Kauf et al. v. Colt Resources, Inc. et al.
[Indexed as: Kauf v. Colt Resources, Inc.]
2019 ONSC 2179
Superior Court of Justice, Glustein J.
April 5, 2019
Securities regulation — Misrepresentation — Statutory cause of
action — Company failing to disclose in its Q2 2016 disclosure that its
CEO had caused it to make investment — Company disclosing investment in its Q3 disclosure but not revealing that it was unauthorized —
Company’s CFO certifying that disclosures did not contain misrepresentations — Company issuing press release in December 2016 press release
that did not specifically state that investment was unauthorized but
stated that CEO was leaving — Plaintiff moving successfully for leave
to proceed with action for secondary market misrepresentation
against CFO and others — Reasonable possibility existing that plaintiff could establish at trial that on date of press release CFO either
knew that investment was unauthorized or deliberately avoided
acquiring such knowledge — Reasonable possibility existing that
plaintiff could establish at trial that press release was public correction as it signalled that there were concerns about CEO’s conduct
relating to investment.
The plaintiff brought a proposed class action against C Inc., its former CEO P, its
CFO J and others for misrepresentation. In July 2016, P caused C Inc. to make an
unauthorized investment, leaving most of C Inc.’s cash unavailable for its use.
C Inc.’s Q2 2016 financial statements and related documents (the “Q2 2016 disclosure”) did not disclose the investment. Its Q3 2016 disclosure revealed the existence
of the investment and that it was secured on a personal guarantee given by P, but
not that it was unauthorized. J certified that the disclosures did not contain misrepresentations. C Inc. issued a press release in December 2016 announcing that
P was leaving. In January 2017, C Inc. issued a press release in which it disclosed
that P had made the investment and had not been authorized to do so. The plaintiff
brought a motion under s. 138.8(1) of the Securities Act, R.S.O. 1990, c. S.5 for leave
to proceed with his claim for liability for secondary market misrepresentation under
s. 138.3 of the Act. The defendants did not oppose leave to plead most of the
misrepresentation claims, but J opposed leave to proceed against him with
respect to the alleged misrepresentation in the December 2016 press release,
relying on the knowledge requirement for a non-core document under s. 138.4(1)
of the Act, and the defendants submitted that there was no reasonable possibility
that the plaintiff could establish at trial that the December 2016 press release
was a public correction.
Held, the motion should be granted.
There was a reasonable possibility that the plaintiff could establish at trial
that as of the date of the December 2016 press release, J either knew that the
investment was unauthorized, or deliberately avoided acquiring such knowledge.
The note to reader, contained as part of J’s certification for the Q3 2016 disclosure, only advised the reader that the “controls”, “procedures” and “processes”
for matters outside the representations made in the disclosure were not certified. That carve-out for internal processes and controls did not vitiate an alleged
misrepresentation by omission that the investment was unauthorized. There
were no policy considerations that militated against finding J liable at trial.