ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-12-466694-00CP
DATE: 20140708
BETWEEN:
EXCALIBUR SPECIAL OPPORTUNITIES LP
Plaintiff
– and –
SCHWARTZ LEVITSKY FELDMAN LLP
Defendant
Margaret L. Waddell and Nasha Nijhawan, for the Plaintiff
Tim Farrell and Jordan Page, for the Defendant
Proceedings under the Class Proceedings Act, 1992
HEARD: June 26 and 27, 2014
PERELL, J.
REASONS FOR DECISION
A. INTRODUCTION
[1] The Plaintiff, Excalibur Special Opportunities LP, is a Canadian investor. Under United States legislation, it was one of 57 “accredited investors” that invested in Southern China Livestock, a Chinese hog producer, whose American owners were reorganizing and financing operations with a reverse takeover and a private placement of common shares and warrants.
[2] The class of investors was comprised of 50 Americans, five investors from around the world, and two Canadians.
[3] In 2010, the American promoters and marketers of the private placement provided the accredited investors with a Private Placement Memorandum that indicated that the plan was to eventually go public under U.S. securities legislation. The Private Placement Memorandum included as an exhibit an Audit Report prepared by the Defendant, Schwartz Levitsky Feldman LLP (“SLF”), which is a Toronto and Montreal accounting firm that had a group that specialized in the audits of Chinese businesses and that was qualified to give an opinion in accordance with Generally Accepted Accounting Principles (“GAAP”) and the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”).
[4] In this proposed class action against SLF, Excalibur says that SLF provided a “Clean Audit Report” and that without this Clean Audit Report, the private placement would never have gotten off the ground. Excalibur says that all the accredited investors relied on the Clean Audit Report in making their decision to invest in Southern China Livestock.
[5] The 57 investors invested $7,594,965, but within a year they learned that Southern China Livestock lacked financial controls over its all-cash-business. Excalibur says that “this shocking disclosure” was entirely at odds with a Clean Audit Report, because under generally accepted accounting principles, a Clean Audit Report is categorically not possible for an all-cash-business that lacks financial controls.
[6] Following the shocking disclosure, within 22 months, Southern China Livestock went out of business, the investors lost their investment, and Excalibur commenced a class action on behalf of the accredited investors.
[7] Excalibur sues SLF to recover the $7,594,965 lost by the investors, and it now seeks to certify its action as a class proceeding under the Class Proceedings Act, 1992, S.O. 1992, c. 6.
[8] Excalibur submits that in providing a Clean Audit Report, SLF committed the torts of negligent misrepresentation and negligence causing the investors to lose their investment. In other words, Excalibur submits that in breach of a duty of care, SLF spoke falsely (negligent misrepresentation) and alternatively in breach of a duty of care, SLF ought not to have spoken at all (negligence).
[9] SLF resists certification and submits that none of the certification criteria have been satisfied.
[10] In particular, SLF submits that: (a) Excalibur has not pleaded a tenable cause of action for negligent misrepresentation and negligence; (b) the proposed class definition is overly broad; (c) a global class definition should not be certified; (d) the proposed common issues do not satisfy the test for common issues; (d) a class action is not the preferable procedure because Excalibur does not need a class action to obtain access to justice and the individual issues overwhelm the utility of a common issues trial; (e) Excalibur is not an appropriate Representative Plaintiff; and (f) Excalibur’s litigation plan is deficient and unfair to SLF’s procedural rights because 56 of the 57 Class Members are avoiding a non-residents’ civil procedure obligation to post security for costs.
[11] For the reasons that follow, I conclude that: (a) Excalibur has pleaded a tenable action for negligent misrepresentation and negligence, and, therefore, the first criterion for certification is satisfied; (b) subject to the issue of a global class definition, the class definition is not overly broad; (c) although a global class definition may be certified, Excalibur’s action is not appropriate for a global class and, therefore, the second criterion for certification is not satisfied; (d) some of the proposed common issues satisfy the common issues criterion, and the third criterion for certification is satisfied; (e) the preferable procedure criterion is not satisfied in the case at bar; and (f) standing alone (i.e. on the assumption that the other criteria have been satisfied) the fifth criterion for certification is satisfied because Excalibur is an appropriate Representative Plaintiff and its litigation plan has no fatal deficiencies, but the plan and the notice of certification should specify that Class Members from outside of Ontario may be required to post security for costs for their individual issues trials.
