COURT FILE NO.: CV-20-00641990-00CP
DATE: 20210628
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Harpreet Badesha, Plaintiff
– AND –
Cronos Group Inc., Michael Gorenstein, William Hilson, Jerry Barbato, Kevin C. Crosthwaite Jr., Bronwen Evans, Murray R. Garnick, Bruce A. Gates, Jason Adler, James Rudyk, Jody Begley, Alan Friedman and Michael Coates, Defendants
BEFORE: Justice E.M. Morgan
COUNSEL: Garth Myers and Paul Bates, for the Plaintiff
James Doris, Michael O’Brien, and Alexandria Matic, for the Defendants, Cronos Group Inc., Michael Gorenstein, Jerry Barbato, Kevin C. Crosthwaite Jr., Bronwen Evans, Murray R. Garnick, Bruce A. Gates, Jason Adler, James Rudyk, Jody Begley, Alan Friedman and Michael Coates
Catherine Francis, for the Defendant, William Hilson
HEARD: June 7-8, 2021
LEAVE TO PROCEED/certification MOTIONS
[1] It is well accepted that “class actions improve access to justice by making economical the prosecution of claims that any one class member would find too costly to prosecute on his or her own”: Hollick v. Toronto (City), 2001 SCC 68, [2001] 3 SCR 158, at para 15. But at what point does the procedure magnify small errors so that the plea for access becomes much ado about too little?
I. The two motions
[2] The Plaintiff in this proposed shareholders’ class action brings a double-barreled motion: leave to proceed under section 138.3 of the Ontario Securities Act, RSO 1990, c. S 5 (“OSA”) and certification under section 5(1) of the Class Proceedings Act, SO 1992, c. 6 (“CPA”). The claim in its essence is a secondary market claim in which shareholders of the Defendant, Cronos Group Inc. (“Cronos”), allege misrepresentation in certain of Cronos’ public statements and/or core documents.
[3] To some extent the issues in the leave motion and the certification motion parallel each other. That said, the motion for leave to proceed is logically prior to the motion for certification. If the former does not succeed there will be no ongoing OSA secondary market claim and the motion to certify that claim will be rendered moot.
[4] The Amended Statement of Claim also contains misrepresentation claims at common law and a shareholder oppression claim under the Ontario Business Corporations Act, RSO 1990, c. B 16 (“OBCA”). Those claims do not require prior leave to proceed, but, of course, do require certification if the action is to proceed as a class action.
II. The parties to the action
[5] By way of introduction, the Plaintiff, a retail securities investor, brings this action on behalf of the following proposed class of purchasers of Cronos securities (the “Class”):
All persons and entities who, during the period from August 14, 2018 at 7:00 a.m. ET to March 30, 2020 at 4:33 p.m. ET (the “Class Period”), acquired Cronos shares in the secondary market other than Cronos and its subsidiaries, affiliates, officers, directors, senior employees, legal representatives, heirs, predecessors, successors and assigns, the Individual Defendants and any member of their families and any entity in which any of them has or had during the Class Period any legal or de facto controlling interest.
[6] In his claim and motion materials, the Plaintiff indicates that he is seeking to certify a world-wide class of Cronos shareholders. This includes purchasers who bought Cronos shares on the TSX and on NASDAQ.
[7] Cronos is a Canada-based global company whose primary business is the cultivation, manufacturing, and marketing of cannabis and cannabis-derived products for medical and adult-use recreational markets across the world where lawful. During the proposed Class Period, the company expanded its portfolio and products, and entered the U.S. market to offer hemp-derived cannabidiol products to U.S. consumers.
[8] Among other initiatives, Cronos announced on November 12, 2019 that it was launching its PEACE+ brand of cannabis tincture products, which it planned to sell widely in convenience stores using the distribution network of one of its major investors, Altria Group Inc. (“Altria”). As will be discussed later in these reasons for judgment, Cronos announced on March 30, 2020 that it was delaying the roll out of PEACE+ tinctures in the United States.
[9] The individual Defendants were each officers, directors, and/or members of Cronos’ audit committee during the proposed Class Period. In brief, those Defendants held the following positions:
Michael Gorenstein was the CEO, Chairman and President of Cronos.
William Hilson was the CFO of Cronos until April 15, 2019, at which time he became Chief Commercial Officer and continued in that role until December 31, 2019.
Jerry Barbato replaced Mr. Hilson as CFO on April 15, 2019, after serving as Senior Director of Corporate Strategy at Altria, and remained in that role for the duration of the proposed Class Period.
Michael Gorenstein, Kevin C. Crosthwaite Jr., Bronwen Evans, Murray C. Garnick, Bruce A. Gates, Jason Adler, James Rudyk, Jody Begley, Alan Friedman, and Michael Coates were all Directors during the proposed Class Period.
Bronwen Evans, Jason Adler, James Rudyk, and Alan Friedman were members of the Audit Committee, with Mr. Rudyk acting as Chair.
III. The impugned events
[10] Although the proposed Class Period starts nine months earlier, the events relevant to this claim really begin on May 9, 2019. On that date, Cronos released its first quarter 2019 results in its Interim Condensed Unaudited Consolidated Financial Statements for the three-month period ending March 31, 2019. At the same time, it released a Management Discussion and Analysis (“MD&A”) for the same three-month period. The quarterly results included revenues recognized by Cronos in connection with a transaction entered into in March 2019 involving the exchange of cannabis dry flower for cannabis resin with a third party.
[11] On August 8, 2019, Cronos released its second quarter 2019 results in its Interim Condensed Unaudited Consolidated Financial Statements for the three and six-month periods ending June 30, 2019. At the same time, it also released its MD&A for the preceding three and six-month periods. Those results included the revenue recognized from the Q1 dry flower/resin exchange transaction.
[12] On November 12, 2019, Cronos released its third quarter 2019 results in another Interim Condensed Unaudited Consolidated Financial Statements for the three and nine-month periods ending September 30, 2019. Again, it simultaneously released an MD&A for the three and six-month periods ending September 30, 2019.
