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Theratechnologies1 leave threshold proves too robust for plaintiff shareholder in Securities Class Action

In Mask v. Silvercorp Metals Inc.2 released on October 22, 2015, the Ontario Superior Court of Justice considered a motion for leave to commence an action for secondary market misrepresentation under section 138.8 of the Ontario Securities Act,3 and a motion to certify the action as a class proceeding under section 5(1) of the Class Proceedings Act, 1992.4

Deficient pleadings, uncontroverted expert evidence and a strict application of the Court of Appeal’s analysis in Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.5 led Justice Belobaba to dismiss both motions.

The Facts

Over a two week span in 2011, anonymous internet postings questioned Silvercorp Metal Inc’s (“SVM”) financial accounting and alleged that the company had overstated certain mineral resources and reserves. As a result, SVM’s share price dropped about 30 percent. SVM responded by issuing a press release and a Schedule 4 that reconciled production to revenue from 2006 to the middle of 2011 (the “Schedule 4”). SVM also retained AMC Mining Consultants to prepare a new technical report, which was produced in June 2012 (the “AMC Report”).

In May 2013, the plaintiff, a former SVM shareholder, alleged that a comparison of the AMC Report and the Schedule 4 demonstrated that SVM had overstated its mineral production and grade levels in its 2010 and 2011 public reports.

The plaintiff advanced three claims: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make a timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports that it knew, or should have known, had not been prepared in accordance with industry standards or properly audited.

The Leave Motion

The Court found that the plaintiff’s pleadings did not identify which words or figures, in particular documents or on particular dates, were alleged to be misrepresentations pursuant to section 138.3(1) of the OSA. The plaintiff is required to link the misrepresentations to a public correction, however, the plaintiff failed to indicate what public correction was made or when it occurred. Nevertheless, the Court determined that since “publicly corrected” is not defined in the OSA, anonymous internet postings can constitute public corrections under section 138.3 of the OSA.

The leave requirements under section 138.8 of the OSA require that the court be satisfied that an action was brought in good faith and that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff”.6 In the wake of Theratechnologies, plaintiffs must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset. Here, the plaintiff alleged that there were obvious misrepresentations in SVM’s Schedule 4 due to material differences between the numbers in the AMC Report and the Schedule 4. An AMC geologist involved in the preparation of the AMC Report swore an affidavit on behalf of SVM explaining that different reporting parameters had been applied to the two reports and, therefore, there were no actual discrepancies between the reports. While the plaintiff produced an expert report of its own, the plaintiff’s expert failed to rebut or even address the conclusions of SVM’s expert. The Court favoured AMC’s detailed and uncontroverted evidence.

The plaintiff also alleged that SVM failed to make timely disclosure of a material change as required under section 138.3(4) of the OSA. The plaintiff did not, however, plead any material facts as to any specific production data received by SVM showing a material change within the OSA definition.

The Certification

The Court applied the Court of Appeal’s analysis in Kinross and concluded that a class action is not the preferable procedure where leave under section 138.8 of the OSA has been denied because the statutory misrepresentation claim has no reasonable possibility of success and where the common law misrepresentation claim is “destined to fail” because it rests on the same evidentiary foundation.7

The Court also found that the plaintiff’s negligence claim was in substance a pleading of negligent misrepresentation and could not therefore be certified where the claim for misrepresentation had been denied.

Comment

This case reaffirms the Supreme Court of Canada’s ratio in Theratechnologies. Where a plaintiff’s case is so weak or has been so successfully rebutted by the defendant that it has no reasonable possibility of success, the leave threshold is intended to provide “a robust deterrent mechanism” to ensure that cases without merit are prevented from proceeding.8

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1 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 [Theratechnologies].
2 Mask v. Silvercorp Metals Inc., 2015 ONSC 5348.
3 R.S.O. 1990, c. S.5 [OSA].
4 S.O., 1992, c. 6 [CPA].
5 Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp., 2014 ONCA 901 [Kinross].
6 OSA, supra at s 138.8.
7 Kinross, supra at para 138.
8 Theratechnologoes, supra at para 38.

Theratechnologies1 leave threshold proves too robust for plaintiff shareholder in Securities Class Action

Ontario Proposes Whistleblower Regime

On October 28, 2015, the Ontario Securities Commission (OSC) published proposed OSC Policy 15-601 – Whistleblower Program (Policy). The proposed Policy provides for the adoption of a whistleblower program by the OSC with the aim to encourage individuals to report information on securities- or derivatives-related misconduct. The whistleblower program is designed to further the OSC’s mandate to protect investors from unfair, improper, or fraudulent practices, and to foster fair and efficient capital markets. If implemented, the whistleblower program would be the first of its kind for securities regulators in Canada.

