It's not easy to be a financial analyst or advisor these days. Already under siege by various regulators who are increasingly paying attention to misleading 'stock pumping', and investors claiming they were duped by shoddy advice, financial analysts have a new potential adversary: the company that the advisor is covering itself. In a decision released this Summer, one Ontario judge may have opened the door to new claims by companies who feel aggrieved by negative coverage by financial analysts. But the sky hasn't fallen yet, argue Robert W. Staley and Derek J. Bell.
On July 7, 2004, Justice James Carnwath of the Ontario Superior Court refused to strike a claim brought by Trizec Properties Inc. and Trizec Canada Inc. against a senior research analyst with Citigroup Global. The claim alleged that the advisor made oral and written comments about Trizec that were misleading and based on faulty research. It is alleged that the Citigroup advisor essentially claimed that Trizec's board was spinning out of control. Citigroup downgraded the stock and the stock plummeted in value from US$13.95 to US$11.64. Trizec sued, seeking damages in excess of CDN$12 million.
The claim was framed in defamation, negligent misrepresentation, and as a breach of the misleading advertising provisions of the Competition Act. Citigroup brought a motion to strike all the claims except for the defamation claim. The reason for striking the negligence and competition claims was obvious: it is much easier to defend a defamation claim because of certain statutory and common law defences (such as the defence of public interest) that a defendant can rely on in defending a defamation claim. These are not available in claims of negligence and breaches of the Competition Act.
It is a well-settled principle in Canadian law that a plaintiff cannot, through artful pleading, frame an action for the sole purpose of obtaining a tactical or other advantage. Plaintiffs sometimes try to sue companies or individuals with insurance coverage in terms of "negligence" rather than an intentional tort, in order to get access to insurance proceeds (insurance policies usually exclude coverage for claims of intentional acts). Judges will strike the negligence claim if the essence of the claim really is an intentional tort. As one U.S. judge commented, "A plaintiff , by describing his or her cat to be a dog, cannot simply by that descriptive designation cause the cat to bark."
Similarly, a plaintiff who really has a defamation claim cannot artfully plead negligence or other causes of action in order to get around defences available only in defamation.
Therefore, Citigroup alleged that the negligence and misleading advertising claims were really just the defamation claim recast in different colours. But Citigroup went further, arguing that the claims in negligence and misleading advertising were doomed to fail, even if they were not coupled with a defamation claim.
Citigroup's attack on the negligent misrepresentation claim was simple: there is no possible way that financial analysts owe a duty of care to the companies they are covering. Further, there was no meaningful allegation that Trizec "relied" on any statement by the analyst, to their detriment. And the attack on the Competition Act claim was even more straightforward: competition claims can only be sustained where there are allegations that the representation had an "undue effect on competition" – and no such allegation was made here.
Justice Carnwath agreed with Citigroup's first argument – that the negligence and competition claims were simply defamation claims dressed up in sheep's clothing – and struck the claims. But Justice Carnwath was not willing to go the extra mile and hold that these types of claims could never succeed at trial. Saying that the claim was "a novel pleading", Justice Carnwath refused to rule that they were doomed to failure. It was possible, the judge found, that a duty could be found in these circumstances, and it was also possible that the statements had an "anti-competitive effect". The latter finding has raised eyebrows in the competition bar, as this is not traditionally the type of conduct that could give rise to a finding of "undue effect" on competition.
The media response to the decision was perhaps overly dramatic – the National Post suggesting the decision would "put analysts in a box", and Canadian Business warning of a "chilling effect" on research analysts. But the reality was that the claim was bound to proceed one way or another – the only question was whether the action would be restricted to a defamation claim, or if it would be broader.
Even if "negative coverage" claims are launched solely as negligence actions in the future (i.e., unbundled from a defamation action), there are a number of hurdles a plaintiff will face prior to judgment. The plaintiff will need to prove almost the impossible – that the statements made were incorrect, that the decline in value of the stock was the reasonably foreseeable consequence of a single analyst's views, and perhaps most importantly, that there are no public policy reasons to deny judgment. At first blush, it certainly seems arguable that there are good public policy reasons to allow analysts to freely speak their minds, particularly when warning investors about potential problems with a company. It is one thing to wrongfully "pump" a stock for personal gain, it is quite another to warn clients of pitfalls with a company.
The hurdles facing plaintiffs bringing Competition Act claims are perhaps even greater. Demonstrating to a court that a misrepresentation by a financial analyst had an "undue effect" on competition in a public securities market will be a difficult, if not impossible task. Even the government has failed more times than it has succeeded in proving "undue effect on competition" to a court – even with price fixing conspirators and cartels!
And, it would be a bold plaintiff to sue only on these other grounds rather than pursuing the more obvious defamation claim. When one does, you can reasonably expect that the defendant will put on a much more focused attack on these and other defects of a claim in negligence and antitrust. Even if the claim survives a motion to strike, it will be difficult for the plaintiff to succeed at trial. On the other hand, the Supreme Court in Ontario recently ruled that the CBC could be found liable for defamation even when the statements made were true (!), so perhaps anything is possible.