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Mutual fund leveraging class action certified

In  a decision released in February, Ontario Superior Court Justice J. B. Shaughnessy certified a class action against mutual fund dealer Investia Financial Services Incorporated, its franchisee, Money Concepts (Barrie), and two of its former registered salespersons, David Karas and James Stephenson, relating to allegedly improper leveraging strategies that were used in the purchase of mutual funds. In particular, it is alleged that the defendants allowed leveraging (i.e. borrowing to invest) pursuant to a scheme that was applied systematically to their clients and that this leveraging scheme breached industry standards and regulations and caused serious harm to their clients.

There were two actions involved in the certification motion – the first involved an individual representative plaintiff who had borrowed approximately $900,000 to invest in mutual funds through his representative, David Karas. The second action involved representative plaintiffs, a retired couple, who had borrowed $100,000 to invest through James Stevenson. All plaintiffs alleged that Investia and Money Concepts knew or should have known of the alleged scheme by Karas and Stevenson to arrange for their clients to borrow large sums of money to invest and should have taken steps to monitor those activities more closely.

Certification of a proceeding as a class action requires, among other things, that there be common issues among all members of the proposed class and that it be a preferable procedure to have those issues determined in a class action, rather through individual proceedings or other types of procedures. In this case, the defendants opposed certification of the action as a class action on the primary basis that there were no common issues among the various individuals who borrowed money to invest through the defendants. In particular, they argued that the issue of whether borrowing to invest is suitable is a question that must be answered separately for each and every investor based upon their financial status, investment objectives, risk tolerance and other factors. As such, they argued that such a question cannot be tried as a common issue in a class proceeding. The defendants also highlighted the availability of other avenues of recovery in opposing certification, including resolution of potential class members' claims through a consensual process offered by the Ombudsman for Investment and Banking Servicves ("OBSI").

Justice Shaughnessy disagreed with the defendants and certified the action as a class proceeding. According to his ruling, issues relating to whether the defendants breached their duties to class members in relation to the supervision of leveraging strategies can be tried as common issues for all persons who borrowed to invest through the defendants.  In doing so, Justice Shaughnessy found that such issues can in fact be determined on a class-wide basis and that doing so would substantially advance the interests of members of the class.

Justice Shaughnessy, however, did not certify all common issues proposed by the plaintiffs. He agreed with the defendants that the assessment of damages cannot proceed on an aggregate, classwide basis and that damages caused by any breaches must be determined separately for each class member. He did, however, also certify as a common issue the claim for punitive damages against the defendants.

It is fair to say that this decision is likely a bit surprising to most members of the class action bar. It is likely even more surprising to members of the financial services industry. Borrowing is very much an individualized process that is based upon the creditworthiness and personal characteristics of the specific borrower. Investing is, if anything, even more based on the specific characteristics of the investor, including the investor's level of sophistication, risk tolerance, and objectives. After all, the cardinal rule in the investment industry is the "know your client" rule, not the know your class rule.  It is difficult, therefore, to understand how the suitability of borrowing to invest can be determined as a single issue for dozens of different individuals, all of whom would have had their own investment objectives, financial background, and risk tolerance. While it may be that a common set of rules and procedures should have applied to the issue of borrowing to invest, the application of those rules and procedures to each investor would have been far from common.

Kenneth A. Dekker
Affleck Greene McMurtry LLP

Kenneth A. Dekker

Kenneth Dekker, a partner of the firm, is a successful trial and appellate lawyer who is valued by his clients as a resourceful and practical litigation counsel.

Over more than two decades, Ken has litigated noteworthy cases in a range of fields that include class action defence, securities and broker-dealer litigation and regulatory defence, corporate and shareholder disputes (including oppression and winding up cases), defamation, civil fraud litigation, disputes over contracts, injunctions, professional liability litigation, employment litigation and cross-border litigation issues.

Ken has appeared before all levels of courts in Ontario, including the Ontario Court of Justice, the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario, as well as before the Supreme Court of Canada. Ken also represents and advises clients in regulatory matters before the Investment Industry Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and the Ontario Securities Commission (OSC).

Ken has been ranked as Repeatedly Recommended for Securities Litigation by Lexpert, for Corporate and Commercial Litigation by Best Lawyers of Canada, and he has been given the highest available rating of AV, or pre-eminent, by his peers on Martindale-Hubbell.

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