An inference too far: leave to proceed with secondary market cause of action denied

In Longair v. Akumin Inc. et al, 2024 ONSC 3675 (Longair), the Ontario Superior Court of Justice declined to grant leave to proceed under the Securities Act¹ and declined certification against one of the defendants, who was being sued as an expert for a secondary market misrepresentation claim². The Court rejected the plaintiff’s argument that materiality and a correction could be inferred from the broader evidence that was presented.

What you need to know

For secondary market misrepresentation claims under the Securities Act:

• Materiality may be inferred but only in very limited circumstances: The materiality of an alleged misrepresentation, which is a component of the statutory cause of action, can be inferred but only when the apparent market impact of a misrepresentation is objectively obvious, without the need for further evidence.
• Distinct evidence is needed if a distinct case is pleaded: If the plaintiff chooses to plead distinct alleged misrepresentations against each defendant, they will likely need distinct evidence regarding materiality and corrective statement to be granted leave.
• Corrections of an alleged misstatement remain an important consideration when applying the leave test: Despite some case law drawing into question whether a correction is an element of the cause of action, corrections remain an important consideration in the application of the leave test.

There are limits to inferring materiality

In limited cases to date, courts have been willing to make a commonsense inference of the materiality of an alleged misrepresentation. For example, in Tietz, the British Columbia Court of Appeal inferred the materiality of an alleged misrepresentation related to a company’s failure to disclose an agreement that required it to pay out 25% of the value of its assets and 50% of its cash³. In Longair, the Court reinforced that there are limits on when materiality may be inferred. In the circumstances of this case, the Court found that the materiality and correction of the alleged misrepresentations made by the expert could not be inferred from the evidence filed on the motion, which was focused almost entirely upon alleged misrepresentations made by the other co-defendants.

Distinct evidence needed for distinct misrepresentations

If a plaintiff seeks leave to commence an action against multiple defendants, careful attention should be given to the alleged misrepresentations pleaded against each. This is especially important for experts who, under the Securities Act, can only be held liable for a misrepresentation also contained in a report, statement or opinion they gave⁴. In the event that distinct misrepresentations are pleaded, distinct evidence will likely be required to show that each of the alleged misrepresentations was material and corrected. In this case, the Court rejected the plaintiff’s argument that the evidence regarding alleged misrepresentations made by the co-defendants was sufficient to meet the leave test with respect to the case against the expert.

Corrections remain an important element

Recent Ontario Court of Appeal decisions have called into question what role a correction plays in the statutory secondary market cause of action⁵. In Longair, the Court confirmed that whether a correction is an element of the cause of action or just a necessary part of the statutory scheme, it remains an important component on leave. The Court took the time to comment on the purported corrections in this case.