In Badesha v. Cronos Group, 2021 ONSC 4346, the court refused to certify an action alleging securities misrepresentation because there was no reasonable possibility that the alleged misrepresentations caused any loss. The plaintiff argued that thousands of alleged misrepresentations in the defendant’s financial statements should be treated as separate misrepresentations, but failed to establish—or even plead—that anyone relied on any one of them.

Many securities misrepresentation certification decisions focus on the predominance of individual issues (see our recent post on 0116064 B.C. Ltd. v. Alio Gold Inc., 2021 BCSC 540). Cronos Group is a reminder that a misrepresentation is not enough to clear the hurdle of a reasonable cause of action required for certification: someone must have allegedly relied on the misrepresentation. Negligence in the air is not enough to certify a class action.  

The plaintiff in Badesha is a shareholder in Cronos, a Canadian medical and recreational cannabis company. Cronos delayed the release of annual filings in March 2020 to allow for review and audit of revenue recognition related to several 2019 transactions. Eventually, Cronos reissued restated MD&A and Interim Financial Statements for the first three quarters of 2019, correcting accounting errors that inappropriately counted wholesale transactions as revenue. The plaintiff brought the action on behalf of a proposed worldwide class of all past and current Cronos shareholders who acquired shares between the first alleged misrepresentation and the revision.

The plaintiff claimed to have identified 570 individual misrepresentations in Cronos’ financial documents for the first three quarters of 2019. The plaintiff then alleged that each alleged misrepresentation was reiterated by Cronos’ directors and officers and there were actually 7,449 individual misrepresentations. The plaintiff apparently wanted to increase the amount it might receive in damages if the claim succeeded by relying on thousands of individual alleged misrepresentations.  

In a companion motion for leave to proceed under s. 138.3 of the Ontario Securities Act, the court held that none of the alleged individual misrepresentations could have had a material impact in the context of the company, its industry, or the market overall. The plaintiff would have to show that each of the 7,449 alleged individual misrepresentations was separately and distinctly material. But the evidence did not even attempt to meet that standard (a motion under s. 138.3 involves a more detailed assessment of the merits of case than a certification motion). The proposed action therefore failed to meet the criteria of s. s. 138.3.

Similarly, because the plaintiffs had not alleged that anyone relied on any individual misrepresentation, they could not meet the requirement under the Class Proceedings Act to plead a reasonable cause of action