New York Highest Court Imposes Three Year Limitations on State Attorney General Securities Actions

On June 12, 2018, New York’s highest court issued a ruling that a three year statute of limitations, not the six year statute applicable to fraud claims, applies to claims brought under New York’s Martin Act.  People v. Credit Suisse Securities (USA) LLC, et al.  The Martin Act is the New York State Blue Sky law that gives the New York Attorney General broad authority to bring civil and criminal claims arising from fraudulent conduct in connection with the sale and purchase of securities.  While the claims thereunder overlap with those available under the U.S. federal securities laws, it has been used frequently, especially since the 2008 financial collapse, by aggressive New York Attorneys General where the U.S. Securities Exchange Commission does not step in, and at times even where it does.  While having no impact on the scope or substance of such claims, the narrowing of the statute of limitations will pressure state authorities to expedite their investigations of suspected securities fraud, or risk losing the claims.

The Martin Act

Enacted in 1921, the Martin Act (New York General Obligations Law, Article 23-A, §§ 352, et. seq.) has been considered the most expansive state securities law in the United States.  The Act prohibits deceitful acts including false statements in connection with the sale of securities and commodities in or from New York.  Notably, a number of claims available to the Attorney General under the Act do not require proof of scienter or reliance.  Given New York’s importance as a financial center, the Act gives the New York Attorney General  jurisdiction over the largest financial institutions in the world.

New York Attorney General Elliot Spitzer aggressively used the Martin Act during his term beginning in the early 2000s.  Its use escalated following the 2008 financial collapse, and its aggressive use continued by his successor, Attorney General Eric Schneiderman.

The Case

Following the 2008 financial collapse, the New York Attorney General’s office began investigating Credit Suisse and affiliates in connection with the sale of mortgages that it packaged into bonds and sold to investors in 2006 and 2007.  In 2012, Attorney General Schneiderman bought claims against Credit Suisse alleging that it had deceived investors as to the quality of the mortgages for which it was civilly liable under the Martin Act, among other grounds.  Credit Suisse sought dismissal on the grounds that a three year statute of limitations applicable to “[a]ctions to recover upon a liability, penalty or forfeiture created or imposed by statute” (New York Civil Practice Law and Rules § 214(2)) barred those claims.  The Attorney General’s office countered that a six year statute of limitations for fraud should apply, and thus the claims were timely.

In ruling in favor of Credit Suisse, the Court distinguished between fraud claims that existed under common law, to which a six year statute of limitations applies, and claims under the Martin Act.  While the Act does apply to fraud-related claims that existed under common law, the Martin Act imposes many obligations that did not exist at common law, justifying the imposition of a three year statute of limitations.

Implications

The sole Dissent to this decision warned:  “Make no mistake, this is a significant decision with potentially devastating consequences for the People of the State of New York, as well as markets beyond our borders, which depend on New York as a global financial center.”  The Dissent called upon the New York State Legislature to amend the Act to impose a longer statute of limitations “to correct this error before significant damage is done to the State’s securities markets.”  While the Legislature’s appetite for such statutory action is unclear, what is clear is that, at least until the Legislature acts, the New York Attorney General will be constrained by a three year statute of limitations.  It is likely, however, that the Attorney General will try to obtain some relief from that time limitation by seeking voluntary tolling agreements from those under investigation for potential Martin Act violations.

Parity in sentencing for insider trading: AMF v. Beauchamp, 2018 QCCQ 3604

In a recent decision, AMF v. Beauchamp, Délisle J. of the Quebec Court, Criminal and Penal Chamber, refused to follow the request of the Quebec securities regulator, the Autorité des marchés financiers (AMF), that a prison term be added to the sentence of an accused in an insider trading case.

Background to the Decision

Francis Beauchamp (Beauchamp) pleaded guilty to nine counts of insider trading. He had received privileged information (as defined in the Quebec Securities Act (QSA)) relating to four separate acquisitions from the spouse of the then assistant to the Chief Financial Officer of BCE Inc., Ms. Morier. Beauchamp had personally traded while in possession of said privileged information, making profits in excess of $275,000. He had shared the privileged information with his parents who had themselves also traded.

Earlier, the tipper, her spouse and her parents also pleaded guilty to related charges of insider trading and were all condemned to pay a monetary fine, without any imprisonment. While the AMF and Beauchamp agreed on the terms of the fine to be paid by Beauchamp following his guilty plea (i.e. $500,000), the AMF requested from the Court that imprisonment be added to his sentence.

The Court’s Analysis

The only question to be adjudicated by Justice Délisle was whether or not a prison sentence should be imposed on Beauchamp, in addition to the fine that he had agreed to pay, when the tipper Ms. Morier, her spouse and her parents had not been sentenced to any imprisonment. In other words, should the principle of parity in sentencing of similar offenders for similar offences committed in similar circumstances be applied or not?

