Executive Summary: Key Legal and Evidentiary Issues

• The case is a certified class proceeding in which investors allege that ten publicly-traded Issuers, their directors and various “Purported Consultants” participated in an unlawful means conspiracy using deceptive private placements and sham consulting contracts, resulting in losses to non-conspiring investors.

• Investors who sold their shares before the B.C. Securities Commission’s November 26, 2018 investigation announcement (“early sellers”) were held to have articulated a basis for loss causation linked to the alleged scheme and should not have been excluded from the class.

• The Court of Appeal held that the statutory cause of action for secondary market misrepresentation under s. 140.3 of the Securities Act is directed at responsible issuers subject to British Columbia law and their disclosure obligations, and is not limited to shares acquired through Canadian stock exchanges.

• The pleadings were found sufficient, at the certification stage, to allege a single overarching civil conspiracy originating with four individuals and implemented through multiple private placements, even though the evidence at trial may ultimately show several distinct conspiracies.

• The possibility of multiple conspiracies and fairness concerns for defendants who participated in only some private placements did not displace the chambers judge’s conclusion that a class proceeding with common issues is the preferable procedure.

• The Court of Appeal allowed the appeal (by including early sellers and removing the subclass division) and dismissed the cross appeal, leaving the certification order in place subject to specified wording changes to the class definition and related paragraphs.

Background and alleged scheme

This case arises from a class proceeding brought by investors who purchased shares in ten publicly listed companies (the “Issuers”) and allegedly suffered losses. The plaintiffs say the Issuers deceived the investing public by announcing private placements as fully subscribed at the stated issue prices while failing to disclose that subscribers or related persons received substantial repayments from the Issuers through sham consulting contracts. The recipients of these payments are described as “Purported Consultants”.

According to the further amended notice of civil claim, four individuals — Anthony Jackson, Justin Edgar Liu, Cameron Robert Paddock, and Ali (also referred to as “Aly”) Babu Mawji — conceived the scheme in January 2018. The ten Issuers then issued shares by way of private placements between January 30, 2018 and July 25, 2018, with two Issuers (Beleave Inc. and Marapharm Ventures Inc.) conducting second private placements before November 2018.

The plaintiffs allege that several Purported Consultants subscribed for private placement shares and, in exchange, they or associated companies received substantial lump-sum “consulting fees” despite not providing consulting services or being expected to do so. The consulting fees allegedly represented a significant portion of the subscription price, were not disclosed to the investing public, and operated as kickbacks. As a result, the net capital raised by the Issuers was allegedly far less than announced and the net price paid by the subscribers was substantially lower than the disclosed issue price.

The plaintiffs further assert that most private placement subscribers sold their shares shortly after acquiring them, with some allegedly short-selling their shares (effectively disposing of them before acquisition). The shares were allegedly sold for less than the disclosed issue price but more than the subscribers’ net cost after the kickbacks, allowing the subscribers to profit. The plaintiffs say this conduct meant the Issuers raised much less capital than stated, the market price of the shares fell, and investors who were unaware of the scheme overpaid for their shares and suffered financial losses upon disposition. They characterize the scheme as a conspiracy to defraud capital markets.

Suspicions about the scheme became public on November 26, 2018, when the B.C. Securities Commission announced that it was investigating and made certain orders.

Claims and statutory cause of action

The plaintiffs’ claims are based on three causes of action: unlawful means conspiracy; fraudulent misrepresentation (or, in the alternative, negligent misrepresentation); and secondary market misrepresentation under s. 140.3 of the Securities Act, R.S.B.C. 1996, c. 418.

The secondary market misrepresentation provisions in s. 140.3 establish a statutory right of action for damages where a responsible issuer, or a person with actual, implied or apparent authority to act or speak on its behalf (or an influential person in specified circumstances), releases a document or makes a public oral statement that contains a misrepresentation, or fails to make timely disclosure of a material change, and a person acquires or disposes of the issuer’s securities during the relevant period. The statute expressly provides that such a person has a right of action for damages “without regard to whether the person relied on the misrepresentation” or on the issuer having complied with its timely disclosure requirements.

The cause of action under s. 140.3 is framed around “responsible issuers” and their written documents and public oral statements that would reasonably be expected to affect the market price or value of the issuer’s securities, and around failures to make timely disclosure. It is not tied in its text to specific stock exchanges or to the place where trades occur.

