Many eyes will be focused on the first cases being brought under Ontario''s new civil liability regime for securities fraud, proclaimed in provisions as Bill 198 at the end of last year.
It doesn't hurt that the defendant in the cases, which are expected to be consolidated in one action, is high-profile IMAX Corp., known for its breakthrough eight-storey-high movie screens that provide the "IMAX experience."
The filings by civil litigation specialists Sutts, Strosberg LLP in Windsor and Siskind, Cromarty, Ivey & Dowler LLP in London, allege that IMAX, a Mississauga-based company, misrepresented its 2005 earnings in a February news release and in subsequent statements, "by recognizing revenue from theatres that had yet to open," resulting in IMAX's shares trading "at artificially inflated prices."
But in August when the company revealed it was being investigated by the U.S. Securities and Exchange Commission for misrepresenting earnings, the shares took a plunge, dropping 40 per cent to a low of $4.91.
Sutts, Strosberg's Jay Strosberg says the inflated price comes against the backdrop of a potential sale of the company. "It's public knowledge that they were being shopped around," he says.
Siskinds is claiming $400 million in damages and $100 million in punitive damages while Sutts, Strosberg is claiming $200 million. The suits are a class for all shareholders who purchased IMAX shares between February and August. The firm says "a number of investors were hurt very badly."
The two firms are taking advantage of Bill 198's provisions, which create a new regime in Ontario designed to protect investors from corporate earnings misrepresentation, such as what allegedly occurred here. IMAX, for its part, says the allegations are "without merit," noting the corporation "has spent close to four decades building its reputation and brand, and we look forward to the opportunity to have these frivolous actions dismissed."
Siskinds' Dimitri Lascaris says that prior to last December "there was a perception, and quite rightly, that issuers in Canada were operating in an environment of virtual impunity. There were a number of scandals over the years in which investors got left out in the cold."
Lascaris adds it wasn't impossible to sue for misrepresentation, but the common law holds that plaintiffs need to prove they relied on "materially misleading" financial statements. But the reality is that investors "buy stocks for a variety of reasons" whether based on information someone has told them or the perception of a company's reputation - without seeing any financial documents - yet they also get stung if a company misstates earnings.
"So people who didn't have huge losses and really didn't have an economic incentive to sue individually were left out in the cold."
The case is expected to draw rapt attention in the corporate, securities and legal communities, not just because it's the first under Bill 198 but because of how the bill's machinations will be put through their paces.
"It's the first time it has been done," Strosberg says. "It's the subject of much anticipation. He notes that the high-profile nature of the defendant "also helps."
Aspects of the legislation that plaintiff lawyers aren't entirely happy with also bring some intrigue in terms of how the bench will deal with them.
For one thing, the Superior Court must approve leave for an action to go ahead, a highly unusual provision that is "unlike any other piece of legislation," Lascaris says. "You're being compelled as a plaintiff to get permission before you have discovery, before you have an opportunity to compel the defendant to produce the relevant evidence."
Lascaris says another dampening feature is that claims are capped at five percent of a corporation's market capitalization, which is " a serious obstacle to getting full relief" if, say, if a company's capitalization is $100 million and damages are $1 billion, "which happens from time to time" in securities cases. In that case, Lascaris says, "You're out of luck - all you're going to get is one-tenth of your loss."
Mary Condon, who teaches securities law at Osgoode Hall, says the court will grant leave only "if the action is being taken in good faith and if there's a reasonable possibility of success."
But she suggests this "gate-keeping" function was put in place to prevent a wide-open litigious environment as has existed in the U.S. where companies would settle very early after claims were filed even if plaintiffs "were in the early stages of having information," just to "make the thing go away."
Condon says the cap is "clearly meant to be a deterrent" to unmeritorious claims and can be lifted "if you can prove the defendants knew of the misrepresentation."
Montreal lawyer Robert Yalden, with Osler, Hoskin & Harcourt LLP, who represented four large companies in the Civil Liability Coalition, which lobbied against provisions in Bill 198, says corporations' biggest objection is that the regime is "out of step" with civil liability in the U. S.
For example, when it comes to misrepresentation in "core" financial documents like annual and quarterly statements, rather than the onus being on the plaintiff to show that the defendant acted fraudulently or was grossly negligent, "the onus is reversed."
Yalden says as soon as a plaintiff establishes a financial inaccuracy, "the onus shifts to the defendant to demonstrate that they did everything they reasonably could to ensure that no inaccuracy got into the document."
As well, he says, while the judge must approve leave for the action to proceed, "it's a very open-ended" test. "It's going to be very hard for a court, unless it's a clearly and completely frivolous case, to make a determination on the prospect of success without allowing the case to proceed."
Moreover, he adds, in the U.S. one-third of cases get knocked out after defendants bring motions to dismiss "because plaintiffs can't make a reasonable prospect" of proving fraud or gross negligence. No such provision exists here.
As for the cap, Yalden says it's still a substantial amount of money when large firms, likely the prime target of "class action boutiques," are forced to pay out.
What the coalition wanted instead was "harmonization" with the U.S. environment and where U.S. jurisprudence might be "relevant in the context here," Yalden says.
"I think it provides tremendous temptation for U.S. litigants and Canadian litigants to start cases up here because the landscape may well turn out to be easier than it is in the United States."