In support of its request, the AMF sought to downplay both the guilty plea of Beauchamp – by arguing that it had come late in the day, 11 days before the start of the trial on the merits – and his collaboration with the AMF – by arguing that the information received from Beauchamp only confirmed or corroborated information already in the hands of the prosecutor. Moreover, the AMF argued that Justice Délisle was not privy to the plea bargains between the AMF and each of the tipper, her spouse and her parents and was thus not in a position to determine whether similar offences had been committed in similar circumstances.

Justice Délisle refused the AMF’s request and only sentenced Beauchamp to the $500,000 fine agreed upon.

Justice Délisle found that Beauchamp’s guilty plea had come sufficiently early so as to avoid any witness being called at trial, mentioning that the guilty pleas of the tipper and of her spouse only came 18 months after the notice of infraction had been served, and not at the first occasion.

Justice Délisle refused to minimize the collaboration of Beauchamp, stating that when Beauchamp accepted to answer the questions of the AMF investigator, he had no knowledge of the evidence already assembled by the AMF. The fact that his answers only confirmed or corroborated evidence already in the hands of the prosecutor could thus not be held against him.

Finally, Justice Délisle wrote that the AMF “had voluntarily held back the details of the plea bargains” of the tipper, her spouse and her parents “in the hopes of convincing him to impose a more severe sentence on” Beauchamp. While clearly not appreciative of this lack of transparency on the part of the regulator, he referred to a reported judgment involving the tipper, her spouse and her parents containing sufficient information for him to determine that the principle of parity in the sentencing had to be applied.

Take Aways

In addition to a fine, the Quebec securities regulator can request imprisonment against only one of several individuals accused of breaching the QSA and in support of such request, can attempt to downplay the importance of both a guilty plea based on its late timing and of the accused’s collaboration with the AMF’s investigation.

To defeat such a request, the terms pursuant to which a co-accused has already pleaded guilty to a breach of the QSA and the sentence imposed on him/her could prove to be very relevant, in light of the principle of parity in sentencing of similar offenders for similar offences committed in similar circumstances.

The Importance of Materiality in Secondary Market Misrepresentation Claims: Paniccia v. MDC Partners Inc. Securities Class Action

In the recent decision of Paniccia v MDC Partners Inc., Perell J. refused to grant leave to proceed with a putative secondary market securities class action under Part XXIII.1 of the Ontario Securities Act (OSA) against MDC Partners Inc and certain of its officers on the basis that the alleged misrepresentations were not material.  The decision presents valuable insight into the assessment of materiality, an issuer’s obligation to disclose a regulatory investigation, and a plaintiff’s obligation to plead a corrective disclosure under Part XXIII.1.

Background to the Decision

In August 2015 the Plaintiff brought a putative class action in Ontario for negligent misrepresentation and a statutory secondary market misrepresentation claim on behalf of shareholders of MDC. MDC’s shares traded on the TSX and NASDAQ, where 98.2% of the trading occurred.  However, only approximately 0.8% – 2.6% of MDC’s shares were held by residents of Canada.

While initially seeking to certify a global class, in response to a motion by the Defendants to limit the proposed class to purchasers on the TSX, the Plaintiff refined the class to persons or other entities in Canada who acquired shares of MDC on any domestic or foreign exchange or through an over-the-counter transaction during the class period.

The Plaintiff pleaded multiple misrepresentations between October 29, 2014 and March 2, 2015. In particular, the Plaintiff’s allegations were that a) MDC failed to disclose the issuance of a subpoena by the SEC requiring MDC to produce information about the expenses of Miles Nadal, the CEO of MDC, and its accounting practices, among other things;  b) MDC failed to disclose an internal investigation into its internal controls over accounting prompted by the subpoena;  c) MDC failed to disclose that it began reporting “adjusted” EBITDA because the SEC had required the qualification “adjusted” to be added;  d) MDC did not disclose the true amount of its CEO’s compensation;  and e) MDC misstated how it presented its business “segments”.

The Plaintiff argued that these misrepresentations were partially corrected on April 27, 2015 when MDC disclosed to the market that the SEC had served a subpoena. MDC also disclosed that it had formed a special committee of independent directors to investigate the matters raised by the SEC’s subpoena and that following the internal review, Mr. Nadal had agreed to reimburse the company in the amount of $8.6 million.  The following day, MDC’s shares dropped in value by 28% on both the TSX and NASDAQ.  On July 20, 2015, Mr. Nadal and MDC’s Chief Accounting Officer resigned and together repaid or forfeited approximately $40 million USD in severance and compensation.

