To File Or Not To File Evidence? That Is The Question For Defendants Facing Securities Class Actions

The Supreme Court of Canada has confirmed that the test for leave to pursue a statutory claim for secondary market misrepresentation is “more than a speed bump.” For defendants, this means there may be an opportunity to “do battle [at] the outset” and mount an aggressive opposition to a motion for leave. This likely involves filing substantive responding evidence. But how does a defendant decide whether this is the right strategy? Whether to file evidence in response to a leave motion is a difficult strategic decision often faced by defendants in securities class actions.

Early Trend - Minimal Evidence Filed by Defendants

Based on the early jurisprudence, the test for leave was thought to be a relatively low threshold. Courts treated the statutory requirement that the plaintiff establish a “reasonable possibility that the action will be resolved at trial in [its] favour” as a bar that could be easily surpassed. This meant that defendants would often not file any substantive evidence in response to a leave motion, focusing their arguments instead on whether the plaintiff had met its evidentiary burden and on technical issues such as whether the class was properly defined.

Defendants would choose to remain silent on the substantive allegations because, by filing responding evidence, the plaintiffs would be able to cross-examine the defendants’ witnesses and would have corresponding rights to documentary production. This could end up helping the plaintiff by furthering its fact gathering investigation at an early stage – a risky proposition when the plaintiff faces only a low bar to success on the leave motion.

Recent Decisions – Evidence To Defeat Leave Motions

In several recent decisions, however, leave motions have been defeated, largely based on the evidence filed by the defendants in response to the motion. Most recently, in Atlantic Power, Justice Belobaba reviewed the significant amount of evidence filed by the defendants (which included more than 14,000 electronic records and 10 boxes of affidavits, expert reports, cross examination transcripts and corporate documents) and concluded that the defendants had disproven the plaintiff’s allegations and therefore there was no reasonable possibility of success at trial.

Strategic Considerations for Defendants

There is no doubt that a leave motion can be defeated with evidence. But deciding whether or not to wage this war is still not an easy decision. The evaluation is made even more complicated because it is happening so early in the litigation. Determining whether it may be possible to successfully convince the court that the plaintiff has failed to establish a reasonable possibility of success at trial will likely require a significant amount of fact gathering, analysis and expert consultation. The available evidence will have to be carefully analyzed and tested before determining whether it is worth the risk of filing anything at all.

How can defence counsel meet this strategic challenge and confront the evidentiary question head on? Here are some suggestions:

• Assemble the available evidence about the critical facts that go to the heart of the plaintiff’s allegations as soon as possible.
• Assess whether the factual foundation of the plaintiff’s claim can be demonstrably proven to be false based on contemporaneous documents. The less questions of witness credibility are in play, the greater the likelihood a motions judge will be able to find no reasonable chance of success based on a “paper record” without the plaintiff having had the benefit of discovery.
• Assess how much the plaintiff’s claim depends on the opinion of an expert and the quality of that opinion. In particular, focus on the factual underpinnings on which plaintiff’s expert opinion is based. In Kinross, for example, based on evidence filed by the defendants, the court found that the plaintiffs’ primary expert: (1) relied on irrelevant data; (2) ignored relevant data that did not support his opinion; and (3) mischaracterized or misunderstood the import of existing data. When a plaintiff’s claim is dependent on an expert opinion that is refuted from a factual standpoint, this enables the court to conclude that the plaintiff has not met its burden, on the evidence, of establishing that the claim has a reasonable possibility of success.