Case Name:

Authorson (Litigation guardian of) v. Canada (Attorney




PROCEEDING UNDER the Class Proceedings Act, 1992.


Joseph Patrick Authorson, deceased by his Litigation

Administrator, Peter Mountney and by his Litigation

Guardian, Lenore Majoros, plaintiff, and

The Attorney General of Canada, defendant


[2004] O.J. No. 5204


249 D.L.R. (4th) 214


[2004] O.T.C. 1154


44 C.C.P.B. 11


136 A.C.W.S. (3d) 149


2004 CarswellOnt 5514


Court File No. 99-GD-45963



 Ontario Superior Court of Justice


Brockenshire J.


Heard: September 20-23, 2004.

 Judgment: December 31, 2004.


(152 paras.)


Damages -- Assessment -- Interference with economic relations -- Breach of fiduciary relationship -- Trusts -- Administration -- Investment of trust funds -- Compensation of trustee -- The trustee -- Duty of prudence.


Motion by the plaintiffs for the summary judgment assessment of damages for breach of fiduciary duty. This was a class action concerning the federal Crown's management of a disabled veterans' fund, which was used from time to time to pay expenses of the veterans. The court found that the Crown was in breach of its fiduciary duty as the Trustee of the fund. It concluded that an aggregate assessment of damages was appropriate. The Crown argued that the assessment of damages could not be done by way of summary judgment. The plaintiffs argued that the Crown, as a fiduciary, would have been required to invest the trust funds in accordance with the prudent man principle. The Crown argued that it would have been required to manage the accounts according to the relevant provincial Trustee Acts. The Crown also argued that an amount for Trustee compensation should be deducted from any damage award. The parties did not agree on whether simple or compound interest was to be applied in relation to treatment allowances.

HELD: Motion allowed. The assessment of the quantum of damages was adjourned to allow for submissions based on the court's reasons. Damages were to be assessed on the basis of a basic asset mix of 60 per cent bonds, 35 per cent equity and five per cent cash, with some flexibility for changing market conditions. The court took judicial notice of the asset mix as being that of a prudent trustee. The provincial Trustee Acts could not affect investment decisions made by the federal government in its role as a fiduciary. There was no common law right for a trustee to claim a fee for services. The Crown had no basis to claim fees. There were orders-in-counsel providing for simple interest on treatment allowances from 1920 to 1953. From 1953 to 1978, simple interest was applicable. After 1978, the interest was to be calculated as compound interest. It was not necessary to send the matter to trial, despite differing opinions by the experts on the appropriate investment policy. The calculation of damages was not to include the possibility of capital gains. The pension fund model was inappropriate for many reasons. The most appropriate model was that used by professional trustees.


Statutes, Regulations and Rules Cited:

Bill of Rights.

Class Proceedings Act, 1992.

Limitation Act.

Trustee Act.

[Editor's note: Original reasons for judgment were released December 22, 2003. See [2003] O.J. No. 5239.]



Raymond G. Colautti, David G. Greenaway, and Peter Sengbusch, for the plaintiff

John Spencer, William A. Knights, Roslyn Mounsey, Sheila Hepworth, and Julie Demarco, for the respondent









1     On December 22, 2003, following the decision of the Supreme Court of Canada on the Bill of Rights issue in this Class Action, I released decisions on liability and on quantum, which are now reported in 69 O.R. (3d) at pgs. 107 & 129.

2     In the liability decision I concluded that the Supreme Court of Canada decision did not bring the action to an end, but did require that from any assessment of damages, an amount on account of "interest" had to be deducted.

3     In the assessment decision, I concluded that an aggregate assessment is appropriate, that the Class was not barred from entitlement by reasons of statutes of limitations or equitable limitations, that the summary judgment approach used before me was appropriate, and that figures produced by Mr. Hodson, the expert in accounting retained by the Crown, as to the annual amounts of principal constituted, as counsel agreed, the best estimate available, and finally that compounding annually until records were computerized and then monthly was appropriate.

4     I further rejected the views put forth by the Crown on what the investment return on the principal should be, indicating the Crown approach was based on what it would have been inclined to do, rather than what it was law obliged to do under the fiduciary obligation it had accepted.

5     While I had provided answers to some of the questions put to me by counsel, and put by Professor Charette, the expert for the Class, I indicated I needed further information before I could complete the aggregate assessment.

6     In Paragraph 77, found at p. 155 of 69 O.R. (3d) I indicated the areas in which I saw a need for further information. For convenience I repeat that list, as follows:


(a)          The issue of whether simple or compound interest is to be applied re treatment allowances from 1928 to 1953.

(b)          The whole question of capital gains including what is and was regarded as prudent in the investment industry, and then, if appropriate, improving the yield of the fund by adding amounts for judicious conservative purchases and sales.

(c)          The views of knowledgeable persons in the investment industry as to portfolio investing, and the makeup of such portfolios at different times through the history of this particular fund. I have noted that the Crown supplementary factum on the history of trustee investment in Canada indicates that through the entire period trustees could invest in provincial as well as federal bonds and also in high grade corporate bonds and debentures, and assume that through most if not all of the period investment in at least some common stocks were authorized.

(d)          In addition to the views of fund managers, such as trust officers, investment dealers, advisors to pension funds etc., it would be most helpful if decisions of the courts on what was acceptable from time to time could be gathered and presented. I see that Widdifield on Executors and Trustees has gathered, in the section on investments, a number of decisions and articles on this subject.

(e)          I will need some information on how the calculation and deduction of "interest" under the D.V.A. Act is to be handled, as well as how the crediting for "interest" paid on veterans' accounts before 1928 and to veterans such as those in St. Anne de Bellevue Hospital is to be handled. I seek confirmation that the principal, and resulting interest re the "estates" claim, which I previously denied, has been "backed out" of the existing calculations.

(f)           The calculations provided to date should be up-dated, to say December 31, 2003.

7     Needless to say, due to the passage of time, the calculations should now be updated to say December 31, 2004.

8     Counsel for both the Class and the Crown assiduously responded to my requests, by gathering information and retaining experts both to assist me, and this continuing to be an adversarial process, to hopefully assist the respective positions being put forth by the opposing counsel. The original motion, which had been adjourned pending their seeking further information, continued on September 20, 2004 for an additional four days, and then adjourned again, awaiting the release of this decision.

Preliminary Objections

9     The Crown in the opening paragraphs of its factum put forth caveats that the Crown submissions being made, are to be without prejudice to the Crown positions that the Supreme Court of Canada decision had completely ended the action, and also that my ruling that the basis for the assessment was to be "not what the Crown could have done, but what a subject should have done", because the Crown had assumed a private rather than a public obligation without creating a statutory and regulatory framework for the obligations it was assuming, was fundamentally wrong. I appreciate that the these positions were put forth to preserve the Crown's fundamental positions, and observe that, having made my rulings, it would be up to the Appellate courts to determine if the fundamental positions of the Crown are correct or not in law.

10     The Crown also, starting at p. 11 of its factum and to some extent in oral argument, submitted that this assessment could not be done by way of summary judgment. This decision deals with the materials introduced at this continuation of the summary judgment motion. The same position was put forth by the Crown in the initial arguments on the summary judgment motion, and I rejected the position in Paragraph 38, starting at p. 143 of my previous decision in 69 O.R. (3d). In my view the position I put forth then is still applicable, but as considerable new material has been put before me, I feel it is more convenient to review that material, and then give my reasons for that conclusion.

The "Legal Lists" Argument

11     The position of class counsel was that the Crown, as a fiduciary, would have been required to invest the trust funds on hand in accordance with the "prudent man" principle. The Crown, both in legal argument and through an affidavit of Andrew Smith, put forth the position that a prudent trustee would have been required to manage the veterans' accounts according to the investment provisions of the relevant provincial Trustee Acts during the period under review. Because those Acts limited authorized investments for trustees, and no explicit investment authority had been given to the trustee, if the Acts were applicable, they would have a very substantial affect on the damage claim.

12     Professor Charette, the expert for the Class, had calculated a damage range of $1,686,992,000 to $1,295,707,000 if damages were calculated on the basis of an unrestricted prudent trustee. If investment opportunities were limited by provincial Trustee Acts, Professor Charette calculated the damage range would be reduced to between $436,253,000 to $398,132,000.

13     The Crown in Paragraphs 104 to 117 of its Factum provided an interesting history of the development, and final abolition of statutory controls on trustee investments. However, these controls were all contained within the provincial Trustee Acts. There is and was no federal Trustee Act, nor within the period in question any federal statute that limited the investment powers of trustees.

14     The argument raised by the Crown here is similar to the one raised earlier in relation to provincial Limitation Acts. I dealt with that in Paragraphs 12 through 14 of my decision of December 22, 2003, 69 O.R. (3d) 129. There, as here, I find that the decision of the Supreme Court of Canada in Markevich v. Canada [2003] 1 S.C.R. 94, 2003 S.C.C. 9, is applicable and leads to a negative answer to the argument that the provincial Trustee Acts could effect investment decisions made by the federal government in its role as the fiduciary for the members of this Class.

