Carriage motions in securities class actions


Published on

The primary consideration on a class action carriage motion is arriving at a solution that is in the best interests of all class members, is fair to the defendants, and consistent with the policy objectives of the Class Proceedings Act, 1992.1

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Carriage motions in securities class actions

  1. 1. Carriage Motions in Securities Class Actions: Restoring the Primacy of the “Primary Consideration” By A. Dimitri Lascaris, Emilie Maxwell and Serge Kalloghlian, Siskinds LLP The primary consideration on a class action carriage motion is arriving at a solution that is in the best interests of all class members, is fair to the defendants, and consistent with the policy objectives of the Class Proceedings Act, 1992.1A careful examination of recent carriage decisions in securities class actions reveals that,although the ‘primary consideration’ is simple to articulate and has never been the subject ofsignificant controversy, its application to specific carriage contests has become increasinglyproblematic.Moreover, the uneven application of the ‘primary consideration’ to particular contests forcarriage has infused considerable uncertainty into the task of predicting the outcomes of thesecontests. In an environment of uncertainty, carriage contests are less likely to be resolved bynegotiation, and are more likely to require a judicial resolution. If the Courts wish to see fewercarriage motions, then the carriage test ought to be simplified such that contestants for carriagecan better predict outcomes. Moreover, if contestants for carriage are less able to predictoutcomes, then their counsel will be reluctant to incur investigative and other litigation costs untilthe issue of carriage has been resolved, because a loss in the carriage motion may result incounsel’s investment in the case being lost.As things stand, however, a lengthy list of factors now informs the determination of whichcontestant for carriage will best serve the interests of the class. In addition, although Courtshave expressed reluctance to delve deeply into the merits of competing claims, this in fact iswhat Courts increasingly do. The result is that carriage contestants divulge more and more oftheir investigative work and strategies, and are increasingly inclined to highlight potentialweaknesses in the investigation and strategies of their competitors.A debate as to the optimal strategy for the plaintiffs to pursue can have salutary effects by, forexample, revealing potential impediments to certification at a preliminary stage of the litigation,when the defects that give rise to those impediments can be rectified at relatively little cost, andwith little to no unfair prejudice to the defendants. However, if such debates betweencontestants for carriage occur in full view of the defendants, it is highly questionable whethersuch debates truly serve the interests of the class.It is therefore submitted that the ‘primary consideration’ would be better realized by modifyingthe conduct of carriage motions in three respects, each of which will be explored in greaterdetail throughout the remainder of this article.First, if defendants are permitted to participate in carriage motions, even if only as observers,then judges who evaluate the competing claims advanced by the contestants for carriageshould generally defer to the judgment of the competing counsel groups as to how the caseought to be framed, and Courts should deem one pleading to be preferable to the competing1 Sharma v. Timminco Ltd., [2009] OJ No 4511 at para 14, (SCJ) [Timminco]; see also Simmonds v. Armtec Infrastructure Inc., [2012] OJ No 277 at para 16, (SCJ) [Armtec] Siskinds LLP
  2. 2. -2–pleading only if one of the pleadings suffers from an obvious defect of a material nature.Alternatively, Courts should exclude defendants from carriage motions, and subsequent to thedetermination of carriage, the case should be assigned for case-management to a class actionsjudge who played no role in deciding carriage.Second, Courts should place greater emphasis on the attributes of the proposed representativeplaintiff(s). Specifically, Courts should generally prefer plaintiffs who have demonstrated agreater inclination to act as rigorous monitors of the litigation.Third, Courts should go beyond asking whether the competing counsel groups have expertise inclass actions, and should seek to determine the degree to which the experience of thecompeting counsel groups is relevant to the particular subject matter of the class proceeding.Recent Carriage Decisions in Securities Class ActionsIn the past four years, three Ontario securities class actions have generated a carriage motion.2In Timminco, two counsel groups competed for carriage of a class action stemming from allegedmisrepresentations relating to the issuer’s production of solar grade silicon. Both groupsasserted claims in negligence and negligent misrepresentation and declared an intention toseek to leave to plead the causes of action under Part XXIII.1 of the OSA.In Armtec, the plaintiffs alleged that the defendants misrepresented the issuer’s financialperformance in an interim reporting period that preceded the issuance of a prospectus. Twofirms competed for carriage, and both asserted claims of negligence, negligentmisrepresentation, and statutory prospectus misrepresentation, and also declared their intentionto seek leave under Part XXIII.1 of the OSA. One group also pleaded unjust enrichment andwaiver of tort. Carriage was awarded to the group that did not plead unjust enrichment andwaiver of tort.Finally, in Smith v Sino-Forest Corp.3, three plaintiff groups and their respective counselcompeted for carriage of the matter. While each group alleged that the defendant had mademisrepresentations to investors, each group alleged a different central misrepresentation. Inessence, one group based its proposed action on alleged non-arm’s length transactions withundisclosed related parties, another group based its claim largely upon the defendants’ allegedmisrepresentation that the issuer’s financial statements were in compliance with GAAP, and thethird group grounded its case on statements of the defendant regarding its integrity. Carriagewas awarded to the second of these groups.2 Siskinds LLP participated, as counsel to proposed representative plaintiffs, in each of these carriage motions.3 [2012] OJ No 88, (SCJ) [Sino-Forest] Siskinds LLP
