COURT FILE NO.: CV-16-544173

DATE: 2019/04/10

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Vince Cappelli

Plaintiff

– and –

NOBILIS HEALTH CORP., HARRY JOSEPH FLEMING, CHRISTOPHER H. LLOYD, ANDREW CHEN, KENNETH J. KLEIN and CALVETTI FERGUSON, P.C.

Defendants

Andrew Morganti, Eli Karp and Hadi Davarinia for the Plaintiff

Alan Lenczner, Nilou Nezhat and Brendan Morrison for the Defendant Nobilis Health Corp.

Proceeding pursuant to the Class Proceedings Act, 1992

HEARD: March 18, 2019

PERELL, J.

REASONS FOR DECISION

Shell game, thimblerig, a game of sleight of hand, in which three containers or nutshells are quickly moved and the contestant [the judge] must spot the one with a pea or other object underneath.

A. Introduction

[1] Pursuant to the Class Proceedings Act, 1992[^1] and s. 138.3 of the Ontario Securities Act[^2] and the comparable statutes across Canada,[^3] Vince Cappelli sues Nobilis Health Corp., Harry Joseph Fleming, Christopher H. Lloyd, Andrew Chen, Kenneth J. Klein, and Calvetti Ferguson, P.C. for misrepresentation in the secondary market for corporate securities.

[2] The action has been settled as against all of the defendants - with the exception of Nobilis.

[3] With leave of the court, which leave I shall grant, Mr. Cappelli has decided to abandon his common law claims against Nobilis, and he now seeks certification of a class action and leave to pursue his statutory claim for secondary market misrepresentations as against Nobilis.

[4] For the reasons that follow, I decline to grant leave and I dismiss the certification motion.

B. Overview

[5] Pursuant to s. 138.8 (1) of the Ontario Securities Act, Mr. Cappelli seeks leave to bring a statutory cause of action under s. 138.3 (1) of the Act against Nobilis for misrepresentation in the secondary market.

[6] For a s. 138.3 (1) claim, the fundamental constituent elements are twofold. First, there must be material misrepresentation(s) in a core corporate document, and Mr. Cappelli submits that there are material misrepresentations in Nobilis’ core documents of: (1) March 23, 2015; (2) May 14, 2015; and August 14, 2015, which are collectively identified as the “impugned documents”.

[7] Second, there must be a corrective disclosure connected to the alleged misrepresentations in the impugned documents, and Mr. Cappelli pleads two corrective disclosures to define two classes and two class periods. Analytically, he has pleaded two discrete misrepresentation claims based on the impugned documents.

[8] The first corrective disclosure is an article, an internet blog posting, by SeekingAlpha.com on October 9, 2015. The Seeking Alpha article discloses four or five misrepresentations allegedly made by Nobilis that I shall label Misrepresentation Set #1. The Seeking Alpha article defines a class period for Class Period I from March 23, 2015 to October 8, 2015.

[9] For Class Period II, the second corrective disclosure is Nobilis’ press release dated January 5, 2016. The January 5, 2015 press release announced that Nobilis’ consolidated financial statements for 2014 and Q1 and Q2 2015 required restatement and should no longer be relied upon. The January 5, 2016 press release restated five accounting matters and also indicated that Nobilis’ internal controls had not been effective. Thus, the January 5, 2016 press release discloses six misrepresentations that I shall label Misrepresentation Set #2. This second corrective disclosure, which Mr. Cappelli submits corroborates the first corrective disclosure, defines Class Period II as the period from October 9, 2015 to January 5, 2016.

[10] Mr. Cappelli connects and equates Misrepresentation Sets #1 and #2 with the restatement of Nobilis’ financial statements that occurred on January 12, 2016. It is complicated and confusing, but it shall be important to note that unlike the Seeking Alpha article and the January 5, 2016 press release, the financial statements of January 12, 2016 are not expressly pleaded to be a corrective disclosure. Nevertheless, the financial statements of January 12, 2016 disclosed the six misrepresentations of Misrepresentation Set #2, and they revealed four significant and additional untrue statements in the impugned documents about accounting matters. I shall label these four additional alleged misrepresentations revealed by the financial statements of January 12, 2016 as Misrepresentation Set #3.

[11] Under s.138.8 (1) of the Act, for leave to be granted, the court must be satisfied that: (a) Mr. Cappelli’s action is brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of Mr. Cappelli. It is conceded that Mr. Cappelli’s action is brought in good faith, but Nobilis submits that there is no reasonable possibility that Mr. Cappelli will succeed at trial.

[12] Nobilis submits that Mr. Cappelli’s action has no reasonable possibility of success for four reasons.

a. First, Nobilis submits that as the action has been pleaded (Misrepresentation Set #2), there are no misrepresentations that have a reasonable possibility of being successfully proven to be material (the no material misrepresentations argument).

b. Second, Nobilis submits that the two pleaded corrective disclosures do not qualify as corrective disclosures both as a matter of pleading and as a matter of evidence because the alleged corrective disclosures are not responsive to the pleaded alleged material misrepresentations (the no corrective disclosures argument).

c. Third, Nobilis relies on the expert’s report defence under s. 138.4 (11) of the Ontario Securities. Thus, Nobilis submits that if there were material misrepresentations, these misrepresentations can be attributed to Calvetti Ferguson, P.C., which audited the financial statements. Nobilis submits that the liability of its auditor exculpates Nobilis from liability (the expert’s report argument).

d. Fourth, Nobilis relies on the causation or attribution defence under s. 138.5 (3) of the Ontario Securities Act. It submits that the evidence establishes that the alleged material misrepresentations (Misrepresentation Set #2) did not cause any damage to the investors in Nobilis’ shares (the no causation argument).

[13] Nobilis responded substantively to the case that Mr. Cappelli actually pleaded (Misrepresentation Set #2), but, Nobilis responded procedurally to the case that Mr. Cappelli presented in his factum (Misrepresentation Set #3), and Nobilis did not substantively rebut the particularized misrepresentation allegations that appeared in the factum (Misrepresentation Set #3).

[14] In turn, by and large, Mr. Cappelli did not attempt to rebut what Nobilis’ experts said about the pleaded misrepresentations (Misrepresentation Set #2) not being material. It is informative to note that there were no cross-examinations of either party’s witnesses. Rather, Mr. Cappelli relied on the apparent materiality of Misrepresentation Set #3 in their arguments to rebut Nobilis several defences to the leave motion.

[15] Except for its arguments about causation, by and large, I agree with Nobilis’ arguments, and I, therefore, decline to grant leave under the Ontario Securities Act. It follows that without a permitted statutory cause of action, that Mr. Cappelli’s action cannot be certified under the Class Proceedings Act, 1992. So, I dismiss the certification motion.

[16] By way of a broad-brush summary of why Nobilis’ arguments succeed and why I am refusing to grant leave, there are two major reasons that Mr. Cappelli cannot connect the dots to establish a statutory misrepresentation cause of action.

[17] As for the first major reason, while Mr. Cappelli might have proven that Misrepresentation Set #3 contains material misrepresentations with associated corrective disclosures for Classes I and II, those misrepresentations, however, are not aligned with his pleadings, which are based on Misrepresentation Set #2. Given the precise and particular nature of the statutory cause of action under the Ontario Securities Act, I cannot grant leave to proceed with a statutory misrepresentation claim that has not been pleaded.

[18] As for the second major reason, for Misrepresentation Set #2 (the misrepresentations that have actually been pleaded by Mr. Cappelli), Nobilis has shown that these misrepresentations are not material misrepresentations.

[19] These conclusions make it unnecessary to consider whether Nobilis’ expert’s report argument and its causation argument provide additional reasons to dismiss the motion for leave, but since these matters were the subject of some considerable argument, my view is that the expert’s report argument but not the causation argument is available for Misrepresentation Set #2 but that neither argument would likely have been available to prevent leave from being granted with respect to Misrepresentation Set #3 had Mr. Cappelli’s statutory cause of action been based on those misrepresentations.

[20] One may gather from this overview that the leave motion was a version of a shell game of where’s the misrepresentation. Practically speaking, Mr. Cappelli’s motion for leave pursuant to the Ontario Securities Act was based on one set of facts that the parties argued in two parallel analytical universes where the arguments were made in one legal and factual universe, but the counterarguments were made in the other legal and factual universe.

[21] Ultimately, Mr. Cappelli’s efforts to connect the constituent elements of a statutory misrepresentation claim failed, and while I am sympathetic to the plight of those who invested in Nobilis’ stock, which has undoubtedly plummeted in value after the truth of its affairs and financial position was revealed, the fundamental problem here for Mr. Cappelli is that while the Ontario Securities Act provides a counterattack weapon against corporate misrepresentations that have harmed investors in the secondary market, the counterattack weapon is a timely Exocet missile of a statutory cause of action, not a cluster bomb of unconnected misrepresentations and unconnected corrective disclosures.

C. Mr. Cappelli’s Investment in Nobilis Shares

[22] Mr. Cappelli resides in Vaughan, Ontario. He is a Certified Public Accountant and Certified General Account.

[23] Mr. Cappelli bought 7,000 Nobilis shares between October 5 and October 9, 2015, and he sold all his shares by October 13, 2015. Thus, during Class Period I, Mr. Cappelli purchased and held 3,000 shares, which were later sold at a loss. And during Class Period II, Mr. Cappelli purchased and sold 4,000 Nobilis shares suffering a loss on these shares as well.

[24] Based on these share transactions, technically speaking, Mr. Cappelli is a member of Class I but not a member of Class II. He is not a member of Class II because he was not holding but had already sold his shares when the class period for Class II closed. From this circumstance, Nobilis argues that Mr. Cappelli cannot be the representative plaintiff in this proposed class proceeding.

[25] I see no reason why Mr. Cappelli cannot be the representative plaintiff for Class I, and given my conclusion that this action cannot be certified, I need not decide whether he qualifies to be the representative plaintiff for Class II. I merely mention that if he did not qualify to represent Class II, then this technical problem would have been solved by appointing a replacement representative plaintiff for Class II.

D. The Class Action: Procedural History

[26] As the narrative below will reveal, in a press release of January 5, 2016, there were disclosures about the unreliability of Nobilis’ financial statements, and Mr. Cappelli, who had sold his shares in October 2015 at a loss, may have felt that the disclosures in the January 5, 2016 press release explained why his own former investment in Nobilis’ shares had been a financial failure.

[27] In January 2016, Mr. Cappelli retained counsel to prosecute a class action. The proposed class Counsel is now a consortium of Morganti & Co. P.C. and Strosberg Sasso Sutts LLP.

[28] On January 8, 2016, Mr. Cappelli issued a Statement of Claim in a proposed class action against Nobilis Health Corp., Harry Joseph Fleming, Christopher H. Lloyd, Andrew Chen, Kenneth J. Klein, and Calvetti Ferguson, P.C. Mr. Fleming was Nobilis’ President. Mr. Lloyd was Nobilis’ CEO. Mr. Chen was Nobilis’ CFO and then its Executive Vice President of Finance. Mr. Klein was Nobilis’ CFO after July 9, 2015.

[29] On January 12, 2016, there were further disclosures about the unreliability of Nobilis’ financial statements when it released its financial statements. This disclosure precipitated a further dramatic decline in the value of Nobilis’ shares, which would not have affected Mr. Cappelli, since he had already crystallized his personal loss.

[30] Mr. Cappelli’s Statement of Claim was amended on July 22, 2016 and again on December 6, 2016. There was a subsequent amendment, but for the purposes of the leave motion, it was withdrawn, and the leave and certification motion was argued on the basis of the Fresh as Amended Statement of Claim of December 6, 2016.

[31] On January 5, 2017, Mr. Cappelli served and filed a Notice of Motion seeking leave to assert a statutory cause of action under s. 138.3 of the Ontario Securities Act. The motion pertained to documents and statements that Nobilis had released between March 23, 2015 and January 5, 2016, which is the day that Nobilis issued its press release referred to above.

[32] In this recital of the procedural history and later in the description of the evidentiary and factual background to the leave motion, it is necessary to keep in mind that the press release of January 5, 2016 identifies the alleged misrepresentations that I have labelled Misrepresentation Set #2. It shall be very important to differentiate the misrepresentations identified in the press release from the four additional misrepresentations identified by Nobilis on January 12, 2016, when it released financial statements with restated figures. As noted above, I have labelled the additional four misrepresentations of the January 12, 2016 financial statements as Misrepresentation Set #3.

[33] On June 14, 2018, I granted a consent or unopposed motion: (a) dismissing that action as against Messrs. Fleming, Lloyd, Chen, and Klein without costs; (b) certifying the action for settlement purposes as against Calvetti Ferguson, P.C.; (c) approving the settlement with Calvetti Ferguson, P.C.; and (d) approving Class Counsel’s request for payment of legal fees and disbursements from the settlement funds.[^4] Calvetti Ferguson, P.C. settled the claims against it for $2.0 million (USD).

[34] With the action having been resolved against the co-defendants, what was left was a proposed class action just against Nobilis for common law negligence and for a statutory misrepresentation claim pursuant to the securities law statutes across the country. As noted above, Mr. Cappelli has abandoned his common law misrepresentation claims and only pursues a statutory secondary market misrepresentation cause of action against Nobilis for which leave is required under the Ontario Securities Act.

[35] In his proposed class action, Mr. Cappelli proposes the following common issues:

a. Did Nobilis or any of the former defendants misrepresent the accuracy of the Nobilis financial statements and its compliance with U.S. Generally Accepted Accounting Principles (“GAAP”)? If so, who made the misrepresentation, when, where and how?

b. Did Nobilis or any of the former defendants misrepresent the adequacy of Nobilis’ internal controls over financial reporting and/or its disclosure controls and procedures, and if so when, where and how?

c. Did the misrepresentation in (a) and/or (b) constitute a misrepresentation within the meaning of the OSA and, if necessary, the analogous provisions of the equivalent Securities Acts of the other provinces?

d. Were the misrepresentations in (a) and (b) above publicly corrected? If so, when, how and by whom?

e. Is Nobilis vicariously liable, or otherwise responsible, for the acts of the former Individual Defendants and its other officers, directors and employees during the Class Period?

[36] After Mr. Cappelli served and filed his Notice of Motion for leave along with its supporting materials, Nobilis delivered responding material and Mr. Cappelli delivered rebuttal reply material.

[37] There were no cross-examinations.

[38] After some procedural wrangling about whether Mr. Cappelli could use a Second Fresh as Amended Statement of Claim and reopen the evidentiary record, the leave motion was argued on March 18, 2019 based on the Fresh as Amended Statement of Claim and based on the existing evidentiary record.

E. The Proposed Change to the Class Definition

[39] Mr. Cappelli proposes to define two classes for Class Period I and for Class Period II. These definitions, which are set out below, differ from the definitions in Mr. Cappelli’s Amended Fresh as Amended Statement of Claim, also set out below. The original definitions, in effect, defined class members as purchasers (Canadians or foreigners) who purchased shares on the Toronto Stock Exchange. The revised definitions adds Class Members who are Canadians who purchased on the New York Stock Exchange (“NYSE”).

[40] The revised definitions for Class I and Class II state:

Class I

Other than Excluded Persons (as defined in the Claim), all persons and entities who acquired Nobilis’ common shares listed on the Toronto Stock Exchange, and all Canadians who purchased Nobilis’ common shares on the NYSE on or after March 23, 2015 and who held some or all such securities until after October 8, 2015.