In August and September 2015, the SEC raised a new matter with MDC about how MDC grouped or segmented its partner firms into reporting units. The SEC’s correspondence on this topic was publicly filed.

MDC’s auditor did not withdraw their unqualified audit opinions, require a restatement of MDC’s financial statements nor withdraw ICFR reports in connection with any of these events.

A parallel U.S. class action was commenced and dismissed before certification by the United States District Court – Southern District of New York in September 2016. However, the SEC brought an enforcement action against MDC and some of its officers resulting in “no contest” settlements with the SEC in January, May, and November 2017.

The Court’s Analysis

Justice Perell denied leave to commence a statutory claim for secondary market misrepresentation under s. 138.8(1) under the OSA, finding that all of the alleged misrepresentations shared a “fundamental flaw”: a lack of materiality.

His Honour summarized the law concerning the test for materiality under the OSA, which is determined objectively from the perspective of what a reasonable investor would consider important in deciding whether to invest and at what price. The determination of materiality involves a contextual and fact-specific inquiry.

On a motion for leave to pursue a statutory cause of action, the fact that a company restated its financial statements constitutes evidence that there was a material misrepresentation. However, the absence of a restatement does not mean that leave ought not to be granted. Without evidence of a restatement, a criminal or regulatory finding, or some other type of acknowledgement by the defendants that a misrepresentation was made, the onus will be on the Plaintiff to adduce other evidence demonstrating that there is a reasonable prospect of establishing a material misrepresentation.

Expert evidence on the issue of materiality is not determinative. While the Plaintiff’s expert, a certified public accountant, was qualified to opine on materiality from an accountant’s or auditor’s perspective, the assessment of materiality under securities law is ultimately the court’s prerogative:

“Depending on the nature of the alleged misrepresentation, a court may be assisted by understanding what is material from an auditor’s point of view and what is the appropriate accounting or auditing standard, […] ultimately, it is for the court to determine what is objectively important to a reasonable investor in making his or her investment decisions”.

Justice Perell undertook a careful examination of each of the alleged misrepresentations and determined that each failed for lack of proof of materiality. In each case, the evidence of a material misrepresentation was so weak that there was no possibility of success at trial.

Receipt of a Regulatory Subpoena is Not a Material Fact

He rejected the allegation that the receipt of the SEC subpoena was a material fact that ought to have been disclosed. In general, the mere service of a subpoena does not trigger a duty to disclose: “[a]n investigation is not a conclusion about a fact.” Further, under securities law, the existence of an investigation is confidential and ought not to be disclosed absent the consent to the regulator.  Premature disclosure of an investigation may in fact be harmful and adversely affect share values.  A reasonable investor would expect the company to respond to the subpoena, cooperate with the investigator, and conduct an internal investigation and then determine whether there was a material fact to correct or a material change to report to its investors.  This is precisely what occurred.

No Misrepresentation about Internal Controls

Justice Perell held that there was no misrepresentation about the effectiveness of MDC’s internal controls. No restatement had been required by MDC’s auditors and neither the Plaintiff nor its expert identified any specific weakness in MDC’s ICFR or a material misstatement about the ICFR.  The Plaintiff and its expert sought to infer a weakness from the fact that MDC later reported that it was taking steps to improve its ICFR.  According to Perell J., this inference was backwards and did not logically follow.

No Misrepresentation About EBITDA Reporting

The evidence established that MDC did in fact disclose its exchange of correspondence with SEC about the use of the term “adjusted EBITDA”, as it was publicly filed on EDGAR. Further, MDC’s EBITDA reporting was not false or misleading because it disclosed to investors how it calculated EBITDA.  Additionally, there was no public correction with respect to the alleged adjusted EBITDA misrepresentation in the pleaded corrective disclosures or otherwise.  This necessary element of the statutory cause of action was absent from the pleading.

No Material Misrepresentation about the CEO’s Compensation

There were no false statements about the CEO’s compensation nor any corrective disclosure of it. The reimbursement expenses were at all times reflected in MDC’s financial statements.  Furthermore, the quantity and nature of these expenses were not material.  The Company disclosed that it did not expect there would be any impact to its previously issued financial statements as a result of its conclusion that certain amounts had been inappropriately reimbursed to its CEO and no restatement of the financial statements has ever been made.  The SEC did not require a restatement as a result of its investigation.

No Segments Misrepresentation

Finally, Justice Perell also found no basis for the allegation that there was a business segments misrepresentation. The alleged segment misrepresentation issue arose after the disclosures pleaded as partially corrective, and the Plaintiff had not pleaded any specific public correction with respect to the alleged segments misrepresentation.  In any event, the alleged segments misrepresentation lacked materiality.

