Source: http://www.canadiansecuritieslitigation.com/category/regulatory-osc-iiroc
Timestamp: 2019-04-21 10:09:45+00:00

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Deficient pleadings, uncontroverted expert evidence and a strict application of the Court of Appeal’s analysis in Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp.5 led Justice Belobaba to dismiss both motions.
Over a two week span in 2011, anonymous internet postings questioned Silvercorp Metal Inc’s (“SVM”) financial accounting and alleged that the company had overstated certain mineral resources and reserves. As a result, SVM’s share price dropped about 30 percent. SVM responded by issuing a press release and a Schedule 4 that reconciled production to revenue from 2006 to the middle of 2011 (the “Schedule 4”). SVM also retained AMC Mining Consultants to prepare a new technical report, which was produced in June 2012 (the “AMC Report”).
In May 2013, the plaintiff, a former SVM shareholder, alleged that a comparison of the AMC Report and the Schedule 4 demonstrated that SVM had overstated its mineral production and grade levels in its 2010 and 2011 public reports.
The plaintiff advanced three claims: (1) a statutory and common law claim for misrepresentation; (2) a statutory claim for failure to make a timely disclosure; and (3) a common law claim in negligence alleging that SVM co-authored and published public reports that it knew, or should have known, had not been prepared in accordance with industry standards or properly audited.
The Court found that the plaintiff’s pleadings did not identify which words or figures, in particular documents or on particular dates, were alleged to be misrepresentations pursuant to section 138.3(1) of the OSA. The plaintiff is required to link the misrepresentations to a public correction, however, the plaintiff failed to indicate what public correction was made or when it occurred. Nevertheless, the Court determined that since “publicly corrected” is not defined in the OSA, anonymous internet postings can constitute public corrections under section 138.3 of the OSA.
The leave requirements under section 138.8 of the OSA require that the court be satisfied that an action was brought in good faith and that “there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff”.6 In the wake of Theratechnologies, plaintiffs must adduce sufficient evidence to demonstrate a reasonable chance of success, lest their claim be denied at the outset. Here, the plaintiff alleged that there were obvious misrepresentations in SVM’s Schedule 4 due to material differences between the numbers in the AMC Report and the Schedule 4. An AMC geologist involved in the preparation of the AMC Report swore an affidavit on behalf of SVM explaining that different reporting parameters had been applied to the two reports and, therefore, there were no actual discrepancies between the reports. While the plaintiff produced an expert report of its own, the plaintiff’s expert failed to rebut or even address the conclusions of SVM’s expert. The Court favoured AMC’s detailed and uncontroverted evidence.
The plaintiff also alleged that SVM failed to make timely disclosure of a material change as required under section 138.3(4) of the OSA. The plaintiff did not, however, plead any material facts as to any specific production data received by SVM showing a material change within the OSA definition.
The Court also found that the plaintiff’s negligence claim was in substance a pleading of negligent misrepresentation and could not therefore be certified where the claim for misrepresentation had been denied.
1 Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 [Theratechnologies].
2 Mask v. Silvercorp Metals Inc., 2015 ONSC 5348.
3 R.S.O. 1990, c. S.5 [OSA].
4 S.O., 1992, c. 6 [CPA].
5 Musicians’ Pension Fund of Canada (Trustees of) v. Kinross Gold Corp., 2014 ONCA 901 [Kinross].
6 OSA, supra at s 138.8.
7 Kinross, supra at para 138.
8 Theratechnologoes, supra at para 38.
Enhanced public disclosure by Staff of credit granted to persons for their cooperation during enforcement investigations.
Historically, the OSC, and other regulatory organizations, refused to enter into settlement agreements without an acknowledgment of wrongdoing. This approach often stymied settlement discussions as formal admissions could (and likely would) be admissible in any related civil proceeding.
This new policy to accept no-contest settlements fosters the efficient resolution of regulatory disputes and is ultimately a positive development. It enables market participants to enter into settlement agreements, in proper circumstances, without the risk of admissions against interest (a constant feature of all settlement agreements in the old regime) being used against them in subsequent civil proceedings.
One hopes that the OSC’s adoption of no-contest settlement agreements reflects a trend among regulatory bodies. It remains to be seen whether other provincial securities regulators and/or the Investment Industry Regulatory Organization of Canada—the national, self-regulatory organization charged with the oversight of investment advisors and trading activity on Canada’s debt and equity marketplaces—will follow suit.