In developing the proposed Policy, the OSC reviewed written comments received regarding OSC Staff Consultation Paper 15-401: Proposed Framework for an OSC Whistleblower Program, which was released on February 3, 2015 (as discussed in our previous client alert). In addition, the OSC considered the dialogue about the whistleblower program that took place at its June 2015 public roundtable. As a result, the proposed Policy sets out a structured program that includes how information may be submitted to the OSC, whistleblower protections, eligibility and monetary amounts for whistleblower awards.

Who is eligible to be a whistleblower?

Under the proposed Policy, a whistleblower is an individual who voluntarily provides original information relating to a violation of Ontario securities law that has occurred, is ongoing or is about to occur. The proposed Policy expands the list of individuals who are eligible to be whistleblowers. The list of eligible individuals now includes directors and officers, chief compliance officers, in-house legal counsel and culpable whistleblowers provided that there is a reasonable basis to believe that:

a. the subject is engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors;

b. the subject is engaging in conduct that will impede an investigation of the misconduct; or

c. in circumstances where the whistleblower provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer or the individual’s supervisor, at least 120 days have elapsed since the whistleblower provided the information.

What type of information would entitle a whistleblower to be eligible for an award?

To be eligible for a whistleblower award, the OSC expects that information will relate to a serious violation of Ontario securities law and will be:

a. original information;

b. information that has been voluntarily submitted;

c. of high quality and contain sufficient timely, specific and credible facts; and

d. of meaningful assistance in investigating the matter

How will whistleblower awards function?

For a whistleblower to receive a monetary award, the OSC requires an individual to report information and misconduct that results in administrative proceedings or a settlement under section 127 of the Ontario Securities Act or section 60 of the Commodity Futures Act. Upon final resolution of a matter, the OSC would offer an eligible whistleblower a monetary award between 5-15 percent of the total monetary sanctions imposed in a hearing or settlement where total sanctions or voluntary payments exceed CA$1 million. If the total sanctions imposed or voluntary payment is equal to or greater than CA$10 million, the award would be capped at a maximum amount of CA$1.5 million. However, if the monetary sanctions imposed or voluntary payment is equal to or greater than CA$10 million, and the OSC in fact collects an amount equal to or greater than CA$10 million in respect of the proceeding, the whistleblower may be awarded up to a maximum of CA$5 million.

The determination of an award under the proposed whistleblower program is discretionary and requires the OSC to analyze the established criteria provided by the proposed Policy. Some factors that may increase the amount of an award to a whistleblower are:

a. the timeliness of the whistleblower’s initial report;

b. whether the whistleblower’s assistance saved time in the investigation;

c. the whistleblower’s efforts to remedy the harm caused by the violations of Ontario securities law; and

d. any unique hardship the whistleblower experienced as a result of the report.

Other factors that may decrease the amount of a whistleblower award are:

a.the whistleblower refused to provide additional information or assistance to the OSC when requested;

b.whether the whistleblower unreasonably delayed reporting the violations; and

c.the degree to which the whistleblower was culpable or involved in the violations.

Expectations

The whistleblower program is expected to increase the OSC’s effectiveness in gaining high quality information in enforcing matters such as insider trading, accounting, disclosure violations and registrant misconduct. Further, the whistleblower program is expected to encourage companies to self-report misconduct to the OSC.

To avoid investigations by the OSC and potential monetary sanctions, it is imperative that companies implement appropriate procedures and conduct scrupulous oversight to ensure compliance with Ontario securities legislation.

Comments

The OSC is inviting feedback and written comments on the proposed Policy until January 12, 2016.

The OSC’s aim is to have a whistleblower project established in the spring of 2016.

For more information about the proposed Policy, please contact Jason A. Saltzman, Michael Schafler or Matthew Fleming at Dentons.

This article was co-authored by Tom Budziakowski an articling student in Dentons’ Toronto office.

