The Price Of ‘market Timing’: Damages Awarded In Multi-decade Securities Class Action

Key takeaways

In Fischer v. IG Investment Management Ltd. et al.,¹ Justice Koehnen of the Ontario Superior Court of Justice assessed damages in a long-running securities class action where the Court had previously found the defendant mutual fund companies negligent for permitting frequent, short-term trading that caused harm to long-term retail investors, with damages limited to one form of such trading known as time zone arbitrage.²

The decision addresses how to measure the dilutive harm to unitholders caused by the arbitrage trading. The Court awarded aggregate damages of nearly $100 million, in addition to significant prejudgment interest, and additional damages in respect of certain time zone arbitrage accounts that the Ontario Securities Commission (OSC) had not identified in its prior investigation and settlement, the quantum of which remains to be determined. The decision provides important guidance on determining aggregate damages in the context of class proceedings with parallel regulatory settlements.

Background and procedural history

This class action was commenced on behalf of unitholders in mutual funds managed by several mutual fund companies. The proceeding was bifurcated into liability and damages trials. In the liability decision, Justice Koehnen found the two remaining defendants negligent for permitting frequent trading in their funds but limited damages to trades constituting time zone arbitrage, in part because the funds’ prospectus disclosures about the risks of frequent trading demonstrated that mutual fund managers knew or ought to have known of the potential for harm to unitholders.

The litigation has had a lengthy procedural history, including proceedings before the Supreme Court of Canada. The OSC had investigated mutual fund market timing beginning in 2003, and the defendants paid more than $100 million into affected funds through OSC settlements. While the defendants argued that these settlements fully compensated investors, appellate courts — including the Supreme Court of Canada at certification — rejected that position. Accordingly, a further damages hearing was convened to assess the civil compensatory damages within the context of the class proceedings.

The decision

The central issue at the damages trial concerned the methodology for assessing damages arising from dilutive harm to investors. The plaintiffs sought principal damages of approximately $130 million from the defendants, with prejudgment interest or return claims ranging from approximately $200 million to $475 million. The defendants maintained that the class had suffered no damages.

The plaintiffs relied on the “Next Day NAV” method to quantify damages, which measured the dilutive impact on funds by comparing the fund’s net asset value (NAV) on the date of a trade against the following day’s NAV. The defendants advanced a “profits method” to quantify damages that focused on the gains actually earned by frequent traders. The Court accepted the plaintiffs’ Next Day NAV approach, holding that it measured dilution — the specific harm flowing from the negligence found at the liability stage — while the defendants’ profits method measured traders’ returns rather than the harm to unitholders. The Court took issue with the latter approach because it asked how the traders fared, rather than what loss to unitholders flowed from the defendants’ conduct.

The Court also rejected the argument that each trader’s subjective motivation needed to be proved. Instead, it held that time zone arbitrage could be identified through objective trade characteristics and the absence of evidence of alternative strategies that could explain the trading patterns.

The Court awarded simple prejudgment interest at 2.8%, rejecting compound-return approaches advanced by the plaintiffs. The Court held that compound returns were inappropriate given the variable investment horizons of over one million class members and evidence that many class members had redeemed their units well before trial.

While the defendants argued that the earlier OSC settlements should fully offset civil liability, the Court declined to give them that effect, citing prior appellate decisions (including at the Supreme Court of Canada) that rejected this argument at certification.

Why this matters for public companies in Canada

The Court’s comments on damages quantification methodology have significant implications for corporate defendants. The decision reinforces an approach in which damages are assessed by reference to the specific harm flowing from the established liability. In this case, the Court was not persuaded by the defendants’ expert methodology, finding that it measured the “wrong thing” — traders’ returns rather than harm to unitholders.

The Court’s reasoning on compound interest also suggests that plaintiffs face a high bar in seeking compound returns. The Court rejected the plaintiffs’ compound-return theories because class members had widely varying investment horizons, many had redeemed their units before trial, and the record lacked the evidence needed to support compounding. That said, simple prejudgment interest can still produce a substantial award. On the figures summarized by the Court, simple interest alone could bring the approximately $98 million in principal damages to an all-in award exceeding $150 million before costs, although the precise figure will depend on the final interest calculation and any further directions from the Court.

Footnotes

1. 2026 ONSC 4142.

2. 2023 ONSC 915.