[13] The financial results incorporated revenues recognized from several exchange transactions entered into in September 2019, including a wholesale exchange in which cannabis dry flower was traded for cannabis extracts in three concurrent transactions and a separate wholesale transaction for a sale of dried cannabis to a third party. The results for the nine-month period ending September 30, 2019 also included the revenue recognized from the first quarter 2019 exchange transaction.
[14] On March 2, 2020, Cronos issued a press release indicating a delay in its annual financial filings for fiscal year 2019 “due to a continuing review by the Audit Committee of the Company’s Board of Directors, with the assistance of outside counsel and forensic accountants, of several bulk resin purchases and sales of products through the wholesale channel and the appropriateness of the recognition of revenue from those transactions.” This press release, along with a Form 12b-25 Notification of Late Filing issued the same day, effectively put the market on notice that the company expected to report for fiscal year 2019: (i) an increase in net revenue; (ii) a material inventory write-down; (iii) a material decrease in gross profits; (iv) a material increase in operating loss; (v) a material gain on revaluation of financial liabilities; (vi) restructuring charges; and (vii) a material increase in net income.
[15] Two weeks later, on March 17, 2020, Cronos disclosed in a Material Change Report that it had determined “on the recommendation of the Audit Committee of the Company’s Board of Directors and after consultation with KPMG LLP, the Company’s independent registered public accounting firm, that Cronos’ previously issued unaudited interim financial statements for first, second and third quarters of 2019 . . . w[ould] be restated and reissued.” The Report elaborated that “the Audit Committee of the Company’s Board of Directors ha[d] been conducting a review of certain bulk resin purchases and sales of products through the wholesale channel, and the restatement was being made to eliminate certain of these transactions through the wholesale channel.”
[16] On March 30, 2020, two weeks after the Material Change Report, Cronos released a number of documents at once. These included a restated MD&A for the first three quarters of 2019, along with restated Interim Financial Statements for those three quarters. The company also issued on the same date certifications by its CEO and CFO for the financial statements for the first two quarters of 2019, an Audited Annual Financial Statements, an MD&A, and an Annual Report (with certifications from its CEO and CFO) for the year ended December 31, 2019.
[17] The amended and restated financial documentation for the first two quarters of 2019, prepared by Cronos’ audit committee with the assistance of outside counsel and forensic accountants, concluded that there were accounting errors in the previously filed interim financial statements “due to one wholesale transaction that was inappropriately accounted for as revenue.” For the third quarter of 2019, the restatement stated that for the nine months ended September 30, 2019 there were accounting errors in the previously filed interim financial statement “due to three wholesale transactions, one of which occurred during the three-months ended March 31, 2019 and was inappropriately accounted for as revenue.”
[18] In addition to all of that, Cronos indicated in its March 30, 2019 press release headlined “Cronos Group Reports 2019 Fourth Quarter and Full-Year Results”, that it had paused the distribution of PEACE+ hemp-derived CBD tinctures through its shareholder Altria’s U.S.-based distribution. It further announced an inventory write-down of US$24 million which, as the press release indicates, was primarily driven by downward pressure in market prices during the year.
[19] In its amended and restated MD&A, Cronos identified certain weaknesses in internal control over financial reporting and listed the measures adopted to remediate those weaknesses. Further, Cronos’ 2019 Annual Report included a report from its auditors, KPMG, which elaborated on the revenues recognized and restated from the first and third quarter exchange transactions. KPMG indicated in its report that the assessment had demanded “especially challenging, subjective, or complex judgments” by “forensic accounting professionals with specialized skills and knowledge”. It explained the restated revenue recognition as follows:
We identified the evaluation of revenue recognition through the wholesale sales channel as a critical audit matter. The evaluation of bulk sales of dried cannabis flower, where the Company also purchases cannabis resin from the customer, required a higher degree of auditor judgment. Judgment was required to assess whether such transactions were linked and in the scope of Accounting Standards Codification (ASC) 606 Revenue from Contracts with Customers or ASC 845 Nonmonetary Transactions, and to assess if the transactions had commercial substance and resulted in revenue being recognized.
IV. The pleading
[20] At the hearing of the motion, Mr. Myers, for the Plaintiff, set out a litany of what he characterized as separately and independently actionable misrepresentations committed by Cronos and the individual Defendants during 2019. In all, the Plaintiff claims that there were over 570 individual misrepresentations in Cronos’ 2019 first, second, and third quarter Interim Financial Statements and MD&As. These are alleged to have been reiterated or augmented or supplemented and added to in various statements and certifications by the individual Defendants. When one tallies it all up, there are allegations of just under 8,000 misrepresentations covered by the Plaintiff’s pleading.
[21] The accounting misrepresentations are listed in lengthy schedules to the Amended Statement of Claim. Each alleged misrepresentation relates to purportedly improper revenue recognition for the Q1 and Q3 2019 exchange transactions described above. Thus, any one adjustment made by KPMG is characterized as a multiple error, impacting on, and attributed by the Plaintiff to, anything from accounts receivable, to inventory, to gross and net revenue figures.
[22] The Plaintiff seeks a declaration that each of these itemized figures be treated as separate misrepresentations such that each misrepresentation gives rise to a separate liability limit under Part XXIII.1 of the OSA. And the list of separate and independently actionable misrepresentations does not end with the Interim Financial Statements and MD&As. It includes various standard statements that accompany those documents, press releases announcing the information in those documents, telephone calls announcing earnings, and other similar statements that reference the documents containing the initial misrepresentations.
[23] By way of illustration, in further support of his claim the Plaintiff alleges that Cronos’ accounting misstatements resulted in misrepresentations regarding its compliance with applicable accounting standards. Cronos’ 2019 first, second, and third quarter Interim Financial Statements each stated, in standard fashion, that the company prepared its financial statements in accordance with International Accounting Standard (“IAS”) as well as with International Financial Reporting Standards (“IFRS”). Likewise, Cronos’ MD&As for the same periods stated that its financial statements were prepared in accordance with IFRS and IAS.
