An Ontario court has decided that a possible class action lawsuit against a couple of mutual fund companies may still proceed, despite the fact that the firms have already settled a regulatory case against them.

Ontario’s Superior Court of Justice Divisional Court has ruled on an appeal from a decision handed down in January 2010, which dismissed a motion for certification as a class action against the five fund firms that were sanctioned as part of the mutual fund market timing case back in 2004.

IG Investment Management Ltd., Franklin Templeton Investments Corp. and AGF Funds Inc. have since entered into settlements with the plaintiffs in this case, but CI Mutual Funds Inc. and AIC Limited remain as defendants.

The divisional court decision released Jan. 31, 2011 notes that the motion judge found that the plaintiffs had established four out of the five necessary criteria for certification as a class action, but that they failed on the fifth criterion — that a class proceeding would be a ‘preferable procedure’, and so their claim for certification was denied.

The motion judge found that a class action would be the preferable procedure if he ignored the Ontario Securities Commission’s enforcement case against the firms. “The motion judge concluded that the OSC settlement satisfied the goal of behaviour modification and that the OSC proceedings provided the plaintiffs with access to justice. He therefore ruled that the class action was not the preferable procedure for resolving the plaintiffs’ claims and dismissed the motion for certification. It is clear that but for the OSC settlements, the action would have been certified,” the divisional court decision says.

However, on appeal, the divisional court concludes that the motion judge’s analysis of the impact of the OSC settlement on the issue of preferable procedure is fundamentally flawed.

“The OSC proceedings had already been completed at the time this action was commenced. The action does not seek the recovery of the $205 million already paid; it seeks recovery of the damages not recovered through the OSC proceeding,” the divisional court decision says. “On the evidence before the motion judge, which must be accepted for purposes of the motion, a significant amount of money is still owed to these plaintiffs. It cannot be said that the OSC process is a preferable procedure for recovering damages it failed to recover in the first place.”

The divisional court decision says that the motion judge effectively treated the OSC proceeding as a reasonable settlement of the plaintiffs’ claims. “Unless it can be said that the plaintiffs have achieved full, or at the very least substantially full, recovery, they are entitled to maintain this action,” the divisional court decision says. “There is no other viable alternative for recovering the shortfall after the OSC settlement and all of the other tests for certification had been met. Accordingly, in my view, the certification motion ought to have been granted.”

“It is necessary to recognize what this action is about. It is not about the $108 million in losses already recovered from these two defendants; it is about the losses over and above that amount that the plaintiffs allege are still owing, and which the plaintiffs’ expert estimates at $333 million,” the divisional court decision adds. “In my opinion, the motion judge lost sight of that point and this led him into error when determining whether the OSC proceedings and the settlement agreements provided access to justice for the investors.”

As a result, the appeal was allowed, and a certification order will be issued “on the condition that the motion judge approves a revised litigation plan”.