Protecting the Micro-Cap Investor: Colt Resources Inc.

(April 5, 2019).  Lawyers Andrew Morganti, Albert Pelletier, and Hadi Davarinia were successful in earning the Ontario Superior Court of Justice’s approval to grant their clients’ motion for leave to proceed towards discovery and trial against Colt Resources Inc. (“Colt”) and several of its former officers and directors.  The decision is styled as Kauf v. Colt Resources, Inc., 2019 ONSC 2179, and it validates many important legal issues that confirm that the Securities Act was created to protect investors and the integrity of capital markets not corporations and its rogue officers.  Specifically, the court decision affirms that:

• The investor should not be required to put forth direct evidence of knowledge of an officer to mislead investors (such as an email or attendance of a meeting); and
• A company ought not to be able to benefit from “carving” out negative news by “storm warnings” leading to speculation about bad news and then claim that there is no linkage to the final public correction.  Such an approach incentivizes corporations to issue press releases which do not fully disclose the material facts, but instead create uncertainty in the market.

The decision also evidences that Morganti & Co. will align its interests with that of its clients whenever they have been mislead or how small the investment.  Colt listed its securities on the Toronto Venture Exchange and Frankfurt Stock Exchange with a market capitalization of approximately C$50 million.  Colt is a mining company incorporated pursuant to the Canadian Business Corporations Act with operations in Western Europe.  It is alleged that Colt failed to release a “Material Change Report” after it invested in a Turkish company resulting in investors taking on more risk than they had known and then releasing the truth over three news releases over a two month period in order to condition the market to the bad news.

The Firm represents a German-based investor that purchased the Canadian defendant’s securities listed on the Frankfurt Stock Exchange.  The Firm now represents domestic and foreign investors that all relied upon the integrity of the Canadian capital markets to invest in the Defendant; (a) investors were tricked in to holding shares previously purchased; and (b) investors were tricked into purchasing more shares.

Morganti & Co. was previously successful representing clients confirming that civil liability and damages arising from the Canadian provincial Securities Act applies to companies’ securities listed on foreign stock exchanges (e.g., an anti-Morrison v. National Australian Bank regime) in Kaynes v. BP plc, 2013 ONSC 5802, affirmed by 2014 ONCA 580, at paragraph 32; and Pannicia v. MDC Partners Inc., 2017 ONSC 7298.