Class actions in Quebec

By Mindy Paskell-Mede
Illustration: Jason Schnieder

The province’s legislation is the oldest and the bluntest in Canada. And It promotes class proceedings

On September 12, 2006, the Quebec Superior Court rendered judgment on a motion to certify a class action against a number of defendants in connection with a fraud that occurred at the Norbourg Group. For purposes of such a motion, which determines whether or not the action can proceed as a class action or must be taken, if at all, on an individual basis, the court is obliged to accept all the plaintiffs’ allegations as if true. Obviously, the plaintiffs will eventually be obliged to prove their case in accordance with ordinary legal principles. Nevertheless, class certification is an important step, since both the prosecution and defense of class actions can be extremely costly.

Quebec’s class-action legislation is the oldest in the country and, in many ways, the bluntest instrument. It is widely recognized that it promotes class proceedings. For example, if a plaintiff is unsuccessful in having his or her proposed class certified, he or she can appeal from that decision, whereas a defendant who is unsuccessful in resisting such a bid cannot appeal.

Readers of this column are likely familiar with newspaper accounts of the Norbourg fraud. For purposes of the decision, the Superior Court accepted the following facts as if true. From 2001 until August 25, 2005, Vincent Lacroix orchestrated various schemes to swindle approximately $130 million from 9,000 investors whom the representative plaintiff sought to certify as a class. In short, Lacroix admitted to having stolen his clients’ funds that he had invested in mutual funds managed by his own companies and admitted to having falsified documents and manipulated computer programs in order to avoid detection of that fraud.

In addition to suing Lacroix and others accused of having participated directly in the fraud as his accomplices, the representative plaintiff also named a number of defendants who were alleged to have acted negligently. Of particular interest, three accounting firms and the Autorité des marchés financiers, which is the Quebec counterpart to other provinces’ securities commissions, were named as defendants.
In order to certify a class, the judge must form the opinion that four criteria have been met:

• the class members’ recourses must raise similar, identical or related questions of law or fact;
• the allegations must appear to justify the conclusions sought;
• the composition of the class must be such as to render other procedural vehicles impracticable; and
• the proposed class representative must be in a position to adequately represent the members.

The judge had little difficulty ruling that the class could be appropriately certified against the defendants who were alleged to have participated directly in the perpetration of the fraud. The judge then considered the situation of the accounting firm that audited Norbourg itself and the Norbourg Funds (certain mutual funds in which some of Norbourg’s clients were invested). Recognizing that these auditors had not yet been given the opportunity to defend themselves, the judge held that on the face of the pleadings, there were sufficient allegations to justify the conclusions sought. Moreover, the issue of the auditors’ negligence raised identical questions of fact and law for each class member. The size and composition of the group rendered other procedural vehicles impracticable, and as a result the class action against these auditors was certified.

Two other auditing firms named as defendants, however, were successful in resisting certification as against them. The first firm audited certain specific mutual funds in which Norbourg invested its clients’ money, known as the Evolution Funds. The court held that the pleadings were sufficient to allow the matter to go to trial against these auditors with respect to those members of the class whose money was in fact invested in the Evolution Funds. However, not all members of the proposed class were so invested. The group must be homogenous and each member of the group must have sufficient legal interest to sue each defendant, which simply wasn’t the case with respect to those of Norbourg’s clients whose money was invested in other funds. Therefore, the motion to certify a class action against this accounting firm was dismissed.

The third accounting firm audited Evolution Funds Co. Inc., which was not itself a mutual fund but a company owned by Lacroix and his cronies, and acted as manager and/or fiduciary of the Evolution Funds. Given the fact that its audit report was therefore addressed to the perpetrators of the fraud and not circulated more broadly, it was argued that there was no causal connection between any alleged negligence and the plaintiffs’ damages. The court agreed.

The proposed representative plaintiff had not alleged how that auditor would have or could have alerted the investors of any fraud that might have been uncovered. Moreover, the same problem existed with respect to the auditor of the Evolution Funds themselves: there were many members of the putative class whose money wasn’t even invested in those funds. Therefore, the motion to certify a class action against this accounting firm was also dismissed.

Finally, a significant portion of the judgment focused on the claim against the Autorité des marchés financiers. It was asserted that the Autorité des marchés financiers did not follow up on its own inspection program, allowing Lacroix to delay giving appropriate responses and having his computer system verified.

As a public body, however, the Autorité des marchés financiers claimed a certain immunity. In this respect, the law has always recognized that a certain degree of deference must be awarded public bodies in their legislative, judicial and administrative activities. For example, it would not be appropriate to sue a public body for failing to follow a political agenda that the plaintiff would prefer. The common law has traditionally seen this distinction as one between the policy function and operational function, allowing lawsuits in negligence with respect to the latter, but not the former. The court held that the civil law does not necessarily import such common law notions exactly and therefore, although recognizing the distinction between the two functions of a public body, refused to go the step further and adopt the common-law notion of proximity to determine whether a cause of action would lie against the Autorité des marchés financiers with respect to its alleged operational deficiencies in following through on its inspections of Norbourg.

Specifically, the court had no difficulty holding that the allegations, if true, could give rise to liability of the Autorité des marchés financiers. The allegations were not vague assertions that something must have gone wrong, given the end result. In fact, the court pointed to two examples.

First, as early as 2003, in the course of an ordinary inspection, Lacroix expressed surprise that the inspectors wished to have paper copies of various documents from the trust company that was holding the investment certificates. The inspector replied, indicating that it was normal procedure to reconcile paper and electronic records on an annual basis, and gave Norbourg a few weeks within which to comply. Three months later, a follow-up letter was sent, simply noting that there were irregularities and indicating that there might be further questions at a later date. It now appears that much of the fraud was committed through the falsification of these electronic reports.

Second, that four months before the scandal broke, the Autorité des marchés financiers had received a FINTRAC report from the police, indicating that certain transactions among Evolution, Norbourg and the trust company had the hallmarks of misappropriation.

The court held that these examples were sufficient to raise questions as to the degree of follow-up conducted by the Autorité des marchés financiers, questions that should be answered by a judge at trial rather than be dismissed at a preliminary stage.

The court held the civil law does not require the Autorité des marchés financiers to have had a specific positive duty with respect to the 9,000 investors in order for it to be sued. Once there was negligence and the failure to discharge a general obligation of diligence, a public body such as the Autorité des marchés financiers could be sued. In fact, there is statutory immunity in the governing legislation, but that immunity is not absolute. Where the Autorité des marchés financiers is found to have acted in bad faith, the immunity no longer pertains. Given that the nature and number of faults alleged to have been committed by the Autorité des marchés financiers constituted gross negligence, no immunity would prevail. Therefore, the court certified the class action against the Autorité des marchés financiers.

Mindy Paskell-Mede, BCL, LLB, is partner at Nicholl Paskell-Mede in Montreal. She is Technical editor for Law