



COURT OF APPEAL FOR ONTARIO

CITATION:
    Wright v. Horizons ETFS Management (Canada) Inc., 2020 ONCA 337

DATE:
    20200601

DOCKET:
    C67205 & C67410

Lauwers,
    Hourigan and Thorburn JJ.A.

BETWEEN

Graham
    Wright

Plaintiff/Moving
    Party (Appellant)

and

Horizons
    ETFS Management (Canada) Inc.

Defendant/Responding
    Party (Respondent)

Alistair Crawley, Clarke Tedesco, Michael
    L. Byers, and Alexandra Grishanova, for the appellant

R. Seumas M. Woods and Ryan Morris, for the
    respondent

Heard: February 27,
    2020

On appeal from the
    order of Justice Paul M. Perell of the Superior Court of Justice, dated June
    20, 2019, with reasons reported at 2019 ONSC 3827.

Thorburn J.A.:

1. OVERVIEW

[1]

These are two appeals from a certification judges
    order refusing to certify an investor class action and dismissing the action on
    the basis that the pleadings do not disclose a reasonable cause of action.
[1]

[2]

The proposed class action arises out of the
    dramatic collapse of a proprietary derivatives-based exchange-traded fund (the
    Fund) created and managed by the respondent, Horizons ETFS Management (Canada)
    Inc. (Horizons).

[3]

The Fund was meant to provide inverse exposure
    to stock market volatility. The Fund was described in the prospectus as highly
    speculative and involv[ing] a high degree of risk. Units in the Fund were
    offered to retail investors, as well as registered brokers and dealers who
    bought and sold them over stock exchanges.

[4]

After two years of growth, the value of the Fund
    dropped suddenly and dramatically: on February 5, 2018, the Fund lost almost
    90% of its value overnight. Investors lost nearly $40 million and the Fund
    never recovered.

[5]

In April 2018, Horizons announced that it was
    closing the Fund because it no longer offer[ed] an acceptable risk/reward
    trade-off for investors.

[6]

Graham Wright brought a claim pursuant to the
Class
    Proceedings Act, 1992
, S.O. 1992, c. 6, as the representative plaintiff
    for all persons who owned units of the Fund at the close of the Toronto Stock
    Exchange on February 5, 2018 (the Class). He alleged that Horizons was
    negligent and was liable for making misrepresentations in its prospectus under s.
    130 of the
Securities Act
, R.S.O. 1990, c. S.5.

[7]

The certification judge held that the statement
    of claim did not disclose a reasonable cause of action, because it was plain
    and obvious that:

a.

Horizons owed the Class no duty of care and that
    there was therefore no cause of action in negligence; and

b.

Mr. Wright and the Class did not have a cause of
    action pursuant to s. 130 of the
Securities Act
, as the Fund was
    offered over stock exchanges and not directly to investors. They could and
    should have proceeded under s. 138.3 of the
Securities Act,
not under
    s. 130.

[8]

Mr. Wright submits the certification judge erred
    in both holdings.

[9]

First, Mr. Wright submits that the statement of
    claim discloses a cause of action in negligence. In particular, he claims
    Horizons was negligent in designing, developing, offering, and promoting a
    financial product that was not adequately tested before launching, excessively
    risky, complex and doomed to fail. He also alleges that Horizons failed to
    explain the nature and extent of the risks of investing in the Fund, monitor
    the Funds investment strategy, or diligently perform its duties as manager of
    the Fund. When the Fund inevitably failed, Horizons failed to take action to
    prevent investors from sustaining massive losses.

[10]

Second, Mr. Wright maintains Horizons made
    misrepresentations in its prospectus within the meaning of s. 130 of the
Securities
    Act
. Mr. Wright claims that the prospectus failed to disclose the real
    risks attached to the Fund, including the disparity in the way gains and losses
    are experienced, and that it was inevitable that the Fund would lose all or
    substantially all of its value in a single day.

[11]

Horizons argues that the certification judge
    correctly concluded that Horizons, as the creator of the Fund, had no duty to
    protect investors from a high-risk investment product or from possible losses.
    The prospectus clearly indicates that these were high risk investments and
    that large sums could be lost in short order. Even if there were such a duty,
    there are sound policy reasons for not allowing such claims where the parties
    are best left to allocate risks through alternative means.

[12]

Second, Horizons claims Mr. Wright has no right
    of action for misrepresentation under s. 130 of the
Securities Act
.
    Horizons argues that a remedy under s. 130 is not available for
    misrepresentations associated with purchases on the
secondary
market
    (the stock exchange) and is only available for purchases on the
primar
y
    market. Instead the claim should have been brought pursuant to s. 138.3 of the
Securities
    Act
.

[13]

The only issue on these appeals is whether the
    certification judge erred in concluding that the pleading discloses no cause of
    action as required by s. 5(1)(a) of the
Class Proceedings Act, 1992
and the action should therefore be dismissed.

[14]

For the reasons that follow, I would allow the
    appeal, set aside the order of the certification judge dismissing the motion
    for certification and the action, allow the claim to be amended such that a
    claim can proceed under s. 130 of the
Securities Act,
and remit the
    matter to the certification judge to determine whether the remaining criteria
    for certification are met.

2.
THE FACTS

[15]

For the purpose of the cause of action criterion
    on a certification motion, the facts pleaded in the statement of claim are
    deemed to be true:
Pro
‑
Sys Consultants
    Ltd. v. Microsoft Corporation
, 2013 SCC 57, [2013]
    3 S.C.R. 477, at para. 63.

[16]

The significant facts in the pleading and as
    found by the certification judge are set out in the following paragraphs.
[2]

A.

The Funds Design

[17]

Horizons designed, managed and marketed the
    Fund. It was responsible for investing and reinvesting Fund assets. Horizons
    earned fees based on a percentage of the assets under management in the Fund.

[18]

The Fund was a highly complex derivative
    exchange-traded fund or ETF designed to provide inverse exposure to stock
    market volatility.

[19]

An ETF is an investment vehicle in which an
    underlying asset class - like a group of stocks, bonds, or commodities - is pooled
    in an investment portfolio and held in trust for unitholders.

[20]

Like many ETFs, this ETF was passively, not
    actively, managed.

[21]

It was based on the VIX Index and the S&P
    500 VIX Short-Term Futures Index (the VIX Futures Index).

[22]

The VIX Index measures market volatility.
    Investors cannot directly invest in the VIX Index.

[23]

The VIX Futures Index was developed by S&P
    Dow Jones Indices LLC and licensed to Horizons in order to provide exposure to
    the VIX Index. The VIX Futures Index is an index that is comprised of two near
    term VIX futures contracts  a first month and a second month contract  that
    are rebalanced daily in order to maintain a continuous one-month maturity.

[24]

The value of the VIX Futures Index is determined
    based on a weighted average of the VIX futures contracts.

[25]

Horizons designed the Fund so that when the VIX
    Futures Index declined by a certain percentage on a given day, the Funds net
    asset value automatically went up by that percentage. Conversely, when the VIX
    Futures Index increased on a given day, the Funds net asset value went down by
    that percentage.

[26]

The Fund was to pursue daily investment results
    that attempted to correspond to the inverse of the daily performance of the VIX
    Futures Index. It did so by shorting (selling) longer term VIX futures
    contracts and covering the short position by purchasing nearer term VIX
    futures contracts.

