Court approves class action settlement, $37.5 million in fees in ‘bet the firm’ case against CIBC

The Superior Court of Justice has approved a class action settlement against CIBC in a “ ‘bet the firm’ case which went on for 14 years, with very significant risks, and very satisfactory results.” Justice Frederick Myers, writing for the court, noted that “[O]n the facts, this may be the poster child for a mega-case in which full fees ought to be maintained.”

In Green v. CIBC, 2022 ONSC 373, the court approved the settlement of a class action, as well as the fees of class counsel, in a case that sprung from the “worldwide failure of financial markets in 2007” and involved “difficult questions of corporate governance and securities laws disclosures concerning some of the most mathematically complex investment products unleashed on public markets — subprime U.S. residential mortgage-backed securities.”

Justice Myers noted that the plaintiffs were “shareholders of CIBC” (Canadian Imperial Bank of Commerce) and in 2007, CIBC “had about US$11.5 billion in sub-prime investments of various forms.”

The plaintiffs alleged in their lawsuit that CIBC not only “failed to disclose properly its exposure to risk of losses on these investments,” but also “positively misrepresented to the market place that it did not have any major risk of exposure on May 31, 2007.”

The plaintiffs claimed, the court noted, that “when the market learned of the true extent of CIBC’s exposure to losses on its sub-prime portfolio, in November and then, through CIBC’s corporate disclosure in December, 2007, CIBC’s shares lost 20% of their value.” They claimed that due to the bank’s “failure to make proper disclosure of its risk on its sub-prime investments,” the plaintiffs bought CIBC shares “at a time when the price was inflated and they suffered commensurate losses when the truth was revealed.”

According to court documents, the settlement will have CIBC “pay a total of $125 million.”

The payment, the court noted, “will be used to fund class counsel fees and disbursements, pay mandatory CPF repayment and 10% levy, leaving approximately $68 million to be distributed to class members …”

In approving the motion for settlement, Justice Myers noted that “[C]ase law recognizes that the court must pay particular attention to settlement proposals in which counsels’ personal interests in collecting a large fee may conflict with their duties to their clients.”

“In effect the court watches for a ‘sweetheart’ deal in which class counsel lets the defendants off with a smaller payment or one that does not properly compensate some or all of the class members because counsel is favouring their own desire to be paid,” he explained.

He stressed that, in a case such as this, “where the proposed settlement payment is very high — over $100 million — an added concern arises.”

“The actual fee amount may just be so high as to undermine the integrity of the profession in the public eye,” he added.

Justice Myers also noted that “[U]nfortunately there are really no objective criteria for measuring when fees are so high as to be unseemly.”

“It seems to me there may be an element of the ‘gag test’ at play. That is, if granting the amount claimed, makes the judge gag a little before signing his name, the integrity concern is invoked,” he explained.

Justice Myers referenced Chief Justice George Strathy’s, “sitting ex officio as a judge of this court,” decision on the certification motion of the action. Chief Justice Strathy described the case as “extraordinary” by “any standard.”

In considering an award, Chief Justice Strathy noted that: “a) the plaintiffs put the claim at between $2 billion and $4 billion, amounts that I cannot say are unrealistic; b) the class is very substantial and includes over 100,000 Canadian shareholders; c) this was one of the first cases to advance a claim under Part XXIII.1 of the Securities Act dealing with secondary market misrepresentation and it is an important landmark case; d) the facts were extraordinarily complex and required sophisticated expert evidence; e) the law was both complex and novel; f) the record was massive: there were a total of 25 affidavits filed by the parties, cross-examinations were conducted over 29 days, and the evidentiary record comprised 45 volumes of material; g) the hearing before me, which was based entirely on the record, took seven days; h) the proceeding was vigorously contested by the defendants, who were well resourced and represented by teams of highly experienced counsel; i) although the plaintiffs did not achieve everything they sought on the certification motion, they achieved very substantial success; and j) the motions were skillfully and thoroughly prepared, prosecuted and argued by experienced class counsel.”

