Justice Perell of the Ontario Superior Court of Justice has dismissed a motion by a proposed class to certify a class action claiming that a number of mutual fund companies failed to stop market timing in the mutual funds they managed. The claim alleged that the activity of certain short term frequent trading market timing investors, whose purpose was to exploit stale-pricing of securities held within a mutual fund, served to have a detrimental impact on normal course investors and that the defendant fund companies permitted this market timing to occur.

IG Investment Management Ltd., CI Mutual Funds Inc., Franklin Templeton Investments Corp., AGF Funds Inc. and AIC Limited were named as defendants to the proposed class action. From 2003 to 2005, these same fund companies had been the focus of an Ontario Securities Commission probe and enforcement proceedings. The OSC concluded that the defendant fund companies had failed to implement appropriate measures to protect their funds and their investors against market timing activity. In arriving at a negotiated settlement, OSC Staff focused on determining the amount of harm to investors caused by market timing, and various approaches to quantifying harm were considered and debated. The negotiated resolution saw the fund companies pay $205.6 million directly to unitholders, as well as the expense of distributing the compensatory payments to investors.

The plaintiffs claimed that the OSC resolution had not fully compensated investors and that the action should be certified as a class action so that the balance of the investors’ losses could be recovered. In responding to the certification motion, the defendant fund companies argued that the OSC resolution was an alternative means of achieving a class-wide remedy for unitholders that achieved the objectives of class actions – behaviour modification, access to justice, and judicial economy – while avoiding the significant class counsel fees and other litigation costs and time that the class members would otherwise bear. It was the position of the defendant fund companies that the OSC proceeding, and not the proposed class action, was the preferable procedure for resolving issues related to market timing.

To be certified as a class action the court must be satisfied that all of the criteria for certification found in s. 5(1) of the Class Proceedings Act are met, namely that the pleadings disclose a cause of action, there is an identifiable class, common issues, an adequate representative plaintiff with a workable litigation plan, and, most significantly in this case, that a class proceeding would be the preferable procedure for the resolution of the common issues.

Though Justice Perell found that the plaintiffs satisfied four of the five criteria in this case, he was not convinced that a class action would be the preferable procedure to address the plaintiffs’ allegations regarding market timing. Justice Perell determined that the OSC proceedings and settlement agreements provided access to justice for the investors. He observed that OSC Staff gave itself the mission of obtaining restitutionary compensation for the harm suffered by the investors, played much the same role as would be played by class counsel in the class proceedings, had expertise, and committed the resources to vigorously and diligently pursue obtaining compensation for the harm suffered by the investors. In response to the plaintiffs’ argument that the quality of the access to justice was in doubt because the amounts paid by the fund companies may not have amounted to all of the monies lost by investors as a result of market timing, Justice Perell agreed with the defendants that the court should not second guess the access to justice provided by the OSC once the court was satisfied that the OSC’s purpose was to obtain restitutionary compensation for the harm suffered by investors and the process to do so was adequate. Justice Perell held that the plaintiffs’ failure to satisfy the preferable procedure criteria was fatal to their motion for certification.