A judge was wrong to exclude certain investors from a proposed securities class action against a series of companies and various people that investors allege were involved in a sham consulting scheme, the Court of Appeal for British Columbia has ruled.
In 2024, a judge in the Supreme Court of B.C. certified a proposed class action against 10 public companies, their officers and directors, along with others that were allegedly involved in a scheme to mislead investors in private placements.
The alleged scheme, which has been the subject of enforcement action by the B.C. Securities Commission (BCSC), involved investors being misled by issuers engaged in private placements, who claimed that their deals were fully subscribed — without disclosing that some of those subscribers weren’t genuine investors, and were repaid by the issuers through sham consulting contracts.
In the proposed class action, investors alleged that they were harmed by the deception, which amounted to a conspiracy to defraud capital markets. They also make various other claims, including allegations of fraudulent or negligent misrepresentation. None of the allegations have been proven.
A group of investors appealed the court’s certification decision, arguing that it wrongly excluded certain investors from the action — namely, investors that had sold their stock in the issuers before the alleged scheme was exposed by the BCSC in November 2018.
They also argued that the lower court shouldn’t have divided the class of investors based on whether they acquired their shares on Canadian stock exchanges.
The Court of Appeal for B.C. upheld the appeal from investors, ruling that the lower court judge was wrong to exclude the early sellers, and that it was also wrong to divide the plaintiffs into two classes.
“The early sellers ought not to have been excluded from the class as they clearly articulated a basis for finding that they had suffered a loss,” the appeal court noted.
As for the decision to divide the plaintiffs, the appeal court noted that the law at the heart of the case involves regulating issuers, not specific exchanges.
“In my view, the statutory cause of action under … the B.C. Securities Act is not restricted to investors who acquire shares in B.C. companies through Canadian stock exchanges. Accordingly, the judge’s decision to create two subclasses of plaintiffs was not justifiable,” it said.
Additionally, the appeal court rejected a cross-appeal from a handful of the defendants, who argued that the judge was wrong to certify the case alleging a single conspiracy, rather than a series of separate schemes.
“While the argument of multiple conspiracies may add complexity to the proceeding, it does not cast any doubt on the chambers judge’s conclusion that a class proceeding is the preferable procedure,” the appeal court said.
“The fact that the scheme ultimately involved 12 different private placements, with some involving different participants, does not change the nature of the alleged overarching conspiracy into 12 separate conspiracies.”