On February 17, 2012, the Ontario Superior Court of Justice
certified a class action brought against two investment advisors
and their registered dealer (the "Dealer") in the case of
French and Karas et al v. Smith and Stephenson et al, 2012
ONSC 1150 ("French"). This is a terrible
decision for securities dealers, mutual fund dealers and advisors
because a class action was certified, notwithstanding that a
strategy alleged to be applied to an entire client base must be
assessed for individual suitability to determine if the advisor was
The class is comprised of the clients of two mutual fund
advisors, David Karas ("Karas") and James Stephenson
("Stephenson"). The claim alleges that Karas and
Stephenson inappropriately applied a "one size-fits all"
investment strategy for their clients and had no regard for client
suitability or objectives. The plaintiffs allege that Karas and
Stephenson engaged in a leveraging scheme whereby they encouraged
and facilitated clients to take on debt for the purpose of
purchasing mutual funds. As a result, the plaintiffs allege, Karas
and Stephenson enjoyed additional compensation through increased
trading volume while their clients bore the cost and risk
associated with investing with debt. The plaintiffs further claim
damages against the Dealer for failing in its compliance
responsibilities by allowing this leveraging to occur.
In support of their claim that the defendants have breached the
duties owed to their clients, the plaintiffs pointed to a Mutual
Fund Dealer Association ("MFDA") Member Regulatory Notice
which provides that leveraging is not suitable for all investors
and that individual consideration must be given with respect to the
client's know your client ("KYC") form.
To approve of the certification, the Court concluded that the
proposed class members share sufficiently similar claims, which all
relate to the duty of care owed by the defendants to their clients.
However, the Court held that the actual damages suffered by each
claimant will require an individual assessment based on a number of
factors, including the date of purchase, the applicable interest
rate on loans, tax implications and mitigation. As a result, the
quantum of damages was not certified as a common issue.
We are hopeful that this decision will be appealed as it is our
view that the decision incorrectly applied the law. Both the
standard of care and whether or not there was a breach of the duty
must be assessed on a case-by-case basis. A class cannot be
certified when suitability is at the heart of the claim,
notwithstanding that one strategy may have been applied across the
board. Whether that strategy was suitable must be determined based
on the sophistication and risk tolerance of EACH plaintiff. How can
this be determined in a class action proceeding? It can't.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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