A decision of the British Columbia Court of Appeal earlier this year highlights one of the pitfalls of “no admission” settlements, exhibiting that a securities regulator in a cooperating jurisdiction may not be able to issue a reciprocal order when the settlement contains no specificity or admission upon which to conclude that any wrongdoing occurred.
In Lines v. British Columbia (Securities Commission),1 the two individual appellants, as well as five corporations, had been the subjects of an SEC investigation that ended in settlement. Pursuant to the settlement agreement, the accused parties were to disgorge approximately $1.3 million, pay unspecified civil penalties and the two individuals undertook not to engage in trading in penny stocks in the over-the-counter U.S. markets for a period of 2 to 3 years. The terms of this settlement had been incorporated into a final judgment of the New York District Court.
At issue before the Court of Appeal in Lines was whether the British Columbia Securities Commission (“BCSC”) had been entitled to issue a reciprocal order under section 161(6)(d) of the British Columbia Securities Act, prohibiting the two individual appellants from trading in any securities in British Columbia for the period covered by the SEC settlement.
The appellants argued that the BCSC erred by ordering significantly more onerous sanctions than those set out in the settlement agreement, noting that the SEC settlement did not contain a total ban on trading as it continued to permit them to trade on major U.S. exchanges. Further, given that the SEC settlement agreement did not particularize the misconduct alleged and expressly provided that there was no admission or denial by the appellants with respect to the SEC allegations, the appellants argued that the reciprocal order constituted a denial of procedural fairness by effectively imposing sanctions without articulated or proven allegations.
The Court of Appeal overturned the BCSC’s reciprocal order, finding that in order to issue an order under s. 161(6)(d) British Columbia Securities Act, it is incumbent upon the BCSC to make its own determination of what is in the public interest rather than to simply render an automatic order based on the outcome in a foreign jurisdiction. In this case, the SEC settled the matter without any conclusion of wrongdoing and the BCSC had simply supposed that, because the appellants consented to certain sanctions with the SEC, it was in the public interest to ban those individuals from trading securities in British Columbia for a specified period. This of course ignores that a party may agree to a settlement simply to avoid the cost of defending allegations, particularly if they are not admitting to wrongdoing..
Also important was that the trading ban imposed by the BCSC was significantly more onerous than the SEC settlement. While the Court of Appeal left open the possibility that a reciprocal order may, in certain circumstances, impose more onerous sanctions than the original order, justice, transparency and intelligibility dictate that there must be evidence or admission of wrongdoing to do so.
While the BCSC’s reciprocal order was overturned, the Court of Appeal did go on to note that the reasons of its decision do not prevent the BCSC from imposing a reciprocal order commensurate with the trading ban in the SEC settlement, provided that the BCSC finds that such an order is in the public interest.
This decision likely adds more fuel to the fire for detractors of the “no admission” settlement, which is something that Canadian securities regulators do not currently entertain but has been a topic of discussion. While many recognize that, in certain cases, a no admission settlement can help broker a happy compromise and save tens to hundreds of thousands of dollars in legal and investigative fees, it is clear that a settlement agreement that is sparse on details and has no admission of liability is not going to be as helpful to reciprocating jurisdictions as one which contains a full set of agreed upon facts and the conclusion drawn therefrom. In other words, a reciprocating jurisdiction can’t just rubber stamp sanctions without at least some basis to conclude that the outcome is in the public interest of its jurisdiction.
Practically speaking, if a Canadian jurisdiction entered into a no admission settlement such as the one in this case, it could create increased inter-provincial inefficiency by resulting in the need for a duplicative investigation by another jurisdiction, thus necessitating increased expense for regulator and respondent. Of course, a national regulator would quell these concerns in Canada.
Finally, we note that while the SEC’s practice is different from that of Canadian regulators, the SEC does not allow parties to specifically deny allegations in settlement. Rather, they only allow, as in Lines, the inclusion of a “neither admit nor deny” clause, thus leaving matters fully neutral. Further, in May 2012, the SEC announced that they would no longer allow such wording in a case where a party has already admitted or been convicted of the applicable allegations in a criminal proceeding.