This article was prepared for and presented at the ABA’s National Institute on US-Canadian Securities Litigation conference held on May 18 in Toronto.

Introduction

As the number of cross-border investigations increases, a higher degree of cooperation between regulators in Canada and the United States is required to effectively enforce securities laws and regulations. While this cooperation has generally been recognized as necessary to the proper functioning and oversight of the securities regimes in both countries, how it affects the rights of individuals subject to investigation by a Canadian regulator merits discussion.

The laws protecting individuals and governing regulatory investigations in Canada and the United States differ. In Canada, for example, securities regulators are entitled to compel individuals to testify and produce documents relevant to an investigation. These individuals enjoy Charter and Evidence Act protections which prohibit the subsequent use of their compelled testimony to incriminate them. By contrast, in the United States, compelled individuals have the right to plead the Fifth Amendment and avoid testifying.

In the United States, the Securities and Exchange Commission (“SEC”) is able to commence civil, injunctive and administrative proceedings; however, it can also refer matters to the Department of Justice (“DOJ”). The potential for information sharing with the DOJ raises the risk that information shared with the SEC by Canadian regulators could lead to an individual having his involuntary testimony used against him in the United States perhaps in breach of the Charter and Evidence Act protections.

Further clouding the landscape is the lack of guidance by the Ontario Securities Commission (“OSC”) and other regulators, and scarce jurisprudence on the issue. It seems that individuals subject to an examination request by a Canadian regulator are left with three choices: (1) refuse to cooperate with the regulator and risk being held liable for contempt by the court;1 (2) cooperate and risk having the testimony used in the US and potential penal sanctions; or (3) cooperate while trying to negotiate additional protections and assurances.

The impression in Canada is that Canadian rights against self-incrimination are significantly diminished in comparison to the rights available in the United States. This paper focuses on how a Canadian resident, compelled to give evidence in a Canadian regulatory proceeding, can preserve his or her right to be free from self-incrimination in the context of a cross-border investigation. Its purpose is to: (1) provide an overview of the differing regimes in Canada and the United States with respect to self-incrimination; (2) examine how the courts in Ontario and Alberta have dealt with the issue; (3) consider how US courts have treated the use of foreign compelled evidence in US proceedings; (4) provide practical tips for defence counsel when faced with summonses in cross-border investigations.

Cooperation between Canadian and US Regulators

Cooperation between regulators in Canada and the US is increasing – a fact evidenced in statistics, recognized by the courts, and contemplated by multilateral memoranda of understanding. The OSC routinely receives requests for assistance from other Canadian and international jurisdictions. Since it began publishing statistics in 2010 regarding international cooperation, the amount of international requests for assistance has increased.2 The Supreme Court of Canada has noted that the “securities market has been an international one for years”3 and that “given the reality of interprovincial, if not international, capital market, ‘[t]here can be no disputing the indispensable nature of interjurisdictional co-operation among securities regulators today’.”4

Interjurisdictional cooperation is also contemplated in the memoranda of understanding between Canada and the US. In January 1988, the OSC and the SEC entered into a Memorandum of Understanding5 (“1988 MOU”), which “recogniz[ed] the increasing international activity in securities markets and the corresponding need for mutual cooperation in matters relating to the administration and enforcement of United States and Canadian securities laws.”6 The 1988 MOU was the first formal arrangement between Canadian and US securities authorities regarding the exchange of information. The signatories of the 1988 MOU agreed to provide one another with the “fullest mutual assistance” by (i) providing access to information in official agency files; (ii) taking evidence of persons; and (iii) obtaining documents from persons for investigations, litigation or prosecution of cases.7

The 1988 MOU requires authorities to take the testimony of persons “in the same manner and to the same extent as in investigations or other proceedings in the jurisdiction of the request Authority” and entitles all persons giving testimony to “all of the rights and protections of the laws of the jurisdiction of the requested Authority.”8 Furthermore, it states that “[a]ssertions regarding other rights and privileges arising exclusively pursuant to the law of the jurisdiction of the requesting Authority shall be preserved for consideration by the courts in the jurisdiction of the requesting Authority.”9

