Expected flood of lawsuits against public companies by secondary market investors isn’t happening

The anticipated flood in Canada of class action lawsuits by secondary market investors against public companies has not yet materialized, in part because the representative plaintiffs in such lawsuits must seek leave of the courts to proceed.
In the June 2009 issue of Crawford’s newsletter, ProClaim, the feature article discusses recent amendments to class action legislation in Ontario, Alberta, Quebec and British Columbia. The changes give secondary market investors the right to sue a public company and key related persons for misrepresentations or failure to make timely disclosure.
Investors acquiring securities in the primary market have always had a longstanding right to sue for misrepresentation. But investors in the secondary market, also known as the aftermarket (where stocks, bonds, options and futures are bought), have not had the same right until now.
The aftermarket is estimated to make up at least 90% of the overall market.
“These legislative amendments have resulted in a limited increase in the filing of secondary market class actions, but the expected flood of cases has not occurred,” ProClaim says.
Part of the reason is the requirement for the plaintiffs to seek leave of the court to launch such proceedings.
“The leave application is a preliminary screening mechanism requiring the representative plaintiff to demonstrate that his action is brought in good faith and has a reasonable possibility of success at trial,” Kerry Eaton, the vice president of Crawford & Company (Canada) Inc.’s Class Action Services, is quoted as saying in ProClaim.
Eaton adds that if the court approves the application for leave, it then goes to a second round of screening known as certification.
He said the costs associated with these pre-screening stages are a real consideration in these secondary market lawsuits.
“The reality in this scenario is that only well-heeled individuals or institutional investors are prepared to launch such securities-based class action lawsuits,” Eaton said.