An Ontario court has granted leave for a proposed class action to proceed against three executives of Zungui Haixi Corp., which was permanently banned by the Ontario Securities Commission (OSC) earlier this year for disclosure and governance failures.
The plaintiffs in the proposed suit brought a motion to the Ontario Superior Court of Justice seeking leave to assert an action against Zungui executives, and brothers, Fengy Cai, Jixu Cai, and Yanda Cai, who did not appear to defend the motion.
According to the court’s decision issued October 9, “In order for leave to be granted, the plaintiffs must demonstrate that the proposed action against the Cai brothers is brought in good faith and that there is a reasonable possibility that the proposed action will be resolved at trial in the plaintiffs’ favour.”
The decision notes that the plaintiffs in the case are investors who bought shares in the firm’s 2009 IPO, which raised almost $40 million. The investors are now alleging that Zungui’s IPO prospectus was misleading because it contained material misrepresentations, and that the financial statements in the prospectus and subsequent disclosures were materially false too.
By 2011, the firm’s shares were cease traded, and became effectively worthless, after it failed to produce financial statements. And, earlier this year, the OSC permanently banned two of the Cai brothers (Fengy and Yanda) from the markets; noting in its sanctions decision, “Within two years of the completion of its initial public offering, Zungui simply ceased to comply with the audit committee and financial statement obligations under Ontario securities law, and left its investors in an untenable position.”
The court’s decision indicates that the plaintiffs are also suing the firm’s former auditor, Ernst & Young LLP, and its underwriters, CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP, and Mackie Research Capital Corp., among others. The suit has not yet been certified as a class action, and that motion will be argued at a later date, it notes.
For now, the Ontario Superior Court of Justice has just granted the motion for leave to proceed against the Cai brothers, after concluding that there is “no reason to doubt the good faith of the plaintiffs”, and that they have “established the required reasonable possibility of success at trial.” This ruling, it notes, is without prejudice to the other prospective defendants.