[12] In the result, the first criterion (cause of action), the third criterion (common issues) and the fifth criterion (representative plaintiff) are satisfied, but the second criterion (class definition) and the fourth criterion certification motion (preferable procedure) are not satisfied.
[13] Since all of the criterion for certification must be satisfied, the motion for certification is dismissed.
B. FACTUAL BACKGROUND
1. The Investment in Southern China Livestock and its Aftermath
[14] Excalibur is a limited partnership organized under the laws of Manitoba operating as an investment fund based in Toronto. It is registered as an extra-provincial limited partnership in Ontario. It invests in small-cap private companies and small-cap publicly traded companies.
[15] SLF is a firm of chartered accountants with offices in Toronto and Montreal. It is registered with the PCAOB and is licenced to audit companies listed in the United States.
[16] SLF has a “China Group” led by Gerry Goldberg, a partner in its Toronto office. The firm holds itself out to be an expert in conducting financial due diligence and auditing services for companies based in China.
[17] Southern China Livestock owned or operated 19 hog farms in China through subsidiary corporations. It itself was owned by American corporations.
[18] On January 28, 2010, SLF issued an Audit Report with respect to Southern China Livestock’s fiscal year-ends’ September 30, 2008 and September 30, 2009. The single-page Audit Report was addressed to “the Shareholders of Southern China Livestock”.
[19] The Audit Report, which accompanied the financial statements, stated:
Schwartz Levitsky Feldman LLP
CHARTERED ACCOUNTANTS
LICENSED PUBLIC ACCOUNTANTS
TORONTO - MONTREAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Southern China Livestock International Inc.
We have audited the consolidated balance sheets of Southern China Livestock International Inc. as at September 30, 2009 and 2008 and the consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the management of Southern China Livestock International Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The company is not required to have nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal controls over financing reporting. Accordingly, we express no such opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern China Livestock International Inc. as of September 30, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in accordance with generally accepted accounting principles in the United States of America.
Toronto, Ontario, Canada
January 28, 2010
1167 Caledonia Road
Toronto, Ontario, M6A 2X1
Tel: 416 785 5353
Fax: 416 785 5663
[20] Pausing here, it is an important point to note that in this proposed class action, Excalibur does not specify in what way, if at all, Southern China Livestock’s consolidated financial statements did not present fairly, in all material respects, its financial position and the results of its operations and its cash flows in accordance with GAAP. Rather, as noted above, Excalibur alleges that given the lack of adequate financial controls, the financial statements were not able to present Southern China Livestock’s financial position in accordance with GAAP.
[21] Returning to the narrative, in March 2010, Rodman & Renshaw LLP of New York, U.S.A., acted as placement agents for a private placement to purchase shares and warrants in Southern China Livestock.
[22] Concurrently, with the private placement, Southern China Livestock, which itself was a Nevada company incorporated in 2009, was being reorganized pursuant to a reverse takeover of Expedite, 4 Inc., a Delaware company incorporated in 2007.
[23] Southern China Livestock sought to raise between USD $5 million and USD $10 million by the private placement. Its stated plan was to use the proceeds primarily to acquire hog farms (73%), to create a fertilizer production line (12%), and to finance general working capital (15%).
[24] The private placement was offered to “accredited investors” under an exemption to the prospectus requirements of the U.S. Securities Act of 1993. Investors were offered investment Units at a price of USD $10 per Unit. Each Unit was comprised of two common shares of Southern China Livestock, and one warrant to purchase an additional common share.
[25] Excalibur became interested in Southern China Livestock’s private placement.
[26] Suresh Madan is Executive Vice President and portfolio manager for Excalibur. He is a chartered financial analyst and highly experienced in reading financial statements and offering memorandum. He has an MBA degree. He is familiar with the standards of the PCAOB. Mr. Madan communicated with a representative of Rodman & Renshaw LLP.
[27] On March 12, 2010 Mr. Madan received a copy of the Private Placement Memorandum, which is 230 pages in length, including 154 pages of attached exhibits. Exhibit B was SLF’s Audit Report and the consolidated financial statements of Southern China Livestock.
[28] Mr. Madan read the Private Placement Memorandum, in his words “page for page, word for word.” It took him three to four hours of close reading. He then spoke to William Hechter, the President of Excalibur, and they discussed the investment opportunity and its risks.
[29] The Private Placement Memorandum was the only material that Excalibur considered before deciding to invest in Southern China Livestock.