  3. 3. -3–The Role of the Competing Pleadings in Carriage DecisionsIn determining carriage of a class proceeding, courts should avoid “embark[ing] upon ananalysis as to which claim is most likely to succeed [...]” Such analyses are to be reserved forinstances in which one of the competing claims is clearly “fanciful or frivolous”.4There is a compelling logic to this approach. At the certification stage, the pleadings are subjectonly to the ‘plain and obviousness’ standard, which seems similar to the standard of ‘fancifuland frivolous’ claims. There is no good reason why contestants for carriage should besubjected to more rigorous scrutiny of their pleadings than they would be in the certificationcontext.However, in each of Timminco, Sino-Forest, and Armtec, the Courts engaged in relativelydetailed analyses of the competing claims, and resolved the carriage contest at least in part onthe basis of perceived weaknesses in one of the claims.In Timminco, for example, the Court identified the two factors that were “critical” to its carriagedecision to be: (1) the nature and scope of the causes of action advanced; and (2) the theoriesadvanced by counsel as being supportive of the claims advanced.5 However, nowhere in thedecision did the Court hold that the causes of action or theories advanced by the losingcontestant were ‘fanciful or frivolous.’Similarly, in Armtec, the Court engaged in a relatively detailed analysis of at least two evolvingareas of law. First, the court detailed the challenges presented by one proposed plaintiff’sunjust enrichment / waiver of tort claim.6 Second, the court explored the propriety of including inthe proposed class Armtec shareholders who had sold their securities before the end of theproposed class period (or “early sellers”).7 Ultimately, the Court preferred the approach of thecounsel group that had excluded early sellers from its proposed class, and who had notadvanced a waiver of tort claim. Again, however, the Court did not find that either of theseapproaches was ‘fanciful or frivolous.’ On the contrary, the Court acknowledged that someOntario Courts had certified classes in securities class actions that included early sellers, whileother Ontario Courts had either certified unjust enrichment / waiver of tort claims in thesecurities context, or had declined to strike such claims on a pre-certification motion to strike.8Finally, in Sino-Forest, the Court evaluated, among other matters, the definition of the class, thejoinder of certain defendants, and the prospects for certification of the competing actions.Indeed, the Court identified the prospects for certification as a “determinative factor” in thecarriage decision.9 Again, however, the Court did not hold that any of the competing actionswas doomed to founder at the certification stage.Notably, in Sino-Forest, the Court understandably expressed discomfort with the task ofanalyzing the competing claims in full view of the defendants:4 Timminco at para 15; Armtec at para 195 Timminco at para 686 Armtec at paras 24-307 Armtec at paras 41-458 Armtec at paras 25, 43, and 459 Sino-Forest at para 236 Siskinds LLP
  4. 4. -4– No doubt to the delight of the defendants and the defendants’ lawyers, which have a watching brief, the [carriage motion] also involves the rivals hardheartedly and toughly reviewing and criticizing each other’s work and pointing out flaws, disadvantages, and weaknesses in their rival’s plans for suing the defendants.10As indicated above, debates of this nature at the very preliminary stage of determining carriageof the action can yield benefits for the class by enabling the successful contestants for carriageto refine and improve their claims. However, these benefits may be largely negated, if notoverwhelmed, where the debate occurs in full view of the defendants, because the defendantsmight thereby gain a better understanding of weaknesses in the plaintiffs’ claims. Therefore, ifcarriage judges are going to embark upon a detailed evaluation of the competing claims, it isimperative that defendants be excluded from the carriage motion.This in fact was done in a securities class action carriage motion which preceded the trilogy ofTimminco, Armtec and Sino-Forest. In Genier v CCI Capital Canada Ltd.,11 a case in which theauthors’ law firm acted as counsel to a proposed representative plaintiff, the Court excludeddefence counsel from part of the hearing of the carriage motion because, during that part of thehearing, the competing plaintiffs’ counsel debated an issue that the Court deemed to besensitive. Unfortunately, however, the exclusion of defence counsel from part of the hearingwas not referenced in the Court’s reasons.When confronted by a proposal that defendants be excluded from a carriage motion, defendantsgenerally argue that, in the carriage motion, plaintiffs’ counsel may take positions or makeassertions which the defendants may wish to contest, and that excluding defence counsel fromthe carriage motion may unfairly influence the case-management judge by depriving thedefendants of an opportunity to contest an argument or assertion with which they disagree.Whatever merit this concern may have, any such concern would surely be dispelled if the judgerendering the carriage decision played no other role in either case-managing or trying the classproceeding. Thus, Courts should give serious consideration to separating the roles of carriagejudge and case-management judge. Such a separation would free the contestants for carriageto have a full and frank debate on the merits and defects of the competing claims and strategiessuch that the interests of the class would best be served.Section 12 of the Class Proceedings Act confers upon the Court a “broad discretion” to “[...]make any order it considers appropriate respecting the conduct of a class proceeding to ensureits fair and expeditious determination [...]”