Liability Rumblings Along the Blockchain

By Robert A. Schwinger on July 19, 2019 Posted in Cross border issues, Other developments

In his Blockchain Law column, Robert A. Schwinger writes: When parties interact in transactions conducted via blockchain technology, they may find themselves in relationships to one another that the law has not yet had the opportunity to clearly define. Courts, commentators, governmental officials, litigants and legislatures are now exploring which participants in various kinds of blockchain-based activities might be subject to liabilities for injuries or wrongs allegedly arising from those activities.

Read the full article.

Sino-Forest Cont’d: Cultural Practices do not Excuse Illegal Acts

By Peter Tae-Min Choi on July 11, 2019 Posted in Other developments, Securities regulatory decisions, White collar crime

In Hung et al v Ontario (Securities Commission), 2019 ONSC 3423, the Divisional Court dismissed an appeal brought by four senior officers of Sino-Forest Corporation (the Appellants) in one of Canada’s largest frauds in history. The Appellants sought to set aside the decision on the merits of a panel of the Ontario Securities Commission (OSC) dated July 13, 2017 (Merits Decision), and set aside or amend the decision of a second Panel on sanctions dated July 9, 2018 (Sanctions Decision). In the alternative, the Appellants sought to remit the matter back to the Commission for rehearing with respect to both decisions.

As discussed in our previous commentary, the OSC Panel found that the Appellants, among others, engaged in deceitful and dishonest conduct related to Sino-Forest’s standing timber assets and revenues knowing they constituted fraud, contrary to s. 126.1 of the Ontario Securities Act (the Act).

The Concept of Guanxi and the Intention to Commit Fraud

One of the Appellants’ primary arguments on appeal was that the Merits Panel failed to consider Chinese business and cultural practices in deciding that some or all of the Appellants had the intention, or mens rea, to deceive and defraud Sino-Forest investors.

Specifically, the Appellants argued that the Chinese practice of guanxi, which refers to implicit reciprocal obligations to respond to favours, precluded the need to cement business arrangements in writing until a later time. The Appellants stated that “Favours like assisting a business counterpart establish a new company, signing agreements on behalf of business counterparts and providing assistance in fundraising are common favours known to guanxi. […] Against the backdrop of guanxi, written contracts do not have the same prominence in China.” As such, the Appellants submitted that Sino-Forest would, among others, enter into handshake deals for standing timber volumes and complete the paperwork afterward and backdate the date of the contracts.

After a long hearing, the Merits Panel concluded on the basis of considerable evidence that the Appellants knew investors’ financial interests were put at risk by their acts, whether or not those acts were done in accordance with Chinese cultural or business practices:

Sino-Forest was listed on the TSX, was an Ontario reporting issuer, raised US $3 billion of capital from Investors, and was required to issue financial statements prepared in accordance with Canadian generally accepted accounting principles. For the purposes of our analysis, Ontario securities law is paramount and overrides any explanations for illegal conduct being excusable in the name of guanxi, however it is defined.

The Divisional Court found this conclusion to be reasonable. It held that although cultural practices can explain the Appellants’ behaviour, they cannot excuse illegal acts. As senior executives, the Appellants had a responsibility to ensure that Sino-Forest complied with Ontario securities law. As the Court stated, “This responsibility overrides any other explanation for illegal conduct.”

Sanctions Decision

The Appellants also appealed the Sanctions Decision on the basis that the sanctions were unprecedented and excessive. The Commission ordered, among others, that:

The Appellants permanently cease trading or acquiring securities;
The Appellants resign and be permanently prohibited from becoming or acting as a director or officer of any issuer, registrant or investment fund manager; and
The Appellants Chan, IP, Hung and Ho pay administrative penalties in the amount of $5,000,000; $2,650,000; $2,000,000; and $2,000,000 respectively.

