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Carriage Motions in Securities Class Actions: Restoring the Primacy of the “Primary Consideration” By A. Dimitri Lascaris, Emilie Maxwell and Serge Kalloghlian, Siskinds LLP

The primary consideration on a class action carriage motion is arriving at a solution that is in the best interests of all class members, is fair to the defendants, and consistent with the policy objectives of the Class Proceedings Act, 1992.1 A careful examination of recent carriage decisions in securities class actions reveals that, although the ‘primary consideration’ is simple to articulate and has never been the subject of significant controversy, its application to specific carriage contests has become increasingly problematic. Moreover, the uneven application of the ‘primary consideration’ to particular contests for carriage has infused considerable uncertainty into the task of predicting the outcomes of these contests. In an environment of uncertainty, carriage contests are less likely to be resolved by negotiation, and are more likely to require a judicial resolution. If the Courts wish to see fewer carriage motions, then the carriage test ought to be simplified such that contestants for carriage can better predict outcomes. Moreover, if contestants for carriage are less able to predict outcomes, then their counsel will be reluctant to incur investigative and other litigation costs until the issue of carriage has been resolved, because a loss in the carriage motion may result in counsel’s investment in the case being lost. As things stand, however, a lengthy list of factors now informs the determination of which contestant for carriage will best serve the interests of the class. In addition, although Courts have expressed reluctance to delve deeply into the merits of competing claims, this in fact is what Courts increasingly do. The result is that carriage contestants divulge more and more of their investigative work and strategies, and are increasingly inclined to highlight potential weaknesses in the investigation and strategies of their competitors. A debate as to the optimal strategy for the plaintiffs to pursue can have salutary effects by, for example, revealing potential impediments to certification at a preliminary stage of the litigation, when the defects that give rise to those impediments can be rectified at relatively little cost, and with little to no unfair prejudice to the defendants. However, if such debates between contestants for carriage occur in full view of the defendants, it is highly questionable whether such debates truly serve the interests of the class. It is therefore submitted that the ‘primary consideration’ would be better realized by modifying the conduct of carriage motions in three respects, each of which will be explored in greater detail throughout the remainder of this article. First, if defendants are permitted to participate in carriage motions, even if only as observers, then judges who evaluate the competing claims advanced by the contestants for carriage should generally defer to the judgment of the competing counsel groups as to how the case ought to be framed, and Courts should deem one pleading to be preferable to the competing

1 Sharma v. Timminco Ltd., [2009] OJ No 4511 at para 14, (SCJ) [Timminco]; see also Simmonds v. Armtec Infrastructure Inc., [2012] OJ No 277 at para 16, (SCJ) [Armtec]

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pleading only if one of the pleadings suffers from an obvious defect of a material nature. Alternatively, Courts should exclude defendants from carriage motions, and subsequent to the determination of carriage, the case should be assigned for case-management to a class actions judge who played no role in deciding carriage. Second, Courts should place greater emphasis on the attributes of the proposed representative plaintiff(s). Specifically, Courts should generally prefer plaintiffs who have demonstrated a greater inclination to act as rigorous monitors of the litigation. Third, Courts should go beyond asking whether the competing counsel groups have expertise in class actions, and should seek to determine the degree to which the experience of the competing counsel groups is relevant to the particular subject matter of the class proceeding. Recent Carriage Decisions in Securities Class Actions In the past four years, three Ontario securities class actions have generated a carriage motion.2 In Timminco, two counsel groups competed for carriage of a class action stemming from alleged misrepresentations relating to the issuer’s production of solar grade silicon. Both groups asserted claims in negligence and negligent misrepresentation and declared an intention to seek to leave to plead the causes of action under Part XXIII.1 of the OSA. In Armtec, the plaintiffs alleged that the defendants misrepresented the issuer’s financial performance in an interim reporting period that preceded the issuance of a prospectus. Two firms competed for carriage, and both asserted claims of negligence, negligent misrepresentation, and statutory prospectus misrepresentation, and also declared their intention to seek leave under Part XXIII.1 of the OSA. One group also pleaded unjust enrichment and waiver of tort. Carriage was awarded to the group that did not plead unjust enrichment and waiver of tort. Finally, in Smith v Sino-Forest Corp.3, three plaintiff groups and their respective counsel competed for carriage of the matter. While each group alleged that the defendant had made misrepresentations to investors, each group alleged a different central misrepresentation. In essence, one group based its proposed action on alleged non-arm’s length transactions with undisclosed related parties, another group based its claim largely upon the defendants’ alleged misrepresentation that the issuer’s financial statements were in compliance with GAAP, and the third group grounded its case on statements of the defendant regarding its integrity. Carriage was awarded to the second of these groups.

