A proposed class action against CIBC Asset Management Inc. (CAM), alleging that the company engaged in closet indexing in certain mutual funds, has now been certified by the Supreme Court of British Columbia.
The certification decision follows an earlier ruling, which found that while most of the elements that qualify a lawsuit as a proposed class action are present in this case, the plaintiffs had failed to establish that a common issue involving alleged closet indexing actually exists.
However, in that 2022 decision, the court also granted leave for the plaintiffs to submit further evidence to prove that a potential common issue exists.
In the meantime, three other proposed class actions based on closet indexing allegations (against TD Asset Management Inc., RBC Global Asset Management Inc., and HSBC Global Asset Management) have already been certified as class actions.
According to the court’s decision, in this case, the plaintiffs have now submitted evidence — including affidavits from a professor at University of Toronto that included an analysis of specific CIBC funds’ performance — that, they argue, indicate that the fund manager engaged in closet indexing that harmed investors in those funds by charging fees for active management, but only delivering index-like performance.
The defendants, including CAM, CIBC, and CIBC Trust, opposed certification, arguing that the plaintiffs failed to establish a basis in fact supporting the proposed common issue.
However, the court sided with the plaintiffs, finding, among other things, that competing expert evidence “illustrates that a common issue actually exists.”
The analysis of fund performance “provides an evidence-based argument that the performance of the funds was economically and statistically linked to the benchmark,” the court noted.
“Whether that linkage was sufficient to attract legal liability is a complex issue that cannot be answered simply by looking at graphs or performance reports,” it said.
Additionally, the court found that the plaintiff “shown some basis in fact the defendants charged the class members active management-level fees for returns they could have realized by investing in low-cost passive index funds” — and that they also provided evidence that the disclosure of the funds’ investment strategies may have been inadequate.
None of the allegations have been proven.
However, the court found that the plaintiffs provided a basis in fact for the alleged common issues, and it ordered the case certified as a class action.