[27]

If volatility remained low, the Funds strategy
    generated income by selling longer term VIX futures contracts at a premium in
    relation to nearer term contracts, since market conditions became easier to
    predict as the contract date drew closer.

[28]

However, where market volatility increased, the
    price to repurchase a VIX futures contract could increase quickly (to a
    theoretically unlimited level). The cost of rebalancing at the end of each
    trading day could erase any gains accrued over months or years, in a single
    day.

[29]

Mr. Wright claims that the risks of index
    shorting have increased significantly due to the growth of algorithmic trading
    and that only the most sophisticated hedge funds had sufficient expertise to
    dynamically manage the underlying risk of the Funds strategy.

B.

The Distribution of the Funds Units

[30]

Horizons distributed all units in the Fund to a
    designated broker or dealer through a continuous distribution agreement between
    Horizons and the broker or dealer. These newly created units were known as
    Creation Units.

[31]

Investors who bought units from a designated
    broker or dealer did not know whether they were receiving Creation Units or
    units from the brokers or dealers inventory that were previously in
    circulation on the stock exchange (the secondary market).

C.

The Prospectus and Other Information about the
    Fund

[32]

Before an ETF can begin trading on a Canadian
    stock exchange, its manager must file a prospectus and the regulator must issue
    a receipt for the prospectus.

[33]

The Ontario Securities Commission issued
    receipts for an initial and amended Fund prospectus in 2011 and 2012. Units
    began trading in April 2012.

[34]

Mr. Wright relies on the prospectus dated
    December 22, 2017. The December 2017 prospectus contained a warning that units
    in the Fund are highly speculative and involve a high degree of risk. It
    warned investors that "[h]istorically, the [VIX Futures] Index has
    experienced significant one day increases on days when equity markets have had
    large negative returns which, if repeated, could cause [the Fund] to suffer
    substantial losses.

[35]

The prospectus provided that [v]olatility is a
    market condition that is easier to identify than it is to manage and that:

The risk of loss in
    investing through derivatives can be substantial. In considering whether to buy
    Units of an ETF, the investor should be aware that investing through
    derivatives can quickly lead to large losses as well as large gains. Such
    losses can sharply reduce the net asset value of an ETF and consequently the
    value of an investors Units in the ETF.
Market
conditions may also make it difficult or impossible
    for an ETF to liquidate a position.

[36]

The ETF Facts document similarly stated:

This ETF is a
    commodity pool and is highly speculative and involves a high degree of risk. It
    is intended for use in daily or short-term trading strategies by sophisticated
    investors. You should carefully consider whether your financial condition
    permits you to participate in this investment. You may lose a substantial
    portion or even all of the money you place in the commodity pool.

[37]

However, the prospectus did not include the note
    that was on Horizons website after February 5, 2018 that acknowledged that
    [t]his product is only appropriate for investors who understand volatility and
    its associated risks before they make a trade in [the Fund].

D.

The Funds Losses on February 5, 2018

[38]

From 2016 through January 2018, there was
    unprecedented low volatility and the Fund grew significantly in value by
    accruing risk premium and attracting new investor money. Investors made money
    by betting that the market would continue to remain stable.

[39]

However, in 2018, this structure generated sudden
    and significant losses when volatility increased after a period of low
    volatility.

[40]

On February 5, 2018, reports of strong job
    numbers caused the S&P 500 to decline by 4.1% as investors speculated about
    the prospect of rising inflation and interest rates.

[41]

Investor anxiety caused the VIX Index to spike
    significantly in percentage terms, since it had been sitting at historically
    low levels. The Fund suffered a corresponding loss of 81.42% of its value from
    February 5 to February 6, 2018. Investors who held units in the Fund during
    this period lost most of the money they had invested.

[42]

To make matters worse, investors bought Fund
    units on February 5, 2018 at inflated prices, which exacerbated their losses.
An unprecedented volume of 4,481,010 units traded over the TSX on
    February 5, 2018. As the price of units fell, investors like Wright purchased
    them, believing that the spike in volatility would not last and that they could
    reap a profit by holding the units until the VIX Index returned to its mean.

[43]

What these investors did not realize was that,
    because of the pricing mechanism used by the Fund, the market price of the
    units did not reflect the Funds net asset value. As a result, purchasers who
    bought Fund units that afternoon significantly overpaid for units that were
    going to be marked down in value after the close of the market once the Fund
    rebalanced and calculated its net asset value.

[44]

Mr. Wright alleges that it would have been
    apparent to Horizons during the day on February 5, 2018 that the nearer term
    VIX futures contracts were going to be priced at a much higher level and that
    the net asset value of the Fund would need to be marked significantly downwards
    from the net asset value struck by Horizons at 4:00 p.m. Sophisticated market
    participants who understood the volatile futures market would have also known
    that the Fund would be obligated to buy a significant number of VIX futures
    contracts to implement the required daily rebalance.

[45]

Mr. Wright pleads that Horizons could have
    contacted the TSX to halt trading in the Units of [the Fund on February 5,
    2018] as it became apparent that its market price was becoming dislocated from
    its net asset value but did not.

[46]

The Fund suffered dramatic losses in the
    after-market (between 4:00 and 4:15 p.m.), as the prices of the near term VIX
    futures contract continued to rise after 4:00 p.m.

[47]

When unitholders woke up the next day, the value
    of their units was $2.49  a decline of 81.42% from the previous nights close
    and nearly 87% less than the price at the close on February 2, 2018.

[48]

The unitholders were not able to trade units
    until approximately 2:00 p.m. on February 6, 2018, as Horizons halted trading
    earlier that day. After trading resumed, the price never recovered.

[49]

Under the heading What Happened when the Inevitable
    Occurred, Mr. Wright pleads that investors were not provided with
    disclosure of the real risks of investing in the Fund and Horizons took no
    action as investment manager to reduce or close out [the Funds] position in
    the face of this developing scenario of increased downside risk.

E.

Horizons Closes the Fund

[50]

Not until April 10, 2018, did Horizons disclose
    that the Fund did not have an acceptable risk/reward trade-off. On that date,
    Horizons announced that it would no longer be accepting any direct
    subscriptions for Fund units and that it would be terminating the Fund on June
    11, 2018. The press release stated:

After reassessing the performance of 
    [the Fund], particularly their respective performance following the first week
    of February, when volatility futures contracts spiked by more than 100% during
    one 24-hour trading period
,
we have come to the conclusion that these ETFs no
    longer offer an acceptable risk/reward trade-off for investors
, said Steve Hawkins, President and Co-CEO of Horizons ETFs. 
Ultimately,
    we do not want to be offering investment products that have the potential to
    lose the majority of an investors capital in such a short period of time
.
    [Italics in original; underlining added.]

3. THE CAUSES OF ACTION PLEADED

[51]

Mr. Wright issued a lengthy statement of claim
    against Horizons for negligence and for liability for prospectus
    misrepresentation under s. 130 of the
Securities Act
.

[52]

Horizons has not filed a statement of defence.

A.

Allegations of Negligence

[53]

The essence of the negligence claim is that
    Horizons breached its duty of care by:

a.

Designing and developing the Fund when it knew
    or ought to have known that the Fund was excessively complex and risky for any
    investor (especially retail investors), and doomed to fail
;

b.

