Under the Ontario Securities Act (“OSA”), a statutory right of action exists for secondary market misrepresentation for any person who acquires or disposes of an issuer’s securities within the relevant time period. An action for secondary market misrepresentation requires leave of the court under s. 138.8. Such leave may only be granted where a plaintiff has met his burden of showing, to a reasonable possibility of success, both an alleged misrepresentation and a public correction of that misrepresentation. While the case law on the former prong is relatively clear, the latter has been largely undefined. The recent decision of Superior Court Justice Edward P. Belobaba in Swisscanto v. Blackberry sheds some light on what, exactly, a plaintiff must show to meet its burden of establishing the existence of a public correction.
In Swisscanto, the Plaintiff, a European investment fund that bought 1,700 BlackBerry shares during the proposed class period, sought leave to bring a class action suit for secondary market misrepresentation. The claim stemmed from the release of the BlackBerry 10 smartphone (“BB 10”), a product that BlackBerry hoped would revitalize its business. On launch, BlackBerry’s revenue recognition policy was of the “sell-in” variety, where BlackBerry booked the sale when the product was sold to its distributors, rather than waiting until the distributors actually sold the product (which would constitute “sell-through” accounting). This practice is permitted under GAAP only if the seller can make “reasonable estimates of the actual amount of adjustments that might be needed to help move the product from distributors to end-users.”
Between January 30, 2013 and June 1, 2013, sales of the BB 10 to end-users were extremely disappointing. Only about a quarter of the BB 10 phones shipped to distributors were actually purchased by end users, leading to several concessions by BlackBerry that failed to increase sales. To that end, on September 20, 2013, BlackBerry announced its results for 2Q14. The Release noted that BlackBerry would write off by way of inventory charge almost $1 billion in unsold BB 10 smartphones, eliminate 40 percent of its global work force, limiting its focus to corporate and professional customers, and pursuing a buyer. At the bottom of the first page, BlackBerry also noted that, going forward, it would change its revenue recognition practice from sell-in to sell-through. When the price of BlackBerry’s shares dropped by 15 percent, the instant suit was filed.
At issue was whether there was an alleged misrepresentation and, if so, whether there was a public correction. The court concluded that the plaintiff presented at least enough evidence to show a reasonable possibility of a misrepresentation. More interesting was the court’s discussion of whether a public correction occurred. The plaintiff argued that BlackBerry’s announcement of a change to sell-through recognition constituted a public disclosure. The defendant argued that it was merely a footnote, and one unconnected to the failure of the BB 10.
Justice Belobaba laid out very specific criteria to use in determining whether the public correction requirement of s. 138.3 of the OSA had been satisfied. He proposed that courts consider the following:
- Whether the public correction was pleaded with sufficient precision to provide fair notice to the defendant, using specific words or figures that allegedly constitute the public correction of the alleged misrepresentation, along with its timing.
- Whether there is some linkage or connection between the pleaded public correction and the alleged misrepresentation. The correction need not be a “mirror-image” of the misrepresentation, or a direct admission of a previous falsity, but it must at least share the same subject matter of, and relate back to, the misrepresentation.
- Whether the public correction is reasonably capable of revealing to the market the existence of the misrepresentation. The correction need not be understood by the ordinary investor. It is sufficient that market participants with specialized knowledge and expertise can understand that the language of the release equates to a public correction of a misrepresentation.
- The form taken by the public correction. Justice Belobaba took care to note that the correction may take “any number of forms” and need not come from the defendant corporation. The source of the correction can be third parties like media reports or internet postings.
Taking these factors into consideration, the court concluded that the public correction requirement was satisfied by the language in the September 20, 2013, statement. It essentially concluded that the statement could be fairly understood to inform sophisticated market participants that BlackBerry was correcting the sell-in method of revenue recognition that had been used during the class period.
This decision is relevant to investors because it lays out a very clear set of guidelines to be considered in determining whether the public correction requirement has bene met. It also clarifies that the public correction requirement is really a temporal marker for assessing damages. It essentially bookends the class period, which runs from the date of the misrepresentation to the date of the public correction of that misrepresentation. It is not a substantive hurdle to be cleared; it is simply the end date of the class period, and its importance thus pales in comparison to the requirement of showing an alleged misrepresentation.