Finally – the First Merits Decision in a Securities Class Action for Secondary Market Misrepresentation
After years of waiting and several near misses, the Ontario Superior Court of Justice has finally decided the merits of a class action under the secondary market liability provisions of Part XXIII.1 of the Ontario Securities Act. Justice Belobaba’s decision in Wong v. Pretium Resources Inc., 2021 ONSC 54 dismissed the plaintiff’s claims, finding that there had been no misrepresentation, and in any event, the defendants were entitled to a reasonable investigation defence.
As the first of its kind, Wong provides valuable insight into the relationship between leave to proceed, certification, and judgment on the merits. The decision also provides clarity on the structure of the defences to statutory liability. The take-away is that clearing the hurdle of leave to proceed does not count for much in the final arithmetic.
By way of disclaimer, McCarthy Tétrault LLP represented the defendants throughout.
Wong concerned an allegation that a gold miner, Pretium Resources Inc. (“Pretium”), and its then-CEO failed to disclose an adverse opinion about its mineral resource estimate. The adverse opinion was tendered by Strathcona Mineral Services Ltd. (“Strathcona”). Pretium had engaged Strathcona to oversee a bulk sample program. However, Pretium had not engaged Strathcona to assess the resource estimate, which had been prepared by Snowden Mining Industry Consultants Pty Ltd. (“Snowden”).
Pretium did not believe Strathcona was qualified to estimate the mineral content of the unique deposit at issue. Accordingly, Snowden remained engaged to update its resource estimate at the conclusion of the bulk sample program. Snowden considered Strathcona’s concerns and advised Pretium that the existing resource estimate remained valid. Pretium’s own technical team likewise concluded that Strathcona was wrong. Pretium communicated these views to Strathcona, which was unmoved. Frustrated that Pretium would not disavow Snowden’s resource estimate, Strathcona resigned.
Pretium publicly disclosed Strathcona’s resignation, and shortly thereafter it disclosed Strathcona’s concerns about the resource estimate. The plaintiff alleged that these disclosures caused the price of Pretium’s securities to fall, and that both disclosures constituted corrective disclosure of a material misrepresentation: namely, the omission of Strathcona’s concerns about the resource estimate. The plaintiff advanced claims for both common law misrepresentation and statutory misrepresentation under Part XXIII.1 of the Securities Act.
Days after Strathcona resigned, however, Pretium began to receive mill results from the bulk sample, which proved that Snowden was right and Strathcona was wrong. With the benefit of fulsome analysis, the results of the bulk sample materially confirmed Snowden’s earlier resource estimate. Ultimately, Pretium built the mine and brought it into commercial production. In time, the price of Pretium’s securities rose to new highs.
The question in Wong was whether investors could recover any damages that they actually suffered, or were statutorily deemed to have suffered, on account of the temporary decline in the price of Pretium’s securities following the impugned disclosures.
Justice Belobaba granted leave to assert the cause of action for secondary market misrepresentation under part XXIII.1 of the Securities Act: Wong v. Pretium Resources Inc., 2017 ONSC 3361. In so doing, he explained that, while Pretium had conducted a reasonable investigation of Strathcona’s concerns, “there still remains a reasonable possibility” that the defendants would fail to prove at trial that “they had no reasonable grounds to believe that the omission about Strathcona’s findings and concerns was an omission of a material fact that a reasonable investor would find important and would reasonably want to know”. The Divisional Court refused leave to appeal. Thereafter, the action was certified as a class proceeding on consent.
After making documentary production, the defendants moved for summary judgment. In the months that followed, the plaintiff sought several adjournments and moved to amend his claim to expand the allegations. Shortly before the defendants’ summary judgment motion was to be heard, the plaintiff brought a mirror cross-motion for summary judgment in his favour. The motions for summary judgment proceeded to a hearing before Justice Belobaba on a record that was voluminous, but that did not disclose any material questions of credibility.
Justice Belobaba began by noting that “leave to proceed will be granted if there is enough evidence to clear the ‘reasonable possibility’ hurdle”, but “when the matter is litigated in full and the plaintiff’s hurdle is the more demanding ‘balance of probabilities’, the defendants may prevail and the securities class action will be dismissed”. He explained that he had granted leave to proceed under Part XXIII.1 because it appeared that “by any objective measure, reasonable investors would have considered it material that two respected mining consultancies retained by Pretium – Snowden and Strathcona – fundamentally disagreed as to whether there were valid mineral resources”.
