Stung By Deceit: Re Natural Bee Works Apiaries Inc.

On July 3, 2019 the Ontario Securities Commission (“OSC”) released its decision in Re Natural Bee Works Apiaries Inc., 2019 ONSEC 23 (“Natural Bee”).   Natural Bee provides useful guidance concerning proof of falsity and participation in a fraudulent scheme under section 126.1(1) of the Ontario Securities Act (the “Act”).

Background

In Natural Bee, OSC Staff alleged that Natural Bee Works Apiaries Inc. (“NBW”), Rinaldo Landucci (“Landucci”), its sole director, and Tawlia Chickalo (“Chickalo”), an employee of NBW who was at one point identified as its President, committed breaches of the Act including engaging in a course of conduct relating to securities that they knew or ought reasonably to have known perpetrated a fraud, and making misleading statements in marketing materials.  In addition, Chickalo was alleged to have traded securities of NBW without registration and without a prospectus or a prospectus exemption.

OSC Findings

At the conclusion of a six day hearing, the Hearing Panel (the “Panel”) determined that Staff had succeeded in proving all of its allegations.

Chikalo was found to have sold shares of NBW, a company “apparently” engaged in the sale of bee-related products, to friends and persons to whom she had sold beeswax candles.  Chickalo prepared marketing materials designed to induce persons to invest in shares of NBW which repeated false information that had been provided to her by Landucci.  Chickalo undertook no inquiries whatsoever into the veracity of those  statements, which were characterized by the Hearing Panel as involving “extravagant deceit”.  Further, funds from the sale of the shares totaling $291,250 were transferred to bank accounts controlled by the respondents.  Most of that money was used for personal expenditures or withdrawn in cash.

The decision is noteworthy for three reasons.

First, the Panel concluded that even though Staff did not adduce evidence to refute the truth of statements made in the NBW marketing material, for example that NBW would be launching on NASDAQ with a “lowest launch value” of $4 a share, it was open to draw an inference that the statements were false.  Applying its expertise as a specialized securities tribunal, the Panel concluded that the claims were “baseless”.  Further, no evidence was submitted by the respondents to support the truth of the statements.

Second, the Panel found that Chickalo had breached the fraud provision of the Act on the basis of willful blindness and/or recklessness.  In this case, Landucci made false statements to Chickalo in order to lure her into repeating such statements to investors in the course of her capital-raising role.  Although Chickalo lacked actual knowledge of Landucci’s fraudulent scheme, she was willfully blind about whether Landucci’s statements were true.  Chickalo simply accepted them at face value and composed detailed solicitation materials that reflected these false claims that were designed to make investing in NBW seem like a “sure bet”.  The Panel concluded that Chickalo reasonably ought to have known that these statements were false and thereby found that she had participated in the fraudulent scheme.

Finally, relying upon prior OSC decisions, the Panel applied the “Kienapple” principle which stands for the proposition that the same misconduct should not form a basis for separate overlapping contraventions.  The Panel determined that the principle applied equally in the OSC’s securities regulatory context and declined to find violations of other provisions of the Act given its finding of fraud.

Sanctions

The OSC released its decision on sanctions and costs on September 25, 2019.  Pursuant to 127(1) of the Act, the OSC ordered that the respondents:

(a) cease trading or acquiring any securities or derivatives (with a few exceptions);

(b) pay an administrative penalty of $650,000 to the OSC ($150,000 to be paid by Chickalo);

(c) disgorge $267,203 to the OSC ($32,281 to be disgorged by Chickalo); and

(d) pay $267,806.59 in costs to the OSC ($80,341.98 to be paid by Chickalo).

The OSC Panel did not view Chickalo’s lack of actual knowledge or self-proclaimed “inexperience in capital-raising activities” as a substantial mitigating factor.  Chickalo had played a “supporting but significant” role in Landucci’s fraudulent scheme.  The apportionment of the monetary sanctions was reflective of that sentiment.

