Court File and Parties

COURT FILE NO.: CV-22-00691394-00CP DATE: 20240918 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: RICHARD M. BANACH, Plaintiff – and – GALAXY DIGITAL HOLDINGS LTD., MICHAEL NOVOGRATZ, and ALEX IOFFE, Defendants

BEFORE: Justice E.M. Morgan

COUNSEL: Paul Bates, Soheil Karkhanechi, and Mahdi Hussein, for the Plaintiff Seamus Woods and Ryan Morris, for the Defendants

HEARD: September 16, 2024

ADMISSIBILITY OF EXPERT REPORTS

[1] The Plaintiff in this proposed class action has submitted a number of expert reports in its motion record for certification. Two of them are from sources objected to by the Defendants: an investor in the Defendant company, and a lawyer whose professed expertise is in Ontario law.

Background

[2] The Second Amended Statement of Claim alleges misrepresentation in public disclosure materials issued by Galaxy Digital Holdings Ltd. (“Galaxy”), a Cayman Islands company whose shares are listed on the TSX. The Plaintiff has served a motion record for the upcoming certification motion, which is scheduled to be heard roughly 9 months from now. The Defendants are in the process of responding to that motion.

[3] Galaxy is a digital asset and blockchain company operating in areas it describes as global markets, asset management, and digital infrastructure solutions. The central allegation in the Statement of Claim is that Galaxy misrepresented the nature and risk of its holding of, and exposure to, the digital asset TerraLuna. The Plaintiff and proposed class state that Galaxy thereby failed in its public disclosure obligations, causing loss to investors and entitling them to damages.

[4] Understanding Galaxy’s business, and coming to grips with the allegations made against it, takes considerable knowledge of the digital asset and blockchain world. It makes sense that Plaintiff’s counsel would include in its certification materials a number of expert reports that analyze and explain what may be to many people an unfamiliar business environment. After all, “[a]n expert's function is precisely this: to provide the judge and jury with a ready-made inference which the judge and jury, due to the technical nature of the facts, are unable to formulate”: R. v. Mohan, [1994] 2 SCR 9, quoting R. v. Abbey, [1982] 2 SCR 24, at 42.

[5] That said, in order to be helpful to the court, the expert evidence tendered by a party must be admissible. And in order to be admissible, it must be necessary in the sense of conveying “special knowledge” not likely known outside the field of specialty: Kelliher (Village of) v. Smith, [1931] SCR 672, at 684. It must also “must be, and be seen to be, independent and impartial”: White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23, [2015] 2 SCR 182, at para. 8.

[6] Defendants’ counsel submit that two of the expert reports contained in the Plaintiff’s motion record – the affidavit and report of Jon Aikman dated August 29, 2023 (the “Aikman Report”) and the affidavit of Francis Robert Allen dated September 11, 2023 (the “Allen Report”) – fall short of those requirements. The Defendants challenge the admissibility of both reports, and move to strike them from the record.

Investor as expert – the Aikman Report

[7] Jon Aikman is a lawyer by training, but has been heavily involved in the business of “financial technologies, digital assets, cryptocurrencies, and blockchain”, as he describes it. In the opening paragraphs of his report, he indicates that he has “specific expertise in equity valuation of companies engaged in those activities.”

[8] The Aikman Report provides an overview of blockchain and digital assets, including stablecoins, algorithmic stablecoin systems generally and, in particular, the TerraLuna ecosystem which led to Galaxy’s background difficulties at issue in this action. Mr. Aikman then goes on to opine on the nature of Galaxy’s risk exposure to TerraLuna and what he considers Galaxy’s insufficient disclosure of that risk.

[9] Mr. Aikman is not a full-time academic, but he is an adjunct lecturer in the business schools at Queens University and at Cornell University. He has also taught executive courses on an array of subject matters related to the industry in which Galaxy operates, including: “Fintech and Its impact, Crypto Economics and Payments, Hedge Funds and Broker-Dealers, Alternative Investments, Artificial Intelligence and Finance, Finance for Global Managers, Advanced Portfolio Management, Impact Investments, and Equity Markets & Analysis.” In addition, he is the founder of a fintech development and consulting firm, Nordai Analytics Corporation.

