The lawsuit involved breaches of trust, fiduciary duty, and securities law disclosure requirements
The British Columbia Court of Appeal has granted certification for a class action against HSBC alleging misrepresentation of mutual fund management.
The appeal court overturned a lower court decision denying certification and ruled that the plaintiff’s claim disclosed a valid cause of action and should proceed as a class action.
The proposed class action claimed that HSBC marketed its mutual funds as “actively managed” while allegedly employing a “closet indexing” strategy, meaning the funds closely mirrored benchmark indices despite charging higher fees. Investors in active funds typically pay higher management fees, expecting to outperform passive funds that track a benchmark index. The appellant argued that HSBC’s Equity Fund did not provide this expected advantage, resulting in investors overpaying for what was essentially a passive investment.
The BC Supreme Court refused to certify the class action, ruling that the notice of civil claim did not disclose a valid cause of action. The judge interpreted the claim as alleging civil fraud, even though the plaintiff had not explicitly pleaded fraud. When the appellant later amended the claim to clarify that she was not alleging fraud, the judge found that the revised pleading failed to establish a cause of action.
The judge rejected the appellant’s argument that HSBC breached its disclosure obligations under securities regulations, concluding that fund managers must intentionally adopt an investment strategy and cannot negligently misrepresent it. As a result, the court dismissed the certification application.
The Court of Appeal found that the lower court treated the claim as fraud when the appellant had not pleaded fraudulent intent. The appellant could have pleaded the tort of civil fraud but chose not to. The court emphasized that the claim involved breaches of trust, fiduciary duty, and securities law disclosure requirements, none of which required proof of fraud.
The appeal court also found that the lower court improperly applied an exception to the usual rule against costs in class actions. While the lower court found the appellant’s amendments confusing, the Court of Appeal held that they did not amount to “exceptional circumstances” warranting costs. The court set aside the costs award and confirmed that neither party would receive costs for the appeal.
Ultimately, the court ruled that the claim met the legal threshold for certification under the Class Proceedings Act and should proceed.
