12/12/2013 11:42 EST | Updated 02/11/2014 05:59 EST

Mutual fund class-action lawsuit OK'd by Supreme Court

Canada's highest court will allow a class-action lawsuit against two of Canada's largest financial companies to go ahead.

In a 7-0 decision, the Supreme Court ruled on Thursday that a class-action suit can proceed against mutual fund firms AIC Ltd. and CI Mutual Funds Inc.

Those two were among five companies that financial regulator the Ontario Securities Commission found to have engaged in "market timing" practices that hurt investors in some of the companies' mutual funds.

Market timing is when an investor makes investment decisions based on directions he or she thinks the broader economy will take — not necessarily based on the fundamental conditions of the specific investment or company. It it also used to describe rapid, short-term trading to take advantage of perceived price discrepancies, while also racking up large profits for trading divisions, regardless of how the trades turn out.

Previous settlements

In the case in question, bets on the direction of certain stocks that ended up turning out poorly cost investors millions of dollars.

The fund companies have already paid millions to settle the issue with regulators, but a number of investors didn't agree with the settlement and pursued an additional class-action lawsuit for more compensation.

A lower court judge initially denied the suit, but that was overturned by other courts and now the Supreme Court has ruled the suit can proceed.

Three of the five firms involved have already settled, leaving the suit to go ahead against AIC and CI. Those two companies have already paid a respective $58.8 million and $49.3 million in fines in the case.

One expert named in the case files says under his one method of calculation, losses endured by investors because of the market timing activities were estimated at $192.6 million for AIC’s investors and $349.3 million for CI’s investors.

The judge estimated that the size of the class could be as high as 264,036 people with AIC and 803,903 people with CI.

Writing for the court, Justice Thomas Cromwell said the original judge was wrong to have barred the class-action suit.

"I agree with the Divisional Court and the Court of Appeal that the motion judge erred in principle in his analysis and that this justified appellate intervention in his exercise of discretion to refuse certification," Cromwell wrote.

"As I see it, the correct legal principles support those courts' decision to certify the proposed class action."