The court overturned a certification judge’s finding that the pleadings disclosed no cause of action after they were amended to disclaim allegations of fraud.
In Gibbs v. HSBC Global Asset Management (Canada) Limited, 2025 BCCA 31, Justice Lauri Ann Fenlon found that the certification judge overlooked causes of action that he had previously recognized, including breach of trust, breach of fiduciary duty, failure to comply with the Securities Act, and unjust enrichment.
“It is evident from the allegation of intentional nondisclosure that the appellant could have pleaded the tort of civil fraud. However, she chose not to. That decision was hers to make,” the judge wrote, noting that allegations of fraud, if unproven, can result in a special costs award against a plaintiff.
The appellant, Linnea Gibbs, commenced a class action against the defendants, HSBC Global Asset Management (Canada) Limited and HSBC Investment Funds (Canada) Inc., alleging that mutual funds that they represented to investors as “actively managed” were instead “passively managed.”
She submitted that fees paid by investors in passive funds are typically in the range of 0.05–0.25 per cent, whereas the fees charged for the respondents’ equity fund are in the range of 1.97 per cent.
The lawsuit alleged that the defendants were engaged in closet indexing or holding investments very similar to a passively managed fund while charging for an actively managed fund.
In the first certification hearing, the certification judge determined on his own initiative that the notice of civil claim met all the requisite elements of the tort of civil fraud, even though it had not been pleaded or relied upon by the appellant.
He also found that the notice of civil claim (NOCC) disclosed a cause of action. However, the judge noted that even though the appellant’s expert evidence described metrics that may be used to identify closet indexing, it did not apply those metrics to the relevant equity fund.
The judge adjourned the application to give the appellant an opportunity to supply that evidence.
The appellant subsequently filed an amended NOCC expressly disclaiming fraud and emphasizing her claims in negligence, breach of fiduciary duties, and failure to comply with statutory disclosure obligations.
The judge rejected the amendments and described the pleadings as confounding. He observed that it was unclear how a failure to disclose that a closet indexing strategy was being used could be negligent, given that an investment strategy must be intentional.
The judge adjourned that certification application once again to allow the appellant to file a further amended NOCC.
In a fresh as amended notice of civil claim (FANOCC), the appellant provided further particulars to explain how a failure to disclose an investment strategy would not necessarily involve fraud.
However, the judge held that the pleading lacked material facts about closet indexing and failed to disclose a fraudulent intent to mislead investors about the relevant equity fund’s investment strategy.
He concluded that the FANOCC did not meet the requirements of the Class Proceedings Act to plead a cause of action.
The appellant challenged the decision, arguing that the certification judge erred in determining that the FANOCC did not disclose a cause of action.
Justice Fenlon noted that the certification judge’s reliance on the unpleaded tort of civil fraud became the lens through which he assessed whether the amended pleadings disclosed a cause of action.
She rejected the certification judge’s assessment that the amended NOCC changed the thrust of the plaintiff’s NOCC, noting that the appellant had not pleaded civil fraud in the original NOCC.
She noted that breach of trust, breach of fiduciary duty, failure to comply with Securities Act disclosure obligations and unjust enrichment had been pleaded in each version of the appellant’s claim.
“Read as a whole, it is evident that the FANOCC, as in each version of the claim, relies on causes of action that do not require proof of fraud,” the judge wrote, noting that trustees may breach their obligations under a trust without engaging in fraud.
She observed that the FANOCC alleged the respondents either intentionally employed a closet indexing strategy and withheld this information from investors or, through negligence, failed to recognize that their investment choices were insufficiently distinct from the benchmark to offer unit holders a reasonable chance of outperforming it.
“In either case, the FANOCC claims the respondents’ failure to disclose this information to investors was a breach of their disclosure obligations under the Securities Act, as well as a breach of their trust and fiduciary duties. Fraud is not a requisite element of any of those wrongs,” the judge wrote.
The judge observed that while the appellant could have pleaded the tort of civil fraud, it is more difficult to prove intent to deceive than to prove failure to comply with statutory disclosure requirements and common law trust and fiduciary duties.
Justice Fenlon held that the FANOCC met the requirement in s. 4(1)(a) of the Class Proceedings Act.
She also held that the certification judge’s earlier findings that the claim met the remaining requirements for certification continued to apply and certified the action as a class proceeding.
Counsel for the appellant John Archibald of Investigation Counsel PC said that the decision confirmed that closet indexing does not require an allegation or proof of fraud.
“Securities disclosure and trust laws should protect investors from an undisclosed strategy to closely track benchmark performance and the substantial risk of after-fee underperformance, given the excessive fees being charged for such a strategy,” he told Law360 Canada in an email.
Paul Bates also acted as counsel for the appellant.
Counsel for the appellant were John Archibald of Investigation Counsel PC and Paul Bates.
Counsel for the respondent were Ross McGowan, Michelle Maniago and Curtis Fawcett of Borden Ladner Gervais LLP. They were not immediately available for comment.
(Editor's note: This original version of this story has been updated with new information.)
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