The Supreme Court of Canada has kept alive a potential multibillion-dollar shareholder class action against Canadian Imperial Bank of Commerce that alleges the bank misled investors in 2007 about its exposure to the U.S. subprime-mortgage market.
The top court's decision, released on Friday, means that the case – filed in 2008 after the subprime-mortgage collapse kicked off the global financial crisis – could now proceed to trial.
"It's a huge victory for shareholders right across the country," said Joel Rochon, a Toronto lawyer spearheading the case against CIBC. "This is the start of a meaningful process toward a trial of one of Canada's largest banks."
The decision also left intact the the plaintiffs' ability to seek damages well above the limit of 5 per cent of a defendant's market capitalization imposed on this kind of lawsuit under the provisions of the Ontario Securities Act. Plaintiffs in these cases typically do this by filing what are known as common-law claims in the same lawsuit – claims that face no cap on damages.
The plaintiffs allege that damages against CIBC under their common-law claims could approach $4-billion, much higher than the $1.5-billion they can demand under the Securities Act. But legal experts say the unprecedented task of proving common-law claims in such cases remains an uphill battle in Canada because, unlike in the United States, plaintiffs must individually prove each single shareholder actually relied on a company's alleged misstatements.
"While we are disappointed in the ruling, this was a procedural decision on whether the court would permit the matter to proceed as a class action. We continue to believe that CIBC's conduct was appropriate and that our disclosure met applicable requirements," CIBC spokesman Kevin Dove said in an e-mail. "If this matter proceeds to trial, we intend to vigorously defend it on the merits."
In its complex split decision on Friday, the top court considered three shareholder class actions: the CIBC case, and cases launched on behalf of shareholders against Imax Corp. and Celestica Inc., alleging those companies also failed to properly disclose financial woes to investors. None of the allegations have been proved.
The primary issue at stake was whether a strict interpretation of a three-year deadline in the Ontario Securities Act meant that all three cases were out of time, and should be tossed out.
In the CIBC case, the court kept it alive.
The Supreme Court also agreed that the case against Imax should not be thrown out. (The Imax case has since settled, but the agreement has not been approved by a judge.)
In the third case, the court dismissed a lawsuit against Celestica, saying the plaintiffs took too long to file a motion seeking the leave or special permission required under the Ontario Securities Act for this kind of case to go ahead.
All three cases, which have dragged on for years, appeared dead in the water after the Ontario Court of Appeal initially ruled in 2012 (in a separate case) in favour of a strict interpretation of the act that imposed a three-year time limit for a judge to grant the required leave.
The appeal decision provoked outrage from plaintiffs' lawyers, who warned that the corporations they were suing would simply use delaying tactics to run out the clock. Bay Street defence lawyers welcomed the tight deadline, saying it was meant to shield companies from allegations that hung over them for ages.
In the CIBC case, Ontario Superior Court Justice George Strathy declared the lawsuit out of time in 2012, but he said he made the decision "with considerable regret" because he believed elements of the case against the bank had a "reasonable possibility of success" at trial.
Last year, however, the Ontario Court of Appeal, in a rare move, reversed itself on the deadline issue. Plus, the Ontario government has since amended the legislation to eliminate the strict interpretation of the three-year deadline, meaning the question for any future Ontario case is moot.
Since the case against CIBC was filed, the bank has argued it acted properly and released accurate information. It also argued it could not have been expected to predict the U.S. subprime meltdown and global financial crisis., which it described as a "once-in-a-century tsunami."
The class action alleges that CIBC misled its shareholders by playing down its $11.5-billion potential exposure to the U.S. subprime-mortgage market in 2007. This served to artificially inflate the bank's share price, the suit alleged. When the bank's losses, which would eventually result in nearly $10-billion in writedowns, were later revealed, the bank's share price sank.