Class II

Other than Excluded Persons (as defined in the Claim), all persons and entities who acquired Nobilis’ common shares listed on the TSX, and all Canadians who purchased Nobilis’ common shares on the NYSE on or after October 9, 2015 and who held some or all such securities until at least January 5, 2016.

[41] The definitions in the original Statement of Claim and in the Amended Fresh as Amended Statement of Claim for Class I and Class II were:

Class I

All persons, other than Excluded Persons as defined in the Amended Fresh as Amended Statement of Claim, who acquired Nobilis’ securities from and including March 23, 2015, other than on the NYSE MKT and who held some or all of those securities at the close of trading on October 8, 2015;

Class II

All persons, other than Excluded Persons as defined in the Amended Fresh as Amended Statement of Claim, who acquired Nobilis’ securities from and including October 9, 2015, other than on the NYSE MKT and who held some or all of those securities at the close of trading on January 5, 2016.

[42] Nobilis argues that because of the intervention of limitation periods, Mr. Cappelli cannot revise the class definitions at this juncture. I disagree, and for the purposes of the leave motion and for the certification motion, I shall use the revised class definitions.

[43] Mr. Cappelli concedes that the proposed revised Class definitions would add persons to the proposed Classes I and II more than three years after the alleged misrepresentations were made. Here, it may be noted that these additions to the complement of Mr. Cappelli’s proposed Ontario class action are the Canadian cohort of a proposed class action in the United States brought on behalf of those who had purchased on the NYSE and who were originally expressly excluded from Mr. Cappelli’s originally proposed class definition.

[44] Mr. Cappelli submits that by filing a Notice of Motion seeking leave under 138.3 (14), he suspended the running of the limitation period for Canadian purchasers on the NYSE alleging that there were misrepresentations in the impugned documents. Nobilis, however, argues that it is now too late for Mr. Cappelli to be representative plaintiff for the Canadians who have already had their day in court in the United States. (The day was a disappointing one for the purchasers on the NYSE, given that the United States District Courts twice dismissed class actions based on the facts of the immediate case.)

[45] My own analysis is that the limitation period with respect to Mr. Cappelli’s personal statutory cause of action with respect to Misrepresentation Set #2 stopped running when Mr. Cappelli delivered his Notice of Motion seeking leave. The issue then becomes the extent to which the limitation period stopped running against the defined and the potential class members seeking to assert a statutory misrepresentation claim based on Misrepresentation Set #2.

[46] Nobilis, in effect, concedes that the limitation period would stop running against the class members who were originally defined as class members, but it argues that the limitation period would continue to run against potential class members who had been expressly excluded in Mr. Cappelli’s proposed definition.

[47] The limitation period certainly would stop running for the class of persons for whom Mr. Cappelli identified and chose to represent. Does the limitation period also stop running for potential class members?

[48] Given that Nobilis is a Canadian corporation and given that Nobilis’ shares were sold on a domestic and on a foreign stock exchange, originally Mr. Cappelli had three ways that he could have defined the class suing the Canadian corporation; namely: (1) a Canadian (national) and global class of purchasers on the TSX; (2) a Canadian (national) and global class of purchasers on the TSX plus a Canadian (national class) of purchasers on the NYSE; or (3) a global Class action of purchasers on the TSX or the NYSE.

[49] At the time at which Mr. Cappelli commenced his action in January 2016 and at the time at which he delivered his Notice of Motion for leave in January 2017, he chose option #1. In 2019, he now wishes to pick option #2, an option which he could have chosen in 2017 but did not. As already mentioned, Nobilis, however, submits that it is too late for Mr. Cappelli to redefine the class definition.

[50] There is, practically speaking, no prejudice to Nobilis by Mr. Cappelli adding class members who were always potential class members. From the moment that the proposed class action was commenced, Nobilis would have known or it ought to have known that in addition to option #1, that options #2 and #3 were possibilities for defining the class members.

[51] Nobilis would have also known that that one of the issues for the certification motion would be whether the class definition was overinclusive or underinclusive. (Class definitions are frequently changed during certification motions, sometimes at the request of a defendant.) In these circumstances, I agree with Mr. Cappelli that it is not too late to add Canadians who purchased the shares of a Canadian corporation that were sold on a foreign stock exchange. The situation would be different if the cohort of Canadian purchasers on the NYSE were advancing a different claim than the originally defined class members, but they are not.

[52] Option #3 and a genuinely global class action might raise forum conveniens and other conflict of law concerns, but there are no such concerns with option #2.[^5] The Canadian purchasers on the NYSE have never had their day in court with respect to their rights under Canadian securities law, which is different than American law.

[53] For the above reasons, I shall use the revised class definitions for Class I and for Class II for the purposes of this leave motion and for the certification motion.

[54] And now that Nobilis knows that the added class members will be included in an action that is not going to be certified, it should appreciate that there is no prejudice whatsoever to Nobilis in having them added.

F. Evidentiary Background

[55] Mr. Cappelli supported his motion for certification and for leave to bring the statutory claim with the following evidence:

• Vince Cappelli, the proposed Representative Plaintiff swore an affidavit dated January 31, 2017. He was not cross-examined.

• Lawrence Kryzanowski swore an affidavit dated January 31, 2017. Mr. Kryzanowki is a financial economist who is the professor of finance and senior research chair in finance at the John Molson School of Business at Concordia University. He received undergraduate degrees in economics and mathematics from the University of Calgary and a Ph.D. in business administration (finance) from the University of British Columbia. He was not cross-examined.

• Andrew Mintzer swore three affidavits dated May 18, 2016, October 15, 2018, and January 3, 2019. Mr. Mintzer of Santa Monica, California is a Certified Public Accountant (“CPA”) in the U.S. and a Chartered Professional Accountant in Canada. His accounting firm is Hemming Morse LLP and he was an auditor with Ernst & Young LLP. Mr. Mintzer is a member of the American Institute of Certified Public Accountants, where he has held significant positions with respect to auditing standards. He is also a certified fraud examiner. He was not cross-examined.

• Sharon Strosberg swore an affidavit dated February 2, 2017. Ms. Strosberg is a partner at Sutts, Strosberg LLP, one of the counsel for Mr. Cappelli. She was not cross-examined.

[56] Nobilis resisted Mr. Cappelli’s motion with the following evidence:

• Kevin Chesser swore an affidavit dated August 3, 2017. Mr. Chesser, of Cypress, Harris County, Texas is a shareholder of Briggs & Veselka, Co., an accounting and auditing firm. He has a BBA in accounting from Lamar University of Beaumont, Texas. He is a Certified Public Accountant. He was not cross-examined.

• Bradley A. Heys swore an affidavit dated July 27, 2017. Mr. Hays of Toronto, Ontario is an economist, a Certified Financial Analyst, and a Certified Fraud Examiner, and he is the director of NERA Economic Consulting. He has an MA in Economics from Queen's University, a Bachelor of Commerce from the University of Guelph, and a JD from the University of Toronto, where he also taught a graduate level economics course in Economic Analysis of Law for ten years. He was not cross-examined.

• Anthony M. Lendez swore an affidavit dated August 3, 2017. Mr. Lendez is a partner of BDO USA, LLP and the leader of its financial reporting disputes & monitorships practice. He is a Certified Public Accountant, a Certified Fraud Examiner, and Certified in Financial Forensics. He was not cross-examined.

G. Facts

1. 2007-2014

[57] Nobilis is a Canadian corporation incorporated pursuant to British Columbia’s Business Corporations Act.[^6] Nobilis maintains its corporate headquarters in Houston, Texas. It was incorporated in 2007 under the name Northstar Healthcare Inc., and it changed its name to Nobilis in December 2014.

[58] Nobilis’ business is the ownership and operation of ambulatory surgical centres and surgical hospitals across a variety of specialities including orthopaedic surgery, podiatric surgery, ENT (ear. nose, throat) surgery, pain management, gastro-intestinal, gynecology and general surgery. to 2015. By January 2016, Nobilis owned five ambulatory surgical centres, four surgical hospitals, and it partnered with 33 medical facilities.

[59] From 2011 until the summer of 2015, Calvetti Ferguson, P.C. a Houston-based accounting firm was Nobilis’ auditor. It was paid in excess of $500,000 (USD) annually to audit the financial statements and to provide its audit opinion.

[60] From 2007, Nobilis’ securities were listed on and traded on the Toronto Stock Exchange (“TSX”) under ticker symbol “NHC,” and from 2015, it shares were listed on the New York Stock Exchange for small-cap companies (“NYSE MKT”) under ticker symbol “HLTH”.

[61] Nobilis is a reporting issuer in all provinces and territories of Canada and a “responsible issuer” as defined in s. 138.1 of the Ontario Securities Act and the provisions in the comparable provincial securities statutes across Canada.

[62] It shall be significant to note that when Nobilis gained a listing on the NYSE MKT, it was required on a go-forward basis to file its audited statements under U.S. GAAP and to refile statements for 2013 and 2014 in accordance to U.S. GAAP. Up until December 2014, Nobilis prepared its annual financial statements in accordance with the Canadian standard, i.e., International Financial Reporting Standards (“IFRS”.

[63] Nobilis is a company that grew rapidly by acquisition, particularly in the period from 2013 to 2015. For example, in January 2014, Nobilis acquired an ownership interest in two imaging centres and one urgent care clinic in Houston. For another example, in September 29, 2014, Nobilis closed an agreement with First Surgical to establish a limited liability company for the purposes of operating a hospital and surgical centre to be managed by Nobilis. The hospital is owned 51% by Nobilis and 49% by First Surgical. For this project, Nobilis raised $7.5 million by a private placement of shares.

[64] For yet another example, on December 1, 2014, Nobilis acquired Athas Health, LLC for approximately $31.2 million to expand its marketing services. Upon closing, Nobilis paid $3 million in cash, $12 million by a promissory note, and it issued 6.7 million common shares that were subject to a lock up of up to two years and 4.7 million common shares that were to be issued over two years.

2. The March 23, 2015 Core Documents

[65] On March 23, 2015, Nobilis released its: Annual Information Form (“AIF”), audited annual financial statements, Management Discussion and Analysis (“MD&A”) and management certifications for year 2014. These documents represented that:

a. Total liabilities for the 2013 year were $6.94 million.

b. Total liabilities for the 2014 year were $42.28 million.

c. Shareholders’ equity as at December 31, 2013 was $15.70 million.

d. Shareholders’ equity as at December 31, 2014 was $65.3 million.

e. Net income for the 2013 year was $6.67 million.

f. Net income for the 2014 year was $20.25 million.

g. Net income per fully dilute common shares for the 2013 year was $0.03.

h. Net income per fully diluted common shares for the 2014 year was $0.15.

i. The company’s Disclosure Controls and Procedures (“DC&P”) were operating effectively.

j. The company’s Internal Control over Financial Reporting (“ICFR”) were operating effectively, and,

k. The Year 2014 Filings did not contain any untrue statements or omissions of material fact, and fairly presented in all material respects the financial condition and financial performance of the company.

[66] Pursuant to U.S. GAAP, the 2014 financial statements were audited by Calvetti Ferguson, P.C., which issued a clean audit report with no qualifications.

[67] Mr. Cappelli submits that the March 23, 2015 core documents contained material misrepresentations. These documents are impugned documents.

[68] In April 2015, Nobilis purchased a 54.7% equity interest in Victory Medical Centre Houston, L.P., a Texas limited partnership (Herman Drive Surgical Hospital, LP) and Plano Surgical Hospital.

[69] On May 14, 2015, Nobilis released its interim financial statements, MD&A, and management certifications for Q1 2015. These documents represented that:

a. The company’s total liabilities for Q1 2015 was $34.71 million.

b. Shareholders’ equity as at March 31, 2015 was $71.80 million.

c. Net income for Q1 2015 was $3.28 million.

d. Net income per fully diluted common shares for Q1 2015 was ($0.02).

e. The company’s DC&P as of March 31, 2015, were effective.

f. There were no changes in the company’s ICFR that occurred in the three months ended March 31, 2015 that had materially affected, or were reasonably likely to materially affect the company’s ICFR, and,

g. The Q1 2015 Filings did not contain any untrue statements or omissions of material fact, and fairly presented in all material respects the financial condition and financial performance of the company.

[70] Pursuant to U.S. GAAP, the May 2015 financial statements were audited by Calvetti Ferguson, P.C., which issued a clean audit report with no qualifications.

[71] Mr. Cappelli submits that the May 14, 2015 core documents contained material misrepresentations. These documents are impugned documents.

[72] In July 2015, Nobilis purchased Victory Medical Centre Plano, L.P., a Texas limited partnership, and Scottsdale Liberty Hospital.

3. The August 2015 Core Documents

[73] On August 14, 2015, Nobilis released its interim financial statements, MD&A, and management certifications for Q2 2015. The documents contained the following representations:

a. The company’s total liabilities for Q2 2015 was $53.20 million.

b. Shareholders’ equity as at June 30, 2015 was $102.35 million.

c. Net income for Q2 2015 was $2.15 million.

d. Net income per fully diluted common shares for Q2 2015 was ($0.02).

e. The company’s DC&P as of June 30, 2015, were effective.

f. There were no changes in the company’s ICFR that occurred in the three months ended June 30, 2015 that had materially affected, or were reasonably likely to materially affect the company’s ICFR, and

g. The Q2 2015 filings did not contain any untrue statements or omissions of material fact, and fairly presented in all material respects the financial condition and financial performance of the company.

[74] Pursuant to U.S. GAAP, the August 14, 2015 financial statements were audited by Calvetti Ferguson, P.C., which, once again, issued a clean audit report with no qualifications.

[75] Mr. Cappelli submits that the August 14, 2015 core documents contained material misrepresentations. These documents are impugned documents.

[76] After the release of its 2015, 2nd quarter audited financial statements, Nobilis terminated the engagement of Calvetti Ferguson, P.C., and it engaged Crowe Horwath, a larger and national accounting firm to provide auditing services.

4. 2015 and The Post of an Anonymous Internet Blogger

[77] On October 9, 2015, an anonymous Internet Blogger, “Seeking Alpha” published a fourteen-page stock analysis by an anonymous author, “The Emperor Has No Clothes.” The blog post was highly critical of Nobilis. The analysis was entitled “Nobilis: About to Fall from Nobility, Part l, 65%+ Downside;” it stated:

Summary

Surgical center roll up with a management team having experience with prior roll ups losing 90%+ of shareholder value; defunct roll up and Nobilis have the same chairman, 3 CFOs, VP IR, GC.

Insiders have cashed out more than $70 million in the year-to-date period through a combination of share sales and compensation (-14% of current market cap).

Accounting red flags: 4 CFO changes in a handful of years, along with recent auditor resignations; potentially overstated revenues; newly acquired acquisitions with Accounts Receivable issues. Questionable marketing, with paid studies touting inappropriate success rates for its medical procedures.

The company is significantly overvalued, and appears to be guiding for unachievable targets; 65%+ downside in current stock price.

Nobilis: A Brief Overview

Nobilis (HLTH, TSX:NHC) (formerly known as Northstar Healthcare) is a roll up of ambulatory surgical centers and medical services companies. The company owns surgery centers in Texas and Arizona, and provides marketing and management services for its own as well as third-party facilities. Nobilis has acquired various surgery centers, where it uses its marketing engine to refer procedures to doctors who perform surgeries at these facilities. The plan is for this marketing engine to drive growth at owned and acquired facilities. One of Nobilis' key acquisitions included the rights to AccuraScope, which is a spine surgery that offers patients a very short recovery time versus traditional procedures.

