Class Proceeding Against Investment Advisor, Firm And Trustee Certified At The Expense Of Individualized Causes Of Action

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Background

Verbeek was an investment advisor and, at some relevant times, a registered representative of the defendant Dundee Securities Corporation (“Dundee”). According to the plaintiffs’ allegations, between August 1998 and June 2001, Verbeek ran an investment scheme pursuant to which his clients could access money in their retirement savings on a tax-free basis. Under the scheme, Verbeek’s clients would either create a self-directed, locked-in RRSP at Verbeek’s investment firm (such as Dundee) or open a trust account at a third party trustee (such as the defendant Canadian Western Trust Company, or “CWT”). Those RRSP funds were then used to purchase shares in certain Canadian Controlled Private Corporations, or “CCPCs”, which were purportedly qualified investments for locked-in RRSPs. Verbeek’s clients were then to receive loans using the CCPC shares as collateral. The CCPC shares were subsequently found to be worthless, and Verbeek’s clients lost some or all of their money. The plaintiffs also allege that the CCPC shares were not eligible investments for locked-in RRSPs and were immediately taxable, and that the loans were illegal.

The plaintiffs allege that Dundee and CWT are liable on the basis of breach of contract, negligent performance of a service, negligence simpliciter and breach of fiduciary duty. At the certification motion, the plaintiffs sought to certify an overall “Verbeek Class” (which would include all of Verbeek’s clients who participated in the investment scheme) and two subclasses: the “Dundee Subclass” (composed of all Verbeek Class members who participated in the investment scheme while Verbeek was registered at Dundee) and the “CWT Subclass” (composed of all Verbeek class members whose shares were held by CWT).

In analyzing the proposed class action, Justice Lauwers found that it met the criteria set out in s. 5 of Ontario’s Class Proceedings Act, 1992, S.O. 1992, c. 6, though he expressed reservations about the fact that the class and sub-class definitions were subjective and referenced the merits of the plaintiffs’ claim, and held that the common questions required some amendment. Accordingly, Justice Lauwers certified the action conditionally pending completion of the above amendments.

Discussion

While Dundee and CWT opposed certification on several bases, the most interesting arguments concerned the requirement that each plaintiff’s individual claim share a common issue.

Dundee argued that the plaintiffs’ allegations of breach of contract, negligence and breach of fiduciary duty would oblige the court to engage in the fact-specific inquiry of assessing the suitability of the individual investments proposed by Verbeek to each of his clients, rendering those causes of action incapable of being common issues. CWT likewise argued that there was no evidentiary basis for determining that the proposed class members all participated in the same investment scheme in the same way for the same purpose.

In rejecting these arguments and holding that the causes of action disclosed common issues, Justice Lauwers rejected the “degree of hyper-commonality” demanded by Dundee and CWT, holding that it is well settled that courts must not set the bar too high on the common issues test. Justice Lauwers approved of the plaintiffs’ position that “the investment scheme was a scam and entirely inappropriate for any investor”, which he found to be a plausible assertion on the evidence. In accepting this simple characterization of commonality, however, Justice Lauwers pointed out that the plaintiffs might be limiting grounds for liability that would otherwise be available to individual class members in separate actions – for example, allegations of a breach of an IA’s duty to know his client.

Justice Lauwers’ decision highlights some of the difficulties associated with asserting individualized causes of action in the IA-client context as “common issues” in a class proceeding. Plaintiffs in such situations will need to determine whether they are willing to sacrifice certain individual causes of action in order to take advantage of the beneficial cost and efficiency aspects of class proceedings.