Justice Perell concluded with respect to each of the alleged misrepresentations that having considered all of the evidence, the plaintiff’s case was “so weak that it has no reasonable possibility of success”. On that basis leave, was denied.

Key Take Aways

The decision in Paniccia is significant for a number of reasons.

It emphasizes the importance of the materiality element of the statutory cause of action for misrepresentation and provides further clarity concerning both the test for materiality and proof of materiality.  In the absence of evidence of a material misrepresentation such as a restatement of financial statements,  a criminal or regulatory finding, or an acknowledgment of a misrepresentation by the defendants, plaintiffs must adduce other evidence to establish a material misrepresentation.  Courts will carefully scrutinize expert evidence on materiality.

The decision provides welcome clarity on the absence of an obligation to disclose the mere issuance of a subpoena, relying on U.S. case law such as the decision in In re Lions Gate Entertainment Corp., 2016 U.S. Dist. LEXIS 7721 and regulator guidance such as the Ontario Securities Commission’s Guidelines for Staff Disclosure of Investigations, set out in Staff Notice 15-703.  The “general rule” is that there will be no public disclosure of information about an on-going or closed investigation.

Finally, to our knowledge, this is the first decision where leave was expressly denied in respect of a misrepresentation allegation for failure to plead a corrective disclosure. The law in Canada has been developing on this issue, in particular with the decisions of Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v. SNC-Lavalin Group Inc., 2016 ONSC 5784 and Swisscanto Fondsleitung AG v. BlackBerry Ltd., 2015 ONSC 6434 which laid the groundwork for understanding the corrective disclosure element of the statutory cause of action.  Justice Perell’s reasons demonstrate that a corrective disclosure is a core element of the statutory cause of action and a plaintiff must plead his/her case in such a manner that ties a correction to an alleged misrepresentation.

Alberta Securities Commission Policy 15-601: Credit for Exemplary Cooperation in Enforcement Matters – New Provision for No-Contest Settlement Agreements

On October 25, 2017, we wrote about the Alberta Securities Commission’s (ASC) new Policy 15-601 which “explains the use of discretion by ASC staff when considering the appropriate enforcement action and assessing the appropriate sanction for misconduct.”  A link to the publication is here.

As we predicted in October, the ASC recently issued a press release announcing a “new tool in the expanding ASC Enforcement toolbox” – the “opportunity to enter into no-contest settlement agreements in certain and limited circumstances”.

This new “tool” was created by amendments to Policy 15-601, including a new section 14. Section 14 states:

No-Contest Settlement Agreement

  1. In very limited circumstances, and in no instance where it appears to ASC staff you have engaged in abusive or fraudulent misconduct, ASC staff may choose to enter into a No-Contest Settlement Agreement with you. A No-Contest Settlement Agreement will include all of the following:

(a)        a statement of facts and conclusions asserted by ASC staff, which you neither admit nor deny;

(b)        terms and conditions of settlement, including appropriate sanctions based on your conduct, and your acceptance of those terms;

(c)        confirmation that you have paid, or undertaken to pay, at the time the No-Contest Settlement Agreement is executed, Restitution[1], and any other agreed upon monetary settlement or costs.

The ASC contemporaneously published a “backgrounder” which shed some further light on section 14, stating that:

  • The decision whether to consider a no-contest settlement agreement will always be in the sole discretion of the ASC.
  • No-contest settlement agreements may be considered if the respondent has self-reported, is fully cooperating, and is taking financial responsibility for its actions.
  • No-contest settlement agreements will not be considered “if the ASC has reason to believe that a respondent has engaged in abusive or fraudulent misconduct, or if it is in the public interest to proceed with a quasi-criminal or criminal investigation.”
  • In determining whether to consider a no-contest settlement agreement, the ASC will consider a variety of factors as contemplated by Policy 16-501 regarding the determination as to whether the respondent should receive credit for exemplary cooperation.
  • This amendment to Policy 15-601 represents the first time that the ASC has formally acknowledged that no-contest settlement agreements may be appropriate, albeit in very limited circumstances where the respondent has shown exemplary cooperation. We expect that they will be rare in Alberta, but time will tell.

[1] Defined as “compensation to anyone affected by your misconduct.”

US Supreme Court puts an end to untimely piggyback class actions

Companies confronting serial class actions won much needed relief from the US Supreme Court yesterday, in a decision that held that a class action tolls statutes of limitations only for putative class members’ individual claims, and not for later-filed class actions. A second class action must be filed within the limitations period, or it is barred. The opinion in China Agritech v. Resh (“Resh”), written by Justice Ginsburg, is a welcome development for companies that have been subject to repeated class action lawsuits raising the same claims.

