Securities fraud cases generally operate as “opt-out” class actions in the majority of Canadian jurisdictions, some of the very few places outside the United States where this is so. Courts in Ontario, the province with the most active securities fraud practice, and an opt out regime, have often looked to the judiciary down south to interpret its relatively new securities laws. However, several Ontario courts have recently rejected U.S. guidance in one key area – determining whether its securities laws apply to foreign traded securities. This trend could result in increased cross-border disputes arising from the overlap between members of U.S. and Canadian classes.
Most recently, Justice Barbara A. Conway of the Ontario Superior Court of Justice rejected BP plc’s argument that the court should limit the scope of the Ontario law, holding that Canadian investors may continue to pursue a class action against the energy company even if they bought its stock on a non-Canadian exchange. In an October 9 decision, Justice Conway refused to stay the proceedings in Kaynes v. BP, a proposed class action brought under the Ontario Securities Act. In her ruling, Justice Conway rebuffed BP’s arguments (1) that the Act applied only to losses on stock bought on the TSX (an Ontario market), and (2) that courts in the United States and the United Kingdom were more appropriate venues for plaintiffs.
Like investors in other venues, plaintiffs in the Canadian case allege that they lost money when BP stock prices plummeted after the Deepwater Horizon disaster in the Gulf of Mexico in April 2010, which killed 11 workers and caused the worst oil spill in U.S. history. The plaintiffs claim that BP knowingly or recklessly misled the public about operational safety before the spill and misrepresented the amount of oil spewing into the Gulf as the disaster unfolded, artificially inflating the company’s stock price.
In her decision, Justice Conway explicitly rejected the defendant’s argument that she should follow the standard applied by the U.S. Supreme Court’s 2010 landmark ruling in Morrison v. National Australia Bank, which effectively bars investors of any nationality from pursuing federal claims for money lost on stock they bought outside the United States. Before Morrison, investors could seek redress under U.S. federal laws if the fraudulent conduct in question took place in the United States or significantly affected U.S. investors. Since Morrison, they only can rely on federal law for shares bought on U.S. exchanges. Foreign companies often issue only a small percentage of their stock, if any, in the United States in the form of American Depository Shares (ADS). In the case of BP, the majority of the company’s stock traded as ordinary shares on the London and Frankfurt stock exchanges. In addition, Justice Conway rejected BP’s arguments that, even if the court has jurisdiction over the claim, it would be more appropriate for plaintiffs to pursue legal action in the United States or Europe.
“There is nothing in the wording of [Ontario’s Securities] Act that restricts the cause of action to investors who purchased their shares on an Ontario exchange,” Justice Conway wrote. “In essence, BP would be imposing a limitation in the Act where none exists.” In deciding that Ontario’s Securities Act applied to the case, Justice Conway determined that there was a “real and substantial connection between the plaintiffs’ claim … and the province of Ontario.”
By contrast, because of the Morrison decision, the U.S. BP class action only covers purchasers of BP’s ADS. Berman DeValerio is co-lead counsel in the class action representing the Ohio Public Employees Retirement System, one of two lead plaintiffs. Because of the ADS limitation, several pension funds from various states and foreign countries began filing individual lawsuits seeking to apply U.S. state laws to losses suffered on ordinary share purchases. Among the first of these cases was an Ohio state court action filed by four Ohio public pension funds represented by Berman DeValerio. Several other individual lawsuits were subsequently filed in Judge Ellison’s court, the U.S. District Court for the Southern District of Texas.
Because Canadian classes may encompass investors who purchased securities on U.S. exchange, there is a potential for cross-border issues. Indeed, a Canadian case could include U.S. investors who purchased American Depository Shares in the U.S. In fact, the plaintiff in the Ontario BP case, Peter Kaynes, bought ADS in New York during the class period. His lawsuit, however, seeks to cover Canadian investors who bought during the class period, regardless of where their shares were purchased. The plaintiff there defined the class to exclude investors who purchased ADS in New York unless they opt out of a U.S. class action pending in a Houston federal court.
Going forward, there is no guarantee that cases won’t seek to cover the same class members. There have been some cases where Canadian and U.S. counsel have sought classes with overlapping coverage and this could lead to further cross-border issues. This changing face of litigation should remain of interest to U.S. investors in foreign securities, and it will require careful attention.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.