Ontario Proposes Whistleblower Regime

Ontario Securities Commission Willing to Accept “No-Contest” Settlements

On March 11, 2014, the Ontario Securities Commission (the “OSC”) adopted the following enforcement initiatives aimed at encouraging cooperation from market participants and streamlining its dispute resolution process:

  1. A new program to facilitate the settlement of appropriate enforcement cases in circumstances where the respondent does not make formal admissions respecting its misconduct (sometimes referred to as no-contest settlements);
  2. A new program for explicit no-enforcement action agreements;
  3. A clarified process for self-reporting under Staff’s credit for cooperation program; and
  4. Enhanced public disclosure by Staff of credit granted to persons for their cooperation during enforcement investigations.[1]

Perhaps most noteworthy among these four new initiatives, which are set out in OSC Staff Notice 15-702, is that the OSC is now willing to resolve certain enforcement matters on the basis of a settlement agreement in which the respondent does not make formal admissions regarding its alleged misconduct or contravention of Ontario securities law. [2]

Historically, the OSC, and other regulatory organizations, refused to enter into settlement agreements without an acknowledgment of wrongdoing. This approach often stymied settlement discussions as formal admissions could (and likely would) be admissible in any related civil proceeding.

This new policy to accept no-contest settlements fosters the efficient resolution of regulatory disputes and is ultimately a positive development. It enables market participants to enter into settlement agreements, in proper circumstances, without the risk of admissions against interest (a constant feature of all settlement agreements in the old regime) being used against them in subsequent civil proceedings.

However, the OSC indicated that no-contest settlement agreements would not be appropriate in serious cases where:

  1. the person has engaged in abusive, fraudulent or criminal conduct;
  2. the person’s misconduct has resulted in investor harm which has not been addressed in a satisfactory manner; and
  3. the person has misled or obstructed Staff during its investigation. [3]

In the United States, the Securities and Exchange Commission has entered into no-contest settlements for many years. Yet, this approach has been controversial. In U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., for example, Judge Rakoff refused to approve a $285 million no-contest settlement agreement as it was “neither reasonable, nor fair, nor adequate, nor in the public interest.” [4]

One hopes that the OSC’s adoption of no-contest settlement agreements reflects a trend among regulatory bodies. It remains to be seen whether other provincial securities regulators and/or the Investment Industry Regulatory Organization of Canada—the national, self-regulatory organization charged with the oversight of investment advisors and trading activity on Canada’s debt and equity marketplaces—will follow suit.

 

[1] Ontario Securities Commission, News Release, “OSC Proceeds with New Initiatives to Strengthen Enforcement” (11 March 2014), online: OSC

[2] Ontario Securities Commission, “OSC Staff Notice 15-702, Revised Credit for Cooperation Program” 37 OSCB 2583 (13 March 2014), online: OSC 

[3] Ibid at para 20.

[4] U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11 Civ. 7387 (2011).

Ontario Securities Commission Willing to Accept “No-Contest” Settlements

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings

On December 5, 2013, the Supreme Court of Canada released its much-anticipated decision in McLean v. British Columbia (Securities Commission) [1], providing clarity on the limitation period applicable to “secondary proceedings” in the securities enforcement context. Specifically, the principal issue before the Supreme Court was when the 6-year limitation period under the B.C. Securities Act begins to run when one provincial securities regulator wishes to enforce the order of another – as of the date of the underlying misconduct or the date of the extra-provincial order? The BCSC argued that the event giving rise to the proceeding against McLean was not her original misconduct, but rather the fact of having agreed with a securities regulator to be subject to regulatory action. Writing for the majority, Justice Moldaver upheld the BCSC’s order, finding that, on a standard of reasonableness, the interpretation advanced by the BCSC should be given deference.

Background

In 2008, the appellant Patricia McLean entered into a settlement agreement with the Ontario Securities Commission (“OSC”) in respect of misconduct that predated 2001. The salient parts of the resulting OSC order [2] (the “OSC Order”) barred McLean from trading in securities for 5 years, and banned her from acting as an officer or director of certain entities registered under Ontario’s Securities Act for 10 years. In 2010, the BCSC issued a reciprocal order adopting the same prohibitions of the OSC Order pursuant to s. 161(6)(d) of its Securities Act. McLean appealed the reciprocal order on the basis that the relevant limitation period had expired: s. 159 of the B.C. Securities Act provides that proceedings “must not be commenced more than 6 years after the date of the events that give rise to the proceedings”.

The issue before the Supreme Court was whether, for the purposes of s. 161(6)(d) of the B.C. Securities Act, “the events” that trigger the 6-year limitation period in s. 159 was (i) the underlying misconduct that gave rise to the settlement agreement, or (ii) the settlement agreement itself. Under the former interpretation – advanced by McLean – the BCSC order would be statute-barred. If, however, the limitation period clock began to run on the date of the OSC Order (as the BCSC contended), the BCSC order would stand as the proceeding was commenced well within 6 years of the OSC Order.