2 Siskinds LLP participated, as counsel to proposed representative plaintiffs, in each of these carriage motions. 3 [2012] OJ No 88, (SCJ) [Sino-Forest]

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The Role of the Competing Pleadings in Carriage Decisions In determining carriage of a class proceeding, courts should avoid “embark[ing] upon an analysis as to which claim is most likely to succeed [...]” Such analyses are to be reserved for instances in which one of the competing claims is clearly “fanciful or frivolous”.4 There is a compelling logic to this approach. At the certification stage, the pleadings are subject only to the ‘plain and obviousness’ standard, which seems similar to the standard of ‘fanciful and frivolous’ claims. There is no good reason why contestants for carriage should be subjected to more rigorous scrutiny of their pleadings than they would be in the certification context. However, in each of Timminco, Sino-Forest, and Armtec, the Courts engaged in relatively detailed analyses of the competing claims, and resolved the carriage contest at least in part on the basis of perceived weaknesses in one of the claims. In Timminco, for example, the Court identified the two factors that were “critical” to its carriage decision to be: (1) the nature and scope of the causes of action advanced; and (2) the theories advanced by counsel as being supportive of the claims advanced.5 However, nowhere in the decision did the Court hold that the causes of action or theories advanced by the losing contestant were ‘fanciful or frivolous.’ Similarly, in Armtec, the Court engaged in a relatively detailed analysis of at least two evolving areas of law. First, the court detailed the challenges presented by one proposed plaintiff’s unjust enrichment / waiver of tort claim.6 Second, the court explored the propriety of including in the proposed class Armtec shareholders who had sold their securities before the end of the proposed class period (or “early sellers”).7 Ultimately, the Court preferred the approach of the counsel group that had excluded early sellers from its proposed class, and who had not advanced a waiver of tort claim. Again, however, the Court did not find that either of these approaches was ‘fanciful or frivolous.’ On the contrary, the Court acknowledged that some Ontario Courts had certified classes in securities class actions that included early sellers, while other Ontario Courts had either certified unjust enrichment / waiver of tort claims in the securities context, or had declined to strike such claims on a pre-certification motion to strike.8 Finally, in Sino-Forest, the Court evaluated, among other matters, the definition of the class, the joinder of certain defendants, and the prospects for certification of the competing actions. Indeed, the Court identified the prospects for certification as a “determinative factor” in the carriage decision.9 Again, however, the Court did not hold that any of the competing actions was doomed to founder at the certification stage. Notably, in Sino-Forest, the Court understandably expressed discomfort with the task of analyzing the competing claims in full view of the defendants:

4 Timminco at para 15; Armtec at para 19 5 Timminco at para 68 6 Armtec at paras 24-30 7 Armtec at paras 41-45 8 Armtec at paras 25, 43, and 45 9 Sino-Forest at para 236

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No doubt to the delight of the defendants and the defendants’ lawyers, which have a watching brief, the [carriage motion] also involves the rivals hardheartedly and toughly reviewing and criticizing each other’s work and pointing out flaws, disadvantages, and weaknesses in their rival’s plans for suing the defendants.10 As indicated above, debates of this nature at the very preliminary stage of determining carriage of the action can yield benefits for the class by enabling the successful contestants for carriage to refine and improve their claims. However, these benefits may be largely negated, if not overwhelmed, where the debate occurs in full view of the defendants, because the defendants might thereby gain a better understanding of weaknesses in the plaintiffs’ claims. Therefore, if carriage judges are going to embark upon a detailed evaluation of the competing claims, it is imperative that defendants be excluded from the carriage motion. This in fact was done in a securities class action carriage motion which preceded the trilogy of Timminco, Armtec and Sino-Forest. In Genier v CCI Capital Canada Ltd.,11 a case in which the authors’ law firm acted as counsel to a proposed representative plaintiff, the Court excluded defence counsel from part of the hearing of the carriage motion because, during that part of the hearing, the competing plaintiffs’ counsel debated an issue that the Court deemed to be sensitive. Unfortunately, however, the exclusion of defence counsel from part of the hearing was not referenced in the Court’s reasons. When confronted by a proposal that defendants be excluded from a carriage motion, defendants generally argue that, in the carriage motion, plaintiffs’ counsel may take positions or make assertions which the defendants may wish to contest, and that excluding defence counsel from the carriage motion may unfairly influence the case-management judge by depriving the defendants of an opportunity to contest an argument or assertion with which they disagree. Whatever merit this concern may have, any such concern would surely be dispelled if the judge rendering the carriage decision played no other role in either case-managing or trying the class proceeding. Thus, Courts should give serious consideration to separating the roles of carriage judge and case-management judge. Such a separation would free the contestants for carriage to have a full and frank debate on the merits and defects of the competing claims and strategies such that the interests of the class would best be served. Section 12 of the Class Proceedings Act confers upon the Court a “broad discretion” to “[...] make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination [...]”.12 It is thus submitted that section 12 provides an ample basis upon which a Court could order a separation of the carriage decision and casemanagement roles.