Certification decision in the Supreme Court of British Columbia

On the certification application, the chambers judge held that each alleged cause of action — unlawful means conspiracy; fraudulent or negligent misrepresentation; and statutory secondary market misrepresentation — was reasonably set out in the further amended notice of civil claim and was not bound to fail. She also concluded that the statutory requirements for certification of a class proceeding were met, including that a class proceeding was the preferable procedure for resolving the claims.

However, she imposed two limitations on the class. First, she excluded from the class investors who sold their shares before November 26, 2018, when the B.C. Securities Commission announced its investigation. In doing so, she relied primarily on Pearson v. Boliden Ltd., 2002 BCCA 624, and held that there were no alleged partially corrective disclosures during the class periods and that no facts were pleaded to support a claim that an early seller suffered a loss.

Second, she divided the plaintiff class into two subclasses: investors who purchased their shares through a Canadian stock exchange and those who purchased through a non-Canadian exchange (such as the Frankfurt Stock Exchange or OTC markets in the United States). Relying on Pearson and on Kaynes v. BP, PLC, 2014 ONCA 580, she held that the statutory secondary market provisions had no application to shares distributed on foreign exchanges and concluded that only those who acquired shares through a Canadian stock exchange could advance the statutory claim under the B.C. Securities Act. She nonetheless accepted a global class for the common law claims.

Appeal issues: early sellers and subclass division

On appeal, the plaintiffs challenged (1) the exclusion of early sellers from the class and (2) the division of the class into Canadian- and non-Canadian-exchange subclasses.

With respect to early sellers, the Court of Appeal distinguished Pearson. In Pearson, this Court had concluded that shareholders who sold their shares before a tailings dam failure did not suffer a loss attributable to a misrepresentation in a prospectus because any depreciation in the share price resulted from the dam’s collapse, not from the earlier non-disclosure; those early sellers, having purchased and sold at inflated prices, were held not to have suffered compensable loss.

In the present case, the Court of Appeal held that the allegations support a claim that early sellers did suffer loss. The plaintiffs allege that the Purported Consultants resold or short-sold their shares at a significant discount from the disclosed issue price, that these were free-trading shares, and that this selling had an immediate effect on the market. They also allege that the Issuers raised far less capital than they purported to have received. On this basis, the Court held that early sellers could show a loss directly attributable to the alleged fraud on the capital markets and that the fall in share prices was attributable, at least in part, to the alleged misrepresentation rather than to a later “triggering event” analogous to the dam failure in Pearson.

The Court concluded that the chambers judge misapprehended the law by treating Pearson as establishing a general proposition that early sellers should be excluded from securities class proceedings and by finding that early sellers could not possibly demonstrate compensable loss. Accordingly, the exclusion of early sellers from the class was held to be an error.

On the subdivision of the class, the Court focused on the nature of the statutory cause of action under s. 140.3. It observed that the primary market prospectus-based provisions at issue in Pearson were linked to the regulation of distributions on exchanges within provincial legislative authority and that this Court had limited their reach to such distributions. In contrast, s. 140.3 deals with documents and public oral statements whose content would reasonably be expected to affect the market price or value of a security of a responsible issuer. It is not tied to prospectuses or to initial marketing of shares and does not contain language limiting its application to trades on Canadian exchanges.

The Court referred to commentary and Ontario case law on parallel secondary market provisions that do not impose a “place of trading” requirement but instead focus on whether the issuer is a reporting issuer or has a real and substantial connection to the jurisdiction. It also noted that in Kaynes v. BP, PLC, the Ontario courts accepted jurisdiction over a secondary market misrepresentation claim by Ontario shareholders who purchased through a New York exchange but ultimately directed, on forum preferability grounds, that the matter proceed in a United States court.

Given that all Issuers in this case are reporting issuers under the B.C. Securities Act and, except for one, have their registered offices in British Columbia, and that there is no dispute about a real and substantial connection between British Columbia and the facts, the Court held that s. 140.3 is not restricted to investors who acquire shares through Canadian stock exchanges. It concluded that the division of the class into two subclasses based on the place of trading was not justified and that the statutory cause of action is available to class members regardless of whether they purchased their shares through Canadian or non-Canadian exchanges.

Cross appeal: conspiracy pleading and multiple conspiracies

Three Purported Consultants pursued a cross appeal, arguing that the certification judge failed to properly analyze the adequacy of the conspiracy pleadings and that the further amended notice of civil claim, properly construed, alleged several separate conspiracies — one for each private placement — rather than a single overarching agreement. They relied on what the judgment calls the “multiple conspiracies problem”, discussed most often in criminal conspiracy cases such as R. v. Cotroni; Papalia v. The Queen.

