On March 27, 2017, for the first time in Canadian history, an appellate Court revoked a voluntary settlement made between an individual and a securities regulator. Agreeing with the grounds for appeal raised in Mr. Daniel Pharand’s notice of appeal and in view of the Court of Appeal’s decision to grant leave to appeal to Mr. Pharand, the Autorité des marchés des financiers (“AMF”) acquiesced to the entirety of the conclusions sought by Mr. Pharand in appeal, including the dismissal of the proceedings instituted by the AMF against Mr. Pharand.

In the matter of Daniel Pharand v. Autorité des marches financiers et al.[1], Mr. Daniel Pharand, a former director of Arura Pharma Inc. (“Arura”), had entered into a settlement agreement with the Autorité des marches des financiers (the “AMF”) in which he was asked to make a number of admissions of fact and law. In particular, Mr. Pharand was required to admit that he had sold shares of Arura while in possession of privileged information (or material non-public information) thus breaching section 187 of the Québec Securities Act, the prohibition against insider trading.

Mr. Pharand entered into the settlement to avoid engaging in an expensive seven day trial, the cost of which would have greatly exceeded the $8,700 fine being sought against him (and the $5,000 fine he ultimately agreed to pay in the settlement). The AMF also entered into a settlement with Mr. Jacques Gagnon, but Mr. Gagnon did not appeal the decision sanctioning the settlement agreement.

The AMF had also instituted proceedings against the FIER Cap Diamant S.E.C. (the “FIER”) and several other individuals in which it alleged several violations to the Securities Act, including tipping and insider trading. These other defendants did not enter into a settlement and proceeded to trial.

The settlement agreements were filed with the three members of the Bureau de decision et de revision (now known as the Tribunal administratif des marches financiers) (the “Tribunal”) at the start of the trial. The Tribunal elected to hear the entirety of the evidence in respect of the other defendants prior deciding on whether the settlements made with Mr. Pharand and Mr. Gagnon should be sanctioned pursuant to its public interest jurisdiction. The majority of the members of the Tribunal dismissed the AMF’s case against the FIER and the other individuals, but nonetheless sanctioned the settlement agreements.[2]

Mr. Pharand appealed the ruling to the Court of Québec, which upheld the Tribunal’s decision.[3] The decision dismissing the AMF’s case against the other defendants, which had been appealed by the AMF, was also upheld in a separate judgment rendered by the Court of Québec.[4] Mr. Pharand and the AMF each sought leave to appeal to the Court of Appeal from the Court of Québec decisions. The Québec Court of Appeal granted leave to appeal to Mr. Pharand[5], but refused the AMF’s application for leave[6].

In his notice of appeal, Mr. Pharand argued that two principal errors of law had been committed by the Court of Québec:

  1. The judge had erred in deciding that the Tribunal’s decision to sanction the settlement agreements was reasonable; and
  2. The judge had erred in considering findings of the dissident panel member to compensate for the contradictions between the decision of the majority to sanction the settlement agreement and its decision to dismiss the proceedings in respect of the other defendants

At the heart of both errors raised by Mr. Pharand is the factual admission that he was required to make in the context of his settlement agreement, namely that the specific privileged information in his possession at the time that he sold his shares was that Arura had to reimburse a debt of approximately $4,000,000 resulting from a purchase price adjustment. The majority of the hearing panel ultimately found that the $4,000,000 debt had been settled by Arura for an amount of $500,000 prior to the date on which Mr. Pharand had sold his shares. In its decision, the majority of the hearing panel found that the debt, which now amounted to $500,000, did not constitute privileged information. Interestingly, Mr. Pharand, having already left Arura, was not aware that the debt had been settled at the time that he executed his trade, although he was aware of the existence of negotiations with the creditor.

The argument raised by Mr. Pharand in appeal was therefore framed as follows: the majority of the hearing panel should have refused to sanction Mr. Pharand’s settlement agreement as it was ultimately found that the information in his possession at the time he sold his shares did not constitute privileged information; therefore, Mr. Pharand had not breached Québec securities law. Indeed, the information in Mr. Pharand’s possession was out-of-date and no longer reflected the actual situation at Arura when the trade was executed. Considering the majority’s findings in respect of the other defendants, there was a flagrant contradiction within the majority’s reasons.