"The Emperor Has No Clothes" has a solid track record, and Nobilis' stock is likely to drop in a similar style.

Fear the Roll Up: Roll Ups Rarely End Well, and Nobilis' Version is a Disaster Waiting to Happen

Roll ups have a recurring pattern of being bad stock market investments. The strategy sounds appealing to investors as an acquiring entity goes out picking up businesses and putting them together with the promise of significant synergies and cost reductions. Investment banks and their analysts love roll ups as well, as the constant stream of acquisitions provide continuing opportunities for transaction advisory and financings related to paying for them, both of which all add up to rich fees.

For investors, roll ups are not nearly as attractive. Acquisitions give the impression of growth, even if the actual businesses are not growing, or even in decline. Management can continue to pay themselves handsome wages as top line expansion continues to reinforce the market excitement about the company's underlying "growth" story. Even the traditional earnings measures of the most conservative value investors can be distorted by all the opportunities in merger accounting to shift expenses and pad post-acquisition results. Synergy realizations are rare, and are more often than not unlikely to be realized.

A Team with Well-Catalogued Experiences of Failure

Management teams of public companies often give comfort to investors in their stocks by listing a history of successes at prior companies and with experience in the underlying industry. As a result, stockholders can hang their hats on the likelihood of success based on management's skills and history of success. Nobilis' management does not follow this pattern, as it has no successes, as far as I can see, that resulted in any creation of shareholder value.

One would expect to see a recurring pattern in the backgrounds of a management team for a medical company to have lots of like experiences in the medical industry. But Nobilis has a different pattern. Instead, we see a common background in a company called Acro Energy Technologies.

Current Nobilis chairman of the Board, Harry Fleming, was Acro Energy's founder and chairman. […]

The tidal wave did not work out like Harry expected, as we see that in February 2013, Acro Energy filed for Chapter 7 bankruptcy. […]

Déja, Vu All Over Again... But Only Worse

In the case of Nobilis, the company has guided to having picked up undervalued and bankrupt assets. But with this management team and these assets, this story is likely to end very badly. However, the reality is that these assets were undervalued and bankrupt for a reason. If the underlying acquisitions are garbage, accumulating various acquisitions just yields a larger pile of garbage.

Out of the above noted acquisitions, Athas is the largest, and will be well documented throughout the rest of this report. The Victory Plano & Healthcare acquisitions come from a bankruptcy on the back of inability to collect accounts receivable, and Nobilis seems just as unlikely to change this reality. The third largest acquisition, First Nobilis, was formerly public and fell over 80% due to lawsuits against the company.

Follow in the Same Failed Footsteps

We have already seen the striking overlap of management between Nobilis and Acro. But the similarities go even further. Just like Acro, Nobilis is based in Houston, Texas. And just like Acro, it listed on the Canadian exchange, despite having no business operations in Canada. And just like Acro, Nobilis chose Calvettii Ferguson & Wagner, a small accounting firm with limited public company experience, to be its auditor. But the one minor difference is that unlike Acro, Nobilis jumped on the scene with a bang.

Who is paying for this?

One part of the excitement surrounding Nobilis' stock relates to growing the mix of in-network surgeries, but this is odd, given insurance already appears to be skeptical of the surgery. Additionally, one of its recent acquisitions, Victory, was shut down because of shift to in-network and the resulting inability to collect on accounts receivable that it was owed by insurers. On June 12, 2015, the Victory CEO said, "'Unfortunately, as out-of-network providers, we came under attack by large insurance carriers. Even though we were able to execute in-network agreements with three large insurers, the extreme slowness and lack of payment from the carriers constrained liquidity significantly. We have responded by reducing expenses and changing our facilities to provide fewer services and kept our emergency rooms open.

A Big Valuation and a Big Supply of Shares to Sell

Current valuation: Even with the most bullish of expectations, Nobilis is still overvalued, despite the retreat of its stock price in the last few months. If the company achieves the very debatable guidance that it has laid out, it will still be valued at 12x 2015E EBITDA. The following table illustrates how significant Nobilis' valuation is. There is no way a glorified marketing engine deserves any of these multiples.

Target valuation: Based on the fundamental business issues that I have described, along with overly optimistic guidance with low likelihood of success, it is my view that the stock could trade down to $1.85/share, which would represent a generous 12x 2015E EBITDA multiple, based on Q2-2015 run-rate EBITDA levels ((12x multiple x $13.1M EBITDA less $14M debt) / 77.2M shares). My target price, thus, implies a 65%+ downside in the current stock price.

Are Nobilis' Financials Any More Reliable Than the Company's Surgical Procedure?

Any roll up with multiple mergers is going to lead to some complicated accounting. And Nobilis takes this even further with many subsidiaries and partial ownership of entities. Appendix A shows Nobilis' complicated organization, with 31 different entities and multiple ownership percentages. All this for a company that brought in only $49 million in revenue last quarter, for a shockingly low revenue per entity of less than $2 million. And of all the accounting firms to audit that complexity, which one did Nobilis pick? None other than tiny Calvetti Ferguson, with a total of 38 professionals. Barely more than the number of entities it audited at Nobilis. And the company's CFO situation inspires no more confidence.

Nobilis CFO Position: a Revolving Door

Since 2010, Nobilis has changed CFOs four times. […]

In August, Calvetti resigned as auditor. This follows closely after the last CFO change in July. A new CFO and a new auditor are now charged with figuring out all the complicated arrangement and deals built up over the years. While this does not guarantee that any problems will be found, it definitely increases the uncertainty.

Even my outsider's review of Nobilis' financial statements uncovered some potential issues. Per the organization chart or the following statements, "The Company assigned 100% of its equity interest in MSID to NHC ASC - Dallas, of which the Company owns 35% as a result of syndication... In November 2013, the Company sold 15.1% of its ownership interest in the Kirby Partnership to existing physician limited partners, effectively decreasing the Company's ownership interest to 25%" - so this means the company owns 35% of MSID and 25% of Kirby.

However, it appears to be fully consolidating both entities. The effect of this would be to inflate revenues so that the growth story appears better than it really is (Source: Nobilis' latest 10-K).

Conclusion: A Potential House of Cards

Nobilis has no accolades which would cause me to believe that the company can be one of the few successful and sustainable roll up strategies. Instead, it has a history of poor management with two prior roll ups that resulted in over 90% losses to shareholders (Acro Energy and Northstar Healthcare from 2007-2010). Fundamentally, Nobilis is very unlikely to make bullish guidance, yet management is extremely well paid and sells stock relentlessly. One of its primary marketed experimental procedures (AccuraScope) has questionable insurability, unsubstantiated success rates, lack of recognition from any institutions (insurance, university or medical bodies) and a poor history, with patient lives being ruined. And to top it all off, the company's accounting situation appears unstable and vulnerable. This report is part I of a potential multi-series write-up, as Nobilis' depth of issues runs deep.

[78] On October 9, 2015, after the publication of the Seeking Alpha article, the market price of Nobilis' common shares declined from $6.82 (the closing price on October 8, 2015) to $4.93 (the closing price on October 9, 2015), a decline of nearly twenty-eight percent. The decline continued and by the tenth trading day after the article had been published, the share price was down to $4.02, a 41.1 percent decline.

[79] On October 11, 2015, Nobilis’ Board of Directors issued a response to the Seeking Alpha article. The response stated that Nobilis had serious disagreement with the article but had appointed Independent Counsel to investigate the matter. The response stated:

Statement from the Nobilis Health Corp. Board of Directors

The Nobilis Board of Directors and its Audit Committee have been made aware of and have reviewed a blogger's posting on a site called "Seeking Alpha". This anonymous posting contains significant inaccuracies, inflammatory accusations and several misrepresentations concerning our company, its management and our financial condition. While we understandably have serious disagreement with these scurrilous claims, as to their validity and accuracy, the public and investors should know that the Nobilis Board of Directors and its Audit Committee take seriously any and all such claims made publicly about our company, as we understand the material effect such claims may have on our reputation and on our financial integrity.

Accordingly, in an effort to address these allegations we believe that full disclosure and complete transparency is the appropriate way to show our commitment to the public, our investors and our regulators. To this end, the Chairman of our Audit Committee, Steve Ozonian is announcing that the Committee and the Board's Independent Directors have appointed and retained an outside Independent Counsel who will conduct a full review of each and every allegation raised by this blog. This Review will be presented to the public as an Independent Counsel's Report and will be based upon a pre-commitment to full transparency and disclosure.

The Independent Counsel appointed to conduct this Review are Robert R. Hopper, Esq., Managing Partner, Robert R. Hopper & Associates, Attorneys at Law, Minneapolis, MN; and, Lanny J. Davis, Esq., Lanny J. Davis and Associates, Attorney at Law, Washington, DC. Both of these counsel are exceedingly experienced attorneys with the integrity to lead and guide this process.

Mr. Ozonian, his Audit Committee members and the Independent Directors have the endorsement of Nobilis' full Board of Directors to engage Independent Counsel and undertake this Review. All of Nobilis’ Directors are confident that the work of the Independent Counsel and their Review will show that these allegations have no merit whatsoever and that when brought to the "light of day", these allegations will be completely dismissed and the truth in Nobilis' financial integrity will prevail.

[80] On November 3, 2015, the Independent Counsel, Robert R. Hopper and Lanny J. Davis, announced that the allegations in the Seeking Alpha article were incorrect and unfounded. Their report stated:

[The] blogger’s five primary assertions [are] false, misleading, or without foundation. While we report solely on the five primary allegations made by the Blogger, we reviewed the blogger’s other assertions to be equally false, misleading, or without foundation.

[81] On November 5, 2015, Nobilis announced that it had commenced a lawsuit against the (by then identified) author of the Seeking Alpha article and his employer.

[82] In November 2015, Nobilis began operations at Scottsdale Liberty Hospital following the closing of another acquisition transaction.

5. The October 2015 Anonymous Internet Post as a Corrective Disclosure

[83] Mr. Cappelli submits that the Seeking Alpha article is a corrective disclosure.

[84] To foreshadow the discussion below, Nobilis, however, submits that the Seeking Alpha article cannot be a corrective disclosure because, although it is critical of Nobilis stock value, the author’s criticisms do not connect any of the alleged misrepresentations in the impugned documents that are the predicate of Mr. Cappelli’s pleaded misrepresentation claim (Misrepresentation Set #2).

6. The November 11, 2015 Press Releases

[85] On November 11, 2015, Nobilis released the following press release:

Nobilis Conference Call to Announce Preliminary Quarterly Results of Over $50 Million in Revenue and $9 Million in Adjusted EBITDA; Quarterly Earnings Release Delayed

MARKETWIRED November 11, 2015 -- Houston Texas. Nobilis Health Corp. (NYSE MKT: HLTH) (TSX: NHC) (“Nobilis” or the “Company”) today announced management’s preliminary results for the third quarter 2015 and that the Company’s final earnings release will be delayed.

Third quarter preliminary revenues are $50.1 million and preliminary Adjusted EBITDA is $9 million, resulting in an increase of approximately 191% and 373%, respectively, as compared to revenue of $17.2 million and Adjusted EBITDA of $1.9 million for the prior corresponding period. For the nine months ended September 30, 2015, preliminary revenues are $136.0 million and preliminary Adjusted EBITDA is $19.6 million, resulting in an increase of approximately 206% and 577%, respectively, as compared to revenue of $44.4 million and Adjusted EBITDA of $2.9 million for the prior corresponding period. Adjusted EBITDA for the trailing 12 months ended September 30, 2015 is estimated at $27 million.

In August 2015, the Company engaged Crowe Horwath as its independent registered public accounting firm. “Crowe has informed us that their quarterly review procedures will not be completed within the deadline for the SEC filing of our Form 10-Q,” said Kenny Klein, the Company’s Chief Financial Officer. “Management and Crowe have identified certain non-cash accounting differences arising in our conversion from U.S. GAAP and IFRS rules and opening balance sheet valuations which will delay the Company’s earnings release and the filing of its quarterly financial statements. Therefore, the Company will not issue its Quarterly Report on Form 10-Q for the three months ended September 30, 2015 on November 12, 2015 as previously anticipated.”

“The issues remaining under review should not result in material changes to the preliminary revenues and preliminary Adjusted EBITDA announced today as those are primarily non-cash items,” said Chris Lloyd, the Company’s Chief Executive Officer.

In lieu of the previously scheduled earnings call, the Company will, however, hold a conference call on November 12th at 10:00 a.m. CST to update shareholders on third quarter revenue and discuss reasons for delay. The Company will update shareholders as soon as possible regarding the release date of final numbers and the timing of the rescheduled earnings call. […]

To provide our auditors with adequate time to fully review the Company’s finances, the Company will file a Form 12b-25 Notification of Late Filing with the U.S. Securities and Exchange Commission with regard to its Quarterly Report. The Company will hold its earnings conference call to discuss final third quarter results promptly following the filing of that Quarterly Report.

[86] On November 12, 2015, Nobilis’ common share priced dropped twenty percent on the TSX and eighteen percent on the NYSE MKT.

7. 2015, cont’d, and 2016 - Audit Review and January 5, 2016 Corrective Disclosure

[87] In preparing the audits for the third and fourth quarters of 2015, Crowe Horwath reviewed the prior U.S. GAAP financial statements for 2013, 2014, and first two quarters of 2015. It identified accounting standards deficiencies in the audits that had been completed by Calvetti Ferguson, P.C.

[88] Crowe Horwath’s opinion was that the financial statements needed to be corrected to be compliant with accounting standards required for a listing on the NYSE.

[89] As a result or the review by Crowe Horwath, on January 5, 2016, Nobilis filed amended financial reports for 2013, 2014, and for the first two quarters of 2015. Calvetti Ferguson, P.C. agreed with the restatements.

[90] The U.S. Securities and Exchange Commission (“SEC”) reviewed the restatements and the reasons for revision. The SEC found no significant misrepresentation or misconduct and closed its file, taking no action. Similarly, the Ontario Securities Commission (“OSC”) took no action.

[91] On January 5, 2016, Nobilis released the following press release, which addressed the five accounting matters that required restatement to comply with U.S. GAPP. The press release stated:

Nobilis Health Corp. Announces Intention to Restate Consolidated Financial Statements for Fiscal Year 2014 and for 2015 Interim Periods; Updates Delay in Filing of Third Quarter Financial Statements

MARKETWIRED January 5, 2016 – Houston, Texas. Nobilis Health Corp. (NYSE MKT: HLTH) (TSX: NHC) (“Nobilis” or the “Company”) today announced that the previously issued consolidated financial statements covering the Company’s fiscal year ended December 31, 2014 (including financial information contained therein for prior periods) and the consolidated financial statements for the fiscal quarters ended March 31, 2015 and June 30, 2015 (collectively, the “Restatement Reports”), and the financial statements for the periods covered by the Restatement Reports included in the Company’s Registration Statement on Form S-1 (File No. 333-206642) that was declared effective on October 27, 2015, require restatement and should no longer be relied upon. Accordingly, investors should no longer rely upon the Company’s previously-issued financial statements for these periods (or the financial information for comparable prior periods contained in such financial statements), any earnings releases relating to these periods, the auditors’ reports on those financial statements, and management’s report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. The Company intends to amend the Restatement Reports to correct the errors and file them with the Securities and Exchange Commission as soon as possible.

