News – Morganti

Appellant Court confirms that Underwriters have a duty of care to investors

(January 6, 2020) Ontario’s Divisional Court (Backhouse, D.L. Corbett, and Myers JJ.) released an important decision concerning the role of class proceeding claims in providing access to justice for investors against investment banks.

Today’s decision reverses the motion court’s October 24, 2017 decision declining to certify a common law claim against underwriters Cormark Securities Inc. and Dundee Securities Ltd. The Court held that the motion judge fell into legal error on matters central to a proper application of section 5 of the Ontario Class Proceedings Act despite the constituent element of reliance and damages.

Although the Divisional Court’s reasons focus much on the fact that there was already a certified statutory claim against the corporate defendant, the Divisional Court affirmed that a common law claim requiring the investor to plead and prove reliance and damages can be certified “even standing alone.” Equally as important, the Divisional Court confirmed that it is Court’s view that Underwriters owe a duty of care, pursuant to common law and statutorily, to investors, e.g., “… there will be little financial incentive for underwriters to meet the standard of care required by the certificate mandated by the Securities Act. This claim is one involving an alleged misrepresentation in a statutorily-mandated investment document, behaviour that society has an interest in curbing.”

The Divisional Court’s decision will be important to several ongoing shareholder class action claims.

On January 10, 2020, the Underwriters advised the Plaintiff that they will seek leave to appeal to the Ontario Court of Appeal.

LBP Holdings Ltd. v. Hycroft Mining Corporation, Cormark Securities Inc., and Dundee Securities Ltd., 2020 ONSC 59.

Morganti & Co. adds another principal litigator to represent investors

(JANUARY 1, 2020) Sajjad Nematollahi has joined Morganti & Co., P.C. as a principal. Sajjad has close to a decade of professional experience representing investors in shareholder litigation. He earned legal degrees from Harvard Law School (LL.M., 2010) and McGill University, Faculty of Law (LL.M., 2009). Sajjad previously practiced law at Siskinds LLP.

Settlement reached with the STARS GROUP, INC.

(December 17, 2019) The law firms of Faguy & Co. Inc. (Montreal), and Morganti & Co., P.C. (Toronto), on behalf of investors that purchased The Stars Group Inc. (TSX: “TSGI”) (formerly known as Amaya Gaming) securities are pleased to announce that they have reached a settlement for CDN $30 million to resolve the claims against TSGI. The settlement is conditional upon the approval of the Quebec Superior Court.

If the settlement is approved by the court, investors who purchased TSG securities between March 31, 2014 and March 22, 2016 and still held some of those securities until March 23, 2016 will be able to submit a claim to be compensated. The settlement’s details, including the process for investors to file claims, will be published once approved by the courts.

Pursuant to Quebec statutory laws, the liability limits are thought to be approximately CDN $38.4 million. Class counsel have indicated “To our knowledge, this is the largest settlement for a case involving alleged insider trading and it is also the highest percentage recovery based on secondary market liability limits under applicable securities legislation in Canadian history, e.g., CDN $30 million out of CDN $38.4 million”.

All parties will be seeking to implement a formal notice program and the final approval of the proposed settlement in short order.

Modern Times (1936): The investors are the victims

(October 3, 2019). None of us enjoy getting kicked in the face from an investment gone bad. It hurts more when the investment goes bad when the company’s share price drops from an announcement admitting that before you made the investment it was already being investigated for accounting irregularities. What about when Canadian courts, supported by your provincial tax dollars, deny you access to justice to bring a foreign defendant to court for your financial losses while the the court refers to you as the unreasonable investor?

The Ontario Securities Commission appears to have regulations that allows companies to omit ongoing regulatory investigations from investors! Hey, we did not support those politicians that voted in favour of that legislation — legislation likely backed by multinational insurance companies and now uber wealthy Canadians residing in Switzerland (e.g., I smell the stench of certain cannabis companies hiding behind Bay Street law firms).

