A recent decision from the Capital Markets Tribunal has changed the rules on using compelled testimony in administrative proceedings.
On December 23, 2024, the Capital Markets Tribunal issued a decision in TeknoScan Systems Inc (Re), 2024 ONCMT 32 ("Teknoscan"). The Ontario Securities Commission ("OSC") alleged that the respondents - TeknoScan Systems Inc. and three officers – engaged in fraud contrary to s. 126.1(1)(b) of the Securities Act (Ontario) by omitting essential facts about a share purchase transaction. While these allegations were ultimately made out, the case is more notable for its procedural findings.
The OSC, like other provincial securities regulators, gathers evidence in the course of investigations by using its power to summons evidence and documents.1This typically involves requiring a target or subject of an investigation to attend at a compelled examination before the OSC. Experienced counsel who attend these examinations will typically put on the record that their clients are availing themselves of protections against the use of their evidence under federal and provincial Evidence Acts, as well as under the Securities Act and Charter of Rights and Freedoms.
If, following the OSC's investigation, a proceeding is commenced, it was typical practice for OSC lawyers to seek to use the transcript of the compelled evidence against the respondents. Past OSC decisions in Sextant Capital Management Inc. et al.2and Eda Marie Agueci et al.3held that excerpts of compelled examinations could be read in against respondents where the respondents did not undertake to testify at the hearing. This in essence meant that respondents to OSC proceedings had to either testify (and be cross-examined) at the hearing, or let the OSC admit their compelled interview transcript (a one-way examination, where the person interviewed does not typically have an opportunity to tell their 'story'). This made it practically difficult for respondents to simply hold the OSC to the standard of making out its own case, and compelled participation in the hearing.
It was common ground in Teknoscan that the Capital Markets Tribunal had the general discretion to admit examination transcripts as hearsay evidence.4The question was whether that right was altered in circumstances where the respondents had invoked the protection under s. 9 of the Evidence Act (Ontario), which in essence requires a person who is being compelled to answer questions to answer a question posed to them, but prevents that evidence from being used against them in another proceeding (sometimes called derivative use immunity).5]
The tribunal in Teknoscan held that Agueci and Sextant "were simply wrongly decided on [the]issue" of admitting compelled transcripts where the person examined expressly availed themselves of applicable Evidence Act protections. The tribunal held that s. 9 of the Evidence Act overrode the tribunal's general discretion to admit hearsay evidence, and that the OSC did not provide a compelling basis to admit the transcripts for context or as admissions against interest (an exception to the rule against using hearsay) in the circumstances.
While this evidentiary ruling was favourable to the respondents, the outcome of the case was not. The tribunal found that the respondents misled Teknoscan shareholders by omitting essential facts about a share purchase transaction, which was found to be a sham that was misleadingly and dishonestly described to investors. The tribunal determined that the omission of essential facts in a notice constituted "other fraudulent means" under s. 126.1(1)(b) of the Securities Act (Ontario).
Teknoscan reinforces that targets or potential respondents in securities regulatory investigations should take appropriate steps to avail themselves of proper protections. While the OSC's enforcement powers remain unchanged by the decision, it has important implications for how securities regulatory prosecutors handle investigations and hearings. Cases where a respondent does not agree to testify may in some cases be more challenging for securities regulators to prosecute. Regulators need to present their cases differently - such as, for example, by summonsing a respondent as part of the prosecution's case, or using statements made in their transcript to impeach them. Respondents who, for example, made damaging admissions as part of a compelled examination may be able to more easily (potentially) avoid consequences arising from the admissions. Teknoscan's impact remains to be seen, but counsel and persons that are the subject of investigations by securities and other regulators should review it carefully.
Footnotes
1 See s. 13 of the Securities Act (Ontario)
4 See s. 15 of the Statutory Powers Procedure Act (Ontario)
5 S. 9 reads:
Witness not excused from answering questions tending to criminate
9 (1) A witness shall not be excused from answering any question upon the ground that the answer may tend to criminate the witness or may tend to establish his or her liability to a civil proceeding at the instance of the Crown or of any person or to a prosecution under any Act of the Legislature.
Answer not to be used in evidence against witness
(2) If, with respect to a question, a witness objects to answer upon any of the grounds mentioned in subsection (1) and if, but for this section or any Act of the Parliament of Canada, he or she would therefore be excused from answering such question, then, although the witness is by reason of this section or by reason of any Act of the Parliament of Canada compelled to answer, the answer so given shall not be used or receivable in evidence against him or her in any civil proceeding or in any proceeding under any Act of the Legislature.
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