[24] The Plaintiff pleads that each of these statements constitute separate misrepresentations because the exchange transactions engaged in during the first and third quarters of 2019 had to be restated; accordingly, they did not meet the requirements for revenue recognition under IAS or IFRS. One accounting figure can in this way be replicated as 8 or more alleged misrepresentations as described in the pleading.
[25] The Plaintiff further claims that Cronos made yet more misrepresentations in each MD&A and Annual Information Form issued during the relevant period. These misrepresentations are alleged to have been made by Cronos’ failure to disclose material risks tied to Cronos’ defective internal controls over financial reporting (“ICFR”) and disclosure controls and procedures (“DC&P”), as well as to its relationship with cannabis dry flower wholesale customers and bulk resin and tincture supplies. Again, these alleged misrepresentations refer back to the accounting approach to the 2019 first and third quarter statements.
[26] As set out in the Amended Statement of Claim, these alleged separate and distinct material risks include the fact that (a) “separate transactions involving the sale of cannabis dry flower through the wholesale channel as well as the purchase of bulk resin and tincture would be classified as one transaction”; (b) that “revenue from wholesale cannabis sales would not meet the criteria for revenue recognition or would otherwise be deemed to be a consignment sale”; that (c) that “Cronos’ reported revenue generation and revenue increases, and consequential line items, were overstated or understated, as the case may be”; and (d) that “the public disclosure of these events, transactions and circumstances could give rise to regulatory inquiries and investigations”.
[27] On top of that, the Plaintiff claims that the MD&As and Certifications of Interim/Annual Filings Certificates issued by Cronos during the relevant period misrepresented that ICFR and DC&P were adequately designed and that Cronos’ filings were free from material misrepresentations. The Plaintiff alleges that these statements constitute untrue statements of fact because Cronos admitted in its restated financial statements and MD&As that there were material weaknesses in its first, second, and third quarter ICFR, indicating that its DC&P were not effective. Accordingly, the Plaintiff claims that, separate and apart from the claim with respect to the restated financial statements, the standard language used to certify of those statements by Cronos, its CEO, and its CFO’s certifications were independently wrongful on a number of accounts.
[28] In addition, the claim states that during the relevant time officers of Cronos misrepresented matters in numerous non-core documents. The Plaintiff pleads that, separate and apart from any other misrepresentations, Cronos’ press releases announcing first, second and third quarter results for 2019 contained misrepresentations arising from improper revenue recognition of the exchange transactions – i.e. the misrepresentations that were in the financial statements whose publication the press release announced. These allegedly separate misrepresentations included misrepresenting reported net revenue, net revenue increase, kilograms sold, and cost of sales before fair value adjustments per gram sold.
[29] Furthermore, the Plaintiff pleads that during Cronos’ 2019 first quarter earnings call, Cronos’ expected quarter over quarter revenue growth for the upcoming year was “touted” by its officers on the call. The pleading likewise alleges that similar “touting” of Cronos’ revenue growth was done during its third quarter 2019 earnings call. Each of these instances is presented as a distinct and actionable misrepresentation and is pleaded as separate from the alleged misrepresentation which the statement in question was reporting on.
[30] The Amended Statement of Claim states that these many misrepresentations were publicly corrected during the period February 24, 2020 through March 30, 2020. This series of disclosures is said to have commenced with Cronos’ February 24, 2020 press release announcing a delay in release of its year-end financial results. The pleading alleges that the public correctives continued with the company’s press releases of March 2, 2020 and March 17, 2020, its Material Change Report, a MarketWatch article published on March 19, 2020 that largely reiterated the information contained in the March 2 and 17 press releases, and, finally, the March 30, 2020 press release and restated financial statements themselves.
V. The leave motion
[31] As indicated at the outset, the leave motion under section 138.3 of the OSA is logically prior to the certification motion simultaneously brought by the Plaintiff. Section 138.3(1) of the OSA gives a right of action for damages 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. This is the primary focus of the Amended Statement of Claim.
[32] The criteria for leave and the criteria for certification under section 5(1) of the CPA overlap to some extent, but with some key differences. For one thing, the Supreme Court of Canada said in Hollick, supra, at para 16, that “the certification stage is decidedly not meant to be a test of the merits of the action.” In analyzing the question of certification, it is off limits for the motion judge to attempt an assessment of the strength of the claim beyond satisfying the requirement under section 5(1)(a) of the CPA that there be a cause of action: Fresco v. Canadian Imperial Bank of Commerce, 2012 ONCA 444, at para 71.
[33] The same cannot be said for a leave motion. The test for leave under section 138.8(1)(b) of the OSA entails an assessment of whether there is a reasonable possibility that the Plaintiff will succeed at trial. This language, of course, does not import the trial burden of proof and so does not require that the Plaintiff establish his case on the balance of probabilities: Theratechnologies Inc. v 121851 Canada Inc., 2015 SCC 18, [2015] 2 SCR 106, at para 38. It does, however, open the door to a more substantive rather than strictly procedural evaluation of the claim. The “reasonable possibility” phrase used in section 138.8(1)(b) has been said to impose a “low merits-based threshold” for proceeding with the action: Mask v. Silvercorp Metals Inc., 2015 ONSC 5348., at para 45.
a) The “good faith” requirement
[34] Section 138.8(1)(a) of the OSA requires, first of all, that it be shown that “the action is being brought in good faith”. If a Plaintiff fails this initial screening the claim cannot be granted leave. The requirement is similar to, although perhaps not entirely identical with, that under section 5(1)(e) of the CPA that there be a suitable representative plaintiff.
[35] Counsel for the Defendants embarked on a rather aggressive challenge to the Plaintiff, criticizing much about him as not being up to the task. The critique started off by attempting to impugn his good faith by showing that his name was incorrectly printed – his first and last names were transposed – in the style of cause at the front of the Amended Statement of Claim. Defendants’ counsel then criticized the Plaintiff for submitting a litigation plan that was not up to the standard they demanded. They also criticized the Plaintiff for having sworn an affidavit in support of the leave motion but not having sworn a separate affidavit, presumably repeating some of the same content, in support of the certification motion. In addition to these specific “errors” which they argue the Plaintiff committed, Defendants’ counsel sought to cross-examine the Plaintiff on how and why he consulted lawyers at the outset of the case.
