The Ontario Securities Commission’s decision to open the door to no-contest settlements means officers and directors of publicly listed companies accused of securities violations may be able to cut a deal with regulators without admitting they did anything wrong.
The move is popular with lawyers who act for companies in court. They like no-contest settlements because they keep a corporation’s conduct out of the public record so it can’t be used as evidence to bolster a shareholder lawsuit.
But no-admission settlements are relatively unpopular with plaintiffs’ counsel who say they help officers and directors evade responsibility.
In fact, the kind of no-contest settlements just coming into force in Canada were at the heart of a major three-year controversy in the US.
It started when US District Court Judge Jed S. Rakoff declined to approve a proposed $285-million no-contest settlement with Citigroup Global Markets over claims the bank had misled investors in a mortgage security.
He called the proposed $95-million penalty “pocket change” for a company Citibank’s size, and rebuked the US Securities and Exchange Commission for allowing the bank to settle without admitting wrongdoing, saying the deal was “neither fair, nor reasonable, nor adequate, nor in the public interest.”
He also criticized the boilerplate language used for 40 years, which says the company neither admits nor denies guilt, as “hallowed by history, but not by reason.”
The OSC introduced its own regime of no-contest settlements right in the middle of all the hubbub.
Staff acknowledged they had studied Judge Rakoff’s decision, and even published a paper highlighting key differences between the OSC and the SEC settlement regimes. They argued the facts underpinning a settlement order is more transparent to the Ontario tribunal required to approve it than it is to a US judge.
Ultimately, Judge Rakoff was required to approve the Citi deal after an appeals court called his move to block it “an abuse of discretion.” He did so in August with clear reluctance.
But Ontario has opened itself up to no-contest settlements at a time the SEC is backing away from them, says Dimitri Lascaris, leader of the securities class actions group at Siskinds LLP.
Lascaris, a plaintiffs’ lawyer, says he doesn’t buy the OSC’s rationale it needs no-contest settlements to speed up the load of investigations and prosecutions, allowing enforcement to concentrate on the most serious cases.
“What is the point of getting to a mediocre outcome more quickly?” he says. “Speed is not the be all and the end all of enforcement. What matters is deterrence; and the fact you get a resolution a year or two earlier than you otherwise would is not useful to investors if the effect is to dilute deterrence.
“When people don’t have to make admissions of guilt it’s harder to make them pay money to people they’ve injured. And even more importantly, if you don’t have to make an admission, even if you’ve made serious wrongdoing, you can continue to function in the capital markets and occupy positions of responsibility.”
John Campion, a litigator at Fasken Martineau DuMoulin LLP, says if the securities commission is able to settle more proceedings with large dollars attached to them, then that is a deterrent in and of itself.
“It may be the only way to handle very complex cases that are lying in the balance, or would take years to complete without sufficient resources to do it,” Campion says. “You have to weigh how long, how expensive and how secure a prosecution is going to be — can you actually win the case?
“If you’re the regulator there is a negative attached to taking cases forward and losing if it happens all the time — that hardly creates the kind of deterrence you might like. So I see a no-contest settlement as very much part of the arsenal, and regulators should use it.”
The OSC’s new regime rules will not permit no-contest settlements in cases of fraud, abuse of markets, criminal cases or where someone has tried to obstruct OSC investigations, which means it won’t be on offer to anyone believed to be involved in Ponzi schemes or boiler-room operations.
Andrew Gray, a litigation partner at Torys LLP, says in the US, the SEC is dialling back the use of no-admission settlements to roughly the same level.
“The SEC has ended up saying it will be doing no-contest settlements, but fewer of them and not in cases involving serious cases of intentional wrongdoing. In those cases the SEC will require admissions — and that’s sort of where the OSC has ended up.
“So where it looked like they were going to be ships passing in the night, I think they have actually ended up in the same port.”
He believes where no-admission settlements will see the most use is in the type of case where there has been an inadvertent disclosure error and the company has moved to bolster its internal systems so it doesn’t happen again.
While no-contest settlements have only been adopted in Ontario so far, what the OSC does in enforcement has a ripple effect right across the country because its jurisdiction extends to any company that trades on the Toronto Stock Exchange, says Julie-Martine Loranger, a litigation partner at McCarthy Tétrault LLP in Montreal.
Loranger welcomes no-contest settlements as a positive development for people who may have inadvertently run afoul of securities laws without intending to commit fraud. She says it can help preserve their relationship with the securities commission staff from becoming needlessly adversarial.
“The relationship with a regulator is like a marriage,” she says. “You may fight with them, but you wake up the next day and they’re still there. So while you may want to get into the ring with the regulator, you don’t want a full boxing match because they’re going to regulate you and keep regulating you.
“Sometimes you want to settle with them, set the matter aside, but you have this pending civil litigation stopping you. So if you have the chance to get rid of a big headache, continue to have a good relationship with the regulator, and move on and continue your battle on the civil action, it’s a great option.”
When it comes to securities enforcement, the policing of insider trading is the other clear hot button these days. The Ontario Securities Commission, like many other provincial regulators, has made illegal insider trading a major focus.
Insider trading cases can be notoriously difficult to prove because they generally involve strong circumstantial evidence.
Gray says regulators have become increasingly willing to use the public-interest jurisdiction to punish people in cases where the actions being alleged fall short of running afoul of the law.
“There have been a number of cases, including some in Alberta and some in British Columbia, where people are being criticized and in many cases sanctioned by regulators for being too close to the line in terms of insider trading — particularly around transactions and where the individuals are relatively high up in the organization,” he says. “That’s the securities-law development that people should definitely be keeping their eye on.”
While the use of the public-interest jurisdiction is not new, practitioners say it was designed for exceptional circumstances involving serious conduct that brings Canadian capital markets into disrepute.
There is a growing sense that regulators are more willing to use it as an everyday tool, a way to issue sanctions in cases where they can’t prove an actual breach of the act.
In Ontario, an OSC panel declined to do that in a case involving the acquisition of Baffinland Iron Mines Corp. Two well-connected mining executives were accused of insider trading and tipping, and OSC staff requested the pair also be found to have engaged in conduct contrary to the public interest even if cleared of the other charges.
The OSC panel declined to do so.
Jeffrey Leon, a litigation partner at Bennett Jones LLP, welcomed the result.
“Somebody should be able to look at the statute, attempt to stay within it, and it’s only in the most blatant cases where you take advantage of something and really act in a way that hurts the capital markets that the commission should fall back on the public-interest jurisdiction.”
In Alberta, securities regulators have also been frustrated in attempts to get panels to accept strong circumstantial evidence, says John Blair, national head of the commercial litigation group at Borden Ladner Gervais LLP.
“There have been outright acquittals on four insider trading cases — this is what most people in Alberta are talking about in enforcement issues these days,” says Blair, who’s based in Calgary. “But all these cases are helping them determine what the panels will consider it convincing that there’s been an illegal trade.”
Canadian regulators are coming under pressure because the SEC is prosecuting insider trading cases so vigorously, says Campion.
“I think they’re feeling the heat to get on with it because American regulators are so aggressive. We just don’t seem to have been as aggressive.”