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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 - PowerPoint PPT Presentation
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Canadian Securities Law and Practice:Session IV - Litigation and Enforcement
Mary G. Condon
2
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)
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
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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
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)
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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”
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?
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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
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]
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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]
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))
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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
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)
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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)
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