American Apparel Inc. disclosed recently that The Securities and
Exchange Commission has launched a formal investigation into issues
raised during its Board evaluation of matters relating to its
ousted CEO Dov Charney. It said that the Company intends to
cooperate fully with the SEC. This investigation has arisen in the
context of civil litigation against American Apparel, actual and
threatened, brought following the emergence of details concerning
Charney's sexual harassment of American Apparel employees, and
the American Apparel Board's alleged lack of oversight of the
It is not uncommon that companies face battles drawn
simultaneously on both civil and regulatory fields: allegations
within civil proceedings (including class actions) can lead to
regulatory proceedings and vice versa. Often proceedings overlap,
forcing companies to focus their attention and resources on
separate but inter-related matters, each fraught with unique but
potentially serious exposure, including significant reputational
There are many Canadian examples of companies forced to defend
civil and regulatory proceedings. Some notable instances include:
BMO Nesbitt Burns, who faced class proceedings and an
OSC proceeding in relation to its distribution of securities of
FMF Capital Group during an IPO; Nortel Networks Corp., who dealt
with concurrent class proceedings and OSC proceedings in relation to alleged
misrepresentations it made about its financial performance to
investors; and Sino-Forest Corporation, who is currently fighting a
class proceeding and an OSC proceeding in light of its alleged false
and misleading statements in its public filings.
The OSC's March 2014 introduction of "no-contest"
settlements was in part a recognition of the difficulty facing
regulators and civil litigators simultaneously. From the point of
view of an accused wrongdoer, "no-contest" settlements
may allow companies to quickly resolve regulatory proceedings
without admitting to facts or liability that may be detrimental to
their defences in concurrent class actions and other civil
proceedings. For regulators, the availability of
"no-contest" settlements can help facilitate the speedy
resolution of proceedings, given the greater willingness of
respondents to settle without concern that any admissions they may
make will lead to increased exposure in civil proceedings. See our
prior blog post on this topic: OSC Approves First No-Contest Settlement –
Ernst & Young LLP to Pay $8 Million. We have also addressed
this issue on Osler's Canadian Class Action Defence Blog: Increased Risk of Securities Class Actions with
The plight of American Apparel is another reminder that when
faced with a civil claim, companies and boards must always have an
eye on regulatory proceedings that may be on the horizon (or vice
versa). Companies should ensure that they are prepared to defend
multiple proceedings holistically in a coordinated fashion, and
should consider pre-emptively developing internal procedures with
legal counsel and other experts to outline how the risks posed by
litigating on multiple fronts can be managed.
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.
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