Underwriters Under Scrutiny: Liability to Secondary Market Purchasers

Capital Markets Mid-Year Report 2016

During the first half of 2016, class action plaintiffs took steps to expand the liability of underwriters under the Ontario Securities Act (the Act).1 While the Act does allow investors who purchase securities in a public offering to sue the offering’s underwriters, when it comes to secondary market transactions, the Act does not include “underwriters” in the list of parties who may be sued for secondary market liability.

Recent cases have seen class action plaintiffs attempt to characterize an underwriter as both a “promoter” and an “expert,” both categories of persons that may be sued for liability to secondary market investors under Part XXIII.1.

Underwriters Under the Securities Act

Part XXIII.1 of the Act deals with liability for misrepresentations in an issuer’s continuous disclosure documents. It allows an investor who purchased shares other than through a public offering—for example, by buying over a stock exchange—to claim for damages against a number of capital markets participants. Historically, the efforts of investors who purchased in the secondary market to bring class proceedings for common law negligent misrepresentation have been thwarted because of the requirement that each individual investor prove reliance. The introduction of Part XXIII.1 in December 2005 represented a sea change for investors, creating a cause of action for secondary market misrepresentation without the requirement that each investor prove reliance on the alleged misrepresentation.

The Act lists the types of market participants who may be liable to secondary market investors. This list is limited to (a) the issuer, (b) certain directors and officers (c) “influential persons,” including “promoters” and directors and officers of those influential persons and (d) “experts” in certain circumstances.).2 Underwriters are not included in the list, but class action plaintiffs have argued that investment dealers who act as underwriters in an offering should also be considered promoters (a type of “influential person”) and experts under Part XXIII.1, exposing them to liability for secondary market misrepresentation claims under the Act.

Underwriter as “Promoter?”

Under the Act, a promoter is a person or company who, acting alone or in conjunction with others, directly or indirectly takes the initiative in founding, organizing or substantially reorganizing the business of an issuer.3 The question of whether an underwriter could be considered a “promoter” was addressed in Goldsmith v. National Bank of Canada.4 In that case, National Bank of Canada and its subsidiary National Bank Financial (NBF) had offered banking, financial advisory and underwriting services to OpenRange Energy Corp. and to Poseidon Concepts Corp., an entity spun out of Open Range Energy through a reorganization that occurred by way of a plan of arrangement. Poseidon had engaged in an equity offering for which NBF acted as lead underwriter and the plaintiff alleged that the prospectus for the offering contained misrepresentations about Poseidon’s financial condition.

Recent cases have seen class action plaintiffs attempt to characterize an underwriter as both a “promoter” and an “expert,” both categories of persons that maybe sued for liability to secondary market investors.

Poseidon filed for CCAA protection in the spring of 2013, leaving aggrieved investors with limited targets for compensation on their losses. The Goldsmith case was commenced against National Bank on the basis that it, acting in conjunction with others including National Bank Financial, was a promoter. The plaintiff alleged that the services offered by National Bank and NBF were “essential” to the reorganization that had resulted in the creation of Poseidon. However, in considering all of the varied arguments the plaintiff offered as to why National Bank, together with NBF, should be considered a promoter, the motions judge concluded that when a bank, financial adviser or underwriter did nothing more than offer the services it had agreed to offer, it could not—without more——be considered a promoter.5

The plaintiff appealed this decision to the Court of Appeal on the basis that, among other arguments, the definition of promoter was elastic and the definition applied by the motions judge was too narrow.6 In its decision in early 2016, the Court of Appeal rejected the plaintiff’s argument. It found that the phrase “taking the initiative” as used in the definition of promoter required some autonomous conduct beyond simply applying influence (as the plaintiff claimed National Bank had done), and the legislative framework suggested that a promoter must play a closer role in an issuer’s business than simply exercising influence over decision makers.7 This decision will not eliminate the possibility that an underwriter could be found to be a promoter, but it will be difficult for a court to accept that an underwriter simply acting as underwriter, without more, should be liable to secondary market purchasers as a promoter.

