The judge in a class action suit against two mutual fund companies that were targeted by market timers more than a decade ago has ruled that the plaintiffs in the case — investors in the funds — are not entitled to the disclosure of additional trading data, or evidence provided to regulators in their market timing investigations.

The case originated in 2003 when it was revealed that investors in several mutual funds, including those of three firms that have already settled with the plaintiffs, sustained losses after the funds were targeted by market timers in after hours trading: the allegation is that these activities benefitted the market timers but harmed investors. The firms are not alleged to have conducted the market timing, but to have permitted it.

The Ontario Superior Court of Justice denied a motion from the class action plaintiffs that are suing CI Mutual Funds Inc. and AIC Ltd., (acquired by Manulife Financial Corp. in 2009).

The plaintiffs in the case, which was certified as a class action in 2011 even though a settlement had already been reached as a result of regulatory investigations in 2004 and 2005, had already brought an application to require CI and AIC to produce mutual fund trading data. They also sought documents that were disclosed to the Ontario Securities Commission (OSC) by the firms in the OSC’s investigation of the alleged market timing, as part of the discovery in the class action suit.

According to the decision, by Justice Paul Perell, the plaintiffs argue that the trading data and the OSC documents are relevant to the case. Citing the opinion of an economics professor, they argue that the documents are necessary to determine the full extent of market timing; and, to understand the extent to which the fund companies are liable to investors.

The fund companies opposed the motion on a number of grounds, including relevancy. The court agreed. “The question for this motion is whether the trading data and the documents disclosed to the OSC, which overlap to a certain degree, are relevant to the common issues trial and should be produced for the examinations for discovery. In my opinion, the answer to this question is ‘no’,” Justice Perell ruled.

The decision concludes that the documents and information requested by the plaintiffs are not relevant to the common issues to be decided in the case. “The standard of care is an objective measure, not a subjective measure,” the decision says. “It is a measure of what an ordinary, reasonable and prudent mutual fund manager would do in the same circumstances. It is a measure of behaviour and not a measure of the consequences of misbehaviour,” the decision says.

“In the case at bar, knowledge of the full extent of the damage caused by all the market timers in AIC and CI mutual funds is a subjective measure of the consequences of the alleged misconduct, and this knowledge would not contribute to the proof of the objective standard of reasonable conduct, and it would not contribute to whether that objective standard was breached by acting or failing to act,” the decision says.

The decision notes that; “The plaintiffs bring a profoundly novel negligence and breach of fiduciary duty action. There is no precedent for their action, which alleges a failure by the defendants, who are the managers of mutual funds, to prevent market timing.” The court found that the information sought by the plaintiffs will not contribute to proving the novel argument that is being proposed; nor would it contribute to determining whether a fiduciary duty existed and whether it was breached. “Put shortly, I do not see how knowledge of the extent of harm caused contributes to the proof of the existence of a fiduciary relationship, the duties attendant to that fiduciary relationship, and whether those attendant fiduciary duties have been breached,” the decision says.