Canada: No Gold In Attempted Securities Class Action Against Coal Company

Last Updated: September 27 2012
Article by Jason Woycheshyn, Michael A. Eizenga and Eric R. Hoaken

A recent Ontario decision confirms that lawyers must carefully scrutinize the evidentiary record (particularly expert reports) before arguing a motion for leave to commence an action for secondary market misrepresentation under Part XXIII.1 of the Securities Act (Ontario). On September 14, 2012, the Ontario Superior Court Justice released the reasons of Justice Strathy in Gould v. Western Coal Corporation,1 which denied leave to proceed with a proposed class action that alleged that the company and certain of its former directors had misrepresented the true financial status of the company. Further, Justice Strathy denied Gould's request to certify the action as a class proceeding. The action alleged that certain former directors and institutional investors conspired to artificially depress the company's share price in order to create false panic with investors, increase their own holdings at a discount and gain a windfall when the stock later surged in value.

The Key Players

Western Coal Corporation (WCC) is a British Columbia company involved in the exploration, acquisition and development of coal mining properties. It is listed on the TSX and was a reporting issuer under the Securities Act. WCC's major shareholder was the defendant, Cambrian Mining PLC. The defendant, Audley Capital Advisors LLP, was a major shareholder of Cambrian. The plaintiff, Gould, was an investor, who between January and November 2007 purchased $100,000 worth of WCC debentures.

The Going Concern Note

On November 14, 2007, WCC released its financial results for Q2 2008. The alleged misrepresentation, which was at the root of all of Gould's claims, was contained in a note to the financial statements and in the MD&A (the going concern note) and read, in part:

At current coal prices and Canadian/US dollar exchange rates, the Company does not expect to have sufficient funds to meets its long term debt obligations as they come due...and accordingly the Company will require equity or debt financing from its major shareholder and/or external sources. These circumstances lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.

Immediately after the release of the Q2 2008 results, there was a significant decline in the value of WCC's common shares (from $1.68 to $0.58). On November 15, 2007, Gould read a newspaper article about WCC's financial results that suggested the company was on the "brink of collapse". Gould immediately liquidated all of his WCC holdings, leaving him with a capital loss of $30,000.

On November 30, 2007 (two weeks after the release of the Q2 results), Audley made a vital investment of $30 million in WCC by way of debentures convertible at $0.75 per share (the Audley Financing) allowing the company to honour its obligations with its main lender. In April 2008, coal prices rose sharply, dramatically increasing WCC's profitability and share price. Ultimately, in 2011, Walter Equity bought WCC for $11.50 per share.

The Allegations

Gould asserted three claims: an action for misrepresentation in the secondary securities market under the applicable provisions of the Securities Act; a conspiracy claim; and, an oppression claim under the Business Corporations Act (British Columbia).

Gould alleged that the defendants fabricated a financial crisis in the November 2007 disclosure as part of a master plan to spread alarm among investors, enrich themselves and seize control of WCC. Gould also asserted that the alleged misrepresentations violated generally accepted accounting principles (GAAP) and artificially depressed WCC's share price.

Further, Gould challenged a number of transactions that followed shortly after the release of the company's Q2 results, most notably the acquisition of shares by three WCC directors and the Audley Financing. Gould alleged the latter transaction, along with two transactions between WCC and Cambrian, were the "end game of the conspiracy" and were oppressive because they diluted class members' holdings in the company.

Gould attempted to bring the action on behalf of a class of investors who held or disposed of WCC's securities between the release of the Q2 2008 financial statements and the filing of a Material Change Report confirming the completion of the Audley Financing.

Justice Strathy noted that the plaintiff's case had "morphed" over time in the face of extensive and largely unchallenged evidence of the defendants. Most notably, the plaintiff had nearly abandoned his assertion that the alleged misrepresentation was part of a scheme to enable Audley to seize an interest in WCC.

The Leave Test Confirmed

The central issues were whether WCC's financial statements contained a misrepresentation and were prepared in accordance with GAAP. Consistent with the decision of Justice van Rensburg in Silver v. IMAX Corporation,2 Justice Strathy confirmed that the leave motion requires an evidence-based analysis of whether the plaintiff's claim has a reasonable possibility of success at trial. The threshold for satisfying the leave test is low; the plaintiff need only establish more than a mere possibility of success at trial.