The Divisional Court found that the Sanctions Decision was reasonable. Since the Commission has wide discretion to impose sanctions to protect investors and foster confidence in capital markets, and given the enormity of the fraud which included the fact that approximately 70% of Sino-Forest’s total timber holdings and revenue claimed between 2007 and 2010 could not be realized, the Divisional Court held that there was no principled basis upon which the Court should interfere with the sanctions imposed by the Panel.

Takeaways

Cultural practices may explain behaviour, but they do not excuse acts contrary to securities legislation.
Securities regulators have wide discretion to impose sanctions provided there is a principled reason for doing so.

The author would like to thank Tiana Corovic, Summer Law Student, for her contribution to this article.

The Test on a Motion to Strike Pleadings in Proceedings Before the Ontario Securities Commission

By Linda Fuerst on June 25, 2019 Posted in Other developments, Securities regulatory decisions

In (Re) El-Bouji, 2019 ONSEC 19, the Ontario Securities Commission (OSC) determined that the test on a motion to strike portions of an affidavit filed by Staff in response to the respondent’s motion challenging the Commission’s jurisdiction to adjudicate certain allegations in a Notice of Hearing and Statement of Allegations is essentially the same as the test set out in Rule 25.11 of the Ontario Rules of Civil Procedure. Orders by the OSC to strike evidence in advance of a hearing or another motion should be made only for “special reasons”, based on the criteria set out in Rule 25.11, and in the clearest of cases.

The respondent’s allegation that certain of the information contained in Staff’s affidavit was irrelevant did not warrant the striking of those passages, absent the existence of other grounds set out in Rule 25.11. “Relevance and admissibility are considerations for the panel hearing the evidence on the [jurisdictional] motion”.

Clearing the Way: “Ice Breaker” Settlements in Class Actions

By Linda Fuerst on June 25, 2019 Posted in Class actions, Other developments

In a recent class action settlement approval hearing, Justice Belobaba of the Ontario Superior Court affirmed the value of early “ice breaker” settlements in complex class actions involving multiple defendants. In such a settlement, one defendant settles ahead of the rest for what may be viewed as a “token” amount, along with a pledge to provide cooperation to the plaintiffs. (Di Filippo and Caron v. Bank of Nova Scotia et al, 2019 ONSC 3282).

The Facts

In the case in issue, the proposed settlement would resolve two class actions each involving substantially the same group of defendants, all of which were financial institutions. It was alleged that the defendants had engaged in manipulative trading in gold and silver instruments.

Approval of the Settlement

At the settlement approval hearing, one objector opposed approval of the settlement on the basis that the settlement amount of $5.47 million was only a “token amount” in comparison to the total damages claimed of $1 billion in each class action.

Class counsel sought to justify the settlement amount on two bases. First, in a somewhat similar class action relating to allegedly manipulative foreign exchange trading, settlements of Ontario class actions for amounts representing approximately 3.5 to 4.8 % of settlement amounts approved in parallel US class actions were approved by the Ontario court. The settlement in the case before Justice Belobaba represented approximately 4.33% of amounts paid by the settling defendant to settle parallel class actions in the US. Justice Belobaba accepted that on that basis the Canadian settlement amounts were consistent with the settlement range in the foreign exchange case.

Second, class counsel argued for the approval of the settlement on the basis that it was an “ice breaker” that provided significant non-monetary benefits to the class. Justice Belobaba agreed that the plaintiffs’ agreement to accept what may be a “token” settlement amount was more than outweighed by the “importance and potential benefits” of the non-monetary cooperation that the settling defendant committed to provide as a term of settlement. His Honour observed that particularly in class actions alleging “secret price fixing conspiracies”, a settling defendant’s commitment to cooperate with class counsel is “one of the most significant and valuable features of the settlement”, assisting in the advancement of claims against the non-settling defendants and encouraging them to settle.

In addition to the approval of the proposed settlement the Court also approved an interim fees award to class counsel, noting that such awards lessen the significant financial burden typically assumed by class counsel in complex cases, and motivate class counsel to continue to devote their best efforts to the cause, in the best interests of the class.