 U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11 Civ. 7387 (2011).
On December 5, 2013, the Supreme Court of Canada released its much-anticipated decision in McLean v. British Columbia (Securities Commission) , providing clarity on the limitation period applicable to “secondary proceedings” in the securities enforcement context. Specifically, the principal issue before the Supreme Court was when the 6-year limitation period under the B.C. Securities Act begins to run when one provincial securities regulator wishes to enforce the order of another – as of the date of the underlying misconduct or the date of the extra-provincial order? The BCSC argued that the event giving rise to the proceeding against McLean was not her original misconduct, but rather the fact of having agreed with a securities regulator to be subject to regulatory action. Writing for the majority, Justice Moldaver upheld the BCSC’s order, finding that, on a standard of reasonableness, the interpretation advanced by the BCSC should be given deference.
In 2008, the appellant Patricia McLean entered into a settlement agreement with the Ontario Securities Commission (“OSC”) in respect of misconduct that predated 2001. The salient parts of the resulting OSC order  (the “OSC Order”) barred McLean from trading in securities for 5 years, and banned her from acting as an officer or director of certain entities registered under Ontario’s Securities Act for 10 years. In 2010, the BCSC issued a reciprocal order adopting the same prohibitions of the OSC Order pursuant to s. 161(6)(d) of its Securities Act. McLean appealed the reciprocal order on the basis that the relevant limitation period had expired: s. 159 of the B.C. Securities Act provides that proceedings “must not be commenced more than 6 years after the date of the events that give rise to the proceedings”.
The issue before the Supreme Court was whether, for the purposes of s. 161(6)(d) of the B.C. Securities Act, “the events” that trigger the 6-year limitation period in s. 159 was (i) the underlying misconduct that gave rise to the settlement agreement, or (ii) the settlement agreement itself. Under the former interpretation – advanced by McLean – the BCSC order would be statute-barred. If, however, the limitation period clock began to run on the date of the OSC Order (as the BCSC contended), the BCSC order would stand as the proceeding was commenced well within 6 years of the OSC Order.
Moldaver J. first focused on the preliminary issue of the appropriate standard of review regarding the BCSC’s order. Contrary to the BC Court of Appeal’s decision, Moldaver J. held that the governing standard of review was one of reasonableness, not correctness, on the basis that the resolution of unclear language in an administrative decision maker’s “home statute” is usually best left to the decision maker. This approach is consistent with recent Supreme Court of Canada jurisprudence (see Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association ), which held that there is a presumption of reasonableness when it comes to a tribunal’s interpretation of its home statute(s).
 The bottom line here, then, is that the Commission holds the interpretative upper hand: under reasonableness review, we defer to any reasonable interpretation adopted by an administrative decision maker, even if other reasonable interpretations exist…Judicial deference in such instances is itself a principle of modern statutory interpretation.
According to the Supreme Court, when faced with two competing reasonable interpretations of an administrative body’s “home statute”, the administrator – in this case, the BCSC – with the benefit of its expertise, is entitled to choose between those interpretations and “courts must respect that choice”.
The Supreme Court’s decision reinforces judicial deference when it comes to securities regulators dealing with their own governing statutes and regulations. The resolution of unclear language in a “home statute” is usually best left to administrative tribunals, as a tribunal is presumed to be in the best position to weigh the policy considerations in choosing between multiple reasonable interpretations of such ambiguous language. Although the interpretation of a limitation period was at issue, which is arguably a general question of law, the Court applied a reasonableness standard of review because of the tribunal’s construal of its home statute. This proposition will likely have far-reaching application.
Moreover, an important policy consideration that appears to motivate the decision is the need for inter-jurisdictional cooperation among securities regulators, given the challenges inherent in the decentralized model of securities regulation in Canada. While a securities commission cannot abrogate its responsibility to make its own determination as to whether an order is in the public interest, sections like s. 161(6) of the B.C. Securities Act obviate the need for inefficient parallel and duplicative proceedings – in this case, by providing a triggering “event” other than the underlying misconduct. It remains to be seen whether provinces can “piggy-back” on reciprocal orders sequentially, a question that the court did not want to specifically answer at this time. However, in addressing McLean’s concerns that the interpretation of the BCSC could effectively lead to indeterminate proceedings by provincial securities regulators, the Supreme Court seemed to suggest that an overall reasonableness approach to a regulator’s discretion would alleviate such concerns.
