ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 11-CV-436360-00CP
DATE: August 27, 2013
BETWEEN:
JERZY ROBERT ZANIEWICZ and EDWARD C. CLARKE
Plaintiffs
– and –
ZUNGUI HAIXI CORPORATION, E&Y, FENGYI CAI, JIXU CAI, YANDA CAI, MICHELLE GOBIN, MICHAEL W. MANLEY, PATRICK A. RYAN, ELLIOTT WAHLE, MARGARET CORNISH, CIBC WORLD MARKETS INC., CANACCORD GENUITY CORP. (f.k.a. CANACCORD FINANCIAL LTD)., GMP SECURITIES LP and MACKIE RESEARCH CAPITAL CORPORATION (f.k.a. RESEARCH CAPITAL CORPORATION)
Defendants
Charles M. Wright and Douglas M. Worndl for the Plaintiffs
Deborah Berlach for the Defendant Zungui Haizi Corporation
Margaret L. Waddell for the Defendant Michelle Gobin
Michael A. Eizenga for the Defendant Michael W. Manley
James S.F. Wilson for the Defendants, Patrick A. Ryan, Elliott Wahle, and Margaret Cornish
Linda L. Fuerst for the Defendant Ernst &Young LLP.
Kent Thomson and Derek Ricci for the Defendants CIBC World Markets Inc., Canaccord Genuity Corp. (f.k.a. Canaccord Financial Ltd.) and Mackie Research Capital Corporation (f.k.a. Research Capital Corporation and GMP Securities LP.
Proceeding under the Class Proceedings Act
HEARD: August 27, 2013
PERELL, J.
REASONS FOR DECISION
A. INTRODUCTION AND OVERVIEW
[1] This is a securities class action under the Class Proceedings Act, 1992, S.O. 1992, c. 6 and the Ontario Securities Act, R.S.O. 1990, c. S.5. The Plaintiffs Jerzy Robert Zaniewicz and Edward C. Clarke advance common law tort claims and also statutory claims with respect to the sale of the shares of Zungui Haizi Corporation in the primary and secondary markets.
[2] The Plaintiffs bring this motion for: (a) certification for settlement purposes as against the Defendants CIBC World Markets Inc., Canaccord Genuity Corp., GMP Securities LP, and Mackie Research Capital Corporation (the “Underwriting Syndicate”); (b) approval of three settlements; (c) ancillary orders, including the appointment of an administrator; (d) approval of the notice program; and (e) approval of the plan of distribution (the “Plan of Allocation”) for the settlement funds.
[3] Class Counsel also bring a motion for approval of its counsel fees and disbursements. Class Counsel seeks $2,250,000.00, plus disbursements, interest on disbursements, and applicable taxes. The total request is for $2,807,037.56.
[4] For the reasons that follow, I certify the action as against the Underwriting Syndicate for settlement purposes. I approve the three settlements and Class Counsel’s request for counsel fees. I approve the requests for ancillary orders. However, I do not approve the proposed Plan of Allocation, and, rather, I have varied the plan and approved a modified Plan of Allocation.
[5] As I will explain, in this case, the court has the jurisdiction to approve the settlement agreements and then establish a plan of distribution that is different than the plan of distribution proposed by the parties.
B. FACTUAL BACKGROUND TO THE CLASS ACTION
[6] See Zaniewicz v. Zungui Haixi Corp., 2013 ONSC 2959, which sets out most of the factual background and the procedural history. See also: Zaniewicz v. Zungui Haixi Corp., Zaniewicz v. Zungui Haixi Corp., 2012 ONSC 4842, Zaniewicz v. Zungui Haixi Corp., 2012 ONSC 4904, and Zaniewicz v. Zungui Haixi Corp., 2012 ONSC 6061.
[7] In December 2009, Zungui made an initial public offering ("IPO"), and it raised approximately $40 million in Ontario's capital markets.
[8] Zungui and its directors and officers had a statutory obligation under the Ontario Securities Act to provide Zungui's investors with timely and accurate disclosure regarding the business of Zungui, including disclosure in Zungui's interim and annual financial statements.
[9] In its interim and annual financial statements, Zungui and the Defendants Yanda, Fengyi, and Zungui Cai (the “Cai Brothers”) assured investors that Zungui's financial statements presented fairly, in all material respects, the financial position of Zungui in accordance with GAAP. They represented that the Zungui’s offering documents contained full true and plain disclosure of all material facts relating to the offering of securities.
[10] The Plaintiffs are residents of Ontario. Each purchased common shares of Zungui in the primary market. Mr. Clarke also purchased common shares of Zungui in the secondary market.
[11] On August 22, 2011, Zungui issued a press release announcing that its auditor, Ernst & Young LLP (“E&Y”), had suspended its audit of Zungui's financial statements for the year ended June 30, 2011. With that announcement, Zungui's shares immediately lost 77% of their value. Subsequently, Zungui's shares became the subject of various temporary and permanent cease trade orders, and they are now worthless.