The 1988 MOU effectively facilitates the use of information obtained by a request, including compelled testimony, in civil, administrative, or self-regulatory enforcement proceedings, and potentially in criminal prosecutions.10 It is particularly troublesome for the subjects of the requests since it stipulates that, to the extent permitted by law, “[e]ach Authority will keep requests made under this Memorandum of Understanding, the contents of such requests, information gathered in response to requests, and any other matters arising during the operation of this Memorandum of Understanding, including consultations between Authorities, confidential”.11

In December 2002, the OSC and the SEC, as members of the International Organization of Securities Commissions, executed a further Multilateral Memorandum of Understanding12, substantially the same as the 1988 MOU.

The Right against Self-Incrimination in Canada and the US

  1. Protections for Canadians under the Charter & Evidence Acts

The right against self-incrimination is derived from ss. 7, 11(c) and 13 of the Charter,13 which ground the basis for the following protections under the Charter and provincial Evidence Acts in respect of compelled evidence:

  • Use immunity, which provides that prior testimony cannot be used to incriminate a witness in a subsequent proceeding except in prosecuting perjury;
  • Derivative use immunity, which prohibits the use of testimony as a means of obtaining incriminating evidence otherwise unavailable. Derivative evidence is not automatically excluded. The court must determine whether the evidence could have been obtained through alternative means;
  • Constitutional exemption, which protects a witness from testifying if the purpose of obtaining the testimony is to establish penal liability.14

Under s. 7 of the Charter, “[e]veryone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”15 The courts have not interpreted s. 7 of the Charter to automatically preclude “a securities regulatory authority from compelling an individual to testify during an investigation, notwithstanding that the individual’s liberty interest is engaged.”16 A witness may be able to obtain a Charter remedy if: (i) the witness is subsequently charged with an offence, and (ii) able to prove that the predominant purpose of the regulatory investigation was to determine whether he was guilty of a criminal offence or an offence under securities legislation.17

Pursuant to s. 11(c) of the Charter, “[a]ny person charged with an offence has the right not to be compelled to be a witness in proceedings against that person in respect of the offence.”18 Unfortunately, s. 11(c) does not protect a witness compelled to give evidence in a securities regulatory investigation or an administrative proceeding because the individual is not “charged with an offence.”19

Section 13 of the Charter, however, provides use immunity for compelled testimony in all proceedings, including a regulatory proceeding. Under s. 13, a witness who testifies in any proceeding has the right not to have any incriminating evidence given by him used to incriminate him in a subsequent proceeding. The witness’ prior testimony may only be used in prosecution for perjury or for impeaching the witness. Furthermore, the Supreme Court of Canada has interpreted s. 13 as also affording derivative use immunity. 20

Recent jurisprudence, however, has provided grounds for a concern that the protection afforded by s. 13 of the Charter has been diminished. In R v Nedelcu,21 the Supreme Court of Canada held that non-incriminating statements made during examinations for discovery in a civil case could be used against an accused in a criminal case to impeach his credibility in the criminal proceedings:

In this case, the Crown sought to use Mr. Nedelcu’s “non-incriminating” prior discovery evidence to impeach him. The use of his non-incriminating discovery evidence for that purpose did not convert it into incriminating evidence, i.e. evidence that the Crown could use, if permitted to do so, to prove or assist in proving one or more of the essential elements of the offences upon which Mr. Nedelcu was being tried. As such, s. 13 was not engaged.22

Justice Moldaver defined “incriminating evidence” as

evidence given by the witness at the prior proceeding that the Crown could use at the subsequent proceeding, if it were permitted to do so, to prove guilt, i.e. to prove or assist in proving one or more of the essential elements of the offence for which the witness is being tried.23

Whether Nedelcu contradicts prior jurisprudence and effectively allows for self-incrimination through impeachment with “non-incriminating” evidence is an issue that has been since been contemplated by courts.