The refinement of the product type definition.
Disclosure of resources other than reserves: Currently, a reporting issuer can elect to disclose contingent resources or prospective resources in conjunction with its annual filings without triggering any additional reporting obligations. Under the proposed amendments, if a reporting issuer elects to disclose contingent or prospective resources in conjunction with its annual filings then the reporting issuer must also disclose the related future net revenue and the resource estimates must be evaluated or audited by a qualified reserves evaluator or auditor.
Disclosure of oil and gas metrics: Currently, the disclosure of only certain oil and gas metrics (e.g. netbacks, finding and development costs) triggers specific methodology or disclosure requirements under NI 51-101. The CSA are proposing a principle-based approach applicable to the disclosure of all oil and gas metrics. Under the proposed amendments, the disclosure of any oil and gas metric requires the reporting issuer to identify the standard, methodology and meaning of the metric, and to provide a cautionary statement as to the reliability of the metric. In addition, if there is no identifiable standard for the metric, then the reporting issuer must disclose the parameters used in the calculation of the metric and a cautionary statement that the metric does not have any standardized meaning.
Disclosure of resources under alternative disclosure regimes: Currently, if a reporting issuer is subject to an alternative resources disclosure regime, such as that prescribed by the United States Securities and Exchange Commission, then it must obtain exemptive relief to present resources disclosure in accordance with such alternative disclosure regime. Under the proposed amendments, a reporting issuer that is subject to an alternative disclosure regime may present such alternative disclosure provided that the alternative disclosure is accompanied by the disclosure required by NI 51-101; and the alternative disclosure satisfies certain other conditions relating to the adequacy and reliability of the alternative disclosure regime. In addition, the estimates prepared under the alternative disclosure regime must have been prepared or audited by a qualified reserves evaluator or auditor.
Refinement of the product type definition: The proposed amendments reconcile the definition of product type to the definition used in the Canadian Oil and Gas Evaluation Handbook. Under the proposed amendments, the existing distinction based on whether the product is conventional or unconventional is eliminated in favour of using the source and process for recovery of the product in question. In addition, the concept of production group is eliminated.
Clarifying the disclosure requirement when a reporting issuer has no reserves.
CSA Request for Comments: The CSA welcome comments on the proposed amendments and have posed five specific questions which commenters may choose to address. The comment period ends on January 17, 2014. The full text of the proposed amendments can be found here.
The Appellants, Sanji Sawh and Vlad Trkulja, who were both mutual fund dealers and exempt market dealers, founded Investment House of Canada (“IHOC”) in 2003. IHOC was a member of the Mutual Fund Dealers Association (“MFDA”), a self-regulatory organization (“SRO”) recognized by the Ontario Securities Commission (the “Commission”).
In 2009, following an investigation into IHOC, the MFDA commenced a disciplinary proceeding in relation to several alleged violations of the MFDA Rules, By-laws or Policies by IHOC and the Appellants. The Appellants and the MFDA subsequently reached a settlement agreement pursuant to which IHOC resigned from the MFDA and wound down, and the Appellants admitted to several contraventions of the MFDA Rules. The settlement agreement was approved by an MFDA hearing panel.
As a consequence of the settlement agreement, the Appellants’ registration as dealing representatives of a mutual fund dealer was suspended. Six weeks after the settlement agreement, the Appellants applied to the Commission to have their registrations reinstated, which was denied. The Appellants requested a review of the decision and, after a six-day hearing before two commissioners, the OSC determined that the Appellants lacked the proficiency and integrity required by sections 27(1) and (2) of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”), to be registered as dealing representatives of a mutual fund dealer, and that reinstatement of their registrations would be otherwise objectionable.
The Appellants appealed to the Divisional Court, arguing that the conduct reviewed by the OSC was almost exclusively conduct that had already been fully investigated by the MFDA – which had not imposed a sanction barring the Appellants from applying for reinstatement of their registrations – and that by refusing their application, the Commission had departed from its established practice of deferring to the determinations made by expert SROs such as the MFDA.
In delivering the Panel’s decision, Justice Sachs agreed with the Appellants that the case law surrounding Commission reviews of SRO decisions highlights the importance of deference to an SRO’s findings. In the Appellants’ case, however, the Commission was not conducting a hearing and review of the MFDA’s settlement agreement or the hearing panel’s decision approving that agreement (which, in any event, did not provide that the Appellants’ registration would be reinstated).