Offering and promoting the Fund to retail
    investors knowing it contained structural design flaws, offered unreasonable
    risk/reward trade-offs, and was doomed to fail;

c.

Failing to explain the nature and extent of the
    risks involved in investing in the Fund;

d.

Exposing investors to catastrophic price
    reductions after the close of trading  when they were unable to protect
    themselves, which was inherent in the design of the Fund as a passively
    managed fund; and

e.

Failing to exercise its powers as manager to
    mitigate the risk to investors of changing market conditions or to address
    evident problems with the trading of the Fund over the TSX on February 5, 2018.

[54]

Mr. Wright pleads that as a result of these
    breaches, the Class suffered economic loss.

B.

Allegations of Misrepresentations under s. 130
    of the
Securities Act

[55]

Mr.
    Wright claims these breaches were compounded by various misrepresentations in
    the Funds prospectus, which failed to fully and adequately disclose:

a.

The Funds strategy of accumulating assets and
    the risks versus rewards of investing in the Fund;

b.

The fact that the intra-day trading value of the
    Fund might be inflated or inaccurate;

c.

The potential for the value of the Fund assets
    to drop precipitously after the close of the trading day and the fact that the
    Fund could lose all or substantially all of its value in a single day;

d.

The valuation methodologies for the calculation
    of the Funds net asset value;

e.

The disparity in the way gains and losses would
    be experienced by the Fund (incremental gains versus rapid losses); and

f.

The fact that it was inevitable that the Fund
    would lose all or substantially all of its value at some point, and that this
    could occur almost instantly.

4. LEGAL ANALYSIS

[56]

The standard of review applicable to a
    certification judges determination of law that a claim discloses no reasonable
    cause of action is correctness:
Hodge v. Neinstein,
2017 ONCA 494, 136
    O.R. (3d) 81,

at para. 52, leave to appeal refused, [2017] S.C.C.A.
    No. 341.

[57]

The test to be met in determining whether the
    pleadings disclose a cause of action for the purposes of s. 5(1)(a) of the
Class
    Proceedings Act, 1992
is the same as that applied on a motion to strike a
    pleading under r. 21.01(1)(b) of the
Rules of Civil Procedure
, R.R.O.
    1990, Reg. 194:
Pro
‑
Sys
, at para. 63. That is, a
ssuming that the facts as stated in the
    statement of claim can be proved, is it plain and obvious that the claim cannot
    succeed?

[58]

On a motion to strike for failure to disclose a
    cause of action pursuant to s. 5(1)(a) of the
Class Proceedings Act, 1992
,
    the following principles apply:

a.

No evidence is admissible:
Lipson v. Cassels
    Brock & Blackwell LLP
, 2013 ONCA 165, 114 O.R. (3d) 481, at para. 87;

b.

All allegations of fact pleaded are assumed to
    be true unless they are patently ridiculous, manifestly incapable of proof, or
    amount to bald conclusory statements unsupported by material facts:
R. v.
    Imperial Tobacco Canada Ltd.
,

2011 SCC 42, [2011] 3 S.C.R. 45, at
    paras. 21-22;
Castrillo v. Workplace Safety and Insurance Board
, 2017
    ONCA 121, 136 O.R. (3d) 654, at para. 15; and
Transamerica Life Canada Inc.
    v. ING Canada Inc.
(2003), 68 O.R. (3d) 457 (C.A.), at para. 38;

c.

Cases that are unique or novel, that involve
    matters of law that are unsettled, or that require a detailed analysis of the
    evidence should not be resolved without a full factual record:
Transamerica
,
at paras. 57-59;
Imperial Tobacco
,
at para. 21; and
Hunt
    v. Carey Canada Inc.
,
[1990] 2 S.C.R. 959,

at pp. 990-91;

d.

The pleading must be read generously to allow
    for drafting deficiencies and the plaintiff's lack of access to key documents
    and discovery information. The court should err on the side of permitting an
    arguable claim to proceed to trial:
Transamerica
, at para. 38;
Raush
    v. Pickering (City)
,
2013 ONCA 740
, 369 D.LR.
    (4th) 691, at para. 34;

e.

A plaintiff cannot rely on the possibility that
    new facts may be discovered; it must plead the material facts upon which it
    relies:
Imperial Tobacco
,
at para. 22; and

f.

The pleading will be struck only if it is plain
    and obvious that the plaintiff cannot succeed or, in other words, if the claim
    has no reasonable prospect of success:
Hunt
,
at p. 980;
Imperial
    Tobacco
, at para. 17.

[59]

While a motion to strike is a tool that must be
    used with care, it serves an important function. In
Imperial

Tobacco
,

at para. 19, the Supreme Court

directed that:

The power to strike
    out claims that have no reasonable prospect of success is a valuable
    housekeeping measure essential to effective and fair litigation.

It unclutters the
    proceedings, weeding out the hopeless claims and ensuring that those that have
    some chance of success go on to trial.

[60]

With those principles in mind, I turn now to an
    analysis of the claims in this case, beginning with the negligence claim.

A.

The
Negligence
Claim

(1)

The Certification Judges Reasons in Respect of the Negligence Claim

[61]

The certification judge refused to certify the class action on the
    basis that the pleadings did not disclose a cause of action.

[62]

He held that:

Mr. Wrights pure
    economic loss claim does not come within the currently recognized category for
    the negligent supply of a shoddy good, which in this case would be a carelessly
    designed investment product that Mr. Wright alleges ought not to have been
    designed and sold.



The category for pure economic losses for a
    shoddy goods is a narrow category that involves products that have a prospect
    of causing physical harm to persons or property unless repaired. Apart from
    common law and statutory negligent misrepresentation claims, there is no
    precedent for recovery of pure economic losses from a negligently created
    financial products such as an ETF. [Footnote omitted.]

[63]

The certification judge therefore concluded that
    the claim was either a novel claim, or a claim that fell within the category of
    negligent performance of a service.

[64]

He acknowledged that
    [a]
t first blush there was a
    formidable argument that Horizons has a duty of care to the Class Members of
    investors in the circumstances of the immediate case. However, he ultimately
    concluded that there was no precedent for the scope of the duty of care
    advanced by Mr. Wright.

[65]

According to the certification judge, Mr. Wright
    took the position that Horizons breached its duty of care: (a) not to develop
    and market an ETF that was too risky for the retail investment market; and (b)
    to actively manage the passively managed ETF when it became evident that the
    investment risks of this particular ETF were being actualized because of the
    TSX trading that occurred on February 5, 2018. He held that those allegations
    amounted to unprecedented and new duties of care for investment fund managers
    that made it necessary to engage in a more comprehensive duty of care analysis.

[66]

The certification judge accepted that there was
    a legally proximate relationship between the Class and Horizons. However, for
    him, the issue was the scope of the
undertaking
    assumed by Horizons.

[67]

He held that Horizons did not undertake to
    protect the Class against the risk of losing their investment: 
Horizons did not warrant or guarantee
    returns... It warned of the risks. Horizons  did not undertake to change a
    passively managed ETF into an actively managed one.

[68]

He held that Horizons only undertook to place on
    the exchange a financial product that operated in accordance with the
    accompanying disclosure documents. He held that Horizons duty arose solely by
    virtue of any representations it made about the product and/or compliance with
    its requirements to disclose the products nature. Horizons did not undertake
    to actively manage the Fund or step in to stop investor losses and could not be
    held liable for failing to do so.