Takeaways

  • In appropriate circumstances, the OSC will rely upon its specialized expertise to draw inferences from the evidence even in the absence of proof of a particular fact.
  • Reckless or willfully blind conduct may be sufficient to establish a breach of the fraud provision of the Act.
  • The Kienapple principle may apply in the securities regulatory context such that the same misconduct does not form the basis for separate overlapping contraventions.

 

The authors would like to thank Jessica Silverman, articling student, for her contribution to this article.

Alberta Securities Commission secures restitution for Lutheran Church congregants

Two ordained ministers are among the five named individual Respondents who have settled with the Alberta Securities Commission (the Commission) in Re Lutheran Church-Canada, the Alberta-British Columbia District, 2019 ABASC 140.  The individual Respondents were all involved in investment funds run by the Lutheran Church-Canada, Alberta-British Columbia District (the District), which became insolvent in 2015.  The individual Respondents admitted that they authorized statements in promotional literature from 2008 to 2014 about the investment funds that they knew or ought to have known were misleading contrary to section 92(4.1) of the Alberta Securities Act (the Act).

The Funds

The District operated two funds, the Church Extension Fund and the District Investment Fund (collectively, the Funds), which were used to help build schools and churches.  The Church Extension Fund was used by the District to invest in “faith-based developments”.  The District Investment Fund offered its investors registered investments, which provided tax efficiencies though RRSP, RRIF and TFSA accounts.

In the 1990s, the District began loaning substantial amounts of money to support the development of a large seniors’ housing complex.  In 2005, the District incorporated EnCharis Community Housing and Services (ECHS) to hold and manage this development.  By 2009, approximately $49 million of the approximately $78.8 million raised in the Church Extension Fund was loaned in ECHS.  However, the ECHS was experiencing substantial financial difficulties.  In 2015, the financial difficulties faced by ECHS resulted in insolvency for itself and for the Funds.

Misleading Investors

The District continued to promote the Funds by emphasizing, among others, the “partnership between investors and congregations to share the Good News of Jesus Christ”.  The Respondents failed to inform investors that a substantial portion of the Funds was invested in mortgages with the ECHS and that the ECHS had defaulted on its principal payments in 2007, 2008 and 2009.  The District also received an auditor’s opinion in 2012, which stated that certain assets were overvalued and that an impairment write-down was necessary in respect of the District’s financial statements.  However, the District did not inform investors of the opinion until 2014.  Despite knowing the financial difficulties that the Funds faced, the District only stopped soliciting new investments in March 2014, mere months before the Funds collapsed into insolvency.

The Settlement

The District and the District Investment Fund admitted to making statements which they knew or ought to have known did not state all of the facts required to be stated to make the statements not misleading in violation of section 92(4.1) of the Act.  The individual Respondents each, as a consequence of his position on the Board, with the District, and with the District Investment Fund, authorized, permitted, or acquiesced in the above-noted breach of the Act.

On September 11, 2019, the individual Respondents agreed to pay a total of $500,000 to investors (the Settlement Funds) and $100,000 to the Commission for costs.  The Settlement Funds will be distributed to investors through the same distribution scheme which was imposed on the District in a parallel Companies’ Creditors Arrangement Act proceeding.  The Settlement Funds will help make up for the anticipated shortfall from the District’s CCAA proceeding of around $27 million.

Further, the individual Respondents and the District undertook to permanently refrain from trading in or purchasing securities; acting as a registrant, investment fund manager or promoter; advising in securities or exchange contracts; and acting in a management or consultative capacity in connection with activities in the securities market.

Some of the investors were unsophisticated congregants investing for retirement.  Settlements such as this are necessary to remind those involved in securities that there is a high standard for timely and accurate disclosure, regardless of context.

The authors would like to thank Tom Sutherland, articling student, for his contribution to this article. 

Alberta Court of Appeal considers an investment scheme

The Alberta Court of Appeal has provided helpful analysis relating to personal liability of actors in investment schemes: personal liability of principals and claims under the Securities Act.

Facts

Charles Ryan promoted a plan to develop land through various corporate vehicles. Markus Abt invested $800,000 after speaking with an investment advisor with Sun Life. Mr. Abt believed he would receive 70% return on the investment and monthly payments of $2,600.

