Ontario Superior Court Narrows Foreign Exchange Class Action

May 26, 2020

Written By Ranjan Agarwal, Emrys Davis, Alexander Payne and Tim Heneghan

The Ontario Superior Court's recent decision granting certification in a foreign exchange price-fixing class action (Mancinelli v. Royal Bank of Canada, 2020 ONSC 1646) reminds counsel and stakeholders of: (a) the relatively low threshold for class action certification in Ontario, and (b) the Court’s significant discretion to narrow or alter a proposed class.

Background

The plaintiffs commenced a wide-ranging claim against 18 groups of financial institution defendants. The plaintiffs alleged that over 11 years the defendants had engaged in a conspiracy to fix prices of currency traded on the foreign exchange market. By the time the court heard the certification motion, 14 of the 18 defendants had settled.

The plaintiffs alleged that, in order to carry out the conspiracy, dealers within the defendant financial institutions communicated from time to time by chatrooms named “The Cartel” and “The Bandits’ Club” to coordinate prices offered to individual customers and manipulate benchmark exchange rates. As a result, the plaintiffs alleged that this conduct impacted the prices of various FX instruments bought directly or indirectly by the plaintiffs, causing substantial losses.

Analysis and Takeaways

The approach taken and principles applied by Justice Paul Perell, the Certification Judge, largely confirmed existing jurisprudence. That said, the “episodic” nature of the alleged conduct raised novel issues and distinguished aspects of the conduct here from a typical price-fixing class action, where the conspiracy is usually alleged to have affected all prices over the class period, and not to have had episodic effects on certain transactions.

Justice Perell considered the episodic nature of the conduct and its impact on certification at various stages of the analysis, including:

1. whether the plaintiffs’ pleading discloses a cause of action;
2. whether there is an identifiable class;
3. whether there are common issues as between class members; and
4. whether a class action is the preferable procedure.

Ultimately, the unique features of foreign exchange transactions and the alleged price-fixing of such transactions were an important consideration underlying the Court’s refusal to certify the claims of certain categories of proposed class members.

1. The Cause of Action Criterion is a “Molehill”, not a Mountain

To succeed on the cause of action criterion, Justice Perell said that the plaintiffs “need only climb over the molehill of the plain and obvious standard”.

The defendants asserted three main arguments in support of the position that the plaintiffs’ pleading did not satisfy the cause of action criterion:

1. the plaintiffs did not sufficiently plead the particulars necessary for a claim in conspiracy;
2. a subgroup of the proposed class did not suffer a loss, and do not have standing to sue; and
3. a subgroup of the proposed class does not have an unjust enrichment claim.

Justice Perell rejected the defendants’ arguments that the conspiracy claim lacked particularity, finding that the plaintiffs have “concisely pleaded an episodic conspiracy of price-fixing in Foreign Exchange Market over an eleven-year period.” In doing so, the Court acknowledged that conspiracy claims often lack in pleaded particularity given the inherently secretive nature of the alleged conduct, with the details of the asserted conspiracy largely in the hands of the alleged conspirators.

Justice Perell also dismissed the defendants’ remaining arguments on the cause of action criterion.

2. “Some Basis in Fact” is a Low Standard

To succeed on certification, the plaintiff must show “some basis in fact” for each of the certification criteria, other than the requirement that the pleadings disclose a cause of action (which is based on the sufficiency of the pleadings).

For an issue to be a common issue, it must be a substantial ingredient of each class member's claim and its resolution must be necessary to the resolution of each class member's claim. In the context of the common issues criterion, the “some basis in fact” analysis involves a two-step requirement that:

1. the proposed common issue actually exists; and
2. the proposed issue can be answered across the entire class.

In asserting that there are common issues, the plaintiffs relied heavily on a methodology prepared by their expert witness. The expert opined that using accepted economic and statistical tools, including regression analysis, it was possible to calculate the losses caused by the defendants’ collusion to those proposed class members who traded directly with the bank dealers or who traded mutual funds.

In response, the defendants’ attacked the expert’s proposed methodology, and argued that because the alleged conspiracy was episodic and involved changing permutations of twinned currencies and twinned conspirators, there was no basis in fact for a common issue.