[69]

He also held that, in any event, there are
    policy reasons for not extending the scope of the duty of care as far as Mr.
    Wright would have it extend as this was in essence a purchaser-vendor
    relationship. He held that [a]s a legal matter, this type of relationship and
    any associated grievances [are] typically dealt with as a matter of contract
    bargaining and not by a tort claim for pure economic losses.

[70]

In his view,
extending
    a duty of care for pure economic loss to the creator of an index-tracking ETF
    would: (a) deter useful economic activity where the parties are best left to
    allocate risks through the autonomy of contract, insurance, and due diligence;
    (b) encourage a multiplicity of inappropriate lawsuits; (c) arguably disturb
    the balance between statutory and common law actions envisioned by the
    legislator; and (d) have the courts take on a significant regulatory function
    when existing causes of action, the regulators, and the marketplace already
    provide remedies.

[71]

He therefore concluded that it was plain and
    obvious that there could be no common law negligence claim against Horizons.

(2)

The Legal Framework for Negligence Claims for Economic Loss

[72]

The negligence claim involves allegations that
    the Class suffered losses after investing in a fund that was negligently
    designed and operated.

[73]

A plaintiff can plead both negligence and
    negligent misrepresentation (or, in this case, a misrepresentation under s. 130
    of the
Securities Act
) arising out of the same factual circumstances,
    as long as the claims are distinct:
Lipson
, at paras. 96-98.

[74]

Canadian courts have limited tort recovery for
    cases involving pure economic loss where there is no physical harm or damage to
    property:
Arora v. Whirlpool Canada LP
, 2013 ONCA 657, 118 O.R. (3d)
    113, at para. 52, leave to appeal refused, [2013] S.C.C.A. No. 498. While there
    is no automatic bar to recovery for pure economic loss, such claims warrant
    more rigorous examination than other claims for negligence:
Lavender v.
    Miller Bernstein LLP
, 2018 ONCA 729, 142 O.R. (3d) 401, at para. 72, leave
    to appeal refused, [2018] S.C.C.A. No. 488, citing
Martel Building Ltd. v.
    Canada
, 2000 SCC 60, [2000] 2 S.C.R. 860, at para. 35; and
Mandeville
    v. The Manufacturers Life Insurance Company
, 2014 ONCA 417, 120 O.R. (3d)
    81, at paras. 148-50, leave to appeal refused, [2014] S.C.C.A. No. 390.

[75]

As noted by the late Honourable Allen M. Linden
    et. al. in
Canadian Tort Law
, 11th ed. (Toronto: LexisNexis Canada,
    2018), at p. 408:

[R]ights-based torts theorists  take the
    position that negligence duties exist to protect correlative legal rights. The
    law recognizes a person's right to personal security and it recognizes property
    rights. These are protected by negligence law. However, neither the law nor
    acknowledged philosophical thinkers have ever recognized a primary right
    related to purely economic interests.

The rights-based theorists do support recovery
    for economic loss in misrepresentation cases by either grounding the claim in
    the right to personal integrity or by treating the misrepresentation action as
    equivalent to contract. However, they hold that other types of pure economic
    loss ought not to be recoverable at all in negligence.

[76]

Some of the reasons for the refusal to recognize
    claims for pure economic loss include the possibility of indeterminate
    liability, the difference between social loss (such as physical harm) and the
    transfer of wealth from one person or group to another, the relevance of
    existing and potential contractual allocation of loss, and the fact that
    negligently-caused purely financial injury does not constitute a violation of a
    recognized legal right. When looking at a claim for pure economic loss, it is
    therefore important to consider whether the plaintiff had an opportunity to
    protect itself by contract from the risk of economic loss and declined to do
    so.

[77]

The Supreme Court recently reviewed the approach
    to determining the existence and extent of a duty of care in a claim for
    economic loss. The two-step process is:

a.

whether the parties are in a sufficiently close and direct (or
    proximate) relationship and whether the harm suffered is reasonably foreseeable
    such that a
prima facie
duty of care exists; and if so,

b.

whether there are residual policy considerations
    that should insulate the defendant from liability.

See
Deloitte & Touche v.
    Livent Inc. (Receiver of),
2017 SCC 63, [2017] 2 S.C.R. 855, at paras.
    23-45 and
Darmar Farms Inc. v. Syngenta Canada Inc
., 2019 ONCA 789,
    148 O.R. (3d) 115, at para. 54, leave to appeal to S.C.C. requested, 38915.

[78]

The first issue to be determined is whether the
    claim fits within or is analogous to a recognized duty of care. If
a relationship falls within a previously established
    duty of care or is analogous to one, then the requisite close and direct
    relationship is shown:
Livent
,
    at para. 26.

(a)

The Duty of Care Analysis Where There Is a Previously Established
    Duty of Care

[79]

Determining whether a proposed duty of care fits
    within an existing or analogous duty is a matter of precedent:

[W]here a case is like another case where a
    duty has been recognized, one may usually infer that sufficient proximity is
    present and that if the risk of injury was foreseeable, a
prima facie
duty of care will arise.

Childs v. Desormeaux
, 2006 SCC 18, [2006] 1 S.C.R. 643, at para. 15.

[80]

When a court relies on an established duty of
    care, there are no overriding policy considerations that would [negate] the
    duty of care:
Livent
, at para. 28, citing
Cooper v. Hobart
,
    2001 SCC 79, [2001] 3 S.C.R. 537, at para. 39. The majority in
Livent
further instructed, at para. 28, that:

A consequence of this approach
however, is that a finding of proximity based upon a
    previously established or analogous category must be grounded not merely upon
    the identity of the parties, but upon examination of the particular
    relationship at issue in each case. Otherwise, courts risk recognizing
prima
    facie
duties of care without any
    examination of pertinent second-stage residual policy considerations.

[81]

The Supreme Court has recognized five categories
    of cases in which plaintiffs may recover in negligence for economic loss not
    causally connected to physical or property harm. These categories were first discussed
    in
Canadian National Railway Co. v. Norsk Pacific Steamship Co.
,
    [1992] 1 S.C.R. 1021, at p. 1049,
per
La Forest J., citing Bruce
    Feldthusen, Economic Loss in the Supreme Court of Canada: Yesterday and
    Tomorrow (1990-91) 17 Can. Bus. L.J. 356, at pp. 357-58, and were later
    adopted by the full court: see, for instance,
Martel
, at paras. 38, 45.
    The five categories are:

1.

the independent liability of statutory public
    authorities;

2.

negligent misrepresentation;

3.

negligent performance of a service;

4.

negligent supply of shoddy goods or structures;
    and

5.

relational economic loss.

[82]

Mr. Wright asserts that this claim falls under
    the category of negligent supply of shoddy goods and/or negligent performance
    of a service.

[83]

Professor Feldthusen points out that these categories
    are helpful when analyzing liability for pure economic loss to the extent that
    the cases within each category rely on a common justification for imposing
    liability. Categorization focuses the policy analysis and avoids a case-by-case
    approach, which risks inconsistent results. Categories will evolve as the
    jurisprudence evolves: Bruce Feldthusen,
Economic Negligence
, 6th ed.
    (Toronto: Carswell, 2012), at pp. 16-17, 22.