Takeaways

Query whether Justice Belobaba’s comments about the efficacy of ice breaker settlements may lead to a race by defendants to be the first to settle complex class actions involving multiple defendants where providing cooperation is of value to the class.

IIROC’s 2018 Enforcement Report: Strengthening Enforcement Authority Across Canada

By Ted Brook on June 19, 2019 Posted in Legislation, rules and policies, Other developments

Overview

On May 16, 2019, the Investment Industry Regulatory Organization of Canada (IIROC) published its 2018 Enforcement Report (the Report). The Report summarizes IIROC’s enforcement activities in 2018 and provides an update on the progress of IIROC’s enforcement priorities, chief among which has been the strengthening of IIROC’s legal authority and enforcement powers across Canada.

Enforcement Activities

IIROC conducted 127 investigations in 2018, 40% of which resulted in prosecutions. The number of prosecutions increased from 44 in 2017, to 52 in 2018. Of those 52 prosecutions, 42 were against individuals and 10 were against firms. Ontario had the most investigations and prosecutions, with 77 and 26 respectively. British Columbia had the next highest number, with 20 and 9 respectively.

With respect to sanctions in 2018, the Report indicates that IIROC suspended 21 individuals, permanently barred five individuals from working in a registered capacity, and imposed financial penalties against individuals totalling $3.2 million. According to the Report, IIROC also terminated two firms and imposed almost $1 million in financial penalties against firms. Although IIROC imposed fewer sanctions against firms than individuals in 2018, 85.3% of the total fines received by IIROC were collected from firms.

Enforcement Priorities

According to the Report, strengthening its legal authority across Canada remained a key priority for IIROC in 2018. IIROC intends to acquire a “full enforcement toolkit” in each Canadian province and territory. For IIROC, a “full enforcement toolkit” means (i) the legal authority to collect fines, (ii) the legal authority to collect and present evidence, and (iii) statutory immunity for IIROC and its personnel when acting in the public interest. IIROC has now obtained a full enforcement toolkit in four Canadian provinces (Alberta, Quebec, PEI and Nova Scotia), and, in 2018, made significant progress in several other jurisdictions.

Legal Authority to Collect Fines

In 2018, IIROC acquired the legal authority to collect fines through the courts in six additional provinces and territories: Nova Scotia, Northwest Territories, Nunavut, Yukon, Manitoba and British Columbia. According to the Report, although firms and individuals who wish to remain IIROC Dealer Members or registrants must pay their fines, many choose to avoid payment by leaving the securities industry and abandoning their registration. The authority to collect fines in the courts is intended to address this problem.

Saskatchewan was added to this list of jurisdictions in 2019. As a result, IIROC can now collect fines through the courts in every province and territory except New Brunswick and Newfoundland and Labrador.

Legal Authority to Collect and Present Evidence

IIROC also made progress in 2018 by acquiring legal authority to collect and present evidence for disciplinary proceedings from six additional provinces and territories: Northwest Territories, Nunavut, Yukon, Quebec, Nova Scotia, Prince Edward Island (PEI). Although IIROC can compel the cooperation of individual registrants and Dealer Members, without specific authority IIROC cannot force other individuals and entities to cooperate, even if they have relevant evidence. Before 2018, only two provinces had granted IIROC the authority to collect evidence from non-regulated parties. As a result of legislative changes in 2018, IIROC can now collect evidence and compel cooperation in every Canadian province except British Columbia, Saskatchewan, New Brunswick, Newfoundland and Labrador, and Ontario.

Statutory Immunity and Protection

Finally, in 2018, IIROC succeeded in obtaining statutory immunity protection in four additional provinces. IIROC is seeking statutory immunity for good faith performance of its regulatory functions because IIROC believes that such immunity is necessary to allow IIROC and its personnel to take appropriate regulatory action in the public interest without fear of reprisal. Alberta was the first Canadian province to grant IIROC this type of protection in June 2017. With the legislative developments in 2018, IIROC now has statutory immunity protection in Alberta, Manitoba, Quebec, Nova Scotia, and PEI.

