Executive Summary: Key Legal and Evidentiary Issues

• Class members sought damages for time zone arbitrage trading permitted by two mutual fund managers over a period spanning 1998 to 2003.
   
• Determining the correct damages methodology required the court to choose between the Next Day NAV (dilution) method and the profits method advanced by the defendants.
   
• Objective trading characteristics, rather than proof of a trader's subjective motivation, were held sufficient to identify time zone arbitrage transactions.
   
• Prior settlements with the Ontario Securities Commission and the Investment Dealers Association did not bar the plaintiffs' civil claim for further damages.
   
• Expert evidence originally prepared in respect of one defendant was permitted to be used by the co-defendant after a conflict of interest arose between the experts and that co-defendant.
   
• Simple, rather than compound, prejudgment interest was ultimately assessed as the appropriate award given the scale and diversity of the class.
   

Facts of the case

This decision is the damages phase of a long-running Ontario class action brought by unitholders against two mutual fund managers, CI Mutual Funds Inc. and AIC Limited, following an earlier liability finding against them in 2023. The claim concerns "time zone arbitrage" — a trading strategy in which sophisticated traders exploited the fact that foreign securities held in North American mutual funds were priced using stale closing values from overseas exchanges. By buying and redeeming fund units around predictable price movements in North American markets, these traders profited at the expense of long-term unitholders, whose per-unit value was diluted as a result. The court found in the earlier liability decision that the defendants had been negligent in permitting this trading to occur in what the judgment refers to as the "Certified Funds," though recoverable damages were confined to harm from time zone arbitrage specifically. The Ontario Securities Commission had separately investigated the practice starting in 2003 and reached settlement agreements under which CI paid $49.3 million and AIC paid $58.8 million into their respective funds, with further payments made to settle a related investigation by the Investment Dealers Association. The plaintiffs argued that these settlements did not fully compensate the class and that additional trading accounts, beyond those the OSC had identified, should also be included in the damages assessment.

Policy and legislative provisions at issue

The judgment centres on section 128(1) of the Ontario Courts of Justice Act, which entitles a successful party to simple, non-compound prejudgment interest calculated from the date the cause of action arose. Section 130 of the same Act gives the court discretion to vary that default rate where it is "just to do so," having regard to factors including changes in market interest rates, the circumstances of the case, and the amounts claimed versus recovered. The court also considered sections 8(3), 12, and 24 of the Class Proceedings Act, 1992, which respectively govern amendment of a certification order, the court's general authority to ensure fair and expeditious resolution of a class proceeding, and the availability of aggregate damages assessed without individualized proof, provided liability can reasonably be determined on a class-wide basis.

Reasoning and analysis

The court rejected the defendants' proposed "profits method" of assessing damages, reasoning that the frequent traders' own profits were irrelevant to the harm actually suffered by the class; the relevant measure was instead the dilution unitholders experienced, calculated through the plaintiffs' preferred "Next Day NAV" method. The court further held that time zone arbitrage trades could be identified from objective characteristics of the transactions themselves, rejecting the defendants' argument that subjective proof of a trader's motive was required, particularly where the defendants offered no evidence of any actual alternative trading strategy. On the preliminary issue of the OSC settlement, the court found — consistent with earlier appellate rulings in the same proceeding, including a Supreme Court of Canada decision — that the OSC's mandate was to protect capital markets rather than to compensate individual investors, and that the settlements were expressly without prejudice to civil claims. The court also addressed the admissibility of expert evidence from two professors originally retained jointly by both defendants, who later withdrew their opinions as to AIC only after a conflict arose between them and AIC; the court permitted AIC nonetheless to rely on the reports those experts had prepared in respect of CI, reasoning that the underlying evidence involved general methodological concepts rather than analysis specific to either defendant, and that the plaintiffs had not shown any specific prejudice. On the motion to amend the class definition to exclude newly identified "Additional Accounts," the court found the proposed exclusion was not arbitrary, was supported by trading-pattern evidence and filters, and caused no unfair prejudice to AIC despite being brought after the damages trial had proceeded. Finally, on prejudgment interest, the court declined to award a compound rate, reasoning that the more than one million class members had widely varying investment horizons and that many had redeemed their units well before trial, making a uniform compound rate an imprecise proxy for actual harm; the court instead applied the prescribed simple rate of 2.8% under the Courts of Justice Act.

Ruling and overall outcome

The court ruled in favour of the plaintiff class, adopting the Next Day NAV method subject to a discount — applied to account for imprecision in the methodology — of 10% for CI and 3% for AIC. Against CI, the court calculated gross damages of $136.2 million for the previously identified accounts, reduced by the 10% discount and by deductions for the OSC settlement, switch fees, and the IDA settlement, resulting in a net judgment of $60.48 million, with a further amount to be added once filters for additional, newly identified accounts are finalized. Against AIC, the court calculated a total gross damage award of $98,400,659, which after equivalent deductions resulted in a net judgment of $37,900,659.63. Simple prejudgment interest at the rate of 2.8% was ordered to apply to all amounts owing from the commencement of the action. The court remained seized of the matter to resolve outstanding issues, including finalization of the filters applicable to CI's additional accounts and possible adjustments for class members in other provinces, and invited the parties to return regarding costs if unable to agree.