Stock Markets May Go Up, and They May Go Down: You Never Accepted the Risks That the Company You Invested in Was Intentionally Omitting Material Facts About Its Risk Profile

Preamble

Andrew Morganti, a leading investor protection lawyer that practices law in Toronto, Ontario, Canada, and the United States of America in Washington, District of Columbia. He has over two decades of experience representing investors and has served as lead counsel in over a dozen prominent pro-investor court decisions published by the courts of Alberta and Ontario, Canada, California state court, and the U.S. Federal District Court for the Southern District of New York.

Overview

Investment losses are stressful and often create a financial crisis. Most investors write off these losses and don’t look back.

While many investment losses are a result of routine business activities, certain losses are a result of the company’s negligence or intentional wrongful conduct.

In these situations, news often emerges that contradicts the company’s prior statements about its business, capital structure, financial statements, or operations. The price or value of the underlying asset drops materially (e.g., by more than 10%).

Question:

When the price or value of an investment drops by more than 10% in a single day, why should investors contact an investment protection lawyer?

Answer:

After an immediate 10% plus drop in the price of an investment on higher than normal trading volume within a day suggests that the market was surprised by the news, either because it was completely unexpected or it contradicted the company’s prior statements. This news will be identified as the “public corrective statement(s)” and possibly trigger the limitations period.

Across Canada, the general rule is that a claim must be filed within two (2) years from the date of the news for common law causes of action, whereas some provincial Securities Act causes of action can be as short as 180 days. Additionally, many provincial Securities Act causes of action have an absolute three (3) year period regardless of when the public corrective statement was released.

Question:

How are investors supposed to know if the 180-day or 2-year rule applies?

Answer:

The first step is to determine whether the securities were purchased in an initial public offering or a secondary offering. Alternatively, we look to see whether the shares can be traced to a merger or acquisition, with a supporting management circular (e.g., if new shares were received from owning the old company’s shares). The causes of action linked to these purchases will be considered to be “primary market” causes of action.

If an investor loses money from buying securities in a public offering or secondary offering from a company, the investor will have common law causes of action for which there is a 2-year period. The common law cause of action, depending upon whether it is one of negligent misrepresentations or fraud, may include the necessity of the investor to plead and prove reliance upon the company’s statement or omission in making his or her investment decision. Even in a class action context, I have been successful in having my client plead the cause of action and elect the remedy of damages, putting the client back in the financial position as if the investment was not made. 1 Moreover, my clients have been successful in getting these common law causes of action certified by the appellate courts. Indeed, Ontario courts will treat individual damages and reliance as a stand-alone, post-common-issue trial administration process.

The Ontario Securities Act, Part XXIII, s. 138(b), also provides investors with a cause of action that does not require reliance and (i) if brought within 180-days, the investor can seek rescission of the investment (i.e., return the securities and recover 100% of the investment as if it never happened); or (ii) within 3-years since the offering date but the investor is limited to the damages linked to the public corrective statement which is typically the value of the drop in the price of the security (e.g., not the cost basis of the investment).

Question:

What about the situation where an investor purchases shares in the open market, such as the Toronto Stock Exchange or CBOE Canada?

Answer:

If the security was purchased in a typical stock exchange transaction, the causes of action linked to these purchases will be considered to be a “secondary market” cause of action. The investor will have common law causes of action for which there is a 2-year period. The common law cause of action, depending upon whether it is one of negligent misrepresentations or fraud, may include the necessity of the investor to plead and prove reliance upon the company’s statement or omission in making his or her investment decision. The constituent elements of the causes of action are the same between primary and secondary market causes of action.

The Ontario Securities Act, Part XXIII.1, s. 138.3, also provides investors with a cause of action for damages that does not require reliance and (i) if brought within 3-years after the date on which the document containing the misrepresentation was first released; and (ii) the court grants permission to allow the cause of action to advance forward because it found that the cause of action was brought in good faith and there is reasonable possibility the action will be resolved at trial in favour of the investor.

It is critically important for investors to recognize that by issuing a claim with both secondary market causes of action, the 2-year limitation period associated with the common law cause of action will toll the limitation period for all putative class members. However, the limitation period associated with the Securities Act cause of action is only tolled by the filing of the investor’s s. 138.8 motion record to seek permission to advance the cause of action.

Question:

Lawsuits cost a lot of money; what happens if an investor’s damages are less than the cost of a lawsuit? Can the investor advance these causes of action against companies as a class action so that the law firm will finance the expenses and earn a legal fee only if the outcome is successful?

Answer:

Yes, investors can advance their causes of action within a class action. In fact, unless there are unusual circumstances, I recommend that investors start with a class action for strategic reasons and then, if necessary, advance their individualized cause of action. My clients have been successful with this approach across multiple types of investor claims, including situations where the class action was unsuccessful but my client still recovered money.

Question:

What if the company has no money or is in bankruptcy? Is it still worth the investor’s time to contact an investor protection lawyer?

Answer:

Absolutely. More often than not, shareholder litigation and settlements that include payments to investors come from directors and officers insurance policies. Other than the annual premium and some modest deductible, companies rarely pay out-of-pocket expenses.

Andrew is licensed to practice law in Ontario, Canada, and Washington, D.C. and represented investors in the development of the pro-investor case law as reflected in Arsfinatica v. Morgan Stanley & Co., Inc., Wyldfyre Technologies Inc. v. Merrill Lynch & Co., Inc; Stevens v. Ithaca Energy Inc. (Alberta); Kaynes v. BP, plc (Ontario); Pannicia v. MDC Partners Inc (Ontario); Kauf v. Colt Resources, Inc (Ontario); Auxly Cannabis Group Inc. (Ontario); Stajic v. Wayland Group Corp (Ontario); and Catucci c. Valeant Pharma Int’l Inc. (Quebec). Morganti & Co. was recognized by Institutional Shareholder Services ("ISS") within the top 50 securities class action firms measured by recoveries in 5 different years. In Canada, Andrew is a member of Milosevic & Associates, a leading trial and appellate law firm focused on litigating civil fraud claims.