[84]

Within the five categories, courts have
    recognized specific duties of care such as an auditors duty to a corporation
    when performing a statutory audit and a solicitors duty to a potential beneficiary
    when preparing a will:
Livent,
at paras. 58-66;
Whittingham v.
    Crease & Co.
(1978), 88 D.L.R. (3d) 353, at p. 373 (B.C.S.C.).

[85]

When determining whether a proposed duty of care
    fits within an existing or analogous duty, a court should avoid construing
    existing duties of care in an overly broad manner and be attentive to the
    particular factors which justified recognizing that prior [duty]:
Livent,
at
    para. 28. These factors include (in the case of negligent misrepresentation and
    negligent provision of services) (a) the defendants undertaking to provide a
    representation or a service and (b) the plaintiffs reasonable reliance on that
    undertaking such that the risk of injury was reasonably foreseeable:
Livent
,
    at paras. 30-31.

(b)

The Duty of Care Analysis Where There
    is No Established Duty of Care

[86]

The Supreme Court has left open the possibility
    that new categories of recovery for pure economic loss or duties of care might
    emerge.

[87]

Where the case does
not
fall within an
    established duty or a duty analogous thereto, the court must (just as in the
    case of an established duty of care) satisfy itself that (a) there is a
    proximate relationship and (b) that the risk of injury is foreseeable:
Livent
,
    at paras. 29-32. If so, a
prima facie
duty of care will be
    established.

[88]

To determine whether a close and direct
    relationship exists, the court must examine all relevant factors arising from
    the relationship between the plaintiff and defendant. While the factors are diverse
    and depend on the circumstances of each case, they include factors such as
    expectations, representations, and the property or other interests involved as
    well as any statutory obligations. In the case of a duty of care falling within
    the category of negligent misrepresentation or negligent performance of a
    service, two factors are determinative in the proximity analysis: the
    defendants undertaking and the plaintiffs reasonable reliance:
Livent
,
    at paras. 29-30.

[89]

Once a
prima facie
duty of care is established,
    the court must go on to consider whether there are residual policy reasons that
    would negate the imposition of a duty of care:
Livent
,
at paras. 37-45;
Cooper
,
at para. 30.

[90]

The question is whether, despite the proximate
    relationship and the reasonable foreseeability of the plaintiffs injury, the
    defendant should nonetheless be insulated from liability. This inquiry is
    concerned with the effect of recognizing a duty of care on other legal
    obligations, the legal system, and society more generally. The court will
    consider policy objectives that suggest that this duty of care ought not to be
    recognized, including the existence of other remedies and concerns about
    creating unlimited liability to an unlimited class:
Livent
,

at
    paras. 37-41.

(3)

Application of the Legal Framework for
    Negligence to the Facts in this Case

[91]

In determining whether it is plain and obvious
    that Mr. Wrights statement of claim discloses no reasonable cause of action in
    negligence, the facts as stated in the statement of claim are assumed to be
    true.

[92]

The first question to be answered is whether the
    claim falls within a previously established category of claim for pure economic
    loss and a duty of care thereunder.


(i)

Negligent Supply of Shoddy Goods

(a)

Is there a Recognized Claim for Breach of the
    Duty of Care?

[93]

Mr. Wright suggests that this case fits within
    the established category of cases for pure economic loss resulting from the
    negligent supply of shoddy goods. Mr. Wright pleads that, like the provider of
    shoddy physical goods, Horizons inflicted economic devastation on the Class by
    developing and promoting a Fund that was negligently designed. Unit purchasers
    were not told of all of the risks of investing in the Fund or how the pricing
    mechanism worked. When the inevitable happened, they lost all or substantially
    all of the value of their Units.

[94]

The Supreme Court first allowed a claim for pure
    economic loss for the negligent supply of shoddy goods/structures in
Winnipeg
    Condominium Corporation No. 36 v. Bird Construction Co.
, [1995] 1 S.C.R.
    85. It approved a subsequent purchasers claim against a building contractor
    for economic loss resulting from the negligent supply of dangerous and shoddy
    structures. When a portion of the buildings stone cladding fell off, the
    plaintiff determined that there was a risk that other portions of the cladding
    could fall off and injure someone. The plaintiff incurred substantial costs to
    replace the cladding, which the Supreme Court held were, in principle,
    recoverable if they were the foreseeable result of the defendants negligence.

[95]

However,
Winnipeg Condominium
did not
    address whether pure economic loss arising from the negligent supply of a
    shoddy good is recoverable absent a dangerous physical defect.

[96]

In the later decision of
Arora
, Hoy
    A.C.J.O. held, at para. 83, that the Supreme Court carefully left the issue of
    whether there should be no recovery for pure economic loss where goods are
    shoddy, but not dangerous, for another day. See also Feldthusen,
Economic
    Negligence
, at p. 195.

[97]

The court in
Arora
rejected the claim
    for pure economic loss resulting from the provision of alleged shoddy but
    non-dangerous washing machines. Hoy A.C.J.O. observed that the appellants
    economic loss claim is for diminution in value  that is, the difference in
    value between the product they thought they were getting and the one they
    actually received:
Arora,
at para. 96. She held that the claim had no
    reasonable prospect of success and dismissed the appeal from the certification judges
    decision to deny certification of the proposed class action on the basis that
    the pleadings did not disclose a cause of action.

[98]

In light of this case law, I agree with the
    certification judge that this case does not fall within the established
    category of recovery for pure economic loss for the negligent supply of shoddy
    goods or any established duty within that category.

[99]

I will now address the appellants main
    argument: Horizons negligently performed a service.


(ii)

Negligent Performance of a Service

(a)
Is there a
    Recognized Claim for Breach of the Duty of Care?

[100]

Mr. Wright submits that the certification judge erred in concluding
    that the claim did not fall within any recognized duty within the category of
    cases for negligent performance of a service. The certification judge held that
    there was no precedent for the scope of the duty
alleged
    by Mr. Wright.

[101]

Mr. Wright claims this case is analogous to the claim in
Cannon v. Funds for Canada Foundation,
2012 ONSC
    399, 13 C.P.C. (7th) 250, leave to appeal refused, 2012 ONSC 6101, 112 O.R.
    (3d) 641 (Div. Ct.).

[102]

In
Cannon
, at paras. 155-60, and 169-77, Strathy J. (as he
    then was) held that there was a reasonable cause of action against the creators
    and promoters of a tax avoidance program that the participants alleged was
    negligently designed and  did not work when they were told that it would. In
    particular, he held, at para. 177, that:

Accepting these allegations as true for the
    purposes of the s. 5(1)(a) test, Appleby as a creator of the Gift Program
    arguably owed a duty of care to a prospective donor to ensure that the program
    would work and that the donor would receive a valid charitable donation receipt
    in return for his or her gift. I conclude that there is a properly pleaded
    cause of action against Appleby for negligence.

[103]

The claim was allowed to proceed against one of the creators of the
    scheme even though the creator had no direct contractual relationship with
    investors:
Cannon
, at paras. 173-77, 245.

[104]

I
n my view, this case is analogous to
Cannon
.
As in
Cannon
, Mr. Wright alleges that Horizons:

·

Created the Fund for
    investment;

·

Earned monies from the
    promotion and management of the Fund; and

·

Undertook to provide a
    financial product that was suitable for investors.