10 Sino-Forest at para 3 11 [2005] OJ No. 1135 (SCJ). 12 Armtec at para 17

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The Role of the Competing Plaintiffs in Carriage Motions Critics of class actions often suggest that many plaintiffs have too small an economic stake in the litigation to be motivated to act as effective monitors of class counsel, and that therefore many class actions are ‘lawyer driven.’ These concerns fail to take into account two realities. First, for many consumers and investors, losses that may seem economically insignificant to a well-compensated lawyer may in fact be economically significant to a consumer or an investor possessing limited assets. Second, money is not the only motivator for many members of our society. Many people who agree to assume the role of representative plaintiff do so, at least in part, from a sense of indignation, and a desire to ensure that wrongdoers are held to account. Nevertheless, it is true that the prospect of significant compensation is generally an important motivator for many prospective representative plaintiffs, and that plaintiffs who stand to gain more from the litigation will generally have more motivation to act as rigorous monitors of class counsel than class members whose injuries are marginal. Accordingly, the United States Private Securities Litigation Reform Act of 1995 (the “PSLRA”) provides that, in securities class actions, the proposed plaintiff with the largest financial loss ought presumptively to be the lead plaintiff. 13 The rationale for this rule was summarized by the court in Sino-Forest as “[...] ensur[ing] that institutional plaintiffs with expertise in the securities market and real financial interests in the integrity of the market would control the litigation, not lawyers”.14 Under the PSLRA, this presumption may be rebutted by proof that “the presumptively most adequate plaintiff will not fairly and adequately protect the interests of the class; or is subject to unique defenses that render such plaintiff incapable of adequately representing the class”.15 There is certainly some merit to the American approach. For one thing, the presumption that the lead plaintiff with the largest loss is the most suitable lead plaintiff introduces a considerable degree of predictability into determinations of carriage. This reduces the incidence of battles for carriage, with their attendant costs and delays. In the Ontario securities context, delays can be particularly problematic following the recent Court of Appeal decision in Sharma v. Timminco.16 In that case, the Court held that section 28 of the Class Proceedings Act did not operate on the facts before it to suspend the limitation period applicable to claims under Part XXIII.1 of the OSA prior to leave being granted to prosecute such claims. Quite apart from limitation issues arising from carriage battles, less uncertainty as to who will lead the litigation means that class counsel will be more willing to invest in a case prior to a final resolution of the carriage issue.

13 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I) 14 Sino-Forest at para 282 15 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II); Stone v Agnico-Eagle Mines Ltd, 2012 WL 386354 at 2 (SD NY 2012). 16 Sharma v. Timminco, [2012] OJ No 719, (Ont CA)

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Clearly, the drafters of Part XXIII.1 were familiar with the PSLRA,17 but the drafters did not incorporate into Part XXIII.1 a presumption that the plaintiff with the largest loss is the most suitable plaintiff. This may be due to the fact that the U.S. approach, while offering some advantages, is by no means perfect. For example, the PSLRA presumption greatly restricts the court’s discretion to examine other factors affecting the interests of the class, such as the experiences and resources of the plaintiff’s counsel. Moreover, the PSLRA approach ignores an important distinction between relative and absolute loss. Whereas an institutional investor might suffer damages that are considerably larger than the damages sustained by a competing individual plaintiff, the damages sustained by the institution might constitute a minute fraction of its assets under management, whereas a smaller loss sustained by an individual might constitute a large proportion of the individual’s net worth. In such circumstances, there is a question as to whether the institutional plaintiff or the individual plaintiff is more motivated to monitor class counsel rigorously. In Sino-Forest, Justice Perell noted the distinctions between large institutional plaintiffs and retail investor plaintiffs, stating: [...] it is hard to believe that given their financial heft, [institutional investors] need the Class Proceedings Act, 1992 for access to justice or to level the playing field or that they need an indemnity to protect them from exposure to an adverse costs award. [...] In his factum, [prospective counsel] eloquently argued that individual investors victimized by securities fraud should have a voice in directing class actions. Mr. Smith lost approximately half of his investment fortune; and according to [prospective counsel], Mr. Smith is an individual investor who is highly motivated, wants an active role, and wants to have a voice in the proceeding.18 In light of such considerations, it is submitted that the Court should not give weight only to the absolute losses of the competing plaintiffs, but should also be mindful of their relative losses. A party with a smaller absolute loss but a larger relative loss might be more motivated than the competing plaintiff to act as a rigorous monitor. Finally, it is submitted that the Court should not simply assume that the lead plaintiff with the largest absolute or relative loss is the best plaintiff. If there is evidence before the Court that, notwithstanding a plaintiff’s relatively small losses, it is acting as a more rigorous monitor of class counsel then a competing plaintiff with larger losses, then the Court should give primacy to the plaintiff who has demonstrated a greater determination to exercise oversight. For example, whether a plaintiff has entered into a fulsome retainer agreement with his or her counsel, and the terms of that retainer, may well shed light on the plaintiff’s willingness and ability to act as a rigorous monitor.