The financial statements for the Restatement Reports contain errors related to (1) accounting for warrants and options issued in the Company’s private placements in 2013, 2014 and 2015 and options granted to non-employees; (2) business combination accounting with respect to the Athas and First Nobilis transactions that occurred in December and September 2014, respectively; (3) reclassification of contingently redeemable noncontrolling interests to temporary equity; (4) share based compensation matters; and (5) calculations of fully diluted shares outstanding for application of the treasury stock method, as more fully described below. Based on management’s preliminary assessment to date, the Company does not believe there will be any significant changes in revenue or Adjusted EBITDA for the periods covered by the Restatement Reports, except for approximately $700 thousand in additional reported revenue and an anticipated minor positive impact on Adjusted EBITDA for the three months ended March 31, 2015 and the six months ended June 30, 2015.

Based on our assessment to date, we expect the key impacts on our previously reported results for the relevant periods to be as follows:

Accounting for warrants and options issued in private placements and options issued to non-employees as liabilities – The Company determined that FASB ASC 815-40-15-7I (“ASC 815-40”), Contracts in entities own equity, should have been applied to the accounting for warrants and options issued in private placements and for options issued to non-employees. This accounting would have resulted in the Company classifying warrants and options issued in connection with 2013, 2014 and 2015 private placements by the Company as liabilities rather than as stockholders’ equity. Similarly, this same accounting is applicable to stock options issued to non- employees once the performance conditions of such awards are completed. The Company first issued options to non-employees during the second quarter of 2014. Once recorded as liabilities, the warrants and options must be revalued each quarter with changes in their valuation reflected in earnings.

The impact of the proper application of ASC 815-40 is a reclassification from equity to liabilities of $2.4 million during 2013 for warrants and options requiring liability classification and recognition of $442 thousand of income during 2013 for the decrease in the value of such liabilities from the date of issuance through year- end. The impact for 2014 of the proper application of ASC 815-40 is estimated to be a recognition of $3.7 million of expense for increases in the value of such liabilities through December 31, 2014 (including the effect of additional issuances and exercises of such instruments).

At December 31, 2013, the warrant and stock option liabilities recognized for the proper application of ASC 815-40 in the Company’s balance sheet totaled $2.4 million. During the quarter ended March 31, 2014, $374 thousand of income was recognized for decreases in the value of such liabilities through March 31, 2014. During the three months ended June 30, 2014, $372 thousand of income was recognized for decreases in the value of such liabilities (a total of $746 thousand of income for the six months ended June 30, 2014).

At December 31, 2014, the warrant and stock option liabilities recognized for the proper application of ASC 815-40 in the Company’s balance sheet totaled $6.7 million. During the quarter ended March 31, 2015, $3.4 million of expense was recognized for increases in the value of such liabilities through March 31, 2015. During the three months ended June 30, 2015, $1.7 million of income was recognized for decreases in the value of such liabilities (a total of $1.7 of expense for the six months ended June 30, 2015).

Recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS – We initially adopted accounting principles generally accepted in the United States of America (“U.S. GAAP”) effective January 1, 2013 in connection with our filings made with the U.S. Securities & Exchange Commission for registration of our common stock under the Securities Exchange Act of 1934 in early 2015. Previously we prepared our financial statements under International Financial Reporting Standards (“IFRS”). The Company determined that FASB ASC 805, Business Combinations (“ASC 805”) was not properly applied in the initial adoption of U.S. GAAP by the Company and its application to the First Nobilis acquisition completed in September 2014. Under U.S. GAAP, noncontrolling interests should be measured at fair value on the acquisition date [ASC 805-20-30-1] whereas under IFRS these may be measured at their proportionate share of the recognized amount of the acquiree’s identifiable net assets [IFRS 3.19].

The impact of the proper application of ASC 805 as of the date of acquisition (September 2014) is a reduction in noncontrolling interests of $2.0 million, a decrease in acquired intangible assets of $1.4 million and a decrease in recognized goodwill of $0.6 million, in each case beginning with the period ended September 30, 2014. Amortization expense recognized since the acquisition date will decrease by $15 thousand quarterly because of this change.

Adjustments to the acquisition accounting for the Athas transaction – The Company determined that it did not properly apply ASC 805 in its initial accounting for the Athas acquisition completed in December 2014. The Company incorrectly used an earlier version of the report of the independent valuation firm that was later modified and, secondly, incorrectly gave recognition of Athas’ deferred rent as a liability in the acquisition accounting.

Also, we expect to correct our accounting policies related to accounts receivable factoring activities which commenced with the Athas acquisition. Under ASC 310-10-25-3, factoring revenue is recognized over the period from purchase of the account receivable until its collection. Correction for these accounting policies affects the initial acquisition accounting for the Athas transaction because it included accounts receivable for transactions recognized before the factoring purchase date.

The impact of the proper application of ASC 805 as of the date of acquisition is an increase in acquired intangible assets of $1.4 million, a reduction of liabilities of $260 thousand and a decrease in recognized goodwill of $1.7 million, in each case beginning with the period ended December 31, 2014. Amortization expense recognized since the acquisition date will increase by $15 thousand quarterly because of this change.

The impact of the proper application of ASC 310-10-25-3 as of the date of acquisition is a decrease in acquired accounts receivable of $1.7 million, a reduction in accrued liabilities of $0.3 million and a corresponding net increase in goodwill of $1.4 million, in each case beginning with the period ended December 31, 2014. This correction of the Company’s accounting policies will impact the timing of revenue recognition in the future. However, this change had no impact on 2014 revenues given the proximity of the acquisition date for Athas to the Company’s 2014 fiscal year end. Revenues and accounts receivable for and as of the three months ended March 31, 2015 and the six months ended June 30, 2015 increased by $735 thousand.

Reclassification of Contingently Redeemable Noncontrolling Interests to Temporary Equity – The Company determined that it did not properly apply SEC Accounting Series Release No. 268, Presentation of Financial Statements of Redeemable Preferred Stock (“ASR 268”) in classifying contingently redeemable noncontrolling interests associated with NHC ASC- Dallas, LLC, Northstar Healthcare Dallas Management, LLC and First Nobilis. Agreements with the third-party equity owners in these entities give these owners limited rights to require the Company to repurchase their equity interests upon the occurrence of certain events. The contingently redeemable noncontrolling interests associated with these entities should be classified in the Company’s balance sheet as “temporary” or mezzanine equity in accordance with ASR 268.

The impact of the proper application of ASR 268 is a reclassification of $12.9 million of contingently redeemable noncontrolling interests from “permanent” equity to “temporary” or mezzanine equity at December 31, 2014 and $1.3 million at December 31, 2013; a reclassification of $15.5 million of contingently redeemable noncontrolling interests from “permanent” equity to “temporary” or mezzanine equity at March 31, 2015; and a reclassification of $15.9 million of contingently redeemable noncontrolling interests from “permanent” equity to “temporary” or mezzanine equity at June 30, 2015.

Other Adjustments – We have also identified and made correction for certain other accounting matters affecting our previous financial statements. These include (i) corrections for stock-based compensation expense for expected term, forfeitures and related assumptions in determining the grant date valuations of option awards, (ii) corrections to the accounting for options issued to non-employees to measure such awards as of the date that performance was completed, and (iii) corrections to the calculations of fully diluted shares outstanding for application of the treasury stock method. The combined impact of these other corrections was an increase in compensation expense of $74 thousand for the year 2013 and an increase of $367 thousand for the year 2014; an increase in compensation expense of $4 thousand for the quarter ended March 31, 2014 and an increase of $621 thousand for the quarter ended March 31, 2015; and a decrease in compensation expense of $9 thousand for the quarter ended June 30, 2014 (decrease of $5 thousand for the six months ended June 30, 2014) and an increase of $470 thousand for the quarter ended June 30, 2015 (increase of $1.1 million for the six months ended June 30, 2015).

Mr. Steve Ozonian, Chairman of the Company’s Audit Committee, issued the following statement: “Our executive management team, together with our Board of Directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity. The Audit Committee takes the Company’s internal controls over financial reporting and the integrity of its financial statements very seriously, and we are committed to implementing corrective measures and becoming current in our periodic reporting obligations as soon as possible.”

UPDATE ON DELAY IN FILING OF UNAUDITED INTERIM FINANCIAL STATEMENTS

The Company previously announced that due to its new auditor having not completed their quarterly review procedures, it would not be in a position, by the filing deadline, to file its unaudited interim financial statements for the three and nine months ended September 30, 2015 (the “Financial Statements”) and the related management’s discussion and analysis (“MD&A”) and related CEO and CFO certificates. It remains uncertain as to when the Company will be able to finalize its Financial Statements and related disclosures.

As previously announced, the Company continues to work with its auditor to resolve certain accounting issues that are delaying the finalization and release of the Financial Statements and the MD&A. As noted above, the Company intends to amend the Restatement Reports to correct the errors and file them as soon as possible. The Financial Statements, MD&A and related CEO and CFO certificates are expected to be filed shortly after the amendments to the Restatement Reports are filed.

The Company has made and the Ontario Securities Commission, as principal regulator for the Company, has approved an application under National Policy 12-203 – Cease Trade Orders for Continuous Disclosure Defaults (“NP 12-203”) requesting that a management cease trade order be imposed in respect of this late filing rather than an issuer cease trade order. The issuance of a management cease trade order generally does not affect the ability of persons who have not been directors, officers or insiders of the Company to trade in their securities. The Ontario Securities Commission issued the management cease trade order on Friday, December 4, 2015.

The Company confirms that it will satisfy the provisions of the alternative information guidelines under NP 12-203 by issuing biweekly default status reports in the form of news releases for so long as it remains in default of the filing requirements to file its Financial Statements and MD&A within the prescribed period of time. The Company confirms that there have been no failures with respect to the Company fulfilling its stated intention of satisfying the requirements of the alternative information guidelines and further confirms that there is no other material information relating to the status of the default and its affairs that has not been generally disclosed.

[92] The five accounting issues that were the subject of the press release were also identified and described in Nobilis’ Form 8-K dated January 5, 2016 submitted to the SEC. The five accounting issues (which are a part of Misrepresentation Set #2) were:

a. accounting for warrants and options issued in private placements to non-employees;

b. recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS;

c. adjustments to the acquisition accounting for the Athas transaction;

d. reclassification of contingently redeemable noncontrolling interests to temporary equity;

e. other adjustments including: (i) corrections for stock-based compensation expense, (ii) corrections to the accounting for options issued to non-employees, and (iii) corrections to the calculations of fully diluted shares outstanding for application of the treasury stock method.

[93] The statements made in the January 5, 2016 press release were made because the new auditors required that five discrete items had to comply with U.S. GAAP rather than IFRS and certain items had to reclassified as temporary rather than permanent equity. Nobilis submits that these five accounting issues arose as a result of the Nobilis’ large and complex transactions in 2014 and 2015, which had increased Nobilis’ net income of $1.6 million in 2013 to $50.8 million in 2015 and as a result of the conversation from Canadian IFRS to U.S. GAAP.

[94] To foreshadow the discussion below, Nobilis submits that the restatements set out in the press release were not material because the adjustments: (a) had no impact on total revenue or gross profit; (b) had no impact on operational, financing, or investing activities; and (c) there was no diminution of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization).

[95] All the stock market analysts who were following Nobilis commented favourably on the press release of January 5, 2016 or regarded it as a non-event, and on the following day, January 6, 2016, Nobilis’ stock price rose on the TSX. The price of the shares rose by thirteen percent from $3.85 to $4.36. The view of the analysts was that the information did not relate to operating performance and had no significant effect on the value of Nobilis’ securities.

[96] On January 12, 2016, Nobilis released its the 2nd quarter 2015 financial statement and MDA. Included within Nobilis’ Form 10-K/A was the following statement:

On December 29, 2015, our Audit Committee of the Board of Directors, after consultation with management and the Company’s predecessor auditors concluded that the Company’s financial statements as of and for the three months ended March 31, 2015 and 2014, should be restated because the financial statements did not properly account for the following items:

• Accounting for warrants and options issued in private placements and options issued to non-employees as liabilities …

• Recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS …

• Adjustments to the acquisition accounting for the Athas transaction …

• Reclassification of Contingency Redeemable Noncontrolling Interests to Temporary Equity …

• Other adjustments.

[97] The January 12, 2016 financial statements also revealed that:

a. Liabilities for the restatement period were understated:

i. Total liabilities for the 2013 year were $9.34 million [not $6.94 million].

ii. Total liabilities for the 2014 year were $48.38 million [not $42.28 million.]

iii. Total liabilities for Q1 2015 were $41.25 million [not $34.71 million], and

iv. Total liabilities for Q2 2015 were $65.24 million [not $53.20 million].

b. Shareholders’ equity for the restatement period was overstated:

i. Shareholders’ equity as at December 31, 2013 was $12.04 million [not $15.70 million].

ii. Shareholders’ equity as at December 31, 2014 was $43.80 million [not $65.30 million].

iii. Shareholders’ equity as at March 31, 2015 was $47.72 million [not $71.80 million], and,

iv. Shareholders’ equity as at June 30, 2015 was $72.38 million [not $102.35 million].

c. Net income for the restatement period was misstated:

i. Net income for the 2013 year was $7.04 million [not $6.67 million].

ii. Net income for the 2014 year was $16.19 million [not $20.25 million].

iii. Net income for Q1 2015 was $2,000 [not $3.28 million].

iv. Net income for Q2 2015 was $3.34 million [not $2.15 million].

v. Total net income for the period January 1, 2013 to June 30, 2015 was $26.56 million [not $32.35 million].

d. Net income per fully diluted share for the restatement period was misstated:

i. Net income per fully diluted share for the 2013 year was $0.04 [not $0.03].

ii. Net income per fully diluted share for the 2014 year was $0.07 [not $0.15].

iii. Net income per fully diluted share for Q1 2015 was $0.07 [not $0.02]

iv. Net income per fully diluted share for Q2 2015 was $0.01 [not $0.02].

[98] Thus, the January 12, 2016 financial statements disclose Misrepresentation Set # 2; i.e., the five accounting misrepresentations plus the misrepresentation that Nobilis had effective Disclosure Controls and Procedures (“DC&P”) and Internal Control over Financial Reporting (“ICFR”) as of December 31, 2014, March 31, 2015 and June 30, 2015, and that its ICFR was free of material weakness, as defined by SEC regulations. The January 12, 2016 financial statements also disclose the four additional misrepresentations that I have labelled Misrepresentation Set #3.

[99] The statements of Misrepresentation Set #3 revealed the four additional misrepresentations that: (1) total liabilities were understated between 14% and 35%; (2) shareholders’ equity was overstated between 23% and 34%; (3) net income was overstated by 18% for total net income earned between January 1, 2013 and June 30, 2015; and (4) net income per fully diluted share was overstated by 250% for one quarter during the restated period, and misstated between 33% to 250% for the entire restated Period.

[100] With the release of the January 12, 2016 financial statements, the market reacted by selling off Nobilis’ common shares on the TSX and NYSE. By January 26, 2016, ten-trading days after the release of the January 12, 2016 financial statements, the stock market price of Nobilis’ shares dropped fifteen percent on the TSX and nineteen percent on the NYSE.

[101] From November 11, 2015 to January 26, 2016, Nobilis’ stock price on the TSX had declined from $4.78 to $2.88, a forty percent decline.

