The Ontario Securities Commission (OSC) has released its reasons
for imposing sanctions on Coventree Inc. (Coventree) and its two
most senior officers for failing on two occasions to issue press
releases and material change reports. These failures produced four
breaches of Coventree's disclosure obligations as a reporting
issuer in Canada. The sanctions are significant ($2.25 million in
penalties and costs) and were divided between the company ($1.25
million) and the two senior officers' charges ($500,000
The sanctions are significant for both reporting issuers like
Coventree and the most senior officers responsible for determining
when material changes occur in a public company's business.
The decision sends the following messages to public companies,
Disclosure is of capital importance in securities law:
The failure to recognize and publicly disclose material changes
on multiple occasions is treated as egregious conduct (¶62)
deserving of a penalty equal to the highest ($1 million) the OSC
The OSC considered but did not treat, either as defences or as
significantly mitigating factors: (¶67):
that Coventree's breach of its disclosure obligations was
the unusual factual circumstances producing unprecedented
instability in its business;
the fact that Coventree disclosed some of the information in
letters or management discussion and analysis (MD&A) disclosure
and intended to amplify that disclosure in prospective MD&A
the fact that some of the disclosure decisions raised difficult
and complex issues in the midst of an unprecedented credit crisis;
the breaches of the (Ontario) Securities Act (Act)
were "less egregious" than other disclosure cases, such
as the Cineplex case involving Myron Gottlieb and Garth
Even though the OSC acknowledged that Coventree is in the
process of winding up and that there is next to no danger of a
recurrence of misconduct, the OSC focused on imposing a substantial
penalty that would promote general deterrence: ¶68.
If Coventree had breached the statute only by failing to file
material change reports but had promptly issued press releases in
respect of these changes, the breaches would have been treated as
less serious: ¶60.
The OSC stated that it could have imposed the maximum
administrative penalty of $1 million for each of the four breaches
and explicitly rejected the argument that only one sanction should
be imposed in relation to breaches arising out of a single set of
facts: ¶65. Accordingly, the $1 million penalty was
"significant ... but not at the top end of the range of
penalties we could have imposed": ¶74.
Each of the two officers against whom proceedings were brought
received a $500,000 monetary penalty. Some noteworthy
considerations in relation to the officers are:
In keeping with other OSC decisions, the high seniority,
sophistication and degree of involvement of both officers in
materiality judgments tended to magnify the standard of conduct
expected of them: ¶57.
The complexity of the disclosure judgments they are making, the
unusual circumstances in which the judgments were being made and
the willingness of the officers to make their reasoning transparent
to the Coventree board did not relieve the officers of
The officers' high level of cooperation and lack of
financial benefit were not sufficient to reduce the financial
penalty below $500,000 each: ¶67.
The officers' rights to seek indemnity from Coventree were
not denied by the OSC because the OSC decided it did not have this
power under s 127 of the Act: ¶ 79.
In the award of costs (¶¶81 and following), the staff
cost request was significantly reduced because:
counsel were responsible in the conduct of the contested
counsel agreed some facts so that every factual issue would not
have to be canvassed;
staff proved only part of its case and did not prove the
principle that every day that a disclosure remained unmade
constituted a new offence; and
some of the issues discussed were matters of first
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