(February 4, 2021) Today the Ontario Superior Court of Justice (Justice Morgan) approved the Settlement Agreement between investors and FSD Pharma, Inc. (“HUGE”), that will require HUGE to convey $5.5 million, inclusive of costs, legal fees, and taxes, to investors. Investors received more than the available directors and officers insurance.
The Claim alleges that the Defendant made material misrepresentations in FSD’s business, operations and finances by omitting from core documents, non-core documents and statements, material facts regarding the status of its project with Auxly Cannabis Corp. to build-out 220,000 square feet of cannabis cultivation space in Cobourg, Ontario. The Claim further alleges that these misrepresentations resulted in the price for FSD securities being artificially inflated during the Class Period, thereby causing damage to Class Members once the truth was revealed and the inflation in the prices for those securities was removed, and that the Defendant is liable for a portion of these losses.
On July 21, 2020, the court rendered judgment in the Plaintiff’s motion for leave to proceed with a claim for secondary market securities misrepresentation under Part XXIII.1, s. 138.3 of the Securities Act, RSO 1990, c. S.5 (“OSA”). In that judgment I reviewed the background of the dispute and granted the Plaintiff leave to proceed with a claim commencing with the release of the Defendant’s third quarter Management Discussion and Analysis (“MD&A”) dated November 29, 2018: Miller v. FSD Pharma, Inc., 2020 ONSC 4054 (“Leave Decision”).
The Leave Decision is important because it recognized the role of public corrections for shareholder claims and that companies will be held accountable to for not disclosing material facts when they chose to speak on the topic. Importantly, the Leave Decision recognized that companies cannot disclose adverse material facts buried within footnotes of news releases to relieve their duty to provide continuous disclosures to investors:
The fact that the February 6-7, 2020 press releases provide relevant context to the January 8, 2019 press release is borne out by the impact of each of those statements on the stock market. The evidence shows that while the market remained relatively flat following the January 8, 2019 corrective disclosure, it dropped nearly 20% following the February 6-7, 2019 contextualization of that correction. That is, the footnote reference of January 8th was not absorbed until its meaning was revealed the following month, following which there was an immediate adverse market impact.
Before February 6-7, 2019, the context of the January 8, 2019 press release was, of course, known to the Defendant as its author. Multi-million dollar business relationships deteriorate over time, and by January 8, 2019 the Defendant already knew that the building permits were issued far too late to meet the end-of-year deadline for the Project’s completion. The Defendant also already knew on November 29, 2018 that Auxly was engaged in a futile exercise – “drinking through a fire hose” – in its attempt to reverse the failing Project. But until February 6 and 7, 2019, all of this was obscured from the investing public.
Investors that purchased shares of HUGE between September 20, 2018 and February 7, 2019, are eligible to participate and receive their pro rata amount of the Settlement Fund.
Investors are encouraged to participate in the Settlement. The terms of the Settlement and Claim Form can be viewed at the administrators website at www.fsdsecuritiesclassaction.com.
Andrew Morganti and Albert Pelletier represented the investors.