[102] Nobilis’ share price and investor support never returned. Its shares eventually were delisted from the TSX. The shares currently trade at $0.39. Nobilis’s market capitalization is now down to $31 million from over $500 million.

H. The Experts’ Evidence

(a) Andrew M. Mintzer

[103] Mr. Mintzer opined that: (a) Nobilis’ financial statements from December 31, 2013 to June 30, 2015 were not prepared in accordance with U.S. GAAP and violated SEC reporting requirements; (b) Nobilis’ statement that its disclosure controls and procedures were effective from December 31, 2013 to June 30, 2015 were misleading because there were material weaknesses in its internal controls over financial reporting as of December 31, 2014; (c) Nobilis’ restatement of its financial statements validated [confirmed?] the Seeking Alpha article criticisms of Nobilis’ disclosure failures; and (d) Calvetti Ferguson, P.C. did not comply with professional auditing requirements when it issued an unqualified clean opinion on Nobilis’ financial statements as the statements were not prepared in accordance with U.S. GAPP.

[104] Mr. Mintzer stated that definition of materiality under GAAP is similar to the definition of materiality under the Ontario Securities Act and that the omissions or misstatement of an item in a financial report would be material if, in the light of surrounding circumstances, the magnitude of the item was such that it is probable the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

[105] Mr. Mintzer said that errors resulting in a restatement of previously issued financial statements were inherently material under GAAP; i.e., a restatement was per se an admission by the corporation that its former financial statements contained material errors.

[106] Mr. Mintzer said that Nobilis’ January 12, 2016 re-statement of its financial statement was reasonably correlated with the allegations set out in the Seeking Alpha article. Mr. Mintzer stated that the accounting issued raised by the Seeking Alpha article were errors with: (a) accounting practices with regards to entities that the Company had less than 50% ownership; (b) the valuation and accounting for acquisitions made by the Company; (c) the compensation of current and former directors and officers; and (d) issues with regards to its accounts receivable from prior acquisitions.

[107] In his cross-examination, Mr. Mintzer stated that he was not asked to do an analysis of whether the January 5, 2016 press release had any impact on the price of Nobilis’s shares and that he did not do this analysis.

(b) Lawrence Kryzanowski

[108] Mr. Kryzanowski opined that a reasonable investor: (a) would consider it important that the financial statements of a publicly-traded company fairly present in all material aspects the financial condition, results of operations, cash flows, expenses, assets and earnings, including adherence to GAAP or IFRS; (b) would consider the statement that Nobilis’ financial statements fairly present in all material aspects the financial condition, results of operations, cash flows, expenses, assets and earnings, including adherence to GAAP or IFRS an important factor in making the decision to purchase Nobilis securities; and (c) would consider the statement that Nobilis’ internal control over financial reporting was effective, as being an important factor in making the decision to purchase Nobilis securities.

[109] Pertaining to ICFR, Mr. Kryzanowski explained that internal control weakness disclosures were important to investors and were associated with a negative stock price reaction and that lenders charged greater rates to lend to such companies. He said that knowledge that a company has ICFR weaknesses had empirically been found to have a materially-negative impact on the valuation placed on the company by both investors and lenders.

[110] Mr. Kryzanowski stated that reasonable investors will consider any misrepresentation in financial filings to be material (important) if such information relates to firm performance and/or stewardship that would have significantly altered the information made publicly available and had significance in their decisions to invest. In this case, a reasonable investor would have made an investment decision with the incorrect belief that Nobilis’ filings contained no material misrepresentations.

[111] Further, he stated that investors rely upon financial statements to assess the honesty and reliability of a corporation’s management, even errors in financial statements that are not technically material from an accounting perspective are still material to the investing decisions of reasonable investors because they have a bearing on the credibility of management.

[112] Mr. Kryzanowski did not specifically consider whether the accounting items restated in the January 5, 2016 press release impacted on investor expectations or the market price of Nobilis shares. He does not analysis of the content of the restated financial statements and he does not comment about the published analysts’ reports.

(c) C. Kevin Chesser

[113] Mr. Chesser stated that the five accounting matters discussed in the January 5, 2015 press release were not material representations. He said that these five matters did not result in any metrics that shareholders focus and rely on. They five matters did not reveal any diminution to cash flow or EBITDA and the information did not impact on operational, financing or investing activities.

[114] Of the five accounting issues described in Nobilis’ January 5, 2016 press release and in the Nobilis’ Form 8-K dated January 5, 2016, Mr. Chesser explained that:

a. (accounting for warrants and options issued in private placements to non-employees) - When Nobilis completed private placement financings in 2013, 2014 and 2015 it issued warrants and options to certain non-employees for services, and under U.S. GAAP, these warrants and options should have been classified as liabilities rather than as stockholders' equity. Because Nobilis' financial statements were reported in U.S. dollars the warrants and options had to be reported as liabilities and revalued each quarter with changes in their valuation reflected in earnings. These liabilities are valued by the use of Black-Scholes valuation models and their size is impacted mostly by the Nobilis ' stock price and its volatility. Ultimately, the instruments would expire if not exercised or settled by issuance of the underlying shares which are then recorded as equity.

b. (recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS) - When Nobilis acquired a 51% interest in First Nobilis, it should have applied U.S. GAAP and measured the 49% non-controlling interests at fair value rather than at their proportionate share of the acquired assets, permitted under IFRS. Using U.S. GAPP would change the values recorded for goodwill and intangible assets. The result was a reduction in non-controlling interests of $2 million, a decrease in acquired intangible assets of $1.4 million and a decrease in recognized goodwill of $0.6 million.

c. (adjustments to the acquisition accounting for the Athas transaction) - Nobilis determined that in accounting for the Athas acquisition completed in December 2014, it incorrectly used an earlier, later amended, independent valuation report and incorrectly booked Athas’ deferred rent as a liability. The correct accounting yielded an increase in acquired intangible of $1.4 million, a reduction of liabilities of $260,000 and a decrease in recognized goodwill of $1.7 million. Nobilis also corrected its accounting policies with respect to factoring accounts receivable which had commenced with the Athas acquisition. The practice had been to pay doctors for cases approximately 45 days after the surgery date and then file and collect the insurance proceeds, which typically occurred at about 60 days. Under U.S. GAAP ASC 310-20, this is considered a factoring arrangement under which revenue should be recognized over the period from purchase of the account receivable until its collection. Correction for these accounting policies affected the initial acquisition accounting for the Athas transaction because the transaction included accounts receivable for cases recognized before the factoring purchase date. The ultimate amounts to be recognized as revenue were not impacted by this change.

d. (reclassification of contingently redeemable noncontrolling interests to temporary equity) - The acquisition of NHC ASC-Dallas LLC, Northstar Healthcare Dallas Management, and First Nobilis involved agreements with third party equity owners who were given limited rights to require Nobilis to repurchase their equity interests upon the occurrence of certain events. These non-controlling interests should have been classified on the company’s balance sheet as “temporary” or mezzanine equity rather than full equity. In aggregate the numerical numbers of these numbers did not change.

e. (other adjustments) - The combined impact of these corrections was an increase in compensation expense of $74 thousand for the year 2013 and an increase of $367 thousand for the year 2014. The adjustments did not impact Nobilis’ previously reported cash, cash equivalents or cash flows from operating, financing or investing activities. Mr. Chester opined that that the impact of these adjustments on EPS (earnings per share) was negligible.

[115] Mr. Chesser stated that the accounting issues discussed in the January 5, 2016 press release with matters that should have been identifiable by an independent auditor in its routine procedures. He said the accounting issues discussed in the press release arose from Nobilis’ acquisitions and private placements, and these matters are usually given special attention by an auditor because of their size and complexity.

[116] Mr. Chesser opined that there is no relationship between the allegations in the Seeking Alpha article and the accounting issues noted in the January 5, 2016 press release. Mr. Chesser stated:

After careful review of this Article and comparison to the identified accounting issues corrected in the restatement, I have concluded that the identified accounting issues corrected were not identified in the Article.

Of the particular accounting criticisms raised in the Article, I am not aware of any assertion including by the predecessor or successor auditors that Nobilis' accounting for these items was materially misstated. The Article questions Nobilis' ability to collect its accounts receivable. The restatement adjustments do not include correction for any uncollectible accounts receivable or asset impairments.

The correction and restatement of the identified accounting issues does not relate to any of the article's claims or criticisms.

(d) Bradley A. Heys

[117] Mr. Heys opined that the restatements of the accounting matters discussed in the January 5, 2016 press release were not material from an economic and finance perspective. Mr. Heys opined that: (a) the alleged misrepresentations were not material from an economic and finance perspective; i.e., at the dates of each of Nobilis' public disclosures of its originally stated financial statements, it would not have been reasonable to expect any significant effect on the market price or value of Nobilis' shares had those financial statements been prepared in accordance with the relevant accounting standards; and (b) any economic losses incurred by members of the Class are attributable to factors other than the correction of the alleged misrepresentations, implying that aggregate damages to members of the Class are $nil.

[118] Mr. Heys opined that there is no relationship between the allegations in the Seeking Alpha article and the accounting issues noted in the January 5, 2016 press release. Mr. Hays stated:

More specifically, none of the allegations made in the Seeking Alpha Article are related to, or are corrective of, the Alleged Misrepresentations:

a. The Seeking Alpha Article makes several serious allegations regarding the legitimacy of Nobilis' business operations, growth strategy, marketing tactics, and management team, and raises questions about the quality of its financial reporting, as set out in Section 4.3.1 above. The article effectively implies that Nobilis is a fraudulent and unsustainable business, and that the market price of the Company's shares dramatically exceeded their actual value.

b. None of these allegations are related to, or supported by, the subsequent restatement of Nobilis' financial statements that are the subject of the Alleged Misrepresentations. Rather, the restatements of the Company's financial statements are largely the result of technical accounting adjustments, as described in Section 4.3.2 above.

c. The technical accounting changes that led to the restatement of the Company's financial statements are unrelated to, and do not confirm, the allegations made in the Seeking Alpha Article. For example:

i. The Seeking Alpha Article questions the merits of a roll-up strategy and suggests that Nobilis' revenue growth was only due to its acquisitions. In contrast, the restatement of the Company's financial statements did not have any significant affect the reported sales revenue and did not reveal any flaw in the Company's business strategy;

ii. The Seeking Alpha Article's allegations or insinuations about the "AccuraScope procedure" are not confirmed by, or even related to, the restatement of the Company's financial statements (and are otherwise said to be baseless by both the Company and independent analysts);

iii. The technical accounting adjustments relating to the accounting for warrants and stock options are not connected to and do not confirm the assertions in the Seeking Alpha Article that management was extracting undue compensation from the Company; and

iv. The restatements do not provide any indication that the Company's previously issued guidance was "overly optimistic.”

[119] Mr. Heys did an event study and it was his opinion that the study demonstrated that the January 5, 2016 press release had no adverse impact on Nobilis’ share price.

[120] The methodology of an event study uses a market model to measure the statistical relationship between the changes in the market price for the stock and the effects of other market and/or industry factors. The difference between the actual return and the return that would have been expected—i.e., the "predicted return"—given the returns for the market and industry is referred to as the "excess" or "company-specific" return. Estimation of the market model based on actual historical data provides an estimate of the expected volatility (or variance) of daily excess returns which provides the statistical benchmark for assessing the significance of any change in the market price of the security.

[121] Mr. Heys’ stated that the event study analysis revealed that following Nobilis’ January 5, 2016 press release in which it disclosed that it would restate its previously issued financial statements and provided details regarding the nature of those restatements, the stock price increased by more than thirteen percent, which was a statistically significant excess return after controlling for industry effects.

[122] Mr. Heys deposed that Mr. Kryzanowski’s report did not address the same questions as the press release and rather discussed the general importance to investors of properly prepared financial statements and opined that Nobilis' representations that its financial statements were prepared in accordance with the relevant accounting standards would have been important information to a reasonable investor.

[123] Mr. Heys deposed that Mr. Kryzanowski’s report did not consider how or whether the differing accounting treatment of the items that were the subject of the restatements [in the January 5, 2016 press release] might have impacted investor expectations or the market price or value of Nobilis' common shares during the Class Periods. Further, Mr. Heys stated that Mr. Kryzanowski’s report did not provide any of the analyses that would be required to assess whether the correction of the alleged misrepresentations was the cause of any economic losses to members of the class.

(e) Anthony M. Lendez

[124] With respect to the accounting matters noted in the January 5, 2016 press release, Mr. Lendez stated that income from operations for the year ended December 31, 2014 and the quarter ended June 30, 2015 decreased by 1.6% and 29.9%, respectively, but increased by 2.6% for the quarter ended March 31, 2015. There was a two percent increase in total revenue and gross profit for the quarter ended March 31, 2015. Mr. Lendez said that in light of in light of the Company's total revenues for the quarter of $48.9 million, total shareholders' equity of $72.4 million, and total assets of $153.5 million as of June 30, 2015, the impact of the accounting issues in the press release did not have a material impact on income from operations and had no impact on Nobilis’ total revenue and gross profit for the year ended December 31, 2014 and the quarter ended June 30, 2015.

[125] Mr. Lendez said that the accounting matters had a positive impact on Nobilis’ adjusted EBITDA, which is a metric disclosed in an earnings release due to its importance to shareholders.

[126] Mr. Lendez opined that there is no relationship between the allegations in the Seeking Alpha article and the accounting issues noted in the January 5, 2016 press release. Mr. Lendez stated:

I have read the Seeking Alpha article (the "Article") dated October 9, 2015 titled, Nobilis: About To Fall From Nobility, Part I, 65%+ Downside. There are five topics discussed in the Article, namely (1) the Company's strategy of acquiring entities and putting them together with the promise of significant synergies and cost reductions (referred to as "roll ups" in the article); (2) that insiders have sold more than $50 million of their stock in the year-to-date period; (3) accounting red flags (characterized in the article as four CFO changes in a handful of years, recent auditor resignations, potentially overstated revenues, newly acquired acquisitions with accounts receivable issues); (4) questionable marketing with paid studies touting inappropriate success rates for its medical procedures; and (5) that the company is significantly overvalued and appears to be guiding for unachievable targets. All of these issues are different from, and wholly unrelated to, the accounting issues that were addressed by the Restatement.

[127] Mr. Lendez stated that if an auditor of a public company determines that the company has not complied with GAAP, then the auditor must notify the company’s management so that appropriate corrective measures can be taken to become compliant. He said that if management failed to undertake remedial action to correct its non-compliance with GAAP, then the auditor would have to express a qualified or an adverse audit opinion on the company's financial statements. Mr. Lendez took from the fact that Calvetti Ferguson, P.C. had not qualified its opinion that it did not take exception to Nobilis accounting.

[128] Mr. Lendez did not identify any information withheld by Nobilis from the auditors that would have precluded Calvetti Ferguson, P.C. from evaluating all the facts and circumstances surrounding the accounting issues that were the discussed in the January 5, 2016 press release.

I. The Pleaded Statutory Misrepresentation Action

[129] In his Statement of Claim, after the pleading of the impugned documents, the allegations that are relevant to the statutory cause of action for misrepresentation against Nobilis are set out in paragraphs 3-12, 24-33, 42, 56-67 of the Amended Fresh as Amended Statement of Claim dated December 6, 2016 as follows:

NATURE OF THE ACTION

3. This is a proposed securities class action for misrepresentations about the financial state of Nobilis and the adequacy of its controls and procedures, with respect to disclosure and financial reporting, made by the Defendants in core documents and in other written and oral statements during Class Period I and by the Nobilis Defendants during Class Period II.