Discussion

Moldaver J. first focused on the preliminary issue of the appropriate standard of review regarding the BCSC’s order. Contrary to the BC Court of Appeal’s decision, Moldaver J. held that the governing standard of review was one of reasonableness, not correctness, on the basis that the resolution of unclear language in an administrative decision maker’s “home statute” is usually best left to the decision maker. This approach is consistent with recent Supreme Court of Canada jurisprudence (see Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association [3]), which held that there is a presumption of reasonableness when it comes to a tribunal’s interpretation of its home statute(s).

With respect to the limitation period issue, although Moldaver J. concluded that “both interpretations are reasonable” and “both find some support in the text, context, and purpose of the statute”, he held that judicial deference must be given to the BCSC’s order:

[40] The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations exist…Judicial deference in such instances is itself a principle of modern statutory interpretation.

[41] Accordingly, the appellant’s burden here is not only to show that her competing interpretation is reasonable, but also that the Commission’s interpretation is unreasonable

According to the Supreme Court, when faced with two competing reasonable interpretations of an administrative body’s “home statute”, the administrator – in this case, the BCSC – with the benefit of its expertise, is entitled to choose between those interpretations and “courts must respect that choice”.

Conclusion

The Supreme Court’s decision reinforces judicial deference when it comes to securities regulators dealing with their own governing statutes and regulations. The resolution of unclear language in a “home statute” is usually best left to administrative tribunals, as a tribunal is presumed to be in the best position to weigh the policy considerations in choosing between multiple reasonable interpretations of such ambiguous language. Although the interpretation of a limitation period was at issue, which is arguably a general question of law, the Court applied a reasonableness standard of review because of the tribunal’s construal of its home statute. This proposition will likely have far-reaching application.

Moreover, an important policy consideration that appears to motivate the decision is the need for inter-jurisdictional cooperation among securities regulators, given the challenges inherent in the decentralized model of securities regulation in Canada. While a securities commission cannot abrogate its responsibility to make its own determination as to whether an order is in the public interest, sections like s. 161(6) of the B.C. Securities Act obviate the need for inefficient parallel and duplicative proceedings – in this case, by providing a triggering “event” other than the underlying misconduct. It remains to be seen whether provinces can “piggy-back” on reciprocal orders sequentially, a question that the court did not want to specifically answer at this time. However, in addressing McLean’s concerns that the interpretation of the BCSC could effectively lead to indeterminate proceedings by provincial securities regulators, the Supreme Court seemed to suggest that an overall reasonableness approach to a regulator’s discretion would alleviate such concerns.

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[1] http://canlii.ca/en/ca/scc/doc/2013/2013scc67/2013scc67.html
[2] http://www.osc.gov.on.ca/en/9009.htm
[3] http://www.canlii.org/en/ca/scc/doc/2011/2011scc61/2011scc61.html?searchUrlHash=AAAAAQALMjAxMSBzY2MgNjEAAAAAAQ

Supreme Court defers to Securities Commission on the Interpretation of Limitation Periods in Secondary Proceedings

Securities regulators propose amendments to oil & gas disclosure standards

The Canadian Securities Administrators (CSA) have published for comment proposed amendments to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (NI 51-101) and Companion Policy 51-101CP Standards of Disclosure for Oil and Gas Activities (51-101CP). NI 51-101 and 51-101CP set forth the disclosure standards applicable to reporting issuers engaged in oil and gas activities. In the proposed amendments, the CSA target several aspects of the disclosure regime applicable to oil and gas reporting issuers, including the following:

  • The disclosure of resources other than reserves;
  • The disclosure of oil and gas metrics;
  • The disclosure of resources under alternative disclosure regimes; and
  • The refinement of the product type definition.

Disclosure of resources other than reserves: Currently, a reporting issuer can elect to disclose contingent resources or prospective resources in conjunction with its annual filings without triggering any additional reporting obligations. Under the proposed amendments, if a reporting issuer elects to disclose contingent or prospective resources in conjunction with its annual filings then the reporting issuer must also disclose the related future net revenue and the resource estimates must be evaluated or audited by a qualified reserves evaluator or auditor.