However, on the more developed summary judgment record, Justice Belobaba was able to conclude that “this initial characterization of Strathcona and Snowden as two equally skilled resource estimate consultants with equal expertise and qualifications offering equally valid opinions has now been dislodged”. Rather, he concluded that Strathcona was not qualified to estimate Pretium’s resource, and “Strathcona’s so-called concerns or opinions were not only unsolicited but inexpert, premature and unreliable”. In turn, Justice Belobaba was satisfied that “Pretium acted properly throughout and was right in not disclosing bad and misleading information”.
No material misrepresentation
Justice Belobaba accepted Pretium’s defence that there had been no material misrepresentation. He found that Strathcona’s concerns were the result of fundamental methodological errors, which Pretium and Snowden had immediately recognized. Justice Belobaba accepted that “unreliable information is not a material fact that must be disclosed” and “[n]othing is achieved by flooding the market with unhelpful information”. Because no material fact had been omitted, there was no misrepresentation. On this basis, the statutory cause of action was never made out, and the alleged link between the impugned disclosure and the decline in the price of Pretium’s securities was irrelevant.
In any event, there was a reasonable investigation
Justice Belobaba also accepted Pretium’s alternative defence of a reasonable investigation under s. 138.4(6) of the Securities Act. The defence is available on proof that (i) the defendant conducted a reasonable investigation before the impugned document was released, and (ii) at the time of the release the defendant had no reasonable grounds to believe that the document contained a misrepresentation. In granting leave to proceed, Justice Belobaba had been satisfied with the reasonableness of Pretium’s investigation, and he affirmed that finding on the summary judgment record. The first branch of the defence was established.
However, Justice Belobaba granted leave to proceed because, in his view, it was possible that the defendants’ subjective belief that Strathcona’s concerns were wrong might not be objectively reasonable. On the amplified summary judgment record, however, he was convinced of the “objective dimension to the defendants’ subjective perspective of why the Strathcona data was ‘inherently unreliable’”. On this basis, he concluded that the second branch of the reasonable investigation defence was satisfied and the defendants were entitled to a complete defence.
The defendants also raised two further statutory defences: reliance on Snowden as an appropriately qualified expert under s. 138.4(11) of the Securities Act and appropriate disclosure of forward-looking information under s. 138.4(9) of the Securities Act. Justice Belobaba noted that “counsel for the defendants advanced compelling submissions” for both of these defences, but concluded that there was no need to reach a holding, in view of the other grounds to dismiss the action. Justice Belobaba’s judicial restraint leaves for another day the development of these infrequently considered defences.
Justice Belobaba’s decision is a study of the chasm between a reasonable possibility of success, which is sufficient to obtain leave to proceed, and actual success on a balance of probabilities. This gap is particularly prominent where the alleged corrective disclosure falls short of an admission of a misrepresentation. As Justice Perell explained in Paniccia v. MDC Partners Inc., 2018 ONSC 3470, these circumstances require the plaintiff to prove that “the Defendants misled the market by publishing an untrue statement of material fact”.
Whereas the court seems prepared to tolerate some lacunae in the evidence on the motion for leave to proceed, it expects more solid footings on the merits of the action. Thus, while the court may have been prepared to give the plaintiff the benefit of the doubt at an earlier stage of the action, he bore the burden of proof on a balance of probabilities on summary judgment, and he could not refute the defendants’ objective basis to discount Strathcona’s opinion as misleading.
Justice Belobaba’s decision also provides important guidance on the structure of the available defences under Part XXIII.1 of the Securities Act. Wong confirms that a misleading or unreliable statement is not a material fact, even if its disclosure might affect the price of the issuer’s securities. In turn, the Securities Act could not fault the defendants’ refusal to disclose information that was actually erroneous. Had the defendants been wrong on that point, and had Strathcona been proven right, the defendants would nevertheless have been entitled to a reasonable investigation defence because they took appropriate steps to evaluate Strathcona’s concerns, subjectively believed them to be wrong, and had an objective basis for that determination.
We expect that Wong will be an important precedent as the practice of secondary market securities class actions matures and litigants look for guidance on what is required to go the distance.