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Can a common issue really be "common" when its
resolution requires an individual investigation vis-a-vis every
class member in a class action? This is the question we are left
with following the certification of French and Karas v Smith
and Stephenson1 as a class proceeding.
The action
The named defendants in this matter were two registered
investment advisors, Karas and Stephenson, their registered dealer
and related companies.
The plaintiff class was comprised of investor clients of Karas
and Stephenson and individuals who participated in what the
plaintiffs called the "Leveraging Scheme."
The Leveraging Scheme was an investment strategy. Under the
Leveraging Scheme, investors borrowed money that they then invested
in mutual funds or segregated funds.
The plaintiffs pleaded that Karas and Stephenson negligently
recommended that all their clients follow the investment strategies
in the Leveraging Scheme. The plaintiffs alleged that providing
uniform, "one size fits all" investment advice breached
industry standards because advisors must consider whether a
particular investment strategy is suitable for a particular client
in light of that client's investment objectives and risk
tolerance.
Class action certification in Ontario
Class actions are regulated by statute. In Ontario, an action
cannot proceed as a class action unless and until it has first been
"certified" by the court under the Class Proceedings
Act.2 Certification is not a test of the merits of
the claim. Rather, the certification test is
"procedural:" it is an assessment of whether the action
is appropriately prosecuted as a class action.
As part of the certification test, plaintiffs are required to
demonstrate that their claims raise "common issues."
"Common issues" are defined as common, but not
necessarily identical, issues of fact or law that arise from
common, but not necessarily identical, facts. An issue will be
"common" where its resolution is necessary to the
resolution of each class member's claim and where that issue is
a "substantial ingredient" of each class member's
claim, although common issues need not predominate over the
non-common issues in a case.
The French certification motion
French passed the certification test and was certified
as a class proceeding. One of the common issues that was
"certified" was whether the defendants Karas and
Stephenson breached their duty to individual class members. To
prove such a breach, the plaintiffs would need to demonstrate that
Karas and Stephenson did not meet the standard required of
reasonable investment advisors.
It is questionable whether this matter is properly a
"common" issue.
If, as the plaintiffs suggest, the defendants were obliged to
ensure that the Leveraging Scheme was suitable for each investor
before recommending it, proving a breach of duty would require
showing that the investment was not suitable for each individual
client in light of their own particular suitability profile. Simply
demonstrating that the Leveraging Scheme was ultimately recommended
to investors, even if it was recommended to all investors, does not
shed light on whether the advisor took appropriate steps before
making the recommendation to his client. The necessarily
individualized nature of this inquiry seems to suggest that breach
of duty is not appropriate to be determined on a class-wide basis
as a common issue.
Dealers, advisors and their counsel will undoubtedly want to
follow this certified class proceeding, and watch particularly for
whether this decision represents a change in the law in this area.
It is possible that French may represent a lowering of the
threshold for what is considered a "common issue" in a
class proceeding.
Footnotes
1. 2012 ONSC 1150 (CanLII)
("French")
2. SO 1992, c 6
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
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