Ontario court dismisses proposed class action against Horizons

An Ontario court has dismissed a proposed class action against fund manufacturer Horizons ETFs Management (Canada) Inc. over the collapse of an inverse exchange-traded fund (ETF) in 2018.

The proposed class action was filed over investor losses suffered in the Horizons BetaPro S&P 500 VIX Short-Term Futures Daily Inverse ETF (HVI-ETF), a fund that lost 90% of its value overnight on Feb. 5, 2018, amid a spike in market volatility. Horizons later terminated the fund.

The plaintiff in the proposed suit reportedly lost approximately $210,000 as a result of the fund’s drop. In May 2018, he brought a proposed class action asserting claims of negligence and misrepresentation against Horizons.

According to an Ontario Superior Court of Justice ruling, among other things, the plaintiff alleged that the firm breached a duty of care to investors by developing a product that was excessively complex and risky for retail investors, and not appropriate as a passively managed fund.

However, the court found that the claim does not set out reasonable grounds for a lawsuit, and it dismissed the plaintiff’s motion for certification as a class action.

“In my opinion, it is plain and obvious that [the plaintiff’s] common law negligence action is a failed attempt to add to the list of negligence claims for pure economic loss,” the court said in its ruling.

It also dismissed the other cause of action for alleged misrepresentation in the primary market, finding that sales of an ETF over an exchange do not meet the definition of primary market distribution.

The decision noted that a plaintiff could try to make a claim for secondary market misrepresentation against an ETF manufacturer, but that such a claim was not made in this case, and if it had been, a court must grant leave before this sort of claim can be brought.

“[The proposed plaintiff] has not pleaded a claim [alleging secondary market misrepresentation] and so I shall dismiss the statutory claim that he has brought, which is a cause of action that is not available to him or the putative class members,” the decision said.

As a result, the court concluded that there is no reasonable cause of action in the case and it dismissed the bid to certify a class action.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.