4. During Class Period I, the closing price of Nobilis' securities increased over sixty-five (65%), from $6.06 per share to as high as $10.05 per share.

5. The Plaintiff alleges that during the Class Periods, the price of Nobilis' securities was artificially inflated as a result of the acts and omissions of the Defendants.

6. During the Class Periods, Nobilis' accounting for its acquisitions of Athas and First Nobilis, as found in its FYE 2014 and Q1 and Q2 2015 financial statements were incorrect, resulted in the overstatement of goodwill and provided the investing public with a misleading view of Nobilis' revenues, expenses, and general business operations.

7. On October 9, 2015, SeekingAlpha.com, an investment research website, published an article asserting that Nobilis may have made misrepresentations in its core documents and other publications, about its: (a) accounting practices with regards to entities in which it had less than 50% ownership; (b) the valuation and accounting for acquisitions made by it; (c) the compensation of current and former directors and officers; and (d) issues with regards to its accounts receivable from prior acquisitions ("Corrective Disclosure I").

8. The publication of Corrective Disclosure I caused the price of Nobilis' securities to drop 27.7% on the TSX from a closing price of $6.82 on October 8th to $4.93 on October 9, 2016. Ten (10) trading days after Corrective Disclosure I, the price of Nobilis' securities closed at $4.02.

9. Nobilis vehemently denied the allegations in press releases, telephone briefs, public statements and in the Hopper-Davis Report repeatedly characterizing them as "baseless allegations ... [that] are completely false", "scurrilous claims...[that] have no merit whatsoever", "inflammatory and slanderous", "spurious and misleading", and "false, misleading, or without foundation". The Company attempted to paint itself as the "victim of a scheme to 'short and distort' and manipulate Nobilis' stock".

10. Despite its steadfast denials of the allegations, on January 5, 2016, Nobilis announced its intention to restate its consolidated financial statements for FYE 2014 and Q1 and Q2 of 2015. Nobilis also announced that its Registration Statement filed October 27, 2015 required restatement and should no longer be relied upon by investors, and again delayed the release of its Q3 2015 financial results ("Corrective Disclosure II”).

11. Thereafter, the price of Nobilis' securities on the TSX and NYSE MKT plunged once again. Ten (10) trading days after Corrective Disclosure II, the price of Nobilis' securities on the TSX closed at $3.13, 19% below the closing price on January 5, 2016 and more than 54% below the closing price on October 8, 2015.

12. On January 12, 2016, Nobilis filed the restated financial statements.

13. Calvetti Ferguson was Nobilis’ independent registered public accountant. On March 31, 2015, it certified that Nobilis' 2014 and 2013 consolidated audited financial statements presented fairly, in all material respects, the final position of the company as at December 31, 2013 and 2014 and its financial performance and cash flows in accordance with IFRS. On April 2, 2015 it certified that very similar 2014 and 2013 consolidated audited financial statements presented fairly, in all material respects, the final position of the company as at December 31, 2013 and 2014 and its financial, performance and cash flows in accordance with U.S. GAAP. During 2014 and 2013, it earned $512,000 and $230,000, respectively, from Nobilis. On September 2, 2015, it resigned from serving as Nobilis' independent registered public accountant effective August 14, 2015.

THE MATERIAL EVENTS

25. Nobilis initially adopted U.S. GAAP in early 2015.

26. The financial statements for FYE 2013, 2014 issued on March 23, 2015 were the last Nobilis publicly issued financial statements purportedly prepared in accordance with IFRS. All financial statements prepared or released thereafter were purportedly prepared in accordance with U.S. GAAP.

27. On March 23, 2015, Nobilis released its audited, annual, consolidated financial statements, AT and MD&A for fiscal 2014.

28. Chen and Lloyd certified, in Form 52-109F1, that these documents did not contain any misrepresentations and acknowledged their responsibility for establishing and maintaining ICFR and DC&P as those terms are defined in NI 52-109.

29. Nobilis stated in the MD&A that management had conducted an evaluation of the effectiveness of the design and operation of the DC&P as of December 31, 2014 and concluded that they operated effectively. They further stated that management, under the direction of Chen and Lloyd, assessed the effectiveness of the ICFR as of December 31, 2014 and concluded that they were operating effectively.

30. Calvetti Ferguson stated in its audit report that the consolidated financial statements were prepared in accordance with Canadian generally accepted auditing standards and that Nobilis' financial performance and cash flows for those years were fairly presented in accordance with IFRS.

31. On April 2, 2015, Nobilis filed the FYE 2013, 2014 consolidated financial statements on EDGAR.

32. Calvetti Ferguson stated, in its unqualified audit report, that the consolidated financial statements were prepared in accordance with the standards of the PCAOB and that the consolidated financial statements fairly presented, in all material respects, the financial position of Nobilis and the results of its operations and its cash flows for the years audited in conformity with accounting principles generally accepted in the United States.

33. These certifications and statements were incorrect because these core documents did not fairly present, in all material respects, the financial condition and results of operation of Nobilis or the true effectiveness of its ICFR or DC&P as demonstrated by Nobilis' January 2016 restatement of these core documents.

34. On October 9, 2015, SeekingAlpha.com published an article that was critical of Nobilis. The article questioned among other things: (a) the turn-over in chief financial officers within short periods of time; (b) over-priced acquisitions of companies related to insiders; (c) accounting irregularities; (d) the validity of Nobilis' sales of AccuraScope; (e) insiders selling tens of millions of dollars worth of stock within the past several months; and (f) materially unrealistic pro forma revenues and expenses that the insiders knew were overly optimistic.

35. On January 5, 2016, Nobilis announced that it was restating its previously published consolidated financial statements and MD&A for FYE. 2014, Q1 2015, and Q2 2015. Nobilis also announced that its Registration Statement of October 27, 2015 should no longer be relied upon by investors. Nobilis again delayed filing its Q3 2015 financial results.

36. On January 7, 2016, Nobilis announced the resignation of Lloyd as CEO, effective January 6, 2016 and the appointment of Fleming as the new CEO.

37. On January 12, 2016, Nobilis released its Q3 2015 results and filed the previously announced financial restatements. In Form 10-K/A Nobilis admitted that its financial statements for the three months ended March 31, 2015 and June 30, 2015 and for FYE 2014 should be restated because the financial statements did not properly account for the following:

(a) accounting for warrants and options issued in private placements and options issued to non-employees as liabilities rather than as shareholders' equities;

(b) recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro rata value permitted under 1FRS thereby overstating its assets;

(c) adjustments to the acquisition accounting for the Athas transaction by overstating receivables and failing to apply the correct valuation report;

(d) reclassifying contingently redeemable noncontrolling interests to temporary equity; and

(e) other adjustments.

55. Furthermore, Nobilis admitted in its restated financial statements released on January 12, 2016, for FYE 2014, and Q1 and Q2 2015, and in its Q3 2015 financial statements (which were also released on January 12, 2016) that its management had determined that Nobilis' internal controls were deficient in a manner that constituted a material weakness (as defined by SEC regulations,) in its ICFR as at December 31, 2014, March 31, 2015, June 30, 2015, and as of September 30, 2015.

56. Nobilis admitted in its restated MD&As that there were material weaknesses in its DC&P and ICFR because:

(a) it did not maintain a sufficient compliment of personnel with the appropriate level of accounting knowledge, experience and training in the application of U.S. GAAP necessary to support its operations; and

(b) it did not apply the appropriate level of review and oversight to the accounting and disclosure for significant, infrequently occurring transactions such as business combinations and private placements.

57. To remedy these material deficiencies Nobilis:

(a) replaced the CFO on July 9, 2015;

(b) strengthened it accounting and financial reporting group with the addition of five new professionals with knowledge, experience and training in the application of U.S. GAAP;

(c) engaged third-party accounting specialists to assist with significant, infrequently occurring transactions; and

(d) revised and implemented remediation steps for a more detailed supervisory review process.

58. Subsequent to its resignation, Calvetti Ferguson performed additional audit procedures and concluded that its previously issued report was no longer valid as the financial statements of Nobilis as originally reported on contained material departures from U.S. GAAP. Calvetti Ferguson issued a revised audit report with a dual date, the original date for the unchanged items and the January 12, 2016 date for the restated items.

59. Errors that require the restatement of previously filed financial statements are material under U.S. GAAP.

THE MISREPRESENTATIONS

60. On March 23, 2015, Nobilis and Calvetti Ferguson represented in Nobilis' FYE 2013 and 2014 consolidated financial statements that those financial statements were prepared in accordance with IFRS.

61. On April 2, 2015, Nobilis and Calvetti Ferguson represented that the FYF, 2013 and 2014 consolidated financial statements were prepared in accordance with U.S. GAAP.

62. Thereafter, the Defendants represented that all financial statements and the restatements were prepared in accordance with U.S. GAAP. But those statements were untrue and misleading because the financial statements were not prepared in accordance with U.S. GAAP. These statements contained misrepresentations and omissions of material facts.

63. In each MD&A during Class Period I, Nobilis represented that its disclosure controls and procedures were effective. This was a misrepresentation as Nobilis admitted on January 12, 2016 that there was a deficiency in its internal control over financial reporting that constituted a material weakness, as defined by SEC regulations, as at December 31, 2014, March 31, 2015, June 30, 2015, and as of September 30, 2015.

64. In its Annual 2013, and 2014 MD&A, Nobilis represented that its ICFR and DC&P were effective which was untrue and misleading.

65. During Class Period I, and Class Period II, Nobilis represented that Nobilis' system or DC&P and ICFR were effective, when in fact they were deficient and suffered from material weaknesses.

66. ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with a company's generally accepted accounting principles. DC&P are designed to provide reasonable assurance that information required to be publicly disclosed is accurately recorded, processed, summarized and reported within time periods specified in securities legislation.

67. In Nobilis' FYE 2014 consolidated financial statements filed on April 2, 2015, Calvetti Ferguson represented that: (a) Nobilis' financial reporting was U.S. GAAP compliant; and (b) it had conducted its audits of Nobilis in compliance with PCAOB Standards. These representations were untrue and misleading.

68. During Class Period II, the Nobilis Defendants did not correct, but rather reaffirmed the misrepresentations made in Class Period I.

69. These further representations were misrepresentations because:

(a) the claims in the SeekingAlpha.com article were correct, in that the Nobilis financial statements released in Class Period I were not reliable and did not comply with applicable laws and regulations; and

(b) the changes to the Nobilis financial statements in the restatements were material.

J. Legal Background

[130] Part XXIII.1 of Ontario’s Securities Act provides several statutory causes of action for secondary market misrepresentation. The objectives of Part XXIII.1 of the Ontario Securities Act are to deter misrepresentative disclosure and to provide a remedy for injured investors, while at the same time preventing strike suits against issuers.[^7]

[131] Under s.138.8 (1) of the Ontario Securities Act, leave of the court is required to proceed with a statutory misrepresentation cause of action. Section 138.8 (1) reads:

138.8 (1) No action may be commenced under s.138.3 without leave of the court granted upon motion with notice to each defendant. The court shall grant leave only where it is satisfied that,

(a) the action is being brought in good faith; and

(b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

[132] In the leave test, “good faith” has been interpreted to mean that the plaintiff has brought his or her action in the honest belief that he or she has an arguable claim, for reasons that are consistent with the purpose behind the statutory remedy, not for an oblique or collateral purpose, and with the genuine intention and capacity to prosecute the claim if leave is granted.[^8]

[133] In the immediate case, it was not disputed that Mr. Cappelli satisfies the good faith branch of the test for leave.

[134] The various statutory causes of action for which leave is required are connected to an issuer’s disclosure obligations under the Ontario Securities Act. Section 138.3 (1) establishes a statutory cause of action with respect to a misrepresentation made by on or behalf of a responsible issuer in its core documents.

[135] In the immediate case, there is no dispute that Nobilis is a responsible issuer and that the alleged misrepresentations were made in its core documents, which in this case were comprised of AIFs, audited annual financial statements, quarterly financial statements, MD&As and management certifications.

[136] The statutory cause of action provided by s. 138.3 (1) of the Act for secondary market misrepresentation is available to any person who acquires or disposes of an issuer's securities between the time that documents containing misrepresentations were publicly released and the time when the misrepresentations were publicly corrected.

[137] There are a variety of statutory defences to claims against a responsible issuer, including two that are relevant to the immediate case; namely: (1) s.138.4 (11) (expert’s report defence); and (2) s.138.5(3) (damages attributable to other causes not recoverable), which state:

Expert report, statement or opinion

138.4 (11) A person or company, other than an expert, is not liable in an action under section 138.3 with respect to any part of a document or public oral statement that includes, summarizes or quotes from a report, statement or opinion made by the expert in respect of which the responsible issuer obtained the written consent of the expert to the use of the report, statement or opinion, if the consent had not been withdrawn in writing before the document was released or the public oral statement was made, if the person or company proves that,

(a) the person or company did not know and had no reasonable grounds to believe that there had been a misrepresentation in the part of the document or public oral statement made on the authority of the expert; and

(b) the part of the document or oral public statement fairly represented the report, statement or opinion made by the expert.

Assessment of Damages

138.5 (3) Despite subsections (1) and (2), assessed damages shall not include any amount that the defendant proves is attributable to a change in the market price of securities that is unrelated to the misrepresentation or the failure to make timely disclosure.

[138] To plead the statutory cause of action for misrepresentation in the secondary market, the plaintiff should identify and articulate the falsity of the representation and link the misrepresentation to a corrective disclosure so with sufficient clarity and precision so as to give the other party fair notice of the case they are required to meet and to enable the court.[^9]

[139] The specification of the date of the public correction is a factor in the calculation of damages under Part XXIII.1 of the Ontario Securities Act.[^10] The specification of the public correction is important for class actions about Part XXIII.1 claims because it determines the class period for the purposes of determining class membership and, for the Class Members seeking damages, the public correction is a factor in the calculation of damages under Part XXIII.1 of the Ontario Securities Act.[^11]

[140] Once the plaintiff shows a misrepresentation and a public correction, causation is presumed and damages are implied. In other words, causation, or more precisely the lack of it, is transformed into a defence under s.138.5(3) (the “attribution defence”), if the issuer can show that the decline in share price was not caused by the misrepresentation.[^12]

[141] To plead the statutory causes of action, the plaintiff should: (1) identify the misrepresentation and when and where it was made; (2) specify the falseness of the statement; and (3) identify the public correction and when it was made.[^13]

[142] In Mask v. Silvercorp Metals Inc.,[^14] Justice Belobaba stated:

22. As I have already noted, s. 138.3 provides a statutory cause of action for damages sustained between two time-posts: the time that documents containing the alleged misrepresentations were publicly released by the defendant and the time that the misrepresentations were publicly corrected. It is obviously a matter of fairness to the defendant that both the start point (the misrepresentation) and the end point (the public correction) be identified with some precision.

23. Indeed, Ontario law is clear that a plaintiff is required to specifically “identify and articulate” the “falsity” in the initial representation, which the court can then use as a “benchmark to determine when and whether there was a corrective disclosure”. The plaintiff must “link” that misrepresentation to a “pleaded public correction”, providing “full particulars” of “the necessary material facts with sufficient clarity and precision so as to give the other party fair notice of the case they are required to meet.”

