Ontario Superior Court of Justice certifies Securities Class Action in McKenna v. Gammon Gold - with Limitations

Justice Strathy of the Ontario Superior Court of Justice has added to the growing body of securities class actions, in the recent decision in McKenna v. Gammon Gold Inc., [2010] O.J. No. 1057 (S.C.J.). In granting certification of a prospectus-misrepresentation class action, Justice Strathy shed some light on (a) the issues surrounding the inclusion of non-residents as a part of the class; and (b) whether a plaintiff is required to prove direct reliance at the certification stage for a common-law negligent-misrepresentation claim.

The defendants were Gammon Gold Inc. , a TSX- and AMEX-traded Nova Scotia company with mining operations in Mexico (Gammon), together with its senior officers and/or directors (collectively, the Gammon Defendants), and the Canadian financial institutions who underwrote the prospectus offering, BMO Nesbitt Burns Inc., Scotia Capital Inc. and TD Securities Inc. (collectively, the Underwriters). The representative plaintiff, Ed McKenna (McKenna), alleged that the defendants made misrepresentations in Gammon's prospectus and other public filings, the effect of which was to overestimate the actual and anticipated production rate at Gammon's Mexican mines and to misrepresent the real state of Gammon's business. McKenna, who purchased Gammon shares pursuant to Gammon's public offering under a short-form prospectus dated April 19, 2007 (the Prospectus), sought to represent a class of plaintiffs who purchased Gammon shares both under the prospectus and in the secondary market during the class period of October 10, 2006 (the date of Gammon's press release, which allegedly contained misrepresentations regarding its projected mining production) to August 10, 2007 (the date on which Gammon stated for the first time that it was unlikely to meet its production projections, a disclosure that allegedly caused Gammon's stock price to drop 28% over the subsequent five trading days).

In certifying the primary market purchasers as a class proceeding under s. 130 of the Securities Act against all defendants, and an additional claim for unjust enrichment against the Underwriters, Strathy J. made some important findings related to (a) the "thorny issue of reliance" in a common-law misrepresentation class action and (b) the court's jurisdiction over non-resident class members.

Causes of Action

On behalf of the primary-market purchasers, McKenna asserted common-law causes of action for negligent misrepresentation (against all defendants)...

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