In ACI Brands v Pow, Justice Perell held that Nedelcu does not diminish the protection provided by s. 13 and is not a departure from prior law on the protection against self-incrimination.24 Justice Perell stated that

even if Nedelcu is a diminishment of s. 13 Charter rights or values, the Canadian approach to self-incriminating evidence, which was never an absolute protection, does not have to change… s. 7 of the Charter is and has been the backstop for any erosion of s. 13 of the Charter in particular cases, and it remains available for the Accused Defendants.25

In addition, Perell J. noted that previous decisions by “the Supreme Court of Canada and the Ontario Court of Appeal have already decided that no change is required to the law about compelling incriminating testimony in civil proceedings” and these decisions continue to govern.26

In addition to the Charter, s. 9 of the Ontario Evidence Act,27 s. 9 of the Alberta Evidence Act,28 and s. 5 of the Canada Evidence Act29 also afford use immunity for testimony compelled in provincial and federal proceedings. Notably, the scope of the protections provided by s. 9 of the Ontario Evidence Act goes beyond protection from incrimination and, consequently, is broader than that afforded by s. 13 of the Charter and s. 5 of the CanadaEvidence Act.30 Under s. 9 of the Ontario Evidence Act, compelled testimony must not be used to establish the witness’s liability in subsequent civil or regulatory proceedings; however, in order to engage the protection of this section and the other Evidence Acts, a witness must expressly claim these protections at the time of compulsion prior to testifying. Similarly, s. 9 of the Alberta Evidence Act affords witnesses who expressly claim it, protection from the use of compelled evidence against them in subsequent proceedings. In Re Agueci, s. 9 of the Alberta Evidence Act was given a liberal and purposive interpretation to also prevent the use of compelled testimony in concurrent proceedings.31

  1. Compelling Evidence under the OSA and the ASA

Regardless of whether or not they have been diminished in effect, the protections contemplated and provided for by the Charter and Evidence Acts are necessary in light of regulators’ statutory right to compel a witness to give evidence. A Commission’s freedom to share compelled information and the level of procedural protections offered to witnesses differ from province to province. Our focus will be on Ontario and Alberta.

Ontario

Subsections 11(1)(a) and 11(1)(b) of the Ontario Securities Act32 (the “OSA”) provide the Commission with the power to appoint persons to investigate any matter relating to:

  • the due administration of Ontario securities law or the regulation of capital markets in Ontario;33 or
  • the due administration of the securities laws or the regulation of the capital markets in another jurisdiction, which consequently allows the Commission to appoint SEC staff as part of the investigative team.34

The power to investigate includes the right to question a person and to compel production of documents.35

Section 16 of the OSA protects the privacy rights and interests of compelled witnesses. It provides a presumption in favour of maintaining the confidentiality of compelled evidence, which can only be disclosed in accordance with the specific exceptions outlined in s. 17 of the OSA.36

Subsection 17(1) permits the Commission to disclose any compelled testimony or documents if it is in the public interest.37 However, unlike the Alberta Securities Act38 (the “ASA”), the OSA provides the compelled witness with some procedural protections in the event of disclosure, including the right to reasonable notice and an opportunity to be heard prior to disclosure of compelled testimony and documents.39

Despite these protections, the OSC has the discretion to order disclosure to (i) other securities regulatory bodies, (ii) self-regulatory bodies or organizations, (iii) law enforcement agencies, and (iv) government or regulatory authorities without notice to the subject of the investigation if deemed in the public interest.40 This discretion is subject to s. 17(3) and 17(7), which prohibit disclosure to “a municipal, provincial, federal or other police force or to a member of a police force; or a person responsible for the enforcement of the criminal law of Canada or of any other country or jurisdiction” without the written consent of the person from whom the testimony was obtained.41 Consequently, compelled testimony cannot be disclosed to the police without the witness’s consent, but compelled witnesses may not be aware that their testimony has been shared with a foreign regulator such as the SEC.

