Canada: Brokers’ Report - November 2012

Editor: David Di Paolo

On May 31, 2012, the Ontario Securities Commission (the "Commission") issued its reasons for decision dismissing a stay motion by Mitchell Finkelstein and a prematurity cross-motion by Staff following the hearing held on November 10 and 11, 2011.

Finkelstein sought to stay the Commission's administrative proceeding brought by Staff in relation to his alleged tipping on six separate occasions (the "Stay Motion"). He made his request on the basis that Staff carried out its investigation in a manner which violated both its duty to act fairly and Mr. Finkelsten's fundamental right to a fair and proper "Wells Process". He further alleged that Staff failed to provide sufficient time and particulars to enable him to respond to Staff's enforcement notices sent to him prior to the issuance of the Notice of Hearing, Amended Statement of Allegations and Amended Amended Statement of Allegations. In response to Finkelstein's Stay Motion, Staff brought a cross-motion to dismiss the Stay Motion on the grounds that the Stay Motion was premature (the "Prematurity Motion").

In the United States, enforcement actions are recommended by the Securities and Exchange Commission ("SEC") staff and authorized by their commission. Before the decision to authorize an enforcement action is taken at the commission level, the "Wells Process" is initiated. This process consisted of a "Wells Notice", sent by SEC staff, and a "Wells Submission" (made by the recipient of the "Wells Notice"). In the U.S., respondents can bring motions to strike an enforcement action on the basis of a deficient or non-existent "Wells Process", however, the courts tend to dismiss such motions unless SEC staff's conduct is egregious, occurs before the enforcement action is initiated and/or prejudices the ability to present a full defence.

The Stay Motion raised novel and important issues including: (i) whether Staff have a duty to conduct a formal "Wells Process" such as the one adopted by the SEC; (ii) the requirements associated with this obligation, if applicable; and (iii) the consequences that flow from a finding that Staff's investigation of a respondent was conducted in an unfair and abusive manner.

With respect to the Stay Motion, the Commission held that while Staff has a duty of fairness to persons under investigation, the U.S. "Wells Process" and its requirements do not apply to OSC enforcement proceedings. The Commission noted that while the SEC staff has an obligation to comply with a "Wells Process", which has detailed requirements and forms part of the U.S. Code of Federal Regulations, the OSC enforcement notice process is not mandated by any legislation or by the Rules of Procedure. In Ontario, the decision about whether and when to provide an enforcement notice in the later stages of an investigation remains within Staff's discretion, subject to the principles of the duty of procedural fairness. The Commission also noted that the duty of fairness owed to a respondent during the investigative stage of a matter is clearly distinguishable from the procedural fairness requirements at the adjudicative stage of a proceeding.

The Commission then assessed whether Staff breached their duty of fairness owed to Finkelstein in their handling of the enforcement notice process based on:

  • the nature of the decision being made;
  • the individual's legitimate expectations;
  • the nature of the investigation;
  • its subject matter; and
  • the statutory provisions under which the Commission was acting.

The Commission was of the view that Staff discharged their duty of fairness and afforded Finkelstein a degree of procedural protection by informing him of the nature of the case against him and by giving him an opportunity to provide an explanation of his conduct and provide information to Staff prior to the issuance of the Amended Statement of Allegations.

The Commission held that while there is a practice of Staff providing a potential respondent with a final opportunity to bring to the attention of Staff any circumstances which may influence Staff's decision to issue a Notice of Hearing and a Statement of Allegations, Staff ultimately retains a discretion, subject to the requirements of minimal procedural fairness, to implement the practice in a variety of ways, and to take a variety of factors into account.

Within the context of the Stay Motion, Finkelstein also alleged abuse of process. The Commission held that the test for finding an abuse of process is extremely high and the conduct of Staff at issue did not meet this threshold as Staff's conduct was neither oppressive nor vexatious. Moreover, the Commission held that abuse of process would only be found in an "extremely rare" situation. Accordingly, the Commission held that there were no grounds to justify the Stay Motion. The Commission held that a stay of proceedings will only be granted as a remedy for abuse of process when the very high threshold in the "clearest of cases" is met. In particular, the Commission noted that a stay of proceeding will only be appropriate when: (i) the prejudice caused by the abuse in question will be manifested, perpetuated or aggravated through the conduct of the hearing or by its outcome; and (ii) no other remedy is reasonably capable of removing that prejudice. Finally, in situations where it is unclear whether the abuse is sufficient to warrant a stay, a compelling societal interest in having a full hearing could tip the scales in favour of proceedings.

