When Price Drops Prove Too Much: Rethinking Materiality In Secondary Market Misrepresentation Class Actions

In secondary market misrepresentation cases, materiality does an enormous amount of work. It is the gatekeeper: no material misrepresentation, no liability. Courts therefore look for proxies – ways of inferring whether an alleged misstatement was "reasonably expected to have a significant effect on the market price or value of the securities."

One increasingly common proxy is the market's reaction to a corrective disclosure. If the share price drops "materially" after the correction, the reasoning goes, that must mean the earlier misrepresentation was itself "material."

In Dziedziejko v Canopy Growth Corporation, the Ontario Superior Court of Justice leaned heavily on precisely that inference. While price drops in response to a corrective disclosure may be probative, over-reliance on price drops is problematic. A post-correction price drop can signal many things to the market, only some of which relate to the materiality of the original misstatement. Courts