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Shareholders file lawsuit over market timing controversy

Shareholders enraged by the settlement reached last week between mutual fund companies and Ontario's securities watchdog in the market timing scandal are taking the matter into their own hands. Five investors filed a lawsuit in Ottawa on Friday in what is believed to be the first class-action case linked to the controversy.

The suit alleges nine fund companies and bank subsidiaries enabled market professionals to pocket hundreds of millions of dollars by zipping in and out of funds to the detriment of longer-term investors. The claims have not been proven in court.

Last week, four fund companies reached a landmark settlement with the Ontario Securities Commission after acknowledging they routinely gave preferential treatment to 15 unidentified market pros.

Those pros reaped profits totalling $300-million over a five-year period. According to the deal, the fund companies will pay $156.5-million in restitution to investors who lost money as a result of the trading manoeuvres.

In addition to the settlement, three bank-owned brokerages and a division of Investors Group Inc. were fined $46.5-million, bringing the total compensation to $203-million.

The defendants named in Friday's suit are: CI Mutual Funds Inc.; AGF Funds Inc.; I.G. Investment Management Ltd.; Investors Group Financial Services Inc.; AIC Ltd.; BMO Nesbitt Burns Inc.; RBC Dominion Securities Inc.; TD Waterhouse Canada Inc.; and Franklin Templeton Investments Corp.

In addition to restitution for losses, the suit seeks aggravated, punitive and exemplary damages.

Regina-based lawyer Tony Merchant of Merchant Law Group, which launched the action, estimates long-term investors suffered losses to their portfolios well in excess of the $203-million restitution figure.

"You get caught and you pay back some of the money -- that's not the way we deal with other areas of wrongdoing," he said.

Ron Arnst, manager of media relations for Investors Group, said it is not the firm's policy to comment on matters that are before the courts.

© 2007 The Globe and Mail. All rights reserved.

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