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The future of a class-action lawsuit targeting mutual fund managers for a "market timing" scheme that allegedly cost ordinary investors hundreds of millions of dollars will be decided by the Supreme Court of Canada on Thursday.

At issue is whether the aggrieved investors had the right to launch a class action against the mutual fund companies, even though the defendants had already settled allegations over the issue with the Ontario Securities Commission and agreed to pay back $205.6-million.

In 2010, Ontario Superior Court Justice Paul Perell initially refused to give the class-action lawsuit a green light, siding with arguments from the defendants who argued that the OSC proceedings were a "preferable procedure" to a class action. But two subsequent appeal rulings sided with the investors, who claim the compensation falls far short of their real losses.

Some lawyers watching for the decision say it could have major ramifications for the growing area of securities class actions, since most such lawsuits by investors seeking their money back are launched parallel to action by securities regulators.

The market timing case dates back to a 2003 OSC probe of five large mutual fund managers. Market timing, which is legal, allows sophisticated investors to take advantage of the way mutual funds are priced. Unlike stocks, the value of a mutual fund is set just once a day, at 4 p.m. Eastern Time. Traders can use this fact to move in and out of funds based on, for example, overseas market activity that has rendered the current pegged value of a fund out of date.

In settlements with the OSC in 2004 and 2005, AIC Ltd., CI Mutual Funds Inc., Franklin Templeton Investments Ltd., AGF Investments Inc., and IG Investment Management Ltd., acknowledged, without admitting civil liability, that they had allowed certain investors to engage in market timing in a way that harmed long-term investors, and agreed to pay $205.6-million in compensation. In 2009, class actions on behalf of the funds' unit-holders were launched against the fund managers, with plaintiffs arguing that their losses from market-timing could be as high as $800-million.

The current appeal before the Supreme Court involves just two of the defendants, AIC and CI Mutual Funds Inc., as the others have settled.

Lawyer Brian Radnoff of Lerners LLP said that securities cases weren't the only type of class actions that could be affected by the ruling. In other class-action cases, he said, defence lawyers often argue that regulators, not class-action plaintiffs, should be holding companies to account for faulty or dangerous products, false advertising or price-fixing schemes.

Mr. Radnoff, who is not involved in the case, said he believed restoring the initial decision barring the investors' class action would "significantly reduce" the growing number of securities class actions filed in Ontario.

"It would be a significant problem, for investors and for these type of class actions," said Mr. Radnoff in an interview.

But Dimitri Lascaris, a litigator who files many securities class actions against companies on behalf of investors, but is not involved in this case, disagrees.

Mr. Lascaris, a partner with Siskinds LLP in London, Ont., says Canadian securities regulators rarely seek to force defendants to actually pay back investors. A ruling barring class actions in cases when the regulator did so would have little effect, short of a "sea change" in enforcement practices, he said.

"Historically, rightly or wrongly, securities regulators have in very few instances sought to recover compensation for investors," Mr. Lascaris explained. "The market timing case is very unusual for that reason."

Lawyer Andrew Gray of Torys LLP, who does defence work on class actions and OSC cases but is not involved in this case, said he hoped the Supreme Court would restore the initial ruling blocking the class action.

That would encourage companies to settle allegations with securities regulators more quickly and pay back investors, he said, rather than worrying about their double exposure in a class-action: "If there was a way to wrap up all of your issues with the regulator quickly, in some cases that's probably net-net the best outcome for everyone."

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