Canadian Securities Law and Practice:Session IV - Litigation and Enforcement

Mary G. Condon

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Overview

Criminal/Regulatory Enforcement • Criminal Code offences• OSA offences and public interest power

• Investigations

Civil Liability under OSA• Primary market actions• Secondary market actions

Policy issues (La Porta vs. Coffee)

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Criminal/Regulatory Enforcement Powers

Criminal Code• New(ish) CC offence of insider trading

OSA s.122 (quasi-criminal)

OSA s.126.1 and s.126.2 (fraud; market manipulation; misleading statements)

OSA s.127 (public interest power)

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Regulatory Investigations

OSA Part VI

Investigative powers• Examination of documents• Compel testimony, but s.17(7)• R v. Jarvis [2002] 3 S.C.R. 757

Cross-border cooperation• Global Securities v. BC (Securities Commission

[2000] 1 S.C.R. 494

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Criminal Code

Ss.380-384; s.400• R. v. Drabinsky [2009] O.J. No. 1227

S.382.1(1); prohibited insider trading

Aggravating circumstances re sentencing

Role of IMETs in investigations

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OSA s. 122

Various offences created by s.122

S.122 (4); specific sanction for breach of s.76 (insider trading prohibition)• R. v. Landen [2008] O.J. No. 4416

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OSA s. 127

Administrative hearing

Public interest orders

Is a breach of the OSA required?• Re Canadian Tire (1987) 10 OSCB 857 • Cf. administrative penalties or disgorgement

Philosophies of sanctioning• Re Cartaway Resources [2004] 1 S.C.R 672

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Trends in Enforcement

Use of criminal law sanctions

Hearings vs. settlements

Recent OSC decisions• AIT (2008); Coventree (2011)

Inter-jurisdictional enforcement (OSA s.127(10))

Insider trading issues

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Primary market liability (OSA s.130)

What does plaintiff have to prove?• Purchase of securities under prospectus• Purchase made during period of distribution• Misrepresentation in prospectus

Remedies• Rescission or damages

Limitation periods (s.138)

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Primary market liability

Who is potentially liable?• Issuer/selling shareholder; underwriters who

sign prospectus; every director; experts; other signatories

Defences• Issuer• Non-issuer defendants

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Primary market liability

Issuer defences• Purchaser knowledge of misrepresentation

(s.130(2))• Depreciation not caused by misrepresentation

(s.130(7)) Additional defences (directors; officers; underwriters)

• Did not know about/consent to filing• Expert statement not made by them etc• Conducted reasonable investigation to provide

reasonable grounds for belief that no misrepresentation

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Kerr v. Danier Leather (SCC, 2007)

May 6, 1998: receipt obtained for Danier final prospectus• Contained forecast of Q4 1998 financial results

May 16-19; financial info about first half of Q4 assembled

May 20; distribution closed

June 4; Danier issues revised forecast and material change report; share price drops substantially

June 27; Q4 ends; original forecast “substantially achieved”

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Issues for decision

1. Interpretation of OSA s.57 and distinction between material fact and material change • was there a continuing obligation to disclose

material facts until the end of the distribution period?

2. Was there an implied representation that the forecast was objectively reasonable?

3. Is the business judgment rule relevant to an analysis of whether senior management has fulfilled its statutory obligations?

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Secondary market liability (OSA Part 23.1)

Consistency with primary market

Consistency with U.S.

Deterrence/compensation

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What are issuers/influential persons/ individuals liable for?

Documents that contain a misrepresentation

Public oral statements that contain misrepresentations

Failure to make timely disclosure

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Cause of action

Leave of court required (s.138.8)

No need to show reliance

Acquisition or disposition of security at relevant time

Existence of misrepresentation or failure to make timely disclosure

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Additional elements of proof re non-core docs/public statements

For non-core documents or public oral statements that• Person/company knew there was

misrepresentation or• Person/company deliberately avoided acquiring

such knowledge or• Person/company was guilty of gross

misconduct in connection with document/statement

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What is a core document?

For directors/influential persons, includes prospectuses, take-over bid circulars, MDA, AIF, annual financial statements, interim financial statements

For issuers/officers, all these plus material change reports

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What will plaintiff have to prove ctd.

For failure to make timely disclosure [re directors/influential persons only] (s.138.4(3)) that• Person/company knew of the material change or• Person/company deliberately avoided acquiring

knowledge of the material change or• Person/company was guilty of gross misconduct

in connection with failure to make timely disclosure

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Who is liable?

- for documents containing misrepresentation, see list (a)-(e) at s.138.3(1) [responsible issuer, directors, officers, influential persons (if knowingly influenced), experts]

-for public oral statement, see list (a)-(e) at s.138.3(2) [more or less same as above, with exception of addition of “person who made public oral statement”]

-for failure to make timely disclosure, see list (a) to (c) in s.138.3(4) [responsible issuer, directors/officers, and influential persons (if knowingly influenced), but not experts]

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Defences for misrepresentations in documents (s.138.4(5)&(6))

Plaintiff acquired/disposed with knowledge that document contained misrepresentation. Burden of proof on defendant [all potential defendants]

Made reasonable investigation and had no reasonable grounds to believe document contained misrepresentation [all potential defendants]

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Defences for public oral statements

Plaintiff acquired/disposed with knowledge that statement contained misrepresentation. Burden of proof on defendant [all potential defendants]

Made reasonable investigation and no reasonable grounds to believe statement contained misrepresentation [all potential defendants]

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Defences for failure to make timely disclosure

Plaintiff acquired/disposed with knowledge of material change. Burden of proof on defendant [all potential defendants]

Made reasonable investigation and no reasonable grounds to believe failure to make timely disclosure would occur. Burden of proof on defendant [all potential defendants]

Defence based on prior confidential disclosure (s.138.4(8))

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Due diligence: primary and secondary market cases

Primary market cases: individual director assessment of due diligence

Secondary market cases: s. 138.4(7) factors with respect to reasonable investigations/gross misconduct

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Limits on liability

Action for damages only

Proportionate liability under s.138.6• Not available where defendants other than

issuers knowingly authorized or permitted misrepresentation or failure

Assessment of damages under s.138.5

BUT

Only pay lesser of aggregate damages assessed and liability limits as defined in Part [s.138.7 and s.138.1]

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When do liability limits come off?

See s.138.7(2)

Implications for leave applications

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Settlements and Costs Rules

Court approval of settlements required (s. 138.10)

Costs rule (s.138.11)

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Emerging jurisprudence on scope of Part 23.1

Standards for leave • Silver v. Imax Corporation (2009)

Combining common law heads of liability with statutory claims• Dobbie v. Arctic Glacier (2011)

Global class actions?• Imax; Abdula v. Canadian Solar (Aug 2011)

Third-party funding• Dugal v. Manulife (March 2011)

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Conclusions and Policy Issues

NERA #s from early 2011• 25 of 28 securities class actions involve

secondary market civil liability provisions• Development of plaintiff-side legal expertise

Public vs. private enforcement