[36] Mr. Bates, responding to all of this on behalf of the Plaintiff, made a strong argument at the hearing before me that this was not a proper way to treat a proposed representative Plaintiff. He emphasized that this is a retail investors’ securities claim, and in that respect is a species of consumer protection action: see Kerr v. Danier Leather Inc., 2007 SCC 44, [2007] 3 SCR 331 at para. 32. He submitted that as a general policy matter, retail investors ought not be subjected to a chilling level of personal criticism lest they be reluctant to ever bring a claim as representative plaintiff.
[37] The Plaintiff’s view, expressed with considerable force by Mr. Bates, is that Defendants’ counsel’s approach appeared to be aimed more at discouraging any potential plaintiff than at disqualifying this particular Plaintiff. After all, the accusations levelled at the Plaintiff were of a type that could be applicable to anyone whose name appeared on the front of the pleading.
[38] I do understand this well articulated concern. There was nothing fruitful to be gained by the way the Defendants challenged the Plaintiff. Defendants’ counsel’s approach to the good faith issue was not exactly improper or inappropriate, but it was nonsensical.
[39] None of the accusations thrown at the Plaintiff had a chance of even grazing his integrity and good faith. In effect, Defendant’s counsel seemed to be criticizing the lawyering and clerical work that went into putting the Plaintiff’s claim together. I am more than sure, for example, that the Plaintiff is perfectly aware of his own first and last names. I am equally certain that he did not type his name on the front page of the Amended Statement of Claim himself. If someone in Plaintiff’s counsel’s firm made a typographical error and transposed the Plaintiff’s names, it is obviously not a failing of the Plaintiff. To submit otherwise is, frankly, ridiculous.
[40] The same is true with the design of the litigation plan and the tactical calculation of what content to include and in which motion record to submit an affidavit. These are legal strategy decisions, and, as Mr. O’Brien, for Cronos, agreed in his response to my question about it, are easily recognized as such by all counsel. They have nothing to do with the Plaintiff’s ability to carry out his function as Plaintiff or his good faith in bringing the action.
[41] In addition, the Plaintiff was cross-examined on areas that were obviously privileged. Ms. Francis, on behalf of the Defendant, William Hilson, asked the Plaintiff how he got in touch with his lawyers, when he first spoke with them, how his lawyers reviewed the documents in the record with him, why he decided to sue the individual Defendants, etc. These were all refused by Plaintiff’s counsel, as one would expect.
[42] The entire exercise was unproductive, and foreseeably so. I do not know why Defendants’ counsel bothered to go down this dead-end road. But in doing so, they missed the mark by a wide margin.
[43] The Plaintiff is a retail investor in Cronos’ stock. He cannot be impugned by pointing to decisions that litigation lawyers make on his behalf. It should be obvious that clients neither prepare litigation plans nor advise themselves on litigation tactics in compiling motion records. It should also be obvious that Plaintiffs in a consumer protection claim like this one rely and act on the advise of counsel perhaps even more than in some other types of cases. After all, they are retail customers of a complex industry governed by a sophisticated combination of corporate law, securities regulation, accounting standards, etc. Very few of the things the Plaintiff was asked about touch on whether he is personally qualified to be Plaintiff.
[44] The good faith requirement is a basic one. It is designed to protect the company and long-term shareholders from the volatility imposed by so-called strike suits and other spurious claims: Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60, [2015] 3 SCR 801, at para 68. The Plaintiff must have brought the action in the belief that there is an arguable claim and for reasons that are consistent with the purpose behind the statutory remedy. That is the sum total of the section 138.8(1)(a) requirement.
[45] As a criterion for leave to proceed, good faith does not test the knowledge level or skill set of the Plaintiff. It certainly does not ask whether the Plaintiff has reliable clerical skills, or can second guess his counsel’s legal strategy decisions, or whether he can prepare a better litigation plan to submit in the motion record. It likewise does not require a Plaintiff to divulge to opposing counsel what he discussed with his lawyers and when he discussed it. It is a threshold test designed to filter out cases brought for surreptitious or collateral purposes, or that are brought by a person shown to lack a genuine intention to prosecute the claim or who has no real belief in the merits of his or her own claim: Mask v. Silvercorp Metals Inc., 2015 ONSC 5348, at paras 32-35.
[46] The aggressive approach taken by Defendants’ counsel is rare, and for good reason. It has been observed in previous cases that “[v]ery few OSA leave motions fail to clear the good faith requirement”: Ibid., at para 33. Try as they might, Defendants’ counsel have unearthed nothing that suggests that the Plaintiff has brought the action in anything but good faith. Their time and effort in this regard was spent on pursuing arguments that simply have no cogency.
b) The “reasonable possibility” requirement
[47] As indicated above, section 138.8(1)(b) of the OSA requires that for leave to be granted there must be a reasonable possibility that the claim will succeed at trial. This does not, of course, mean that the leave motion is a form of mini-trial where the Plaintiff has to prove his case. However, “[w]hat is required is sufficient evidence to persuade the court that there is a reasonable possibility that the action will be resolved in the claimant’s favour”: Theratechnologies, supra, at para 39.
[48] The reasonable possibility test is therefore a relatively low hurdle that is, nevertheless, not de minimis. It is “more than a speed bump” in the road to permitting the action to proceed: Ironworkers Ontario Pension Fund v. Manulife Financial Corp. (2013), 2013 ONSC 4083, 44 CPC (7th) 80, at para 39 (SCJ). The effect of the requirement is to ensure that the motion court “undertake a reasoned consideration of the evidence to ensure that the action has some merit”: Theratechnologies, at para 38.
