Not out of the woods yet: When regulatory settlements have downstream consequences for class action certification
Mackenzie v. Chartwell Asset Management Inc (“Mackenzie”),[1] is a recent decision in a continually evolving line of cases addressing the sufficiency of pleadings at the certification stage. It also illustrates one way in which prior regulatory proceedings can affect class action certification risk.
Two important lessons emerge from Mackenzie:
- First, Mackenzie serves as a reminder that factual admissions in publicly-disclosed, regulatory settlements can have consequences for class action certification, potentially assisting plaintiffs to define their claims and also to meet the “some basis in fact” threshold for certification. This decision underscores the need for defendants to use careful language when drafting factual admissions, and to consider and mitigate potential class action risk proactively (e., at the drafting stage).
- Second, Mackenzie emphasizes that informational asymmetry in the class actions context does not relieve plaintiffs of their obligation to investigate their claims and plead the material facts and particulars necessary to support viable causes of action. To the contrary, in this case, the certification judge disagreed with the “tactical decision” by plaintiff’s counsel to draft general, broad, and vague pleadings in an attempt to avoid limiting the claims at the certification stage, finding such tactics to be incompatible with the certification regime.
The Proposed Class Action
The plaintiff, Ms. Mackenzie, was an investor who lost her retirement savings after investing with the defendants, Chartwell Asset Management Inc. (“Chartwell”) and Gregory Cameron. Ms. Mackenzie alleged that although she believed she was invested in a conservative portfolio, the defendants had misrepresented the nature of her investments. Ms. Mackenzie lost over $200,000, and filed a regulatory complaint.
The Regulatory Proceedings
The Financial Planning Canada Standards Council (“FPCSC”) initiated regulatory proceedings against Mr. Cameron after it received complaints involving seven of his clients. In a 2021 decision accepting a joint settlement agreement,[2] Mr. Cameron admitted and the FPCSC found that he failed to recommend suitable investment strategies to at least seven clients, that he failed to adequately disclose the level of risk about investing in a particular mutual fund portfolio to at least seven clients, and that these failures were contrary to his ethical and professional responsibilities.
The BC Securities Commission (“BCSEC”) also initiated regulatory proceedings against Mr. Cameron, Chartwell, and others, which resulted in a second settlement agreement that was supported by an agreed statement of facts.[3] As an investment fund manager, Chartwell was required to meet a legislated standard of care when calculating the net asset value of the fund. However, Chartwell and Mr. Cameron admitted to falling short of this standard, in particular by valuing the fund without having sufficient information and by failing to re-evaluate the fund’s value despite the presence of risk indicators.
The Certification Test
Despite well-defined admissions of wrongdoing in the regulatory proceedings, Ms. Mackenzie “wished to keep her pleadings vague and not limit her claims” to the specific wrongdoing or investments identified in the settlement agreements. She argued that the broad pleadings were a necessary “tactical decision”[4] because she was operating at an “information deficit”.[5] As a result, the pleadings rested on bald allegations about unparticularized “misrepresentations” and undefined “investments”, which were mostly devoid of supporting material facts.
The court found the pleadings failed to disclose a cause of action, and rejected Ms. Mackenzie’s tactical position with respect to breadth, finding this was an “untenable position to take at a certification hearing”.[6] The limited nature of pre-certification discovery did not relieve Ms. Mackenzie of her obligation to investigate her claim and plead the material facts to support a viable cause of action. She had not sought pre-certification discovery, and there was no evidence of other investigation efforts.
Additionally, the broad and non-specific nature of the allegations advanced in the pleadings made it impossible for the court to assess whether the other elements of the certification test were met. The certification judge emphasized that she could not “certify vague and broad proposed common issues … and wait to see if and how issues get narrowed at a common issues trial”.[7] Rather, the purpose of pleadings is to “define the issues with sufficient precision to be both manageable and fair to both parties, and to enable to Court to determine whether there is some basis in fact for common issues.”[8]
While the pleadings did not include allegations about the specific wrongdoing admitted in the regulatory settlements, the court suggested that amendments to the pleadings could raise viable claims and common issues regarding the defendants’ wrongdoing. For example, as a result of the BCSEC ruling and settlement agreement, the court found there was “some basis in fact” supporting common issues about the valuation of one particular fund.[9] However, the extent to which factual admissions in regulatory settlements may be used in subsequent civil proceedings (including class actions) is a complex and evolving area of the law.[10] While not raised in this case, such settlements often contain express “limiting use” or “privative” clauses, which may seek to limit the admissibility or weight of the factual admissions in subsequent proceedings (although they are generally treated as affecting weight rather than admissibility).[11] These clauses are one of many tools that may be used to proactively mitigate class action risk when drafting regulatory settlements.
Leave to Amend
Notwithstanding the deficiencies in the pleadings, the Court granted leave for the plaintiff to amend the claim and proposed common issues, finding that Ms. Mackenzie had identified “potential focused claims, arising out of the FPCSC and BCSEC rulings and settlement agreements, which could possibly be amenable to a class proceeding”.[12] The interests of justice and the objectives of class actions—particularly access to justice—favoured allowing the amendment, considering the significant interests at stake (including alleged losses of $1 million by the FPCSC complainants).
[1] Mackenzie v. Chartwell Asset Management Inc, 2024 BCSC 1185 [Mackenzie].
[2] See FP Canada Standards Council, Report on Disciplinary Action (online).
[3] See Chartwell Asset Management Inc. (Re), 2022 BCSECCOM 52.
[10] See, recently, Tietz v. Bridgemark Financial Corp., 2024 BCSC 1166 at para. 116; Fischer v. IG Investment, 2023 ONSC 915 at para. 194. See also National Bank Financial Ltd. v. Potter, 2012 NSSC 76 at para. 54-56; MacRury v Keybase Financial Group Inc., 2017 NSCA 8 at paras. 30-41.
[11] See e.g., Fischer v. IG Investment, 2023 ONSC 915 at paras. 192 and 194; see also Abel v Modi, 2020 ABQB 530 at paras. 27-33.