News & Events
Keynote Speech to the Advanced Forum on Securities Litigation
Lawrence E. Ritchie
Vice-Chair, Ontario Securities Commission
Toronto
November 28, 2007
Thank you very much for the opportunity to speak at this program today.
Before joining the OSC as Vice-Chair, I was a litigator at Osler, Hoskin & Harcourt for almost 20 years. In the last 10 years or so, I specialized in various degrees in a variety of securities litigation. This included broker-dealer litigation, regulatory enforcement work, some transactional work, and certainly some shareholder class action work. So coming to the OSC as a Vice-Chair, I bring the perspective of the litigator and an appreciation of the litigation process.
In part, because my perspective is somewhat different than others, certainly on the executive floor, they make me give you general disclaimer that says: “the views that are reflected in this presentation are my own and do not necessarily reflect those of the Chair or other Vice-Chair, the Commission members, or staff”.
The topics for discussion at today’s conference represent a vast range of matters that fall within the scope of what could be called securities litigation. And securities litigation is firmly grounded as a salient feature in our securities regulatory landscape.
Take-over bids and other corporate transactions, shareholder activities, client-broker disputes, multi-million dollar class actions, to enforcement proceedings before our Commission, a self-regulatory organization or the courts: all of these can be properly characterized as securities litigation.
And they are all topics and areas of interest that will be the subject of dialogue and discussion over the next couple of days in what looks like a very interesting and informative agenda.
In the brief time I have today, I would like to give you my perspectives on some of the securities litigation matters with which I am most familiar, both as a result of my eight months as Vice-Chair, adjudicating on matters that come before the OSC, as well from the time that I spent as defence counsel prior to joining the OSC.
I intend to briefly touch upon some thoughts I have on a few interrelated topics, summarizing some of the things I have been looking at and speaking about over the past few months:
- The evolution of the Commission’s “public interest” jurisdiction and how focus is brought to the exercise of our discretion;
- Judicialization of Commission proceedings;
- Relationship between class actions and Commission proceedings; and
- Some thoughts on enforcement activities and comparative litigation efforts and outcomes in other jurisdictions.
Dispute resolution by administrative bodies plays a crucial role in modernizing and consistently updating economic regulation. Decision-making by tribunals like the OSC needs to be flexible and responsible to ever-changing market dynamics and issues.
At the same time, certainty in decision making is a high goal which we as decision makers all strive to achieve. Market participants have a right to effectively predict how a regulator will respond when a matter comes before it in an administrative proceeding. The challenge for securities adjudicators is to effectively balance that necessary “certainty” with the flexibility built into the exercise of a “public interest” jurisdiction.
The OSC is charged with administering the Securities Act, and furthering its goals. The mandate of the Commission is reflected in the purpose of the Act, which are:
- to protect investors from unfair, improper or fraudulent practices; and
- to foster fair and efficient capital markets and confidence in capital markets.
The Commission’s power to make orders in the public interest is enshrined in section 127 of the Act which reads, quite simply: “The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders”.
For example, the Commission can order that a stock be cease-traded, that an exemption doesn’t apply to a person or company, that information be filed, that a person be forbidden from becoming a director or officer, or that an administrative penalty be paid. The latter, along with the power to disgorge profits improperly obtained, requires a finding of a breach of securities laws. As well, section 127.1 allows the Commission to order the payment of investigation or hearing costs.
One of the biggest challenges for Commissioners as adjudicators is that the Act does not define “public interest”. One who watches or participates in proceedings at the Commission will hear many different positions as to what the public interest means. While one party frames the public interest as being coincident with shareholder protection, another may argue that it requires the promotion of the free flow of capital and unhindered functioning of the capital markets. Of course, the promotion of both fall squarely within the Commission’s mandate, and enhancing both is clearly in the public interest. But, the Commission’s application of its power is necessarily a balancing act.
But the absence of prescriptive guidelines on what is meant by the “public interest” does not create an unbridled ability for Commission panels to do whatever it feels like doing.