.12 It is thus submitted that section 12 provides anample basis upon which a Court could order a separation of the carriage decision and case-management roles.10 Sino-Forest at para 311 [2005] OJ No. 1135 (SCJ).12 Armtec at para 17 Siskinds LLP
  5. 5. -5–The Role of the Competing Plaintiffs in Carriage MotionsCritics of class actions often suggest that many plaintiffs have too small an economic stake inthe litigation to be motivated to act as effective monitors of class counsel, and that thereforemany class actions are ‘lawyer driven.’These concerns fail to take into account two realities. First, for many consumers and investors,losses that may seem economically insignificant to a well-compensated lawyer may in fact beeconomically significant to a consumer or an investor possessing limited assets. Second,money is not the only motivator for many members of our society. Many people who agree toassume the role of representative plaintiff do so, at least in part, from a sense of indignation,and a desire to ensure that wrongdoers are held to account.Nevertheless, it is true that the prospect of significant compensation is generally an importantmotivator for many prospective representative plaintiffs, and that plaintiffs who stand to gainmore from the litigation will generally have more motivation to act as rigorous monitors of classcounsel than class members whose injuries are marginal.Accordingly, the United States Private Securities Litigation Reform Act of 1995 (the “PSLRA”)provides that, in securities class actions, the proposed plaintiff with the largest financial lossought presumptively to be the lead plaintiff. 13 The rationale for this rule was summarized by thecourt in Sino-Forest as “[...] ensur[ing] that institutional plaintiffs with expertise in the securitiesmarket and real financial interests in the integrity of the market would control the litigation, notlawyers”.14 Under the PSLRA, this presumption may be rebutted by proof that “thepresumptively most adequate plaintiff will not fairly and adequately protect the interests of theclass; or is subject to unique defenses that render such plaintiff incapable of adequatelyrepresenting the class”.15There is certainly some merit to the American approach. For one thing, the presumption thatthe lead plaintiff with the largest loss is the most suitable lead plaintiff introduces a considerabledegree of predictability into determinations of carriage. This reduces the incidence of battles forcarriage, with their attendant costs and delays.In the Ontario securities context, delays can be particularly problematic following the recentCourt of Appeal decision in Sharma v. Timminco.16 In that case, the Court held that section 28of the Class Proceedings Act did not operate on the facts before it to suspend the limitationperiod applicable to claims under Part XXIII.1 of the OSA prior to leave being granted toprosecute such claims.Quite apart from limitation issues arising from carriage battles, less uncertainty as to who willlead the litigation means that class counsel will be more willing to invest in a case prior to a finalresolution of the carriage issue.13 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)14 Sino-Forest at para 28215 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II); Stone v Agnico-Eagle Mines Ltd, 2012 WL 386354 at 2 (SD NY 2012).16 Sharma v. Timminco, [2012] OJ No 719, (Ont CA) Siskinds LLP
  6. 6. -6–Clearly, the drafters of Part XXIII.1 were familiar with the PSLRA,17 but the drafters did notincorporate into Part XXIII.1 a presumption that the plaintiff with the largest loss is the mostsuitable plaintiff. This may be due to the fact that the U.S. approach, while offering someadvantages, is by no means perfect.For example, the PSLRA presumption greatly restricts the court’s discretion to examine otherfactors affecting the interests of the class, such as the experiences and resources of theplaintiff’s counsel. Moreover, the PSLRA approach ignores an important distinction betweenrelative and absolute loss. Whereas an institutional investor might suffer damages that areconsiderably larger than the damages sustained by a competing individual plaintiff, thedamages sustained by the institution might constitute a minute fraction of its assets undermanagement, whereas a smaller loss sustained by an individual might constitute a largeproportion of the individual’s net worth. In such circumstances, there is a question as towhether the institutional plaintiff or the individual plaintiff is more motivated to monitor classcounsel rigorously.In Sino-Forest, Justice Perell noted the distinctions between large institutional plaintiffs andretail investor plaintiffs, stating: [...] it is hard to believe that given their financial heft, [institutional investors] need the Class Proceedings Act, 1992 for access to justice or to level the playing field or that they need an indemnity to protect them from exposure to an adverse costs award. [...] In his factum, [prospective counsel] eloquently argued that individual investors