[49] This question of whether there is a reasonable possibility of success applies to the central question in the Plaintiff’s claim: did the alleged misrepresentations and the subsequent public corrections have a ‘material impact’? As my colleague Perell J. put it in Cappelli v Nobilis Health, 2019 ONSC 2266, at para. 145 [citations omitted]:
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). Leave will not be granted where there is no misrepresentation or where the materiality of the misrepresentation is not established.
[50] Section 1(1) of the OSA defines “misrepresentation” as “an untrue statement of material fact” or “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”. It goes on to define a “material fact” as one “that would reasonably be expected to have a significant effect on the market price or value of the securities.”
[51] Although the definition is an objective one, the reasonableness of the expectation of market impact must be analyzed in its context and must take into account the “entire circumstances of the company, its industry, and market”: Miller v FSD Pharma, Inc., 2020 ONSC 4054, at para 65, citing Cornish v Ontario Securities Commission, 2013 ONSC 1310, at para 51. The analysis, in other words, involves looking beyond the text of the documents issued by a reporting issuer like Cronos; it requires an examination of “the context in which the alleged public corrections were made and how the alleged public corrections would be understood in the secondary market”: Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v Barrick Gold Corporation, 2021 ONCA 104, at para 36.
[52] Mr. Myers, on behalf of the Plaintiff, submits that the multiple press releases in early 2020, taken together, prove Cronos’ 2019 misrepresentations. In their factum Plaintiff’s counsel contend that, “Collectively, these corrective disclosures revealed the existence of the misrepresentations in Cronos’ prior public filings.” They go on to state that these public corrections effectively speak for themselves in demonstrating the materiality of the misrepresentations. Accordingly, they submit in their factum that there is no need here “to answer how the alleged public corrections were understood in the secondary market.” In my view, however, that approach omits an indispensable aspect of the materiality analysis.
[53] The Court of Appeal made this very point in Barrick, at para 50, quoting approvingly from the motion court’s judgment in Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v. SNC-Lavalin Group Inc, 2016 ONSC 5784, at para 45:
In SNC-Lavalin, Perell J. correctly rejected a purely semantic and mechanical approach to the determination of a public correction (referred to, here, as a corrective disclosure). He reasoned, at para. 45:
[T]he determination of whether a corrective disclosure is corrective depends not only on a semantic analysis of what the public correction means but also on an analysis of how the words would be understood in an efficient market and also a statistical analysis of the effect of those words on the market’s evaluation of the value of the securities that had been misrepresented to the marketplace.
[54] The impact on the market lies at the heart of the statutory definition of “material fact”. It is not just an add-on to be examined in case the public corrections are somehow unclear. The possibility exists that there were misrepresentations in the form of inaccuracies in financial statements, but that they had negligible market impact and so were not material in the OSA sense of the term.
[55] The Defendants rely on the report of their economics expert, Professor Douglas Skinner of University of Chicago, to establish the market context which they say is relevant to the materiality analysis. Professor Skinner stresses that in 2019 Cronos was still a young company in the process of expanding its business and markets, that it was an early entry into a new industry, and that as such its prospects in the market were not based on short term revenue.
[56] Professor Skinner also addresses the Plaintiff’s economics expert, Professor Douglas Cummings of Florida Atlantic University, and indicates that of the 5 dates on which Professor Cummings says were public correctives disclosed by Cronos, three of them show no statistically relevant movement in share price the following trading day and one shows a dip attributable to the unrelated news that Cronos was delaying its PEACE+ program which had previously generated considerable enthusiasm among analysists. The fifth incident, which did show a statistically relevant decline on the day following the corrective announcement, was a volatile day with the share price losing and recovering in interim trading for which the piece of news contained in Cronos’ disclosure does not account.
[57] Finally, and perhaps most importantly, Professor Skinner observes that, “[t]he alleged corrective disclosure occurred during a period of unusual market volatility, as news came to the market regarding the seriousness of the COVID-19 pandemic in February and March 2020.” This, if anything, is an understatement.
[58] The Plaintiff himself has included in his Supplemental Motion Record a market analysis by Morningstar Financial Research whose very title makes the point more emphatically: “COVID-19 Pandemic Tanks Cannabis Stocks but Has Little Impact on Their Long-Term Potential”. The market decline in late March 2020 that is pointed to by the Plaintiff and his economics expert is, according to this evidence, more reflective of the materiality of the pandemic than of anything that Cronos did or did not announce to the public. As Morningstar puts it, “The COVID-19 outbreak has rattled the economy and broader equity markets. Likewise, shares in cannabis companies have dropped significantly.”
[59] The accounting matters that were restated by Cronos in March 2020 were already relatively obscure, with market analysts generally perceiving them as insignificant in both the long and the short term. For example, another market report contained in the Plaintiff’s evidentiary record, issued by MKM Partners in early March 2020 (i.e. before the full impact of the pandemic on the market at large was known), indicated that Cronos’ delay in filing its 2019 financials was a tempest in a teapot that would correct itself in short order: “We are taking advantage of broad market concerns and weakness related to 10K filing uncertainty, to upgrade Cronos to Buy.”
[60] The MKM report went on to opine that the bulk sale exchange transactions that prompted the need to restate Cronos’ financials were an insignificant portion of its business and assets, reporting: “1) Bulk wholesale (source of the filing issue) is not of strategic importance going forward; 2) Cronos is sitting on C$1.9bn in net cash and equivalents, which is ~75% of market cap”.
[61] In fact, some market reports described the delay and restatement of 2019 earnings as a sign of Cronos’ fundamental health as a corporation. Under a headline announcing “FY19 Earnings Delay Driven in Part by Sector Decline”, the March 2020 market analysis issued by Raymond James Ltd. explained any share price weakness for Cronos being a symptom of more general investor response to the cannabis industry. It then went on to opine that, in fact, the management and accounting methodologies exhibited by Cronos are a cut above its competitors in the industry.
[62] The accounting restatement was thereby presented in the Raymond James report as a positive rather than a negative reflection on the company: “CRON's [Cronos’] Management Team Continues to Demonstrate Solid Fiscal Discipline: CRON has been historically judicious in its use of cash—not indulging in acquisition frenzies like some of its peers—and it has been willing to undertake painful reviews when necessary, as we suspect is happening now.” In other words, the restatement and review of accounting methodology was seen as one of a well-managed company’s strengths rather than one of its failings.