It is very much directed by widely recognized standards and market practices. It is guided by principles of behaviour that are reflected throughout the Act, and local and national rules and policy statements made under the authority of the Act.
It is informed and focused by judicial pronouncements and jurisprudence, and heavily influenced by previous Commission decisions, as well as those of other Canadian securities authorities.
Securities commissions adjudicate within a common law tradition in which certainty is promoted through consistent and responsible decision making.
Over time, the Commission’s public interest power has evolved considerably. Originally, orders were only made granting cease-trade orders or refusing an exemption from securities law. These powers were explicitly within the legislative authority of the commission and were used to protect the public from immediate harm by ordering that a stock not be traded, and or that an unfair transaction be stopped through the removal of exemptions. While the powers of the Commission expanded with legislative reform over time, many commentators view the greatest change having occurred through a series of Commission decisions.
The Cablecasting case and the so-called trilogy which followed, namely: Canadian Tire, Selkirk and HERO made clear that the Commission can act to issue orders in the public interest in the absence of a breach of a statutory provision or even policy statement. However, all of those cases recognize that novelty and perceived uncertainty and unfairness could result from these types of orders. The Commission has cautioned that the use of the public interest power absent a breach of the Act or specific rule or policy should be made sparingly.
In Financial Models, the Commission noted that it will intervene in the public interest even if the Act has not been specifically violated (a) in cases of clear abuse of the capital markets, and/or (b) if a conduct in question is contrary to the underlying principle of policy of a rule or law.
When approaching standards such as “clear abuse” and “breach of principles”, it is, in my view, incumbent upon decision makers to articulate those principles, and what it has recognized as an abuse, through its written reasons. and that is what we try to do.
Public interest in the context of enforcement proceedings
By the late 1990s, many enforcement proceedings at the Commission were based upon section 127 exclusively, without referring to breaches of specific provisions of the Act or used as a back-up for an alleged direct violation of the Act. Sanctions available for parties found to have acted contrary to the public interest were largely administrative in nature. Prohibitions on acting as an officer or director, taking away the parties’ right to trade securities, etc.
The Commission in Mithras, and affirmed by the Supreme Court in the Asbestos case, noted that the role of the Commission is not to punish past conduct since that is the role of the courts. Rather, the Commission is here to protect investors as best it can by restraining future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient.
Scandals, such as Enron, WorldCom, Nortel and Bre-X, led to calls for more effective weapons for securities regulators to fight improprieties and abuse in the capital markets. In 2002, the legislature added ‘administrative penalties’ and disgorgement of profits to the Commission’s arsenal under section 127. Currently, if in the opinion of the Commission a person has not complied with securities laws, an administrative penalty of up to $1 million can be levied for each infraction. These provisions are clearly geared towards use in enforcement actions and some argue that these begin to look very much like punitive measures. However, courts to date have upheld their validity.
These new powers, however, highlight this tension between punishment and prevention. The Supreme Court in the Cartaway decision has confirmed that general deterrence is a relevant factor when fashioning sanctions in administrative proceedings. Quoting from the Court of Appeal decision, Justice LeBel stated, “the notion of general deterrence is neither punitive nor remedial. A penalty that is meant to generally deter is a penalty designed to discourage or hinder like behaviours in others.” However, as some commentators, such as Professor Anand, observe, the line between a punitive and protective approach is not readily definable.
Judicialization of Commission Proceedings
Over the years, as the consequences of Commission proceedings have become more serious, Commission proceedings have become more like court proceedings.
Professor Mary Condon and others have written that criminalization or over-judicialization of Commission proceedings as a result of its extension into the enforcement area is not necessarily a welcome development. Increasingly long hearings, constitutional motions and procedural motions impede the Commission’s efforts to oversee the market. She argues that the efficiency advantages of the OSC are reduced, with the average case taking somewhere in the neighbourhood of two years to complete. Judicialization and so-called “criminalization” hinders the efforts of the Commission to be flexible in regulating the markets and disciplining wrongdoers.