[30] Mr. Madan’s evidence was:
We were taking certain risks, no doubt. But we were also aware that this company had a U.S. certified form of auditor who had looked at the financial statements and had given a clean audit. That reassured us that the financial statements are correct. … The main comfort was the clean audit opinion, even though in a far-off geography. The clean audit opinion from a Toronto-based company was [a] very significant factor in that comfort.
[31] Excalibur states that in deciding to participate in the private placement, in addition to relying on SLF’s Audit Report, it relied on SLF’s reputation and expertise as a licenced auditor, and its advertised experience in auditing Chinese companies.
[32] The Private Placement Memorandum indicated that after the reverse takeover, Southern China Livestock would seek registration of its shares with the United States Securities and Exchange Commission (“SEC”) for a public offering of its shares.
[33] The Private Placement Memorandum included the following statements about the nature of the investment and the associated risks [capitals in the original]:
THESE ARE SPECULATIVE SECURITIES WHICH INVOLVE A HIGH DEGREE OF RISK. ONLY THOSE INVESTORS WHO CAN BEAR THE LOSS OF THEIR ENTIRE INVESTMENT SHOULD INVEST IN THESE UNITS. SEE “RISK FACTORS”.
AN INVESTOR MUST RELY ON ITS OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE RISKS INVOLVED. … THERE IS NO MARKET FOR THE SECURITIES BEING OFFERED, AND THERE COULD BE NO ASSURANCE THAT ANY MARKET WILL DEVELOP. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISK OF AN INVESTMENT AND THE SECURITIES FOR AN INDEFINITE PERIOD OF TIME.
[Investors are] not to construe the contents of this Memorandum as legal or investment advice. Each prospective investor must consult with his own legal counsel, accountant, and financial advisor as to legal, tax, financial and related matters concerning the Company or an investment therein.
… [Investors] are urged to request from us any additional information that they may consider necessary to make an informed decision or to verify the information set forth in this Memorandum.
If less than $10 million is raised [through the Offering], the Company may not have sufficient funds to move forward with its expansion and acquisition strategy.
[34] The Private Placement Memorandum contained an 11-page section entitled “Risk Factors,” which stated, among other things, that: (a) Southern China Livestock may not be able to comply with the Securities Exchange Act’s Internal Control Reporting Requirements; (b) Southern China Livestock may not receive the auditor’s attestation that it maintained effective internal control over financial reporting, which would be required in 2011; and (c) Southern China Livestock’s revenue is dependent in large part on significant orders from a limited number of customers.
[35] On March 15, 2010, Excalibur signed a Subscription Agreement to invest in Southern China Livestock.
[36] The Subscription Agreement required an investor to represent that it was an “accredited investor;” i.e., Excalibur acknowledged that it had $5 million of assets.
[37] Here it may be noted that to be an accredited investor, individuals had to represent they had a net worth of at least $1 million or two years of $200,000 plus income.
[38] The Subscription Agreement required each investor to acknowledge that:
2.6 Investment Purpose. [The] investment is not a liquid investment.
2.10 Information. … the Subscriber and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company … that have been requested by the Subscriber or its advisors … [and that] the Subscriber and its advisors, if any, have been afforded the opportunity to ask questions of the Company.
2.11 Acknowledgement of Risk. The Subscriber agrees, acknowledges and understands that its investment in the Units involves a significant degree of risk, including, without limitation that (a) the Company is a development stage business with limited operating history and requires substantial funds in addition to the proceeds from the sale of the Units; (b) an investment in the Company is highly speculative and only subscribers who can afford the loss of their entire investment should consider investing in the Company and the Units; (c) the Subscriber may not be able to liquidate its investment; (d) transferability of the Securities (including the underlying Common Stock) is extremely limited; and (e) in the event of a disposition of the Securities (including the underlying Common Stock), the Subscriber can sustain the loss of its entire investment. The Subscriber agrees, acknowledges and understands that such risks are set forth in greater detail in the Memorandum, and further that Subscriber has carefully reviewed and considered the risk factors discussed in the “Risk Factors” section of the Memorandum.
2.11.2 Acknowledgements of Risk Associated with Investing in a PRC Entity. The [proposed investor] has been apprised that the Company conducts all of its business in the PRC. Accordingly, the Company is subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises….
2.13 Transfer or Resale. The [proposed investor] may have to bear the risk of holding the securities for an indefinite period of time ….