[63] To be fair, there are some negative contemporaneous market reports about Cronos in the Plaintiff’s motion record. Eight Capital’s March 27, 2020 report entitled “Top line misses on lower volumes” indicated that Cronos had “disappointing Q4 results” and that the analysis had revised their performance analysis “to reflect adjusted expectations on the timing and ramp-up of the company’s cultivation assets”. That said, the market report portion of the analysis was headed “Results disappoint but shares hang in”, indicating that the analysts’ concern was with Cronos’ actual business performance and not with any reporting issues which impact on share price.
[64] In fact, far from any unexpected or company-driven devaluation of shares caused by Cronos and its management, the Eight Capital report asked the rhetorical question “Why are shares stable on weak results?” In answering its own question, the report opined that, firstly, “Cronos has a strong management and solid partner in Altria to accelerate its global growth.”
[65] As already explained, the Amended Statement of Claim, sets out in Schedule ‘A’ a “comprehensive list of misrepresentations arising from Cronos’ improper revenue recognition for Q1, Q2 and Q3 2019”. That list covers six different Interim Financial Statements and MD&As issued by Cronos in 2019. It contains some 573 alleged misrepresentations, which, when multiplied by the Plaintiff and attributed to each of the thirteen Defendants, comes to a total of 7,449 individual alleged misrepresentations made over the first, second, and third quarters of 2019. The pleading seeks a declaration that these multiple misrepresentations be treated not as a group or as collectively having had market impact, but as separate and distinct misrepresentations each one of which is actionable on its own.
[66] Perell J. observed in Paniccia v MDC Partners Inc., 2018 ONSC 3470, at para 67, that “[f]or the purpose of the leave requirement…each alleged misrepresentation or failure to disclose a material fact is a discrete misrepresentation claim.” The reason for this individualized assessment of causation is evident in the structure of the OSA provisions on secondary market liability. Section 138.3(1) creates a statutory cause of action “[w]here a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation…” As discussed above, the definition of a “misrepresentation” in section 1(1) contains within it the requirement of materiality, such that any alleged misrepresentation must be a material one if it is to be a ground of liability under section 138.3(1).
[67] The OSA also addresses the prospect of there being a sequence of numerous misstatements which are alleged to cumulatively add up to a material misrepresentation. Thus, section 138.3(6)(a) provides that “multiple misrepresentations having common subject matter or content may, in the discretion of the court, be treated as a single misrepresentation”. This would allow a plaintiff to base a secondary market claim on, for example, a number of interim financial statements, MD&As, press releases, etc. disseminated by a reporting issuer, all of which collectively convey the allegedly misrepresented information on which the claim is based. However, as indicated above, the Plaintiff has specifically pleaded that this collective approach to misrepresentations is not the case here. Paragraph 2(g) of the Amended Statement of Claim seeks:
a declaration that each of the misrepresentations stated in paragraph 53 gives rise to separate liability limits for each of the Defendants pursuant to Part XXIII.1 of the OSA and the corresponding provisions of the other Securities Legislation, such that there is no basis to grant the Defendants relief under sc. 138.3(6) of the OSA and the corresponding provisions of the other Securities Legislation to treat the misrepresentations as a single misrepresentation.
[68] Section 138.7 of the OSA sets out liability limits in calculating damages for secondary market claims. Each actionable misrepresentation is subject to its own separate liability limit. In including in the prayer for relief a declaration that each of the nearly 8,000 alleged misrepresentations is a separate ground of liability, the Amended Statement of Claim seeks to attribute a separate liability limit to each of them. This, of course, could potentially increase the damages limit exponentially, and might go some way to explain why the pleading has been framed so that the multiple and repetitive allegations are not grouped together under section 138.3(6)(a) as cumulatively adding up to a single or a lesser number of actionable misrepresentations.
[69] As pleaded, each of the alleged 7,449 individual misrepresentations therefore must be shown to have been separately and distinctly “material” in the OSA’s section 1(1) definition of that term. The Defendants’ evidence of materiality – i.e. of market impact – does not even attempt to meet that standard.
[70] In cross-examination, Professor Cumming conceded that he did not conduct an analysis of the materiality of any of the individual misrepresentations listed in Schedule ‘A’ to the Amended Statement of Claim. He specifically stated that his statistical data “for these 150 line item changes on March 30…it wouldn’t be directly pertinent to start talking about specific items in explaining the statistical evidence that is observed from the share price it would have been on that day. So, it’s more broadly with the sum totality of the disclosure”. He then clarified that in his report he was “not making a connection between any specific line item…but instead, the overall release of the information and the price drop”. He also explained that his analysis of the decrease in Cronos’ share price following the March 30, 2020 Material Change Report “didn’t connect to any particular one of [the] 150 line items”.
[71] Mr. Doris, for Cronos, submits that this collective or global assessment of materiality of the alleged misrepresentations by the Plaintiff’s expert witness is a fatal flaw in the Plaintiff’s case. Indeed, the Plaintiff’s record does not contain evidence that would allow a court to determine the materiality of the alleged misrepresentations relating to the first quarter exchange transactions as separate and distinct from the alleged misrepresentations relating to third quarter transactions. Moreover, none of the line items or any of the numerous misrepresentations listed in the schedules to the pleading are distinguished from each other by the Plaintiff’s economics expert. Furthermore, none of the share price decrease is demonstrated as being traceable to the allegedly faulty internal controls over financial reporting.
[72] In other words, Mr. Doris has accurately identified a fundamental misalignment between the Plaintiff’s pleading and the Plaintiff’s evidence. The Plaintiff has pleaded thousands of individual misrepresentations relating to hundreds of individual line items, but has supported his case with the evidence of an expert witness who did not express any opinion on the central question the Plaintiff’s own pleading requires him to address – i.e. whether materiality can be established for any individual alleged misrepresentations or even categories of alleged misrepresentations as set out in the Amended Statement of Claim. Professor Cumming expressly conceded this point in cross-examination:
No, the statistical evidence that I offer cannot distinguish between particular line items in the schedule in front of me or in paragraph 53 of the six enumerated categories of misrepresentations. Instead, it refers to the sum totality of the evidence and the context.