Justice Myers also emphasized that this was “not a run-of-the-mill case in which a plaintiff seeks $1,000 for the cost of goods sold and delivered evidenced by an unpaid invoice.”

“It is not a case that one can just pick up on an hour’s notice. It requires substantial study and preparation,” he added.

The judge also noted, in considering whether he should hear the settlement motion, that “[F]ew counsel or members of the judiciary can readily engage in a case involving collaterized and synthetic investment products and market details associated with the failure of the sub-prime mortgage market.”

In determining whether the settlement was fair and reasonable, Justice Myers wrote that the plaintiffs’ experts “opined that if everything aligned as they hoped, damages were around $700 million.”

“That is still a long way from $125 million,” he added, highlighting “two specific risks on the merits in this case that struck” him as “truly formidable.”

The first was that CIBC “is a Very Sophisticated Litigant with Thorough Corporate Governance Processes.”

Justice Myers explained that “there was a US class action commenced on the same facts and issues” but it “was blown out on a motion to dismiss in 2012.”

“In this case, the plaintiffs rely on statements made by various bank officials in public contexts as misrepresentations,” he wrote, noting that the U.S. court “disparagingly dismissed the plaintiffs’ evidence of misrepresentations” as “opportunistic rummaging through press releases and internal company documents … .”

Justice Myers added that this “plays into the second equally or more formidable obstacle to the plaintiffs’ claim for liability.”

CIBC, he wrote, “is not a penny-stock huckster.”

“It is a venerable, massive banking conglomerate. It has committees and whole processes designed to conduct necessary due diligence. The bank’s exposure to its sub-prime investments was studied internally by management, by committees, and the board of directors itself in a day long meeting dedicated solely to the one topic,” he stressed.

Justice Myers noted further that “[A]s there is a due diligence defence in the statute, in light of the US judge’s findings and the sheer size and comprehensiveness of the bank’s corporate governance apparatus, the plaintiffs faced a very serious risk of losing this case even if they proved everything on which they relied.”

“So why did the bank pay so much to settle?” he asked.

Emphasizing that he does not “pretend to have anything like the exposure that a trial judge would have,” Justice Myers still noted that he was “left distinctly troubled after reading the bank’s material.”

“At least two of the public statements relied upon seemed to be both authoritatively made and quite likely wrong. Moreover, while the bank’s massive due diligence apparatus was heavily engaged, hindsight shows that it failed spectacularly. So the bank’s case is not that they did a great job. Rather, they need to say they did an adequate job on what was known and being done by others in the market place and they covered themselves by retaining professionals as one does. But we know now that the facts were known and were being yelled by a few in the market place at the time. Arguably, the bank failed or refused to hear and act on facts and evidence that were available to it,” he explained, adding that “there was a real risk that the bank would be found to have been too late to the party and that its diligence was not quite all that was due.”

Justice Myers understood that “hindsight is not the test.”

“But,” he added, “the monumental collapse that occurred cannot be ignored.”

“How do you risk losing as much as $11 billion and not see it coming? The market froze many months earlier while the bank was telling shareholders that all was well,” he wrote, noting that the bank started with “a major leg up given the sophistication of its corporate governance processes” but he would “not expect the trial judge to accept a bureaucratic effort to paper a due diligence process if he felt that the contents should not have survived scrutiny.”

“So each side recognized a very real risk of losing on case-specific and evidence-based issues with trial around the corner. Both sides had very good reason to settle in the views of experienced, skilled counsel with whom I agree,” he concluded.

The second risk he highlighted was that the “Plaintiffs’ Damages Assumptions were Thin.”

“There are always boilerplate issues about how aggregate damages might play out and whether the experts’ reports were likely to be successfully received. The plaintiffs’ problem in this case was that even on their expert’s own evidence, a couple of factual holdings could grossly reduce their damages to modest amounts,” Justice Myers explained.

