A recent decision from the Superior Court of Justice denied certification to a proposed class proceeding against auditors of an investment firm which was placed into receivership for misappropriation and misrepresentation.

Crystal Wealth Management Systems Ltd. (“Crystal Wealth”) was an investment advisor that operated mutual funds from 2007 to 2017. BDO Canada LLP (“BDO”) was the auditor of Crystal Wealth from its inception through to its demise in 2017. Crystal Wealth was required to file annual audited financial statements with the Ontario Securities Commission (“OSC”) and to send the audited statements to each of its unitholders. In 2016, Crystal Wealth failed to deliver information and documents requested by BDO and as a result the audited financial statements for the 2016 year were not filed with the OSC by the March 31, 2017 deadline. The OSC issued a temporary order prohibiting trading in the mutual fund units and in the securities held by the mutual funds.

Crystal Wealth and its mutual funds were placed in receivership. Grant Thornton LLP was appointed Receiver. The CEO of Crystal Wealth admitted to having misappropriated money from the mutual funds and to having misrepresented their net asset value. As a result of the OSC’s temporary order and the appointment of the Receiver, unitholders were prohibited from redeeming their investments in the mutual funds. The Receiver recovered $65 million of which $56 million was distributed to unitholders.  However, this represented only about 30% of the net asset value reported by Crystal Wealth.

The Receiver commenced an action against BDO. At the same time, representative Plaintiffs sought to certify a class action on behalf of all investors who lost money as a result of the fraud perpetrated by Crystal Wealth. They alleged that if BDO had conducted a proper audit, the fraud would have been discovered.

The certification motion was heard by Justice Perell who refused to grant certification.  The Class Proceedings Act, 1992 of Ontario has a five-part test for when a class proceeding should be certified.  The five requirements are:

  • the pleadings disclose a cause of action;
  • there is an identifiable class of two or more persons that would be represented by the representative Plaintiff;
  • the claims of the class members raise common issues;
  • a class proceeding would be the preferable procedure for the resolution of the common issues; and
  • there is a representative Plaintiff who would:
    1. fairly and adequately represent the interests of the class;
    2. has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding; and
    3. does not have, on the common issues for the class, an interest in conflict with the interests of other class members.

 

Justice Perell concluded that the first part of the test had not been met, namely that there was no cause of action disclosed. He referred to the 1997 Supreme Court of Canada case of Hercules Management Ltd. v. Ernst & Young, [1997] SCR 165 where the Supreme Court concluded “…that an auditor just providing a statutory audit does not owe a duty to shareholders or to investors in relation to their personal investment decisions. In the case of shareholders, a claim against an auditor for a negligently performed statutory audit must proceed derivatively as the claim of a corporation against its auditor.”

However, the Plaintiffs also alleged that there was a duty of care based on the fact that the purpose of BDO’s audit was to ensure that Crystal Wealth complied with Ontario securities law.  In this regard, Justice Perell said that the case at bar was indistinguishable from a decision of the Ontario Court of Appeal in Lavender v. Miller Bernstein, 2018 ONCA 729.

As in that case, Justice Perell found that BDO’s audit reports were provided to the OSC pursuant to a statutory requirement. Although they were also provided to the unitholders, there “was no undertaking by BDO to assist the class members in their investment decisions or to safeguard them from Crystal Wealth’s non-compliance with the Securities Act.”

Whitehouse v. BDO Canada LLP, 2020 ONSC 144

James P. Thomson’s practice involves insurance defence in the areas of professional liability, transportation, environmental and coverage.