Disclosure of oil and gas metrics: Currently, the disclosure of only certain oil and gas metrics (e.g. netbacks, finding and development costs) triggers specific methodology or disclosure requirements under NI 51-101. The CSA are proposing a principle-based approach applicable to the disclosure of all oil and gas metrics. Under the proposed amendments, the disclosure of any oil and gas metric requires the reporting issuer to identify the standard, methodology and meaning of the metric, and to provide a cautionary statement as to the reliability of the metric. In addition, if there is no identifiable standard for the metric, then the reporting issuer must disclose the parameters used in the calculation of the metric and a cautionary statement that the metric does not have any standardized meaning.

Disclosure of resources under alternative disclosure regimes: Currently, if a reporting issuer is subject to an alternative resources disclosure regime, such as that prescribed by the United States Securities and Exchange Commission, then it must obtain exemptive relief to present resources disclosure in accordance with such alternative disclosure regime. Under the proposed amendments, a reporting issuer that is subject to an alternative disclosure regime may present such alternative disclosure provided that the alternative disclosure is accompanied by the disclosure required by NI 51-101; and the alternative disclosure satisfies certain other conditions relating to the adequacy and reliability of the alternative disclosure regime. In addition, the estimates prepared under the alternative disclosure regime must have been prepared or audited by a qualified reserves evaluator or auditor.

Refinement of the product type definition: The proposed amendments reconcile the definition of product type to the definition used in the Canadian Oil and Gas Evaluation Handbook. Under the proposed amendments, the existing distinction based on whether the product is conventional or unconventional is eliminated in favour of using the source and process for recovery of the product in question. In addition, the concept of production group is eliminated.

Other effects of the proposed amendments: Some of the other areas of oil and gas disclosure affected by the proposed amendments include the following:

  • Clarifying the concept of marketability as it relates to the reporting of oil and gas volumes;
  • Clarifying the determination of abandonment and reclamation costs and mandating the disclosure of such costs in the determination of future net revenue and in the presentation of significant factors and uncertainties in annual filings;
  • Clarifying the requirement to obtain a consent from a qualified reserves evaluator or auditor in relation to the qualified person’s report provided in connection with the reporting issuer’s annual filings; and
  • Clarifying the disclosure requirement when a reporting issuer has no reserves.

CSA Request for Comments: The CSA welcome comments on the proposed amendments and have posed five specific questions which commenters may choose to address. The comment period ends on January 17, 2014. The full text of the proposed amendments can be found here.

Securities regulators propose amendments to oil & gas disclosure standards

Court Affirms Standard of Review for Decisions of Securities Commissions is Reasonableness

Background

The Appellants, Sanji Sawh and Vlad Trkulja, who were both mutual fund dealers and exempt market dealers, founded Investment House of Canada (“IHOC”) in 2003. IHOC was a member of the Mutual Fund Dealers Association (“MFDA”), a self-regulatory organization (“SRO”) recognized by the Ontario Securities Commission (the “Commission”).

In 2009, following an investigation into IHOC, the MFDA commenced a disciplinary proceeding in relation to several alleged violations of the MFDA Rules, By-laws or Policies by IHOC and the Appellants. The Appellants and the MFDA subsequently reached a settlement agreement pursuant to which IHOC resigned from the MFDA and wound down, and the Appellants admitted to several contraventions of the MFDA Rules. The settlement agreement was approved by an MFDA hearing panel.

As a consequence of the settlement agreement, the Appellants’ registration as dealing representatives of a mutual fund dealer was suspended. Six weeks after the settlement agreement, the Appellants applied to the Commission to have their registrations reinstated, which was denied. The Appellants requested a review of the decision and, after a six-day hearing before two commissioners, the OSC determined that the Appellants lacked the proficiency and integrity required by sections 27(1) and (2) of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”), to be registered as dealing representatives of a mutual fund dealer, and that reinstatement of their registrations would be otherwise objectionable.

The Appellants appealed to the Divisional Court, arguing that the conduct reviewed by the OSC was almost exclusively conduct that had already been fully investigated by the MFDA – which had not imposed a sanction barring the Appellants from applying for reinstatement of their registrations – and that by refusing their application, the Commission had departed from its established practice of deferring to the determinations made by expert SROs such as the MFDA.

Discussion

In delivering the Panel’s decision, Justice Sachs agreed with the Appellants that the case law surrounding Commission reviews of SRO decisions highlights the importance of deference to an SRO’s findings. In the Appellants’ case, however, the Commission was not conducting a hearing and review of the MFDA’s settlement agreement or the hearing panel’s decision approving that agreement (which, in any event, did not provide that the Appellants’ registration would be reinstated).