The Resh decision stems from a perceived ambiguity in earlier decisions that established the class action tolling doctrine. In American Pipe & Construction Co. v. Utah, 414 U. S. 538 (1974), the US Supreme Court ruled that the timely filing of a class action suspends the running of the applicable statute of limitations for all putative or absent class members until class certification has been denied. At that point, those putative class members may then bring their individual claims, even if the claims would otherwise be untimely under the statute of limitations. The American Pipe rule was instituted to further efficiency and economy of litigation, allowing individual class members to rely on the class action vehicle to protect their individual rights and, thus, avoiding flooding federal courts with numerous individual actions. As the court recognized in Resh, however, the American Pipe decision and subsequent Supreme Court decisions interpreting class action tolling only addressed successive individual claims brought by absent class members and did not address successive claims that were alleged on behalf of a class.

Applying American Pipe over the subsequent decades, lower courts divided over the question of whether a class action tolls class claims. Several courts of appeals ruled that class action tolling did not apply to later-filed, otherwise-untimely class action claims. However, other courts of appeals—including the Ninth Circuit in Resh—reached the opposite conclusion. The Ninth Circuit held that American Pipe’s underlying policy objectives justified extending class action tolling to piggyback class actions, meaning that a putative class member in one class action could wait until the first class was denied certification, and then file a second suit, making the same class allegations, without being barred by limitations. That second class action would then, under this theory, toll limitations again, so that defendants would potentially face a litany of copycat class actions.

In Resh, the plaintiff had done just that—he filed a securities fraud class action on the heels of two previous class action cases, raising the same class claims, where class certification had been denied on superiority, typicality, and adequacy grounds. While the two previous class actions had been timely filed within the two-year statute of limitations, the Resh plaintiff’s case was undisputedly filed after the two-year limitations had expired. The district court dismissed the piggyback class claims as untimely, and the Ninth Circuit reversed.

Recognizing the circuit split, the Supreme Court granted certiorari to address the question of whether “a putative class member, in lieu of promptly joining an existing suit or promptly filing an individual action, [may] commence a class action anew beyond the time allowed by the applicable statute of limitations.” And, in its June 11 opinion, the court unequivocally stated: “Our answer is no. . . . We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action. The ‘efficiency and economy of litigation’ that support tolling of individual claims, do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.”

A contrary rule, the court explained, would result in “limitless” piggyback class actions, where a denial of class certification in one class action would only lead to successive class actions, one stacked behind the other, with no end. The court further explained that its ruling in Resh will aid in the efficient and economical adjudication of class actions by encouraging any would-be class representatives to come forward early, before the limitations period expires, allowing district courts to make informed decisions in selecting class representatives and class counsel and in determining class certification, which would be “litigated once for all would-be class representatives.”

The Resh decision provides important protections for class action defendants. Under Resh, successfully defeating a class action no longer raises the specter of a hollow victory, where the defendant must litigate class claims over and over again, even when limitations has run. Now, the defendant can invoke the statute of limitations to defeat any subsequently filed, out-of-time class actions.

If you have any questions about the above you can contact us at darryl.anderson@nortonrosefulbright.com, dan.mcclure@nortonrosefulbright.com, geraldine.young@nortonrosefulbright.com or lauren.brogdon@nortonrosefulbright.com for more information.

UPDATE: No Room for Double Talk: The Ontario Court of Appeal Addresses Restatements, the Reasonable Investigation Defence and the Test for Leave in Rahimi v. SouthGobi Resources Ltd.

On May 31, 2018, the Supreme Court of Canada denied SouthGobi Resources Ltd.’s application for leave to appeal the decision of the Ontario Court of Appeal, which I provided an update on October 7, 2018.  The Court of Appeal decision provides guidance concerning the availability of the defence of reasonable investigation to a claim under Part XXIII.1 of the Ontario Securities Act  in the context of a restatement, and the test for leave to bring such a statutory claim.   

 

Still in Jeopardy: Supreme Court of Canada refuses leave to appeal BC Court of Appeal decision confirming that a Securities Commission financial penalty does not prevent being penalised in criminal fraud proceedings

This morning the Supreme Court of Canada refused leave to appeal[1] from the decision of the BC Court of Appeal in R. v. Samji[2], which confirms that the Charter does not preclude criminal proceedings where a defendant had already been ordered to pay penalties for fraud under the Securities Act.

Rashida Samji, a former licensed notary public, committed a $100 million fraud involving at least 200 investors through a Ponzi scheme she ran between 2003 and 2012. Proceedings were brought against her in front of both the BC Securities Commission (the Commission) and the BC Provincial Court arising out of this scheme.  The Commission ordered various penalties, including a $33 million administrative monetary penalty (AMP).[3]  The Court sentenced Samji to six months’ imprisonment and made restitutionary orders.