15     Further, I had concluded in my decision dated March 24, 2003, 63 O.R. (3d) 707, in the summary judgment motion re the estates in this case, that all of the network of legislation constituting the "Veterans' Charter" was constitutionally in the federal domain and does not intrude at all into provincial powers. That also negatives the Crown arguments.

16     Further, as was pointed out in Paragraph 150 of the Factum of Class Counsel, in Castell and Walker, Canadian Conflict of Laws, 5th Edition, Para. 28.2(d) the authors say,


                 When the testator does not designate a place whose internal law is to govern the administration of the trust, its administration should be governed by the internal law of the testator's domicile at the time of his/her death, unless the trust is to be administered in some other place, in which case the internal law of the latter place should be applied. In the case of a trust created inter vivos, if there is no such designation by the settlor, the courts should apply the internal law of the place to which the administration of the trust is most significantly related or to which it is most closely connected. [Emphasis added]

17     Here, the trust was created in each instance by the assumption of the obligation of a fiduciary by the federal government and the administration was conducted by a department of the federal government, acting throughout Canada. Clearly federal law and not provincial law would govern the administration, and as above noted, there is no federal Trustee Act providing statutory limits on the authority to invest by a trustee.

Compensation of Trustees

18     The Crown Factum devotes Paragraphs 218 through 273 to the subject of compensation for trustees and the deduction of such imputed fees from the damage award. However, as the Crown acknowledges in Paragraph 220 of its Factum, there is no right at common law or equity to a trustee to claim a fee for services. That is a statutory right and the statutes are the same ones above referred to - the provincial Trustee Acts.

19     For all the reasons above discussed, those Acts are not applicable, and so the Crown has no basis to claim fees of any kind. See Waters, "Law of Trusts in Canada", (2d) 716, 717, re Wright Estate, [1990] O.J. No. 3232, 43 E.T.R 69 at para. 10, re Robertson, [1949] O.R. 427, at p. 4 Q.L. version, and Beechwood Cemetary Co. v. Graham, [1996] O.J. No. 2364, at p. 18 Q.L. version. In addition to these authorities, Class counsel also point out that even where a statute authorizes compensation, a trustee who administers an estate unskillfully and unsuccessfully, and an agent who does not faithfully serve his principle, is not entitled to compensation. See Re Scott Estate, [1987] O.J. No. 1614 at p. 4 and Myerscough v. Merrill, [1908] O.J. No. 282, 12 O.W.R. 399 at Paragraph 7.

20     Further, the government had set up under the collection of statutes relating to veterans, what was at one time a vast bureaucracy including dedicated hospitals, retirement homes, and case workers and counsellors from coast to coast, all to assist and serve the veterans, with no thought of claiming payment from them. Specifically, the Government undertook the management of the funds of the veterans who compose this Class, with no mention of, or any apparent thought of claiming compensation, when it knew or certainly should have known that without a specific agreement or statutory authority, it could not later claim compensation. The inference is that it was government policy not to charge for administration services, and it would now be inequitable to change that policy.

21     Further, although the 0.6% per annum recommended by David Yu, one of the experts that provided an affidavit for the Crown, was reasonable in comparison with what a trust company would likely charge and a court allow for the administration of a substantial individual estate, in fact I would think that here, the needed investment decisions, and the implementation thereof could be handled by two or three people, hired for that purpose. The cost of that (as distinct from the cost of administering the principal, which was already in place and being offered free) would pale into insignificance when compared to the cost of say the doctors, nurses, rehabilitation and occupational therapists and others on staff to deal with other needs of these same veterans.

22     I disallow any claim for compensation. There would be some brokerage fees incurred in buying and selling securities under an investment program, which probably should be handled as part of the cost of the security, but I feel any such expenses would simply be immaterial in relation to the present assessment of damages process.

Interest on Treatment Allowances

23     At the previous hearing on quantum, the issue came up of whether simple or compound interest is to be applied in relation to treatment allowances from 1928 to 1953. That question was the first on my list, reproduced above.

24     Class counsel in its Factum, simply stated that Professor Charette, who had been doing the calculations for the Class, had provided tables showing both compound and simple interest on surplus treatment allowances. In my view the Crown, in Paragraphs 315 through 323 has provided the conclusive answer. Firstly, the Crown provided, in Paragraph 317, the references to a series of orders in council from November 21, 1919 through March 19, 1953, specifically providing for simple interest, starting at 5% and then 4% and then 3% in 1928, which continued for the next 25 years. These orders-in-council gave specific instructions as to when the interest would begin to run and when the Crown was required to credit the interest to the veterans' account.

25     No argument was raised before me that the regulations, during the period from 1919 to 1953, are ultra vires or in any way exceeded the authorizing parameters, nor were in any way in conflict with, the authorizing statute or any of the statutory provisions in the "Veterans' Charter".

26     I had dealt with this sort of situation in my decision relating to the estates portion of this Class action, released March 24, 2003, reported at 63 O.R. (3d) 707. There, I had, in summary, pointed out there was no right of a veteran to claim a pension or allowance at common law. The provision of such support and assistance to veterans was "an act of bounty by the Crown". In Paragraph 6 of that decision, I said, "It therefore appears self-evident to me that the Crown would prima facie be entitled to impose any restrictions or conditions upon its 'grace and bounty' as it saw fit and proper."

27     There as here, the Crown had imposed conditions with or prior to the granting of these allowances, and the allowances were taken subject to the pre-ordained conditions. As was pointed out in Ocean Port Hotel Ltd. v. British Columbia, [2001] 2 S.C.R. 781 at p. 796, "where the intention of the legislature, as here, is unequivocal, there is no room to import common law doctrines of independence, 'however inviting it may be for a court to do so'."

28     I declare that interest on treatment allowance funds on behalf of Class members is to be calculated from November 21, 1919 to March 19, 1953 at the rates and in the manner provided in the various orders in council, in effect in that period, particularized in Paragraph 317 of the Crown Factum.

Compound Interest

29     In my decision of December 22, 2003, found at 69 O.R. (3d) 129, I had stated that I presumed that the government was capable of doing monthly compounding calculations for each veteran's account from the time that the veterans' accounts were computerized, but did not have the start date for that.

30     In the supplementary report dated July 6, 2004 of Mr. Hodson, found in Volume 4 of the Crown's motion record, at p. 475, Mr. Hodson discussed computerization, saying that, "in his view April 1, 1989 is the first practical date we believe comprehensive financial data was available for individual veterans to permit monthly compounding." He mentioned computerization initiatives in or about 1985-1986 and stated that prior to that accounting machines were used to maintain individual accounts. He further stated that the last generation of these machines had cards for each veteran's account with a vertical magnetic stripe running down the right hand margin which maintained an electronic record of the running balance and facilitated balancing the ledger, but that these machines did not have the capability to calculate interest.

31     Professor Charette, for the Class, in his report dated March 10, 2004, at pgs. 14 and 15 thereof (pgs. 28-29, the Plaintiff's motion record) stated that he found in previous motion records of the Crown information that manual accounts were kept until the Phillips System began in 1978, using magnetic striped cards. Professor Charette was instructed to calculate compound interest starting in 1978.

32     In Paragraph 26 of the Class Factum it is confirmed that Class counsel had so instructed Professor Charette, partly on the basis of the information Professor Charette had gleaned from the defence reports and partly on the basis of information counsel found, which became Exhibit 78 to the Affidavit of Peter Sengbusch sworn June 11, 2000. This information was that the D.V.A. could have adopted the Phillips card system to calculate monthly compound interest at a modest cost in the area of $10,000.

33     My reference to computerization in my previous decision looked to the time when the Government would have had the capability for automated monthly compounding calculations. I conclude, that although it was not until April 1, 1989 that all of the balances for all of the veterans were loaded unto a modern day computer counting system, by April 1, 1978 the records had been automated on the Phillips Magnetic Stripe Machines, sufficiently so that manual calculations of compound interest could have been avoided by adopting the Phillips Machines at a very modest cost.

34     I could see why the D.V.A. did not incur that modest cost - it was not crediting any interest, let alone doing monthly compounding, except in a few isolated instances, but that was not in accord with the obligation which Major J. found it to exist both in equity and in common law in Bank of America Canada v. Mutual Trust Co., [2002] 2 S.C.R. 601, [2002] S.C.C. 43. I accept the starting date in 1978 used by Professor Charette for the calculation of compound interest, and fix April 1 of that year, the start of a new fiscal period, as the most practical day for commencement.

Evidence and Materials for the Class

35     The Class relied upon the affidavit of Professor Michael Charette and a series of calculations which he carried out. He is a professor of economics and has provided calculations before on behalf of the Class in this action. Further, the Class relied on the lengthy affidavit of Michael Barasso, the Vice-president, Trusts Investments of RBC Investments and Royal Trust Corporation of Canada, as to the investment approaches of RBC and Royal Trust through the years when acting as an trustee. Appended to the affidavit are detailed documents setting out the trust portfolio management policy and guidelines of Royal Trust.

36     Further, through an affidavit of Dexter Robinson, the Class introduced a 2003 Andex Chart which displays graphically the performance of various kinds of investments from 1950 to 2003, and through the affidavit of Ms. Woodcock, are excerpts from the "Hodson report" and also excerpts from the cross-examination of Joan Albert, including copies of original records from D.V.A. which were Exhibits to Ms. Albert's cross-examination.

