Lawsuit against CIBC World Markets can proceed, Ontario court rules

Date: Thursday, February 2, 2012
Author: James Langton

Failed hedge fund suing over million dollar trading loss

An Ontario court has ordered that a lawsuit against CIBC World Markets Inc. can proceed, rejecting the firm's claim that the plaintiffs be required to post almost $400,000 to cover the potential costs of the case.

In a decision published January 30, Thomas Hawkins of Ontario's Superior Court of Justice denied a motion from CIBC World Markets and Belzberg Technologies Inc. seeking an order for security for costs from the plaintiffs, a failed hedge fund known as The Raillery Fund LP and the firm, Montrose Hammond & Co., which managed the fund.

Montrose and Raillery are suing CIBC, which provided brokerage services to the fund, and Belzberg, which provided trading software, over a trading loss of more than $1 million suffered by the fund back in 2009. It claims that CIBC and Belzberg are responsible for the loss, which ultimately led to the firms ceasing operations.

The allegations have not been proven. Indeed, the defendants were seeking security of nearly $372,000 for costs in the case.

However, the court's decision indicates that the plaintiffs only have about $38,000 in assets, and they argue that these funds are needed to pay their lawyers to prosecute this action. Investors in the hedge fund have refused to finance the lawsuit, it notes. Moreover, of the two people behind the corporate plaintiffs, one is unemployed, and the other only recently started working again, although they do have assets such as homes and RRSPs.

Yet the court found that they should not have to put up those assets in this case unless its clear that they have no chance of winning. "It is not in the interests of justice to require a natural individual to sell or encumber those assets which could be described as necessary for life in order to post security for a corporation unless it is clear that the corporate plaintiff lacks a meritorious case," it says.

The court found that it's "unable to say with any degree of confidence what the outcome of this action will be", and that the plaintiffs' action "is far from one which is plainly devoid of merit, or almost certain to fail".

"This is definitely not a situation where wealthy investors are using shell corporations to engage in litigation at the sole risk of the defendants," it says.

While examinations for discovery in the case are complete, the court notes that there remains mediation, the pre-trial hearing, preparation for trial and trial itself, which will likely consume all of the plaintiffs' liquid assets to see through to the end.

"If I made an order which in practice required the plaintiffs... to use these liquid assets to post security for costs, they would be forced to abandon this action. That would not be a just outcome," it ruled.

"For all these reasons, I have come to the conclusion that the just order in the circumstances is an order that the plaintiffs not be required to post security for costs," it says, dismissing the motions, and ordering costs of $3,000 per motion (a total of $6,000) to the plaintiffs.