Sadly, Panicci v MDC Partners, Inc. (“MDC”), 2018 ONSC 3470, certain Ontario Courts appear to have embraced this pro-business anti-investor concept but, in doing so, misunderstood the U.S. Securities and Exchange Commission’s silence as acquiescence of the corporation’s non-disclosure. Compare, SEC v. Mylan N.V., 19-cv-02904 (D.D.C. 2019).

On October 5, 2014, the Securities and Exchange Commission served a subpoena on MDC requiring it to produce documents and testimony with respect to an investigation relating to: (a) reimbursement of expenses incurred by Mr. Nadal; (b) accounting for goodwill; (c) certain other accounting practices; and (d) the trading in its securities by third parties. MDC did not immediately publicly announce the service of the subpoena, and on October 29, 2014, it released a News Release entitled, ‘MDC Partners Inc. Reports Strong Results for the Three and Nine Months ended September 30, 2014.’ There was an accompanying Management Presentation. Thereon after, after reading MDC’s then most recent quarterly report the plaintiff purchased shares of MDC.

After the market closed on April 27, 2015, MDC released a Statement indicating that the SEC had served a subpoena in an investigation into MDC’s disclosure practices relating to: (a) reimbursement of expenses incurred by Mr. Nadal; (b) accounting for goodwill; (c) certain other accounting practices; and (d) the trading in its securities by third parties. The Statement also indicated that MDC had formed a Special Committee of independent directors to investigate the matters raised by the SEC’s subpoena and they were implementing new policies and procedures. The price of MDC’s shares immediately dropped 28%.

The plaintiff alleged that the SEC’s investigation was a material fact requiring disclosure in all of MDC’s quarterly reports released after it received the subpoena. Indeed, the plaintiff argued it was common sense that knowing that MDC was under SEC investigation for accounting irregularities would have significantly altered the total mix of information available to the market.

During early 2018, the Ontario court harshly rejected the plaintiff investor’s submissions. Although the court suggested that receiving the SEC’s subpoena could be a material fact, investors were kicked in the teeth for not having a reasonable possibility that they were mislead. Wait… why would an investor invest hard earn-money into a company being investigated (accurately or inaccurately) for accounting irregularities?

The Ontario court wrote, “the flaw” in the Ontario investor’s submissions:

The SEC never took issue with the timing of MDC’s disclosure of the subpoena and rather noted that MDC’s formation of the Special Committee and its internal investigation were remedial acts that prompted the SEC to resolve the investigation.

Under the Ontario Securities Act, no person or company may disclose the nature or content of an investigation order, the nature or content of any demands for production, or the fact that any document was produced to an investigator, at any time, except to counsel. To disclose the existence of an investigation, including any request for and production of documents, the issuer must first obtain an order from the Commission authorizing the disclosure on the grounds that it is in the public interest. The Guidelines for Staff Disclosure of Investigations, set out in Staff Notice 15-703, indicate that the “general rule” is that there will be no public disclosure of information about an on-going or closed investigation.

In my opinion, there was no misrepresentation and no withholding of a material fact between the time the subpoena was served on MDC and April 27, 2015 when MDC disclosed the service of the subpoena. The mere service of a subpoena does not trigger a duty to disclose, and as noted above, the law is that, generally speaking, the existence of an investigation is a confidential matter that ought not to be disclosed and that disclosure requires the approval of the regulator.

A reasonable investor would not expect a company to immediately report the service of subpoena. What a reasonable investor would expect is that the company would respond to the subpoena, cooperate with the investigator, and conduct an internal investigation and then determine whether there was a material fact to correct or a material change to report to its investors. This is precisely what occurred in the case at bar.

It is the author’s opinion that MDC’s submissions emphasized the pro-business Ontario regulation of not having to disclose regulatory investigations (even if they would be deemed material facts) and the Court put substantial weight on the SEC’s silence (pointing out that MDC was listed on both stock exchanges).

It appears that the U.S. SEC did not appreciate MDC’s conduct as reflected by the millions worth of legal time (multi-year investigation) invested in the investigation and millions in fines collected from MDC. More importantly and hopefully why honest hard-working investors will not be denied access to justice as in Paniccia v. MDC Partners, Inc., the U.S. SEC filed an investor complaint against Mylan N.V. (“Mylan”) for securities fraud on the same basic material facts.