When the developer corporation became insolvent, the Abts sued numerous people involved in the investment. Prior to trial, the Abts settled with Sun Life for $360,000.

The trial judge found Mr. Ryan and several other defendants liable for the Abts’ losses. The trial judge held that Mr. Ryan was liable for negligent misrepresentation. Mr. Ryan appealed.

Personal liability for corporate acts

While the trial judge found Mr. Ryan should be personally liable in tort for negligent misrepresentation, the Court of Appeal did not find it necessary to come to a “definitive conclusion” on this issue. However, the Court of Appeal noted that the “circumstances here may well be sufficient” to meet the test for Mr. Ryan’s personal liability.

The circumstances under which a corporate officer will be personally liable for the corporation’s misrepresentations is noted in Blacklaws v. Morrow, 2000 ABCA 175: are the individual director’s actions “themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own”.

The court found that the circumstances may be sufficient to indicate that Mr. Ryan was acting in his personal interest, separate from the corporation, based upon the following factors:

  • Significant amounts of the funds raised were used to pay the “straw mortgages” to the Ryan corporations.
  • Ryan had organized the corporate structure so that he acquired for a nominal consideration all the “B” units, which were entitled to 35% of the venture’s profits.
  • Ryan was actively involved in helping the Abts’ investment advisor close the transaction with the Abts. He agreed to provide collateral security for the investment by pledging land that he owned.

The Securities Act claim

Since the trial judge found Mr. Ryan liable at common law, he declined to “unpack” the Abts’ Securities Act claim, but concluded the Abts had not proven a Securities Act violation. However, the Court of Appeal found Mr. Ryan liable under the Securities Act.

The Abts alleged that Mr. Ryan breached section 204(1) of the Securities Act, which provided that security purchasers have a right of action for misrepresentation in a prescribed offering document. The offering memorandum used by Mr. Ryan was missing certain required disclosures, such as an independent appraisal disclosing the market value of the real property. While there was no overt misrepresentation on the form, the court held that Mr. Ryan’s failure to disclose material facts constituted a misrepresentation, and held Mr. Ryan personally liable.

In defence, Mr. Ryan relied on the statutory cap on damages in section 204(4) of the Securities Act. Mr. Ryan argued that the Abts could recover the principal amount of the investment but not the 4% compound interest awarded by the trial judge. The Court of Appeal found that section 204(4) may not bar a claim for interest between the date the cause of action arose until judgment. Further, the court held that it did not need to come to a decision on this issue. The Abts had settled with Sun Life prior to trial, and the Court of Appeal found that the Abts “were entitled to allocate the settlement amount paid by Sun Life on any reasonable basis.” The Abts could treat the Sun Life settlement as payment of the interest the trial judge awarded.

Mr. Ryan further relied upon the 180‑day limitation period set out in section 211, arguing that the Abts knew of the claim earlier than March 15, 2012. The court held that the Abts’ earliest warning about their investment occurred in late 2011, when their accountant grew concerned. The accountant expressed further concerns in February 2012. Mr. Abt attempted to take up Mr. Ryan’s previous offer to buy back his units, but Mr. Ryan stopped communicating and Mr. Abt resolved to consult a lawyer by March 28, 2012. The court held that while the accountant had serious reservations about the investment by March 15, 2012, there was no evidence that he or Mr. Abt knew about the misrepresentation by that point.

Take-aways

The Court of Appeal has confirmed the appropriate legal framework for considering claims personally against the principals of investments schemes. Regarding personal liability for misrepresentation, the court examined the true circumstances of the transaction. On the matter of the claim under the Securities Act, the Court of Appeal held that an omission to state material facts can ground liability under the legislation. Further, the court adopted a pragmatic approach to the defences of limitations of liability and limitation periods, in a manner that appreciates the unique challenges of an investment scheme victim.

Alberta Securities Commission signs Enhanced Memorandum of Understanding to strengthen cross-border enforcement cooperation

In July 2019, the Alberta Securities Commission (ASC) joined other signatories, including the Ontario Securities Commission and the United States Securities and Exchange Commission (SEC), by signing the International Organization of Securities Commissions’ (IOSCO) Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU).