The author would like to thank Lauren Rennie, Summar Law Student, for her contribution to this article.

Request to Stay a Securities Regulatory Sanctions Hearing: An Uphill Battle

By Linda Fuerst on June 14, 2019 Posted in Securities regulatory decisions

In Re Mountainstar Gold Inc., 2019 BCSECCOM 123, the British Columbia Securities Commission gave short shrift to a request by the respondents for a stay of the Commission’s imposition of sanctions against them until after certain legal proceedings in Chile.

At the conclusion of the Commission’s hearing on the merits, it determined that over a 3-year period, Mountainstar Gold Inc. had repeatedly contravened section 168.1(1)(b) of the British Columbia Securities Act by making disclosure in its public filings concerning certain Chilean mining claims and related legal proceedings that was false or misleading in a material respect, and that Brent Hugo Johnson, an officer and director of Mountainstar, authorized, permitted or acquiesced in those contraventions.

According to the Commission, “the false or misleading disclosure in issue fundamentally misrepresented ownership of the mining interests comprising Mountainstar’s principal asset and key project”. The Company’s MD&A represented that a party identified as “L” in the Commission’s decision was the registered holder of title to certain mining concessions which were the subject of an option agreement. In fact, L had simply filed petitions with respect to those concessions. L had not acquired any mineral or exploration rights to the areas subject to the petitions. Accordingly, the Company’s MD&A “fundamentally misrepresented the status of L’s legal proceedings challenging title to the underlying mining interests”.

In denying the motion for a stay, the Commission indicated that the respondents had not demonstrated that the Chilean legal proceedings could have a determinative or substantial impact on the sanctions decision.

Further, the Commission found that even if it had accepted that the Chilean legal proceedings were relevant and that there was potential prejudice to the respondents if a sanctions decision was rendered and the Chilean legal proceedings were subsequently decided in L’s favour, it would not consider a stay to be in the public interest. The contraventions were serious. The time required to conclude the Chilean legal proceedings could result in indeterminate and potentially substantial delay. The respondents’ continued participation in the capital markets posed a serious risk to investors and the markets.

Takeaway

This decision confirms the difficulties that respondents face when seeking a stay of securities regulatory proceedings. In reaching its decision, the Commission referred to its prior decision in Starflick.com(Re), 2014 BCSECCOM 25, in which it noted with approval the comments made by the Supreme Court of Canada in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, that where a public authority is charged with the duty to promote and protect the public interest and its activities are undertaken pursuant to that responsibility, it should be assumed “that irreparable harm to the public interest would result from the restraint of that action”.

The AMF is not the sole arbiter of what is relevant and what should be disclosed

By Sophie Melchers, Caroline Larouche and Andres C. Garin on June 14, 2019 Posted in Other developments, Securities regulatory decisions

In AMF v. TMF, Baazov, et al. (Court File No. 500-11-052989-171), the Quebec Superior Court confirmed that the Financial Markets Administrative Tribunal (the Tribunal) has the power to order the Autorité des marchés financiers (AMF), Quebec’s securities regulator, to disclose documents to individuals against whom the AMF is seeking freeze orders and cease-trade orders in the course of an ongoing confidential investigation.

Freeze orders essentially prohibit a person from spending a single penny in his/her possession while cease-trade orders prohibit a person from trading on any and all securities he/she holds. These draconian orders are typically issued while the securities regulator is investigating the targeted person and remain in place for the duration of the investigation (i.e. months, if not years).

When applying to the Tribunal for the issuance of freeze and/or cease-trade orders, the AMF is free to decide which allegations it will make, which documents it will provide to support those allegations and which testimony it will put forward. As applications for freeze and/or cease-trade orders are made in the course of an ongoing confidential investigation, the AMF will choose to disclose what it believes is required to obtain the orders sought, but no more, so as to preserve the confidentiality of its ongoing investigation to the greatest extent possible.

