News – Morganti

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.

U.S. High Court Protects Consumers Over International Comity

(September 4, 2018). Comity. The legal principle that political entities (such as states, nations, or courts from different jurisdictions) will mutually recognize each other’s legislative, executive, and judicial acts. The underlying notion is that different jurisdictions will reciprocate each other’s judgments out of deference, mutuality, and respect. (Cornell Law Legal Definition).

In Animal Science Products, Inc., et al. v. Hebei Welcome Pharmaceutical Co. Ltd., et al., No. 16-1220 (June 14, 2018), Justice Ginsburg delivered a unanimous Court decision that a federal court should accord respectful consideration to a foreign law, but it is not bound to accord conclusive effect to the foreign law. Rather, in determining the foreign law the court may consider any relevant material or sources; and as we interpret the decision, recognize that when the U.S. consumer is indisputably a victim of illegal conduct and suffered an economic injury the federal court should not defer to foreign laws to protect the foreign defendant.

Here, the plaintiffs alleged that the foreign horizontal competitor defendants engaged in a global conspiracy to fix or stabilize the price of vitamin C in violation of antitrust laws. The defendants asked the court to dismiss the claim based upon foreign law and principles of international comity.

The U.S. Supreme Court reiterated that in the spirit of ‘international comity,’ a federal court should carefully consider the foreign state’s views about the meaning of its own laws. But the appropriate weigh in each case will depend upon the circumstances; a federal court is neither bound to adopt the foreign law or to ignore relevant materials. As such, “because the Court of Appeals concluded that it was bound to defer to the foreign law, the court did not consider the shortcomings or results of the position or other aspects of the evidence,” the decision was vacated and remanded for renewed consideration consistent with all the evidence and results of what economic injury to U.S. purchasers of vitamin C.

Here, the U.S. Supreme Court’s insightful and honest assessment of international comity will very likely be relied upon U.S. investors that purchase securities of foreign corporations in future shareholder litigation. Indeed, “Morrison” has never been applied to foreclose a U.S. investor from lodging a Blue Sky or common law claim in U.S. federal court against a foreign corporation relating to securities purchased on a foreign stock exchange. See, Paniccia v. MDC Partners, Inc., 2017 ONSC 7298, at paragraph 33 (referring to Professor Adam Pritchard, Frances and George Skestos Professor of Law at the University of Michigan Law School).

Bottom line, if U.S. consumers are being injured as a result of purchasing foreign product (here being overcharged for vitamin C), and the foreign corporation knows that its product is being purchased by U.S. consumers, it should come to no surprise to the foreign defendant that it may be asked to answer to the U.S. federal courts.

It seems that Canadian courts previously followed the U.S. Supreme Court’s views in requiring foreign corporations to answer to Canadians in Canadian court, see, Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd., 2002 CanLII 63927 (ON SCDC), but what started from a fast-food promotional contest lawsuit involving consumers eating $5 dollar “happy meals” (not investors) has somehow evolved into a notion that it would not be unreasonable for an Ontario investor that believes it is victim of a foreign corporation’s fraud, misrepresentations or Ponzi to be shut-out of Ontario courts on the basis of international comity. See, Kaynes v. BP, plc., 2014 ONCA 580, at 50, but the stay based upon alleged comity lifted by the same panel at Kaynes v. BP, plc, 2016 ONCA 601 (purely procedural reasons preventing the Canadian’s claim to be heard on the merits).

In Kaynes v. BP, plc, 2016 ONCA 601, at paragraphs 16 and 18, the Ontario Court of Appeal wisely recognized (following the same rational pronounced by Animal Science Products, Inc.) that a foreign defendant should not be shielded from answering to Canadian investors on the basis of purely procedural gamesmanship.

We anticipate that this area of law will continue to develop.

Morganti & Co., P.L.C. committed to European-based Investors

(August 10, 2018). Morganti & Co., reminds European-based investors that Morganti & Co., is the European retail-investor shareholders’ North American law firm. With extensive contacts in United States, Caribbean, Central America, and Europe, Morganti & Co., will be in England, Germany, Netherlands, and Panama prior to year-end meeting with clients and lawyers.

Andrew Morganti will be, providing an in-depth analysis at conferences in the England, Panama, and the United States relating to jurisdictional issues of North American courts relating to shareholder related claims. Morganti & Co. currently represents European investors in the litigation involving Ayama, Inc., Barrick Gold, Inc., Deutsche Bank, AG., Guyana Goldfields, Inc., Ithaca Energy, Inc., Valeant Pharmaceuticals International, Inc., and Exxon Mobile Corp.

Q&A: Disclosure of Internal Investigations

(August 11, 2018). Morganti & Co has received several inquiries from investors as to when companies must disclose internal investigation. The following note is our Firm’s general approach.

Question: When does a reporting issue have the affirmative duty to disclose internal investigations?

The answer of this question should commence with examining whether the internal investigation is a material fact. Here, we are guided by Sharbern Holding Inc. v. Vancouver Airport Centre Ltd, 2011 SCC 23, paragraphs 59-61, as to whether a fact (e.g., such as an internal investigation) rises to a level of being an material fact requiring disclosure. Whether the management believes an internal investigation will not result in anything different than the then total mix of information about that particular topic concerning the investigation should not influence the company’s disclosure requirements. Kerr v. Danier Leather Inc., 2007 SCC 44, at paragraph 55.

In Pretium Resources, Inc., the mining company was conducting an internal investigation with a third-party engineering firm based upon adverse facts learned by its own employees and consultants. While the internal investigation was ongoing Pretium Resources released bullish statements about the topic of the investigation but omitted to disclose that it had been sitting on adverse facts about the topic and was engaging in an internal investigation. Management chose not disclose because it relied upon its business judgment to determine that the adverse facts did not appear reliable. (Decision at paragraph 15) The court released a decision following the guidance of Sharbern Holdings Inc. and Kerr finding that if the investor proceeded to a trial there would be reasonable possibility of success that the investor could establish that the internal investigation was a material fact requiring disclosure and, therefore, Pretium Resources violated its continuous disclosure requirements exposing itself to compensate investors for their losses. (Decision at 24). You may read the decision here.

Contrasting Pretium Resources, Inc., there is MDC Partners, Inc. MDC Partners was conducting an internal investigation because it was served with a subpoena from a securities regulator. When the securities regulator and corresponding internal investigation was disclosed several months later the market sold off the securities by over 28%. After a review of Sharbern Holdings, Kerr, that court extended the reading of Part IV of the Securities Act to apply to foreign securities regulators therefore not requiring MDC Partners to disclose the adverse fact that it was served a subpoena and conducing an internal investigation. (Decision at paragraphs 81-84 and, importantly 108). The court dismissed the plaintiff’s motion to proceed towards trial with the statutory claim and granted the motion to dismiss with the proceeding with prejudice. You may read the decision and order here [inset the same 2 documents from earlier]

Answer: Unless the internal investigation arises from being served with a subpoena from a domestic or foreign securities regulator, reporting companies, defined by the Ontario Securities Act, should make disclosure of an internal investigation when the company choses to release a statement(s) that concerns the same topic as the internal investigation. In making the timely disclosure the company can disclose the managements’ views as to why the internal investigation may or may not result in a certain manner. See, Pretium Resources, Inc., Decision at paragraphs 38-39.

Next month we will explore the meaning of an internal investigation.