Professor Charette

37     Professor Charette's approach to identifying appropriate investment portfolio allocations was to search out records of large pools of money, and attempt to see how those that had administered these pools structured their portfolios. He looked to pension plans, funds being handled by financial institutions, and segregated/pooled funds of trust and insurance companies. He felt it best to consider the average allocation of and rate of return for an aggregate pool of funds administered by a group of asset managers who had unrestricted fiduciary responsibility for the allocation of investment funds, including allocation across broad classes of assets. He felt that would provide a preferred benchmark for assessing the "prudent man/best effort" outcome within an evolving historical context. He focused on the asset allocation of private sector trustee pension plans because there he could get reasonably complete quantitative information from Statistics Canada about asset allocation going back to the 1950's, and the available data reflected pension allocations across thousands of individual pension funds managed by hundreds of investment managers. He concluded that funds administered under the provisions of the various Trustee Acts of the provinces would not be good comparators because the asset allocations and the rates of return would not be consistent with the prudent man/best effort standard. He recognized that the Statistics Canada data he was relying on only went back to 1960, but in effect, carried back the allocations he found to 1920, on the basis that at that time the average allocation was 75% of total assets to debt and only 12% to stocks, so there would be little effect on returns by moving to a more conservative portfolio. Interestingly, he found that there was little indication that any substantial amount of private or public trustee funds were ever allocated to short-term investments such as T-Bills, except during the inflationary period of the late 1970's and 1980's.

38     Professor Charette felt that the possibility of trading profits or capital gains should be ignored based on "the efficient market hypothesis" which implies that on the average, professional money managers can't generate returns much in excess of broad market averages. He makes this broad statement more cogent by opining that money managers attempt to identify mis-priced assets and so compete with all other money managers, and the implication from this competition is that such mis-pricings would be relatively uncommon and short lived.

39     In a series of schedules attached, he applied the findings in my earlier decision, did calculations based on portfolios he opined to be representative and concluded that the damage total, consistent with portfolio investment of funds on hand year by year, except for excess treatment allowance Memo accounts, where his schedule at simple interest at the regulation rates would apply, worked out to a total of $2,104,734,000.

Michael Barasso

40     Mr. Barasso, Vice-president, Trust Investments of RBC Investments and Royal Trust Corporation, noted in his affidavit that Royal Trust opened in 1889; by 1920 it had $258,000,000 under administration, and presently has approximately $1.3 trillion of client's assets under administration. By 1974 it was the largest trust company in Canada and 5th in North America.

41     Mr. Barasso testified that from the early 1900's to the 1970's, investment vehicles included Canadian and Provincial Government Bonds and Canadian high dividend equity stock. His evidence was that an acceptable portfolio mix during that period of time would have included 40% equities, 55% bonds and 5% cash. This he described as "a prudent type of asset classic mix". He listed cash, T-Bills or money market funds, Canadian Federal, Provincial and Corporate Bonds and equities, mainly Canadian with some exposure to U.S. equities and eventually the introduction of international equities, as all being investments appropriate under the prudent person rule.

42     He further mentioned that Royal Trust created common trust funds, and I gather from the particulars of the Management Policy and Guidelines annexed to the affidavit, common funds of various types of assets, such as the shares of financial institutions, mining shares etc., and that Royal Trust would pool purchases of various types of bonds and create pooled bond ladders.

43     Further in his affidavit he stated at Paragraph 26 that in approximately the late 1970's trust investments began to introduce U.S. stocks and in approximately the late 1980's to the 1990's international equities were frequently introduced into trust portfolios. He says that in trust portfolios, bonds were usually held to maturity with little trade of bonds for capital gains. For stocks, indexes such as the TSE total return index include trading profits in the reported total returns.

44     In Paragraph 28 he identifies a typical and balanced portfolio over the last 53 years - that is 1950 - 2003, as containing 5% cash (T-Bills, Money Market Funds) 55% bonds and 40% equities. He states that the emphasis in trust management has always been towards a balanced approach and an even handed approach.

Other Class Witnesses

45     There was no contest over the evidence of Dexter Robinson or the accuracy of the Andex Chart he introduced, which was simply used for illustrative purposes. Neither was there any contest over the excerpts from the Hodson Report or from the cross-examination of Ms. Albert, introduced in the affidavit of Gale Lee-Woodcock.

The Crown Evidence

46     The Crown in 5 volumes, introduced affidavits of David Yu, Erik Kirzner, Andrew Smith, Marilyn Letts, Harold Weitz, William Solomon, Peter Gorham, and Nick Hodson, with reports and/or other exhibits annexed. Marilyn Letts is a policy analyst with Veterans Affairs Canada and provided evidence as to internal matters in the Department including particulars of some files. Messrs. Yu, Kirzner and Smith all have expertise in investments. Mr. Solomon and Mr. Gorham are actuaries with expertise in pensions. Mr. Hudson is a Chartered Accountant.

David Yu

47     Mr. Yu had 29 years expertise in the Canadian Investment Industry, mainly as a fixed income investment manager. He testified to the great changes in the investment industry since the 1970's, including a dramatic expansion in the bond markets, bond trading becoming more common place, the advent of computers in the 1980's enabling the free flow of economic and financial data leading to increased sophistication, the emergence of the modern portfolio theory from the 1980's and the entry of Canadian Chartered Banks into the Investment Industry. In the 1990's things continued to snowball to include things like intranet based day trading and discount trading. His point was that trying to apply today's standards, such as modern portfolio theory, to earlier days would create an artificial construct that would not be accurate. Mr. Yu then devoted several pages to the "know your client principle" for investment advisers, and the obligation to develop individualized investment plans for each client. Included in this is consideration of the information provided to him, (and to all the other Crown experts), as to the characteristics of the veterans in this Class and their accounts. Consideration of that list apparently led him to reinforce his suggestion of individual accounts and individual investment plans. However in response to a Crown request for a portfolio suggestion on a pooled or combined basis, he concluded the appropriate portfolio would be a very conservative one aimed primarily at the preservation of capital while providing liquidity and reliability of income. He recommended a portfolio comprised of high quality bonds with short maturity periods of between one and three years, acquired on a "buy and hold" basis and "laddered" over a 3-year period so that every 6 months 1/6 of the portfolio would mature. His view was that that portfolio would avoid the very real affects of the volatility of the capital markets. He pointed to sharp drops in bond prices, several times in the past, and significant declines in the capital value of aggressively invested funds.

48     Mr. Yu opined that an investment manager handling the veterans' funds would not have engaged in bond trading because that is simply an attempt to out perform the market which would ultimately add no value to a bond portfolio, given the proven efficiencies of the marketplace. In his view it would be inappropriate to even consider investing veterans' funds in equities due to the additional risk level, and considering investing in foreign currency vehicles would necessarily compound the risk exposure. He recommended, as I above noted the management fee of 0.6% per annum. His opinion of Professor Charette's use of pension fund portfolios as a comparator was that he did not analyze the pension funds in terms of membership composition, investment horizon and risk tolerance, and so included "at risk" securities such as equities, long-term bonds, and higher risk bonds in his recommendation which did not belong in the veterans' portfolio.

49     Further he believed some of these securities, including high yield bonds and foreign equities would not be readily available through the period of consideration.

Erik Kirzner

50     Professor Kirzner teaches finance, an executive M.B.A. course, and holds a chair in value investing at the Rotman School of Management at the University of Toronto. He also is an experienced investment adviser, who has authored or co-authored numerous books and papers on investment strategies and investment analysis and management etc.

51     He had been asked by the Crown to detail an appropriate investment strategy and rates of return for the veterans' funds and it did so in a detailed report found at Tab 3(b) in Volume 1 of the Crown motion record.

52     In the report, Professor Kirzner concluded, from the information given to him (which did not include the size of the larger accounts, including Mr. Authorson's) that the only legitimate investment objective for the veterans would be preservation of capital, and specifically preservation of real capital which means adjusted for inflation. His opinion was the optimum portfolio would be 100% of riskless assets, since the administered veterans had an uncertain time horizon, would be assumed to have had no tolerance for risk, and had financial objectives of 100% safety of capital. He devotes many pages to a review of the "know your client" principle, and concluded that as many of the veterans were mentally incapacitated, it would be impossible to gather information regarding personal circumstances, investment horizon and risk tolerance, and then added the very pertinent information that from his academic research and experience in the investment advice industry, it is industry practice that where such information cannot be obtained, a very conservative investment approach is taken. In the absence of an ability to determine risk tolerance directly from an investor, the industry practice was to infer the lowest risk tolerance while the investment goals are strictly defined as safety of principal.

53     Further, in his view, as any of the administered veterans could claim their accumulated balances at any time, the appropriate investment objective would have been safety of principal.