[143] In Swisscanto Fondsleitung AG v. BlackBerry Ltd.,[^15] Justice Belobaba stated:

65. In my view, the public correction requirement in s. 138.3 of the OSA can be satisfied as follows:

(i) The public correction must be pleaded with sufficient precision to provide fair notice to the defendant. The plaintiff must point to specific words or figures that allegedly constitute the public correction of the alleged misrepresentation. Because the function of the public correction requirement under s. 138.3(1) is to establish the second "time-post" for fixing liability, the plaintiff must also identify the timing of the public correction.

(ii) The pleaded public correction need not be a "mirror-image" of the alleged misrepresentation or a direct admission that a previous statement is untrue. But there must be some linkage or connection between the pleaded public correction and the alleged misrepresentation -- at the very least, the pleaded public correction must share the same subject matter as, and in some way relate back to, the misrepresentation. The fact that an alleged public correction is over or under-inclusive relative to the misrepresentation is not a bar to establishing that the words or figures constitute a public correction. Of course, the more tenuous the connection between the public correction and the misrepresentation, the more likely that the defendant will be able to show under s.138.5(3) that shareholder losses were unrelated to the misrepresentation.

(iii) The public correction must be reasonably capable of revealing to the market the existence of the alleged misrepresentation. However, the public correction need not prove, or help prove, that the earlier statement or omission was in fact a misrepresentation as defined by s. 1(1) of the OSA. Moreover, the public correction need not be understood by the ordinary investor as revelatory of the existence of a misrepresentation. It may be the case that only market participants with specialized knowledge and expertise (e.g., analysts or traders) are able to understand that particular words or figures constituted the public correction of a misrepresentation. But that will be sufficient.

(iv) The public correction may take "any of a number of forms" and need not emanate from the defendant corporation. The source of the public correction can be third parties, including media reports or internet postings. [footnotes omitted]

[144] For the statutory causes of action, “misrepresentation,” “material change,” and “material fact,” are defined in s.1(1) of the Act as follows:

“misrepresentation” means,

(a) an untrue statement of material fact, or

(b) an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made;

“material change”,

(a) when used in relation to an issuer other than an investment fund, means,

(i) a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made by the board of directors or other persons acting in a similar capacity or by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, and

(b) when used in relation to an issuer that is an investment fund, means,

(i) a change in the business, operations or affairs of the issuer that would be considered important by a reasonable investor in determining whether to purchase or continue to hold securities of the issuer, or

(ii) a decision to implement a change referred to in subclause (i) made,

(A) by the board of directors of the issuer or the board of directors of the investment fund manager of the issuer or other persons acting in a similar capacity,

(B) by senior management of the issuer who believe that confirmation of the decision by the board of directors or such other persons acting in a similar capacity is probable, or

(C) by senior management of the investment fund manager of the issuer who believe that confirmation of the decision by the board of directors of the investment fund manager of the issuer or such other persons acting in a similar capacity is probable;

“material fact”, when used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities;

[145] Thus, under the Act, a misrepresentation is an untrue statement of a fact that would objectively be expected to have a significant effect on the market price or value of the security (i.e. a material fact).[^16] Leave will not be granted where there is no misrepresentation or where the materiality of the misrepresentation is not established.[^17]

[146] Each alleged misrepresentation is a discrete misrepresentation claim for the purpose of the leave requirement and for the purpose of determining whether the claim is not statute-barred.[^18] When a plaintiff seeks leave to amend a statement of claim, the court must consider whether the proposed amendment provides particulars or details of an existing claim for which leave has been granted or a new statutory cause of action requiring leave.[^19]

[147] Materiality is determined objectively from the perspective of what a reasonable investor would consider important in deciding to invest and at what price.[^20] A fact may be considered material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to invest and at what price.[^21] Materiality is a contextual and fact-specific inquiry, determined on a case-by-case basis from the perspective of the reasonable investor and involves the application of a legal standard to specific facts in light of all of the relevant circumstances and the total mix of information.[^22]

[148] The court must therefore inquire into what the reasonable investor would consider as significantly altering the total mix of information made available to him or her in the particular circumstances; this is a fact-specific inquiry, and except in those cases where common sense inferences are sufficient, the party alleging materiality must provide evidence in support of that contention.[^23]

[149] In Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.,[^24] Justice Rothstein summarized the test for materiality and the methodology for applying the test as follows:

61. In sum, the important aspects of the test for materiality are:

(i) Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor;

(ii) An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available;

(iii) The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor's deliberations;

(iv) Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and

(v) The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted from the disclosure documents provided by the issuer.

[150] In several cases, including one of my own, it has been held that a company’s restatement of its financial statements is an acknowledgment by the company that it has made material misrepresentations in relation to its audited financial statements that justifies granting leave to bring a statutory cause of action.[^25] In Middlemiss v Penn West Petroleum,[^26] Justice Belobaba, citing his own decision in Rahimi v. South Gobi Resources,[^27] said: “it is hard to imagine a scenario where a publicly-traded company restates its financials and in doing so allegedly causes shareholder loss and leave under s. 138.8 is not granted.” As I shall explain below, while those holdings were correct for those cases, the legal proposition is overstated and the “is” should be more accurately be replaced by a “may be.”

[151] The phrase “publicly corrected” is not defined in the Ontario Securities Act, and it is taken from economic theory about how to measure damages for misrepresentations that affect the value of securities trading in the primary or secondary market. A key identifier of a public correction is that it can be shown to have a statistically significant impact on market prices.[^28]

[152] The public correction need not be made by the issuer of the security and can take any form of message including statements by the issuer, credit rating agencies, market analysts, and short-sellers in newspaper articles and internet postings even anonymous ones.[^29] The public correction need not be a mirror-image of the alleged misrepresentation or a direct admission that a previous statement is untrue but the correction must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact.[^30] The correction is a one-time event; i.e., partial or cumulative corrections do not amount to a correction but rather are a continuation of the misrepresentation.[^31]

[153] The reasonable possibility of success requirement of the leave test is a meaningful but low threshold, merits-based test that is more than a superficial examination of the merits of the plaintiff’s statutory cause of action but a meaningful examination of the evidence to ensure that the action has some merit.[^32] While relatively low, the test for leave is a different and more robust standard than the general threshold for the certification or authorization of a class action.[^33] The leave test is meant to create a robust deterrent screening mechanism with a reasoned consideration of the evidence from both parties so that cases without merit are prevented from proceeding.[^34]

[154] For the purposes of the leave motion, the evidentiary burden placed on the plaintiff is considerably less than the burden of a trial or a mini-trial. In Theratechnologies inc. v. 121851 Canada inc.,[^35] the Supreme Court of Canada described the plaintiff’s burden. The Court said that the plaintiff should provide a plausible analysis of the legislation and some credible evidence in support for the claim. The Court said that the leave motion should not be treated as a mini-trial or be so onerous as to essentially replicate the demands of a trial. All that was required was sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the plaintiff’s favour.

[155] Using the record of affidavit evidence and cross-examinations, the court hearing the leave motion is entitled to weigh the evidence, but the court must take into account that the leave motion involves merely a paper record and that the statutory leave test sets a low evidentiary threshold.[^36] The motions judge should be cognizant of the fact that full production has not been made and that the defendant may have relevant documentation and evidence that is not before the court.[^37]

[156] As already noted above, on a leave motion, a full analysis of the evidence is unnecessary, and the plaintiff need only provide a plausible analysis of the applicable legislative provisions and some credible evidence in support of the claim sufficient to persuade the court that there is a reasonable possibility that the action will be resolved in the plaintiff’s favour.[^38] The test is that leave should not be granted if having considered all the evidence and having regard to the limitations of the motions process, the plaintiffs' case is so weak or has been so successfully rebutted by the defendant, that the plaintiff’s case has no reasonable possibility of success.[^39]

[157] If a defence is raised by a defendant at a plaintiff’s leave motion, then the test for the plaintiff is whether there is a reasonable possibility that the defendants will not be able to establish the defence; if there is a reasonable possibility that the defendants will not be able to establish the defence at trial, the motion for leave should be granted.[^40]

K. Should Mr. Cappelli be Granted Leave to Assert a Statutory Cause of Action?

[158] I shall begin the analysis of whether Mr. Cappelli should be granted leave to assert a statutory cause of action by identifying the misrepresentations and the corrective disclosures that are the basis of Mr. Cappelli’s statutory cause of action for both Class I and Class II.

[159] In this regard, the first point to note is that there are three sets of misrepresentations, which I have labelled Misrepresentation Sets #1, #2, and #3.

[160] In paragraph 7 of his Fresh as Amended Statement of Claim, set out above, Mr. Cappelli pleads that on October 9, 2015, SeekingAlpha.com published an article asserting that Nobilis made four misrepresentations in its impugned documents. (Some of the witnesses identified more than four alleged misrepresentations as having been revealed by the Seeking Alpha article, which is pleaded as the corrective disclosure for Class I claimants.) The four alleged misrepresentations in the Seeking Alpha article from the Fresh as Amended Statement of Claim, which I have labelled Misrepresentation Set #1 are about: (1) accounting practices with regards to entities in which Nobilis had less than 50% ownership; (2) the valuation and accounting for acquisitions made by Nobilis; (3) the compensation of current and former directors and officers; and (4) issues with regards to Nobilis’ accounts receivable from prior acquisitions. The Seeking Alpha article is the corrective disclosure for Class I.

[161] In his argument, Mr. Cappelli submitted that Misrepresentation Set #1 were reiterated, validated, confirmed, explained, or corroborated by the misrepresentations disclosed by Nobilis’ January 5, 2016 press release, which press release is the corrective disclosure for Class II. This is a shell game argument because the January 5, 2016 press release identifies a different set of six misrepresentations, (five accounting misrepresentations and a misrepresentation about effective internal controls), which I have labelled as Misrepresentation Set #2.

[162] More specifically, the accounting misrepresentations in Misrepresentation Set #2 are about alleged misrepresentations concerning: (1) accounting for warrants and options issued in private placements to non-employees; (2) recognition of the full fair value of non-controlling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS; (3) adjustments to the acquisition accounting for the Athas transaction; (4) reclassification of contingently redeemable non-controlling interests to temporary equity; and (5) other adjustments including: (i) corrections for stock-based compensation expense, (ii) corrections to the accounting for options issued to non-employees, and (iii) corrections to the calculations of fully diluted shares outstanding for application of the treasury stock method.

[163] Mr. Cappelli’s statutory cause of actions are actually built upon the misrepresentations disclosed by the January 5, 2016 press release, which is the corrective disclosure for Class II, which Mr. Cappelli links to the Seeking Alpha article, which is the corrective disclosure for Class I. The point to emphasize is although they have different corrective disclosures, the statutory causes of action for both Class I and Class II are actually built upon the set of misrepresentations that I have labelled Misrepresentation Set #2.

[164] On the leave motion and in the run up to it, Nobilis advanced evidence and argument and asserted that the misrepresentations of Misrepresentation Set #2 were not material misrepresentations. Mr. Cappelli did not cross-examine Nobilis’ experts, and instead, in his factum for the leave motion, Mr. Cappelli relied on the revelation of misrepresentations on January 12, 2016, when Nobilis released restated financial statements as establishing the materiality of all the misrepresentations. I have labelled the additional misrepresentations disclosed by the January 12, 2016 financial statements as Misrepresentation Set #3.

[165] The January 12, 2016 restatement of Nobilis’s financial statements revealed in addition to the accounting misrepresentations identified in the January 5, 2016 press release (part of Misrepresentation Set #2), four more materially untrue statements about accounting information had been made in the impugned documents (Misrepresentation Set #3). As noted above in the description of the factual background, the four additional misrepresentations disclosed on January 12, 2016 were that: (1) total liabilities were understated between 14% and 35%; (2) shareholders’ equity was overstated between 23% and 34%; (3) net income was overstated by 18% for total net income earned between January 1, 2013 and June 30, 2015; (4) net income per fully diluted share was overstated by 250% for one quarter during the restated period, and misstated between 33% to 250% for the entire restated Period.

[166] Mr. Cappelli submitted that the alleged misrepresentations, which I have labelled Misrepresentation Set #3, demonstrated that he had satisfied the onus of showing that there is a reasonable possibility that his action will be resolved at trial in his favour. This is a shell game argument because now Mr. Cappelli is equating all three sets of misrepresentations and relying on the apparently materiality of the misrepresentations of Misrepresentation Set #3 as proof of the materiality of the misrepresentations of Misrepresentation Set #2.

[167] Although most of the misrepresentations are about accounting matters, the misrepresentation sets, however, are not equivalents. Notwithstanding Mr. Cappelli’s efforts to hammer the square-peg of the January 5, 2016 press release and the octagon-peg of the January 12, 2016 financial statements into the round-peg-hole of the Seeing Alpha article, and notwithstanding his efforts to hammer the square-peg of the January 5, 2016 press release into the octagon-peg-hole of the January 12, 2016 financial statements, there is no reasonable possibility that this hammering will succeed. Misrepresentation Set #1 does not equal Misrepresentation Set #2 which does not equal Misrepresentation Set #3. The misrepresentation set upon which the statutory causes of action of Class I and Class II are built is Misrepresentation Set #2.

[168] Having identified the set of misrepresentation that are the predicate for the statutory causes of action for both Class I and Class II, the next point to note is that there is no dispute that the statements of Misrepresentation Set # 2 are false statements. The issue or question for the leave motion is whether there is a reasonable possibility that the action will be resolved in favour of Mr. Cappelli because the false statements of Misrepresentation Set #2 are material misrepresentations. The critical issue for the leave motion is the materiality of the misrepresentations of Misrepresentation Set #2.

[169] Nobilis responded to Mr. Cappelli’s statutory causes of action for Class I and Class II by treating Misrepresentation Set #2 as the operative set of misrepresentations for which Mr. Cappelli was seeking leave for both Class I and Class II. Nobilis submitted that leave should not be granted because the misrepresentations in Misrepresentation Set #2 were not material.

[170] However, Mr. Cappelli did not actually join issue on Nobilis’ arguments about Misrepresentation Set #2 and rather responded to those arguments by general arguments about what counts for materiality as a matter of accounting standards and by relying on the materiality of the misrepresentations in Misrepresentation Set #3, which as I have already mentioned, he equated with the other misrepresentation sets.

[171] The next point to note for determining the leave motion is to recognize that Mr. Cappelli and his experts did not succeed in rebutting Nobilis and its experts about the want of materiality of Misrepresentation Set #2. This finding is the major reason for refusing to grant leave to assert the statutory causes of action.

[172] As I have noted, Mr. Cappelli did not cross-examine any of Nobilis’ expert witnesses, and he responded to Nobilis’ non-materiality argument with generalizations of what counts for materiality in the accounting world and with the maneuver of substituting the materiality of the misrepresentations of Misrepresentation Set #3, which does have the appearance of passing the threshold of both accounting and legal materiality.

[173] In my opinion, weighing the evidence and taking into account that the leave motion involves a low evidentiary threshold and a low merits test, Mr. Cappelli has not provided some credible evidence in support of the claim based on Misrepresentation Set #2 (which is his pleaded set of misrepresentations) that is sufficient to persuade the court that there is a reasonable possibility that the statutory causes of action will be resolved in his favour.

[174] Yes, Nobilis admits in its January 5, 2016 press release that its financial statements contained mistakes, which is to say misrepresentations, and that the statements should no longer be relied upon, but it did not admit that these misrepresentations were material, and it appears that investors and the analysts that had an eye on the trading of Nobilis’ shares, agreed with this assessment of non-materiality, but, more to the point, based on the evidence presented on the leave motion, I conclude that Mr. Cappelli’s case based on Misrepresentation Set #2 is weak and has been successfully rebutted by Nobilis; the pleaded case has no reasonable possibility of success.