Rather, the Commission’s decision was an exercise of its discretion under section 27 of the Act to consider whether the Appellants were suitable candidates for re-registration, over which the Commission has sole jurisdiction (as the MFDA has not been delegated this authority). Justice Sachs held that the Commission’s decision was justifiable and transparent, and met the applicable standard of review of reasonableness.

The Divisional Court’s decision serves as a reminder that SROs derive their jurisdiction by virtue of being recognized by provincial securities commissions and that the power of SROs and their members is always subject to the oversight of those commissions. It also reaffirms the principle, recently expressed in other contexts,[1] that the courts will generally afford considerable deference to the decisions of securities commissions by applying a standard of review of reasonableness.

[1] See, e.g., Cornish v. Ontario Securities Commission, 2013 ONSC 1310 (CanLII) which dealt with continuous disclosure obligations, and Rankin v. Ontario Securities Commission, 2013 ONSC 112 (CanLII) which addressed a settlement entered into between the Appellant and the Commission.

Court Affirms Standard of Review for Decisions of Securities Commissions is Reasonableness

OSC Disclosure Obligations Under the Securities Act (Ontario)

On January 11, 2013, the Ontario Superior Court of Justice (Divisional Court) delivered its decision in Re Rankin, upholding the decision of the Ontario Securities Commission (the “Commission”) dismissing an Application to set aside an order in which it approved a settlement agreement between Commission Staff and the appellant, Andrew Rankin (“Rankin”).

Rankin was managing director of the mergers and acquisitions branch of RBC Dominion Securities. Charged with ten counts of insider trading and ten counts of tipping under ss. 76(1) and (2) of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”), he was ultimately convicted of all ten counts of tipping but was not convicted of insider trading.

Rankin committed these offences by providing confidential information to Daniel Duic, (“Duic”), an acquaintance who himself was in negotiations with the Commission and subsequently settled with it. Duic provided evidence on which the trial judge relied to convict Rankin, sentencing him to 6 months’ imprisonment.

On November 9, 2006, Rankin’s conviction was overturned and a new trial was ordered by Justice Nordheimer of the Superior Court of Justice. Before the commencement of the new trial, on February 19, 2008, Commission Staff reached a settlement agreement with Rankin, which included an admission of guilt. The Commission approved the settlement agreement on February 21, 2008, and released reasons on March 17, 2008.

In August, 2008, Rankin learned that in late 2007, Duic had been under investigation for committing a “technical breach” of his settlement agreement by engaging in trading contrary to the Cease Trade Order included in his settlement agreement.

Rankin brought an Application challenging the Commission’s decision to approve the settlement agreement pursuant to s. 144 of the Act on the basis that the failure of Commission Staff to disclose the investigation against Duic resulted in manifest unfairness to Rankin in deciding to enter into the settlement agreement. The Commission rejected Rankin’s Application.

On appeal, the Divisional Court held that the Commission’s decision not to revoke the settlement agreement was reasonable. The Divisional Court concluded that the information in question would not likely have materially impacted Rankin’s defence strategy, apart from calling Duic’s credibility into question. It further found that the Commission was correct to conclude that the omission of such information did not cause manifest unfairness to Rankin.

Justice Matlow dissented. According to Justice Matlow, it was essential that Rankin be fully apprised of the evidence against him, including the full scope and nature of the investigations against Duic. Furthermore, held Justice Matlow, the Commission erred in considering whether information relating to the investigation against Duic was “crucial information in connection with the negotiation of the Rankin Settlement Agreement” instead of information relevant to Rankin’s decision to enter into the settlement agreement. As Matlow J. put it,

[t]he Commission’s formulation of the test required the Commission to determine whether or not the undisclosed information, as at the time when Rankin agreed to the settlement, “would likely have affected the outcome of the Rankin Administrative Proceeding“. Not only was this requirement irrelevant to the merits of Rankin’s motion before the Commission but, because it called for the Commission to make a determination, as at that time, of the likely outcome of a future hearing, first assuming that Rankin did not have the undisclosed information and then comparing it on the assumption that he did, it was unworkable.

According to Justice Matlow, Rankin should have been provided with all information relevant to his decision to enter into the settlement agreement, not merely that information which was crucial to its negotiation.

Commentary:

The result of the Court’s split decision in this case raises many questions. What rights do persons accused of offences under the Act have to disclosure of the case against them? If an accused person faces possible incarceration resulting from breaches of the Act, should criminal law disclosure obligations not apply to Commission Staff?