54     Professor Kirzner's evidence was that 30-day treasury bills would have been his primary selection for investment of the administered funds throughout the law suit period, however they only became available to retail investors in the 1970's. His conclusion therefore was that:


(a)          From the 1920's to the 1970's the investment vehicle would have been a demand deposit account or a very short government bond;

(b)          After the 1970's 30-day treasury bills and very short-term (less than one year) government of Canada bonds; and

(c)          After 1990 30-day treasury bills, and real return Government of Canada bonds.

55     Professor Kirzner annexed a number of tables which illustrate, as the Andrex Chart does, that long-term bonds produced the highest returns at the highest risk, followed by shorter term bonds, and then by treasury bills, which produced the lowest returns but can never produce a negative return.

Andrew Smith

56     Mr. Smith is a Chartered Financial Analyst with over 40 years in the investment field. Over his career he has been a personal trust officer, investment officer for estate and trust clients, manager of pension fund investments for a trust company, Vice-president of investments for a major investment company and senior consultant and major shareholder in a well-respected investment firm. He was retained by the Crown to prepare a report and provide an opinion on how a prudent trustee would have invested the veterans' administered accounts over the period from 1920 to 1989.

57     In his report Mr. Smith summarized characteristics of veterans' accounts as follows:


(i)           The majority of accounts had relatively small balances at any point in time and had a "saw tooth" pattern of cash inflows and outflows. A minority grew substantially over time.

(ii)         The accounts were essentially demand deposits with the veteran or his/her representative being able to draw on all or part of the funds at any time and,

(iii)        There was an absence of any formal agreement between the veterans and the Crown regarding management of the accounts.

58     From the information he was given, and the assumptions he made, he concluded that for the most part the funds being administered were needed to meet ongoing living expenses and so typically the balances stayed small, and frequent and immediate access to the funds was required. From that alone he concluded that there would be a limited opportunity to invest in anything other than a savings or chequing type of bank account.

59     He concluded the investment time horizon for the administered accounts was uncertain and advised that when it is impossible to tell when the funds might be called upon, a prudent trustee would invest in "on demand" or very short-term investments.

60     Further he opined, based on his experience as a trust and investment officer, that when confronted with a need for liquidity and an uncertain investment horizon, and absent any specific and informed instruction to the contrary, the prudent trustee must assume that there is little or no tolerance for risk, and so it adopt an extremely low risk strategy, prioritizing capital preservation. Once again, he looked to some kind of interest bearing savings accounts payable on demand.

61     Only for the small minority of managed accounts that grew substantially, where draws for immediate needs did not occur and it appeared clear that the funds would not be called on for some considerable period of time, could a more expansive investment strategy be adopted.

62     It was his belief that these administrations would be subject to the provincial Trustee Acts and their inherent restrictions including a ban on common trust funds or mutual funds until 1998.

63     Mr. Smith commented on Professor Charette's use of the investments of pension funds as a comparator by noting that with a pension fund the liability for payouts is long-term and actuarially calculated, with the payout of defined benefit plans being pre-ordained. With the veterans' accounts, the funds could be called for at any time, and any capital loss would have a significant effect on the account and on the veteran.

64     Mr. Smith commented on Mr. Barasso's affidavit. He quoted Mr. Barasso's conclusion that I quoted above, in effect that from the early 1900's to the 1970's an acceptable portfolio mix would have provided 40% equities, 55% bonds and 5% cash, which would have been a prudent mix. The only adverse comment Mr. Smith had to make was that in his view management of these accounts would have been bound by the provincial Trustee Acts, which did not permit that type of portfolio.

65     Mr. Smith agreed with Mr. Barasso's comment that "in a typical trust portfolio bonds were usually held to maturity. There is very little trading of bonds for capital gains ..." He said it was his own experience that bonds were purchased to provide income and were generally held to maturity and that was a standard practice extending back to the early part of the century.

66     Mr. Smith commented on Professor Charette's April 14, 2004 affidavit in which he looked to the average asset allocation across a large number of trustees of defined benefit pension plans, most particularly on Professor Charette assuming that pre-1960 asset allocations for pension plans would be the same as those in and after 1960. Mr. Smith deposed that prior to the mid-1950's, employers simply did not maintain pension plans, but instead bought annuities through life insurance companies for retiring employees, and this was why the data stream that Professor Charette used only began in the year 1960.

Larry Weitz

67     Mr. Weitz was the chief of the pension statistics program at Statistics Canada from its inception in 1965 to when he retired at the end of 1977. During his retirement he continued to research various pension issues and published a book titled "The Past and Future of Canada's Private Pension System."

68     The thesis of Mr. Weitz's lengthy affidavit (113 paragraphs) was that in his opinion, pension plans are not an appropriate reference when attempting to estimate the damages suffered by the Plaintiff Class.

69     First, he deposed that you couldn't, as Professor Charette proposed, extrapolate 1960 data on pension plans backwards to 1920. There were very few pension plans in existence before 1960 and they primarily invested in government bonds and government annuities, which comprised over 70% of their investment portfolio. The rates of return were only 3% or 4% and therefore significantly lower than the rates of return estimated in the Charette report.

70     Mr. Weitz points to the 1953 Dominion Bureau Statistics Survey of Trusteed Pension Funds, which he deposed reflected the portfolio pattern that prevailed to the 1960's. Over 80% of invested assets were in bonds, 4/5ths of that being issued or guaranteed by Federal, Provincial and Municipal Governments with the balance in corporate bonds.

71     The statistics show, he deposed, that the asset allocations changed gradually. The portion of bonds in the portfolio dropped to 7% in 1960, and by 1965 to 64%. In 1970 it was down to 52% and later fell to 46% to 49%. Mr. Weitz contributed this to the plan sponsors starting to see pension plans as a profit center for themselves. In the mid 70's, oil prices disrupted the stock market, and managers quickly returned to Government of Canada Bonds. Aggregate pension fund assets held in equities increased gradually from 7% in 1960 to nearly 28% in 1972 and declined to 20% in 1980, and climbed again to 27% by 1988. However individually, in some pension funds the equity portion was as high as 50% while others held no stocks at all. The equity component was concentrated in low risk blue chip issues.

72     The pension funds got into the mortgage market with 4% of the total portfolio in 1953 being in mortgages. From the 1960's forward, pension funds had roughly 9% of their assets in mortgages and through indirect investment in pooled funds, had a total mortgage component of around 12%. The proportion of investments in short-term securities like treasury bills, fluctuated up and down dependent on whether returns on short-term securities were very high, as they were at times, and whether the stock market was in trouble, when new money would be held in cash waiting for investment opportunities.

73     Mr. Weitz concluded that the two most compelling factors affecting investment patterns of Trusteed Pension Funds were market conditions and self-regulation by sponsors. He felt the latter was the pivotal force that shaped the asset profile.

William B. Solomon

74     Mr. Solomon is a professional actuary that has worked in the pension industry for over 36 years. He is routinely consulted on pension plans valued at between 10 million and 5 billion dollars.

75     His position was that the assumptions and ultimate calculations of damages for the Plaintiff Class deposed to in the Charette report do not accord with the knowledge and experience he had gained through his work related to the investment and management of pension funds. His view was that attempting to base an estimate of the damages owed in this case on pension plan investment policies was inappropriate and lead to erroneous results.

76     He pointed out that pension funds are invested with a long-term investment horizon, which permits the manager to adopt an investment strategy that more aggressively seeks to accumulate investment return on capital. Capital preservation is not a primary concern as market ups or downs will be evened out over the long term. Because the plan members cannot withdraw their funds prior to death or retirement, or termination of employment, the benefits of a long-term investment strategy are likely to be realized. Contrary to this, the funds administered by the D.V.A. could be called on in various circumstances so that there was a significant need for liquidity. Consequently capital preservation would have been of paramount concern. Therefore, he deposed that the investment objectives and the nature of the funds held in pension plans were fundamentally different from those that should have applied to the D.V.A. In fact, he saw the pension plans most analogous to the D.V.A. position as being pension plans in the process of being wound up and awaiting regulatory approval for distribution. In his experience in those circumstances the pension fund managers avoid market risk by investing the entire fund in short term fixed income securities pending approval of the winding up.

77     Mr. Solomon echoed Mr. Weitz on the inappropriateness of trying to extrapolate 1960 pension plan rate of return data back to 1920, and in fact quotes Mr. Weitz's book.

78     Mr. Solomon indicates that Professor Charette's figures on the proportion of pension portfolios in bonds is inaccurate, in that his knowledge, and the information available to him, showed the average pension fund had 40% of its portfolio in bond holdings from 1990 to 2004, which rose to 42% in 1998, and that the 40% figure would hold true for periods reaching back into the 1960's. He also disagreed with the Charette report conclusion that Canadian Federal Bonds would comprise only 1% of pension plan assets.

79     Mr. Solomon also pointed out that private pension plans have to pay custodial, trustee, and monitoring fees, which even on a pooled basis would be 0.6% of the capital value of the pool.

80     Mr. Solomon echoes Mr. Weitz's comment that the two most compelling factors affecting investment patterns of trustee pension funds are market conditions and self-regulation by the sponsors.