Justice Perell disagreed with the defendants’ argument against commonality, finding that an episodic conspiracy can and does raise common issues, including the common issue of whether the defendants conspired to episodically price-fix aspects of the foreign exchange market.

Justice Perell accepted that the expert’s evidence met the low standard set by the case law, and that there was “some basis in fact” for her conclusions and her methodology, despite the “blistering attack” on her analysis (although she was not cross-examined). Justice Perell was critical of the “land, sea, submarine, air, and outer space attack” on the expert’s opinion, and an “untested barrage of criticisms” against the expert.

Justice Perell’s decision serves as a cautionary reminder to class action counsel that:

1. the certification motion is not the time for a “full-fledged battle of the experts”;
2. the threshold for a credible or plausible methodology is generally low; and that
3. on certification, “conflicting expert evidence is not to be given the level of scrutiny to which it would be subject at a trial.”

3. The Court has Significant Discretion to Narrow or Alter the Proposed Class

In assessing identifiable class, common issues, and preferable procedure criteria, the Court accepted the defendants’ argument that the class was made up of three major subgroups:

1. direct purchasers from the defendant financial institutions;
2. direct purchasers from non-defendant financial institutions; and
3. indirect investor purchasers (i.e., parties who did not conduct foreign exchange transactions directly, but instead invested in a mutual fund or equivalent that entered into FX transactions).

Justice Perell found that subgroup (a) (the direct purchasers from the defendant institutions) generally satisfied the identifiable class requirement as long as the class members had entered into an FX transaction with a named defendant’s salesperson either directly or through an intermediary. In doing so, Justice Perell excluded direct purchasers who made purchases on the defendants’ electronic platforms, given the lack of evidence on that issue. The Court similarly accepted that the direct purchasers had common issues, based in part on the expert’s proposed methodology, and that a class action was the preferable procedure in the circumstances.

Justice Perell excluded subgroups (b) and (c) in their entirely. In a substantial narrowing of the class, The Court found that subgroup (b), the direct purchasers from non-defendant financial institutions, could not self-identify (i.e., did not satisfy the identifiable class criterion) due in part to the episodic nature of the price-fixing allegedly perpetrated by the defendant banks.

In considering the identifiable class criterion, Justice Perell held that purchasers from non-defendant banks entered into “bespoke” lawful transactions for FX instruments, and these purchasers could not know whether their individually negotiated transaction with a non-defendant institution was impacted by the alleged wrongdoing. The Court found that the non-defendant banks perpetrated no illegal price-fixing and their services did not coattail on the illegality allegedly perpetrated by the defendants in fixing prices. As a result, the direct purchasers from non-defendant financial institutions could not self-identify, and do not share a common experience with subgroup (a) (the direct purchasers). In doing so, Justice Perell rejected applying the “umbrella purchaser” argument that has been asserted in other price-fixing class actions, again pointing to the episodic nature of the alleged price-fixing conduct in this case.

In evaluating the claims of the indirect investor purchasers, the Court characterized the indirect investor purchasers’ claims as a “meta-claim” and “even more remote,” finding that they similarly failed to meet the identifiable class, common issues, and preferable procedure criterion:

1. the indirect investor purchasers had not personally engaged in a FX transaction with a named defendant—instead, they bought an interest in various investment vehicles, and these vehicles may have been affected by purchases made in the FX market with the defendant financial institutions;
2. the trustees of mutual funds have standing to sue, not the indirect investor purchasers themselves; and that
3. the indirect investor purchasers’ claims might lead to a double-counting of the class’s losses.

As a result, although the class action was certified, the proposed class was substantially narrowed to:

All persons in Canada who, between January 1, 2003 and December 31, 2013 (the “Class Period”), entered into an FX Instrument transaction with a named Defendant’s salesperson either directly or through an intermediary.

Despite Justice Perell significant narrowing of the class, the class remains substantial, and the class action relates to alleged conduct over an 11-year period and a potentially large number of FX trades.

It remains to be seen whether either side will appeal the certification decision.

If you have any questions about the information in this article, please contact a member of the Bennett Jones Class Action Litigation group.

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