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Deloitte & Touche Inc. Seeks to Discontinue Class Action Against Bre-X Principals

Deloitte & Touche Inc. (“Deloitte”), the long-acting trustee for the Estate of Bre-X Minerals Ltd., has brought motions in the Alberta and Ontario courts seeking leave to discontinue the class action litigation that it has been prosecuting against, amongst others, former Bre-X principal John Felderhof and his ex-wife Ingrid Felderhof, as well as the Estate of founder and CEO David Walsh.

As a brief background, in October 1997, an action was commenced in Alberta by investors who lost money on the collapse of Bre-X. In November 1997, the Alberta Bankruptcy Court authorized Deloitte to prosecute the class action on behalf of these investors; shortly thereafter, Deloitte was granted carriage in Ontario in January 1998 (collectively, the “Deloitte Action”). The Deloitte Action asserted that John Felderhof failed to promptly disclose material changes relating to Bre-X’s gold mining properties, and that he conspired with others to deceive investors by issuing false statements, announcements and press releases.

Deloitte’s motions for discontinuance are being brought for two reasons: Deloitte no longer has the financial resources to prosecute the Deloitte Action, and it believes that there is no reasonable prospect of significant recovery from the Felderhofs or the Walsh Estate. Deloitte’s motions are opposed by David Carom, one of the plaintiffs in a second class action against the Felderhofs and the Walsh Estate which, until recently, was in a litigation partnership with the Deloitte Action.

In anticipation of Deloitte’s Ontario discontinuance motion hearing (currently scheduled for March 4, 2013), Mr. Carom recently brought a cross-motion seeking an order that Ingrid Felderhof and Jeannette Walsh (David Walsh’s widow) attend to be examined as witnesses under Rule 39.03 of the Rules of Civil Procedure, and that Ingrid Felderhof allow class counsel to obtain an appraisal of a property in the Cayman Islands. Deloitte opposed the cross-motion based on its concern that its discontinuance motion could be affected in the event that either of the proposed witnesses failed to comply with any order made by the court.

At the cross-motion hearing (2012 ONSC 7278), Perell J. held that since neither of the proposed witnesses had actually been served with a summons, the appropriate decision was to adjourn the cross-motion to allow Mr. Carom to serve summonses. Perell J. noted, however, that had summonses been served, he saw no basis for striking them out. With respect to the request for an appraisal, Perell J. dismissed the motion without prejudice due to the lack of advice concerning his jurisdiction to make such an order, noting that Ingrid Felderhof was not a party to the Ontario litigation.

Deloitte & Touche Inc. Seeks to Discontinue Class Action Against Bre-X Principals

Court Confirms No Need for Defendants to Lead Evidence in Motion for Leave under Part XXIII.1 of the Ontario Securities Act

In the recent decision of Dugai, Murphy v. Manulife Financial Corporation (2013 ONSC 327), the Divisional Court confirmed the principle that defendants have no obligation to lead evidence on a motion for leave to assert a cause of action for secondary market misrepresentation under s. 138.8(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “Act”).

In Dugai, the plaintiff investors proposed a class action alleging inadequacies in the defendant corporation’s Risk Management Policies and Practices, including a cause of action for secondary market misrepresentation under Part XXIII.1 of the Act (for which they require leave under s. 138.8(1)). After being advised that the defendants did not intend to file any affidavits on the leave motion (currently scheduled for March 2013), the plaintiffs summoned two Manulife employees under Rule 39.03 of the Rules of Civil Procedure to provide relevant evidence for use during the leave motion. The defendants brought a motion to quash the summonses, and the plaintiffs brought a cross-motion to compel the defendants to file affidavits. Belobaba J. granted the defendants’ motion and dismissed the cross-motion; the plaintiffs sought leave to appeal in the Divisional Court.

In upholding Belobaba J.’s decision and dismissing the plaintiffs’ application, Harvison Young J. agreed with his analysis that the two issues on motion – whether defendants are required to serve and file affidavits on a s. 138.1 motion, and the availability of Rule 39.03 summmonses in such circumstances – have already been fully adjudicated. Both judges drew particular attention to the decision of Lax J. in Ainslie v. CV Technologies (2008), 93 O.R. (3d) 200 (S.C.J.), one of the first actions brought under Part XXIII.1 of the Act. In Ainslie, FMC’s Robb Heintzman and Matthew Fleming successfully argued that the Act only requires a defendant to file an affidavit where it intends to lead evidence in response to a leave motion, and that allowing the plaintiffs to examine the defendants in the absence of such affidavit evidence would amount to an abuse of process, as it would afford the plaintiffs greater rights of discovery than in an action where it is unnecessary to obtain leave.