81     His opinion on portfolio trading was that while it is more common now, it was not used as an investment strategy until the 1970's. In the 1960's there was relatively little portfolio trading and prior to 1960, because pension fund assets were invested largely in government bonds and government annuities, there would have been few if any positive gains because of the efficiency of the bond markets. In fact he concluded that active trading in portfolio equities of all kinds rarely achieves much success and points to a 20 year survey of pooled funds invested in the T.S.X. Composite Index where the return would have been 9.4%. If the portfolio had been actively traded, before fees, the return would be 9.9%. If fees were taken out the returns would be virtually identical.

82     Mr. Solomon expressed the strong concern that if the veterans' funds were in equity markets, they would be exposed to significant fluctuations dependent on both market and individual stock performance, which could result in the account balance being down at the time it was realized. A portfolio restricted to income producing securities would insulate the veterans' funds from those consequences.

Peter Gorham

83     Mr. Gorham is an actuary, with particular experience in the pension fund area. The Crown asked him to prepare a report commenting on the Charette report of March 10, 2004 and to present some calculations of his own. The report is 40 pages long and takes up all of Volume 3 of the Defence Motion Record.

84     Mr. Gorham summarizes his findings as follows:


(i)           Using pension plan data as a comparator, failed to recognize that in defined benefit pension plans, the risk/return lies with the plan sponsor, not the beneficiaries, and that despite the Charette report saying for the veterans, investments subject to restrictions should not be considered, in fact all pension plans have been subject to investment restrictions for about the last 40 years.

(ii)         Second, he points to what he feels are five significant errors in the Charette report:


(a)          Allocation of prior investment income - failed to allocate the accumulated interest consistently with changes in the allocations of the principle sums, and with his described methodology and,

(b)          Bond yields - in determining the investment returns, he uses bond yields instead of returns, and made the same error with mortgages. In Mr. Gorham's view the use of yields to calculate returns is inappropriate.

(c)          Investment return for equities. He felt the returns from at least 1978 to 2003 are not correct, as they do not equal the industry standard Total Return Index.

(d)          Asset class allocations - the allocation he used for bonds and equities is not reflective of actual pension plan allocations.

(e)          Long bond index - he should not have used that index but rather two other indexes that are more reflective of pension plan investments.

85     In his view, the error in dealing with accumulated interest would understate the final total produced by $200,000,000 while the other four areas together would overstate the result by $660,000,000. The net overstatement would therefore be $460,000,000.

86     Mr. Gorham explained the problem with allocation of prior investment income by the example of bonds, where it was assumed that from 1920 to 1960, 48% of the fund would be in corporate bonds. After 1960 Professor Charette assumed the portfolio would shift to having more equities and less bonds, but the accumulated bond interest was kept as a corporate bond investment, rather than part of it being allocated, as the bonds themselves were, towards acquiring equities.

87     The difference between yields and returns is, on my understanding, really an issue of whether for accounting purposes, the holder of a long term bond should recognize the increase or decrease in the value of the bond itself, together with the annual interest paid, or not. In Mr. Gorham's view, in pension fund accounting, the changes in the principal value of bonds is brought into account each year.

88     On the issue of investment return for equities, Mr. Gorham stated he had compared the returns used for equities from 1978 to 2003 and finds they do not equal the published Total Return Index, which is the standard measure used by the pension and investment community as the indicator of returns for Canadian equities. He suspected that Professor Charette may have combined an index of price changes with an index of dividends and feels the result is to over state the investment returns for equities by approximately $150,000,000.

89     Mr. Gorham deposed in his report that when he first looked at the Charette report, he concluded that the percentages for federal, provincial and corporate bonds did not make sense. Professor Charette had indicated that he arrived at these different percentages from secondary sources, and Mr. Gorham's view is that the asset allocation could be found indirectly in various tables of the T.P.F.F.S. (Trusteed Pension Funds: Financial Statistics). He gives a number of examples, which do indeed show a considerable difference between the percentages allocated to say, Government of Canada Bonds by Professor Charette and by T.P.F.F.S. Mr. Gorham's view is that T.P.F.F.S. allocations are more reasonable and Professor Charette's allocations would over state the resulting damage amount by approximately $210,000,000.

90     Mr. Gorham criticized Professor Charette's use of the long bond index for each of the major bond types. Long term bonds are those with more than 10 years to maturity, and in Mr. Gorham's view the implication is that the holder of a long bond would sell it when it reached 10 years from maturity and buy another bond with a longer maturity, so that there would be no short or medium term bonds in the portfolios. He says that pension funds typically invested a broad range of bonds, from short term to very long term, and the more appropriate measure of the returns available is the S.C.N. Universe Bond Index. That index is based on what an average bond portfolio looks like and is based on actual returns, not on yields.

91     In his view the use by Professor Charette of long bond yields rather than the returns of a bond universe would overstate the results, but he has not made an estimate of the quantum of that effect.

92     Further, Mr. Gorham says that Professor Charette ignored the inevitable expenses of administration that would have been charged against a pension fund, and further ignored the fact that up to the 1970's, a significant portion of funded pensions were secured through group annuities rather than investment portfolios.

Nicholas Martin Hodson

93     Mr. Hodson, a Chartered Accountant, who with his firm Ernst & Young had prepared the report of September 16, 2002, which supplied the principal amount of the veterans' accounts year by year, which all counsel accept as the basis for the calculation of damages, was asked to do a supplementary report encompassing my decisions and the decision of the Court of Appeal since then, and also presenting calculations based on the rates proposed by Mr. Yu as well as comparative rates from the Ronald W. Scott report, which was presented at the previous hearing.

94     In the course of his commentary, Mr. Hodson noted that in the review of the accounting records from 1987 through 1990, approximately 80% of the accumulated balances belonged to approximately 20% of the administered veterans. They had not yet analyzed all of the individual accounts for earlier periods, but his expectation was that this relationship or similar relationships would have existed for extended periods during the 82-year period that is the subject of this lawsuit. Of course the reverse would be true - that 80% of the disabled veterans might have claims against only 20% of the total amount under administration. The great number of blank pages in the section on individual accounts in Mr. Hodson's 2002 Report is mute testimony to the difficulty of analyzing the individual accounts - which is supported by Ms. Letts' 2004 affidavit, advising that to date, of the 25,000 to 35,000 anticipated accounts, only 491 had been analyzed in detail.

95     Mr. Hodson provided a further report, dated August 27, 2004 in which the calculations were reworked using the methodology of veterans' affairs employees to calculate interest and to make other technical adjustments. One that is of interest is that in his earlier calculations, he had built in an administrative fee of 0.6% as suggested by Mr. Yu. On re-examining the calculations, it was noted that these administrative fees could be higher than the incremental interest at the rates suggested by Mr. Yu and Mr. Scott. Mr. Hodson concluded that was unacceptable and his last report limited administrative fees to the amount of the incremental interest.

Marilyn Letts

96     Marilyn Letts gave an affidavit sworn June 26, 2004, telling of the work in reviewing files, and examples from some of them, and a further affidavit sworn August 30, 2004, in which she advised that to that date some 491 files had been identified as probable Class Members which files had been reviewed in detail. They were not in any particular order and included veterans from the first and second world wars and the Korean War. From the 491 files, she found a total of 1,064 administrations, because 365 of the files involved more than one period of administration. Out of this random sample, she found 772 of the administrations, or 72.6%, lasted more than 30 days, but less than a year, with the numbers and percentages tapering off to administrations lasting for 25 years or more but less than 30 years totaling 8 or 0.8%. The final 30 files which had lasted 30 years or more made up 2.8% of the total. The problem of repeated administrations for the same veteran was not something that was commented on in argument.

Supplementary Motion Record

97     In response to the five Volume Motion Record of the Crown, defence counsel filed a supplementary motion record, containing responding affidavits of Mr. Barasso, sworn July 29, 2004 and of Professor Charette, sworn August 4, 2004.

Michael Barasso

98     His affidavit is in specific response to the affidavit of Andrew Smith, filed by the Crown. Mr. Smith had proposed that the administration on the veterans' funds would have had to be in accord with the Provincial Trustees Act. Mr. Barasso noted that that is an issue of law for the court to decide, but to provide the court with complete information, he prepared an alternate spread sheet which in his view set out an asset mix based on the evolution of the Trustee Act in Ontario, in combination with his recommended approach to prudently ensuring that the assets were diversified and transitioned in accordance with the changes and restrictions of that act over time. Further, he had adjusted the asset mix based on market conditions that occurred during the 1973-1974 and the 1987-1988 periods. His conclusion was that it would have been prudent to reduce exposure to equities at that time and to gradually re-invest into equities as the market conditions improved.

Michael F. Charette

99     Professor Charette, in a further report dated August 3, 2004, commented on the points raised by the various defence experts, with detailed comments on the affidavits of Mr. Yu, Mr. Gorham, and Mr. Hodson. He also provided schedules of revised estimates of damages and additional estimates of damages.

100     Professor Charette's comments on the defence suggestions that these funds had to be kept in short term fixed income securities because they could be called on or realized at any time, was that funds that had accumulated over time, growing into the tens of millions by at least 1953, were not at all likely to be required on a short term basis for the "immediate needs" of the veterans. Funds had accumulated precisely because they were not needed. In his view the funds required for short term needs would not actually be included in the accumulating fund balances and short term draw downs of funds by some veterans could be covered by the positive net cash flow into the accounts from monthly deposits, and the cash flow generated by investment earnings of the funds.

