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

Canadian Securities Law and Practice: Session IV - Litigation and Enforcement. Mary G. Condon. Overview. Criminal/Regulatory Enforcement Criminal Code offences OSA offences and public interest power Investigations Civil Liability under OSA Primary market actions

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

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  1. Canadian Securities Law and Practice:Session IV - Litigation and Enforcement Mary G. Condon

  2. Overview • Criminal/RegulatoryEnforcement • 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)

  3. 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)

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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)

  10. Primary market liability • Who is potentially liable? • Issuer/selling shareholder; underwriters who sign prospectus; every director; experts; other signatories • Defences • Issuer • Non-issuer defendants

  11. 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

  12. 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”

  13. 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?

  14. Secondary market liability (OSA Part 23.1) • Consistency with primary market • Consistency with U.S. • Deterrence/compensation

  15. Whatare issuers/influential persons/ individuals liable for? • Documents that contain a misrepresentation • Public oral statements that contain misrepresentations • Failure to make timely disclosure

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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]

  21. Defencesfor 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]

  22. 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]

  23. 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))

  24. 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

  25. 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]

  26. When do liability limits come off? • See s.138.7(2) • Implications for leave applications

  27. Settlements and Costs Rules • Court approval of settlements required (s. 138.10) • Costs rule (s.138.11)

  28. 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)

  29. 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

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