In McCorquodale v. RBC Global Asset Management Inc., 2025 BCSC 2156, published on Nov. 3, Justice Bruce Elwood found that removing the fraud allegations did not change the substance of the certified claims or undermine the existing certification order.
“The interests of justice would not be served by holding the plaintiffs to a pleading they did not make and now seek to expressly disclaim,” the judge wrote.
The plaintiffs, Annabelle McCorquodale and Robert Cummings, commenced a class action alleging that the defendants, RBC Global Asset Management Inc. and the Royal Trust Company, charged investors active management fees for a mutual fund that closely tracked or replicated a market index.
The action is one of four proceedings based on closet indexing, all of which were commenced by the same class action counsel.
During the certification hearing, the defendants took the position that they were being accused of fraud, while the plaintiffs stated that they were not pleading fraud.
In McCorquodale v. RBC Global Asset Management Inc., 2021 BCSC 144, a certification judge took the view that fraud was pleaded even though the plaintiffs did not use the word fraudulent.
The judge certified the class action on causes of action including civil fraud, prospectus misrepresentation under the Securities Act, breach of fiduciary duty and knowing assistance.
The plaintiffs sought to amend their pleadings to focus on an alleged failure by the defendants to disclose the closet indexing strategy, and to expressly disclaim fraud and remove the claims of knowing receipt and knowing assistance.
The proposed amendments sought to focus on the substantial linkage between the fund and the benchmark and the risk that the fund would not outperform the benchmark after fees.
In February 2024, the B.C. Supreme Court dismissed an application to certify one of the other closet indexing actions as a class proceeding on the basis that the pleadings did not disclose a cause of action.
In that case, the court had rejected attempts by the plaintiff to amend pleadings to expressly disclaim fraud, finding that it was unclear how a failure to disclose a closet indexing strategy could be unintentional.
However, the B.C. Court of Appeal overturned the decision in Gibbs v. HSBC Global Asset Management (Canada) Ltd., 2025 BCCA 31, ruling that the certification judge had erred in finding that the pleadings disclosed no cause of action without fraud.
The court held that the plaintiff was entitled to disclaim fraud, and that none of the causes of action pleaded in that case required proof of fraud.
In the case at bar, the defendants argued that the proposed amendment fundamentally changed the nature of what had been certified by introducing an entirely new cause of action premised on a failure to meet risk disclosure obligations and by removing the fraud allegation.
They submitted that the fraud allegation was central to the original certification decision.
Justice Elwood rejected this argument, and found that the proposed amendments did not fundamentally change the nature of what had been certified.
“The plaintiffs did not allege fraud in the pleadings that formed the basis of the certification order in this action. The certification judge inferred the allegation of fraud from his understanding of their closet indexing claim,” the judge wrote.
Justice Elwood highlighted the Court of Appeal’s observation in Gibbs that it was open to the plaintiff to not plead the tort of civil fraud.
“[T]he plaintiffs are entitled to disclaim fraud they did not plead; and fraud is not a required element of breach of trust, breach of fiduciary duty, breach of securities disclosure requirements, or unjust enrichment,” the judge wrote.
The court held that the plaintiffs were entitled to disclaim fraud and to discontinue the pleaded claims of knowing assistance and knowing receipt.
The court also rejected arguments that the amendments raised a new cause of action.
“The proposed amendments clarify that closely tracking the benchmark is not the alleged wrong; rather, the allegation is that the defendants wrongfully failed to disclose this strategy and the risk that the Fund would not outperform the benchmark after fees,” the judge wrote.
The court granted the plaintiffs’ leave to file a fresh as amended notice of civil claim.
Counsel for the plaintiffs, Paul Bates, said the amendments to the civil claim would ensure clarity and consistency with claims in other similar matters.
“There are very few funds in Canada that fall offside the evaluations by sophisticated financial metrics that expose hidden benchmark hugging or indexing strategies. We are enthusiastic to pursue access to justice and fair compensation for class members,” he told Law360 Canada in an email.
John Archibald of Investigation Counsel PC also acted as counsel for the plaintiffs.
Counsel for the defendants were Sean Boyle and Jenna Green of Blake, Cassels & Graydon LLP. They did not immediately respond to a request for comment.
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