101     He deposed that he was criticized for looking to pension funds as a comparable, but the defence experts have not suggested any other comparable portfolio, except short-term fixed income investments, and he was simply trying to assist the court by considering the historical evolution of the actual asset allocation for a large pool of funds. The asset allocation of pension funds could be tracked from 1960 to the present. In his view, looking to the individual veterans whose accounts accounted for the largest portion of the aggregate balances, it would be apparent that these were long-term administrations most likely to end with death. It was his view, with that type of account, a moderate risk of temporary capital loss, to seek a much-improved longer-term returns relative to inflation, would not appear "too risky".

102     Further, Professor Charette argued that the differences raised by the defence experts between defined contribution and defined benefit plans, is largely illusory because in fact the portfolio mixes of the two types of plans are not greatly different. He illustrated this with figures from both types of plans for the years 1992 and 1998. (When I looked at those numbers, there are certainly differences - whether they are "great" or not is a matter of opinion).

103     Professor Charette expressed doubt at the investment management expenses suggested by Mr. Gorham to be 1 to 3% and suggested by Mr. Yu to be 0.6%. He points to the University of Windsor Pension Plan, valued at $365,000,000, where the annual investment fees are between 0.25% and 0.30% of invested funds.

104     Professor Charette, while not disagreeing with Mr. Yu, who spoke of many relatively small accounts, with monthly balances that tended towards zero, stated that the aggregate pattern showed continuing growth of the total fund balance, except 1948 when it declined $14,980 on a fund balance of $7,458,254,000. He pointed to the schedules showing that almost all of the individual classes of funds grew continuously until the mid-1980's, and opined that changes in administrative procedures by the Crown likely explained the decline in the aggregate balances of the individual classes of funds that occurred during the mid-1980's.

105     Professor Charette's description of the situation was that all of the individual accounts were initially relatively small, and once administration began some of them tended to grow more or less continuously over time. The aggregate fund growth would then be dominated by the larger and larger account balances over time. Also, over time the number of veterans under administration grew continuously, and though some accounts were growing larger and larger, the number of small accounts was also increasing, with both of these factors contributing to the aggregate growth.

106     Professor Charette pointed to that annual growth year over year as indicating there would have been sufficient liquidity to meet withdrawals, indicated that generally the annual growth in the fund balances, without any investment income, was 5% or more, and if investment income was added, there would be another 5% or more, and there would always be fund assets allocated to short term liquid investments. He therefore did not see the need to follow a "very conservative" investment strategy.

107     Professor Charette recognized there would have been times when a diversified portfolio would have had a negative income, but said that over the entire period there were only four instances when an administration of 2 years duration would have suffered a capital loss, and only one in which a 3 year administration would have suffered such a loss. (1930-1933). He referred to p. 477 of the Hodson Report of July 2004 indicating that the average administration lasted 15 years. Because of that, in his view, the diversified asset allocation he had proposed would not represent a particularly "high risk" situation.

108     Professor Charette also stated that Mr. Yu's proposal considered only the risk of short-term capital losses due to fluctuations in interest rates and equity prices. He did not consider the loss of value through inflationary erosion, and opines that the risk associated with the fluctuation in capital value of a mixed portfolio was less than the loss through inflation without such a mix. He also noted that between 1950 and 2003, there was one instance where the average annual total real return on Government of Canada Bonds of 1 to 3 years duration remained negative over a 6 year period, and another instance wherein the average annual real return of short-term bonds remained negative over a 12 year period.

109     Professor Charette commented on the affidavit of Mr. Gorham, that some of the Gorham's comments were useful and could be implemented, and he had provided revised estimates of damage incorporating those comments. Some of those adopted were Mr. Gorham's comments on allocation of prior investment income. His comment on the distinction between yields and returns, raised by Mr. Gorham, was that he was aware of the difference, and in Appendix B of his report of October 2002, he had discussed and assessed the difference, had done the calculations, and found that with the assets under consideration and the time period considered, the difference in the accrued earning estimates was relatively small. The rate of return series was not available over the entire period and so he had used debt yields and that gave a continuous series. He did not agree with Mr. Gorham's indication of a $300,000,000 overstatement of earnings, because of using yields rather than rates, and questions the sources of Mr. Gorham's annual figures. However, he had provided an amended schedule with fund-earning estimates based on the Gorham Asset Return Series.

110     Professor Charette concluded that the alternative allocation between Federal, Provincial and Corporate Bonds suggested by Mr. Gorham left the overall debt/equity distribution largely unchanged, but felt Mr. Gorham's approach was reasonable and consistent with his general approach, and so provided new estimates of damages based on Mr. Gorham's suggested allocation of assets.

111     Professor Charette explained that he used the long-term bond yields because the S.C.M. Universe Bond Index that Mr. Gorham had suggested, only began in 1979 and covered a diverse portfolio of bonds, and there simply was a lack of consistent yield or return series for other than long term provincial and corporate bonds. He noted that Mr. Gorham did not suggest an alternative source of bond returns, nor provide estimates based on alternative bond returns.

112     Professor Charette took issue with Mr. Gorham's approach on expenses, indicating that purely administrative expenses, such as record keeping of income etc., would "net out" of the calculation of damages as they would exist irrespective of how the veterans' funds were invested. He felt that investment management expenses would likely be 0.25% to 0.3% of invested funds, not the 1 to 3% suggested by Mr. Gorham.

113     Professor Charette basically adopted the revised figures prepared by Mr. Hodson as to the estate account balances, year by year, and recalculated his figures accordingly. He explained the differences between Mr. Hodson's report on "balances in which interest was paid" and his own relate simply to the use of alternate approaches in doing the calculations.

114     Professor Charette criticized the calculation of damages in the Hodson report, including criticism of the date Mr. Hodson used to start compounding monthly, but accepted, as the Class have accepted, the basic figures produced by Mr. Hodson as to the balances in the administered accounts before interest or damages was added.

Observations on the Evidence

115     Firstly, there was no suggestion made by any counsel, nor did I see any indication in any of the many volumes of materials presented, of any question whatsoever as to the credibility of any of the deponents. Counsel made use of their right to cross-examine, and I heard no suggestion of anything coming from that which would raise any doubts as to the integrity or honesty of any of the deponents. The experts are all unquestionably persons with great knowledge and experience in their particular fields, and obviously expended a considerable amount of time and effort in preparing the reports that were delivered to me. The issues they were dealing with are in my view the sorts of things that are best dealt with in the scholarly way in which they were here - by the careful preparation of a written opinion and supporting materials, which were carefully considered and responded to in writing by other experts in the field. This, I feel, is a much fairer way of exploring complex areas than is relying on spur of the moment oral responses to cleverly worded questions in a viva voce cross-examination.

116     We were dealing here with a situation where all counsel agreed with the figures presented by Mr. Hodson, as to the account balances either by year, and as to the individual accounts within those balances, as being the best that could be produced.

117     At the end of my decision of December 22, 2003, I had indicated that I needed further information in a number of areas. The two which are pertinent here were the "whole question of capital gains including what is and was as prudent in the investment industry ..." and also the views of knowledgeable persons in the investment industry as to "portfolio investing and the make up of such portfolios at different times through the history of this particular fund". The various experts, from the points of view of their various disciplines and based upon their particular understandings of the background, provided a diverse collection of information. In doing so, they gave, in my view, complete information as to why they answered as they did. Unfortunately, several of the Crown experts provided personal opinions on how they felt the funds should have been invested, rather than objective evidence of the practices of the investment community, but I could assume from their affidavits that they felt their views reflected what the views would be of others in their professional positions.

118     In making my request for further information, I had specifically said that I should have it "... either by way of affidavit evidence to be presented at a continuance of the existing motion, or if there is disagreement between experts, perhaps trials of those issues on viva voce evidence at such continuance if the resolution of such disagreement might be helped by hearing the testimony of the experts". It was perfectly obvious, long before the continuance of this motion, that there were differences of opinions among the experts, but none of the counsel asked that the evidence of the experts be received viva voce.

119     I conclude that my findings in Paragraphs 38 and 39 of my decision of December 22, 2003, is exactly applicable, that the requirements of Dawson and of Aguonie, cited therein, have been met, and that, as was found in Chippewas of Sarnia, therein cited, there would be absolutely nothing to be gained by sending this matter to trial. I do not accept the position of the Crown (raised by submissions in Paragraphs 20 to 29 of the Crown Factum, and not by cross-motion) that a summary judgment cannot be granted in this case.

Conclusions from the Evidence

120     The Crown had argued, orally and in Paragraph 39 of the Factum, that Professor Charette did not provide an opinion on the appropriateness of the pension plan analogy used in quantification of damages. As I understand the reports of Professor Charette, he at no point claimed expertise in pension fund investment or in investments generally. The Crown admits as much in Paragraph 37 of their Factum. What he is expert in is actuarial type calculations, and in locating and analyzing materials gathered by Statistics Canada and other organizations.