During her criminal trial Samji sought a stay on the basis that the criminal proceedings infringed her Charter rights.  The Provincial Court, upheld by the Court of Appeal, refused this application and found that the financial penalty did not prevent a criminal sanction for the same underlying wrong.  Since leave to appeal has been refused, this result will stand and all appeals of the stay refusal are now exhausted.

The Securities Act proceeding

The Commission undertook a regulatory proceeding in which it found that Samji had perpetrated a fraud contrary to s. 57(b) of the Securities Act, and ordered various penalties, including an AMP of $33 million, disgorgement of over $10 million, and that Samji be permanently banned from participating in BC’s capital markets.

The AMP was imposed under s. 162 of the Securities Act which provides that where the Commission considers it to be in the public interest it may order an AMP of “not more than $1 million for each contravention” of the Securities Act.  Although an AMP of over $100 million was sought based on the hundreds of contraventions, the Commission found that this would be punitive and inappropriate.  Instead, the Commission ordered an AMP of $33 million as an amount that it found reflected the seriousness of the misconduct and served “as a meaningful and substantial general deterrent to others who would engage in similar misconduct”.

Samji did not appeal the Commission’s decision.

The Criminal Trial

Around the same time, the Crown also laid criminal charges against Samji for theft and fraud relating to the same scheme, with the investigation focussed on 14 specific investors. The matter went to trial in 2016, which was after the Commission’s decisions.

Section 11 of the Charter provides that persons have a right not to be tried or punished twice for the same offence, often known as the rule against double jeopardy.  During her criminal trial Samji sought a stay on the basis that proceeding was contrary to this rule.  In an interim ruling,[4] the trial judge considered whether the criminal matter ought to be stayed on the basis that the AMP ordered by the Commission was a “true penal consequence”, such that Samji could not be punished again for the same wrongdoing.  The trial judge dismissed Samji’s application, finding that the AMP served a regulatory purpose and as such did not constitute a true penal consequence, so the Charter did not preclude the criminal proceeding.

Samji also challenged the criminal proceedings as amounting to an abuse of process contrary to s. 7 of the Charter.  The trial judge dismissed this challenge, finding that the criminal proceeding and regulatory proceeding considered two different offences, were tried by two separate and independent entities, and that the regulatory proceeding had not redressed Samji’s misconduct to society at large as the criminal proceeding was intended to do.

Samji was convicted of all counts of theft and fraud on the basis of an agreed statement of facts. The Court subsequently imposed a sentence of six years’ imprisonment for the fraud convictions, as well as restitution orders totalling over $10 million.[5]

The Appeal

The BC Court of Appeal upheld the trial judge’s determination that the regulatory proceeding and imposition of the AMP did not entitle Samji to a stay of the criminal proceedings. The Court also confirmed that the disgorgement order, the purpose of which is neither punitive nor compensatory as per Poonian, summarised previously, is not relevant to the consideration of whether the AMP is a true penal consequence.

Implications

While it may provide cold comfort to investors who are the victims of fraud, this decision confirms that the imposition of financial penalties by a regulatory body, which a wrongdoer may be unable to pay, will not permit them to escape possible criminal sanctions including imprisonment.

In refusing leave, the Supreme Court of Canada has endorsed the Court of Appeal’s finding that criminal sanctions were not precluded by the Commission’s imposition of an AMP.


[1] 37862 (May 31, 2018)

[2] 2017 BCCA 415

[3] 2014 BCSECCOM 186. 2015 BCSECCOM 29

[4] 2016 BCPC 145

[5] 2016 BCPC 301

Divisional Court confirms that interlocutory OSC orders not eligible for appeal, judicial review

In the recent decision of Cheng v Ontario Securities Commission, 2018 ONSC 2502, the Divisional Court held that an interlocutory order of the OSC was not subject to challenge through an appeal or judicial review.

Background

The OSC commenced enforcement proceedings against Benedict Cheng in April 2017 on allegations of insider tipping.  Cheng brought a preliminary motion seeking a stay of the proceeding or alternatively to exclude certain evidence during the hearing on the grounds of solicitor and client privilege.

OSC staff was in possession of the evidence of Mr. K, a lawyer.  Cheng alleged that he and Mr. K had been in a lawyer-client relationship such that documents authored by Mr. K were subject to solicitor and client privilege.  After a five-day hearing, the OSC dismissed the motion, finding that there was no lawyer-client relationship, and thus no privilege.

Cheng appealed that decision; when advised by OSC staff that he could not appeal an interlocutory order, Cheng commenced a judicial review on the same grounds.  The OSC moved to quash the appeal and judicial review.

