In February 2019, the Alberta Securities Commission (ASC) declined to stay the hearing of pending ASC enforcement proceedings on the basis of the existence of parallel, pending class action proceedings.

Background

In June 2018, Staff of the ASC issued a notice of hearing against Alberta divisions of the Lutheran Church-Canada and several of their former officers and directors (the Respondents), alleging that the Respondents had made misrepresentations contrary to s. 92(4.1) of the Alberta Securities Act (material misleading statements) in connection with securities offered to members of the Lutheran Church.

The allegations followed the financial collapse of Church divisions in 2015 and ensuing proceedings filed under the Companies’ Creditors Arrangement Act.  The Respondents and other parties had also been sued in four class action proceedings commenced in British Columbia and Alberta.  The factual allegations supporting the class actions were similar but not identical to those supporting the ASC proceeding.  The causes of action asserted in the class actions (including breach of trust, breach of fiduciary duty, negligence, breach of contract and oppression) were different than the allegation of contravention of s. 92(4.1).

Applications for a Stay

The allegations of ASC staff were scheduled to be heard on their merits in May 2019.  In October 2018, the Respondents and some of the other defendants in the class actions filed a motion to stay the ASC proceedings pending final resolution of the Alberta class actions.  Subsequently, an additional group of defendants filed an application seeking a stay pending final resolution of all of the class actions.

Standing

The first issue to be determined was the standing of the various parties who were not named in the ASC proceeding.

As a matter of procedure, the panel determined it appropriate to hear submissions regarding standing and the merits of the stay application at the same time because no particular efficiencies would have been gained through bifurcation.  This is a matter of discretion.

Regarding standing, the panel considered the factors enumerated under ASC Rule 15-501, s. 6.1[1], which the panel saw as a codification of common law principles applicable to questions of standing.  The panel was also mindful of “flood gates” concerns raised by Staff regarding strangers to a proceeding being permitted to participate.  Ultimately, the panel concluded that certain applicants were not seeking to tender evidence or make submissions that was substantially different than that of the Respondents.[2]  They were denied standing.  On the other hand, standing was granted to one group of applicants who “presented a different perspective and made different submissions”.

Stay Denied

The panel noted that given its public interest mandate, for the panel to exercise its discretion to grant a stay there must be exceptional and extraordinary circumstances involving irreparable harm that outweighs the public interest in seeing the ASC proceeding concluded.  The evidence of irreparable harm must be clear and not speculative, and the harm must be to the applicant.

The panel emphasized that the fact of parallel legal proceedings is not sufficient to establish irreparable harm.  “ASC proceedings are often preceded or followed by criminal prosecutions, civil suits – including class actions – or both.”  Fears of making inconsistent statements, of having one’s statements in one proceeding used in another, or of inconsistent rulings, are speculative and insufficient.  The panel emphasised that “no matter how broadly a notice of hearing is framed, the ASC can only make findings against those who are named respondents, and only for the contraventions specifically alleged and proved by evidence on a balance of probabilities.”  Further, the trial judges in the class actions were capable of addressing evidentiary issues and ensuring fairness in those proceedings.

The panel also rejected the argument that a stay was warranted because the Respondents could only obtain the evidence necessary to defend the allegations made by ASC staff through the discovery process in the class actions.  The argument was speculative and begged the question as to what the Respondents would do if the ASC proceeding was the only outstanding proceeding.

The panel further concluded that the balance of convenience weighed in favour of the public interest in having the ASC proceeding be determined without delay.  The ASC’s public interest mandate to protect investors and foster a fair and efficient capital market “involves the entire market, and extends beyond the interest of a single group  or even several groups – of specific investors”.  Effective enforcement requires timeliness, efficiency and finality.

While not a surprise, this result highlights the challenges facing companies, directors and officers facing concurrent regulatory and class action proceedings arising out of the same matter.  Formerly, the ASC did not permit no-contest settlements of enforcement actions.  Effective May 4, 2018, the ASC decided that it would entertain no-contest settlement agreements in appropriate circumstances.   For more information on this, please go to:  https://www.albertasecurities.com/securities-law-and-policy/regulatory-instruments/15-601

 

[1] Non-Parties Seeking to Appear before a Panel.

[2] Citing Re Certain Directors, Officers & Insiders of Hollinger Inc., 2005 LNONOSC 858 at para. 48.