121     He was asked to try and find statistical records of the portfolio make up of substantial Canadian investment funds, and found that Canadian pension funds had provided a fairly lengthy record of their portfolios to Statistics Canada, which had averaged them. He then did the necessary mathematical calculations to show what would have happened if the veterans' funds were invested in like portfolios. He did give reasons in his affidavits for his thinking that portfolios like those of the pension funds would be appropriate for a mixture of individual funds, large and small, held for the veterans.

122     As the two supplementary reports filed by him clearly demonstrate, Professor Charette was quite willing to accept the input of others with expertise in investing, and his premise has always been that it is up to the Court, and not the experts, to make a decision on how these funds should have been invested. Of course, as is common with academics when faced with what they see as a one-sided argument, he is inclined to point out the other side.

123     It is clear to me that the various Crown witnesses are speaking from the point of view of the protection that would have been reasonably and rationally necessary for the majority of the disabled veterans, who either had "saw tooth" type of accounts, in which money was deposited once a month, drawn out in bits and pieces during the month and then replaced by another payment the next month, or accounts that may have, through small surpluses every month, or perhaps through missed expenditures for a month or two, accumulated small surpluses in their account. The Class experts on the other hand, were speaking from the point of view of the aggregate total of all the accounts, or from the point of view of the minority of the accounts which achieved very substantial balances.

124     It must be remembered that Mr. Hodson had clearly pointed out, after the exhaustive analysis by he and his firm, that the generality would be that 80% of the accounts made up only 20% of the total, and 20% of the accounts made up 80% of the total.

125     After considering the totality of the evidence, I conclude that the argument of market efficiency should be accepted, that over the long run trading of invested assets does not produce meaningful gains, and that thereafter the possibility of capital gains should not be included in this damages calculation.

126     Some of the Crown experts spoke at length of the "know your client" principle that seemed to suggest that private investment counselors had to individually consider the financial position of each and every one of these veterans. Clearly and obviously, that would not have been practical, and in the majority of cases would not have been successful. A preponderance of the evidence suggests that the majority of the veterans whose monies were being administered, and certainly the majority if not all of those being administered that grew into large accounts, were veterans that had been found to have been incapable of managing their own affairs, so that as Mr. Kirzner observed, they would have been unable to answer the kind of questions that an investment counselor would pose.

127     Incidentally, I had learned from the affidavit of Mr. Harvey, filed on earlier motions, and indirectly from others, that a number of the veterans whose accounts were being administered entered the program voluntarily, some being persons who preferred to have the D.V.A. handle their monthly pension funds, and some being those who as a condition of being given lodging in veterans' retirement homes, etc., handed over their pensions to the D.V.A. for administration. The position of the Crown throughout this lawsuit has been that the Federal Government and the entire bureaucracy, is and always was firmly bound and restricted by the provisions of the Federal Legislation. However the entire basis for D.V.A. administrations was a finding by the Pension Commission that a particular veteran could not manage his/her affairs. I was never pointed to any legislation that authorized voluntary administrations. These, like the "memo accounts", where the Department bureaucracy decided instead of actually issuing cheques and putting real funds under administration, to simply make "off the books" notes of receivables in the veterans' records, were apparently wholesale breaches of the statutory scheme, accepted as recognized practices within the D.V.A.

128     After reading and rereading the affidavits of Mr. Barasso and Professor Charette for the Class, and Mr. Yu, Professor Kirzner, and Mr. Smith for the Crown, and bearing in mind the 80-20 make up of the various accounts, identified by Mr. Hodson, I formed the distinct impression that, if the D.V.A. had seriously and thoughtfully undertaken its obligation to invest on behalf of these disabled veterans, it would have started with, or rapidly developed, a system of, say three different types of investment funds. I would think that all of these veterans' accounts would have needed deposit-type accounts for a small amount of money, say $1,000, to take care of withdrawals for living expenses during the month. In fact, I was taken by the suggestion of Canada Trust, some years ago, that no interest be credited to these small basic deposit accounts because anything earned would be obviously offset by the administrative expense, and the lack of interest would not be questioned. When a veteran's account grew above that minimum amount, I could see the extra surplus funds being invested in units of a common fixed income account, invested in short to long-term interest paying securities, and then, if the veteran's account continued to grow, past say an additional $10,000, further growth in the account would be invested in units of a full portfolio fund including equities. The veterans' case workers and treating medical staff would be well aware of the personal situation of the veteran, and if say an early recovery or a discharge appeared likely, informed decisions could be reached within the D.V.A. to for instance redeem the units of the portfolio fund and place the money in the fixed income fund or perhaps even temporarily in the deposit account.

129     However nothing like this happened, and we do not now have the information on which to try to estimate the financial result if it had happened. No one on behalf of either the Class or the Crown put forth the suggestion of introducing those kinds of variables into the equation - on the present information, it was difficult enough to do calculations on a year-by-year basis using only one investment criteria. While some thought might be given in the future, when dealing with individual claims, to exempting the first $1,000 of an account from an obligation to produce an investment return, the current task is to attempt to arrive at one lump sum, to be held as the total damage amount, from which individual claims would be paid as they are identified.

130     After carefully considering the evidence of the Crown investment experts, I conclude that while their advice to invest the whole of the funds in short-term fixed income "risk less" investments would be appropriate for the very small accounts, it would be totally inappropriate for the very large accounts. On the other hand, after carefully rereading the affidavits of Professor Charette and reviewing the various tables produced by Mr. Hodson and Professor Charette, I conclude that Professor Charette was right in putting forth the position that any need by the small account holders for immediate access to funds could be easily satisfied from the investment earnings of the aggregate of the funds, plus the regular receipts of more pension and allowance monies into the aggregate of the funds, plus the short-term bonds or cash holdings of that aggregate. I am also satisfied with his assertions that although there would be a risk of loss of capital with investments in equities or medium to long-term bonds, there was also some risk even with the short-term bonds advocated by Mr. Yu, and the small risk of some capital loss was more than balanced by the opportunity for capital gains, which would counter the losses arising from inflation.

131     I was particularly impressed by the affidavits of Mr. Barasso, who gave objective evidence of the make up of portfolios created by Royal Trust and RBC for estates and trusts through the entire period covered by this lawsuit. His evidence, which was not challenged by the Crown witnesses, was that the prudent type of asset classic mix, from 1920 to the 1980's was 40% equities, 55% bonds, and 5% cash. He made it clear that in the early days the equities would have been Canadian high dividend paying blue chip type stock and it was not until the late 1970's that U.S. stocks began to be introduced and still later before international equities were introduced into trust portfolios. I take it that implicit in his recommendation is that this would be the portfolio for an estate or fund that was large enough to merit administration by a trust company. However, here, even in the very first years, the aggregate funds on hand that should have been invested totaled over a half million dollars, which certainly would qualify even though at that time many if not all the individual accounts would not have.

132     Professor Charette looked to the average portfolio reported for pension plans as a comparator, on the basis that this source demonstrated the investment policy for pools of Canadian funds, over a significant period of time, which pools were held for roughly similar purposes as the pool of money held by D.V.A.

133     Although the Statistics Canada information contained in the T.P.F.F.S. reports were convenient and broad reaching, they are subject to caveats, some of which were raised by the Crown experts.

134     Firstly, the T.P.F.F.S. statistics do not cover the entire period. There was apparently one report issued in 1954, and then from 1957 to 2000 reports were issued annually covering the previous year in each issue. Professor Charette simply extended back to 1920 the T.P.F.F.S. portfolio of 1960. Professor Charette submitted, at p. 26 of the Class motion record that this was a relatively conservative allocation, and as only 12% was allocated to stocks, there would be limited room to make the portfolio more conservative.

135     Professor Charette noted that the T.P.F.F.S. is an average of thousands of pension funds managed by hundreds of managers. However, the largest pension funds tended to dominate the averages, and those funds were many times larger than the aggregate funds of the veterans.

136     Mr. Weitz, an acknowledged expert on pension plans, questions Professor Charette's use of the 1960 portfolio make up to reflect the investment practices of pension plans from 1920 to 1960. He points out there were far fewer pension plans in existence than after 1960 and they were primarily invested in Government Bonds and Government Annuities. In fact he puts it in Paragraph 15 of his report that their investments were "limited to Government Bonds and Annuities". In Paragraph 16 he puts Government Annuities at over 70% of the Pension funds investment portfolio.

137     Further, Mr. Weitz notes that, on his information, in 1953, 4% of pension holdings were mortgages, which rose to 10% in the next 15 years and was further increased by pension funds owning shares or interests in pooled funds, which raised the effective amount of mortgages in the portfolios to around 12%.

138     Mr. Solomon felt the pension fund comparator was inappropriate and led to clearly erroneous results. The reason for that opinion was that he saw pension plans as having a long term investment horizon, little call for early realization by any member, which permitted the investment managers more aggressively to seek returns on capital. He saw the D.V.A. funds as subject to withdrawal at any time. He, like Mr. Weitz saw pension funds from the 20's to the 60's as 80% invested in Government Bonds, and earning 3 or 4%. Further, he deposed that from 1971 to 2004, the investment of pension funds in bonds might never have been less than 40%, and certainly did not drop to the 33.6% Professor Charette indicated for one year in that period.