[39] On March 29, 2010, the reverse takeover was completed, and the investment offering closed. Two further closings were completed over the next 60 days. In total, $7,594,965 was raised in the private placement.
[40] To be more precise, the first closing raised $5,340,000 from 48 investors, including Excalibur, which invested $400,000. The closing book received by Excalibur included a copy of the signature page of the Subscription Agreement from every other participant in the first closing. In subsequent closings on April 30, 2010 and May 6, 2010, a further $2,254,965 was raised from nine additional investors for a total of 57 investors.
[41] Using information from the closing documents and the corporate filings, it appears that 57 accredited investors purchased units in Southern China Livestock. The residence of these investors is set out in the following chart:
Number of Investors (57)
Residence
10 — New York
9 — California
4 — Connecticut
4 — New Jersey
4 — Pennsylvania
3 — Florida
3 — Illinois
3 — Texas
2 — Nevada
2 — Ohio
2 — Other U.S. States
1 — British Columbia
1 — Cayman Islands
1 — Malaysia
1 — North Carolina
1 — Ontario
1 — Samoa
1 — Tennessee
1 — Utah
1 — United Kingdom
1 — Unknown
1 — Wisconsin
[42] The Breakdown of the amount invested by the investor is as set out in the following chart:
Number of Investors (57)
Amount Invested
19 — $1 to $49,000
12 — $50,000 to $99,000
8 — $100,000 to $199,000
7 — $200,000 to $399,000
3 — $400,000 and over
8 — [unclear]
[43] From the proceeds of the private placement, SLF was paid $45,000 for its services.
[44] On May 27, 2010, Southern China Livestock filed a registration statement (preliminary prospectus), Form S-1 with the SEC with the intention of proceeding with an initial public offering including the Units sold to Excalibur and the other investors.
[45] Included in the Form S-1 filing was the SLF Audit Report that had been included in the Private Placement Memorandum. Unlike the situation with the Private Placement Memorandum, SLF’s consent to use its opinion was included in the filing.
[46] On November 5, 2010, Excalibur purchased 50,000 additional Units from another investor who had participated in the First Closings, Gibralt Capital Corporation, for $550,000. Thus, Excalibur invested $950,000 in Southern China Livestock.
[47] On December 23, 2010, Southern China Livestock filed its annual 10-K Report under American securities legislation that included a Management’s Discussion and Analysis section. Management indicated that its cash transactions involved employees using their own bank accounts to deposit net transaction funds and to make purchases of supplies for the hog business.
[48] The Form 10-K disclosed that: (a) the sale of hogs were primarily cash sales, handled by farm employees; (b) the employees maintained corporate funds in bank accounts that were in their own names; (c) Southern China Livestock had little or no control over the activities of these employees; (d) disclosure controls were ineffective; and (e) internal controls over financial reporting were not effective, including deficiencies in internal accounting staff’s recording transactions.
[49] As noted above, Excalibur describes this disclosure of information as a “shocking discovery.” Excalibur says that the revelations contained in the Form 10-K cast doubt on the accuracy of private placement materials, and indicated to it for the first time that the Audit Report could not have fairly and fully represented the financial state of Southern China Livestock.
[50] Six months’ later, in June and July 2011, Southern China Livestock’s North American directors resigned.
[51] On August 15, 2011, Southern China Livestock withdrew its registration statement (preliminary prospectus), Form S-1 with the SEC, professedly because it had elected not to pursue the sale of its securities.
[52] Southern China Livestock went dark, and its shares and warrants are now worthless.
[53] SLF has never filed a formal withdrawal as auditors of Southern China Livestock, or advised through a filing with the SEC that its opinions can no longer be relied upon.
[54] Excalibur filed an affidavit sworn by Matthew Medlin, a Certified Public Accountant and Managing Director of Duff & Phelps LLC in Washington, DC. Mr. Medlin did not provide any opinion as to whether the disclosed internal control situation should have caused SLF to withhold or qualify its audit opinion.
[55] Rather, Mr. Medlin described the Generally Accepted Auditing Standards (“GAAS”) of the PCAOB that would have been applicable in auditing Southern China Livestock’s financial statements for 2008 and 2009 and the risks associated with an audit that could have had an impact on the audit procedures performed by SLF.
[56] Mr. Medlin deposed as to what he would have expected SLF to do to address those risks, and he indicated that he would be able to opine on whether SLF complied with GAAS when auditing Southern China Livestock’s consolidated financial statements from SLF’s audit file if given access to the audit file.