[12] On September 22, 2011, Zungui's Chief Financial Officer and all independent members of the Board resigned, in part, because the special committee formed to investigate E&Y's concerns had been prevented from fulfilling its mandate.
[13] On September 23, 2011, E&Y resigned as Zungui's auditor. E&Y withdrew its opinions that Zungui's financial statements were GAAP compliant.
[14] On February 2, 2012, the Ontario Securities Commission (“OSC”) ruled that Yanda, Fengyi, and Zungui Cai had engaged in conduct contrary to the public interest, and on August 28, 2012, the OSC ordered, among other things, that Yanda and Fengyi resign as directors or officers of Zungui and be permanently prohibited from acting as directors or officers of any issuer.
[15] The OSC investigation revealed that when E&Y resigned, it advised that all of its audit opinions that formed part of the IPO Prospectus, as well as Zungui's June 2010 financial statements could no longer be relied upon.
[16] On October 3, 2011, Mr. Zaniewicz, commenced the action by the issuance of a Notice of Action. On November 2, 2011, he filed his Statement of Claim. On February 7, 2012 and February 10, 2012, I made orders granting leave to amend the Statement of Claim to add Mr. Clarke as a plaintiff and to correct the description of two of the Underwriters incorrectly described in the style of cause.
[17] On February 8, 2012, the Plaintiffs filed their Fresh as Amended Statement of Claim.
[18] In the action, the Plaintiffs sue not only Zungui and the Cai Brothers, but others allegedly responsible for ensuring that Zungui's public disclosure to primary and secondary market investors was timely and accurate in accordance with securities law. The Plaintiffs allege various statutory claims under the Ontario Securities Act and also common law claims.
[19] The Plaintiffs allege that Zungui's IPO Prospectus was misleading as it contained material misrepresentations. The Plaintiffs allege that the representations were materially false, and Zungui's financial statements contained in the prospectus, and other financial statements later prepared and disseminated in the secondary securities market, were neither accurate nor reliable in respect of reported revenues, net income, assets, and shareholders' equity. Moreover, the Plaintiffs allege that the financial statements did not fairly present, in all material respects, the financial condition, results of operations and cash flows of Zungui for the reporting periods presented.
[20] Alan Mak, who is a chartered accountant, a member of the Institute of Chartered Accountants of Ontario, and a member of the Association of Certified Fraud Examiners opined that the audits conducted by Ernst & Young were not in accordance with GAAP and that Ernst & Young's unqualified audit opinions should not have been given for the 2006 through 2010 reporting periods. E&Y does not admit that it was negligent.
[21] In the class action, the Class Definition is as follows:
All persons or entities wherever they may reside or be domiciled, other than Excluded Persons and Opt-Out Parties, who acquired Eligible Shares.
Eligible Shares means the Shares acquired by a Class Member or Opt-Out Party during the Class Period.
Class Period means the period from and including August 11, 2009 to and including August 22, 2011.
Excluded Persons means each Defendant, the past or present subsidiaries or affiliates, officers, directors, partners, legal representatives, consultants, agents, successors and assigns of Zungui and any member of each Defendant's families, their heirs, successors or assigns, and includes any Southern Zungui Acquirers who acted as a consultant or provided other professional services to Zungui or its subsidiaries in connection with the IPO.
[22] The Class is comprised of three (3) types of acquirers of Zungui common shares: (1) primary market purchasers; (2) secondary market purchasers; and (3) share exchange acquirors (i.e. anyone who was a shareholder of Zungui’s subsidiary, Southern Trends International Holding Company (BVI), who entered into an agreement with Zungui, before its IPO, to exchange their Southern Trends shares for Zungui common shares on a basis of 1:5,000.
[23] Paul Mulholland, a US based certified forensic accountant, was retained by the Plaintiffs, to among other things, calculate the damages of class members. Mr. Mulholland's estimate of damages was $23.76 million comprised of: (a) $10.1 million in damage to primary market purchasers; $12.9 million in damage to secondary market Purchasers; and $0.7 million in damage to share exchange acquirors. (The original Statement of Claim sought damages of $30 million.)
[24] The Defendants, of course, do not admit liability or the amount of the Class Member’s alleged losses.
[...continues exactly as in the original decision...]
Perell, J.
Released: August 27, 2013
COURT FILE NO.: 11-CV-436360-00CP
DATE: August 27, 2013
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JERZY ROBERT ZANIEWICZ and EDWARD C. CLARKE
Plaintiffs
‑ and ‑
ZUNGUI HAIXI CORPORATION, E&Y, FENGYI CAI, JIXU CAI, YANDA CAI, MICHELLE GOBIN, MICHAEL W. MANLEY, PATRICK A. RYAN, ELLIOTT WAHLE, MARGARET CORNISH, CIBC WORLD MARKETS INC., CANACCORD GENUITY CORP. (f.k.a. CANACCORD FINANCIAL LTD)., GMP SECURITIES LP and MACKIE RESEARCH CAPITAL CORPORATION (f.k.a. RESEARCH CAPITAL CORPORATION)
Defendants
REASONS FOR DECISION
Perell, J.
Released: August 27, 2013.