MDC Partners Inc. (TSX: MDZ.A, NASDAQ: MDCA, FRA: MD7A)

Ontario Superior Court of Justice, Court File No: CV-15-252CP
For more information about the court’s Order and Notice of the Dismissal, please click here.

On June 4, 2018, Justice Perell dismissed the plaintiff’s motion for leave to proceed with the statutory claim found at section 138.3 of the Ontario Securities Act. Despite the market sending MDC Partners’ shares down over 28% upon the release of the April 27, 2015 statements about the Securities and Exchange Commission and corresponding internal investigations, Justice Perell took the position that an investigation by a securities regulator is confidential. See, Paniccia v. MDC Partners, Inc., 2018 ONSC 3470, at paragraphs 82-84 and 109, which can be found here.

Most curious, Justice Perell distinguished Wong v. Pretium Resources, Inc., 2017 ONSC 3361, motion to appeal denied by the Divisional Court, by opining that an SEC investigation is not a conclusion (incorrect or correct) about a fact whereas in Pretium Resources, Inc. the third-party engineering firm made a conclusion of fact (although allegedly incorrect).  Id., at paragraph 114, but did not recognize that an SEC investigation materially increased the investment risk for certain types of investors, which was indisputably reflected by the 22% sell-off upon the disclosure.

Justice Perell, however, did correctly point-out that the absence of a restatement does not preclude a finding that a material fact was misrepresented.

Faced with hundreds of thousands in potential adverse cost awards, the plaintiff was forced to voluntarily dismiss the claim.  For this reason, only, the law on this topic will not develop.  The plaintiff continues to believe that he is a reasonable investor and he viewed MDC Partners’ disclosure about the SEC investigation as a material fact that substantially altered the total mix of information he then known about MDC Partners’ investment quality.

This securities class action concerns two-distinct wrongdoings. First, the investors allege that when MDC Partners was served with a subpoena from the U.S. Securities & Exchange Commission and commenced its own internal investigation, it was obligated to disclose these material facts it is investor documents released to the market between October 29, 2014 and March 2, 2015. On April 27, 2015, after the market closed, MDC Partners released a statement disclosing Subpoena and corresponding internal investigation as well as disclosing that it was already making various changed to its internal controls over certain accounting practices. The following day the share price dropped over 28%. While this Subpoena and internal investigations were ongoing, the Company’s former CEO, CFO, and inhouse counsel collectively sold over $1 million worth of stock to, allegedly, give the proceeds to a charity (e.g., and not a charity that benefited investors that purchased MDC Partners’ stock for their retirement accounts). Second, the investors allege a larger scheme whereby the Defendants released investor documents between October 28, 2013 and March 2, 2015, being publicly corrected on April 27, 2015.

The Plaintiff issued a Second Fresh as Amended Statement of Claim on April 23, 2018. The Plaintiff made submissions to Justice Perell to request leave from the court to proceed towards a trial with the statutory claim relating to the documents released between October 29, 2014 through March 2, 2015, and publicly corrected on April 27, 2015.

This securities class action relates to:

  1. the Defendants publishing core documents and making other statements containing alleged misrepresentations about (a)Miles Nadal’s executive compensation; (b) the Company’s accounting for goodwill under Generally Accepted Accounting Principals (“GAAP”); (c) the Company’s computation, presentation, and reporting of “EBITDA”; (d) the effectiveness of the Company’s internal controls; and (e) the Individual Defendants’ non-compliance with MDC’s Code of Conduct;
  2. the failure to disclose that the U.S. Securities and Exchange Commission (“SEC”) had opened a serious accounting irregularity investigation into MDC on October 5, 2014 in relation to some or all of the foregoing, until April 27, 2015; and
  3. the Individual Defendants engaging in insider trading during the Class Period while in receipt of material facts and/or material changes about MDC that had not been generally disclosed to the public, in violation of s. 76 of the Ontario Securities Act (“OSA“), the comparable provisions in the Securities Acts of the other provinces, and MDC’s own Code of Conduct.

The Plaintiff filed his Fresh as Amended Statement of Claim in June of 2016, with the motion for leave to commence a claim pursuant to s. 138.8 of the OSA scheduled to be heard on November 21-23, 2017.

Claim or Motion for Authorization issued: August 7, 2015

Class Period: October 28, 2013 to and including April 27, 2015

Leave to Proceed Record Served: November 17, 2016

Shareholders’ Canadian Counsel: Andrew Morganti, Morganti & Co.

Shareholders’ Expert: Andy Mintzer, CPA, Hemming Morse LLP.

Defendant MDC Partners’ and David Doft’s Counsel: Peter Howard, Stikeman Elliott LLP

Defendant Miles Nadal’s Counsel: Dana Peebles and R. Paul Steep, McCarthy Tétrault LLP

Defendant Michael Sabatino’s Counsel: Wendy Berman, Cassels Brock & Blackwell LLP