Last week, the Supreme Court of Canada heard oral argument with respect to the Ontario Court of Appeal decision, Fischer v IG Investment Management Ltd., 2012 ONCA 47, [Fischer].

In Fischer, a group of mutual fund managers had made arrangements with third parties who engaged in market timing practices. These third parties profited from such market timing practices and the mutual fund managers benefitted from the market timing by earning commissions. The Ontario Securities Commission began proceedings and ultimately settled the matter with an Order requiring the mutual fund managers to pay the investors $205.6 million.

The issue on appeal to the SCC was whether the OSC proceedings and the resulting settlement were the preferable procedure to resolve the investors’ claims, thereby precluding certification for a class action suit under the provincial Class Proceedings Act. The investors’ argued the $205.6 million settlement with the OSC was not sufficient and that a class action suit was the appropriate procedure to recover to damages above and beyond what was already awarded by the OSC.

The Ontario Court of Appeal decided that the regulatory proceedings run by the OSC were not the preferable procedure for recovering damages. Two elements were fundamental to its decision.

First, the role of the OSC is protective and preventative, rather than remedial or punitive. In other words, the OSC’s role is regulatory and while it has the jurisdiction to award compensation, it may only do so within the context of the failure to comply with the applicable legislation and regulations. Securities Regulators do not have the jurisdiction to award compensation for any breach of fiduciary duty, or negligence.

Second, the Court of Appeal took the view there was a “total lack of participation by investors in the OSC proceedings” (at para 71). Notwithstanding the general notice provided by the OSC, none of the affected investors were notified, none of the investors or their counsel attended or made submissions, and all of the substantive portions of the hearing were held in camera. Most important however, was the fact that the amount of the settlement and compensation was determined without any investor participation or any opportunity of the investors to participate. The OSC did not provide any details as to how the amount of the settlement was calculated.

Notably, the settlement agreements expressly allowed for a civil suit with respect to the same proceedings and section 128 of the Securities Act allows the court to make an order despite an order made by the OSC pursuant to section 127.

The Supreme Court’s decision will be of interest as the Court of Appeal allows for multiple proceedings in the same matter between the parties. The Court of Appeal cited the following affidavit evidence of the applicant investors in support of its conclusion:

  Public enforcement by securities regulators and criminal enforcement by criminal law authorities, as well as private enforcement by investors through private suits and class action proceedings all play an important role in ensuring that public company managers and mutual fund managers act in the best interests of shareholders and unit holders, respectively. None of these mechanisms is mutually exclusive (at para 48).  

Although Fischer suggests the threat of a proliferation of claims against parties already involved in regulatory proceedings, attempts to contact investors directly by the securities commissions, more fulsome disclosure with respect to settlement calculations, and restricting in camera sessions to only when necessary will go a long way towards reducing the possibility of multiple proceedings generally, and class proceedings in particular.