Rather, the Commission’s decision was an exercise of its discretion under section 27 of the Act to consider whether the Appellants were suitable candidates for re-registration, over which the Commission has sole jurisdiction (as the MFDA has not been delegated this authority). Justice Sachs held that the Commission’s decision was justifiable and transparent, and met the applicable standard of review of reasonableness.
The Divisional Court’s decision serves as a reminder that SROs derive their jurisdiction by virtue of being recognized by provincial securities commissions and that the power of SROs and their members is always subject to the oversight of those commissions. It also reaffirms the principle, recently expressed in other contexts, that the courts will generally afford considerable deference to the decisions of securities commissions by applying a standard of review of reasonableness.
 See, e.g., Cornish v. Ontario Securities Commission, 2013 ONSC 1310 (CanLII) which dealt with continuous disclosure obligations, and Rankin v. Ontario Securities Commission, 2013 ONSC 112 (CanLII) which addressed a settlement entered into between the Appellant and the Commission.
On January 11, 2013, the Ontario Superior Court of Justice (Divisional Court) delivered its decision in Re Rankin, upholding the decision of the Ontario Securities Commission (the “Commission”) dismissing an Application to set aside an order in which it approved a settlement agreement between Commission Staff and the appellant, Andrew Rankin (“Rankin”).
Rankin was managing director of the mergers and acquisitions branch of RBC Dominion Securities. Charged with ten counts of insider trading and ten counts of tipping under ss. 76(1) and (2) of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”), he was ultimately convicted of all ten counts of tipping but was not convicted of insider trading.
Rankin committed these offences by providing confidential information to Daniel Duic, (“Duic”), an acquaintance who himself was in negotiations with the Commission and subsequently settled with it. Duic provided evidence on which the trial judge relied to convict Rankin, sentencing him to 6 months’ imprisonment.
On November 9, 2006, Rankin’s conviction was overturned and a new trial was ordered by Justice Nordheimer of the Superior Court of Justice. Before the commencement of the new trial, on February 19, 2008, Commission Staff reached a settlement agreement with Rankin, which included an admission of guilt. The Commission approved the settlement agreement on February 21, 2008, and released reasons on March 17, 2008.
In August, 2008, Rankin learned that in late 2007, Duic had been under investigation for committing a “technical breach” of his settlement agreement by engaging in trading contrary to the Cease Trade Order included in his settlement agreement.
Rankin brought an Application challenging the Commission’s decision to approve the settlement agreement pursuant to s. 144 of the Act on the basis that the failure of Commission Staff to disclose the investigation against Duic resulted in manifest unfairness to Rankin in deciding to enter into the settlement agreement. The Commission rejected Rankin’s Application.
On appeal, the Divisional Court held that the Commission’s decision not to revoke the settlement agreement was reasonable. The Divisional Court concluded that the information in question would not likely have materially impacted Rankin’s defence strategy, apart from calling Duic’s credibility into question. It further found that the Commission was correct to conclude that the omission of such information did not cause manifest unfairness to Rankin.
[t]he Commission’s formulation of the test required the Commission to determine whether or not the undisclosed information, as at the time when Rankin agreed to the settlement, “would likely have affected the outcome of the Rankin Administrative Proceeding“. Not only was this requirement irrelevant to the merits of Rankin’s motion before the Commission but, because it called for the Commission to make a determination, as at that time, of the likely outcome of a future hearing, first assuming that Rankin did not have the undisclosed information and then comparing it on the assumption that he did, it was unworkable.
According to Justice Matlow, Rankin should have been provided with all information relevant to his decision to enter into the settlement agreement, not merely that information which was crucial to its negotiation.
The result of the Court’s split decision in this case raises many questions. What rights do persons accused of offences under the Act have to disclosure of the case against them? If an accused person faces possible incarceration resulting from breaches of the Act, should criminal law disclosure obligations not apply to Commission Staff?
The decision of the Divisional Court in this case would suggest the answer is “no”.