The decision of the Divisional Court in this case would suggest the answer is “no”.

If an accused person enters a guilty plea in the criminal context because the crown does not disclose material information relevant to the case against the accused, the accused may succeed in having the guilty plea withdrawn. To do so, the accused must prove (a) that the Crown did not meet its disclosure obligations; and (b), that on a balance of probabilities the lack of disclosure impaired the accused’s right to make full answer and defence (see R. c. Taillefer (2003), 179 C.C.C. (3d) 353 (SCC)).

The Divisional Court distinguished the present case from pure criminal cases, indicating instead that proceedings before the Commission are administrative and quasi-criminal. In such context, the Divisional Court suggested, the public interest does not require the setting aside of the settlement agreement, and concluded that from the perspective of a reasonable person, if disclosed, the information would not have affected the outcome of the proceedings.

This case highlights the distinction between the prosecution’s criminal and quasi-criminal disclosure obligations. Given that an accused person prosecuted under criminal or quasi-criminal charges may suffer the same punishment, namely, a loss of liberty, one might reasonably ask why a distinction exists between the crown’s disclosure obligations in each circumstance.

This question is not resolved by the court in this case, and it appears that at least for the time being, the prosecution will be subject to a lower standard of disclosure in quasi-criminal proceedings than in criminal proceedings, notwithstanding that proceedings under each regime may impose similar if not identical punishments on those convicted.

OSC Disclosure Obligations Under the Securities Act (Ontario)

Cornish v. Ontario Securities Commission

On March 19, 2013, the Ontario Superior Court of Justice (Divisional Court) released its judgment in Cornish v. Ontario Securities Commission, on appeal from a decision of the Ontario Securities Commission (the “Commission”) issued September 28, 2011. The appeal concerned the Commission’s interpretation and application of the term “material change” in the Securities Act, R.S.O. 1990, c. S.5 (the “Act”) and the obligations of reporting issuers to disclose such material changes.

This case provides greater insight and certainty into the meaning of “material change” and the obligations of reporting issuers when such changes occur.

Facts

Cornish was President and CEO of Coventree Inc. (“Coventree”), a niche investment bank specializing in structured finance. Coventree managed and administered ten separate trusts commonly called “conduits” which issued asset-backed commercial paper debt instruments (“ABCP”).

On January 19, 2007, the Dominion Bond Rating Service (“DBRS”) issued a press release in which it changed its credit rating criteria for certain credit arbitrage transactions. The effect of this change was to require Coventree to secure an unattainable type of liquidity to back credit arbitrage transactions going forward. Before this change, the now DBRS-restricted type of credit arbitrage transactions represented 40% of the conduits’ assets, and their use was the largest contributor to Coventree’s growth.

Coventree referred to the DBRS press release in a letter to its shareholders on February 14, 2007, and again in its second quarter Management’s Discussion & Analysis (“MD&A“), publicly filed on May 14, 2007. It stated that the DBRS January Release would “have the effect of reducing the profitability of the Company by substantially curtailing its ability to grow, if not halt in the short term, its credit arbitrage business.”

In July 2007, Coventree took various steps to attempt to address the lack of demand for new ABCP. However, on August 13, 2007, the market for Coventree-sponsored ABCP collapsed, and Coventree’s ABCP investors could not sell or redeem their ABCP instruments. Cornish prepared and issued a press release disclosing the market disruption as a material change.

The Commission found that Coventree breached the Act by failing to issue a news release and failing to file a material change report about the DBRS January Release. The Commission reached this conclusion despite the fact that Coventree’s mentions of the DBRS January Release in its February 14, 2007 letter to shareholders and in its May 14, 2007 MD&A did not result in any significant change in the price of Coventree shares.

Material Change Analysis

Section 75 of the Act requires “forthwith” disclosure of material changes to a reporting issuer’s business, operations or capital. Section 1.1 of the Act defines “material change as”

[A] change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer.

Regarding the application of s. 75 of the Act, the court in this case states:

The first part of the analysis under s. 75 of the Act requires a determination as to whether a change in the “business, operations or capital” of the issuer has occurred and, if so, when. The second part of the analysis requires an assessment of whether the change was material in the sense that it “would reasonably be expected to have a significant effect on market price or value of the securities.”

The court clarified that the appropriate test to be applied in determining materiality is the “market impact test” which considers what effect certain facts, events or developments would reasonably be expected to have had on the market price or value of Coventree shares.

