Executive Summary: Key Legal and Evidentiary Issues

• A Superior Court of Justice motion judge granted leave to proceed and certified a securities class action against Galaxy Digital Holdings Ltd. and two of its senior officers.
   
• Plaintiff Richard Banach alleged that Galaxy failed to disclose material risks tied to its Luna and TerraUSD cryptocurrency holdings between May 2021 and May 2022.
   
• Evidence centred on an internal October 2020 memo in which Galaxy's own executives identified the risk of a "death spiral" in Luna's value, a risk never disclosed to investors.
   
• Defendants argued Luna represented only a small percentage of Galaxy's overall digital asset portfolio for most of the class period, but the court rejected a purely percentage-based materiality test.
   
• Two earlier production disputes over a podcast transcript and supporting data for a company chart were resolved narrowly ahead of the combined motion.
   
• Justice Morgan found the action met both branches of the statutory leave test and all five certification criteria under the Class Proceedings Act.
   

Facts of the case

Richard Banach, a retail investor who purchased 11,076 shares of Galaxy Digital Holdings Ltd. through an online brokerage account, brought a proposed class action against Galaxy, its CEO Michael Novogratz, and its CFO Alex Ioffe. Galaxy is an investment company headquartered in New York City that trades on the Toronto Stock Exchange and was, during the relevant period, heavily engaged in digital assets. Its core holdings included Bitcoin, Ether, and Luna, the native cryptocurrency of the Terra blockchain, which was mechanically linked to the algorithmic stablecoin TerraUSD. Novogratz publicly and repeatedly promoted Galaxy's association with Luna, including through social media posts and a Luna-themed tattoo, describing a "symbiotic relationship" between the company and the asset.

Galaxy began acquiring Luna under an October 2020 agreement with Terraform Labs. Internal communications from that period, including a text exchange dated September 3, 2020 among Galaxy personnel and an internal memo authored by Novogratz and circulated among Galaxy's executives on October 27, 2020, show that the company's own executives recognized specific risks associated with the Luna/TerraUSD design, including a "death spiral" risk tied to the Anchor Protocol's unsustainable yield mechanism. Between May 7 and 12, 2022, TerraUSD lost its peg to the U.S. dollar and Luna's value collapsed to near zero, wiping out an estimated $40 billion in market value. Galaxy's share price fell 42.9 percent [the source attributes this figure to both May 12 and May 13, 2022, in different passages], and the company disclosed a quarter-to-date loss of $300 million. Novogratz subsequently issued a public letter acknowledging that investors had seen their wealth vanish as a result of the collapse.

Banach's proposed class covers all persons who purchased Galaxy shares between May 17, 2021 and May 6, 2022. He alleged that Galaxy's core and non-core disclosure documents during that period — including annual and quarterly MD&As, annual information forms, a registration statement, and earnings-call statements — omitted the specific risks of the Luna/TerraUSD pairing while describing Galaxy's stablecoin holdings in terms suggesting they carried the stability of a fiat currency.

Before the combined leave and certification motion was heard, the parties raised two production disputes at a case conference. The plaintiff sought a transcript of a podcast interview that Novogratz had quoted from in his affidavit, and background documents underlying a chart in Ioffe's affidavit comparing Galaxy's Luna holdings to its total assets. Justice Morgan ordered production of only the quoted portion of the podcast transcript, declining to order production of the remainder or of the chart's supporting materials, and set a timetable running through cross-examinations and factums to a hearing in April 2026.

Policy and legislative provisions at issue

The leave branch of the motion was governed by section 138.8 of the Ontario Securities Act, which requires a plaintiff to show that the action was brought in good faith and that there is a reasonable possibility it will succeed at trial. The certification branch was governed by section 5(1) of the Class Proceedings Act, 1992, which sets out a five-part test: a reasonable cause of action, an identifiable class, common issues, a preferable procedure, and an appropriate representative plaintiff. The Plaintiff's underlying misrepresentation claim relied on section 138.3 of the OSA and on the definition of "material fact" and "misrepresentation" in section 1(1) of the Act. Disclosure obligations were also assessed against National Instrument 51-102 and the Canadian Securities Administrators' Staff Notice 51-363 on crypto asset disclosure, both of which call for issuers to disclose the specific nature and risks of the cryptocurrencies they hold, including continuity schedules tracking purchases and sales. International accounting standards were raised as a further benchmark for whether continuity-schedule disclosure was expected of Galaxy.

Reasoning and analysis

On the discovery disputes addressed in the earlier endorsement, Justice Morgan applied Rule 30.04, concluding that only the specific portion of the podcast transcript actually quoted in Novogratz's affidavit needed to be produced, and that further inquiry into the basis for Ioffe's chart was properly left to cross-examination rather than a pre-hearing production order.

On the merits of leave and certification, the court accepted the technical portions of an expert affidavit from Professor Andreas Park explaining how algorithmic stablecoins operate, but declined to rely on the more argumentative and conclusory portions of his evidence, finding them inconsistent with the objective role expected of an expert witness. The court found that Galaxy's internal materials — particularly the October 2020 memo describing specific supply-expansion and liquidity risks for Luna — showed the company was aware of the risks it later failed to disclose. Cross-examination testimony from Novogratz and Ioffe confirmed that Galaxy disclosed risks specific to other digital assets it held but never disclosed risks specific to Luna or TerraUSD before the May 2022 collapse.

On materiality, the Defendants argued that Luna represented a small share of Galaxy's total assets for most of the class period, based on a comparative chart of Luna's value against total digital and total assets. The court rejected a percentage-driven approach, reasoning that a risk can be material regardless of the size of any single component making up that risk, and noting that the market treated Galaxy and Luna as closely identified with one another. The court also found that Novogratz's candid explanation of algorithmic stablecoin risks on the May 9, 2022 earnings call, and Galaxy's subsequently revised disclosure language, met the legal test for a public correction linked back to the earlier omissions, rather than constituting impermissible backward reasoning from a drop in share price.

On good faith, the court considered that Banach had disclosed a mortgage fraud conviction from approximately eighteen years earlier and a separate regulatory matter involving an unlicensed radio station. Justice Morgan found neither disqualifying, noting the conviction was old and unrelated to any suggestion that the litigation itself was brought improperly.

On certification, the court found the proposed class period tied directly to the alleged misrepresentation and public correction, that the plaintiff's three proposed common issues would advance every class member's claim, that a class proceeding was preferable to numerous individual claims, and that Banach was capable of instructing counsel and had secured litigation funding through the Class Proceedings Fund.

Ruling and overall outcome

Justice Morgan ruled in Banach's favour, granting leave to proceed under section 138.8 of the Securities Act and certifying the action as a class proceeding under section 5(1) of the Class Proceedings Act. Banach was approved as representative plaintiff and his counsel appointed as class counsel, with the class defined as all purchasers of Galaxy shares between May 17, 2021 and May 6, 2022, and the plaintiff's three proposed common issues approved. This decision addresses leave and certification only; no damages or monetary award has yet been determined, and the amount, if any, ultimately owed to the class remains unresolved pending further proceedings. The parties were directed to make separate written submissions on costs.