The Evidence

Justice Strathy took a critical look at the evidence before him. He noted that none of the plaintiff's evidence reflected any first-hand knowledge of the transactions at issue or the underlying facts behind the Q2 2008 disclosure. By contrast, the defendants put forward affidavits from 15 different individuals, all of whom were personally involved in the relevant events. Only four of these witnesses were cross-examined. Counsel for the plaintiff objected to this "mountain of evidence" and argued that such a practice improperly enables well-resourced and powerful defendants to overwhelm would-be class actions. Justice Strathy rejected this position noting that Gould was advancing serious allegations on behalf of the class and seeking damages of $200 million. According to Justice Strathy, the "defendants are entitled to put a record before the court to establish that the plaintiff's misrepresentation claim has no reasonable possibility of success."

Justice Strathy was exceptionally critical of the expert accounting evidence that the plaintiff relied on, questioning its independence to the point where he had no confidence in its reliability. In particular, Justice Strathy criticized the accounting expert's propensity for:

  • opining on matters outside of his expertise including, corporate financing, corporate governance and securities law;
  • engaging in "blatant advocacy, making exaggerated, inflammatory and pejorative comments and innuendos, which were argument rather than evidence";
  • attributing motive and speculating about events over which he had no first-hand knowledge;
  • attempting to find a "boogie man under every bed"; and
  • engaging in inappropriate fact finding.

Justice Strathy noted that the expert's willingness to engage in "advocacy, exaggeration and over-statement and his failure to make a balanced assessment of the evidence...casts serious doubt on his independence and objectivity" and "did not come close to the standard for acceptable expert evidence". These failings, together with shortcomings in the expert's logic gave the Court no confidence that the expert's evidence could possibly be relied upon at trial.

Disclosure Must Be Viewed in Context

Justice Strathy noted that the going concern note could not be read in isolation, but rather had to be considered in the context of the financial statements and MD&A as a whole. Moreover, the note had to be considered from the perspective of a reasonably informed investor. Justice Strathy noted that the Handbook of the Canadian Institute of Chartered Accountants (CICA) and OSC Staff Notice 52-7194 required the disclosure of going concern risk to be clear and robust and identify the uncertainties that cast doubt on the ability of the issuer to continue as a going concern.

The Court found that the language contained in the going concern note originated with the company's auditors and was initially resisted by management based on its expectation that the company would weather the financial crisis. The language was only included upon the insistence of the company's auditors who indicated that such disclosure was required under GAAP. By accurately stating the circumstances facing WCC, the company was doing precisely what the law required it to do. Consistent with the principles established in Kerr v. Danier Leather Inc.,3 Justice Strathy noted that it would have been improper for WCC's directors to "sugar-coat" disclosure of the risk on the basis of management's subjective belief that the company would obtain the necessary financing. The fact that Gould and other members of the class focused only on the negative parts of WCC's disclosure did not mean the disclosure was inappropriate.

With respect to the allegation of insider trading, the Court found that there was no evidence that any insider had any material undisclosed information when they made their trades. The purchases were an attempt to send a positive signal of support to the market and not done as part of a master plan or conspiracy.


Justice Strathy concluded that leave to pursue the claim for secondary market misrepresentation should not be granted because Gould's claim had no reasonable possibility of success at trial. This conclusion made it virtually impossible for Gould's claims of conspiracy and oppression, both of which were founded on the alleged misrepresentations, to be certified. Accordingly, Justice Strathy also dismissed the motion for certification.

The decision in Gould confirms that the threshold for plaintiffs obtaining leave to pursue secondary market liability claims remains low; however, Justice Strathy's carefully reasoned decision makes it clear that the leave test should be considered a meaningful hurdle for plaintiffs to surmount. In particular, the low threshold will not prevent the Court from engaging in a robust evaluation of the evidence before it. Further, the standards to be expected of expert opinions will not be relaxed in the context of leave motions. Therefore, lawyers and parties alike will need to carefully consider and scrutinize the evidence they are putting before the Court. Finally, Justice Strathy's decision is a sharp reminder to all experts of their duty to provide fair, objective and non-partisan evidence within the confines of their area of expertise.


1. 2012 ONSC 5184.

2. [2009] O.J. No. 5573, leave to appeal ref'd, [2011] O.J. No. 656 (Div. Ct.).

3. [2007] 3 S.C.R. 331.

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.

Jason Woycheshyn
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.