Appeal dismissed as not being of a final decision

Appeals of OSC decisions are prescribed by s. 9(1) of the Securities Act :

9 (1) A person or company directly affected by a final decision of the Commission, other than a decision under section 74, may appeal to the Divisional Court within thirty days after the later of the making of the final decision or the issuing of the reasons for the final decision.

Cheng argued that, because the motion decision determined his substantive rights, it was a final decision.  He relied on jurisprudence in the context of cases determining the appropriate route of appeal, which often turn on whether a decision is final or interlocutory, and a ruling from the Court of Appeal for Ontario in which it was held that an order depriving a party of a substantive right that could be determinative of the action is a final order.

The Divisional Court disagreed with this approach, relying on prior rulings in which the distinction between final and interlocutory orders from civil courts was not applied to administrative proceedings.  Motivated by policy reasons, the Court reiterated its reasons from Law Society of Upper Canada v Piersanti 2018 ONSC 640 in observing that “the hearing process would soon grind to a halt if mid-hearing rulings were generally subject to immediate appeal.”[1]  The Court also declined Cheng’s argument that there should be a special carve-out to this principle for determination of a solicitor-client privilege issue.

For these reasons, the appeal was quashed for want of jurisdiction.

Judicial review quashed as premature and not giving rise to exceptional circumstances

Cheng’s judicial review application was also quashed on largely policy grounds.

The Court held that the facts of the case were not so rare that early intervention was required for risk of manifest unfairness to the proceedings.  This view appears to have been informed by an interest in expeditious administrative proceedings:  “[i]ndeed, if Mr. Cheng’s argument were accepted, it would open the way for numerous efforts to review evidentiary rulings rejecting a claim of solicitor and client privilege, with the resulting fragmentation and delay of administrative proceeding that the doctrine of prematurity seeks to avoid”.[2]

The Court declined to exercise its discretion to hear a premature application for judicial review.

This ruling confirms the Court’s intention to allow administrative tribunals to resolve cases expeditiously and finally before their decisions come under judicial scrutiny.  Tribunal litigants faced with adverse decisions on a preliminary issue should be advised that Courts will likely prefer to have the tribunal process run its course before considering intervention.

 

The author would like to thank Shirley Wong, Student-At-Law, for her contribution to this article.

 


[1] Cheng at para 13, citing Piersanti at para 17 and Law Society of Upper Canada v. Paul Alexander Robson, 2013 ONLSAP 0003 at para 31.

[2] Cheng at para 30.

Ontario Court Rejects “Family Resemblance” Test for Defining Securities under the Securities Act

On May 15, 2018, the Ontario Superior Court of Justice in Ontario Securities Commission v. Tiffin confirmed that the “family resemblance” test cannot be used to answer one of the central questions of securities law: what constitutes a security?

Background

In July 2014, the Ontario Securities Commission (OSC) prohibited Mr. Tiffin from trading in securities or relying upon any exemption under Ontario securities law. Mr. Tiffin subsequently issued fourteen promissory notes on behalf of his company, Tiffin Financial Corporation (TFC), to six clients.  As a result, Mr. Tiffin and TFC were charged with breaches of s.122(1)(c) of the Securities Act (the Act) and stood trial before Kenkel, J of the Ontario Court of Justice.

As we discussed in a prior post, the question before Kenkel, J was whether the promissory notes fell within the definition of a “security” under the Act.  In finding that the notes were not “securities”, Kenkel, J cautioned against a literal interpretation of the term, holding that such an approach in Mr. Tiffin’s case would conflict with the purposes of the Act.  Kenkel, J held that exemptions may be found outside the legislative scheme of the Act and accordingly adopted the “family resemblance” test established by the United States Supreme Court in the case of Reves v. Ernst & Young[1].  The family resemblance test presumes that a note is a security unless it bears a strong resemblance to an instrument falling within a enumerated list of categories.  In applying the test, the charges against Mr. Tiffin and TFC were dismissed.

Ontario Superior Court of Justice Allows Appeal

On appeal, Charney, J of the Ontario Superior Court of Justice held that Kenkel, J erred in law. Because the term “security” is defined in the Act, the court held that importing the family resemblance test was unnecessary and undesirable. The court found that the legislature’s deliberate decision to “cast the net wide” in its definition of the term “security” is consistent with the remedial purpose of the Act as it protects vulnerable members of society.

Charney, J disagreed with Kenkel, J’s interpretation of British Columbia (Securities Commission) v. Gill[2], holding that in Gill the BCCA did not “adopt and apply” the family resemblance test to determine whether the instrument was a security; it applied the test to support the reasonableness of the Commission’s decision. Instead, Charney, J relied on the Alberta Court of Appeal’s recent decision in R. v. Stevenson which rejected the family resemblance test, refusing to create exemptions not otherwise found in the statute.[3]

Ultimately, Charney, J allowed the appeal and held that the TFC promissory notes were “notes or other evidence of indebtedness” and were therefore “securities” within the meaning of the Act.

