In McCorquodale v RBC Global Asset Management Inc., 2021 BCSC 144, the British Columbia Supreme Court relied on the principle of consistency in case law in applying a low bar to certification in class proceedings. In doing so, B.C. continues to be one of the friendliest Canadian jurisdictions for class action certification. With changes to Ontario’s class action legislation intended to raise the bar for certification, it is anticipated that more national class actions will be litigated in B.C.
McCorquodale is the second class action to be certified in Canada regarding allegations of "closet indexing," involving a purportedly actively managed fund merely tracking the stock selection of benchmark indexes, such as the S&P/TSX composite. The first was Stenzler v TD Asset Management Inc, 2020 ONSC 111 (leave to appeal denied: 2020 ONSC 5987).
In McCorquodale, the plaintiffs allege that since 2005 the defendants charged clients high fees associated with actively managed investment funds, all the while applying an index investment strategy that mimicked the performance of benchmark indexes, and that this was not disclosed to investors (the Closet Index Strategy). The plaintiffs also pleaded that, as a result of the Closet Index Strategy, the investment funds at issue did not outperform the benchmark once management fees were taken into account.
This case serves as a reminder that the pleadings test and “some basis in fact” burden on plaintiffs remain low bars for certification, but that the post-certification landscape is less clear.
Upholding Fraud Pleadings
Despite the plaintiffs stating at the certification hearing that they were not pleading fraud (and indeed amending their pleadings to remove the words, "fraudulent" and "dishonest"), the court certified fraud as a cause of action. The defendants argued the plaintiffs failed to properly plead sufficient particulars. Rule 3-7(18) of the B.C. Supreme Court Civil Rules imposes an obligation on parties pleading fraud to include “full particulars, with dates and items if applicable.” Despite the defendants’ arguments and the plaintiffs’ concession, the court held that no further particulars were needed because the plaintiffs pleaded that “throughout” the class period the defendants represented that the funds were actively managed.
No Narrowing Based on Limitations Defences
The defendants argued that the court should order a narrower class definition because some class members' claims were likely out of time pursuant to limitations provisions under the B.C. Securities Act (among other securities legislation). The court quoted from Justice Belobaba's decision on this point in Stenzler, holding that the limitation period defence should be considered after certification. To promote "certainty in the law," the court followed Stenzler.
A Low Bar for "Some Basis in Fact"
The court held that, to certify common issues in this claim, it needed to be satisfied that there is “some basis in fact” that the defendants used the Closet Index Strategy. At the certification hearing, the plaintiffs tendered an affidavit by an expert, which was heavily challenged by the defendants and their respective expert, and both sides also entered cross-examination transcripts of the experts. The court held that the plaintiffs' expert analysis provided "some basis in fact" notwithstanding that it was based on the general comparison of performance to a benchmark index and disputed assumptions. The court emphasized the low standard of "some basis in fact" applicable at the certification stage.
Commonality and the Pleadings
The court also held that the plaintiffs' claims met the commonality requirement for certification. The defendants argued that the plaintiffs produced no evidence of a methodology to determine class-wide loss because their expert witness did not address things such as individual investor preferences and objectives. The defendants also submitted that an examination of individual management decisions would be required before common issues could be advanced. However, the court accepted the plaintiffs’ argument that, individual matters would not have changed the overall impact of the Closet Index Strategy. The court noted that if “it is found at trial that RBC GAM used the Closet Index Strategy… and such was not disclosed, then there is the common live argument that Class Members paid or bore excess fees”.
McCorquodale is a reminder of the low bar at certification, but also of the burden to demonstrate commonality at trial. For example, in this case, though the loss common issue was certified, if the trial court finds that it cannot determine the effect of the Closet Index Strategy without reference to individual peculiarities—and the plaintiffs do not put forward a methodology to account for those—the plaintiffs may well be unable to succeed on the loss common issue.