[10] In addition to all of that, Mr. Aikman is an investor in the blockchain industry. He discloses in his report that he owns 561 shares of Galaxy, which he purchased on December 21, 2021. As he explains it, “I bought Galaxy Digital stock in order to gain exposure to the emerging blockchain universe through a publicly listed entity that claimed expertise and institutional-quality due diligence in the crypto space.” That investment has been a disappointing experience for him. He describes the experience in his report:

8. On or about May 8, 2022, through the crypto media, I became aware that the stablecoin TerraUSD had lost its peg to the U.S. dollar which was causing volatility in the digital asset industry.
9. Over the next week, I realized that the price of my Galaxy Digital investment was trading down more than similar companies and the sector and began investigating the reasons. I became aware that in the market’s view, Galaxy Digital had a significant association with Terra, as a result of which the stock price was being driven down.
10. Based on my expertise and review of the relevant material and circumstances, I believe that Galaxy Digital misled the market regarding its investments, risks, and its purported institutional-quality investment due diligence process.

[11] In White Burgess, the Supreme Court of Canada made it clear that an expert witness’ can lose its required objectivity where the expert has an interest in the case. Plaintiff’s counsel acknowledges this, but submits that the appropriate time to consider it is at the motion itself, after hearing the evidence, and that any lack of objectivity should go to weight rather than admissibility.

[12] With respect, there is no principle that would compel such a firm rule. What is at issue here is a question of actual conflict, not just an allegation of perceived bias that a court might possibly conclude is imagined or tenuous: Ibid., at para. 36. If a personal economic interest in a party to the action is self-evident up front at the qualification stage, then there is no reason to put off the consideration of it. Indeed, assessing the proposed expert’s actual objectivity is one of the important criteria for allowing an expert to give evidence in the first place.

[13] Justice Cromwell, in White Burgess, at para. 37, provided numerous examples of where an interest in the action has disqualified an expert witness:

An expert’s interest in the litigation or relationship to the parties has led to exclusion in a number of cases: see, e.g., Fellowes, McNeil v. Kansa General International Insurance Co. (1998), 40 O.R. (3d) 456 (Gen. Div.) (proposed expert was the defendant’s lawyer in related matters and had investigated from the outset of his retainer the matter of a potential negligence claim against the plaintiff); Royal Trust Corp. of Canada v. Fisherman (2000), 49 O.R. (3d) 187 (S.C.J.) (expert was the party’s lawyer in related U.S. proceedings); R. v. Docherty, 2010 ONSC 3628 (expert was the defence counsel’s father); Ocean v. Economical Mutual Insurance Co., 2010 NSSC 315, 293 N.S.R. (2d) 394 (expert was also a party to the litigation); Handley v. Punnett, 2003 BCSC 294 (expert was also a party to the litigation); Bank of Montreal v. Citak, [2001] O.J. No. 1096 (QL) (S.C.J.) (expert was effectively a “co-venturer” in the case due in part to the fact that 40 percent of his remuneration was contingent upon success at trial: para. 7); Dean Construction Co. v. M.J. Dixon Construction Ltd., 2011 ONSC 4629, 5 C.L.R. (4th) 240 (expert’s retainer agreement was inappropriate); Hutchingame v. Johnstone, 2006 BCSC 271 (expert stood to incur liability depending on the result of the trial). In other cases, the expert’s stance or behaviour as an advocate has justified exclusion: see, e.g., Alfano v. Piersanti, 2012 ONCA 297, 291 O.A.C. 62; Kirby Lowbed Services Ltd. v. Bank of Nova Scotia, 2003 BCSC 617; Gould v. Western Coal Corp., 2012 ONSC 5184, 7 B.L.R. (5th) 19.

[14] As indicated, Mr. Aikman does not try to hide or disguise in any way his financial interest in Galaxy. To his credit, he is up front about it. In his Report he assures the court that in the event of a settlement or resolution of this action in favour of the class, he will opt out of any compensation paid to the class members. Plaintiff’s counsel submit that in this way, Mr. Aikman has eliminated any personal conflict and is a proper expert on the matters at hand.