 

The author would like to thank Samantha Black, Summer Student, for her contribution to this article.


[1] Reves v Ernst & Young, 494 US 56, 58 USLW 4208 (1990).

[2] British Columbia (Securities Commission) v Gill, 2003 BCCA 169, (CanLII).

[3] R. v Stevenson, 2017 ABCA 420, (CanLII).

OSC Panel Approves Settlement Agreement for Insider Tipping Without Profit Disgorgement or Administrative Penalty

The Ontario Securities Commission’s recent decision in Re Hutchinson confirmed the important role of cooperation with Commission Staff in reducing sanctions for breaches of Ontario’s securities law.

Background

Donna Hutchinson worked as a legal assistant at a large Toronto law firm, assisting with merger and acquisition transactions. Through the course of her work, Ms. Hutchinson routinely gained access to non-public, confidential information regarding certain transactions. Ms. Hutchinson was alleged to have knowingly provided non-public information about six transactions to Cameron Cornish, another respondent in the proceeding, in violation of section 76(2) of the Ontario Securities Act, which prohibits insider tipping.

A Panel of the Ontario Securities Commission (the Panel) accepted a settlement agreement (the Agreement) reached between Donna Hutchinson and the Commission Staff which provided for a number of sanctions but notably excluded disgorgement of profits or administrative penalties.  Neither Mr. Cornish nor any of the other respondents were party to the Agreement.

Analysis

The Panel noted that Ms. Hutchinson’s breaches of Ontario securities law were serious and could contribute to a lack of confidence in and cynicism towards the fairness of public markets. Although Ms. Hutchinson did not herself trade on the information, her tipping actions were sufficient to undermine public confidence in capital markets.

However, in accepting the Agreement, the Panel identified a number of mitigating factors:

  • Ms. Hutchinson’s acknowledgement of her involvement in the matter saved the Commission from having to expend further resources to establish her liability. The Panel also noted that there was some evidence of remorse on Ms. Hutchinson’s part;
  • Ms. Hutchinson’s employment was terminated, leaving her with extremely limited future career prospects in the legal industry and limited means to pay monetary sanctions;
  • In contrast to the larger profits made by other respondents in the proceeding, Ms. Hutchinson received relatively small profits as a result of her misconduct;
  • Ms. Hutchinson had no prior record of breaching Ontario securities law;
  • Ms. Hutchinson was not and had never been a registrant; and
  • Ms. Hutchinson had been manipulated by an experienced trader.  Based on these mitigating factors, the Panel held that the reduced sanctions proposed under the Agreement aligned with the policy objectives of the Revised Credit for Cooperation Program to promote self-policing, self-reporting, and self-correction by market participants of potential breaches or other conduct contrary to the public interest.
  • The sanctions against Ms. Hutchinson included a reprimand, mandatory resignation from any directorship or officer positions held by her, and time-limited prohibitions on trading, acquisition of securities, registration under the Act, or acting as an officer or director of any issuer, registrant, or investment fund manager.
  • In addition, the Panel emphasized Ms. Hutchinson’s cooperation with Staff, identifying it as a significant mitigating factor.  In March 2014, the Commission published Staff Notice 15-702, “Revised Credit for Cooperation Program” to encourage market participants to cooperate with Commission Staff in exchange for “Credit” in the form of narrower allegations, limited enforcement, reduced sanctions, and/or settlement. Ms. Hutchinson agreed to cooperate with Staff in its investigation of the other respondents and to testify against them in any future proceedings. Given that insider tipping cases tend to be difficult to prove and usually rely on circumstantial evidence, the Panel noted that Ms. Hutchinson’s direct evidence in the matter would be valuable in the proceedings against the other respondents.

Trends

Re Hutchinson is note-worthy because the sanctions against Ms. Hutchinson excluded disgorgement of profits and administrative penalties, which usually form part of the sanctions for insider tipping.  This decision stands in contrast to Cheng, Benedict et al, 2017 ONSEC 14, another insider tipping decision that imposed sanctions including disgorgement of profits and an administrative penalty in the amount of $5,500.  In differentiating between the conduct of Ms. Hutchinson and Mr. Rothstein, it appears the Panel placed significant weight on Ms. Hutchinson’s cooperation and her testimony against the other respondents.  While the Panel did suggest that its findings would be limited to the circumstances of this decision, it may open the door to future arguments that deterrence may be served, even with reduced sanctions.

 

The author would like to thank Kassandra Shortt, student-at-law, for her contribution to this article.

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