With respect to the Prematurity Motion, the Commission held that the Stay Motion was not premature for the following the reasons:

  • the issues raised in the Stay Motion could be fairly, properly and completely resolved without regard to contested facts and the anticipated evidence that will be presented at the hearing on the merits;
  • It was not necessary for a fair hearing that the relief sought in the Stay Motion be granted prior to the proceeding on the merits; and
  • The resolution of the issues raised on the Stay Motion materially advanced the resolution of the matter.

On September 14, 2012, Justice Strathy released his Reasons for Judgment dismissing the plaintiff's motion for leave to commence an action for secondary market misrepresentation under the Ontario Securities Act and dismissing the plaintiff's motion to certify a proposed class proceeding under the Class Proceedings Act (the "CPA").

The plaintiff alleged that the defendants "fabricated" a financial crisis in the defendant Western Coal Corporation ("WCC") in November 2007, in order to artificially depress its stock price, so that they could enhance their shareholdings in WCC at a fraction of what the shares were worth. The plaintiff claimed that, as part of this scheme, some of the defendants created false cash flow projections and made inappropriate write-downs, causing WCC's auditors to insist that the November 14, 2007 quarterly financial statements be qualified by a note that there was "substantial doubt about the ability of WCC to meet its obligations as they come due". The plaintiff alleged that the note was a misrepresentation, and that WCC had deliberately delayed obtaining the financing until after its statements were released so that certain of the defendants could benefit from the resulting decrease in share value.

The plaintiff asserted three claims, which he sought to certify under the CPA:

(a) an action for misrepresentation in the secondary securities market under Part XXIII.1 of the Securities Act, which requires leave of the court;

(b) a claim against some of the defendants for conspiracy; and

(c) a claim for oppression under the British Columbia Business Corporations Act.

In responding to the plaintiff's leave motion, the defendants filed a voluminous evidentiary record, which contained affidavits from fact and expert witnesses in support of their position that the note was not a misrepresentation, and that the allegation that they had delayed obtaining financing was baseless. With respect to the leave motion, Strathy J. held that leave should not be granted under Part XXIII.1 of the Securities Act, as the plaintiff's claim had "no reasonable possibility of success at trial." In reaching this determination, Strathy J. examined the alleged misrepresentation in the context in which it was made, reviewed the accounting principles that were at issue and that informed the disclosures that were made by WCC, examined the process leading up to the release of the disclosure, and examined the expert evidence on both sides of the issue. Of note, Strathy J. completely rejected the expert evidence filed on behalf of the plaintiff, holding that he doubted the expert's independence and held that the expert gave opinion evidence in areas in which he had no expertise.

Although unnecessary for Strathy J. to consider the "reasonable investigation" defence available to the defendants under s. 138.4(6) of the Securities Act, Strathy J. nonetheless concluded that even if there had been a misrepresentation, the evidence established that the defendants had conducted a reasonable investigation and had no reasonable grounds to believe the financial statements contained a misrepresentation.

With respect to the plaintiff's motion to certify a claim against some of the defendants for conspiracy, Strathy J. denied certification due to the fact that the conspiracy claim was largely based on an unfounded misrepresentation. Strathy J. further denied certification of the plaintiff's oppression claim on the basis that an Ontario court does not have jurisdiction over the plaintiff's claim for oppression under British Columbia's Business Corporations Act.

While some commentators have concluded that this decision has raised the bar for plaintiffs to successfully obtain leave, the facts of this case overwhelmingly supported the conclusion that the plaintiff had no reasonable possibility of success at trial. The success or failure of the leave motion continues to be driven by the strength or weakness of the evidence available.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions