On appeal, a court in British Columbia has certified a class action against fund manager HSBC Global Asset Management (Canada) Ltd. and HSBC Investment Funds (Canada) Inc. on behalf of investors who alleged that several funds engaged in “closet indexing.”
The Court of Appeal for British Columbia overturned a lower court decision from February 2024 that refused to certify a proposed class action. The suit alleged that certain actively managed funds were actually passively managed — and that, as a result, investors were overcharged when they paid fees for active management.
Following a series of hearings into whether the proposed class action should be certified, the lower court concluded that the claim failed to disclose viable grounds for a class action and awarded costs to the firms.
Now, those decisions have been overturned on appeal.
In a unanimous decision, the three-judge panel ruled that the claim from plaintiff, Linnea Gibbs, does disclose possible causes of action — including allegations of breaches of fiduciary duty and trust, failure to comply with statutory disclosure obligations, and unjust enrichment.
Among other things, the appeal court found that the motion judge rejected the plaintiff’s pleadings for failing to allege that “closet indexing” involves fraudulent intent to mislead investors about the fund’s investment strategy.
“In his view, it was unclear how a failure to disclose that a closet indexing strategy was being used could be negligent, given that an investment strategy must be intentional,” the appeal court noted in its decision.
However, the appeal court ruled that it wasn’t necessary to allege fraudulent intent.
“In my view, and with respect, the judge erred in concluding that without civil fraud, the [claim] no longer disclosed a cause of action,” the appeal court said — adding that the judge overlooked the other causes of action put forth by the plaintiff that don’t need to allege fraud.
“Trustees may breach their obligations under a trust without engaging in fraud … Similarly, a fiduciary may fall short of the expected standard of utmost good faith without intending to deceive the person to whom a fiduciary duty is owed,” the appeal court said. It added: “a prospectus may fail to disclose material information through oversight rather than deceit.”
In this case, the plaintiff “alleges that the respondents either intentionally used a closet indexing strategy and kept this information from investors, or through negligence were unaware that their investment choices were not sufficiently different from the benchmark to give unitholders the prospect of outperforming the benchmark,” the appeal court said. Ultimately, it concluded that the plaintiffs had met the test for certification as a class action.
It also ruled that the motion judge erred in awarding costs to the defendants in the case, saying that, while the plaintiff’s pleadings were complex and flawed, they didn’t rise to the level of “exceptional,” which would justify awarding costs against a plaintiff in a proposed class action.
“I would allow the appeal, grant the application for certification, and set aside the costs award,” it said.