This is quite true. Commissioners, in exercising their public jurisdiction in enforcement proceedings, have to recognize the need to balance the interest before us: as the Supreme Court said in the Chiarello case, procedures need to allow the tribunal to operate efficiently while ensuring that the interest of the parties are adequately protected. The increase in the breadth of sanctions and outcomes, and the effect of our proceedings on respondents, has required us to ensure parties before us are treated fairly. As the Supreme Court said in the Baker decision, the greater the impact of the a decision on an individual, the more likely he or she is to be accorded greater procedural rights. While the Commission is still in administrative proceeding and subject to the balance of probabilities civil standard, commissions have repeatedly emphasized that the degree of proof required in a disciplinary proceeding before the OSC can reach a conclusion of fact is nothing short of clear and convincing based upon cogent evidence which is acceptable by the tribunal. Not only are rights to participate in the capital markets affected by Commission decisions, but also the right to earn a livelihood as well as exposure to monetary penalties and cost orders.
Given the seriousness of what is often at stake in Commission proceedings, respondents’ counsel have, over the years, been creative in mounting their clients’ defences – Charter and other jurisdictional challenges, strengthened particulars and disclosure requirements, bias challenges, are all staples in a defence counsel’s arsenal.
So processes have to adapt and Commission panels when determining procedures must balance the manner in which rights are respected by the need to ensure the proceeding is not ground to a complete halt. The Commission observed in the Belteco case that preliminary motions can take a life of their own and, as the Supreme Court in DeSouza recognized, proceedings on the merit should not be fragmented by interlocutory preliminary proceedings.
Systems and processes need to evolve to ensure that complex proceedings actually get heard and decided. Commission proceedings are governed by rules of practice which had been the subject of public comment and consideration. Published rules serve an important role in enhancing fairness and transparency. Our rules contemplate settlement conferences, but sometimes that is not enough. In a recent case, the Commission has ordered a formalized case conference system, where the parties, staff and multiple party respondents, will address preliminary matters and motions well in advance of the scheduled hearing date.
So while judicialization of Commission proceedings may seem “inconvenient”, in my view, it has become necessary given the increased seriousness of Commission proceedings. It is our challenge to move cases along as expeditiously as possible, with full regard to the rights of the parties before us.
Class Actions and Their Role in the Regulatory Environment
I’d like to spend a few moments talking about the third area that I identified: securities class actions. As all of you are aware, the class action is a relatively new creature in the securities landscape and, certainly, this is the case for misrepresentation for class actions premised on misrepresentations in the secondary market. There have been numerous class actions in the securities area over the years largely as a result of alleged misrepresentations in prospectuses. Fear of class actions amongst issuers, their officer and directors, is an extremely powerful tool for behaviour modification. However, such fear can give rise to unintended results. For example, given the serious financial ramifications class actions can have on public companies and their officers and directors, it is not surprising that, even in the course of a regulatory investigation, financial liability to class action plaintiffs and their lawyers is a significant factor in how companies and their counsel respond to OSC investigations and proceedings.
In Ontario, it is well known that staff of the OSC require admissions from a respondent before they will bring a settlement to a Commission panel for our approval of it. This can be an impediment to speedy and efficient resolution of some regulatory investigations and matters. So the existence or threat of class actions, and the potential for large damage awards, is always in the minds of counsel when approaching settlement, or otherwise dealings with regulators. As an adjudicator, I play no role in determining when a matter is brought to a hearing or presented to the Commission for approval as a settlement. However, I do raise the question as to whether steps can be taken, as a matter of policy, to facilitate the Commission’s ability to deal with regulatory matters more promptly and collectively in the face of litigation risk.