2. The Proposed Class Action
[57] On October 31, 2012, Excalibur commenced a proposed class action. It seeks damages of USD $7,594,965 on behalf of itself and the other investors for SLF’s alleged negligence and negligent misrepresentations.
[58] Excalibur proposes the following definition for Class Membership:
All persons or entities who purchased investment units (“Units”) of Expedite 4, Inc. between March 29, 2010 and December 23, 2010, and who continued to hold any of the shares or warrants comprising the Units as of December 23, 2010, other than Excluded Parties, where the Excluded Parties are:
the Defendant, including its partners, employees, successors and assigns;
the officers, directors, employees, agents, legal representatives, subsidiaries, affiliates, predecessors, successors and assigns of Expedite 4, Inc., Southern China Livestock International Inc., or Southern China Livestock Inc., and any entity in which any of the foregoing have or had any legal or de facto controlling interest; and
Rodman & Renshaw LLC and Newbridge Securities Corporation (together the “Placement Agents”), including their officers, directors, senior management employees, predecessors, successors and assigns (the “Class”).
[59] Excalibur has actually ascertained the identity of the 57 investors. The 48 proposed Class Members who participated in the First Closings were identified in the closing documents. The identities of the additional nine proposed Class Members were disclosed in public filings.
[60] Every member of the class is alleged to have received and relied upon the Clean Audit Report (the misrepresentation) and to have suffered a total loss of their investment as a result of the negligence and negligent misrepresentation of SLF.
[61] Claims for negligence and negligent misrepresentation require a duty of care. Excalibur’s pleaded allegation of a duty of care can be summarized as follows:
SLF held itself as capable of providing audit services to Chinese companies entering the U.S. capital markets. Southern China Livestock required an accredited auditor for this purpose, and it hired SLF to prepare an essential prerequisite Audit Report for inclusion in a Private Placement Memorandum. SLF knew that without an Auditor’s Report from a PCAOB-registered firm, neither the reverse takeover nor the financing could be completed. SLF knew that the Private Placement Memorandum would be distributed to an exclusive group of qualified investors, like Excalibur, who would rely on the Audit Report in making an investment decision. SLF prepared the Audit Report to be relied on and consented to its inclusion in the Private Placement Memorandum. SLF knew that potential investors would be harmed if the information contained in the Auditor’s Report was materially false, inaccurate or misleading. Therefore, SLF owed the investors a duty of care to exercise the care, skill and diligence of an auditor of public companies in planning and carrying out its audit and in preparing the Auditor’s Report in accordance with GAAS and the rules and standards of the PCAOB.
[62] A claim for negligent misrepresentation requires a misrepresentation. Excalibur’s allegations of misrepresentation are found in paragraphs 56 and 57 of the Statement of Claim, which state:
Given the absence of proper internal controls, Southern China's irregular operational structure and the volume of cash transactions, Southern China's business was highly susceptible to theft and fraud. As a result, Southern China's ability to carry on business in the ordinary course and to continue as a going concern was tenuous. The Auditor’s Report could not have fairly represented the true financial state of [Southern China Livestock].
In light of the true state of affairs regarding [Southern China Livestock’s] operations in 2008 and 2009, and as described in detail below, SLF could not have obtained the degree of comfort and verification required under GAAS and the PCAOB standards to complete an audit of [Southern China Livestock] without significant reservations and qualifications, if SLF could complete any audit at all.
[63] The pleaded allegation of misrepresentation can be summarized as follows:
In the Auditor’s Report, SLF stated that it conducted the audits in accordance with PCAOB standards and it gave an unqualified “clean” opinion about Southern China Livestock’s consolidated financial statements for the fiscal years ended September 30, 2008 and 2009. However, the Memorandum did not disclose Southern China Livestock’s true state of affairs, which was that Southern China Livestock had little financial control over the revenue and expenses of its all cash business. Given these circumstances, the Auditor’s Report could not have fairly represented the true financial state of the business.