Underwriter as “Expert?”

The issue of whether an underwriter can be considered an “expert” was raised in a proposed class action against Allied Nevada Gold Corp. (Allied Nevada), a mining issuer that had filed for bankruptcy protection in the United States, and the underwriters that had assisted with its secondary public offering. The claim alleged that Allied Nevada had failed to disclose certain operational and financing difficulties it was experiencing at its mine. After Allied Nevada filed for bankruptcy, the plaintiff sought leave to amend its claim to add the underwriters, and to claim against the underwriters on behalf of secondary market purchasers.8

The plaintiff’s claim was that in certifying that the prospectus for the secondary public offering contained “full, true and plain” disclosure (as is required under the Act), the underwriters were acting as experts. To the extent that the prospectus contained material misrepresentations, the plaintiff claimed these misrepresentations were statements of the underwriters by virtue of their certification.

In response, the underwriters argued that this broad interpretation of the definition of “expert” would effectively “expertize” the entire content of the prospectus. Under National Instrument 41-101, issuers are required to file the consent of any expert who has prepared or certified (and, therefore, “expertized”) a portion of the prospectus, or a report, statement or opinion referred to in the prospectus.9 This is an important protection for issuers because under the Act, an issuer will not be liable for any misrepresentation purporting to be made on the authority of an expert or purporting to be a copy of or extract from a report, statement or opinion of an expert. The underwriters argued that the plaintiff’s position was contrary to the intentions of the legislature, and that since Part XXIII.1 the Act did not make reference to underwriters, an investment dealer who acted only as an underwriter was excluded from that statutory cause of action.

The Court rejected the plaintiff’s claim that underwriters should be considered “experts” on two grounds.10 First, the Court noted that in order for liability to attach to an expert, the disclosure must repeat a misrepresentation contained in the expert’s report, statement or opinion. In this case, the underwriters’ certification did not repeat any misrepresentations previously made.11 Second and more importantly, the Court reviewed the language of the relevant provisions in the Act and concluded that the legislature did not intend for underwriters to be caught by the secondary market liability provisions of Part XXIII.1.12


Though each case is decided on its own unique facts, the Goldsmith and Allied Nevada decisions suggest that the Court will not expand the liability of underwriters under the Act in situations where the role of the investment dealer in issue is limited to the task of underwriting, as distinct from an investment dealer who also, or separately, acts as a promoter or expert, as those terms are defined by the legislation.


1 R.S.O. 1990 c. S.5 (the Act).

2 Note that the parties who may be liable for a misrepresentation differ slightly where the misrepresentation is in a document as opposed to where it is contained in a public oral statement. As it is unlikely that underwriters will make public oral statements about offerings in which they are involved, our comments are restricted to misrepresentations in documents.

3 Act, s. 1(1).

4 4 2015 ONSC 2746 (Goldsmith).

5 Goldsmith at paras. 26-29.6 2016 ONCA 22.

6 2016 ONCA 22.

7 Ibid. at paras. 39, 43, 46.

8 Note that Torys LLP acts for the underwriters in this case. A similar argument was raised in Wright v. Detour Gold Corporation et al. (Court File No. CV-14-504010). In that case, the plaintiff also sought to add the underwriters as parties to the proceeding on a number of bases, including that the underwriters were “experts” under section 138.3(1)(e). The motion to amend the claim was resolved on the basis that the underwriters be added as defendants to the proposed secondary market misrepresentation claim only. As the underwriters were added by agreement between the parties, the issue of whether underwriters could properly be considered experts was not decided by the Court.

9 NI41-101, s. 10.1.

10 LBP Holdings v. Allied Nevada Gold Corp., 2016 ONSC 1629.11 Ibid. at para. 44.12 Ibid. at para. 47

11 Ibid. at para 44.

12 Ibid. at para 47.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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