Ontario Court of Appeal will examine an Underwriters’ Duty of Care to Investors

(April 8, 2019).  In LBP Holdings Ltd. v. Hycroft Mining Corp., 2017 ONSC 6342, the Ontario Superior Court of Justice (Justice Perell) declined to certify a negligence misrepresentation class action claim against the underwriters of Hycroft Mining Corp.’s (“Hycroft”) secondary offering.

The Plaintiff alleged that the prospectus associated with Hycroft’s secondary offering contained misrepresentations (by omitting material adverse facts about Hycroft’s operations) despite the underwriters providing a certification that the prospectus made full, true and plain disclosures.  In conjunction with the claim against Hycroft, the Plaintiff is seeking to hold the underwriters accountable for their losses that were proximately caused by those misrepresentations, e.g., several weeks after the offering the truth emerged, conflicting with the statements in the prospectus, and the price of Hycroft Mining Corp.’s securities dropped in value.

In denying the certification of the claim against the underwriters (the claim against Hycroft continues), the court primary focused on the possibility of individualized issues of reliance of each member of the putative class (i.e., did each member rely upon the underwriters’ certification in making a decision to purchase shares from them) and the individual damages of the putative class members was too large (i.e., average of USD$200,000 each) to warrant the necessity of a class proceeding, e.g., it would be preferable for each of the 254 putative class members to issue individual claims.  The Plaintiff appealed the decision.

The Ontario Divisional Court (Justices Sachs, Thorburn, and Bale) has allowed the Plaintiff to appeal the decision of the Superior Court of Justice denying the certification of a negligent misrepresentation claim against Hycroft’s underwriters.  The arguments will now advance to the Ontario Court of Appeal.

This is an important issue; having the lower court’s decision stand will result in investment banks being immune from civil liability for negligence or outright failure to conduct due diligence when underwriting public offerings.  Further, the decision will be used by investment banks to seek to repeal the law requiring them to provide certifications of truthfulness on all prospectuses.

Protecting the Micro-Cap Investor: Colt Resources Inc.

(April 5, 2019).  Lawyers Andrew Morganti, Albert Pelletier, and Hadi Davarinia were successful in earning the Ontario Superior Court of Justice’s approval to grant their clients’ motion for leave to proceed towards discovery and trial against Colt Resources Inc. (“Colt”) and several of its former officers and directors.  The decision is styled as Kauf v. Colt Resources, Inc., 2019 ONSC 2179, and it validates many important legal issues that confirm that the Securities Act was created to protect investors and the integrity of capital markets not corporations and its rogue officers.  Specifically, the court decision affirms that:

• The investor should not be required to put forth direct evidence of knowledge of an officer to mislead investors (such as an email or attendance of a meeting); and
• A company ought not to be able to benefit from “carving” out negative news by “storm warnings” leading to speculation about bad news and then claim that there is no linkage to the final public correction.  Such an approach incentivizes corporations to issue press releases which do not fully disclose the material facts, but instead create uncertainty in the market.

The decision also evidences that Morganti & Co. will align its interests with that of its clients whenever they have been mislead or how small the investment.  Colt listed its securities on the Toronto Venture Exchange and Frankfurt Stock Exchange with a market capitalization of approximately C$50 million.  Colt is a mining company incorporated pursuant to the Canadian Business Corporations Act with operations in Western Europe.  It is alleged that Colt failed to release a “Material Change Report” after it invested in a Turkish company resulting in investors taking on more risk than they had known and then releasing the truth over three news releases over a two month period in order to condition the market to the bad news.

The Firm represents a German-based investor that purchased the Canadian defendant’s securities listed on the Frankfurt Stock Exchange.  The Firm now represents domestic and foreign investors that all relied upon the integrity of the Canadian capital markets to invest in the Defendant; (a) investors were tricked in to holding shares previously purchased; and (b) investors were tricked into purchasing more shares.

Morganti & Co. was previously successful representing clients confirming that civil liability and damages arising from the Canadian provincial Securities Act applies to companies’ securities listed on foreign stock exchanges (e.g., an anti-Morrison v. National Australian Bank regime) in Kaynes v. BP plc, 2013 ONSC 5802, affirmed by 2014 ONCA 580, at paragraph 32; and Pannicia v. MDC Partners Inc., 2017 ONSC 7298.

Tulips to Cannabis: Bubbles Will Burst

(March 30, 2019).  Tulips bankrupted thousands of investors, Dot.coms managed by amateurs bankrupted hundreds of thousands of investors, and so market participants have been warned that Cannabis companies with the lofty valuations as Dot.coms managed by the same type of amateurs will too burst.  Your dreams of becoming a successful investor will simply go up in smoke leaving your brokerage account with nothing more than ashes.

Morganti & Co. has been contacted by well over one-hundred investors within the past month complaining that they felt that they were mislead by both privately and publicly listed Cannabis industry companies.   Morganti & Co. can provide investors with realistic guidance supported by tangible court decisions as to how best to recover your financial losses under Canadian provincial laws.  We will align our interests with our clients by financing the litigation and only earning a fee if we are successful.  Additionally, we have the courtroom experience to handle all aspects of shareholder litigation without the necessity to associate outside counsel.

Morganti & Co. is currently serving as lead counsel to putative classes of investors against Cannabis industry companies Auxly Cannabis Group Inc., FSD Pharma Inc., and Namaste Technologies Inc.  The Firm has also been retained by individual investors that lost small fortunes in Aphria Inc., which will follow a different litigation track.