[15] I respect Mr. Aikman’s efforts and his full and frank disclosure, but I disagree with Plaintiff’s counsel that he can be qualified as an expert in this litigation. He has given an assurance that he will not participate in any compensation to the class if that is one day forthcoming, but he is nevertheless an investor in the Defendant corporation. He has a direct financial interest in its economic performance and its overall corporate growth.

[16] Mr. Aikman has experienced loss due to Galaxy’s activities. He states in his Report that he had reached a negative conclusion as a result of his investment, presumably even before being asked to analyze the matter by Plaintiff’s counsel. And, since he speaks of his Galaxy investment in the present tense and provides no indication that he has disposed of it, I can assume that he is an economically rational actor and that, although devoid of conscious bias, at some point he anticipates financial gain. Regardless of whether he opts out of any recovery in this action, he is not a neutral expert.

[17] Counsel for the Plaintiff point out that Mr. Aikman has provided a sworn Acknowledgment of Expert’s Duties under Rule 53. They submit that the court should not be looking behind that sworn Acknowledgment. However, the Acknowledgment is not conclusive of the objectivity analysis. It reflects Mr. Aikman’s belief in his impartiality – and I have no reason to doubt his sincerity in that regard. But signing the Acknowledgement is a threshold requirement for qualifying as an expert; every proposed expert must sign it, and no further consideration is necessary if it is not signed. It is not a final or conclusive step in the analysis. The entirety of factors going to objectivity must be considered.

[18] As a final point, Plaintiff’s counsel has identified one case – Waldman v. Thomson Reuters Corporation, 2012 ONSC 1138 – in which a class member served as an expert witness. There, the potential class was every lawyer in private practice in Ontario, and the defendant was a legal publisher who was alleged to violate copyright by reproducing lawyers’ factums in a publicly accessible database. The expert witness was litigator Ronald Slaght, who deposed as to the process that a law firm typically goes through in producing a factum with multiple members of the firm as authors.

[19] This expert evidence was unchallenged and uncontroversial; the opposing side felt no need to either cross-examine Mr. Slaght or to respond with an expert of its own: Ibid., at paras. 11, 37. It played little role in the final analysis of the legal dispute. In fact, although the court paid some homage to Mr. Slaght’s stature at the bar, it is not clear reading the reasons for decision that the expert evidence was important or even very necessary. What is clear is that the motion judge never had cause to turn his mind to the possibility of a conflict. There is therefore no useful analysis in the Waldman case that can shed light on the issue of expert qualification here.

[20] I want to emphasize that nothing here is meant as a personal criticism of Mr. Aikman. A person can be knowledgeable, honest, and economically conflicted at the same time.

[21] Mr. Aikman does depose to valuable information in paragraphs 11 to 41 of the Aikman Report. That portion of the Report provides a helpful guide to blockchain, digital assets, stablecoins, algorithmic stablecoins, and other concepts associated with the cryptocurrency business. But it is evident to me that a different expert must be found to fulfill that function. A person with an economic interest in the Defendant is simply not “objective and non-partisan”, no matter how much he makes an effort to be: Ibid., at para. 10.

[22] Under the circumstances, Jon Aikman does not qualify as an expert for the purposes of this certification motion.

Lawyer as expert – the Allen Report

[23] Francis Allen is also a lawyer by training. He graduated Osgoode Hall Law School in 1978 and was called to the bar in 1980. The opening paragraphs of his affidavit make it clear that his entire professional experience has been as a lawyer:

1. I am a barrister and solicitor in the Province of Ontario currently practicing in the areas of securities and corporate law as Senior Counsel with O’Connor McLeod Hanna LLP
2. I have been a senior securities and corporate partner with three major business law firms (Osler Hoskin & Harcourt LLP, Borden Ladner Gervais LLP and Bennet Jones LLP), and have practiced securities, corporate and capital markets law for more than 30 years.
3. In my securities and capital markets law practice, I have regularly assisted public companies, their management and boards of directors in responding to and complying with applicable continuous disclosure reporting obligations under securities laws including advising on the materiality of disclosures under these requirements.
4. In addition to my securities, corporate and capital markets private practice legal experience and expertise, I have served as General Counsel of the Ontario Securities Commission (‘OSC’) and as Senior Legal Counsel to the Executive Director of the OSC and as Senior Counsel to the Director of Regulatory Strategy at the OSC. …