The Court reviewed the differences between criminal and civil conspiracy. In criminal law, each count in an indictment may charge only a single offence, and the “multiple conspiracies problem” can raise serious fairness and jury-instruction concerns. In civil cases, by contrast, there is no rule that a claim must relate to a single tort or that only one conspiracy can be pursued in a single action. The Court noted that multiple conspiracies can be addressed in one civil proceeding and that civil juries are less common; courts can determine a case is unsuitable for a jury trial if necessary.

On the adequacy of the pleadings, the cross-appellants argued that the claim focused largely on overt acts tied to individual private placements and did not sufficiently describe a common agreement or dominant overall plan. The Court held that the chambers judge made no error in concluding that the further amended notice of civil claim contains sufficient detail to allege that all defendants were part of a single overarching conspiracy. The pleading states that the scheme was created by four individuals in January 2018 and that other defendants joined and participated in the ongoing scheme across multiple private placements.

The Court accepted that the overt acts are consistent with either one overarching or several separate conspiracies, but held that whether there is an overarching conspiracy is a question for trial based on detailed evidence. At the certification stage, it is enough that a single overarching conspiracy is alleged and that the allegation is not bound to fail. The Court also emphasized that the efficacy of the proceeding would not be destroyed if the evidence ultimately establishes multiple conspiracies; a trial judge can still render judgment and assess damages even if not persuaded that all defendants acted in concert in one enterprise.

The cross-appellants also relied on an article authored by Justice Groberman concerning “wheel” and “rimless wheel” conspiracies, arguing that it is inappropriate for minor participants (“spokes”) to face trial alongside core participants (“hub”) on a general conspiracy. The Court noted that the article dealt with criminal procedure and that later authorities have not fully adopted the thesis that only core participants should be charged in a general conspiracy. It cited commentary stating that, in current law, as long as a person knows the general nature of the overall scheme, intends to adhere to it, and agrees to participate even in a secondary role, that person thereby joins the general conspiracy. The Court agreed with that assessment of the law and held that there is no bar, even in criminal cases, to charging “spoke” participants in the same count as “hub” participants.

The Court was satisfied that the certification judge considered fairness to defendants and treated certification as a gatekeeping function, recognizing that class proceedings can impose burdens and must be fair to both plaintiffs and defendants. It found no error in her conclusion that proceeding as a class action, on the pleadings as framed, is consistent with fair treatment of participants, including Purported Consultants who were involved in only some private placements.

Common issues and preferability of the class proceeding

The cross-appellants further argued that, if the case is characterized as involving multiple conspiracies, there are no true common issues, only superficially similar issues across different Issuers and private placements. They cited cases in which apparently common issues were found, on closer analysis, not to be genuinely common because answering the issue for one claimant would not answer it for another.

The Court of Appeal endorsed the chambers judge’s conclusion that there is “striking similarity” in participants and conduct across the private placements and that there is some basis in fact that overlapping groups of the same Purported Consultants and Issuers followed the same pattern of conduct. The judge had found that trying the conspiracy issues on a common basis across Issuers would avoid substantial duplication of fact-finding and legal analysis, because separate actions would repeatedly address whether many of the same Purported Consultants engaged in the same alleged conduct and whether that conduct constituted a conspiracy at law.

In light of this reasoning, the Court concluded that the proposed issues on conspiracy meet the requirements for certification as common issues and that a class proceeding remains the preferable procedure. It held that arguments based on multiple conspiracies did not undermine the judge’s analysis of common issues or preferability.

Case management and final disposition

The Court emphasized that the certification order was made at an early stage and that, as the case progresses, unexpected issues may arise. The Supreme Court of British Columbia has plenary case management powers to sever parties or issues, amend common issues, or make other procedural orders if necessary. The chambers judge was aware that most substantive issues cannot be resolved at certification.

In its conclusion, the Court of Appeal allowed the appeal and dismissed the cross appeal. It directed that the early sellers be included in the class by specific wording changes to the certification order (removing the exclusionary subparagraph) and that the division of the class into two subclasses be eliminated by deleting the paragraph that created subclasses, along with consequential amendments to certain other paragraphs. The certification order otherwise remains in effect, and counsel were directed to settle the exact wording and review any schedules for necessary consequential changes.