When is an expert an “expert”? Underwriters’ statutory liability for prospectus misrepresentation

In LBP Holdings Ltd. v Allied Nevada Gold Corp.,¹ the Ontario Superior Court concluded that although underwriters may be sued for misrepresentations contained in a prospectus pursuant to s. 130 of the Ontario Securities Act, they are not “experts” for the purpose of statutory secondary market liability claims under s. 138.3 and accordingly are not exposed to liability under Part XXIII.1.
 

Background

In May 2013, Allied Nevada Gold Corp. effected a USD $150-million secondary public offering that was financed as a bought deal and underwritten by Dundee Securities Ltd. and Cormark Securities Ltd. LBP Holdings Ltd. purchased 20,000 shares in the offering.

Following several corrective disclosures by Allied, LBP commenced a class action against the company and two of its executives alleging that Allied had published core documents and made other disclosures containing material misrepresentations that were incorporated by reference into the short form prospectus used in the secondary public offering.

Allied subsequently filed for Chapter 11 bankruptcy protection under U.S. law. Two months later the plaintiff brought a motion to add the underwriters as defendants in the class action.

Common law causes of action for negligence, negligent misrepresentation and unjust enrichment as well as statutory claims under ss. 130 and 138.3 of the Ontario Securities Act (Act) were asserted in the proposed amended claim.
 

Ontario Superior Court decision

The court observed that the test for adding parties was not in dispute. LBP would be granted leave to add the underwriters as defendants unless there was non-compensable prejudice to the underwriters or the asserted causes of action were not tenable.

The underwriters asserted they would suffer non-compensable prejudice if added as defendants because their right to indemnification by Allied for their legal costs had been irrevocably compromised due to the bankruptcy proceedings. The court rejected this argument, finding that the underwriters’ indemnification claim was not extinguished by the bankruptcy proceedings and that they may be able to obtain indemnification under Allied’s insurance policies.

The underwriters did not oppose the assertion of common law causes of action for negligence and negligent misrepresentation, but denied that the statutory causes of action and the claim for unjust enrichment were tenable.

Primary market statutory claim was time-barred

Section 130 of the Act allows purchasers under a prospectus containing a misrepresentation to sue the underwriters on the offering, subject to the claim being commenced within 180 days after discovery of the claim and no later than three years after the date of the purchase. As LBP’s claim had been discovered by the time it had commenced the class action and more than 180 days had passed between then and the motion to add the underwriters, the claim was time-barred.

No secondary market statutory claim against the underwriters

Part XXIII.1 of the Act, which creates a statutory cause of action for secondary market misrepresentations, enumerates specific categories of persons who may be sued. Of these categories, the only one that could potentially apply to the underwriters was that of “expert,” where (i) a misrepresentation was contained in a report, statement or opinion made by the expert; (ii) a disclosure document included, summarized or quoted from that report, statement or opinion made by the expert; and (iii) the expert consented in writing to the use of its report, statement or opinion in the disclosure document.

The court concluded that underwriters were not experts for the purposes of that section for three reasons:

 

1. The statute requires that the alleged misrepresentation be repeated in a document or statement made by the expert. The only statement made by the underwriters was their certification that the prospectus contained full, true, and plain disclosure of all material facts to the best of their knowledge. That statement did not repeat the alleged misrepresentations.
2. The design of the Act makes it clear that underwriters are not “experts” for the purposes of Part XXIII.1. The Act contains separate and distinct definitions of “underwriter” and “expert.” “Expert” is defined as a person whose profession gives authority to a statement made in a professional capacity, including an accountant, auditor, lawyer and engineer, who are all regulated or licensed professionals. Underwriters are not professionals in that sense.
3. The legislature explicitly subjected underwriters to primary market liability in s. 130 of the Act, but did not include them in the list of parties subject to secondary market liability under Part XXIII.1. The legislature’s failure to mention them in s. 138.3 implied that their exclusion must have been deliberate.

No unjust enrichment

The unjust enrichment claim was also found to be untenable. The plaintiff had no reasonable prospect of showing that there was no juristic reason for the underwriters’ “enrichment.” They were paid fees pursuant to an agreement with Allied that was not alleged to be unenforceable or illegal. Also, any deprivation was suffered by Allied, not its shareholders.
 

Conclusion

The decision confirms that underwriters’ statutory liability for misrepresentations contained in a prospectus is limited to claimants under s. 130, and does not extend to claims for misrepresentations made in secondary market disclosure documents. This is a welcome result for underwriters, particularly in cases such as this one where recovery from the issuer becomes unavailable and frustrated shareholders look for other deep pockets for potential targets of litigation.

The authors wish to thank Bert Riviere, articling student, for his assistance in preparing this legal update.

Footnote

¹ 2016 ONSC 1629.