Alberta

Section 42 of the ASA provides the Alberta Securities Commission (“ASC”) with the authority to compel the attendance of witnesses (1) for investigations under s. 41; (2) to give evidence under oath or affirmation; and (3) to provide information and documents as part of the investigation.42

Section 46 of the ASA allows the Executive Director of the ASC to share information with “law enforcement agencies and other governmental or regulatory authorities in Canada and elsewhere” if the Executive Director considers that “it would not be prejudicial to the public interest to do so”.43 Individuals are not provided with any right to notice or a hearing in any circumstance under the ASA.

  1. The Right against Self-Incrimination in the United States

In the US, the right against self-incrimination lies in the Fifth Amendment of the US Constitution, which states:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.44

The protection for a witness against self-incrimination was first declared to be part of the Fifth Amendment by the US Supreme Court in Boyd v United States.45 In stark contrast to the regime in Canada, the Fifth Amendment appears to allow witnesses the opportunity to avoid testifying completely; a powerful right46. By comparison, Canadian protections against self-incrimination are not absolute and not guaranteed to effectively protect an individual.

Canadian Courts’ Approach to Self-Incrimination: Ontario vs. Alberta

Ontario

Although, as mentioned above, judicial treatment of this issue in Canada is scarce, in balancing an individual’s right against self-incrimination with a regulator’s right to information sharing, Ontario courts have taken a more nuanced and practical approach compared to the courts in Alberta.47

In A v Ontario Securities Commission,48 the applicant sought a declaration pursuant to s. 7 and 24 of the Charter and an order quashing a Summons to Witness issued by the OSC. The applicant argued that there was a risk that his testimony may be used against him by American authorities without the protections afforded under the Charter.49

Justice Campbell declined to quash the OSC summons, holding that the entitlement to notice and a hearing under the OSA, combined with the potential to engage the Court to intervene, was sufficient to safeguard Mr. A’s Charter rights.50 No evidence existed to suggest that the information compelled pursuant to the s. 11(1)(a) summons would be shared with the US authorities in circumstances where Mr. A would lose his Fifth Amendment protections.51 However, the Court also suggested that the OSC should have separate investigation teams handling the s. 11(1)(a) and 11(1)(b) investigations.52

Pursuant to the OSA, US investigators can and have been appointed to investigative teams. The extent to which separating the teams, as Campbell J. suggested in his decision, makes a tangible difference is up for debate.

Alberta

In Alberta, the courts have consistently held that the Charter does not have extraterritorial jurisdiction. Alberta courts have also expressed a disinclination to determine matters prematurely when there is only a fear of a future breach of individual rights. Most recently, in Beaudette v Alberta (Securities Commission),53 for example, the appellant argued

that the requirement to provide information and documents concerning his securities activities in North America, coupled with the possibility that the ASC might share that information with other state authorities and, in particular, the United States, infringes his right to liberty guaranteed under s. 7 of the Canadian Charter of Rights and Freedoms.54

The appellant advanced this claim in part due to the possibility that the information or documents compelled from him might be made available to assist in a potential criminal prosecution against him in the United States.55

The Alberta Court of Appeal held that s. 7 of the Charter was not infringed and affirmed that s. 7 of the Charter is not engaged before liberty is actually threatened: “[s]peculation about a potential future breach” has not met the burden of proof since the early Charter era, and “[m]ere allegations of possible foreign state actions associated with Canadian state actions are not proof that those events are likely to happen”.56 Accordingly, “[t]he mere assertion by the appellant here that conscripted evidence from him will somehow be unlawfully shared with United States authorities in a Charter-abusive manner is not evidence that such occurrence is likely.”57

The Court also held that even though compelled evidence could potentially be used in American proceedings, Canadian courts “are not authorized, let alone instructed, by the Charter to arrogate the jurisdiction to evaluate, let alone to control, the investigative or judicial processes of friendly foreign rule of law democracies.”58

Prior to Beaudette, the Alberta Court of Queen’s Bench reached a similar conclusion in ASC v Brost.59 In Brost, the ASC applied for an order compelling attendance for examinations. The SEC was also investigating the respondents and the ASC refused to confirm whether it intended to provide the transcripts of their testimony to the SEC, or whether it would give them notice before doing so. The respondents acknowledged that the Charter had not been breached and did not challenge the constitutional validity of a specific section within the Act. However, they argued that there was a Charter values issue and the Summonses by the ASC must conform with the Charter.