Mylan was under regulatory investigation for accounting violations and incorrectly misclassifying one of its top selling product. However, Mylan omitted to disclose the ongoing adverse regulatory investigation from its quarterly reports. Subsequently, news reports confirmed the regulatory investigation. The markets were spooked by the possible outcome of the regulatory investigation and sold off Mylan’s shares resulting in a 4.7% drop in price.

The SEC’s complaint against Mylan correctly alleges that:

“A public company facing a material loss contingency, such as arising from a [] government investigation, is required under accounting principles and the securities laws to (1) disclose the loss contingency if a loss is at least reasonably possible, and (2) record an accrual for the estimated loss if a loss is probable and reasonably estimable. Contrary to these requirements, Mylan failed in its quarterly, annual and other reports, to disclose the loss contingency or accrue for the loss until it announced a settlement with the regulator” [i.e., approximately a month after the media reported the investigation].

SEC v. Mylan N.V., 19-cv-02904 (D.D.C.). Mylan did not dispute the charges that it mislead investors and paid a $30 million fine.

Morganti & Co. completely and thoroughly embraces the SEC’s position. Honest hardworking investors should not be afraid to invest in public companies that list their securities on domestic and foreign stock exchanges. The direct conflict between the OSC’s regulations and the U.S. SEC’s litigation positions will very likely lead to increase civil litigation especially when the targeted public company lists its securities on both Canadian and U.S. stock exchanges.

Modern Times (1936)

Morganti & Co. + Retail Investors: Settlement reached with Namaste Technologies, Inc.

(July 25, 2019). Morganti & Co. is pleased to announce that, on behalf of Canadian and German investors, it has reached a settlement valued at CAD $2.8 million with Namaste Technologies, Inc. to resolve claims that it released investor documents omitting material facts about its divesture of “Dollinger Enterprises US, Inc.”, between November 29, 2017 and July 23, 2018.

The Canadian and German shareholders alleged that the omitted material facts about this divesture were released on October 4 and 16, 2018, when Citron Research Inc. published reports that Sean Dollinger sold Dollinger Enterprises US, Inc. at an artificially low price, kept an undisclosed financial interest in it, and watched the value of his position increase by multiple times within months renamed as Lifted Innovations, Inc.

“Settling these class action lawsuits removes a major business and capital markets distraction, while clearing our path ahead to increase resources and focus on what will grow the Company,” said Meni Morim, Interim CEO of Namaste Technologies. “We’re on track to becoming the world’s most customer focused cannabis marketplace, and this settlement is a win-win for Namaste Shareholders and business partners alike.”

Under Canadian provincial laws, the amount of damages recoverable from corporations is limited to 5% of its market capitalization. Morganti & Co. measured the 5% limit to be CAD $5.6 million. Albert Pelletier, the lawyer representing the shareholders, stated that, “A recovery of CAD $2.8 million represents a 50% recovery; and the best possible outcome for the class of shareholders. We believe that many shareholder class members are still investors in Namaste and, as such, they have a vested interest to see Namaste succeed.”

Subject to court approval, the settlement funds will be distributed to investors that purchased Namaste’s equity securities listed on the Frankfurt and Toronto stock exchanges after November 29, 2017, and held some of all of those shares until after February 3, 2019.

Alberta’s first statutory open-stock market decision seeks to protect shareholders

(June 24, 2019). The Court of Queen’s Bench of Alberta has released its first decision relating to shareholders’ burden to seek “leave to proceed” with a statutory secondary market (a/k/a, open market purchase) claim against a responsible issuer. The decision is identified as Stevens v. Ithaca Energy Inc., 2019 ABQB 474.

Ithaca Energy had listed its equity securities on the Toronto Stock Exchange and London AIM.

