to pay damages to affected individuals. As such, the remedial powers given to the OSC are insufficient to enable it to fully address the class members' claims. Rather, the OSC proceedings that took place and the proposed class action are intended as parallel, not mutually exclusive, proceedings. The Court of Appeal noted that another provision of the Securities Act allows the OSC to apply to a judge to make a variety of orders including compensation, but such an application was not brought in this case. It is possible that if the OSC took that further step and also applied to the court to make a compensation order, the outcome on certification could potentially have been different.
The Court of Appeal also noted that while the OSC settlement agreements included a compensatory element for investors, these voluntary payments could not alter the regulatory purpose of the OSC proceeding. The role of the OSC proceeding was not to assess the claims raised by the proposed class or to quantify the harm allegedly caused by the defendants' actions, nor was the OSC attempting to quantify the settlement amount in a manner analogous to the way in which damages might be calculated in a civil action. The second distinction found by the Court of Appeal was that the OSC proceeding did not provide comparable rights of participation to the affected investors as the procedural rights available in a class action. The OSC proceeding provided for little to no basis for investor participation: there was no attempt to notify the affected investors; neither the investors nor their counsel attended the hearings or made submissions; the substantive portions of the hearings took place in camera; and the procedure by which the settlements were arrived at did not facilitate investor participation. The investors were not, and were not intended to be, parties to the OSC process. The Court of Appeal also highlighted that the settlement agreements signed by the defendants expressly contemplated that they could face civil law suits.
The Court of Appeal was critical of the approach adopted by both the motions judge and the Divisional Court. It stated that the preferability analysis should not be reduced to an ex post facto assessment of the adequacy of the award arrived at through the alternative procedure. One main reason for this is that a certification motion is a procedural matter, and an evaluation of the adequacy of the settlement would require a determination tantamount to a finding on the merits. Instead, the preferable procedure inquiry must focus on the underlying purpose and nature of the alternative proceeding as compared with the class proceeding.
While this decision highlights the reality that defendants could be faced with a regulatory liability only to be followed by a class action, the Court of Appeal did provide some clarity on the preferable procedure inquiry. The Court of Appeal did not completely shut down the possibility that a regulatory proceeding could be a preferable procedure; the outcome will depend on the facts of each case. However, the criteria laid down by the Court to be considered in a preferable procedure inquiry appear to make that less likely. The relevant consideration is not the outcome of the alternative proceeding, but rather the central characteristics of that proceeding as compared to a class action. Therefore, unless the alternative proceeding provides for meaningful participation by the plaintiffs, and a meaningful opportunity for recovery similar to that which could be achieved in a class action, it will be difficult to find that a class action is not the preferable procedure on this basis. For example, would it be sufficient to have regulatory counsel consult with an investors' committee? While the door may be closed, a window may still be open to avoid multiplicity of proceedings.
Of course, one might question whether class members (other than a representative plaintiff) have meaningful participation in any class action. From a realist's perspective, class counsel negotiate with defence counsel to achieve the best settlement available. Counsel then jointly support the settlement before the Court, with the judge having little, if any, evidence independent of counsel on the adequacy of the settlement. Does the introduction of class counsel following a regulatory settlement really add to the quality of the process? The Court of Appeal says yes. But with a slightly different record and process, one wonders.
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