[64] It is an element of the tort of negligence that the defendant’s breach of duty cause harm to the plaintiff. It is an element of the tort of negligent misrepresentation that the plaintiff suffers harm from having reasonably relied on the defendant’s false statement. Excalibur’s pleaded allegations of causation of harm and reasonable reliance causing harm for itself and for Class Members can be summarized as follows:
It was reasonable for prospective investors, including the Plaintiff and the Class Members, to rely on the Auditor’s Report in deciding to invest in Southern China Livestock because it was prepared by SLF specifically for the Financing and in the ordinary course of SLF's business of providing accounting and audit services to Chinese companies in accordance with GAAS and PCAOB standards. Excalibur and all the Class Members relied on the representation of a clean Audit Report in deciding to invest in Southern China Livestock to their detriment. Excalibur and the Class would never have invested in the Units absent the assurance of a clean Audit Report by SLF.
[65] A claim for negligence requires acts of negligence or breaches of the standard of care. Excalibur’s pleaded allegation of negligence can be summarized as follows:
SLF was negligent: (a) in permitting the Auditor’s Report to be included in the Private Placement Memorandum when it knew that the Class would rely upon SLF's reputation and expertise as auditors licenced by the PCAOB in deciding to invest in the Company and when it knew or ought to have known that it did not exercise the requisite care, skill and diligence of a reasonably competent auditor; (b) in failing to exercise the requisite care, skill and diligence of a reasonably competent auditor of a public company in carrying out its audit to ensure that the Auditor’s Report accurately presented Southern China Livestock’s financial condition and performance; (c) in failing to conduct its audits in accordance with GAAS and GAAP; (d) in failing to detect and to warn about significant weaknesses in [Southern China Livestock’s] governance and internal controls; (e) in failing to plan and perform an audit as part of its audit obligations, SLF was required to plan and perform its audit in accordance with the standards of the PCAOB and GAAS to obtain reasonable assurance as to whether [Southern China Livestock’s] consolidated financial statements were free from material misstatement.
[66] In its reply factum, Excalibur describes its complaint and the negligence of SLF as follows:
The Plaintiff’s complaint is that SLF was negligent in conducting the audits of [Southern China Livestock], as it could never have issued a clean Audit Report if it had done its job competently, and that the Audit Report, which said that the audits had been conducted in accordance with the standards of the PCAOB, and opined that “these consolidated financial statements … present fairly, in all material respects, the financial position of [Southern China Livestock] was materially false and misleading.
[67] Pausing here to foreshadow the discussion and analysis later, it will be my opinion that Excalibur has combined its claim for negligent misrepresentation with its claim for negligence by alleging that that SLF’s misrepresentation was speaking when it ought not to have spoken at all.
[68] In my opinion, by pleading that the absence of proper internal controls for a cash business meant that SLF’s Audit Report could not have fairly represented the true financial state of the business is to combine SLF’s alleged misrepresentation with SLF’s alleged negligence. As I will explain below, this combining of the torts creates analytical problems for the certification of Excalibur’s action. It does not, however, mean that tenable causes of action were not pleaded.
[69] Returning to the topic of Excalibur’s proposed class action, the proposed common issues for the class action are set out later in this Decision, and I will leave the discussion of the common issues and also the discussion about the factual basis for the preferable procedure and representative plaintiff criteria until later in this Decision.
[70] In the class action, SLF has delivered a Statement of Defence in which it denies liability.
[71] In its Statement of Defence, SLF states that it did not make any misrepresentation in its Audit Report. It denies that it made any representation negligently. It denies a duty of care to the investors. It denies and states that it is not aware of any false statements in the financial statements. It states that it took all necessary steps to obtain sufficient audit evidence in performing the audit and that the audit was planned, performed, and completed in compliance with the applicable industry standards, including those established by PCAOB.
[72] SLF denies that it caused the investors to lose their investment or that the losses had anything to do with what was stated in the Audit Report. It denies that any investor relied on the Audit Report and it pleads the Negligence Act, R.S.O. 1990, c. N.8 and states that if any investor lost its investment it was due to its own negligence.
[73] SLF pleads contributory negligence and states that if Excalibur or any investor lost its investment, they have only their own negligence to blame.
D. CONCLUSION
[225] For the above reasons, I dismiss the certification motion.
[226] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with SLF’s submissions within 30 days of the release of these Reasons for Decision followed by Excalibur’s submissions within a further 30 days.
Perell, J.
Released: July 8, 2014
COURT FILE NO.: CV-12-466694-00CP
DATE: 20140708
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
EXCALIBUR SPECIAL OPPORTUNITIES LP
Plaintiff
– and –
SCHWARTZ LEVITSKY FELDMAN LLP
Defendant
REASONS FOR DECISION
PERELL J.
Released: July 8, 2014