[105]

There is arguably, therefore, a relationship of proximity between
    Horizons and the Class. Horizons undertook to create and sell a Fund that was
    suitable for some investors and, on the pleading as drafted, it was not.

[106]

Read generously, the pleading provides that investors were not given
    sufficient information about the nature and extent of the risks and possible
    rewards to enable them to make an informed decision as to whether to invest,
    nor were they told that there was a design flaw and that the investment was
    doomed to fail. Without this information, the undertaking to provide a risky
    but viable investment was not met, and the risk of injury flowing from
    producing a product doomed to fail was reasonably foreseeable.

[107]

For these reasons, Mr. Wright has a reasonable prospect of
    demonstrating that the claim falls within a recognized duty of care under the
    category of negligent performance of a service. As such, it is not clear that
    the claim discloses no reasonable cause of action in negligence.

(b)

Is there a Novel Claim for Breach of the Duty of Care?

[108]

In the event I am wrong and this claim for negligent performance of
    a service does not fall within a recognized duty of care, I will consider
    whether on the facts pleaded, a novel claim for economic loss resulting from
    the negligent performance of a service should be allowed to proceed.

[109]

Where there is no recognized duty, the first step is to determine
    whether there is a proximate relationship between the parties resulting from
    the defendants undertaking that invites the plaintiffs reasonable reliance.
    If so, the defendant becomes obligated to take reasonable care:
Livent
,

at para. 30. The proximity analysis includes an examination of expectations,
    representations, reliance, and the property or other interests involved as
    well as any statutory obligations:
Livent
, at para. 29 (citations
    omitted).

[110]

In this case, the certification judge correctly determined that
    there is a legally proximate relationship between the Class of ETF investors
    and Horizons as ETF fund developer and manager, and that the critical issue is
    the scope of the undertaking assumed by the fund developer and manager.

[111]

However, the certification judge held that Horizons [only]
    undertaking was to place on the exchange a financial product that operated in
    accordance with the accompanying disclosure documents. In response to Mr.
    Wrights claim that Horizons breached a duty of care not to develop and market
    an ETF that was too risky for the retail investment market, the certification
    judge held that Horizons did not undertake responsibility for any gains or
    losses purchasers might realize in purchasing the units. He concluded that
    Horizons cannot be liable for a risk of injury against which it did not
    undertake to protect.

[112]

I disagree. In my view, Horizons undertaking was broader than the undertaking
    that the certification judge described.

[113]

Horizons, as the Fund manager, undertook to its investors to act
    honestly, in good faith and in the best interests of the investment fund and
    exercise the degree of care and diligence that a prudent person would exercise
    in the circumstances as provided for in s. 116 of the
Securities Act.

[114]

Assuming the allegations in the pleading are proven, Horizons
    created a Fund that was not suitable for
any
investors because the
    design flaw rendered it doomed to fail. Moreover, Horizons failed to disclose
    key features of the Funds design and trading strategy so that investors would
    know the real risks before investing. The Fund managers arguably failed to meet
    their undertaking to investors and the risk of injury was reasonably
    foreseeable.

[115]

The failure to provide full disclosure of the risks and/or the fact
    that the product was doomed to fail and the Fund managers failure to develop a
    viable strategy for the Fund might constitute a breach of a
prima facie
duty of care and/or a breach of the fund managers statutory duties as set out
    in s. 116 of the
Securities Act
:
Growthworks WV Management Ltd. v.
    Growthworks Canadian Fund Ltd
., 2018 ONSC 3108, at
    paras. 221 and 321.

[116]

It is not plain and obvious that policy considerations should negate
    the alleged
prima facie
duty of care. The risk of loss cannot be
    addressed by contract because this was not a vendor-purchaser relationship.
    Nor, on the claim as pleaded, can it be addressed by insurance, or due
    diligence by Class members. Moreover, it does not seem apparent that imposing a
    duty would create liability toward an indeterminate number of persons. Allowing
    the claim might cause fund managers like Horizons to exercise caution and
    control in designing investment products and ensure that all material facts are
    provided to investors.

[117]

I also note that on a certification motion, as on a motion to
    strike, the certification judge is not to assess whether the claim can
    withstand summary judgment or a trial on the basis of the material adduced on
    the motion, but only whether the pleadings contain some radical defect such
    that there is no reasonable prospect of success:
Hunt
, at p. 980. The
    courts must err on the side of permitting a novel but arguable claim to
    proceed to trial:
Imperial Tobacco
, at para. 21. A full evidentiary
    record that includes information about how the Fund was structured, the risks
    associated with investing in the Fund, the responsibilities of the Fund manager
    and other evidence may assist in determining the merits of the claim. As
    pleaded, it is not clear that the claim cannot succeed.

[118]

For these reasons, I would not agree that the negligence claim
    should be struck as having no reasonable prospect of success. The certification
    judge erred in concluding that the statement of claim discloses no reasonable
    cause of action for the negligent performance of a service.

B.

The Claim under s. 130
    of the
Securities Act

[119]

Mr. Wright claims the prospectus misrepresented how the Fund
    operated and the nature of the risks involved, and that these
    misrepresentations attract a remedy under s. 130 of the
Securities Act
.
    Mr. Wright makes no common law negligent misrepresentation claim.

[120]

Horizons agrees a claim for prospectus misrepresentation can be
    brought but says the certification judge was correct in holding that the claim
    must be brought pursuant to s. 138.3, not s. 130, of the
Securities Act
.

(1)

The Certification Judges Decision

[121]

The certification judge accepted that there is and should be a
    statutory cause of action for misrepresentation in the selling of ETFs but
    held that the claim should be brought under s. 138.3 of the
Securities Act
(which provides a statutory cause of action for misrepresentations for
    purchasers who acquire securities on the secondary market),

not s. 130
    (which provides a statutory cause of action for misrepresentations in a
    prospectus for funds distributed on the primary market). He dismissed the
    certification motion for a claim under s. 130 without prejudice to Mr. Wrights
    ability to commence a proposed class action relying on s. 138.3 of the
Securities
    Act
and to seek leave to assert that cause of action
.

[122]

The certification judge recognized that sales of ETF Creation Units
    are primary market sales. However, he noted that all other Fund units are
    connected to the secondary market and that Creation Units are comingled with
    those other units. As a result, an ETF purchaser cannot know whether his or her
    purchase involves a primary sale of a Creation Unit or a resale in the
    secondary market. He therefore held that [p]ractically speaking, trading in
    ETFs is a secondary market phenomenon because units are made available for sale
    over an exchange, the purchase price is paid to the unitholder not the issuer,
    and the terms of sale are dictated by the secondary market.

[123]

He also held that a trade in ETF units does not qualify as a
    distribution within the meaning of the
Securities Act
:

They are not securities offered by the
    prospectus in that the vendor is not offering to sell them under the
    prospectus, and the sale is not occurring during the period of distribution or
    during distribution to the public because the sale is not a trade in a
    security not previously issued, not a trade by or on behalf of an issuer in
    previously issued securities of that issuer that have been redeemed or
    purchased or donated to that issuer, not a trade in previously issued
    securities of that issuer from the holdings of any control person, and not a
    trade that is a distribution under the regulations.

[124]

He concluded that, from a policy perspective, it would be odd and
    inconsistent with the overall balanced design of the [
Securities Act
]
    to treat the trading of ETFs, which are so closely associated with the
    secondary market, as outside the operation of [s. 138.3] and within the
    operation of [s. 130].

