Copy and Paste Securities Fraud? The U.S. Supreme Court to Decide

Last month, the U.S. Supreme Court granted certiorari to hear a case where an investment banker copied and pasted misstatements from his boss into emails that, at his boss’s request, he sent to prospective debenture purchasers.  In Lorenzo v. Securities and Exchange Commission, 872 F.3d 578 (D.C. Cir. 2017), a divided United States Court of Appeals for the District of Columbia held that the investment banker was not the “maker” of the misstatements, but nevertheless affirmed the SEC’s determination that he committed securities fraud under a fraudulent scheme theory.  The Supreme Court will thus be faced with the dichotomy of whether an individual can be held liable for fraudulent scheme liability when transmitting a statement that he did not “make” (i.e., the statement was attributed to another person).


In Lorenzo, Francis Lorenzo was director of investment banking at a small registered broker dealer.  Although he knew that Waste2Energy Holdings, Inc. (“W2E”) had issued a Form 8-K reporting an impairment that essentially reduced the value of its intangible assets (previously valued at $10 million) to zero, he omitted the devaluation when soliciting two potential investors by email to invest in debentures for W2E.  Lorenzo sent those emails at the request of his boss, stated in the emails that the messages were being sent at the request of his boss, and copied and pasted the content in the emails to the potential investors from an email that he received from his boss.  However, Lorenzo signed the emails with his name and title and indicated that investors could call him with questions.

Fraudulent Statements and Fraudulent Schemes

As background, the antifraud provisions of federal securities laws prohibit two well-defined categories of misconduct in connection with the offer and sale of securities:  fraudulent statements and fraudulent schemes.

Regarding fraudulent statements, Rule 10b-5(b), promulgated under Section 10(b) of the 1934 Securities Exchange Act (“Exchange Act”), prohibits making any “untrue statement of a material fact.”  The SEC also can avail itself of Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”), which establishes liability for untrue statements or omissions of a material fact.

In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), the Supreme Court held that only the “maker” of a fraudulent statement may be held liable under Rule 10b-5.  According to Janus,

“[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.  Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.  One who prepares or publishes a statement on behalf of another is not its maker.”

Janus, 564 U.S. at 142.

With respect to fraudulent schemes, Rule 10b-5(a) prohibits the employment of “any device, scheme, or artifice to defraud.”  Relatedly, Rule 10b-5(c) prohibits anyone from engaging in “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”  Claims that are brought under Rules 10b-5(a) and (c) are referred to as “scheme liability” claims.  The SEC can also avail itself of this theory under Section 17(a)(1) of the Securities Act, which prohibits the employment of any “device, scheme, or artifice to defraud.”

The Lorenzo Action

In Lorenzo, the SEC initiated administrative proceedings and upheld an administrative law judge’s determination that Lorenzo was liable for making fraudulent statements under Section 10(b) and Rule 10b-5(b), as well as fraudulent scheme liability under Rules 10b-5(a) and (c) and Section 17(a)(1).

Lorenzo appealed the SEC’s decision to the United States Court of Appeals for the District of Columbia.  The D.C. Circuit rejected the SEC’s finding of Rule 10b-5(b) liability on grounds that Lorenzo was not the “maker” of the false statements in the emails he sent to the potential investors.  However, the D.C. Circuit—in a 2-1 decision—sustained the SEC’s finding that Lorenzo violated the fraudulent scheme provisions under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c).

Writing for the majority, Judge Srinivasan wrote that,

“[a]t least in the circumstances of this case, in which Lorenzo produced email messages containing false statements and sent them directly to potential investors expressly in his capacity as head of the Investment Banking Division—and did so with scienter—he can be found to have infringed Section 10(b), Rules 10b-5(a) and (c), and Section 17(a)(1), regardless of whether he was the ‘maker’ of the false statements for purposes of Rule 10b-5(b).”

Lorenzo, 872 F.3d at 588-589.

The majority reasoned that (1) unlike Rule 10b-5(b), Rules 10b‑5(a) and (c), along with Sections 10(b) and 17(a)(1), do not speak in terms of an individual’s “making” a false statement; (2) Lorenzo’s actions do not implicate concerns of overextending the reach of Rule 10b-5 as expressed in Janus and in other Supreme Court decisions that eliminated aiding and abetting liability in private securities fraud actions because here Lorenzo transmitted the misinformation directly to investors and Lorenzo’s involvement was transparent; and (3) Rule 10b-5(b) on the one hand, and Rules 10b-5(a) and (c) on the other, are not mutually exclusive and false statements may overlap in liability under such rules.

Judge Kavanaugh, who has been nominated by President Trump to fill the vacancy on the Supreme Court created by Justice Kennedy’s retirement, lodged a highly critical dissent.  He first criticized the administrative law proceeding and the SEC’s decision to uphold its liability findings as containing irregularities violating Lorenzo’s due process rights, and he stated the majority opinion’s deference to the SEC was unwarranted in these circumstances.  Judge Kavanaugh also cited several federal appellate decisions for the notion that “scheme liability must be based on conduct that goes beyond a defendant’s role in preparing mere misstatements or omissions made by others.”  Id. at 600.

Judge Kavanaugh further emphasized that the SEC’s pursuit of Lorenzo was part of a long-standing effort to blur the distinction between primary and secondary liability matters (which is significant for private securities lawsuits, where aiding and abetting—i.e., secondary liability—is barred).  As Judge Kavanaugh stated,

The distinction between primary and secondary liability matters, particularly for private securities lawsuits.  For decades, however, the SEC has tried to erase that distinction so as to expand the scope of primary liability under the securities laws.  For decades, the Supreme Court has pushed back hard against the SEC’s attempts to unilaterally rewrite the law. Still undeterred in the wake of that body of Supreme Court precedent, the SEC has continued to push the envelope and has tried to circumvent those Supreme Court decisions.  This case is merely the latest example.