17 CSA Staff Notice 53-302, which explains the reasoning behind the draft legislation that formed the basis of Part XXIII.1, makes extensive reference to the PSLRA. 18 Sino-Forest at paras 279 and 284

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The Role of Competing Counsel in Carriage Motions The plaintiffs’ bar in Canada has unquestionably matured since class proceedings legislation was introduced in this country. A significant number of firms across Canada have developed a high level of expertise in class action procedure. To date, Courts have tended to focus on the class actions experience of the competing counsel groups without delving deeply into the relevance of that experience to the particular subject matter of the class action. The tendency of Courts has been to deem “counsel factors” to be neutral as between those groups, so long as each competing group can demonstrate a significant track record in class action litigation. In Sino-Forest, for example, the “attributes of class counsel” were listed as a “neutral or nondeterminative factor” in the court’s decision.19 A similar conclusion was reached in Armtec and Timminco.20 However, although expertise in class action procedure may well be necessary to the effective prosecution of a class proceeding, it may not be sufficient. Class actions cover a vast legal terrain. Securities law is but one of the complex features of the class actions landscape. The subject matter of Canadian class actions now covers areas of expertise as diverse as competition law, franchise law, consumer protection law and common law tort principles. Quite apart from the diversity of the legal regimes under which class actions are today prosecuted, certain types of complex evidentiary issues tend to arise in certain types of class actions. In securities class actions, for example, assessments of share price inflation are generally accomplished by means of event studies. Event studies are statistical methods designed to measure the impact of an event upon the value of a firm. By contrast, an assessment of class damages in a price-fixing case may well give rise to economic and evidentiary issues that do not generally arise in securities cases. If a client needed legal advice in regard to a commercial real estate transaction, she would of course be well advised to seek out a lawyer with expertise in commercial real estate, as opposed to, for example, a wills and estates specialist. Similar considerations apply in the class actions context. Simply stated, counsel who possess expertise in the particular subject matter of a class proceeding are likely to offer significant benefits to the class relative to counsel who have no or relatively limited expertise in that subject matter. It is therefore submitted that Courts called upon to resolve contests for carriage should do more than examine whether the competing counsel groups possess substantial experience in class actions. They should also assess the degree of expertise that the competing counsel groups possess in the particular subject matter of the class action.

19 Sino-Forest at para 235 20 Armtec at paras 53-60; Timminco at paras 83-84

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Conclusion In the view of the authors, the focus of carriage motions should be the plaintiff and her counsel. Courts should focus on principally two questions: (1) on all of the evidence before the Court, which plaintiff is more likely to act as an effective monitor; and (2) which counsel group possesses the greater degree of relevant expertise? Differences in the claims or supporting theories of the competing plaintiffs should enter into the equation only if the claim or supporting theories of a plaintiff suffer from an obvious defect of a material nature or, stated differently, if one of the competing plaintiffs advances a claim that is ‘fanciful or frivolous.’ Alternatively, if the Court is inclined to engage in a searching analysis of the competing pleadings and strategies, then defendants should be excluded from carriage motions, and the carriage judge should not subsequently case-manage the class proceeding. It is submitted that such an approach to carriage motions would better serve the interests of class members. Such an approach also would render carriage outcomes more predictable, and would thereby reduce the incidence of carriage contests and the attendant delays and costs for litigants, their counsel and the judicial system. If you have any questions, please feel free to contact Dimitri Lascaris, Emilie Maxwell or Serge Kalloghlian.

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Carriage Motions in Securities Class Actions