The Ontario Securities Commission (“OSC”) has on two occasions set aside settlement agreements for similar reasons.[7] In the AIT matter, the OSC concluded the following in setting aside a settlement:

"There are many reasons why this matter - the earlier settlements - should be set aside, notwithstanding that they were settlements and not hearings. First and foremost, as Mr. Fabello submitted, is logic and fairness. One can never go wrong using logic and fairness. Logic and fairness certainly dictates that the settlement agreements entered into by AiT and by Mr. Ashe ought to be revoked pursuant to section 144 of the Act. Notwithstanding that everyone, in good faith, at the time believed it to be a violation of the Act, the basis for that conclusion has subsequently been found not to have been a violation."

"The learned tribunal, having heard all of competing arguments [sic] on the issue, has determined there was not a violation of the Act. Mr. Ashe therefore could not be a party to AiT's being in violation of the Act because there was no violation of the Act. So it is absolutely not contrary to the public interest and, in fact, it is very strongly in the public interest that the order go as requested.[8]"

In both OSC decisions, the tribunal recognized and expressed regret for the negative personal, professional and financial consequences suffered by the individual as a result of the settlement agreements. Like in those cases, Mr. Pharand has also suffered the negative personal, professional and financial consequences of a settlement agreement that should have never been sanctioned in the first place. The Court of Appeal ruling will allow Mr. Pharand to fully restore his reputation as a longstanding and respected member of the Canadian business community.

Some takeaways from the Court of Appeal Ruling

1. Time for the AMF to revisit its policy of refusing no-contest settlements?

Contrary to the policy adopted by the Ontario Securities’ Commission in 2014 as part of its Credit for Cooperation program, the AMF, as a matter of pure policy, requires factual and legal admissions in the context of any settlement. In other words, the AMF does not accept no-contest settlements. The Pharand matter demonstrates that a settlement agreement that contains admissions, even once sanctioned by a securities commission, is not bulletproof and even remains subject to appellate review.

Alternatively, a no-contest settlement in the Pharand matter would have been much more difficult to appeal since it would have contained no admissions of fact or law.

It remains to be seen whether the outcome of the Pharand matter will have an effect on the AMF’s policy.

2. Out-of-date or untrue information is not privileged information

As previously mentioned, Mr. Pharand was not aware that the $4,000,000 debt had been settled for $500,000 when he sold his shares. In his notice to appeal, Mr. Pharand argued that the test to determine whether or not information is privileged is an objective test (i.e. information is either privileged or non-privileged and that such a determination does not depend on the personal knowledge or belief of an individual). Having made the factual determination that the debt had been settled for $500,000 prior to Mr. Pharand’s trading and the legal determination that such information was not privileged, the majority of the tribunal was obliged to dismiss the AMF’s proceedings in respect of Mr. Pharand. The information in possession of Mr. Pharand no longer reflected the reality at Arura and therefore could not constitute privileged information.

It may therefore be reasonably deduced from a reading of the notice of appeal combined with the Court of Appeal judgment that information which is stale, out-of-date or untrue cannot constitute privileged information.

3. Collateral consequences of settling with the AMF

The present matter is also an opportunity to remind companies and individuals of the potential collateral consequences that may stem from entering into a settlement with the AMF, which requires admissions of fact and law, including an admission of a breach of securities law. Some collateral consequences may include:

  • reputational damage;
  • reporting obligations for public companies;
  • disciplinary actions against members of professional orders; and
  • ineligibility in obtaining public contracts;

While a reduced monetary penalty and the avoidance of a lengthy and expensive trial may be appealing, it is of the outmost importance to understand all of the potential consequences that may result from a finding of liability, in the administrative context, or a guilty plea, in the penal context. The potential collateral consequences must then be weighed together with the costs of trial, the potential penalties, the strength of the AMF’s case and the strength of the defence.

Considering that the potential collateral consequences will vary between companies and individuals depending on the industry in which they operate or their professions, it is vital to seek legal advice in order to make a fully enlightened decision and to begin to consider the possibility of a settlement.