I agree with the other courts that have rejected the SEC’s persistent efforts to end‑run the Supreme Court.  I therefore respectfully disagree with the majority opinion that Lorenzo’s role in forwarding the alleged misstatements made by Lorenzo’s boss can be the basis for scheme liability against Lorenzo.

Id. at 600-601 (internal citations omitted).


Although Lorenzo involved an SEC enforcement action and on the surface may appear to address a highly technical question, the Supreme Court’s decision may have a large impact on private securities actions.  Holding an individual liable for securities fraud for transmitting a statement he did not “make” may, in some circles, be seen as merely aiding and abetting a Rule 10b-5(b) fraudulent misstatement violation, constituting secondary liability.  However, if such conduct falls into “scheme” liability under Rules 10b-5(a) and (c), the individual would now be a primary actor and liability may be established in a private securities action.

The securities litigation bar will await the Supreme Court’s decision, which will be handed down in 2019.  If Judge Kavanaugh is confirmed by the Senate and joins the Supreme Court, he would be expected to recuse himself when the Supreme Court hears the Lorenzo case.  Accordingly, there is a possibility we could see a 4-4 split among the remaining Justices, resulting in the Supreme Court affirming the D.C. Circuit’s decision without opinion.


U.S. Supreme Court Holds SEC Administrative Law Judges Improperly Appointed

On June 21, 2018, the U.S. Supreme Court ruled that administrative law judges (ALJs) at the U.S. Securities and Exchange Commission (SEC) had been improperly appointed because they qualified as “Officers of the United States” under the “Appointments Clause” of the U.S. Constitution, who under the Constitution may be appointed only by the President, a court of law, or heads of departments.  Lucia v. SEC, No. 17-130Because the SEC’s ALJs had been selected merely by SEC staff, the Court held that they had not been lawfully appointed and therefore lacked constitutional authority to issue sanctions and penalties against the petitioner.

The Case

In Lucia, the SEC had commenced an administrative proceeding against the petitioner Raymond Lucia and his investment company under the Investment Advisors Act for allegedly deceiving prospective clients.  In recent years, such SEC enforcement actions increasingly been brought through such administrative proceedings rather through court actions.  The ALJ assigned to the case issued a decision concluding that Lucia had violated the Investment Advisors Act and imposed sanctions, including civil penalties of $300,000 and a lifetime ban from the investment industry.  Lucia argued that the proceedings were invalid because the ALJ had not been properly appointed under the Appointments Clause and therefore unconstitutionally adjudicated the case.  While both the SEC and the U.S. Court of Appeals in Washington, D.C. rejected Lucia’s argument, the Supreme Court agreed with Lucia and reversed in a 7-2 ruling.

The Court’s ruling viewed SEC ALJs as analogous to special trial judges (STJs) of the United States Tax Court, who in the 1991 Supreme Court case Freytag v. Commissioner were held to be “Officers” subject to the requirements of the “Appointments Clause.”  The Court noted that like the Tax Court’s STJs, the SEC’s ALJs occupy a “continuing position established by law,” have “significant authority” under federal statutes and exercise the same “significant discretion” in carrying out similar “important functions.”  While appointment by the full SEC would satisfy the constitutional requirement for an “Officer” to be appointed by the head of a department, the ALJ in Lucia was selected only by SEC staff members.  Accordingly, his appointment was held unconstitutional.  Two dissenting judges argued that the full SEC’s ability to review ALJ rulings before they became final suggested that the ALJs did not rise to the level of constitutional “Officers,” but the majority disagreed, noting that such review by the full SEC was not mandatory.

The decision against Lucia was thus reversed and remanded.  Any new hearing that against Lucia will now need to be conducted before a properly appointed ALJ.  While the full SEC had attempted to contain this potential problem several months ago by formally ratifying its previously-selected ALJs, the Supreme Court held that Lucia was entitled to have any new hearing conducted by a different ALJ who had not been part of the prior unconstitutional proceeding (although one dissenting judge questioned whether that was truly necessary to properly protect Lucia and satisfy constitutional requirements).


Beyond the specific case of Lucia, the practical effect of the Court’s decision on SEC administrative enforcement proceedings is likely to be limited, for several reasons:

  • Now that the full SEC has ratified the appointments of the SEC’s existing ALJs, and presumably will proceed similarly with all other ALJs going forward, the decision is not likely to have any effect on new cases filed in the future.
  • The Court specifically noted that Lucia had made a “timely” challenge to the validity of the ALJ’s appointment in his case, and that a prior Supreme Court ruling had established that the constitutional validity of the appointment of an officer who hears a case can be challenged by “one who makes a timely challenge.” Thus, even in cases which are not yet final, unless the party raised this objection in a timely manner and then properly preserved it for judicial review, the party is unlikely to be able to obtain relief from the ALJ’s ruling.
  • Similarly, the decision likewise is unlikely to have any impact on decisions that have become final and are no longer eligible for judicial review.
  • The SEC’s order ratifying the prior appointments of its ALJs also directed the ALJs, upon being formally appointed, to reconsider any open matters they had. However, given the Court’s holding that the remedy for a defective appointment should be a fresh hearing from an ALJ with no prior involvement in the case during any period when the ALJ was not properly appointed, it is unclear if SEC ALJs will now be able to ratify any decisions they made in cases prior to the ratification of their own appointments, or whether the proceedings now must go back to square one with a completely new properly appointed ALJ.




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.


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.

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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.


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.


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.