MFDA bans former rep for recommending unsuitable strategy

A retail investor who failed in a class-action bid against HSBC Holdings PLC has been hit with more than $1 million in costs. The result could have a dampening effect on other representative plaintiffs who believe they have a case against a major bank.

The November ruling from the Ontario Superior Court reviews the factors that led to the representative plaintiff’s failure to certify a class action for misrepresentation and concludes that much of the drive behind the lawsuit was “entrepreneurial.”

The ruling by Justice Paul Perell notes that the plaintiff, Ontario resident Wai Kan Yip, bought shares in HSBC Holdings on the Hong Kong Stock Exchange; the firm’s shares trade in Hong Kong and London, but on no Canadian exchange.

The decision notes that Yip “alleged that the putative class members were misled by HSBC Holdings (which was regulated by foreign regulators) making false disclosures about compliance with anti-money laundering and anti-terrorist financing laws and about its nonparticipation in an illegal scheme to manipulate benchmark interest rates used by banks across the world.”

Yip alleged that a $7-billion decline in the shares was due to the allegations, which surfaced in 2012.

Although there may be situations in which shares issued and traded on foreign exchanges are the subject of successful investor lawsuits in Ontario, Perell concluded that this case did not fall within those situations. Perell also concluded that Ontario was not the appropriate jurisdiction for the class action, based on convenience, and that the U.K. was the “natural forum.”

In disputing the costs request made by HSBC Holdings (the ultimate parent of HSBC Canada), Yip’s lawyers argued that he was a “retail investor of modest means with a modest personal stake in the litigation and who tried to access justice on behalf of Canadian investors,” the decision notes.

However, Perell did not agree with that characterization: “There is a make-believe quality to Mr. Yip’s lawyers’ characterization of Mr. Yip’s lawsuit and of HSBC Holdings’ defence to it. It is a fantasy to suggest that when Mr. Yip and his entrepreneurial class counsel sued a foreign defendant for $20 billion, later reduced to the not trifling $8 billion, that they did not reasonably anticipate that HSBC Holdings would spend $0.0001 billion to defend itself.”

The decision continues: “The proposed class action was not altruistic litigation; it was entrepreneurial litigation. Mr. Yip and others willingly traded in foreign stock exchanges with no reasonable expectation that Ontario law might follow them overseas but with the knowledge that the foreign stock markets were regulated by foreign regulators.”

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