On May 31, 2012, the Ontario Securities Commission (the “Commission”) issued its reasons for decision dismissing a stay motion by Mitchell Finkelstein and a prematurity cross-motion by Staff following the hearing held on November 10 and 11, 2011.
Finkelstein sought to stay the Commission’s administrative proceeding brought by Staff in relation to his alleged tipping on six separate occasions (the “Stay Motion”). He made his request on the basis that Staff carried out its investigation in a manner which violated both its duty to act fairly and Mr. Finkelsten’s fundamental right to a fair and proper “Wells Process”. He further alleged that Staff failed to provide sufficient time and particulars to enable him to respond to Staff’s enforcement notices sent to him prior to the issuance of the Notice of Hearing, Amended Statement of Allegations and Amended Amended Statement of Allegations. In response to Finkelstein’s Stay Motion, Staff brought a cross-motion to dismiss the Stay Motion on the grounds that the Stay Motion was premature (the “Prematurity Motion”).
In the United States, enforcement actions are recommended by the Securities and Exchange Commission (“SEC”) staff and authorized by their commission. Before the decision to authorize an enforcement action is taken at the commission level, the “Wells Process” is initiated. This process consisted of a “Wells Notice”, sent by SEC staff, and a “Wells Submission” (made by the recipient of the “Wells Notice”). In the U.S., respondents can bring motions to strike an enforcement action on the basis of a deficient or non-existent “Wells Process”, however, the courts tend to dismiss such motions unless SEC staff’s conduct is egregious, occurs before the enforcement action is initiated and/or prejudices the ability to present a full defence.
The Stay Motion raised novel and important issues including: (i) whether Staff have a duty to conduct a formal “Wells Process” such as the one adopted by the SEC; (ii) the requirements associated with this obligation, if applicable; and (iii) the consequences that flow from a finding that Staff’s investigation of a respondent was conducted in an unfair and abusive manner.
With respect to the Stay Motion, the Commission held that while Staff has a duty of fairness to persons under investigation, the U.S. “Wells Process” and its requirements do not apply to OSC enforcement proceedings. The Commission noted that while the SEC staff has an obligation to comply with a “Wells Process”, which has detailed requirements and forms part of the U.S. Code of Federal Regulations, the OSC enforcement notice process is not mandated by any legislation or by the Rules of Procedure. In Ontario, the decision about whether and when to provide an enforcement notice in the later stages of an investigation remains within Staff’s discretion, subject to the principles of the duty of procedural fairness. The Commission also noted that the duty of fairness owed to a respondent during the investigative stage of a matter is clearly distinguishable from the procedural fairness requirements at the adjudicative stage of a proceeding.
The Commission then assessed whether Staff breached their duty of fairness owed to Finkelstein in their handling of the enforcement notice process based on:
- the nature of the decision being made;
- the individual’s legitimate expectations;
- the nature of the investigation;
- its subject matter; and
- the statutory provisions under which the Commission was acting.
The Commission was of the view that Staff discharged their duty of fairness and afforded Finkelstein a degree of procedural protection by informing him of the nature of the case against him and by giving him an opportunity to provide an explanation of his conduct and provide information to Staff prior to the issuance of the Amended Statement of Allegations.
The Commission held that while there is a practice of Staff providing a potential respondent with a final opportunity to bring to the attention of Staff any circumstances which may influence Staff’s decision to issue a Notice of Hearing and a Statement of Allegations, Staff ultimately retains a discretion, subject to the requirements of minimal procedural fairness, to implement the practice in a variety of ways, and to take a variety of factors into account.
Within the context of the Stay Motion, Finkelstein also alleged abuse of process. The Commission held that the test for finding an abuse of process is extremely high and the conduct of Staff at issue did not meet this threshold as Staff’s conduct was neither oppressive nor vexatious. Moreover, the Commission held that abuse of process would only be found in an “extremely rare” situation. Accordingly, the Commission held that there were no grounds to justify the Stay Motion. The Commission held that a stay of proceedings will only be granted as a remedy for abuse of process when the very high threshold in the “clearest of cases” is met. In particular, the Commission noted that a stay of proceeding will only be appropriate when: (i) the prejudice caused by the abuse in question will be manifested, perpetuated or aggravated through the conduct of the hearing or by its outcome; and (ii) no other remedy is reasonably capable of removing that prejudice. Finally, in situations where it is unclear whether the abuse is sufficient to warrant a stay, a compelling societal interest in having a full hearing could tip the scales in favour of proceedings.
