Paniccia v. MDC Partners Inc. et al.
[Indexed as: Paniccia v. MDC Partners Inc.]
2018 ONSC 3470
Superior Court of Justice, Perell J.
June 4, 2018
Securities regulation — Misrepresentation — Statutory cause of action
— Leave — CEO of company resigning in July 2015 and repaying millions
of dollars in reimbursed expenses and bonuses — Plaintiff seeking leave
to bring proposed class action under Part XXIII.1 of Securities Act for
damages for misrepresentation of material facts in three statements made
between October 2014 and March 2015 — Plaintiff alleging that statements failed to disclose service of subpoena on company by SEC,
company’s establishment of special committee on internal controls over
accounting, SEC’s demand that company use term “adjusted” EBITDA,
true amount of CEO’s compensation, and how company presented its
segments of partner firms — Leave denied — All alleged misrepresentations not material — Securities Act, R.S.O. 1980, c. S-5, Part XXIII.1.
N, the president and chief executive officer of MDC, resigned in July 2015 and
repaid millions of dollars in reimbursed expenses and bonuses. The plaintiff
brought a proposed class action on behalf of Canadian-resident purchasers of
MDC’s securities from October 28, 2013 to April 27, 2017. He asserted both
a common law misrepresentation claim and a statutory misrepresentation claim
under Part XXIII.1 of the Securities Act. With respect to the statutory cause of
action, the plaintiff sought damages for misrepresentations of material facts in
three statements made between October 29, 2014 and March 2, 2015 that were
allegedly corrected by a news release on April 27, 2015. Specifically, he claimed
that those statements omitted the following material facts. (1) They failed to
disclose that the SEC served a subpoena on MDC on October 5, 2014 requiring it
to produce documents and testimony with respect to an investigation relating,
among other things, to reimbursement of expenses claimed by N. (2) They omitted
the fact that MDC co-operated in the investigation by beginning its own internal
investigation, setting up a special committee on internal controls over accounting.
(3) They failed to disclose that the SEC demanded that MDC add the word “
adjusted” to “EBITDA” (earnings before interest, taxes, depreciation and amortization). (4) They failed to disclose the true amount of N’s compensation. (5) They misstated how MDC presented its segments of partner firms. The plaintiff brought
a motion for leave to proceed with the claim under the Securities Act.
Held, the motion should be dismissed.
All of the alleged misrepresentations were not material. (1) A regulator’s investigation, without more, does not trigger a duty to disclose. A reasonable investor
would not expect a company to immediately report the service of a subpoena, but
rather would expect that the company would respond to the subpoena, co-operate
with the investigator, conduct an internal investigation, and determine whether
there was a material fact to correct or a material change to report to its investors.
That is what occurred in this case. (2) For similar reasons, the defendants made no
misrepresentation in not disclosing MDC’s internal investigation. There was no
misrepresentation with respect to the effectiveness of MDC’s internal controls.
MDC’s auditor had not withdrawn or restated its clean audit opinion. (3) MDC’s
EBITDA reporting was not false or misleading. Moreover, the alleged EBITDA
misrepresentation occurred before the statutory leave period, and there was no