A recent decision of the Ontario Securities Commission (OSC) concerning the responsibility of a CEO for his company’s 2003 press release, which contained information concerning an accident and its effect on third-quarter earnings results, has received considerable press comment.
The press treated as novel the OSC’s finding that Eugene Melnyk, who was CEO of Biovail Corporation at the time of the release, had acted contrary to the public interest in allowing the release of information even though no violation of the Securities Act had been demonstrated. (Before Mr. Melnyk’s case was heard, Biovail had settled the charges brought against it by the OSC.)
In fact, the OSC’s finding is not a novel development at all. The OSC has a very well-established jurisdiction under the Securities Act to impose penalties in the public interest, and it has been established for decades that the OSC can exercise its public interest jurisdiction in the absence of a Securities Act violation.
What the Melnyk decision does do is clarify that lawful conduct which falls short of being abusive of capital markets can support the exercise of the public interest power. Prior to Melnyk, it was generally believed that the only lawful conduct that could attract a public interest penalty had to be abusive of capital markets. The OSC rejected that proposition explicitly.
The decision also underlines the risks to public company officers, particularly CEOs, who are treated as pivotal players in coordinating the corporate disclosure process. Biovail’s admissions about its press releases in the settlement it had arrived at long before Melnyk’s hearing were found to bind Mr. Melnyk. Mr. Melnyk was involved in the issuance of the press release in question and could not escape responsibility by claiming good-faith reliance on subordinates (para 401) or ignorance of facts known to them, because he had his own quite separate responsibility to ensure accuracy. The OSC also made it clear that this responsibility is not just engaged when a CEO has seen red flags and ignored them.
Note that at the time of Biovail’s press release in 2003, the Securities Act did not contain provisions creating statutory liability for secondary market disclosure (now found in Sections 138.3 and following of the Securities Act). Under such provisions, directors and officers of public companies may, in certain circumstances, be directly liable for misrepresentations contained in the company’s press release or other disclosure documents.