The Court in Brost noted that although it was clear that some proceedings had been initiated in the United States, it was not clear what form those proceedings would take; moreover, there was no evidence of an existing criminal proceeding involving the respondents.60

The Court also affirmed that the Charter rights do not apply to conduct outside Canada by prosecutors that are not Canadian; consequently, a Charter breach is not possible even if prosecutors in the United States used testimony obtained in Canada against the respondents.61

In addition, the Court highlighted that the “Supreme Court of Canada has confirmed the importance of assisting other securities regulators in an effort to enforce securities regulation on an international level.”62

Courts’ Approach to Self-Incrimination in the US

  1. The Fifth Amendment and the Fear of Foreign Proceedings

The US has gradually extended the Fifth Amendment privilege against self-incrimination; however, the Fifth Amendment is limited to the extent it cannot be invoked to avoid foreign prosecution.63 This limit on the application of the Fifth Amendment was confirmed in the landmark case of US v Balsys.64 In this case, the Supreme Court held that the Fifth Amendment privilege against compelled self-incrimination cannot be invoked solely on the basis of a fear of foreign prosecution.65 The Court held that the Fifth Amendment “applied only when either the sovereign seeking to compel the witness’s testimony was the same sovereign that would use the testimony against the witness, or when the compelling and the using sovereigns were both bound by the Fifth Amendment.”66

Prior to Balsys, federal appellate courts were divided on whether the Fifth Amendment extended to protect a witness who feared that testimony given in a domestic proceeding would be used against him in a foreign criminal proceeding.67

Although Balsys limited the scope of the Fifth Amendment, recent jurisprudence demonstrates that Balsys left open the possibility of a US citizen pleading the Fifth Amendment in a foreign trial for fear of US prosecution.68

  1. US v Allen: The admissibility of foreign compelled evidence in US securities proceedings

While it does not appear that American courts have considered the admissibility of evidence compelled in Canada for the purposes of an investigation in the United States, the issue has arisen in the context of evidence compelled by a British regulator.

In US v Allen, the defendants were charged with conspiracy to commit wire fraud and bank fraud, as well as several counts of wire fraud.69 The defendants moved pursuant to Kastigar70 to suppress the indictment or, in the alternative, to suppress the testimony of Government cooperator Paul Robson and “all evidence derived from Mr. Robson’s testimony.”71 The defendants claimed that

the testimony they were compelled to give to the United Kingdom’s Financial Conduct Authority tainted the U.S. Government’s case against them, particularly as a result of the review of this testimony by Mr. Robson, who subsequently cooperated with the Government and testified at the defendants’ trial.72

Pursuant to Kastigar, a defendant must first demonstrate that he has been compelled to testify in a federal prosecution.73 Then the burden shifts to the federal authorities who have an affirmative duty to establish that their evidence is not tainted and, instead, was derived from a legitimate source independent of the compelled testimony.74

In his decision, Judge Rakoff reaffirmed the scope of the Fifth Amendment:

The Fifth Amendment prohibits the use of immunized testimony in two circumstances: (1) where the immunized testimony has some evidentiary effect in a prosecution against the witness, or (2) where there is a recognizable danger of official manipulation that may subject the immunized witness to a criminal prosecution arising out of the investigation in which the testimony is given. The Government may also violate the Fifth Amendment when a cooperating witness’s exposure to compelled testimony motivates that witness to cooperate and testify against the defendants.75

and concluded that the Government “had identified defendants Allen and Conti as potential targets through means unrelated to any exposure to defendants’ compelled testimony” and “Mr. Robson’s cooperation did not indirectly provide the Government with any tainted information.”76