[175] As I noted above in the Legal Background part of these Reasons for Decision, in several cases, including one of my own, it has been held that a company’s restatement of its financial statements is an acknowledgment by the company that it has made material misrepresentations in relation to its audited financial statements that justifies granting leave to bring a statutory cause of action.[^41] While those holdings were correct for those cases, where the facts of those cases and common sense would indicate that a material misrepresentation had indeed been disclosed by the restatement of the financial statements, the legal proposition in those cases is overstated, and the “is” should be more accurately be replaced by a “may be,” so that the legal proposition becomes a company’s restatement of its financial statements may be an acknowledgment by the company that it has made material misrepresentations in relation to its audited financial statements that justifies granting leave to bring a statutory cause of action.

[176] In the case at bar, the restatement of the financial statements associated with Misrepresentation Set #3 might be an admission of materiality; however, the restatement of the financial statements associated with Misrepresentation Set #2 is not an admission of materiality because Nobilis’ experts have shown that those particular misrepresentations were not material to reasonable investors.

[177] It must be kept in mind that a determination of the materiality of a misrepresentation requires a case specific analysis of the factual circumstances of the particular case and a determination whether the particular misrepresentations would objectively be expected to have a significant effect on the market price or value of the security. Materiality is a contextual and fact-specific inquiry, determined on a case-by-case basis from the perspective of the reasonable investor and involves the application of a legal standard to specific facts in light of all of the relevant circumstances and the total mix of information.[^42] In the case at bar, no common-sense inference of materiality is available for the misrepresentations of Misrepresentation Set #2 and the evidence establishes that Mr. Cappelli has no reasonable possibility of success of showing that the misrepresentations of Misrepresentation Set #2 would have been material to investors in the secondary market.

[178] As I have already mentioned, common sense conclusions of materiality might be available with respect to Misrepresentation Set #3, which was based on Nobilis restating its financial statements on January 12, 2016. The January 12, 2016 release of financial statements does repeat the corrective disclosures of Misrepresentation Set #2 found in the January 5, 2016 press release, but the January 12, 2016 release of financial statements adds the additional set of four misrepresentations that constitute Misrepresentation Set #3, and it is in those additional set of misrepresentations where materiality might be found. Subject to Nobilis having an opportunity to address this set of misrepresentations, I might have concluded that Mr. Cappelli had a reasonable possibility of success with respect to this discrete set of misrepresentations. But, Mr. Cappelli’s statutory cause of action was not actually built on the misrepresentations of Misrepresentation Set #3.

[179] I emphasize that Mr. Cappelli’s statutory cause of action for Class I and his statutory cause of action for Class II are not based on Misrepresentation Set #3, and although it would appear that for a leave motion under Ontario’s Securities Act, Nobilis would have had a very uphill and possibly unsuccessful battle in resisting leave being granted for Misrepresentation Set #3, the point to emphasize is that Nobilis was not sued based on Misrepresentation Set #3, which is a different set of misrepresentations than Misrepresentation Set #2. It is trite that a party cannot succeed on a cause of action that it has not pleaded.

[180] The reality is that Nobilis has not had the opportunity to show that the misrepresentations of Misrepresentation Set #3 are not material, and it is not beyond peradventure that Nobilis might have been able to show that this set of misrepresentations was not material.

[181] There is one item of Misrepresentation Set #2 that requires specific attention because it is not a matter of financial restatement. It is the matter of Disclosure Controls and Procedures (“DC&P”) and Internal Control over Financial Reporting (“ICFR”). The January 5, 2016 press release does not actually mention DC&P and ICFR, directly, but the press release does indicate that Nobilis takes its internal controls over financial reporting and the integrity of its financial statements very seriously. The press release states that Nobilis is committed to implementing corrective measures with respect to its internal controls. In my opinion, these statements by Nobilis may be taken to be a corrective disclosure that it misrepresented the effectiveness of its DC&P and ICFC in the impugned documents.

[182] It does not necessary follow, however, that this corrective disclosure by itself establishes that this misrepresentation about internal controls identified in the January 5, 2016 press release is a material one. An admission by a corporation that it needs to improve its internal controls does not ipso facto mean that it has made an admission that its statements about effective internal controls were a material misrepresentation. The representation of effective internal controls has to be tethered to some factual nexus. The factual nexus of the January 5, 2016 press release was misstatements about five accounting matters that were not material and that arose largely because of the transition from Canadian IFRS to U.S. GAPP.

[183] A statement about the effectiveness of internal controls has to be weighed against the significance of the subject matter being controlled. There is a risk management and proportionality analysis that is connected to the notion of effectiveness, and the materiality of a statement about effectiveness has to be viewed as to whether a reasonable investor would regard the particular statement as having significantly altered the total mix of information made available about the effectiveness of internal controls and whether there was a substantial likelihood that information of change would have assumed actual significance in a reasonable investor's deliberations. The evidence of Nobilis’ experts is that there was no material matters disclosed in what I have described as Misrepresentation Set #2.

[184] This is not to say that revelations about weaknesses in internal controls cannot be serious and material matters. Mr. Kryzanowski’s evidence showed that, generally speaking, the effectiveness of internal controls is a matter of concern to investors in and to lenders to corporations. It is, however, to say that in the immediate case, Nobilis has shown that the misrepresentations disclosed by the January 5, 2016 press release about internal controls were not material misrepresentations. The actual response of investors and analysts suggests that all of the revelations contained in the January 5, 2016 press release were corrective of misrepresentations but not material ones.

[185] I, therefore, conclude that based on the no material misrepresentation argument for Class I and for Class II Nobilis has succeeded in demonstrating that Mr. Cappelli’s action has no reasonable possibility of success. This is dispositive, but I shall, nevertheless, continue the analysis and address; (a) the no corrective disclosure argument, which only affects Class I; (b) the expert’s report argument; i.e., the argument that Calvetti Ferguson, P.C., but not Nobilis, is liable for the misrepresentations in Misrepresentation Set #2; and (c) the no-causation argument; i.e., the argument that the misrepresentations did not cause any damage.

[186] The no corrective disclosure argument concerns only Class I. Mr. Cappelli joined issue with Nobilis’ no corrective disclosure argument, and he relied on the Seeking Alpha article as disclosing that there were material misrepresentations in the impugned documents. The Seeking Alpha article is said to be the corrective disclosure for Class I.

[187] The first analytical string to pull to unravel this dispute and the gamesmanship of the parties is the string that recognizes Mr. Cappelli’s motives and the legal problem with which he was confronted. Mr. Cappelli undoubtedly suffered a loss from his investment misadventure with Nobilis’ shares, but he needed to have the Seeking Alpha article a corrective disclosure connected to material misrepresentations in order to have a claim under Ontario’s Securities Act. In other words, because Mr. Cappelli had sold his Nobilis shares before the January 5, 2016 press release and before the January 12, 2016 release of restated financial statements, he needed to persuade the court that the Seeking Alpha article, which was connected to Misrepresentation Set #1, was also a corrective disclosure of Misrepresentation Set #2, which were the basis of his pleaded statutory cause of action. In still other words, Mr. Cappelli had no personal claim actually based on the January 5, 2016 press release or the January 12, 2016 financial statements (because he had already sold his shares), and thus, he had the problem of designing his claim based on the Seeking Alpha article and linking it to Misrepresentation Set #2.

[188] The identification of a corrective disclosure was a serious problem for Mr. Cappelli because he had pleaded the Saving Alpha article was the corrective disclosure document for Class I. Unfortunately for Mr. Cappelli, the Saving Alpha article is a corrective disclosure for Misrepresentation Set #1, but it is not a corrective disclosure for Misrepresentation Set #2.

[189] Nowhere in the Saving Alpha article is there a challenge or correction to the accounting treatment or accounting principles in the three impugned financial statements of 2014, or of Q1 and 2 of 2015. The impugned documents are not mentioned. A reading of the article reveals no challenge to the earlier financial statements as would eventually emerge from Misrepresentation Sets #2 or Misrepresentation Set #3, for that matter. It follows from this finding that there is no corrective disclosure for Class I. This is another reason not to grant leave for the statutory causes of action of Class I.

[190] Turning now to Nobilis’ expert report argument, which is based on s. 138.4 (11) of the Ontario Securities Act. This argument was advanced in support of Nobilis’ argument that Mr. Cappelli’s case was weak and had no reasonable possibility of success. Neither party was able to find any case law about s. 138.4 (11) of the Ontario Securities Act.

[191] The expert report argument was that Nobilis was not liable for that part of the impugned documents that summarized the audit opinion of Calvetti Ferguson, P.C. with respect to the misrepresentations of Misrepresentation Set #2. More precisely, the argument is that pursuant to s. 138.4 (11) of the Ontario Securities Act, Nobilis had proven that the representations in the impugned documents about Misrepresentation Set #2 represented the opinion made by Calvetti Ferguson, P.C. and Nobilis did not know and had no reasonable grounds to believe that there had been a misrepresentation made by Calvetti Ferguson, P.C.

[192] In my opinion, it will be a very rare situation that the intervention of an unqualified audit opinion will make available a defence under s. 138.4 (11) to the corporation with incorrect financial statements. It appears to me that this defence that the Legislature made available was designed for such things as an expert’s report or opinion about a mining company’s mineral reserves. It was not designed for misrepresentations made by auditors. However, that said, with respect to the misrepresentations of Misrepresentation Set #2 (but not with respect to the misrepresentations of Misrepresentation Set #3), in my opinion, the case at bar is one such very rare case where the corporation can offload liability to the auditor.

[193] The critical factor in the immediate case that makes Calvetti Ferguson, P.C. liable but not Nobilis liable for Misrepresentation Set #2 is that Nobilis had no role to play in Calvetti Ferguson, P.C.’s decisions about how to restate the financial and shareholding data provided from the bookkeeping of Nobilis to accord with U.S. GAAP in the transition from Canadian IFRS.

[194] No financial information was withheld from Calvetti Ferguson P.C. and there was no effort to persuade or dissuade Calvetti Ferguson as to how the information should be represented in Nobilis’ financial statements. The restatement reclassifications for Misrepresentation Set #2 came about from the usually circumstance that the financial statements had to be restated - not because of discovered errors - but because Nobilis’ shares began to trade on the NYSE and the SEC required that U.S. GAPP be followed. The result was the application of different accounting principles and this led to a different presentation of the financial statements based on the same data.

[195] In the immediate case, the data provided by Nobilis was accurate and not misstated by Nobilis, but Nobilis’s new auditors concluded that Calvetti Ferguson had not properly treated that data pursuant to U.S. GAPP. But for the change in auditing standards from IFRS to U.S. GAPP, there would have been no problem with respect to the restatements associated with Misrepresentation Set #2. There is no evidence that there was a mistake in the financial statements pursuant to IFRS. This rare circumstance makes the expert’s report defence available in the immediate case.

[196] In the case at bar, Calvetti Ferguson has accepted its liability. It accepted that it was in error in the presentation and categorization of the financial information presented to it by Nobilis. There is no suggestion in any of the material that Nobilis was not forthcoming or withheld any information. The errors of the auditor consisted of failing to appreciate the principles applicable to accounting for acquisitions and the differences in the treatment of those principles between Canadian IFRS and U.S. GAAP. These errors are uniquely within the competence of the auditor. Nobilis reasonably relied on that competence.

[197] Thus, in my opinion, the expert’s report defence is available with respect to Misrepresentation Set #2. For what its worth, its my opinion, the defence would not have been available had Mr. Cappelli’s case been built on Misrepresentation Set #3. The accounting problems and the restatements problems associated Misrepresentation Set #3 went beyond the transition from IFRS to U.S. GAPP.

[198] The critical factor for the expert’s report defence of a misrepresentation that exists exclusively because of the expert’s treatment of the data will rarely occur when the expert is an auditor who depends upon the bookkeeping of the corporation. Thus, in my opinion, the critical factor of a misrepresentation associated only with the expert’s report would not be present with respect to Misrepresentation Set #3, where the misrepresentations were not a matter of how data from Nobilis was treated by Calvetti Ferguson, P.C. but rather was a matter of data that was not true or that was incorrectly treated in whole or in part by Nobilis. Nobilis had a role in the errors revealed by the January 12, 2017 restatement of its financial statements.

[199] Thus, in my opinion, Nobilis expert report argument supports its main argument that Mr. Cappelli’s case is weak and that his action based on Misrepresentation Set #2 has no reasonable possibility of success. I should add, however, had I concluded that the argument was not available, as it typically will not be available when the expert is an auditor, I still would have concluded that Mr. Cappelli’s case based on Misrepresentation Set #2 was weak and had no reasonable possibility of success.

[200] Finally, turning to the no causation argument, I can be brief. As for Nobilis’ reliance on the causation or attribution defence under s. 138.5 (3) of the Ontario Securities Act, in my opinion, the design of the Act is that this is a post-leave-having-been-granted defence. The leave motion is not the time for an event study to disprove the causation that the Act presumes. Thus, I disagree with Nobilis’ no causation argument.

L. The Certification Motion

[201] For the above reasons, I decline to grant leave to Mr. Cappelli to assert a statutory cause of action for the members of Class I or Class II. It follows that there is no reasonable cause of action and Mr. Cappelli cannot satisfy the first criterion for certification of his proposed misrepresentation class action.

M. Conclusion

[202] For the above reasons, the leave motion and the certification motion is dismissed.

[203] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with Nobilis’ submissions within twenty days from the release of these Reasons for Decision followed by Mr. Cappelli’s submissions within a further twenty days.

Perell, J.

Released: April 10, 2019

COURT FILE NO.: CV-16-544173

DATE: 2019/04/10

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Vince Cappelli

Plaintiff

– and –

NOBILIS HEALTH CORP., HARRY JOSEPH FLEMING, CHRISTOPHER H. LLOYD, ANDREW CHEN, KENNETH J. KLEIN and CALVETTI FERGUSON, P.C.

Defendants

REASONS FOR DECISION

PERELL J.

Released: April 10, 2019

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Silvercorp Metals Inc., 2016 ONCA 641 at paras. 42-43, aff’g 2015 ONSC 5348; Catucci v. Valeant Pharmaceuticals International Inc., 2017 QCCS 3870. [^35]: 2015 SCC 18 at para. 39. [^36]: Musicians' Pension Fund of Canada (Trustees of) v. Kinross Gold Corp., 2014 ONCA 901, aff’g 2013 ONSC 6864; Green v. CIBC, 2014 ONCA 90, var’g 2012 ONSC 3637, aff’d 2015 SCC 60. [^37]: Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719 at paras. 45-49. [^38]: Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18 at paras. 38-39; Green v. CIBC, 2015 SCC 60 at paras. 122, 147, and 212, aff’g 2014 ONCA 90, var’g 2012 ONSC 3637; Goldsmith v. National Bank of Canada, 2016 ONCA 22 at para. 34, aff’g 2015 ONSC 2746. [^39]: Rahimi v. SouthGobi Resources Ltd., 2015 ONSC 5948, var’d 2017 ONCA 719; Swisscanto Fondsleitung AG v. BlackBerry Ltd., [2015 ONSC 6434](https://www.canlii.org/en/on/onsc/doc/2015/2015onsc6