For the first time in its history, further to requests by David Baazov and others and before hearing the AMF application for freeze and cease-trade orders, the Tribunal ordered the AMF to disclose specific documents.

As there is no right of appeal from such an order, the AMF applied to the Quebec Superior Court for judicial review. In its recent judgment, the Superior Court confirmed that even in the context of an ongoing and confidential securities investigation, the Tribunal has the power to order the disclosure by the AMF of documents:

that are directly related to the proceedings instituted by the AMF, to the allegations advanced by the AMF and/or to exhibits adduced in support thereof; and
that appear relevant, prima facie, to allow the individuals against whom the AMF is seeking orders to offer full answer and defense in the context of a fair hearing (débat loyal et équitable).

Moreover, given the significant consequences of freeze and cease-trade orders, the Superior Court confirmed that when the AMF chooses to launch proceedings seeking such orders, the AMF does not remain the sole arbiter of what is relevant and what needs to be disclosed.

Rather, insofar as the above two-pronged test is met and notwithstanding the confidentiality of the ongoing securities investigation, the Tribunal can, to preserve procedural fairness, order the disclosure by the AMF of additional documents to the individuals targeted by the AMF’s requests.

Large and generous interpretation of “investment contract” and “distribution” under the Quebec Securities Act: AMF v. Desmarais, 2019 QCCA 898

By Sophie Melchers on June 11, 2019 Posted in Other developments, Securities regulatory decisions

In its recent decision (AMF v. Desmarais), the Court of Appeal upheld the conviction of a Montreal lawyer who played a central role in the distribution of investment contracts without a prospectus and who acted as a dealer without being registered as such, while reducing his prison sentence and fine.

Facts of the case

Jean-Pierre Desmarais, a partner at a Montreal law firm, assisted Fondation Fer de Lance (FFDL) – a private not-for-profit foundation co-founded by Messrs. Desmarais and Gélinas – in recruiting and convincing 23 “sponsors” to sign a contract requiring them to make sums available to FFDL in the hope of future compensation.

Mr. Desmarais participated in the drafting of the contracts, met with potential investors in his law firm’s offices, received some of the investors’ funds, deposited some of these funds in his law firm’s trust account and later transferred them to FFDL’s trust account (of which he was signatory) or to Mr. Gélinas directly. In total, FFDL raised close to US$1.4M.

Over the years, FFDL experienced various financial difficulties; while some “sponsors” were able to recover their capital, none ever got a return on their investment.

Rationale for the generous and large interpretation of “investment contracts” and “distribution”

The Court of Appeal reiterates that:

the goal of securities legislation is the protection of the investing public, and
it would be impossible for any legislator to include the wide array of financial arrangements that various companies can conceive of under one precise definition

such that the concepts of “investment contract” and “distribution” under the Quebec Securities Act (QSA) need to be given a generous and large interpretation.

What is an “Investment Contract”?

An investment contract is defined in the QSA as a contract whereby a person, having been led to expect profits, undertakes to participate in the risk of a venture by a contribution of capital, without having the required knowledge to carry on the venture or without obtaining the right to participate directly in decisions concerning the carrying on of the venture.

Mr. Desmarais argued that the contracts at issue referred to “sponsors” as opposed to “investors”, to the availability of funds as opposed to their investment and to “ “compensation” as opposed to “return”, such that the contracts should not be found to be “investment contracts” under the QSA and that no prospectus need be prepared.

The semantic arguments raised by Mr. Desmarais were all rejected, in favour of an analysis of the essence of the contract. Simply put, it’s substance over style. The contracts between FFDL and the “sponsors” were found, in essence, to be “investments contracts” under the QSA. The Court added that in this case, the risk of the venture not only included the loss of the capital contributed but also the loss of the expected advantage or profit.

The Court also confirmed that the notion of “securities” (which appears in the definition of “distribution”) encompasses all the forms of investment to which the QSA applies, including an investment contract. As a result, a prospectus had to be prepared ahead of its distribution.

