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CIBC’s head offices at the corner of King Street West and Bay Street in Toronto.Fred Lum/The Globe and Mail

A potential multibillion-dollar class action against the Canadian Imperial Bank of Commerce for allegedly misleading investors about its exposure to U.S. subprime mortgages in 2007 could have succeeded at trial, but must be scrapped because of a time limit, an Ontario judge has ruled.

In a 163-page decision that describes CIBC as "scrambling" to understand the unfolding financial crisis in 2007, Mr. Justice George Strathy of the Ontario Superior Court ruled that several of the plaintiffs' allegations that the bank misrepresented its risks to its investors had a "reasonable possibility of success" at a trial.

But his ruling, dated July 3, ultimately concluded that the case could not go ahead, citing a controversial recent Ontario Court of Appeal decision that strictly interprets a three-year deadline for this kind of shareholder class action.

Toronto lawyer Joel Rochon, of Rochon Genova LLP, is one of the lawyers acting for representative plaintiffs Howard Green and Anne Bell, who launched the suit. He said he is considering an appeal.

He also noted that the February Ontario Court of Appeal court decision in a lawsuit against Timminco Ltd., which strictly interprets a three-year deadline in the Ontario Securities Act, might still end up before the Supreme Court of Canada.

Despite Judge Strathy's decision, Mr. Rochon said, the plaintiffs felt "vindicated" by the ruling. "Who thought that one of Canada's banks was this deep into the subprime mess? … For Justice Strathy to make these findings of fact has to be a bad day for the top executives at CIBC."

A spokesman for CIBC declined to comment on Wednesday. Throughout the case, the bank argued that 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 lawsuit alleged that CIBC misled its shareholders by playing down its $11.5-billion potential exposure to the U.S. subprime mortgage market. 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.

Judge Strathy said he had concluded "with considerable regret" that the claims against the bank could not proceed.

He ruled the plaintiffs had a "reasonable possibility" of proving that comments made during a May, 2007, conference call with analysts – in which Brian Shaw, then chief executive officer of CIBC World Markets, called the bank's risks "not at all major" – were a misrepresentation.

Noting the concerns being raised by the bank at board meetings behind closed doors, Judge Strathy came to a similar conclusion about comments made by then bank chief financial officer Tom Woods on BNN on Aug. 30, 2007, when he said that CIBC had "very low exposure right now," and that it was "feeling pretty good about these positions."

"These statements could be viewed as Pollyannaism in light of the discussions that had been taking place at the Board and in its committees prior to that date," Judge Strathy wrote in his ruling.

He also concluded that the plaintiffs had a reasonable chance of success with their claims that CIBC misrepresented its risks in its second-, third- and fourth-quarter financial results in 2007, along with its 2007 final results.

But the judge ultimately found that the controversial Ontario Court of Appeal February decision in the Timminco case quashed the case against CIBC.

The suit against the bank was filed four years ago, in 2008. The Timminco ruling imposes a strict interpretation of a three-year limitation period under the Ontario Securities Act for this kind of shareholder lawsuit.

Editor's note: In a story July 4, comments made on BNN on Aug. 30, 2007 about Canadian Imperial Bank of Commerce's exposure to the U.S. subprime mortgage market were wrongly attributed to the then-chief-executive-officer of CIBC World Markets, Brian Shaw. The comments were made by CIBC's chief financial officer at the time, Tom Woods.

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