The Ontario Superior Court of Justice has ordered CI Mutual Funds Inc. and AIC Ltd. to pay more than $170 million in damages, including interest, for breaching their duty to investors when they permitted market-timing trading in their mutual funds two decades ago.
The decision on damages, released on July 16, concludes a class action involving five major fund managers that began in 2006 and was certified in 2013 by the Supreme Court of Canada. It affected more than one million investors, according to court documents.
In the case of CI and AIC, the class action alleged that between 1998 and 2003 (CI), and between 1999 and 2003 (AIC), the fund managers permitted sophisticated offshore hedge fund investors to engage in frequent trading in their funds, diluting the investment of long-term investors.
In 2023, the court ruled on CI’s and AIC’s liability, finding that the firms were negligent for permitting the frequent trading.
CI is now CI Investments Inc., and AIC is now AIC Global Holdings Inc.
In the current trial on damages, the court ordered CI to pay nearly $60.5 million to investors and AIC to pay $37.9 million. The court also awarded damages related to some additional accounts at CI identified by the plaintiffs’ expert — other than those previously identified in a related 2004 settlement with the Ontario Securities Commission (OSC) — that engaged in market timing that harmed investors. Those damages hadn’t been calculated when the decision was written. (The damages amount that AIC must pay includes all such additional accounts with the fund manager.) Investors are also entitled to costs.
The court further determined that the investors are entitled to simple prejudgment interest of 2.8% per year, which was the rate in effect when the class action commenced, the decision says.
Damages and interest combined total more than $170 million, Toronto-based Rochon Genova LLP said in a release. Sarah Fiddes, an associate with Rochon Genova who was part of the prosecution, said in an email that “there are likely hundreds of thousands of class members.”
“We are very pleased with the damages award, which actually provides compensation for both the full capital loss for the unitholders plus a reasonable rate of return over the 21 years since the OSC settlement (which did not cover all capital losses suffered),” Peter Jervis, a senior partner with Rochon Genova who led the prosecution, said in an email.
An emailed statement from CI said, “The issues addressed by the court were the subject of a settlement reached with the Ontario Securities Commission on December 10, 2004. As part of that settlement, CI paid $49.3 million in compensation to investors in the affected funds. CI’s position throughout this action has been that the $49.3 million paid under the OSC settlement agreement fully compensated the affected investors. CI is considering the decision and expects to appeal both liability and damages.”
AIC didn’t respond to a request for comment.
A contested issue in the case was the method used to assess damages, with the judge choosing the next-day NAV method advocated by the plaintiffs. The method aims to measure the specific investor harm — dilution — caused by the hedge fund investors’ time zone arbitrage, the decision says. In using the method, the judge applied a discount, given the method “is not necessarily scientifically precise.”
From the discounted amounts, deductions were then made, including CI’s previous OSC settlement of $49.3 million and AIC’s previous OSC settlement of $58.8 million. (Those amounts had been paid to the managers’ respective funds.)
Jervis said via email that a forthcoming notice program will advise investors of the claims administration process. Investors will be able to contact the claims administrator by email or phone, he said, and a system will be available for investors to provide their information to register to receive their share of the proceeds. The firm will provide updates on its website.
“However, it is important to understand that the defendants have 30 days from July 16 to appeal both 2023 liability decision and this 2026 damages decision to the Court of Appeal,” he said. “No claims process will commence until either of those appeals, if advanced, are dismissed, or if a settlement of either or both claims are made.”
In the case of such appeals or settlements, a notice will be approved by the court and broadly advertised, Jervis said.
The 2023 ruling on CI’s and AIC’s liability came almost 20 years after U.S. authorities first exposed harmful market-timing trading. In 2003, New York’s attorney general brought the first enforcement action alleging that mutual fund companies were allowing hedge fund investors to use the asset management companies’ funds in arbitrage trading that harmed long-term investors in those same funds. That discovery led to a series of regulatory investigations and enforcement actions in both the U.S. and Canada.
The class action was later filed against five fund managers that had reached settlements with the OSC in 2004, resulting in the managers paying more than $200 million to their respective funds, according to court documents. In addition to CI and AIC, the fund managers were IG Investment Management Ltd., Franklin Templeton Investments Corp. and AGF Funds Inc. These three managers previously settled with investors.
— With files from James Langton. This story has been updated with additional comment.