[125]

The certification judge therefore held that all ETFs should be
    regulated as a secondary market phenomenon.

(2)

The Legal
Framework

(a)

Purposes of the Securities Act

[126]

One of the underlying purposes of the
Securities Act
is
    the protection of the investing public through full, true and plain disclosure
    of all material facts relating to securities being issued:
Pacific Coast
    Coin Exchange v. Ontario Securities Commission
, [1978] 2 S.C.R. 112, at p.
    126, citing
Re Ontario Securities Commission and Brigadoon Scotch
    Distributors (Canada) Limited
, [1970] 3 O.R. 714, at p. 717.

[127]

With some exceptions, the
Securities Act
requires companies
    to file a prospectus before engaging in a trade in a security that qualifies as
    a distribution. The statutory definition of distribution under s. 1(1) of the
Securities Act
captures that moment of initial distribution when a
    security first becomes available
to the public
, thereby triggering the
    disclosure obligations designed to protect investors: David Johnston, Kathleen
    Rockwell, and Cristie Ford,
Canadian Securities Regulation
, 5th ed.
    (Toronto: LexisNexis Canada, 2014), at 5.7 (italics in original).

[128]

The prospectus must make full, true and plain disclosure of all
    material facts relating to the securities issued or proposed to be
    distributed:
Securities Act,
s. 56(1). Thereafter, companies must
    meet continuous disclosure obligations under Part XVIII of the
Securities
    Act
.

(b)

Sections 130 and 138.3 of the Securities Act

[129]

Sections 130 and 138.3 of the
Securities Act
enhance the
    common law by providing statutory causes of action for misrepresentations that
    affect the value of securities purchased.

[130]

Section 130 provides a statutory cause of action for
    misrepresentations in a prospectus for funds distributed on the primary market:
Tucci v.

Smart Technologies Inc,
2013 ONSC 802, 114 O.R. (3d)
    294,

at paras. 21, 40. Section 130 in Part XXIII provides that:

130. (1) Where a
    prospectus, together with any amendment to the prospectus, contains a
    misrepresentation, a purchaser who purchases a security offered by the
    prospectus during the period of distribution or during distribution to the
    public has, without regard to whether the purchaser relied on the
    misrepresentation, a right of action for damages against,

(a) the issuer or a
    selling security holder on whose behalf the distribution is made

[131]

Section 138.3 provides a statutory cause of action for
    misrepresentations for purchasers who acquire securities on the secondary
    market:
Sharma v. Timminco Limited
, 2012 ONCA 107, 109 O.R. (3d) 569,
    at paras. 7-8, leave to appeal refused, [2012] S.C.C.A. No. 157. Section 138.3
    in Part XXIII.1 provides that:

138.3 (1) Where a responsible issuer or a person or company
    with actual, implied or apparent authority to act on behalf of a responsible
    issuer releases a document that contains a misrepresentation, a person or
    company who acquires or disposes of the issuers security during the period
    between the time when the document was released and the time when the
    misrepresentation contained in the document was publicly corrected has, without
    regard to whether the person or company relied on the misrepresentation, a
    right of action for damages against,

(a) the responsible issuer;

[132]

Section 138.3 provides fewer remedies to investors than s. 130.
    Unlike s. 130, s. 138.3 includes a damages cap of the greater of 5% of the
    issuers market capitalization or $1 million for a responsible issuer, and a
    loser pays costs rule:
Securities Act,
ss. 138.1, 138.7, and 138.11.
    Moreover, a plaintiff who brings a claim pursuant to s. 138.3 must first obtain
    leave to commence an action, unlike a plaintiff who commences an action under
    s. 130:
Securities Act,
s. 138.8(1).

[133]

As such, there are distinct advantages to pursuing a claim under s.
    130 rather than s. 138.3 of the
Securities Act
.

[134]

Both sections enhance the remedies available to investors under the
    common law. The common law tort of negligent misrepresentation requirements are
    as follows:

a.

There must be a duty of care based on a special relationship
    between the representor and the representee;

b.

The representation must be untrue, inaccurate,
    or misleading;

c.

The representor must have acted negligently in
    making the representation;

d.

The representee must have relied, in a
    reasonable manner, on the negligent misrepresentation; and

e.

The reliance must have been detrimental to the
    representee in the sense that damages resulted.

Queen v. Cognos Inc.
,
[1993] 1 S.C.R. 87, at p. 110.

[135]

While at common law plaintiffs must demonstrate reasonable reliance,
    plaintiffs who proceed with a claim for statutory misrepresentation are not
    required to demonstrate reliance in order to recover damages:
Securities
    Act,
ss. 130(1), 138.3(1).

(c)

How the Fund Was Distributed

[136]

Retail investors can only buy or sell ETF units through registered
    brokers and dealers, who buy or sell them over the stock exchanges on which the
    units are listed. These units come from other holders or from the inventory of
    ETF units held by a designated broker or dealer. A designated broker or dealer
    will issue a unit from its inventory of units, if any, or they will make a
    subscription order to the ETF manager, who will create a brand-new unit, a
    Creation Unit.

[137]

An investor who purchases an ETF unit over an exchange does not know
    when purchasing a unit whether he or she is receiving a Creation Unit or an ETF
    unit that has been in circulation previously on a stock exchange (in the
    secondary market). It is not clear from the certification judges findings
    whether Horizons or anyone else is able to determine whether a particular unit
    is a Creation Unit.

[138]

As described by the certification judge, ETFs are regulated on the
    understanding that the sale of a Creation Unit is a distribution within the
    meaning of s. 1(1) of the
Securities Act
:

Canadian regulators take the position that the
    first sale of a Creation Unit of an ETF constitutes a distribution of the unit
    under the securities statutes and National Instrument 41-101 and, therefore,
    the Designated Broker and the Dealers are subject to the prospectus delivery
    requirements set out in that legislation.

However, because Creation Units are generally
    comingled with other ETF units purchased by the Designated Broker and the
    Dealers in the secondary market it is not practicable for the Designated Broker
    or the Dealers to determine whether a particular re-sale of ETF units involved
    Creation Units, ETF units purchased in the secondary market, or both.
    Therefore, the securities regulator grants the Designated Broker and the
    Dealers an exemption from the obligation to deliver a prospectus with each
    re-sale of a Creation Unit. Instead, the Designated Broker and Dealers are
    required to provide a summary document to an investor purchasing units in a particular
    ETF for the first time.

[139]

This position was reflected in the 2014 amendments to the
Securities
    Act.
Sections 71(1) to (1.3) recognize that the sale of Creation Units
    constitutes a distribution that would otherwise require dealers to deliver a
    prospectus to purchasers under s. 53(1) but exempt them from having to do so.
    Dealers are instead permitted to provide investors with a summary document
    called an ETF facts document:
Securities Act,
ss. 71(1.1)-(1.3);
    National Instrument 41-101 
General Prospectus Requirements
, ss.
    3C.2(5)-(6).

(d)

Analysis of the Certification Judges Decision on the Claim for
    Prospectus Misrepresentation

[140]

The allegation in the statement of claim is that the Units were
    distributed by a prospectus that contained misrepresentations. Moreover, since
    the Fund was continuously distributed, each Class member qualifies as a
    purchaser who purchases a security offered by the prospectus during the period
    of distribution or during distribution to the public within the meaning of s.
    130 of the
Securities Act
.