Reduction of the Penalty

In determining the penalty, section 202 of the QSA allows the Court to “take particular account of the harm done to the investors and the advantages derived from the offence”.

Despite confirming that in this case, the most aggravating element was the breach of trust through the abuse of the seriousness of his profession, the Court of Appeal reduced Mr. Desmarais’ prison sentence from 18 months to 6 months and his fine from $345,000 to $70,000 on account of two mistakes made by the trial judge.

First, the trial judge had found that in a worst-case scenario, the investors could lose $290,000 and had taken this into account when deciding the penalty to be imposed on Mr. Desmarais. The Court of Appeal found that there was no evidence beyond a reasonable doubt that there would be any loss. It was thus a mistake in law for the trial judge to have considered losses as an aggravating factor, the existence of which had not been put into evidence.

Second, the trial judge had considered the fees of $305,000 paid to Mr. Desmarais’ law firm. The Court of Appeal held that there was no evidence as to what portion of those fees, if any, had been received by Mr. Desmarais, such that they should not have been taken into account when deciding the penalty to be imposed on Mr. Desmarais.

In its discussion on sanction, the Court of Appeal confirmed that:

lack of remorse cannot be considered as an aggravating factor, particularly when a person contests having ever committed the infraction, and
an accused’s financial means and ability to pay the fine, together with the delay to pay, is a relevant factor.

Take-Away

No matter the terminology used, courts will favour substance over form when determining whether a particular contract or structure falls within the definition of “investment contract” in order to protect the investing public.

The author would like to thank Isaac Harris for his contribution to this article.

Imposition of OSC Sanctions Following a Conviction for an Offence Relating to Securities: The Availability of Carve-Outs in the Public Interest

By Linda Fuerst on June 10, 2019 Posted in Securities regulatory decisions, White collar crime

In Theroux (Re), 2019 ONSEC 20 a hearing panel of the Ontario Securities Commission (OSC) was called upon to decide whether an individual convicted of five counts of fraud over $5,000 contrary to section 380(1)(a) of the Criminal Code should have the benefit of carve-outs from an order under section 127(10) of the Ontario Securities Act (Act) which would otherwise prohibit him from trading in securities and from being an officer or director of any company permanently.

Facts

Alain Theroux had pleaded guilty in the Ontario Court of Justice to five counts of fraud over $5,000. Theroux admitted that he had solicited and accepted funds from investors in excess of $1 million reflecting their investments in bonds, promissory notes and bridge financing marketed in respect of a biofuel venture with a company with which Theroux was associated. Substantial portions of the funds raised were diverted to Theroux’s personal use or to pay other investors and were not invested in the biofuel market.

At a subsequent hearing before the hearing panel of the OSC under section 127(10) of the Act, the fraudulent investments were found to constitute securities under the Act, thereby giving the hearing panel jurisdiction to impose sanctions upon Theroux in addition to the sentence imposed under the Criminal Code of 12 months’ incarceration, two years’ probation, restitution in the amount of $170,800 and a fine in lieu of forfeiture in the amount of $75,000 to be paid within 15 years of his release from prison.

Sanction Carve-Outs

Theroux requested two carve-outs from the sanctions requested by OSC Staff, which included a permanent prohibition on his ability to trade securities and on his ability to act as an officer or director of any company.

He sought to retain the ability to trade securities in certain types of accounts to provide him with the ability to accumulate investment savings and increase the likelihood that he would satisfy the restitution order made under the Criminal Code. The hearing panel agreed that it was in the public interest to permit him to trade in securities or derivatives in a registered retirement savings plan, registered education savings plan, in any registered retirement income fund, and/or a tax-free savings account in which he has a beneficial interest, provided that any trades are carried out through a registered dealer.