139     Mr.Gorham raised a number of technical objections about the pension fund portfolio which Professor Charette had proposed, and the basic objection that the pension plan comparators were as much as a thousand times as large as the D.V.A. funds.

140     Professor Charette, in response to all of this prepared a supplementary report, in which he revised his figures. In an amended version of that report, dated September 13, 2004, Professor Charette made some further amendments.

Asset Allocations

141     I have determined that a strictly fixed income portfolio, very liquid and substantially risk free, would not be acceptable. I have looked to the opinion of Mr. Barasso that 40% stocks, 55% bonds, and 5% cash would be prudent and appropriate, the particular comments of the Crown experts on Professor Charette's suggestion of modeling a portfolio on the average portfolio of pension funds, and the detailed year by year allocations set out in Schedule III to Professor Charette's further amended report of September 13, 2004.

142     I conclude that the pension fund model would not be acceptable, for a variety of reasons. The information on which it is based only goes back, in Professor Charette's model, to 1960. That leaves 40 years dependent on an assumption that what was the average mix for pension plans in 1960 would also be true in 1920. Particularly, the model carries back mortgages as 8.1% of the mix to 1920, while the evidence of the Crown experts was that mortgages only became a popular investment after World War II, when N.H.A. funding started. Likewise, federal, provincial and corporate bond rates are projected back from 1951 at the same figure, while the Crown evidence spoke of substantial differences. T-bill investments are not shown as increasing substantially in 1979 - 1982, when T-bill rates were much above bond rates, nor are they shown as decreasing in 1971 - 1972 when the inverse was true. The T.P.P.F.S. figures are annual averages of the asset allocations of thousands of pension plans, which individually may well have had very different allocations, some of which were right on the money, while others missed the boat. Most importantly, the Crown evidence, which I accept on this point, was that these pension funds, while "trusteed", were not true trust funds, under an obligation to invest in the best interests of the employees covered. The obligation was to satisfy the contractual obligation of the plan sponsor, and as Mr. Weitz and Mr. Soloman deposed, the most important factor in investment decisions was the wishes of the plan sponsor.

143     I conclude that the most appropriate model, to satisfy the fiduciary obligation to invest and keep invested the funds under administration, is that used by professional trustees, who face exactly the same type of obligation, and per the affidavits of Mr. Barasso, have faced it since long before the Crown first undertook the obligation at issue in this case.

The Classic Prudent Conservative Portfolio

144     The classic prudent conservative portfolio which Mr. Barasso testified remained unchanged from the early 1900's to the present day was and is, 55% bonds, 40% equities, and 5% cash (meaning very short term securities like T-Bills). This was and is the response of a major trust company to the obligation to invest prudently, and also to maintain an even hand between life tenants and remaindermen. The latter would also have been a concern of the D.V.A., which had to think of spouses and dependants of disabled veterans.

145     I accept, in part, the views of the Crown witnesses that with the disabled veterans, the major concerns would be the preservation of capital (including against inflation) and liquidity, without incurring losses of capital on realization. Because of those interests, I indicated in Paragraph 128, supra, that perfectly, a part of individual accounts would be in a bond only fund. I conclude that an asset mix inclined further to bonds would have been appropriate for the investment of the veterans' funds and would be the choice of a prudent fiduciary, and would be the appropriate choice for the quantification of the damages herein.

146     I select somewhat arbitrarily, but after considering all of the evidence presented to me, a mix of 60% bonds, 35% equity and 5% cash. If mortgages are included as investments, they would be treated as part of the bond portion of the portfolio. Cash of course, means easily cashed short-term investments such as T-Bills. To provide the flexibility to respond to changing conditions in the market, and in order to maximize the annual returns, I would allow swings of 10% either way in both the bond portfolio and the equity portfolio, so that the proportion of bonds could swing from 70% to 50%, and the proportion of equities could swing from 25% to 45%. I would also allow a 15% variance, on the upside only, of the cash portion of the total portfolio, but with no downside, as minimal liquidity would have to be maintained. Thus the cash portion of the portfolio could go up to 20% but its norm would be 5%.

147     This approach of providing a basic asset allocation mix, but with provision for variance from the norms within fixed limits, is so common in the mutual fund industry, and other financial fields, and so well publicized, that I take judicial notice of it. A proviso that applies is that the fund manager is expected to be able to make out a good investment case for varying from the central norms. The economic and market effects of the stock market boom in the 20's, the depression in the 30's, the second World War, and periods of inflation, recession, and interest rates highs and lows could, in all probability, have provided good reason for varying the asset mix in the portfolio away from the median percentages.

148     We are dealing here with the process of assessing damages for a breach of fiduciary obligations. Case law on that subject, most notably Canson Enterprises Ltd. v. Broughton & Co. (1992), 85 D.L.R. (4th) 129 (S.C.C.) at page 162, makes it clear that the task of making and justifying such changes in asset allocations is to be done as of the time of trial, with the full benefit of hindsight. Because, as was pointed in Canson Enterprises, what is being assessed here is the loss of opportunity, I do not think there should be any "missing the boat" in adjusting asset allocations from time to time within the above limits, to maximize annual returns.

149     I appreciate that over the years the components of the various asset groups would have changed, such as, for instance, a widening through the years the types of stocks included in equities, so that now American and international stocks are included as a matter of course, while that was unheard of in the 20's and 30's. However, there are limits on the statistical information that is now available. Professor Charette and Mr. Gorham debated this in their respective affidavits, and Professor Charette, in his Schedule V, settled on adopting the statistical information Mr. Gorham suggested, in making up his schedule of annual rates of return for the various asset classes. As this schedule is apparently agreed upon by the experts on both sides in this case as representing the best available figures on returns from various asset classes from 1920 through to the present, I can only suggest that Professor Charette calculate from that table, the asset allocations, within the limits I have above prescribed, that would produce the best annual return for each year, with brief descriptions of why the allocations would shift, if they do, from the base percentages of 60% bonds, 35% equity and 5% cash in each year. Those calculations would then go to the defence, for consideration by its experts, with the defence response to be considered by Professor Charette, who could reply thereto. Counsel could then present that material, with a written argument to me, or if either side felt it necessary, with oral argument on the materials at a date to be fixed by me in consultation with the trial coordinator.

150     I should then be able to provide a figure quantifying the aggregate damages in this case.

151     I am concerned over timing, as I appreciate that my decision on liability is awaiting a hearing in the Court of Appeal, and the hope had been that my decision on quantification of damages would be available to the Court of Appeal at the same time, for information, or if all or any part of it should be objected to by either side, for argument at the same time before that Court. It may well be that the actual number, which I expect would simply be the result of mathematical calculations, would not be necessary for the considerations of the Court of Appeal, but for the sake of completeness I would like to get that figure set in the early future.

Summary of findings and conclusion

In this decision, I made the following findings and decisions:


1)            Simple interest only, on interest as provided in the specific Regulations, was payable re treatment allowances, from 1920 to 1953.

2)            No provision should be made for capital gains, in calculating an appropriate investment income on funds that should have been invested.

3)            Mr. Hodson and his firm had "backed out" interest paid, and interest on the "estates" claim, and had dealt with how interest under the D.V.A. Act is to be calculated and deducted.

4)            The argument that the continuation of the assessment of damages should not be done by way of Summary Judgment was not accepted.

5)            The argument that provincial Trustee Acts were applicable, thus limiting the investment authority of the federal Crown, was not accepted.

6)            The claim that the D.V.A. would notionally be entitled to compensation, and thus a deduction from damages to be assessed, was denied.

7)            Compound interest would be payable from April 1, 1978, and simple interest before that, with the caveat that if the principal amounts are finally, after all appeals, assumed to be invested as found herein, then the further assumption would be that the income would compound naturally through the investment of income not paid out to or for the veteran, in the investment portfolio.

8)            The appropriate investment, for the entire period covered in this lawsuit, and until payment of the amount to be assessed, is a mixed investment portfolio.

9)            The appropriate asset mix, for the entire period, is 60% bonds, 35% equities, and 5% cash, with the provisos that, for flexibility to respond to changing market conditions, and to maximize annual returns, the proportion of bonds could rise to 70% or drop to 50%, the proportion of equities could rise to 45% or drop to 25%, and the proportion of cash could rise to 20%, but not drop below 5%.

152     The conclusion reached is that this assessment of damages be adjourned to permit Professor Charrette to calculate the best annual income that could be earned from the portfolio above found to be most suitable, using the figures of Mr. Hodson, accepted by all counsel as the best available as to the total principal to be invested each year, and the figures adopted by Professor Charrette from the comments of Mr. Gorham, a Crown expert, as the annual earnings of each type of asset, and using the limited flexibility permitted to vary from the asset mix indicated as the norm, with explanations to be given if such deviations are made. The results of such calculations are to be shared, and commented on, as discussed in Paragraph 151, supra, with this assessment then to be completed on the basis of either written or oral submissions, as soon as possible. I would ask counsel, if any factual errors are found in these reasons, to bring the same to my attention, for possible correction, before any formal order is taken out. If any further directions should be needed, I may be spoken to.