[141]

The parties and the certification judge agreed that there is a
    statutory cause of action for misrepresentation in an ETF prospectus. The only
    question is whether the Class may proceed by way of a claim pursuant to s. 130
    or whether the Class must proceed by way of s. 138.3.

[142]

For the reasons that follow, I disagree with the certification
    judges conclusion that all units held by the Class should be treated as
    secondary market purchases such that only s. 138.3 applies. I agree with the
    appellant that the certification judge erred in his analysis of the
    requirements of s. 130 but would require that the representative plaintiff
    amend the statement of claim to plead the necessary material facts.

[143]

First, Creation Units are considered by the
Securities Act
to be primary market units and owners of those units should be entitled to
    invoke their rights thereunder. Disclosure documents for Creation Units are
    incorporated by reference into the prospectus and investors who purchased those
    Units qualify as purchasers of a security offered by the prospectus during the
    period of distribution or during distribution to the public within the meaning
    of s. 130 of the
Securities Act
. Moreover, a resale of a Creation Unit
    by a designated broker or dealer to an investor qualifies as a distribution
    under the
Securities Act
, because distribution includes a purchase
    and sale of a security that has not been previously issued in the course of or
    incidental to a distribution:
Securities Act
, s. 1(1).

[144]

Second, denying holders of Creation Units the right to proceed
    pursuant to s. 130 would deny them the advantages of proceeding by way of s.
    130 and would require the Class to seek leave of the court to proceed with a
    claim under s. 138.3 when holders of Creation Units are eligible to proceed
    under s. 130 where no leave is required.

[145]

Third, the fact that Creation Units are comingled with other ETF
    Units purchased by the designated broker and dealers in the secondary market
    should not disentitle holders of Creation Units from invoking their rights
    under s. 130 of the
Securities Act
.

[146]

The Class was not responsible for the way funds are distributed and
    had no control over what kind of unit they were receiving. At this stage in the
    proceeding, Class members do not know, through no fault of their own, whether a
    purchase involved a primary or secondary market sale. This should not be a
    reason for denying them the right to seek the relief to which they are
    entitled. It is not clear from the certification judges findings whether
    Horizons or anyone else can distinguish between sales of Creation Units and
    other units. This issue will be canvassed in the course of the litigation
    including the determination of the best means of addressing this issue, taking
    into account that some members hold Creation Units and others do not.

[147]

Fourth, permitting Mr. Wright to plead a cause of action under s.
    130 does not unduly expand the scope of who may recover under that section. At
    this stage, it is unclear which or how many Class members purchased Creation
    Units. However, the statutory cause of action under s. 130 ultimately will not
    apply to Class members who purchased Fund units that had previously circulated
    on the secondary market. Investors who purchased securities on the secondary
    market must seek leave to bring a claim pursuant to Part XXIII.1, section 138.3
    of the
Securities Act
if the prospectus contains a misrepresentation.
    Section 138.3(1) (under Part XXIII.1) extends a remedy to any purchaser
    alleging a misrepresentation in a document, with different burdens of proof
    depending on whether the document is a core document, which includes a
    prospectus, or any other document:
Securities Act
, ss. 138.1,
    138.4(1).

[148]

It would upset the delicate balance struck by the legislature to
    allow all Class members to bypass the requirements of Part XXIII.1 and proceed
    under s. 130 when only some are entitled to a remedy under that provision:
Canadian Imperial Bank of Commerce v. Green
, 2015 SCC 60, [2015] 3
    S.C.R. 801, at para. 69,
per
Côté J. The limits built into the
    scheme of Part XXIII.1 are deliberate and are carefully calibrated to balance
    the interests of various market participants:
Green,
at para. 69.

[149]

While this conclusion creates a somewhat artificial distinction
    between Class members as none of them knew whether they were purchasing a
    Creation Unit or a unit which had previously circulated on the secondary
    market, this interpretation is consistent with the manner that ETFs are
    distributed and regulated, as well as the wording of s. 130 itself.

[150]

However, I accept that Mr. Wright has not pled the material facts
    necessary to establish that he has a cause of action under s. 130 as he did not
    plead that he purchased one or more Creation Units. Under s. 5(1)(a), the
    representative plaintiff must have a reasonable cause of action against the
    defendant:
Darmar
, at paras. 37-38, citing
Taylor v. Canada
    (Attorney General)
, 2012 ONCA 479, 111 O.R. (3d) 161, at para. 21.

[151]

As a result, I conclude that the statement of claim discloses no
    reasonable cause of action under s. 130 but grant leave to amend the statement
    of claim to allow Mr. Wright to assert that he is a holder of a Creation Unit
    and is entitled to a remedy under s. 130. Based on the certification judges
    findings, it is clear some Class members were holders of Creation Units and Mr.
    Wright may be a holder of a Creation Unit:
Lawrence v. Atlas Cold Storage
    Holdings Inc.
(2006), 34 C.P.C. (6th) 41 (Ont. S.C.). The certification
    judges order was made without prejudice to [Mr. Wright] commencing a proposed
    class action relying on Part XXIII.1 of the Ontario
Securities Act,
R.S.O. 1990, c. S.5

and seeking
    leave to assert that statutory cause of action.

5. DISPOSITION

[152]

I allow the appeal in part on the basis that the statement of claim
    discloses a reasonable cause of action in negligence. I further hold that there
    is no reasonable cause of action under s. 130 as pleaded but would allow the
    appellant leave to amend the statement of claim to assert that he is a holder
    of a Creation Unit and is entitled to a remedy under s. 130. The certification
    judges order is set aside save for the order providing that it is without
    prejudice to [Mr. Wright] commencing a proposed class action relying on Part
    XXIII.1 of the Ontario
Securities Act
,
    R.S.O. 1990, c. S.5

and seeking leave to assert that statutory
    cause of action. I would remit the matter to the certification judge to
    determine whether the remaining criteria for certification are met.

[153]

Partial indemnity costs are awarded to the appellant in the amount
    of $35,000, inclusive of HST and disbursements, as agreed by the parties.

Released: June 1, 2020 (P.L.)

Thorburn
    J.A.

I
    agree. P. Lauwers J.A.

I
    agree. C.W. Hourigan J.A.





[1]

Pursuant to the order of Zarnett J.A. and on the consent of
    the parties, the appellants appeal to the Divisional Court (court file
    DC-19-399) was transferred to this court pursuant to ss. 6(2) and 6(3) of the
Courts
    of Justice Act,
R.S.O. 1990, c. C.43 (
CJA
) to be combined with and
    heard together with the appellants appeal from the same judgment in this court
    (court file C67205). An order dismissing an action lies to the Court of Appeal
    as of right pursuant to s. 6(1)(b) of the
CJA
and an appeal from an
    order refusing to certify a proceeding as a class action lies to the Divisional
    Court as of right pursuant to s. 30(1) of the
Class Proceedings Act, 1992
,
    S.O. 1992, c. 6.



[2]
The facts outlined by the certification judges decision were
    drawn, in part, from the evidence filed on the motion and not simply from the
    statement of claim. However, the appellant does not take issue with the
    certification judges formulation of the facts and both parties rely on these
    facts to support their arguments on this appeal.