[24] To cut to the chase, Mr. Allen has had a lengthy and successful career as a lawyer. It is his knowledge and experience in the field of law at issue in this action that has prompted Plaintiff’s counsel to obtain a report from him and to include that report in the motion record for certification. The Allen Report states that he was retained to address “the risks associated with Terra, Terra USD and TerraLuna” and the disclosure of those risks, and indeed it does so. But it does so from the perspective of a lawyer engaged in securities and capital markets practice, not as a blockchain or cryptocurrency/digital assets expert. His Report demonstrates that his professional expertise is as a lawyer, albeit a highly specialized one who practices in a rarified industry.

[25] As indicated, the core of what Mr. Allen was retained as an expert witness to do is to opine on the risks of a digital asset such as TerrLuna. Defendants’ counsel emphasize that Mr. Allen has no particular expertise in digital assets/cryptocurrencies as an industry person; rather his experience is as a lawyer and legal counsel to a regulator in the securities field. They contend, for example, that the factual background and causes of the failure of Terra, and the specific risks associated therewith, are not within his professional ambit. They are right; in fact, Mr. Allen says so himself in his Report:

By way of background and in order to provide context with respect to Terra, Terra USD, and TerraLuna, I refer to a post from the Harvard Law School Forum on Corporate Governance dated May 23, 2023. While I do not have the expertise to confirm that the extract below from the post is accurate in every respect, the Harvard Law School Forum on Corporate Governance is a reliable publication, and, in my view, the discussion and analysis contained in the extract are reasonable and the three academic authors are reputable scholars.

[26] To analogize, Mr. Allen is akin to a lawyer who has spent decades litigating mesothelioma and other asbestos-related injuries. He has never administered chemotherapy or performed surgery on a diseased lung, but he is intimately familiar with the applicable liability standards and how they apply to the specialized diagnostic steps and treatment procedures that a physician might go through.

[27] As a general rule, it is both risky and unhelpful to have legal analysis presented in the form of an expert report. The risky part is that the report will distort the issues for the trier of fact: Mohan, at 21. That is, it may be taken for more than what it is – i.e. objective, factual truth rather than legal advocacy.

[28] The unhelpful part is that it is presented to the court in the wrong medium and from a professional perspective that is no different from the judges’ own. It is the court’s role as gatekeeper to ensure that the role of expert witness is limited to those areas in which expertise is beyond the knowledge of the court: White Burgess, at para. 16. And while judges are not all-knowing and often need to be brought up to speed on the various fields of law they encounter in their cases, the education of the bench is typically done by counsel in legal argument, not by the testimony or report of an expert witness.

[29] That said, it is uncontroversial to say, as Justice Strathy did in Green v. Canadian Imperial Bank of Commerce, 2012 ONSC 3637, at para. 374, that “many of the issues surrounding disclosure obligations under the Securities Act involve the interaction of disclosure standards, accounting practices and regulatory requirements. Many of these matters are not within the ordinary knowledge of a lay-person and require expert evidence for their resolution. The questions of fact or questions of mixed fact and law are exceedingly complex.” Not only are these issues outside the experience of most lay persons, they are outside the experience of most lawyers as well.

[30] In Green, at paras. 247, 456, a case involving the exposure of certain securities to the complicated risks in the US. residential mortgage market, Justice Strathy considered the expert evidence of David Brown who, like Mr. Allen, is a longtime corporate lawyer and who was former Chair of the Ontario Securities Commission. In Frayce v. BMO Investor Line Inc., 2023 ONSC 16, at para. 23, a case involving the payment of mutual fund trailing commissions to discount brokers, Justice Belobaba considered he expert evidence of Mr. Allen himself on the workings of the then newly acted prohibition on trailing commissions. The evidence provided in those two reports applied legal/regulatory standards – themselves often highly detailed and obscure – to a complicated and often technical industry environment.

[31] In keeping with this pattern, Mr. Allen deposes that his instructions in the case at bar were to “review the public continuous disclosure record of Galaxy during the Class Period”. More specifically, as indicated above, he was to review and assess the disclosure by Galaxy of risk factors relating to its investment in Terra.

