Now that we are into 2021, it seems like an ideal time to reflect on six noteworthy securities law cases from the past year. From securities class actions to enforcement of sanctions, we hand-picked five cases from Ontario and British Columbia, plus one U.S. decision, which together highlight some key securities litigation developments in 2020.
Ontario Securities Commission v. Tiffin, 2020 ONCA 217
The Tiffin decision is confirmation from Ontario’s highest court of the breadth to the definition of a “security” under the Securities Act (Ontario) (the “Securities Act”), and of the courts’ approach to assessing whether a financial instrument is a security. At issue was whether a simple, non-convertible promissory note is a “security” within the meaning of the Securities Act. The Court of Appeal declined to import the “family resemblance” test formulated under U.S. law into Ontario jurisprudence.1 Instead, the court found the Securities Act employs a “catch and exclude” regime, intended to define key terms broadly to capture a wide range of instruments, before providing exemptions crafted to exclude more specific instruments from the scope of the Securities Act. In the end, the court concluded that a simple, non-convertible promissory note is a “security” within the meaning of the Securities Act and that the Securities Act applies to the distribution of a promissory note.
Baldwin v. Imperial Metals Corporation et al, 2020 ONSC 5616
Baldwin underscores that a statutory cause of action for secondary market liability under s. 138.1 of the Securities Act requires that there be a corrective disclosure following a misrepresentation in disclosure documents or public statements. Following the collapse of a mine’s tailing storage facility releasing millions of cubic metres of liquid mining waste onto adjoining areas and waterways, Imperial Metals issued a press release regarding the collapse, and the company’s share price dropped by 40%. A proposed class action suit was brought under s. 138.1 of the Securities Act. Belobaba J. rejected the argument that a statutory cause of action had arisen given the absence of any public correction of a misrepresentation. To constitute a “public correction”, the alleged correcting statement must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact in a previous disclosure document or public statement. In other words, there must be some indication in the alleged public correction, when compared to an earlier material disclosure, that the earlier material disclosure contained a misrepresentation or was misleadingly incomplete. Belobaba J. further rejected the argument that the press release was a partial corrective disclosure, holding that a public correction is a one-time event, and any so-called “partial correction” is nothing more than a continued misrepresentation. Belobaba J. concluded that the only way the press release could be viewed as a “public correction” was if Imperial Metals had previously represented that the tailings storage facility was failproof and would never fail. In this case, such a statement was never made.
British Columbia (Securities Commission) v. BridgeMark Financial Corp., 2020 BCCA 301
BridgeMark Financial speaks to the public’s access to securities regulatory hearings and the evidence filed in those hearings for use in unrelated civil litigation. The B.C. Court of Appeal affirmed that for the purpose of advancing civil proceedings against the respondents, class action plaintiffs were entitled to access evidence filed by the respondents with the B.C. Securities Commission during cease-trade hearings. The cease-trade hearings were in relation to an alleged illegal distribution of securities by the respondents and were unrelated to the plaintiff’s class action. The B.C. Securities Commission allowed the class action plaintiffs, who were not parties to the cease-trade hearings, access to the respondents’ affidavits filed during the cease-trade hearings. The appellate court held that once the securities commission elected to hold a hearing, it had a duty under securities legislation to make that hearing open to the public and it was bound to conduct itself in a manner consistent with the open court principle, even for interlocutory hearings. Moreover, securities commissions are not required to weigh the specific use for which the class action plaintiffs sought the evidence when plaintiffs request access to a hearing or the related materials.
Re Pasquill, 2020 BCSECCOM 457
Re Pasquill demonstrates the B.C. Securities Commission’s broad powers to pursue sanctions against those found to have contravened the Securities Act (British Columbia). Following a finding that two individuals had perpetrated a fraud through a group of companies against hundreds of investors, the Executive Director of the B.C. Securities Commission obtained a preservation order restraining the disposition of funds in two registered retirement income accounts of one of the individuals.
In resisting the order, the individual argued that the registered accounts were exempt from enforcement, relying on the B.C. Court Order Enforcement Act (COEA) which exempts property in registered plans from any “enforcement process”, and the B.C. Pension Benefits Standards Act (PBSA) which prohibits the execution, seizure, or attachment of funds in registered accounts.
The B.C. Securities Commission rejected both arguments holding that the “enforcement process” referenced in the COEA is substantially different than a preservation order under the Securities Act (British Columbia), and the COEA nevertheless expressly exempts enforcement processes arising from an order made under the Securities Act (British Columbia). In respect of the PBSA, the B.C. Securities Commission held that the COEA expressly specified that its provisions prevailed in the event it was inconsistent with another act. Alternatively, the B.C. Securities Commission resorted to its finding that the provisions of the PBSA do not apply because the preservation order was not an “execution, seizure, or attachment” of funds in the individual’s registered accounts.
Michael Patrick Lathigee v. British Columbia Securities Commission, 136 Nev. Adv. Op. No. 79
Efforts to enforce disgorgement orders made by the B.C. Securities Commission in Nevada were successful after the Nevada Supreme Court found disgorgement orders not to be a fine or other penalty (which would be excluded from enforcement pursuant to Nevada law) because the disgorgement order represented the exact amount of money defrauded from investors. As any monies recovered would be returned to the defrauded investors, the court found that the disgorgement award was remedial, not punitive. Furthermore, the court also held that the B.C. Securities Commission’s order would be upheld under the doctrine of comity (that courts of one country may give effect to the laws and judicial decisions of another). In doing so, the Nevada Supreme Court referenced the long border between Canada and the United States, the cooperation shared between the countries’ respective securities regulators, and the general cooperation between the two countries.
Last, a notable mention to In the Matter of ESW Capital, LLC and Optiva Inc., whereby exemptive relief was sought to the minimum tender requirements for a takeover bid by the largest shareholder of Optiva. Although heard in mid-September, the Ontario Securities Commission’s reasons for dismissing the application remain under reserve. Once released, the reasons will likely address the balance between certainty in the application of takeover bid rules versus shareholder choice.
1 Canada maintains a long history of relying on principles of U.S. securities jurisprudence. As far back as 1978, the Supreme Court of Canada in Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 SCR 112 considered American jurisprudence and imported the term “investment contract” into the definition of “security”.