News – Morganti

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 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.

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.

Show Us the Assets: Investors Demand That Mining Company Be Truthful About Its Assets

(December 13, 2018). Since January 31, 2017, Colt Resources, Inc.’s (“Colt”) securities have not traded and the Company has intentionally avoided its continuous disclosure obligations. Indeed, its investors have been in the dark only learning of material facts concerning Colt’s assets being abandoned, forfeited, lost, and sold.

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 evidence with a reasonable possibility of success, which is materially less than 51% chance, that the claim is brought in good-faith and he/she will succeed at the civil trial, e.g., which requires that the evidence proves on a balance of probabilities or 51% or more that the company’s document(s) contains a misrepresentation. 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.

On December 13, 2018, Morganti & Co. made submissions, on behalf of the representative investors located in Alberta, Ontario, and Germany, that there was a reasonable possibility of success that the investors would be able to prove on a balance of probabilities that Colt (a) failed to release a Material Change Report when it invested substantially all its cash in a foreign start-up mining company; (b) that its subsequent Quarterly Report and news releases contained misrepresentations for omitting the material facts about the investment and that its former CEO did it without the Board’s authority; and (c) rather than correcting these prior statements in a single disclosure Colt sprinkled the bad news over three document released over a two month period. During the hearing and after the investors’ lawyers made their submissions, Colt conceded that it failed to release the Material Change Report and that it released core and non-core documents omitting material facts.

The investors are represented by Andrew Morganti, Albert Pelletier, Hadi Davarinia, and Ian Literovich.

Writing Off An Investment Loss May Be Avoidable: Morganti & Co.’s Shareholder Litigation Practice

(December 13, 2018). Aggrieved investors are able to seek recovery for their investment losses from bad investments under certain circumstances. Morganti & Co. offers its legal services to represent aggrieved investors in seeking damages from directors and officers of companies that mislead investors. The legal services are provided on a contingency fee basis and the Firm will finance the cost of the lawsuit. Importantly, investors with as little financial losses can still seek recovery in the form a class proceeding (a “class action”).

Pursuant to Canadian provincial Securities Acts a “responsible issuer” is required to provide continuous disclosure statements about its interim financial statements and material changes in the company’s business, operations or capital that would reasonably be expected to have a significant effect on the market price or value of any of the securities. Responsible issuers are also forbidden to release documents and statements containing any misrepresentation. A misrepresentation includes the situation when a company omits a material fact from a document or statement to investors, e.g., prohibition against cherry-picking only the positive facts opposed to all the material facts on the topic addressed in the press release or statement. A fact may be considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest and at what price.

If the company or a third-party subsequent releases a statement that “publicly corrects” or partially publicly corrects a prior statement or document (e.g., an interim financial statement, management discussion and analysis, press release, etc.) an investor has a right of action for damages against the company and any insider that authorized the release of the previously released document(s) and statement(s) without regard to whether the investor relied on the misrepresentation in making the decision to purchase the company’s securities.

In order to advance the claim for damages an investor must obtain the authorization from the provincial judge and, in doing so, must proffer sufficient evidence that the claim is brought in good-faith and that there is a reasonable possibility of success that the claim will succeed at the trial. This procedure should not be treated as a mini-trial.

With actual experience arguing these applications, opposed to some lawyers that simply hand-off your claim to the experienced lawyers, Morganti & Co.’s lawyers are able to prepare bespoke or tailored applications to the court that will (a) identify the representation by the defendant(s); (b) determine whether the statement is a “core” or “non-core” type and any type of corresponding intent to release the statement; and (c) establish that there is a reasonable possibility that the document or statement contains a misrepresentation.

Before you write-off an investment loss as a normal result of a risk-reward situation, you are welcome to consult with a lawyer at Morganti & Co. to determine whether there is an opportunity to recover some or all of your losses.

During 2018, Morganti & Co. has been in court seeking approval (the above process) for investors to advance their statutory claim to trial relating to MDC Partners Inc., Ithaca Energy Inc., and Colt Resources Inc. During 2019, Morganti & Co. will return to court to complete the submissions against Ithaca Energy Inc. and Colt Resources Inc. and make new submissions relating to Guestlogix Inc., Nobilis Health Inc., North American Palladium Ltd., and Namaste Technologies Inc.

Morganti & Co. further expansion: New Lawyers, Mandates, and Office

(December 1, 2018). Morganti & Co., P.C., is pleased to announce that it has relocated to 21 St. Clair Street East, Suite 1102, Toronto, Ontario M4T 1L9. The space reaches approximately 3,000 sq. ft. and is in the process of being transferred into a technologically advanced legal hub. During 2018, Morganti & Co. settled three shareholder disputes, earned the mandates to represent investors in five shareholder disputes, and added five lawyers and three members to the support staff.