[32] In his review, Mr. Allen first provides a summary of the relevant public disclosure standards. He does that with reference to various national instruments and staff notices issued by the Canadian Securities Association, including CSA Staff Notice 51-363 - Observations on Disclosures by Crypto Assets Reporting Issuers - a standard with which Galaxy itself asserts it complied. He also describes internal controls most typically implemented by public companies to meet their continuous disclosure obligations.

[33] Following that, Mr. Allen delves into an assessment of the voluminous disclosures made by Galaxy during the proposed class period, measuring these disclosures as against the national instruments and staff notices that he described as applicable. While this analysis is, essentially, a review of regulatory law and an application of that law to the relevant facts – i.e. a typical legal analytic approach – it is at the same time well beyond the ordinary working knowledge of lawyers and courts. Without commenting on whether or not I agree with its conclusion, the Allen Report represents an effort to explain how regulatory and “statutory provisions operate in practice with a view to ensuring that the court’s interpretation makes practical sense”: CNOOC Petroleum North America ULC v. 801 Seventh Inc., 2022 ABQB 284, at para. 37, citing Re Criminal Code s. 487.02, 2019 NLCA 6, at para 171; R. v Boule, 2020 BCSC 1493, at para. 11.

[34] Although the Allen Report is submitted as expert evidence – and it does entail substantial legal and regulatory expertise – it is for the most part not exactly opinion evidence. As Justice Agarwal recently described a similar exercise in Kamrani-Ghadjar v. Anaergia Inc., 2024 ONSC 4866, at para 17, “He reviewed the public filings. He’s telling the court what he sees (or doesn’t see) in those documents. He’s not providing the court with his inferences. He’s telling the court… that certain things are missing from the public filings and…that the public filing say certain things. Those are observations, not inferences.”

[35] No expert report can substitute for the analysis that a court itself must make, but a well crafted report of this nature can make accessible to the court a task that might otherwise be deeply buried in the detailed regulatory weeds, as it were. Accordingly, the review of the law and regulations, and the application of that to the Galaxy disclosure materials, passes the twin hurdles of being ‘necessary’ and ‘helpful’, set out in White Burgess.

[36] My one hesitation with this conclusion is in respect of the Conclusion section of the Allen Report. In these final nine paragraphs of the Report, Mr. Allen specially opines on whether Galaxy is guilty of misrepresentation in its public disclosures – i.e. the very act of wrongdoing for which the Statement of Claim asserts liability. In going there, the Report takes a step too far into the role reserved for the court itself.

[37] As the Supreme Court of Canada observed in Mohan, supra, at para. 32, “The closer the evidence approaches an opinion on an ultimate issue, the stricter the application of this principle [of inadmissibility]”. In fact, McLachlin J. (as she then was) noted in R. v. Marquard, [1993] 4 SCR 223 that there is an overall consensus in the case law that an expert witness is not to opine in this way on the ultimate question that the case poses to the court. The Court of Appeal has recently reiterated the admonition that, valuable as expert evidence might be in the right case, an expert is not permitted to “usurp the task of the trier of fact” or the trial judge: R. v. Prasad, 2024 ONCA 601, at paras. 51-52.

[38] In Prasad, at para. 52, the Court of Appeal has instructed that “expert opinion on the ‘very question’ that the trier of fact must answer can…be overcome by the trial judge ordering partial redactions of the text of expert reports.” That is especially the case where, as in the Allen Report, the problematic statements represent a discrete and severable portion of the expert’s evidence. I will therefore follow the Court of Appeal’s guidance and require that the Conclusion of the Allen Report – i.e. paragraphs 69 to 78 – be redacted in the motion record.

Disposition

[39] The motion to strike the Aikman Report from the Plaintiff’s motion record on certification is granted. The Aikman Report is struck, without leave to amend.

[40] The motion to strike the Allen Report from the Plaintiff’s motion record on certification is dismissed. The Allen Report shall remain in the record as expert evidence, with the exception of paragraphs 69 to 78 which are to be redacted.

[41] The result of this motion is divided. There will be no costs of the motion for or against either side.

Date: September 18, 2024 Morgan J.