The court also identified governing principles in applying s. 75 of the Act, and determining if a material change has occurred. The following are the most salient principles identified by the court:

1. Materiality should be assessed objectively from the perspective of an investor and prospectively through the lens of expected market impact. A super critical interpretation of the meaning of “material change” does not support the goal of promoting disclosure or protecting the investing public. If the decision is borderline, the information should be considered material.

2. “Assessments of materiality are not to be made against a standard of perfection or with the benefit of hindsight.”

3. “When a reporting issuer is considering material change disclosure it must apply an objective test as to the expected market impact as it will not have the benefit of actual market impact information.”

4. “Materiality is a highly contextual issue that requires the commission to apply statutory obligations to a particular company in the context of its industry and the market. No single factor will be determinative of whether a material change occurred. In making determinations about materiality common sense must prevail in assessing the broader factual context or the ‘total mix’.”

5. “Since materiality is highly contextual there is no bright line test to determine whether a material change has occurred. That assessment depends on particular circumstances and events.”

6. “A disclosure obligation arises when the material change actually occurs and if the financial impact is experienced at a later date the disclosure obligation is not delayed to that later date.”

7. “The determination of whether a material change has occurred does not require deference to the business judgment of management.”

8. “The commission does not always need evidence of effect on market price to find a material change” has occurred.

Additionally, the court explained why evidence as to an actual impact on the market price of shares is not necessary to prove that a material change has occurred. In the absence of an actual impact on market price, a careful analysis of detailed evidence of the reporting issuer’s business and operations, market conditions and various other market-related factors would be sufficient. As an expert tribunal, the Commission merely applies its expertise to the evidence before it to explain why a lack of change in share price was not determinative of a material change issue.

This case provides greater certainty to reporting issuers in determining their obligations to disclose material change. Notwithstanding that Coventree did in fact inform its shareholders of the likely impact of the DBRS January Release, Coventree did not go far enough in reporting the material change. Based on the principles identified by the court with respect to the application of s. 75 of the Act, reporting issuers faced with similar material changes will not satisfy their obligations under the Act if they fail to file a material change report and news release. Their obligations are not lessened even if an actual change in share value does not result from the material change.

Cornish v. Ontario Securities Commission

The OSC, Not the Courts, Should Determine Third-Party Document Production Requests in OSC Proceedings

In SA Capital Growth Corp. v. Mander Estate, 2012 ONCA 681 the Court of Appeal for Ontario held that requests for third-party document production in relation to Ontario Securities Commission (“OSC”) proceedings should be determined by the OSC, and not the courts.

An alleged Ponzi scheme triggered regulatory proceeding before the OSC and a civil proceeding with a court-appointed receiver. Each of the OSC and the receiver were investigating the appellant, Peter Sbaraglia, in relation to this Ponzi scheme.

The appellant brought a motion before an OSC commissioner requesting third-party production from the receiver to aid in his defence. The OSC commissioner ruled that the OSC lacked the authority to order such production. The appellant did not challenge this ruling and sought third-party productions from the Ontario Superior Court of Justice (which had appointed the receiver).

Justice Pattillo of the Superior Court ordered that the receiver produce some, but not all, of the documents sought by the appellant. The judge applied by analogy the procedure used in R. v. O’Connor, 1995 CanLII 51 (S.C.C.) with respect to obtaining third-party records in criminal matters.

The appellant appealed to request further productions; the receiver cross-appealed claiming it should not have to produce anything.

The Court of Appeal overruled Pattillo J.’s decision to require some productions from the receiver on jurisdictional grounds. Third-party production matters in a regulatory proceeding should be dealt with by the relevant tribunal. In this case, the OSC was best placed to weigh the issues such as relevance, cost, delay and fairness. The Superior Court should not ordinarily grant what would amount to interlocutory procedural orders in relation to regulatory matters.

This case is another example of the deference afforded to the OSC before conclusion of a regulatory proceeding. There is a long line of cases, including the Supreme Court of Canada’s decision in Deloitte & Touche LLP v. Ontario (Securities Commission), 2003 SCC 61, that affirm the OSC’s ability to disclose compelled documents to respondents before it. Persons seeking productions from third parties to assist in their defence at the OSC should ensure that they exhaust the OSC’s internal processes before seeking a remedy in the Superior Court. Here, the OSC has the power under the OSC’s Rules of Procedure to issue a summons under s. 12 of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22 requiring a third party to produce “documents and things specified by the tribunal.”

 

The OSC, Not the Courts, Should Determine Third-Party Document Production Requests in OSC Proceedings