[73] In response to Defendants’ counsel’s arguments on materiality, counsel for the Plaintiff point to Cronos’ restatements themselves as being a form of admission of materiality. In doing so, they note that the Plaintiff’s accounting expert, Dr. Ephrim Boritz, indicates in his report that “[i]n order for a financial statement to require a restatement for other than technical reasons such as changes in accounting standards, the misstatements it contains must be material.”
[74] Citing Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719, Plaintiff’s counsel submit that this accords with the Court of Appeal’s understanding of the significance of financial restatements. However, the Court in Rahimi did not say that a restatement of financial report is ipso facto an actionable misrepresentation. Rather, it said, at para 68, rather that the existence of a restated financial report can be evidence of a material misrepresentation that can rebut a defense of reasonable investigation.
[75] While Dr. Boritz may be correct that from an accounting point of view the very act of restating a financial statement indicates a material error in the original, from a legal point of view the existence of a restated financial statement is evidence, but not automatic proof, of materiality. This distinction was made explicit by Perell J. in Cappelli v. Nobilis Health, 2019 ONSC 2266, at paras 175-176 where he stated that “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” but it “is not an admission of materiality [where]…experts have shown that those particular misrepresentations were not material to reasonable investors.”
[76] Under the OSA, as in most common law jurisdictions with advanced economies and modern securities regulation, the focus is on the market: Poonam Puri, “Legal Origins, Investor Protection, and Canada”, (2010) 6(1) CLPE Research Paper 03, at 6. A restatement of financials may be evidence of a prior misstatement, but it is not so weighty that it overrides the evidence of the materiality experts who have concluded that any such corrections had little to no market impact. With all due respect to Dr. Boritz’ view, materiality is in the eye of the investors, not the accountants.
[77] In sum, the evidence of materiality contained in the record is all but non-existent. What evidence that does exist is weak and tends to confuse market-wide movements in share prices, especially those coinciding with the March 2020 onset of the COVID-19 pandemic, with company-specific movements.
[78] Even more importantly, nothing in the record demonstrates that the thousands of alleged misrepresentations pleaded in the Amended Statement of Claim would each, to use the words of section 1(1) of the OSA, “reasonably be expected to have a significant effect on the market price or value” of Cronos’ securities. In particular, the Plaintiff’s materiality evidence fails to demonstrate the materiality of any of the individual misrepresentations asserted in the Amended Statement of Claim on an individual or even a category basis.
[79] Rather than pleading factual causation for each alleged misrepresentation, the analysis is done on a global basis. All of the alleged misrepresentations are treated as a single misrepresentation; and this is despite their being specifically pleaded as separate and distinct from each other.
[80] The record before me does not support granting leave to proceed. The Plaintiff has not established that there is a reasonable possibility of establishing at trial that the alleged misrepresentations were material. In fact, his own expert witness has conceded that cannot be shown. The claim is therefore lacking a crucial ingredient for liability under Part XXIII.1 of the OSA.
VI. The certification motion
[81] The dominant part of the Plaintiff’s action is brought under Part XXXIII.1 of the OSA, and it cannot proceed without leave. However, the Plaintiff also brings claims at common law and under the OBCA. It is conceivable that even where denied leave under the OSA, he could still seek certification for what are really secondary claims contained in the Amended Statement of Claim.
[82] That said, the issue that most confounds the application for leave under the OSA is equally problematic for certification under the CPA.
[83] Section 5(1) of the CPA provides that the Court shall certify a class proceeding where:
(a) the pleadings or the notice of application discloses a cause of action;
(b) there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant;
(c) the claims or defences of the class members raise common issues;
(d) a class proceeding would be the preferable procedure for the resolution of the common issues; and
(e) there is a representative plaintiff or defendant who,
(i) would fairly and adequately represent the interests of the class,
(ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and
(iii) does not have, on the common issues for the class, an interest in conflict with the interests of other class members.
[84] It is a first principle of civil litigation that, “a defendant should not be subject to any claim, particularly one asserted on behalf of a whole class of plaintiffs, which does not disclose a proper cause of action”: Pearson v Inco. Ltd., [2002] OJ No 2764, at para 84 (SCJ).
[85] That said, the test under section 5(1)(a) of the CPA is not treated as a particularly onerous one. Generally speaking, the test mirrors that applicable on a motion under Rule 21.01 of the Rules of Civil Procedure for striking out a Statement of Claim: the section 5(1)(a) requirement is satisfied unless it is “plain and obvious” that it discloses no reasonable cause of action: Cloud v Attorney General of Canada, [2001] OJ No 4163, at para 10 (SCJ).
[86] Despite the fact that the record before me contains evidence submitted in support of not one but two motions by the Plaintiff, there are serious gaps in the way it is pleaded (and, for that matter, in the evidence as submitted). The Plaintiff’s failure to plead material facts to ground his claims is fatal to both the negligent misrepresentation and oppressions claims. In effect, the Plaintiff has been too clever by half, pleading thousands of individual misrepresentations in order to increase the claim limits but not being able to prove, or even plead, that any one of them caused negative market impact.
[87] As already explained in these reasons for judgment, the Plaintiff’s claim, even – perhaps especially – as augmented by the expert evidence of Professor Boritz – says in effect that the whole of the Defendants’ conduct is greater than the sum of its parts. The problem is that it is the parts – i.e. the separate and distinct allegations of misrepresentation, as pleaded – that must be proven at trial. The record establishes that this cannot be done.
[88] The requirement that a pleading contain adequate particulars is well established. In Enerworks v Glenbarra Energy Solutions Inc., 2012 ONSC 414, at paras 39-40, Perell J. elaborated on the rationale for this rule:
The most important rule about pleadings is rule 25.06 (1) that “[e]very pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.” This rule directs the disclosure of the material facts, which include facts that establish the constituent elements of the claim or defence.