If an accused person enters a guilty plea in the criminal context because the crown does not disclose material information relevant to the case against the accused, the accused may succeed in having the guilty plea withdrawn. To do so, the accused must prove (a) that the Crown did not meet its disclosure obligations; and (b), that on a balance of probabilities the lack of disclosure impaired the accused’s right to make full answer and defence (see R. c. Taillefer (2003), 179 C.C.C. (3d) 353 (SCC)).
The Divisional Court distinguished the present case from pure criminal cases, indicating instead that proceedings before the Commission are administrative and quasi-criminal. In such context, the Divisional Court suggested, the public interest does not require the setting aside of the settlement agreement, and concluded that from the perspective of a reasonable person, if disclosed, the information would not have affected the outcome of the proceedings.
This case highlights the distinction between the prosecution’s criminal and quasi-criminal disclosure obligations. Given that an accused person prosecuted under criminal or quasi-criminal charges may suffer the same punishment, namely, a loss of liberty, one might reasonably ask why a distinction exists between the crown’s disclosure obligations in each circumstance.
This question is not resolved by the court in this case, and it appears that at least for the time being, the prosecution will be subject to a lower standard of disclosure in quasi-criminal proceedings than in criminal proceedings, notwithstanding that proceedings under each regime may impose similar if not identical punishments on those convicted.
On March 19, 2013, the Ontario Superior Court of Justice (Divisional Court) released its judgment in Cornish v. Ontario Securities Commission, on appeal from a decision of the Ontario Securities Commission (the “Commission”) issued September 28, 2011. The appeal concerned the Commission’s interpretation and application of the term “material change” in the Securities Act, R.S.O. 1990, c. S.5 (the “Act”) and the obligations of reporting issuers to disclose such material changes.
This case provides greater insight and certainty into the meaning of “material change” and the obligations of reporting issuers when such changes occur.
Cornish was President and CEO of Coventree Inc. (“Coventree”), a niche investment bank specializing in structured finance. Coventree managed and administered ten separate trusts commonly called “conduits” which issued asset-backed commercial paper debt instruments (“ABCP”).
On January 19, 2007, the Dominion Bond Rating Service (“DBRS”) issued a press release in which it changed its credit rating criteria for certain credit arbitrage transactions. The effect of this change was to require Coventree to secure an unattainable type of liquidity to back credit arbitrage transactions going forward. Before this change, the now DBRS-restricted type of credit arbitrage transactions represented 40% of the conduits’ assets, and their use was the largest contributor to Coventree’s growth.
In July 2007, Coventree took various steps to attempt to address the lack of demand for new ABCP. However, on August 13, 2007, the market for Coventree-sponsored ABCP collapsed, and Coventree’s ABCP investors could not sell or redeem their ABCP instruments. Cornish prepared and issued a press release disclosing the market disruption as a material change.
The Commission found that Coventree breached the Act by failing to issue a news release and failing to file a material change report about the DBRS January Release. The Commission reached this conclusion despite the fact that Coventree’s mentions of the DBRS January Release in its February 14, 2007 letter to shareholders and in its May 14, 2007 MD&A did not result in any significant change in the price of Coventree shares.
[A] change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer.
The court clarified that the appropriate test to be applied in determining materiality is the “market impact test” which considers what effect certain facts, events or developments would reasonably be expected to have had on the market price or value of Coventree shares.
1. Materiality should be assessed objectively from the perspective of an investor and prospectively through the lens of expected market impact. A super critical interpretation of the meaning of “material change” does not support the goal of promoting disclosure or protecting the investing public. If the decision is borderline, the information should be considered material.
8. “The commission does not always need evidence of effect on market price to find a material change” has occurred.
Additionally, the court explained why evidence as to an actual impact on the market price of shares is not necessary to prove that a material change has occurred. In the absence of an actual impact on market price, a careful analysis of detailed evidence of the reporting issuer’s business and operations, market conditions and various other market-related factors would be sufficient. As an expert tribunal, the Commission merely applies its expertise to the evidence before it to explain why a lack of change in share price was not determinative of a material change issue.
This case provides greater certainty to reporting issuers in determining their obligations to disclose material change. Notwithstanding that Coventree did in fact inform its shareholders of the likely impact of the DBRS January Release, Coventree did not go far enough in reporting the material change. Based on the principles identified by the court with respect to the application of s. 75 of the Act, reporting issuers faced with similar material changes will not satisfy their obligations under the Act if they fail to file a material change report and news release. Their obligations are not lessened even if an actual change in share value does not result from the material change.

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