Notably, Judge Rakoff also addressed the fact that the Government had provided evidence to demonstrate that prosecutors were not exposed to defendants’ compelled testimony, including evidence that:

  • a member of the Department of Justice’s (“DOJ”) investigation team gave a presentation to the United Kingdom’s Financial Conduct Authority (“FCA”) on the Fifth Amendment and Kastigar, “in order to explain the importance of maintaining a ‘wall’ between the two countries’ investigations”;
  • the “DOJ asked UK investigators not to share with them any information derived from compelled interviews, and UK authorities confirmed that they would refrain from doing so”; and
  1. Commentary on US v Allen

The defendants’ Kastigar motion in US v Allen presented an “issue of first impression”78 and commentators have criticized Judge Rakoff’s decision for “sidestepp[ing] the seemingly threshold question of whether the Fifth Amendment privilege against self-incrimination and Kastigar apply to involuntary statements made by a defendant to a foreign official who is not himself bound by the U.S. Constitution.”79 Judge Rakoff relegated this issue to footnote 8 of his decision and concluded: “Deeply interesting though this question is, the Court has no occasion to resolve it here, because, even assuming Kastigar applies to testimony compelled by a foreign sovereign, the Government has met its Kastigar burden on the facts here determined.”80

However, commentators have warned that Judge Rakoff’s decision to defer consideration of the Kastigar motion until after trial reflected that he was not able to readily accept the government’s claim that, as a matter of law, Kastigar was simply inapplicable in this case.81 Furthermore,

when the government sought an advisory ruling from the court that no Fifth Amendment violation would occur if they cross-examined the defendants using the compelled testimony [Judge] Rakoff warned the prosecutors that they would be ‘tak[ing] [their] chances on that’ in light of the defendants’ Fifth Amendment protections.82

Others have also noted that Judge Rakoff effectively provided a roadmap for the government to follow in future investigations and prosecutions in order to avoid potential Fifth Amendment violations:

Judge Rakoff highlighted that certain steps the DOJ took to shield itself from exposure to compelled testimony – including educating a foreign regulator about the Fifth Amendment, requesting that a foreign regulator not share compelled information, and requesting to conduct its own interviews ahead of and separate from the foreign regulators – avoided any taint from the involuntary statements.83

Practical Guidance

Given the uncertain landscape and dearth of guidance on the issue, in the event of an investigation by securities regulators, defence counsel must ensure that their client takes advantage of all protections available, including the following:

  1. During a formal investigation, witnesses should explicitly assert their protections against self-incrimination and clearly communicate their expectation that their evidence remain confidential.
  2. Counsel should review the s. 11 Order to ensure that there is a section that binds and prohibits OSC staff investigators from disclosing any compelled evidence, as well as a section that binds and prohibits SEC staff investigators from forward-sharing.
  3. Counsel should consider whether it is appropriate to divide s. 11(a) Order OSC investigators into a team separate from the s. 11(b) Order SEC investigators.84
  4. Witnesses should not consent to sharing their evidence with the SEC unless during the compelled examination the SEC provides an express undertaking to the Commission and to the witness that: (i) it shall not use the evidence, or evidence derived from it, to incriminate the witness or expose him to civil or administrative jeopardy in any proceeding; (ii) it will maintain the evidence in the strictest of confidence; and (iii) it shall not provide it to any party absent further order of the Commission.85
  5. Counsel should consider whether to bring a motion for an order imposing restrictions on the use of the compelled evidence. The Ontario Court of Appeal’s decision in Treat Canada Ltd v Leonidas86 is an example of a case in which the court protected an individual from potential self-incrimination by granting protective orders enforcing the confidentiality and restricting the use of compelled testimony in a foreign jurisdiction.
  6. Witnesses who are American citizens should consider attending the US Embassy in order to plead the Fifth.
  7. Witnesses should consider entering into an agreement with the foreign regulator whereby the witness will go to the US and, with separate US counsel, plead the Fifth Amendment.