victimized by securities fraud should have a voice in directing class actions. Mr. Smith lost approximately half of his investment fortune; and according to [prospective counsel], Mr. Smith is an individual investor who is highly motivated, wants an active role, and wants to have a voice in the proceeding.18In light of such considerations, it is submitted that the Court should not give weight only to theabsolute losses of the competing plaintiffs, but should also be mindful of their relative losses. Aparty with a smaller absolute loss but a larger relative loss might be more motivated than thecompeting plaintiff to act as a rigorous monitor.Finally, it is submitted that the Court should not simply assume that the lead plaintiff with thelargest absolute or relative loss is the best plaintiff. If there is evidence before the Court that,notwithstanding a plaintiff’s relatively small losses, it is acting as a more rigorous monitor ofclass counsel then a competing plaintiff with larger losses, then the Court should give primacy tothe plaintiff who has demonstrated a greater determination to exercise oversight. For example,whether a plaintiff has entered into a fulsome retainer agreement with his or her counsel, andthe terms of that retainer, may well shed light on the plaintiff’s willingness and ability to act as arigorous monitor.17 CSA Staff Notice 53-302, which explains the reasoning behind the draft legislation that formed the basis of Part XXIII.1, makes extensive reference to the PSLRA.18 Sino-Forest at paras 279 and 284 Siskinds LLP
  7. 7. -7–The Role of Competing Counsel in Carriage MotionsThe plaintiffs’ bar in Canada has unquestionably matured since class proceedings legislationwas introduced in this country. A significant number of firms across Canada have developed ahigh level of expertise in class action procedure.To date, Courts have tended to focus on the class actions experience of the competing counselgroups without delving deeply into the relevance of that experience to the particular subjectmatter of the class action. The tendency of Courts has been to deem “counsel factors” to beneutral as between those groups, so long as each competing group can demonstrate asignificant track record in class action litigation.In Sino-Forest, for example, the “attributes of class counsel” were listed as a “neutral or non-determinative factor” in the court’s decision.19 A similar conclusion was reached in Armtec andTimminco.20However, although expertise in class action procedure may well be necessary to the effectiveprosecution of a class proceeding, it may not be sufficient. Class actions cover a vast legalterrain. Securities law is but one of the complex features of the class actions landscape. Thesubject matter of Canadian class actions now covers areas of expertise as diverse ascompetition law, franchise law, consumer protection law and common law tort principles.Quite apart from the diversity of the legal regimes under which class actions are todayprosecuted, certain types of complex evidentiary issues tend to arise in certain types of classactions. In securities class actions, for example, assessments of share price inflation aregenerally accomplished by means of event studies. Event studies are statistical methodsdesigned to measure the impact of an event upon the value of a firm. By contrast, anassessment of class damages in a price-fixing case may well give rise to economic andevidentiary issues that do not generally arise in securities cases.If a client needed legal advice in regard to a commercial real estate transaction, she would ofcourse be well advised to seek out a lawyer with expertise in commercial real estate, asopposed to, for example, a wills and estates specialist. Similar considerations apply in the classactions context. Simply stated, counsel who possess expertise in the particular subject matterof a class proceeding are likely to offer significant benefits to the class relative to counsel whohave no or relatively limited expertise in that subject matter.It is therefore submitted that Courts called upon to resolve contests for carriage should do morethan examine whether the competing counsel groups possess substantial experience in classactions. They should also assess the degree of expertise that the competing counsel groupspossess in the particular subject matter of the class action.19 Sino-Forest at para 23520 Armtec at paras 53-60; Timminco at paras 83-84 Siskinds LLP
  8. 8. -8–ConclusionIn the view of the authors, the focus of carriage motions should be the plaintiff and her counsel.Courts should focus on principally two questions: (1) on all of the evidence before the Court,which plaintiff is more likely to act as an effective monitor; and (2) which counsel grouppossesses the greater degree of relevant expertise? Differences in the claims or supportingtheories of the competing plaintiffs should enter into the equation only if the claim or supportingtheories of a plaintiff suffer from an obvious defect of a material nature or, stated differently, ifone of the competing plaintiffs advances a claim that is ‘fanciful or frivolous.’ Alternatively, if theCourt is inclined to engage in a searching analysis of the competing pleadings and strategies,then defendants should be excluded from carriage motions, and the carriage judge should notsubsequently case-manage the class proceeding.It is submitted that such an approach to carriage motions would better serve the interests ofclass members. Such an approach also would render carriage outcomes more predictable, andwould thereby reduce the incidence of carriage contests and the attendant delays and costs forlitigants, their counsel and the judicial system.If you have any questions, please feel free to contact Dimitri Lascaris, Emilie Maxwell or Siskinds LLP