Harvison Young J. concluded that the number of recent cases which accepted and applied the reasoning in Ainslie “overwhelming supports the motion judge’s interpretation of s. 138.8 that it does not require the defendants to deliver affidavits or to be subjected to cross examination when they do not intend to lead evidence in response to the leave motion”.

Court Confirms No Need for Defendants to Lead Evidence in Motion for Leave under Part XXIII.1 of the Ontario Securities Act

Secondary Market Liability in Canada: Securities Class Actions

This article was written by: Robb C Heintzman, Michael D Schafler and Soloman Lam.

The securities legislation of all Canadian provinces and territories now contain provisions that create civil liability for secondary market misrepresentation. Investors that purchase an issuer’s securities on the secondary market may therefore bring claims for misrepresentation or a failure to make timely disclosure of a material change. As a result, there has been a marked increase in the number of securities class actions in Canada.”

This article provides: an overview of the policy rationale behind the new statutory regime; an examination of the regime’s key features; and an analysis of the case law that has developed around the provisions so far.

To read more, click here.

Secondary Market Liability in Canada: Securities Class Actions

Leave to Assert Secondary Market Liability Claim under Part XXIII.1 of the Ontario Securities Act Granted in Proposed Class Action

In Zaniewicz v. Zungai Haixi Corp (2012 ONSC 6061), Perell J. heard and granted the plaintiffs’ unopposed motion for leave to assert a secondary market liability claim under section 138.3 of Part  XXIII.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “Act”).

The defendant corporation, Zungui, is an Ontario public company that indirectly owned a shoe company incorporated and operating in the People’s Republic of China, and was a reporting issuer under the Act. The individual defendants Fengyi Cai, Jixu Cai, and Yanda Cai (the “Cai Brothers”), who were directors and/or officers of Zungui, were varyingly responsible for approving, or overseeing the audit committee’s approval of, both Zungui’s audited annual financial statements and its unaudited interim financial statements.

In December 2009, Zungui raised approximately $40 million in Ontario’s capital markets through an initial public offering. In Zungui’s financial statements, Zungui and the Cai Brothers represented to the investing public that the financial statements presented Zungui’s financial position fairly in all material respects, and that Zungui’s IPO offering documents contained full, true and plain disclosure of all material facts relating to the offering of securities.

On August 22, 2011, Zungui issued a press release announcing that Ernst & Young (“E&Y”), its auditor, had suspended its audit of Zungui’s financial statements for the year ended June 30, 2011. Zungui’s shares immediately lost 77% of their value, and are now virtually worthless. The Ontario Securities Commission commenced an investigation and, in February 2012, ruled that the Cai Brothers had engaged in conduct contrary to the public interest. The investigation also revealed that when E&Y resigned on September 23, 2011, it advised that all audit opinions that formed part of the IPO prospectus and Zungui’s June 2010 financial statements could no longer be relied upon.

In their claim, the plaintiffs alleged that Zungui’s financial statements (both those contained in its IPO prospectus and others later prepared and disseminated in the secondary securities market) were neither accurate nor reliable, and that the Cai Brothers made misrepresentations in Zungui’s secondary market continuous disclosure documents.

In order for leave to be granted under section 138.8 of the Act, a plaintiff must demonstrate that (i) the proposed action is brought in good faith, and (ii) there is a reasonable possibility that the proposed action will be resolved at trial in the plaintiffs’ favour. In granting leave, Perell J. noted that Part XXIII.1 mandates a preliminary, low-level merits based leave test and that, as at the date of writing, three Ontario courts had considered the test and agreed that the standard is a “relatively low threshold” depending “on the evidence that the parties put before the court” (as described in Silver v. Imax Corporation (2009), 66 B.L.R. (4th) 222 (Ont. S.C.J.)). Perell J. held that there was no reason to doubt the plaintiffs’ good faith and that, while the evidence adduced by the plaintiffs would have satisfied the second arm of the test, the Cai Brothers had been noted in default and their deemed admissions of the factual allegations in the Statement of Claim were sufficient to satisfy the section 138.8 test.

Leave to Assert Secondary Market Liability Claim under Part XXIII.1 of the Ontario Securities Act Granted in Proposed Class Action