The full particulars required by rule 25.06 (8) must set out precisely each allegation of wrongful conduct and the who, where, when, what, and how of that alleged misconduct…
The plaintiff must plead all the material facts on which it relies and all of the facts which it must prove to establish a cause of action which is legally complete. If any fact material to the establishment of a cause of action is omitted, the statement of claim is bad and the remedy is a motion to strike the pleadings, not a motion for particulars.
[89] The misrepresentation claim against Cronos, whether framed in statutory or common law terms, is devoid of particulars when it comes to which misrepresentation caused loss. As already explained, the Plaintiff claims that all of the alleged misstatements collectively caused loss of share value, but it is possible that for any one of those representations there is no loss that can be identified. This is a problem of causation and of particulars that, according to Professor Boritz, cannot be cured. If there were additional facts that help particularize the cause of any given reduction in share value, the Plaintiff or his expert witnesses would have produced it in the context of the motion for leave.
[90] But there is nothing that links what are pleaded as many, many separate and individual misrepresentations to any instance of loss. As pleaded, the Plaintiff’s common law claim amounts to an allegation of tortious conduct absent a causal link to loss. That is a form of claim characterized by Justice Cardozo as “negligence in the air”, which, as the renowned jurist put it, “will not do”: Palsgraf v. Long Island Railroad Co., 248 N.Y. 338, 346 (NYCA, 1928). A negligent act or representation, absent causation, is not actionable as a tort.
[91] Along with Cronos, some eleven individual Defendants have also been sued. Particulars of the claim against, and the loss allegedly caused by, each of the individual Defendants are glaringly absent from the Amended Statement of Claim. The Defendants to a negligent misrepresentation claim cannot simply be lumped together. Each individual defendant is entitled to know the alleged material facts of its misconduct”: Enerworks, at para 65.
[92] Moreover, the Amended Statement of Claim does not allege that the individual Defendants were acting outside of their capacity qua directors and officers of Cronos. It is elementary that, except in cases of physical property damage, persons holding corporate office are not liable for a tort committed by the corporation absent it being “shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own”: ScotiaMcLeod v Peoples Jewellers Ltd., 1995 CanLII 1301, at 15.
[93] An illustration of this fundamental principle is contained in McDowell v. Fortress Real Capital Inc., McDowell v. Fortress Real Capital, 2019 ONCA 71, at paras 54-64, where the Court of Appeal dismissed an appeal of an order striking a claim where the allegations made against the individual officers and directors of the corporate defendants did not provide any particulars of tortious conduct separate from that of the defendant companies. The Court went on to hold, at paras 61-64, that the claims against the senior-most corporate principals, who had allegedly been “directly and personally involved” in the company’s improprieties, must also be dismissed because there was no specific pleading that the alleged misrepresentations were being made personally and not on behalf of the company.
[94] As canvassed in the motion for leave portion of these reasons, the allegations against the individual Defendants are entirely related to steps taken in their respective corporate capacities – particularly in signing off on or certifying financial statements that were later restated. There is no suggestion by the Plaintiff that the individual directors, officers and other individuals named in the Amended Statement of Claim acted for personal gain or outside of the function in which Cronos required them to act. The Alberta Court of Appeal has addressed this kind of claim head-on, finding that a claim of negligent misrepresentation against corporate directors cannot succeed where the conduct of the director was not tortious in itself, and was made for the for a corporate purpose and for the corporation’s benefit: Hogarth v Rocky Mountain Slate Inc., 2013 ABCA 57, at paras 12-14.
[95] The OBCA oppression remedy allegations pleaded against the individual Defendants likewise fail to disclose a viable cause of action. The two-pronged test for personal liability of directors under this statutory cause of action requires that the oppressive conduct be properly attributable to the director, and, most importantly, that the imposition of personal liability be appropriate in the circumstances: Wilson .v Alharayeri, 2017 SCC 39, [2017] 1 SCR 1037, at paras 2-3.
[96] In fact, Justice Côté explained in Wilson, at para 47, that “the oppressive conduct [must] be properly attributed to the director because he or she is implicated in the oppression. In other words, the director must have exercised – or failed to exercise – his or her powers so as to effect the oppressive conduct.” The exercise of standard corporate authority, such as a CFO certifying financial statements, does not fit this mold. There needs to be something more – for the most part personal gain by a director or officer – before a corporate step is actionable as being oppressive.
[97] The Court of Appeal emphasized this personal gain aspect of oppressive conduct in Budd v Gentra Inc., 1998 CanLII 5811, at para 43: “[w]hether the director or officer should be required to rectify that oppression personally is determined by all of the circumstances including the nature of the oppression, the gain if any which flowed to the director or officer, and the effects of other possible orders on other security holders.”
[98] Speaking for the unanimous panel in Gentra Inc., Justice Doherty, at para 50, put the matter bluntly, criticizing the claimant for naming the individual directors when the real claim was against the company: “a ‘shot gun’ approach to the naming of defendants in a lawsuit which serves to needlessly add parties to the proceedings must be discouraged. It can only further complicate and prolong what will of necessity be lengthy and complicated litigation.”
[99] None of the non-OSA claims are any more viable than the claim under Part XXIII.1 of the OSA. Accordingly, the hurdle of section 5(1)(a) of the CPA cannot be jumped over by the Plaintiff. Under the circumstances, certification of the claims that remain after the denial of leave to proceed cannot succeed regardless of how the other criteria in sections 5(1)(b) through (e) of the CPA work out.
VII. Disposition
[100] The Plaintiff’s motions for leave to proceed under section 138.3 of the OSA and for certification under section 5(1) of the CPA are dismissed.
[101] I would ask Defendants’ counsel to send my assistant by email short submissions on costs within two weeks of today, and for Plaintiff’s counsel to send my assistant short submissions on costs within two weeks thereafter. There is no need to deliver copies of authorities with these submissions, provided that any cases are cited with full citations so that they can be found online.
Date: June 28, 2021 Morgan J.