The Fisher decisionconsiders the important question of whether a successful OSC proceeding, resulting in the payment of $205 million in compensation to affected investor mutual funds, prohibits individual investors from suing for damages in civil courts.
The Ontario Court of Appeal recently held that a class proceeding is the preferable procedure to the OSC enforcement proceedings because it can provide relief to individual investors. This, however, paves the way for parallel proceedings on the same set of facts. The "preferable procedure" inquiry is often a main fight on certification motions. The SCC will provide much-needed clarity on this analysis.
Five mutual fund managers were alleged to have permitted market timing in certain mutual funds. Market timing involves trading in mutual funds intended to take advantage of short-term discrepancies in pricing of mutual funds which may arise from time zone differences in the value of securities traded on foreign exchanges. This practice, while not illegal, was alleged to have allowed market timers to earn short-term gains at the expense of long-term investors.
Following an investigation into market timing, the OSC commenced enforcement proceedings against the five mutual fund managers who were alleged to have permitted market timing.
All five of the mutual fund managers entered into settlement agreements with the OSC totaling $205.6 million dollars to be paid to investors in the relevant mutual funds. The mutual fund managers admitted that market timing had occurred in the relevant mutual funds. The admissions were made on a without prejudice basis.
Hearings were held before the panel of the OSC to decide whether to approve the settlement agreements as being in the public interest pursuant to s.127 of the Securities Act. These hearings were held in camera and no notice of the hearings was sent to individual investors. The settlements were ultimately approved by the OSC.
Once the settlements were approved, the plaintiffs commenced class actions against the mutual fund managers concerning the same conduct addressed in the OSC proceedings. The key issue on the certification motion was whether the proposed class action met the preferable procedure criterion under s. 5(1)(d) of the Class Proceedings Act ("CPA").
The motion judge, Justice Paul Perell, denied certification on the ground that the OSC proceedings and the settlement agreements fulfilled the CPA's objectives of judicial economy, access to justice and behavior modification. In particular, Justice Perell held that the proposed class action failed to meet the second element of the Hollick inquiry because the class action would not be preferable to other reasonably available means of resolving the class members' claim. [The first element of Hollick is whether a class action constitutes a fair, efficient and management method for resolving the claims of the class members.] Rather, Justice Perell found that the OSC proceedings were the preferable procedure for resolving these claims.
The Divisional Court overturned Justice Perell's decision. Molloy J., writing for the Divisional Court, found that the OSC proceedings could not be the preferable procedure for recovering damages because the investors' action was for damages beyond the amount recovered through the OSC proceeding. Said otherwise, the Divisional Court did not accept that the investors had achieved the full or substantially full recovery that they are entitled to in a class action.
The Court of Appeal upheld the Divisional Court's decision to certify the class action but for different reasons.
The Court of Appeal was asked to consider two questions:
- Did the Divisional Court err in its application of the standard of review to the motion judge's decision?
- Did the divisional Court err in its preferable procedure analysis?
(1) Standard of Review
The Court of Appeal found that the Divisional Court properly applied the standard of review being a palpable and overriding error. The Court reminded the appellants that "[d]eference cannot shield errors in principle".
(2) Preferable Procedure Analysis
Chief Justice Winkler, writing for the Court, certified the class action on the grounds that the civil action met the CPA objectives of judicial economy, access to justice and behaviour modification whereas the OSC proceedings did not. His analysis focused on the differences between the OSC proceedings and the class action. In particular, he considered the nature and purpose of the proceedings and the lack of participatory rights in OSC proceedings as the main differences between the two proceedings.
Contrary to the Divisional Court's analysis, Justice Winkler commented that question was not whether the investors should be entitled to recover more than what was compensated through the OSC proceedings. The issue was a principled one and required the court "to compare the fundamental characteristics of the proposed alternative proceeding to determine which is the preferable means of fulfilling the judicial economy, access to justice and behavior modifications purposes of the CPA."
As to the nature and purpose of the alternative proceeding, Justice Winkler found that the jurisdiction of the OSC proceeding was inherently regulatory rather than compensatory. Section 127 of the Ontario Securities Act permits the OSC to make regulatory orders in the best interests of the public. It does not, however, empower the OSC to require a party to pay compensation or restitution or damages to affected individuals. [Under Section 128 of the Securities Act the court may make an order for restitution or punitive damages but the OSC did not bring the application under s. 128.] On the other hand, the purpose of the CPA is to obtain relief for individual investors.
As to the participatory rights of investors, Justice Winkler noted that the OSC hearings were held in camera without notice directed to or participation of affected investors. In contrast, the class proceedings procedure is "premised on facilitating transparency and participation on a class-wide basis". The affected investors did not participate in the negotiations leading to the OSC settlement agreements nor did they have an opportunity to weigh-in on the amount of compensation to be paid by the mutual fund managers. Moreover, there is no record of how the amount of compensation was calculated. Indeed, the OSC settlement agreements specifically contemplated the possibility of subsequent civil actions. Justice Winkler concluded that, contrary to the rights afforded to plaintiffs in a class action, the investors were not intended to be parties to the OSC proceedings.
The SCC's decision will be an important judgment as it will allow the Supreme Court to clarify the meaning of the "preferable procedure" criterion, which is usually one of the major battlegrounds on certification, and which has not been considered by the SCC since Hollick v. Toronto (City) and Rumley v. British Columbia.
It will also provide clarity on whether a preferable procedure must be one that will occur in the future, or whether it can be one that has already occurred prior to certification, such that the class action is effectively barred by it.
Finally, the SCC may clarify the meaning of "access to justice" in the class action context. For example, will "access to justice" require a process in which class members are direct participants? Further guidance and clarity by the SCC's is eagerly anticipated.
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.