This step by the ASC reflects an ongoing increase in cooperation among Canadian and foreign securities regulators in the context of increasingly globalized capital markets.

IOSCO

IOSCO was established in 1983 when 11 securities regulators from North and South America agreed to build their inter-American association into an international body.  It was incorporated as a not-for-profit entity in Quebec in 1987, and moved to Spain in 1999.

According to IOSCO, it is “the international body that brings together the world’s securities regulators and is recognized as the global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda.”

In 1998, IOSCO adopted the Objectives and Principles of Securities Regulation which it says are “now recognized as the international regulatory benchmarks for all securities markets”.

In 2002, IOSCO adopted a Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (2002 MMoU) which was aimed at facilitating cross-border enforcement and the exchange of information among international securities regulators.

Subsequently, it was concluded that increases in globalisation and the interconnectedness of financial markets, as well as advancements in technology “changed the way that the securities and derivatives industry operates and how violations of securities and derivatives laws occur. The lessons of the global financial crisis, and the experience gained by the signatories to the 2002 MMoU have made clear that it is critical to enhance information sharing and cooperation between IOSCO members: to keep pace with technological, societal and market developments; to bolster deterrence; and to ensure that IOSCO continues to meet its objectives.” Accordingly, in 2016, IOSCO adopted the EMMoU, which is aimed at enhancing cooperation in this new environment.

EMMoU

The EMMoU focuses on mutual assistance and the exchange of information for the purpose of enforcing and securing compliance with local securities laws.  It is not intended to create legally binding obligations or to supersede those laws.

The EMMoU provides a procedure for requests for assistance and responses to such requests.  Article 6 of the EMMoU limits the use by which the “Requesting Authority” may make of non-public information provided in response to requests for assistance.  Article 7 provides for confidentiality.

According to the ASC, the “EMMoU is focused on safeguarding market integrity and stability, protecting investors and deterring misconduct and fraud in the capital markets.  It fosters greater enforcement cooperation and assistance among securities regulators and provides the fullest assistance permissible in order to increase the effectiveness of investigations.”

Validity of EMMoU under Canadian law

We are not aware of any reported Canadian decisions which specifically consider the EMMoU.  Existing jurisprudence suggests that Canadian courts would support its validity.

Global Securities

In 2000, the Supreme Court of Canada in Global Securities v. B.C. (Sec. Comm.)[1] considered a memorandum of understanding entered between the British Columbia Securities Commission (BCSC) and the SEC pursuant to which the parties agreed to provide the “fullest mutual assistance”, including the sharing of documents and the taking of evidence when requested by another signatory.  During the same year of the memorandum of understanding, British Columbia had amended its Securities Act to authorize the Executive Director to order a registrant to produce records “to assist in the administration of the securities laws of another jurisdiction”.  In the case at hand, the BCSC had made a disclosure order against the respondent pursuant to a request from the SEC in furtherance of an SEC investigation.  The respondent provided only some of the requested documents, and the BCSC issued a notice of hearing to determine whether it was in the public interest to order the respondent to produce the balance.  The respondent then filed a petition seeking a declaration that the new provision of the Act was ultra vires the province.  The petition was dismissed at first instance, but granted on appeal.

The Supreme Court of Canada allowed the appeal of the BCSC, holding that the provision was intra vires.  The Court found that the dominant purpose of the provision was the enforcement of British Columbia’s securities laws.  The provision furthered that goal in two ways.  First, it regulated the intraprovincial securities market, which often required access to records outside the province.  If the BCSC was to expect cooperation from other regulators, it must reciprocate.  Second, it would likely help uncover misconduct abroad by domestic registrants.

Beaudette

In 2015, the Court of Appeal of Alberta in Beaudette v. Alberta (Securities Commission)[2] considered s. 46 of the Alberta Securities Act which allows the Executive Director of the ASC to share information with “law enforcement agencies and other governmental or regulatory authorities in Canada and elsewhere” if the Executive Director considers that “it would not be prejudicial to the public interest to do so.”  The appellant challenged the constitutionality of s. 46 when considered with s. 41 of the Act which gives the ASC authority to compel evidence as part of an investigation, arguing that the possibility of the ASC sharing compelled evidence with other regulators such as the SEC infringed his right to liberty and his protection from unreasonable search and seizure under the Charter.