He went on to note that this settlement “was reached at the last minute.”

“The plaintiffs’ counsel had made a very substantial investment and were ready for trial. The issues were known and studied. There was thorough, massive documentary and oral discovery. There were a large number of experts reports for trial on every conceivable issue. Counsel know their cases. There is no suggestion of this being an early settlement to reap a fee without putting in the work,” he stressed.

According to court documents, the “distribution protocol proposed by counsel was created by one of the plaintiffs’ experts.”

“It uses the losses per share found by the main damages expert to fix a notional loss for each participating plaintiff depending on when he, she, or it purchased shares. The protocol provides that if there is not enough money to pay them all in full, the plaintiffs will share the settlement proceeds pro rata based on the notional losses as calculated,” Justice Myers explained, adding that he had “no hesitation in finding the settlement agreement as proposed is fair and reasonable and approving the agreement as asked.”

In approving costs, Justice Myers explained that class counsel asked for “30% of the $125 million gross settlement proceeds or $37.5 million.”

The judge noted that “the fee sought was completely earned over 14 years of difficult slogging against a formidable foe.”

“The bank had every advantage of size, deep pockets, internal subject-matter expertise, and then delivered a devastating knock-out blow to the plaintiffs’ case in the US,” he added.

Justice Myers also noted that this is “a landmark case.”

“To obtain certification, the plaintiffs had to convince the Court of Appeal to overrule itself and then succeed at the Supreme Court of Canada. This was a David v. Goliath situation and the little guy survived by hard work, perseverance, and impressive tolerance of risk,” he wrote.

The judge explained that Vincent Genova, a founding partner of Rochon Genova LLP (the class counsel’s firm), characterized the action as a “bet the firm” case.

“In addition to working without being paid, the lawyers had to indemnify the representative plaintiffs if costs were awarded to the defendants,” Justice Myers noted, adding that the defendants were represented by two “Seven Sisters” firms whose “costs of certification alone would likely have each exceeded by a large margin the $2,679,277.82 partial indemnity award obtained by the much smaller class counsel firm.”

Plaintiff’s counsel, he acknowledged, also had to pay for all the experts reports, which cost around $7.5 million.

Justice Myers was “troubled” somewhat by the “bet the firm” concept. “Firms,” he wrote, “capitalize as they choose.”

“Some firms keep partners’ capital on hand and borrower commensurately less for operations. Other firms distribute their partners’ capital each year and finance their working capital. Others organize themselves to try to be creditor-proof to the extent possible. Evidence that a firm has insufficient capital to pay a major judgment may not be saying much at all about the risk truly being incurred by the partners,” he explained.

“But,” he acknowledged, “by any standard, the partners of class counsel’s law firm incurred personal risk that was significant both in the likelihood of an adverse event and in the high quantum of liability to be incurred if a negative event came to pass.”

“I would not have liked to have been in their shoes when the US judge summarily dismissed the US class action in 2012 or when Strathy J. initially dismissed the certificate motion. This was not a ‘shooting ducks in a barrel’ case,” he added.

Assessing costs from a “macro perspective,” Justice Myers queried: “is payment of $37.5 million to class counsel unseemly so as to impact on the integrity of the legal profession?”

“If the Toronto Star has a headline, ‘Law Firm Bilks Clients for $37.5 Million’ it certainly will not be a happy day for lawyers. But it would also be horribly misleading. The fee represents 14 years of effort by a small firm whose partners undertook substantial personal financial risk on a very tough case. I do not see that the situation would be different if I use a 25% contingency fee and the headline says ‘$31 million’ or a 20% fee and the headline says ‘$25 million’. By any objective measure, the fee is a big number. But that is all that can be said in my view,” he wrote, in a decision release Jan. 17, determining that there is “nothing unreasonable or untoward about the fee request advanced by counsel.”

Counsel for CIBC declined to comment on the decision. Counsel for the plaintiffs did not respond to request for comment before press time.

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