The case was about market timing the sale of mutual funds. Fund pricing is completed at 4:00 pm Eastern Time, unlike individual stocks that are priced throughout the day once the stock market opens.
Profits should have gone to individual investors. Instead they were siphoned off by sophisticated traders who took advantage of the time difference trading within mutual funds owning foreign stocks. Knowing the value of the overseas markets, they profited from trading with this information.
The five companies pursued by the Ontario Securities Commission were AIC, CI Mutual Funds, Franklin Templeton, AGF and IG Investment Management. After the Commission’s initial investigation, they agreed to pay back just over $200 million to affected investors.
Then it became interesting; very interesting. Those affected investors, unsatisfied with the initial settlement, launched a law suit. The Ontario Superior Court ruled against them saying the matter would be best settled by the regulator instead of a class action law suit.
The decision was appealed. The next two court decisions ruled in favour of allowing investors to continue with their class action law suit against these five mutual fund companies. Three companies reached a settlement but two didn’t. Their fate and the fate of individual investors rested with the pending decision by the Supreme Court. The two companies lost that decision.
Indeed it was a victory for individual investors who claim they lost money because mutual fund companies allowed large traders to profit at their expense. The decision was decisive and in mid-December Canada’s top court ruled 7-0.
Now the class action legal case can continue against AIC and CI, the two firms that did not settle earlier. The judge thought the size of the class action could be as high as 265,000 investors with AIC and 804,000 investors with CI. One expert suggested the loss could be $192 million against AIC and $350,000 million against CI.
This legal case seemed like a classic story of the little guy being taken advantage of by a larger opponent. Many investors often think their interests are secondary to the big companies controlling the investment business. Here, in my opinion the “little guy” won the battle by a convincing margin. Justice did prevail for the individual investor.
There is a fine line between profit, greed,and the misuse of power. This case of market timing is one of many issues expressed by investors. Concerns about hidden mutual fund fees and the potential for a conflict of interest between investors, investment advisors and investment companies serving them are also expressed.
There are two aspects to the December court ruling: fairness and protection. Fairness was given to individual investors against the powerful force of several large investment firms.
The more significant factor is the question of whether this ruling is a shift towards better protection of the interests of individual investors. In this case the court decision was a significant win for individual investors.