Canada: Broker’s Report (Securities Litigation)

THE COURTS

In November 2005 the Ontario Court of Appeal dismissed an appeal brought by Conrad Black ("Black") and other senior officers and directors of Hollinger Inc. requesting that the Court find the Order compelling them to submit to questioning by the Inspector (appointed under s. 229 of the Canadian Business Corporations Act) was premature, or to set aside or dismiss the order. In the alternative, the appellants sought a stay of the Order pending resolution in the criminal proceedings. The Court of Appeal held the Order was not premature. There was no requirement that the Inspector exhaust all other avenues of investigation before examining the appellants, and, in any event, it had become clear that the Inspector would have difficulty obtaining information through other avenues.

Next, the court considered the difference between the right against self-incrimination in Canada and the United States. The appellants agued that if they were required to give evidence to the Inspector in Canada, their testimony could be used against them in any criminal proceedings in the United States. They would, effectively, be denied the protection afforded by the Fifth Amendment. The court noted that a protective mechanism had been established to address the differences in Canadian and American law. As outlined in our July Brokers' Report, in order to gain access to information or evidence from a Canadian proceeding, a request must be submitted with reference to the Mutual Legal Assistance Treaty. At that point, the request is considered and interested parties are given the opportunity to make submissions to the court with respect to the protection of their interests. In addition, a court permitting access to information or evidence may include terms in its order providing for the protection of persons named in the order or of other third parties. The Court of Appeal found that the parties had not yet engaged in the process, and it was not clear which questions would lead to concerns vis-à-vis pending criminal charges in the United States.

In Canada, a witness is not excused from answering a question on the basis that the answer may tend to incriminate him or her. Rather, the Charter of Rights and Freedoms and the Canada Evidence Act provide protections to ensure that incriminating answers cannot be used against that individual in other proceedings in Canada. However, these protections do not provide any guarantee that the evidence cannot be compelled or used in proceedings in the United States. Typically, in U.S. proceedings individual may invoke the Fifth Amendment to refuse to answer a question if it would tend to incriminate him or her. However, once an individual has already testified or provided evidence, he or she loses the right to rely on the Fifth Amendment. Thus, once evidence is provided in the Canadian context, it may be compellable in American proceedings.

The Ontario Securities Act contains a specific prohibition on the disclosure of compelled testimony to criminal law enforcement agencies both in Canada or in any other country in section 17(3), likely intended to address the difficulties that arise due to the different methods of protecting against self-incrimination in Canada and in other countries. However, the issue remains open as to how a witness' right against self-incrimination will be protected in instances where U.S. securities regulators seek the assistance of the OSC to compel testimonial evidence in relation to a U.S. investigation.

On November 25, 2005 The Investment Dealers' Association ("IDA") fined Research Capital Corporation ("RCC") and Patrick Gerald Walsh ("Walsh") $160,000 for failing to supervise and correct compliance shortcomings of a RCC employee described in the settlement agreement only as T. Pursuant to the settlement, RCC and Walsh also agreed to pay $40,000 in costs. The respondents admitted to two counts of conduct detrimental to the public interest contrary to By-law 29.1. First, the respondents admitted that they failed to ensure effective or adequate supervision of a registered representative ("RR") between September 2001 and September 2004. Second, they failed to adequately address and correct compliance shortcomings identified by the IDA and provide reasonable assurances that IDA standards governing compliance and supervision were met between 2002 and June 2004.

Walsh was RCC's ultimate designated person ("UDP"), President and CEO at the relevant time. Accordingly, Walsh was responsible to the IDA for the firm's conduct and the supervision of its employees. In September 2001, T was hired by RCC to act as an RR, providing advice and trading services to retail clients. T had been fined and suspended in 1997 by the Ontario Securities Commission ("OSC") for improper activities as an RR, and was to be placed under "close supervision" by the firm. Close supervision required, inter alia, that monthly reports of his supervision be compiled and kept on file by his employer.

From 2001 to 2004, T persistently engaged in activities the IDA alleged were contrary to its bylaws, regulations and policies. In particular, T opened accounts for and served clients outside his jurisdiction of registration, opened accounts and accepted orders for trading without completing the required documentation, accepted orders for trading in accounts from individuals other than the named account holders, and failed in his "gatekeeper" role and facilitated questionable trading by certain clients.

In 2002 and again in 2004 IDA compliance staff carried out sales compliance reports ("SCR") at RRC. The 2002 and 2004 SCRs described many of the same problems, including specific failings involving the accounts and activities by T. By January 2003, the firm's Chief Compliance Officer pointed out to RCC management that T constituted "a main risk" to RRC and that T's trading was a "main issue" raised by the IDA.

In the settlement, Staff and the respondents acknowledge that the penalty imposed in the settlement agreement would have been significantly higher if RRC had not conducted an extensive search process and retained a consulting expert in the field of sales compliance, cooperated fully, and had no history of previous disciplinary action.

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