Canada: Leave To Commence Meritless Secondary Market Claim Under The Ontario Securities Act Refused

Last Updated: September 26 2012
Article by Ellen Snow

A decision released on September 14, 2012 in the Gould v. Western Coal Corporation class action, on a motion for leave to commence a securities action under Part XXIII.1 of Ontario's Securities Act (the "OSA") provides guidance as to the plaintiff's burden of demonstrating that there is a "reasonable possibility" that the action will be resolved in his or her favour.  Justice Strathy's decision denying leave is the first instance in which a plaintiff has been denied leave to proceed on the basis of the merits of the claim.


Gould, a retired engineer living in Alberta, sought leave pursuant to section 138.8 of the OSA to pursue an action for statutory misrepresentation in the secondary securities market against Western Coal Corporation ("WCC" or the "Company"), a number of WCC's directors and officers, WCC's majority shareholder and an investment fund which had provided financing to WCC.  Gould also made allegations that some of the defendants were liable for civil conspiracy and alleged oppression under British Columbia's Business Corporations Act (the "BCBCA").   The plaintiff sought to certify the entire proceeding pursuant to section 5 of the Class Proceedings Act, 1992 (the "CPA").

Gould's claim was essentially that the defendants had fabricated a financial crisis in WCC in November, 2007 for the purpose of artificially depressing the Company's stock price and enabling the defendants to improve their respective shareholdings in WCC at a discounted price.  Gould alleged that some of the defendants had falsified accounting information which, in turn, caused the Company's auditors to require that a note be included in the November, 2007 quarterly financial statements that there was "substantial doubt about the ability of the Company to meet its obligations as they come due" (the "Going Concern Note"). On receiving that news, Gould, and other investors, sold their WCC shares.   

One week later, WCC announced that it had secured financing in the range of $30-$40 million from the defendant investment fund.  Gould originally suggested that the financing had been pre-arranged and the release of this information was delayed as part of the larger conspiracy to temporarily deflate WCC's share price, to allow the defendants to buy shares and then benefit from the increase in stock price following announcement of the financing.  This latter assertion was largely abandoned by the time of the leave motion, in the face essentially unchallenged evidence by the defendants to the contrary, and the focus of the motion was primarily the allegation that WCC had delayed efforts to obtain financing and deliberately painted an overly bleak picture of the Company's prospects for the insiders' own gain.

The Leave and Certification Motions

The motions for leave to proceed with the secondary market claim and certification of the claim as a class proceeding were heard together.  Gould's evidence on the motion was largely based on the public record as well as the evidence of two experts, one a forensic investigative accounting firm, who deposed that WCC's public statements contained a misrepresentation and that its financial statements had not been prepared in accordance with general accepted accounting principles ("GAAP") and the other, a securities lawyer who deposed that the financing must have been known to WCC and management " a number of days" prior to announcement.

The defendants filed a significant body of evidence on the motion in response, including evidence from fifteen deponents, all of whom were personally involved in the events giving rise to the litigation and who provided what the Court described as "detailed and thoroughly documented evidence concerning their actions during the material time" only four of whom were cross-examined.  In addition, the defendants also tendered evidence from two experts on the issue of the alleged accounting discrepancies.

In considering whether leave to proceed should be granted, Justice Strathy applied the test from Silver v. IMAX Corporation which recognizes that the plaintiff's evidentiary burden on the leave motion is not an onerous one and that the court on such a motion has a limited ability to weigh evidence.  Notwithstanding the low threshold for leave and the conflicting expert evidence tendered, Justice Strathy concluded that the claim had no reasonable possibility of success at trial as the claim had been shown to be based on "speculation or suspicion rather than evidence"; as a result, leave to proceed was not granted.  Justice Strathy was persuaded on the evidence before him that the there was no intentional attempt to misrepresent WCC's financial circumstances and that the Going Concern Note was the product of active and informed discussions between WCC management, the auditor and the Company's Audit Committee.

In dismissing the leave motion, the Court was particularly critical of the Plaintiff's forensic accounting expert, finding that the expert had overstepped the bounds of appropriate expert evidence in numerous respects, including offering opinions outside the expert's area of expertise and effectively becoming an advocate for the plaintiff rather than providing impartial evidence for the Court's assistance.

Given that leave to proceed was not granted, the Court did not need to consider the "reasonable investigation" defence advanced by the defendants as set out in section 138.4 of the OSA but nevertheless concluded that the defence was available to the defendants in the circumstances.   The defendants had engaged in a reasonable investigation and there were no reasonable grounds to believe the financial statements and the Going Concern Note contained a misrepresentation.

The motion for certification of the action as a class proceeding was also dismissed.  The Court found that the civil conspiracy claim could not be certified as the core of that claim was the allegation of misrepresentation, which the Court had found to be groundless and having no reasonable prospect of success.  In addition, the Court concluded that it had no jurisdiction over Gould's allegation of oppression under the BCBCA and such a claim could only be brought in the British Columbia courts as a matter of jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.