With respect to the Prematurity Motion, the Commission held that the Stay Motion was not premature for the following the reasons:
- • the issues raised in the Stay Motion could be fairly, properly and completely resolved without regard to contested facts and the anticipated evidence that will be presented at the hearing on the merits;
- • It was not necessary for a fair hearing that the relief sought in the Stay Motion be granted prior to the proceeding on the merits; and
- • The resolution of the issues raised on the Stay Motion materially advanced the resolution of the matter.
On September 14, 2012, Justice Strathy released his Reasons for Judgment dismissing the plaintiff’s motion for leave to commence an action for secondary market misrepresentation under the Ontario Securities Act and dismissing the plaintiff’s motion to certify a proposed class proceeding under the Class Proceedings Act (the “CPA”).
The plaintiff alleged that the defendants “fabricated” a financial crisis in the defendant Western Coal Corporation (“WCC”) in November 2007, in order to artificially depress its stock price, so that they could enhance their shareholdings in WCC at a fraction of what the shares were worth. The plaintiff claimed that, as part of this scheme, some of the defendants created false cash flow projections and made inappropriate write-downs, causing WCC’s auditors to insist that the November 14, 2007 quarterly financial statements be qualified by a note that there was “substantial doubt about the ability of WCC to meet its obligations as they come due”. The plaintiff alleged that the note was a misrepresentation, and that WCC had deliberately delayed obtaining the financing until after its statements were released so that certain of the defendants could benefit from the resulting decrease in share value.
The plaintiff asserted three claims, which he sought to certify under the CPA:
- an action for misrepresentation in the secondary securities market under Part XXIII.1 of the Securities Act, which requires leave of the court;
- a claim against some of the defendants for conspiracy; and
- a claim for oppression under the British Columbia Business Corporations Act.
In responding to the plaintiff’s leave motion, the defendants filed a voluminous evidentiary record, which contained affidavits from fact and expert witnesses in support of their position that the note was not a misrepresentation, and that the allegation that they had delayed obtaining financing was baseless. With respect to the leave motion, Strathy J. held that leave should not be granted under Part XXIII.1 of the Securities Act, as the plaintiff’s claim had “no reasonable possibility of success at trial.” In reaching this determination, Strathy J. examined the alleged misrepresentation in the context in which it was made, reviewed the accounting principles that were at issue and that informed the disclosures that were made by WCC, examined the process leading up to the release of the disclosure, and examined the expert evidence on both sides of the issue. Of note, Strathy J. completely rejected the expert evidence filed on behalf of the plaintiff, holding that he doubted the expert’s independence and held that the expert gave opinion evidence in areas in which he had no expertise.
Although unnecessary for Strathy J. to consider the “reasonable investigation” defence available to the defendants under s. 138.4(6) of the Securities Act, Strathy J. nonetheless concluded that even if there had been a misrepresentation, the evidence established that the defendants had conducted a reasonable investigation and had no reasonable grounds to believe the financial statements contained a misrepresentation.
With respect to the plaintiff’s motion to certify a claim against some of the defendants for conspiracy, Strathy J. denied certification due to the fact that the conspiracy claim was largely based on an unfounded misrepresentation. Strathy J. further denied certification of the plaintiff’s oppression claim on the basis that an Ontario court does not have jurisdiction over the plaintiff’s claim for oppression under British Columbia’s Business Corporations Act.
While some commentators have concluded that this decision has raised the bar for plaintiffs to successfully obtain leave, the facts of this case overwhelmingly supported the conclusion that the plaintiff had no reasonable possibility of success at trial. The success or failure of the leave motion continues to be driven by the strength or weakness of the evidence available.