However, his request that he be permitted to return to his role as a director of his private company at the end of his term of parole was denied, notwithstanding Theroux’s submission that the company was not involved in the public markets. The concern was that the company could still be used to raise capital or market investment contracts through the exempt market, like the enterprise involved in the fraud that he had committed. On that basis, it was not in the public interest to make that carve-out from the permanent prohibition on him acting as an officer or director of any company.

This decision is consistent with prior decisions of the OSC relating to requests for carve-outs from sanctions. The granting of such carve-outs is not automatic, and must be justified on the basis that they are in the public interest.

Harrington v IIROC: No Equitable Duty Owed by Public Sector Regulators to Disclose Information to Victims of Wrongdoing

By Linda Fuerst and Peter Tae-Min Choi on June 4, 2019 Posted in Other developments, Securities regulatory decisions

On December 31, 2018, the Ontario Superior Court of Justice dismissed an application by Harrington Global Opportunities Fund (Harrington) for a Norwich order against the Investment Industry Regulatory Organization of Canada (IIROC). Harrington sought the order to compel IIROC to provide information that would identify parties which had allegedly been involved in manipulating the market price of shares of a reporting issuer, to permit it to determine the viability of a civil action against them.

Justice Perell’s decision highlights the fact that the issuance of a Norwich order is “a rarely exercised extraordinary discretion”. “[T]he protection of privileges and confidences and the interests of the innocent target of the order”, in this case a securities regulator operating under the public law regime, are “powerful forces” against the issuance of such an order.

This decision sends a clear message that applications for a Norwich order against other regulatory bodies operating in the public law sector will likely be an uphill battle.

Background

Between 2016 and 2018, Concordia International Corp. (Concordia) experienced a significant drop in share price, resulting in a loss of approximately $3.9 billion dollars of its market capitalization. Harrington, a sophisticated investor, believed that Concordia was a victim of a short-selling conspiracy involving a group of traders using social and mainstream media to disseminate misleading information designed to manipulate the market. In order to pursue a conspiracy claim against the alleged conspirators, Harrington applied for a Norwich order to compel IIROC to disclose certain identifying information about the suspected conspirators and certain trade reports generated by IIROC from data provided by investment dealers and trading venues. Investigations by IIROC into the alleged wrongdoing had led it to conclude that no manipulation had occurred.

The Decision

The court dismissed Harrington’s application. While Justice Perell agreed that Harrington appeared to have a valid cause of action for unlawful means conspiracy, it did not satisfy any of the remaining criteria for a Norwich order. In particular:

Harrington failed to satisfy “perhaps the most important criterion for a Norwich order”, the existence of a connection or relationship between the target of the order (IIROC) and the wrongdoer or the wrongdoing. The issue was whether or not IIROC, operating in the public law sector, ought to have a duty to disclose trading information to an investor thinking of bringing a private law tort claim.

Justice Perell determined that it did not. IIROC did not have a relationship with wrongdoing or wrongdoers in the industry that it regulates that would impose a duty upon it in equity to disclose information to victims of the alleged wrongdoing. Further, how IIROC carried out its obligation to investigate potential misconduct, and what information to disclose before, during or after its investigation was for IIROC to decide.

The necessity requirement was not satisfied. Harrington already had a prospective action for civil conspiracy against a particular short seller and others that it believed may have conspired to short and distort the sale of Concordia shares.
Balancing the interests of IIROC against the interests of Harrington tipped the balance against granting the order. IIROC’s duties of keeping confidences and protecting privacy interests, and its interest in maintaining its relationship with other regulators such as FINRA, stood against making the order. FINRA would be less likely to share client and broker data with IIROC in the future if IIROC could be required to disclose such data.
The interests of justice did not favour the granting of the Norwich

Takeaways

Norwich orders are intrusive and should only be granted in extraordinary situations. It is not a means to search out and investigate speculative actions; and
In general, regulators like IIROC are under no equitable duty to disclose information to parties interested in pursuing a private law remedy against suspected wrongdoers under its jurisdiction.

The authors would like to thank Travis Bertrand, Articling Student, for his contribution to this article.