Morganti & Co., P.C. and JSS Barristers, LLP argued that Ithaca Energy’s disclosure statements in its quarterly reports and news releases dated August 12, 2014, October 7, 2014, November 13, 2014, and January 12, 2015, omitted material facts about the delays in progress and conflicts with its outside engineering firm for its bet-the-company project costing hundreds of millions.

Ithaca Energy argued that it did not have to disclose all the adverse facts because its senior management was optimistic that it could get the project back on track. The investors argued that Ithaca Energy’s position directly violated the famous Supreme Court of Canada case of Kerr v. Daniel Leather Inc., 2007 SCC 44, at paragraphs 54 and 55, which was first followed in the context of a leave to proceed motion in Wong v. Pretium Resources Inc., 2017 ONSC 3361, at paragraphs 31 and 38. Specifically, potential and the then current investors of Ithaca Energy should have been given all the then current material facts so they could make their own judgment about whether to accept or not management’s business judgment about the future outcome of the identified problems.

Equally as important for investors in providing a solid guidance as to what must be disclosed to investors, the Court of Queen’s Bench of Alberta also followed Sharbern Holdings Inc. v. Vancouver Airport Centre Ltd, 2011 SCC 23, in determining when an adverse fact rises to a level of becoming a material fact requiring disclosure to investors. That definition can be summarized as asking whether that omitted adverse fact, if disclosed, would have significantly altered the total mix of information made available to investors at that time of the released quarterly report or news release.

Ultimately, the Queen’s Bench of Alberta granted the investor’s application for leave to proceed and certified a class of investors that purchased Ithaca Energy’s securities between October 7, 2014 and February 25, 2015. The proceeding should advanced towards discovery and trial.

Ontario Appellant Court 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 Appellant Court (Justices Corbett, Backhouse and Myers).

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.

News Alert to Canadian Publicly Listed Companies: Continuous Disclosure Obligations Trump the Business Judgment Rule

(March 7, 2019). Morganti & Co. is please to announce that it represented investors against Ithaca Energy Inc. (“Ithaca Energy”) in Alberta’s first “leave to proceed” motion to advance to trial hearing. Prior to going to trial the plaintiff investor (a/k/a, representative investor) must obtain leave to proceed to trial from the judge. This requires the investor to provide evidence that there is reasonable possibility of success that he/she would succeed at the trial, e.g., which is materially less than “on a balance of probabilities” or 51% or more that the company’s document(s) contains a misrepresentation and the public corrective statement(s) is related, e.g., not a mirror-image but merely related, to those misrepresentations. A misrepresentation is defined as an untrue fact or omitted fact that would significantly alter the total mix of information to the reasonable investor reading that particular document(s) released by the corporation.

In the matter of the leave to proceed hearing against Ithaca Energy, it argued that certain adverse facts about the status of its large scale project (e.g., it was disputing with its engineering firm, labour shortages, and always being approximately 10% behind schedule) were omitted from its news releases and quarterly reports because its senior management relied upon the business judgment rule to subjectively believe that the third party engineering firm was posturing against Ithaca Energy to increase the contract price. This line of defense is comparable to what we successfully disputed against another company, which argued that its senior management relied upon the business judgment rule to omit adverse facts from its news releases because they subjectively believed the adverse facts were not reliable.

Morganti & Co. and JSS lawyers argued that Ithaca Energy’s position directly violated the famous Supreme Court of Canada case of Kerr v. Daniel Leather Inc., 2007 SCC 44, at paragraphs 54 and 55, which was first followed in the context of a leave to proceed motion in Wong v. Pretium Resources Inc., 2017 ONSC 3361, at paragraphs 31 and 38. Specifically, potential and the then current investors of Ithaca Energy should have been given all the then current material facts so they could make their own judgment about whether to accept or not management’s business judgment about the future outcome of the identified problems.

The parties anticipate the court’s decision to be released prior to the summer. This decision will be the first court decision in Alberta on the topic of leave to proceed to trial with a statutory secondary market shareholder claim.

The investors are represented by Morganti & Co. lawyers Andrew Morganti and Ian Literovich as well as JSS Barristers (Calgary, AB) lawyer Gavin Price.