British Columbia judge dismisses expert in $ 1.3 billion lawsuit against TD Asset Management for bias against big banks

British Columbia Supreme Court Justice Says Well-Known Financial Critic Could Not Testify As Expert In $ 1.3 Billion Class Action Against TD Bank Asset Management Company because of his alleged bias against the big Canadian banks.

In a ruling this week, Judge Gordon Funt admitted that it was “quite rare” to rule out the testimony of a proposed expert.

But he concluded that Larry Bates – author of Beat the Bank: The Canadian Guide to Simply Successful Investing – has a cause, or “philosophical hostility,” which renders it incapable of being fair and objective with respect to an outstanding claim against TD Asset Management.

“I find ML Bates coming to this court with an unwavering bias against any ‘big Canadian bank’,” Funt said in a ruling released Monday.

“ML Bates apparently views his proposed testimony as an expert witness as part of a game and not as a ‘key part of the search for the truth’.”

The use of “closet indexing” at the heart of class actions

Bates filed a report in June as a proposed expert for investors suing TD Asset Management – a subsidiary of TD Bank – regarding the company’s management of its Canadian Equity Fund, one of the largest funds professionally managed mutual funds in Canada with over $ 5 billion in assets. .

The trial is currently taking place at the courthouse in downtown Vancouver.

TD Asset Management is facing a $ 1.3 billion lawsuit from investors who claim the company overcharged for the management of its Canadian Equity Fund. (John Kwan / Shutterstock)

The class action lawsuit case highlights the issue of so-called closet indexing, which has been the subject of articles in academic journals and surveys by regulators.

This is a practice where managers of high-fee mutual funds secretly make safe but mundane investments designed to reflect a benchmark calculated by tracking the continued performance of major companies on a particular exchange.

TD Asset Management’s Civil Law Notice (TDAM) explains the difference between “passively” and “actively” managed funds.

Dean Turpin, the investor leading the class action, claims that passively managed funds – or index funds – “are designed to closely track or replicate the performance of a specific benchmark, allowing investors to invest money knowing that they will perform roughly equal to the performance of that benchmark. “

In contrast, says Turpin, actively managed funds are operated with the aim of outperforming the benchmark – in this case, the S & P / TSX index which tracks the performance of about 250 companies on the Toronto Stock Exchange.

The managers of these funds “charge higher fees than index funds because of the higher expenses associated with research to select stocks and expenses associated with the increase in trading activity,” the allegation states.

GPTD denies having engaged in an “indexation of the cupboards”

Turpin is suing for alleged breach of trust in relation to “substantial fees” he claims TD Asset Management charged for the active management of his Canadian Equity Fund.

“In truth, the Respondent, as manager of the Canadian Equity Fund, has applied a passive investment strategy designed to closely track or replicate, without exceeding, the performance of the benchmark index of the Equity Fund. Canadian, ”says Turpin.

“The performance of the Canadian Equity Fund (before management fees) has closely tracked the benchmark and has never exceeded the benchmark once the Respondent’s management fees are factored in. “

The Toronto Stock Exchange (TSX) is Canada’s largest stock exchange. The TSX benchmark tracks the performance of major publicly traded companies. (Mark Blinch / Reuters)

According to Funt’s decision, a professor at the University of Toronto was qualified to provide opinion evidence in the case, calculated damages resulting from alleged excess fees, excess transaction fees and an imposition of $ 1.318 billion.

TD Asset Management has denied the claims.

In response to Turpin’s request, the company says it manages the Canadian Equity Fund “diligently and prudently” in accordance with the objectives set out in its offerings: “TDAM did what it said it would do,” says the society.

“GPTD denies having engaged in an“ indexation of the closets ”. There is no regulatory requirement or even an academic consensus on what “closet indexing” means, ”the company said.

“Whatever that might mean, it certainly doesn’t refer to the type of research-based asset selection the fund has used since inception.”

“Banks openly defy investor protection efforts”

In the report Turpin’s lawyers had hoped to present in evidence, Bates cited a passage from his 2018 book.

“The big Canadian banks – and by extension our entire financial industry – occupy a paternalistic position of authority that too many investors unconditionally respect,” he wrote.

“The industry is brilliantly capitalizing on the combination of a misunderstanding of fees, deep loyalty and misplaced trust by charging Canadians the highest investment fees in the world.

Bates claimed that “closet indexing” happens because many mutual fund managers “quietly accept the reality that they can’t always beat the market,” so they follow it instead.

“Closet index funds are designed to both build wealth for [the industry] and, compared to an easily accessible low cost index [exchange traded funds], to destroy the wealth of Canadian investors! ”Bates wrote in a section of his report underlined by the judge.

In considering whether to allow Bates’ testimony, Funt also reviewed a series of tweets, including those in which he complained of the “relentless” tyranny “of high fund fees” and claimed that “the banks were defiant to blatantly investor protection efforts “.

In response to a question from CBC, Bates – who is on the board of directors of the Canadian Foundation for the Advancement of Investor Rights (FAIR) – said he couldn’t comment on Funt’s decision or whatever. it has to do with the case.

“I am a critic of high cost mutual funds sold by banks,” he said in a statement.

“At the same time, I am championing more efficient and less expensive products and services offered by the same banks, such as low-cost index funds, online investment accounts and robo-advisers.”

FAIR executive director Jean-Paul Bureaud said he could not comment on the details of the case or the decision to exclude an expert witness.

“Generally speaking, however, the issue of closet indexing is a significant regulatory and investor protection issue for obvious reasons, including undermining public confidence in our capital markets,” Bureaud wrote. in an email.

“In short, those who can engage in it not only deceive investors, but also undermine confidence in the industry more broadly.”

The trial is expected to continue in October.

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Michael J. Birnbaum

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