An Ontario court is breathing new life into a potential class action lawsuit against a couple of former mutual fund representatives and their dealer, alleging they breached their fiduciary duty to a group of investors in connection with the sale of promissory notes.
The proposed lawsuit alleges that the reps, John Sanchez and Javier Sanchez, and their firm, International Capital Management Inc. (ICM), breached their duty to 170 investors when they sold promissory notes to the investors, ostensibly to invest in a non-arm’s-length company, Invoice Payment Systems Corp. (IPS).
The allegations have not been proven.
In 2021 a motion judge declined to certify the case as a class action, finding it didn’t disclose a viable cause of action for the whole class of investors.
In that ruling, the court indicated that establishing that a fiduciary relationship existed requires a case-by-case analysis of each investor’s financial circumstances, risk tolerance, expertise and experience, among other factors. And so, the case was not suitable to be a class action, it said.
That decision was upheld on appeal to the Divisional Court in 2022, albeit in a divided ruling.
The majority ruled that the case for establishing a fiduciary relationship between the reps and all the clients was entirely based on the fact that they were subject to the rules of the Mutual Fund Dealers Association of Canada (MFDA), and that this wasn’t adequate.
However, the dissenting judge maintained that the MFDA rules and requirements were only one factor in determining whether a fiduciary relationship existed, and that the motion judge erred in failing to consider those other factors.
Now, the Ontario Court of Appeal has overturned the majority Divisional Court decision, siding with the dissenting judge.
“I agree with [the dissent] that the professional rules governing the Sanchez defendants are but one fact supporting the claim that, when the proposed class members purchased IPS notes, there was a fiduciary relationship between them and their financial advisors, and those advisors were acting in breach of their fiduciary duties,” the Appeal Court said.
“The certification judge erred in principle in failing to consider those other facts in conjunction with the Sanchez defendants’ breaches of professional rules,” it noted.
The Appeal Court said the claim argues that the relationship between the reps and the investors “was one of vulnerability, trust and reliance, in which the Sanchez defendants undertook to act in their clients’ best interests.”
It noted that the reps prepared and monitored financial plans for their clients, recommended the notes to clients, and solicited those investments.
“By reviewing the [investors’] financial plans and choosing to whom to recommend the ‘opportunity’ to invest in the IPS notes, the Sanchez defendants unilaterally exercised their discretion in respect of the proposed class members,” the Appeal Court said. It added that they controlled the disclosure provided about the investments, leaving investors vulnerable to their advice.
“In this case, the relationships between the [reps] and the [investors] appear to be long-standing: the latter were selected from the roster of existing Sanchez defendants’ clients, by the Sanchez brothers,” the court noted. It said those investors “had the right to expect that their professional advisors would act in their best interests … the proposed class members had the right to trust their financial advisors.”
The investors “should not have needed to protect themselves from the advice and recommendation of their financial advisors,” the court said.
In 2018 the Sanchez brothers were banned from the industry in a settlement with the MFDA, and John Sanchez was also disciplined by the FP Canada Standards Council, the court noted.
In the settlement with the MFDA, they admitted to violating the self-regulatory organization’s rules in connection with the sale of $25.8-million worth of promissory notes in IPS, generating about $3 million in sales commissions, including admissions that their conduct gave rise to conflicts that weren’t resolved in the best interests of clients, among other violations. Alongside the market ban, they were also fined a combined $150,000 and ordered to pay $25,000 in costs.
While the Appeal Court overturned the lower court’s ruling and declared that the proposed class action claim does disclose a viable cause of action for breach of fiduciary duty to all the investors, it didn’t immediately certify the case as a class action.
Instead, it sent the case back to the Superior Court of Justice for a fresh determination — by a different judge — of whether the case can be certified based on whether it meets the other criteria used to determine whether a class action can proceed.