The Court was quick to reject the search and seizure argument, finding that the appellant had a low expectation of privacy regarding knowledge or records relating to his public trading in the capital markets.

The Court also rejected the argument regarding the right to liberty, finding, among other things, that the appellant’s assertion that compelled evidence would somehow be unlawfully shared with the SEC was not evidence that this was likely to happen.  The Court found that the liberty interest is engaged “where state compulsions or prohibitions affect important and fundamental life choices”, but that “[s]uch choices do not include the election to participate in a highly regulated industry, with its necessarily attendant regulatory rules and consequences thereof.”  Further, the Securities Act authorizes investigation into possible fraud in the capital markets, but it is not “in service of the criminal law”.

Conclusion

The ASC’s signature of the EMMoU reflects a clear intention to foster greater enforcement cooperation and assistance with other securities regulators with a view to increasing the effectiveness of investigations in the context of a global capital market.

 

—————–

[1] [2000] 1 S.C.R.

[2] 2016 ABCA 9. Leave to appeal refused: [2016] S.C.C.A. No. 97.

Ontario Securities Commission v York Rio Resources Inc.: Enforcing OSC Orders as Court Judgments outside of Ontario

On May 21, 2019, in Ontario Securities Commission v York Rio Resources Inc., 2019 BCSC 776,  the British Columbia Supreme Court (BCSC) enforced Ontario Securities Commission (OSC) disgorgement orders as court judgments from another province.

Background

A joint investigation was conducted by the OSC and the British Columbia Securities Commission (BC Commission) into an $18.2 million fraudulent investment scheme.  On March 25, 2013, a panel of the OSC found that Mr. York, Mr. Runic, Mr. Schwartz, and the companies they controlled had committed a fraud, and on March 31, 2014, the OSC issued a $9.2 million disgorgement order.  In this petition, the OSC sought payment of funds held by the BCSC under freeze orders issued by the BC Commission to satisfy the disgorgement order.  Mr. Koch, who provided accounting services to Mr. Runic, opposed the OSC’s petition to have the funds released to it on the basis that the OSC, among others, did not prove its entitlement to the disputed funds.

Enforcement of the OSC’s Orders

Unlike an ordinary creditor, the OSC is not required to prove its entitlement to the funds. Rather, by virtue of s. 151(1) of the Ontario Securities Act, a decision of the OSC is deemed to be an order of the Ontario Superior Court of Justice (ONSC) upon registration.  Since BC comity legislation allows judgments of other provinces to be registered in the BCSC, the OSC decision, once registered with the ONSC was enforceable as if it were an order of the BCSC.  As a result, the BCSC held that “[a]ny quarrel Mr. Koch had with the Merits Decision or Sanctions Decision should have been raised in Ontario and cannot be collaterally attacked in this Court”.

Constructive Trust

Mr. Koch also argued that his previous services entitled him to repayment of costs and fees, relying on Supreme Court of Canada decisions Garland v. Consumers’ Gas Co and Pettkus v. Becker. In his view, establishing a constructive trust would place him in priority over payments to the OSC because as a proprietary remedy, trust property that would otherwise be available to the OSC would be directly removed from the estate in favour of the trust. However, Mr. Koch failed to provide adequate evidence of unjust enrichment or that a constructive trust would be an appropriate remedy. Accordingly, the BCSC found that he did not have any proprietary interest in the money through constructive trust.

Takeaway

OSC disgorgement orders, once registered with the ONSC, are directly enforceable by the BCSC.

 

The author would like to thank Shahroz Ahmad and Vahini Sathiamoorthy, Summer Students, for their contribution to this article.

Liability Rumblings Along the Blockchain

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

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:

  1. The Appellants permanently cease trading or acquiring securities;
  2. 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
  3. 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

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

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

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.

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