At the same time, the Commission can and should, in my view, take into consideration the impact of class actions in determining how its public interest jurisdiction should be exercised in a particular case. The Nortel settlement with the OSC reflects our view that wrongdoers, but not necessarily shareholders, should be held accountable for corporate misdeeds, particularly in certain situations in which the Commission is satisfied that the public is protected going forward. Large civil damage awards in the U.S. class actions, numerous financial re-statements, and changes in management and in the company’s corporate governance structures, were all relevant factors suggesting that the public in that case was being protected, and that the settlement proposed was a reasonable and fair one.
Enforcement Perspectives
Finally, I would now like to talk about the media sport of attacking the enforcement record of the OSC.
With respect to enforcement litigation generally, Canada’s proximity to the U.S. gives rise to comparisons and criticisms relating to securities regulation. We are often compared to U.S. regulators and we are often expected to respond to securities matters like authorities do in the U.S. In comparison with the U.S., securities regulators are often criticized for not being aggressive enough. The perception is generally framed against a backdrop of large fines and jail terms handed out to those convicted of wrongdoing in the U.S. capital markets in contrast to perceived inadequacies in our responses to similar wrongdoings. As Pierre Trudeau once said, “living next to the U.S. is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.”
In my view, the criticism can be unfair. Without trying to be too defensive, the criticism usually does not take into consideration the political and cultural differences between the two countries.
I see the U.S. environment as marked by pendulum swings, which we seek to avoid.
My own view though is that a consistent, coherent and transparent enforcement program can be effective at building and enhancing confidence in the public markets. The system must ensure that the players know the rules of the game, and understand that they will be treated fairly when those rules are enforced. This does not mean that a soft touch is or will be applied. In fact, quite the opposite is true: harsh penalties and other sanctions must be sought and obtained where appropriate. But, as stated, we strive to give market participants better compliance tools, resources and direction to ensure that those instances are few and far between. We are trying to broaden the discourse about the relationship between enforcement and compliance, and therefore move away a bit from measuring enforcement effectiveness in terms of monetary penalties, jail terms and number of proceedings commenced. Proceedings avoided is also worthy to take notice of but is much less visible.
We have recognized that there is a “compliance-enforcement continuum”. At the end of the continuum is compliance; on the other is pure enforcement. This essentially means that there is a full range of tools available to regulators to fulfill our mandate - and where we rest on that continuum sometimes changes depending on the impact an issue has, or may have, on the double mandate of investor protection and emboldening capital markets. Just because our approach may weigh more heavily towards the compliance end of the spectrum doesn’t mean that the OSC is not effective.
Simply put, the OSC cannot, and should not, try to solely rely on enforcement activity to affect and change behaviour of market participants. Investigating, holding regulatory hearings, and prosecuting in court when warranted, is sometimes necessary, and effective, but is at one end of the continuum. At the other end is the cooperative, consultative approach. It means encouraging and guiding issuers to comply with the highest standards of market behaviour.
If there’s compliance with the rules, there’s less need for the enforcement tools at the other end of the continuum. Think of compliance as “fire prevention”, which is certainly preferable to calling for help once the building is in flames.
It’s less exciting maybe. It gets fewer headlines.
But it can be a more effective way to protect investors.
So what regulators can do is try to articulate principles and standards that help all market participants understand what kind of behaviour is expected and consistently apply and enforce them. In doing so, regulators can help market participants police themselves.
Our role and duty as regulators is to help define certain standards for issuers to promote and enforce internally and to be available with enforcement, hopefully as a last resort, when issuers are unable or unwilling to comply. We can do this by clearly establishing standards and principles and guidelines. Defining clearly articulated standards for better market behaviour, strengthening our commitment to compliance reviews and related initiatives, help point issuers in the right direction without necessarily resorting to enforcement steps.
Again, it’s a question of balance.
It’s unrealistic to expect everyone to comply with the standards of good market behaviour without the potential threat of enforcement and litigation. But, in my view, it’s just as unrealistic to expect enforcement alone to encourage proper market behaviour.
Thank you.
