Article TitleRuling could open floodgates

As a result, lawyers say the case suggests judges are willing to entertain cases for matters that extend far beyond Canada’s borders if investors here suffer losses — even if the shares the inves-tor holds were not purchased on a Canadian stock exchange. It’s a development that the investment community needs to watch going forward and could open a floodgate of lawsuits, they warn.

Thus, financial advisors need to pay more attention to such rulings because it’s an opportunity for their clients to seek compensation for losses in cases involving secondary-market liability, says Andrew Morganti of Morganti Legal PC in Toronto, who represents investors in Kaynes v. BP.

Secondary-market liability stems from changes to laws in 2006, when provinces adopted legislation making it easier for investors to sue public companies and their advisors for misrepresentations or failing to make timely disclosure of critical information.

Canada is an advantageous jurisdiction in which to bring such a lawsuit because, unlike in the U.S., investors don’t have to prove they relied on the misrepresentation when buying shares in the secondary market — historically a hurdle to winning such lawsuits.

Since the change, securities class actions in Canada are on the rise. According to NERA Economic Consulting, which provides litigation support services, nine new class actions were filed in 2012. Canada has averaged 12 lawsuits a year since 2008 and there were 51 active cases at the  end of 2012, almost double the number in 2008.

Since 1997, there have been more than 100 securities class actions filed in Canada. The median settlement is $13 million — and rising. In March, an Ontario Court judge approved a $117-million settlement involving Ernst & Young LLP, auditors for failed forestry firm Sino-Forest Corp., the largest settlement involving an auditor in Canada.

Dimitri Lascaris, a lawyer with Siskinds LLP in London, Ont., who is representing investors in the Sino-Forest case and numerous other securities cases, says studies show that investors are “leaving money on the table” by not filing claims.

One U.S. study found fewer than 25% of investors participated in such lawsuits, yet those who did recovered more than US$75,000 on average.

“The amount of time and energy an advisor has to put in monitoring the litigation is very limited,” Lascaris says. “The difference to the client could be quite significant.”

In some cases, he adds, inves-tors recover hundreds of dollars; in other cases, “individuals have received tens of thousands of dollars. How much you get is driven by the size of your loss. The amounts can be quite material.”

Morganti, who is licensed to practice in both Canada and the U.S., says: “Ontario courts are really trying to be diligent and prudent” when applying what is known as the “real and substantial connection test” that’s used to determine if a court should hear a case.

The court looks at four factors: where the defendant lives; where it carries on its business; where the negligent act or misrepresentation took place; and if there was a contract made in Ontario related to the dispute.

What’s interesting about Kaynes v. BP is that BP is a company incorporated in the U.K. with no offices, employees or property here in Canada; it no longer reports to Canadian securities regulators, having voluntarily delisted its shares from the Toronto Stock Exchange (TSX) in August 2008. However, it agreed to continue to send its disclosure documents to Canadian shareholders.

The proposed class of harmed investors in Kaynes v. BP covers Canadians who purchased shares on the TSX, European stock exchanges and the New York Stock Exchange (NYSE) — provided the NYSE purchasers specifically opt out of a similar lawsuit in the U.S. There are an estimated 1,500 Canadian holders of BP shares, with a combined worth of $200 million. The lead inves-tor in this case bought 1,400 American depository shares in Ontario and Alberta on the NYSE.

BP argued that the Ontario court should only hear cases involving shares bought on the TSX. It further argued that the better jurisdiction to hear the case was the U.S., where there’s an existing lawsuit.

Ontario Court Justice Barbara Conway rejected those arguments: “In my view, BP is seeking to restrict and fragment the proposed class at this early stage of the proceedings.” She was “satisfied there is a real and substantial connection between the plaintiff’s claim… and Ontario.”

The fact that BP was once a reporting issuer in Canada is important, Morganti says: “[BP] purposely availed itself of the securities regime of the different provinces to take advantage of the capital markets.”

BP is appealing the decision. Attempts to reach BP counsel were fruitless.

Morganti believes the ruling opens the door to arguing that investor road shows for equities offerings in Canada —or even the issuance of Maple bonds — could lead to potential liability here even if the company doesn’t report to a Canadian securities regulator.

“Foreign companies,” Morganti says, “better have their lawyers review whether or not they’re going down the slippery slope and engaging in conduct that has a real and substantial connection to the province.”

One of the interesting questions still outstanding is how far Ontario courts will go in what are called “F-cubed” cases that involve a foreign investor buying shares on a foreign exchange of a foreign company and suing in Canada.

Three years ago, the U.S. Supreme Court essentially shut down such lawsuits in its Morrison v. National Australia Bank ruling, which adopted an exchange-traded test based on where the shares traded for determining when a U.S. court should hear a case.

Morganti thinks an F-cubed case will be brought in Ontario. “I think a lot of firms are looking at that.” However, Lascaris doesn’t think such cases will fly in Canada. “It has never happened, and I doubt it ever will.”

Nonetheless, lawyers who defend companies in investor lawsuits are worried that Ontario courts are going too far. Andrea Laing, a lawyer with Blake Cassels & Graydon LLP, questions whether Canada will become an “overflow jurisdiction to cases that can’t find a home after the U.S. Supreme Court ruling in Morrison.”

Public companies can choose which exchange they want their shares to list on and which securities regulator they want to report to, Laing says: “I can’t control where secondary-market purchasers live. They can live anywhere in the world. Am I potentially liable to every securities regulator and subject to every securities regime around the world? That’s a troubling prospect for public issuers.”

Advisors interested in tracking investor lawsuits need to follow blogs such as www.canadianclassactionslaw.com or www.branchmacmaster.com/class-actions-blog to learn about them.

Lascaris points out that plaintiff law firms create websites for each piece of litigation to keep investors informed. They also appointed someone to respond to public inquiries. “For financial advisors, it’s as simple as directing their client to the relevant website.” IE