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Today, the Court of Appeal released an important decision governing which class actions may properly be brought in Ontario Courts. In Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP, 2016 ONCA 916, the plaintiff, a limited partnership operating in Toronto, brought suit against a Toronto based accounting firm after losing its almost million dollar investment in Southern China Livestock Inc., a Nevada Corporation, which owned or operated a number of hog farms in China. Excalibur’s action was based in negligence and negligent misrepresentation.

In its claim, Excalibur alleged that in deciding to invest, it relied on the Private Placement Memorandum, which included audit reports prepared by Schwartz Levitsky Feldman LLP for the years 2008/2009, which generally provided that Southern China Livestock Inc.’s audited financial statements fairly presented the financial condition of that company.

Subsequently, Southern China Livestock filed a report in December 2010 with the SEC which stated, among other things, that ‘the hogs were sold primarily for cash, that the employees kept corporate funds in their (personal) bank accounts, that Southern China Livestock had little or no control over the employees and that disclosure controls were ineffective’. Around six months later, Southern China Livestock ‘went dark’ and its shares were thereafter deemed worthless.

Excalibur then brought an action against the auditors in Ontario and sought class certification. It alleged that given the state of Southern China Livestock Inc.’s financial affairs (see bold text above), the accounting firm could not have provided a clean audit report as it had professed to do. Initially, Excalibur’s certification motion was denied, with the motion Judge holding that the claim lacked a real and substantial connection to Ontario, and that joinder was a more appropriate mechanism for resolving the outstanding claims. Excalibur appealed to the Divisional Court, lost, and then appealed further to the Court of Appeal.

The Court of Appeal held that the action should be allowed, and the class certified. In so ruling, the Court of Appeal held it was error for the lower court to find that it should approach the issue of taking jurisdiction of a global class action in a restrained manner. As the Court noted, Excalibur’s action was “against a firm of accountants that resides in Ontario and actively conducts business here in relation to an audit that the firm performed in Ontario. Conceived of in this way, it cannot be said that the action does not have a real and substantial connection with Ontario.” In so doing, the Court relied upon the factors set forth in Club Resorts Ltd. v. Van Breda, [2012] 1 SCR 572, which sets forth the test to determine jurisdiction, both within regular actions and class proceedings.

For more information regarding investment brokerage negligence, please contact malpractice lawyer Michael Lesage at 647-495-8995.

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