A proposed class action alleging that a mutual fund managed by HSBC Global Asset Management (Canada) Ltd. harmed investors by engaging in “closet indexing” is still struggling to find traction in the Supreme Court of British Columbia.

In August 2022, the court declined to certify a lawsuit against HSBC as a class action, finding it failed to establish a common issue for fund investors that justified a class action.

Since then, the proposed plaintiff amended her claim and filed further evidence seeking to establish that a foundation for a class action exists.

In response, the firm sought to have the case dismissed.

The court noted that HSBC argued the revised claim fundamentally altered the plaintiffs’ definition of “closet indexing.” Among other things, the plaintiff’s revised pleading argued that closet indexing represents an investment strategy of having “low active risk” — as measured by metrics such as tracking error and active share — so the fund effectively tracks the benchmark.

The plaintiff also dropped earlier claims of fraud, now arguing that the firm was negligent in failing to properly disclose its investment strategy. She also argued the defendants were “negligent in failing to ensure that their management fees were commensurate with the level of active risk in the equity fund,” the court said.

The court largely sided with HSBC, finding the revised claim “confounding” and that the plaintiff’s case still isn’t clear.

Among other things, the court speculated the plaintiff may be trying to argue that the firm was negligent because the compliance side of the firm didn’t appreciate, and so didn’t properly disclose, the strategy being implemented by the investment side of the business.

“If such is the case, such needs to be clearly pleaded  […] so that the defendants and the court may understand the plaintiff’s claim,” the court said.

“Also possibly, the plaintiff is saying that the defendants, over time, with hindsight, should have realized that their strategy would not result in significant returns for investors having regard to the fees the defendants charged,” the decision suggested.

The court also detailed concerns about the definition of “active risk” in the proposed plaintiff’s claim.

Ultimately, the court concluded the confusing aspects of the claim don’t meet the standard of “pleadings to ensure the litigation process is fair.”

While the firm sought to have the proposed class action dismissed, the court gave the plaintiff 30 days to revise and refile her claim to more clearly set out her theory.

The court will then determine whether it has a case for a possible class action.

The case is one of several being pursued against bank-owned fund managers (the others involve CIBC Asset Management, RBC Global Asset Management and TD Asset Management) alleging that investors were harmed by mutual funds that charged fees for active management while only closely tracking their equity indexes.

While the cases against RBC and TD were certified as class actions, the other two have struggled for certification. Last July, TD prevailed in the first case that went to trial.