A court in British Columbia has allowed the plaintiffs in a proposed “closet indexing” class-action against a fund manager to revise their arguments, clarifying that the failure to disclose the alleged closet indexing is at the heart of its claim.
The Supreme Court of B.C. approved the application from the plaintiffs in a case against RBC Global Asset Management Inc. (RBC GAM) that has already been certified as a class action. The plaintiffs’ application sought to revise the basis of the lawsuit that alleged investors were charged fees for active management in an equity fund that actually just closely tracked its benchmark index.
The plaintiffs applied to amend their pleadings “to focus on an alleged failure by the defendants to disclose the closet indexing strategy”; to clarify linkage between the fund and the benchmark; and to remove certain other claims from the original proceedings, the court noted.
According to the court’s decision, the plaintiffs argued that the proposed changes just aim to clarify their claim, and to bring it in line with a recent decision by the B.C. Court of Appeal in another closet indexing case against HSBC Global Asset Management (Canada) Ltd. The appellate court decision certified that case as a class action after reversing a lower court’s decision that declined to certify it.
RBC GAM opposed the application in the case against it, arguing that it should proceed to trial on the existing pleadings and certified common issues.
“The defendants argue that the proposed amendments in this case both reconstitute the class action and fundamentally change the nature of what has been certified by introducing an entirely new cause of action premised on a failure to meet risk disclosure obligations and removing a fraud allegation that the defendants say was central to the original certification decision,” the court noted.
No new cause
However, the court rejected those arguments, concluding that the proposed amendments don’t fundamentally change the nature of the case that has already been certified, and don’t introduce a new cause of action.
The court noted that while the case against HSBC “involved different defendants, a different mutual fund and some different facts, the reasoning of the Court of Appeal is both persuasive and binding.” The decision added that the plaintiffs aren’t required to plead that fraud took place, “and fraud is not a required element of breach of trust, breach of fiduciary duty, breach of securities disclosure requirements, or unjust enrichment,” it said.
Additionally, the court rejected the argument that the amendments would add a new cause to the existing claim.
“The proposed amendments clarify that closely tracking the benchmark is not the alleged wrong; rather, the allegation is that the defendants wrongfully failed to disclose this strategy and the risk that the fund would not outperform the benchmark after fees,” the court said. “These amendments do not change the substance of the issues; they merely restate the theory of liability.”
Additionally, some flexibility is required in complex commercial litigation, the court said.
“A functional approach to pleadings recognizes that plaintiffs in these kinds of cases may not know the specifics of the conduct they allege at the early stages of an action before discovery. A claim that evolves somewhat may nonetheless fulfill the foundational purposes of pleadings…” it said. In this case, it added that “the proposed amendments explain the case the defendants must meet more clearly.”
The court concluded, “it is just and convenient to grant leave to amend the pleadings and common issues to clarify the certified claims and define the real issues between the parties.”