A significant development in Canada has been the increased number of prosecutions of securities class actions following or in parallel with regulatory proceedings. In the last few years, there have been several cases which have shed light on the interplay between securities class actions and regulatory investigations and/or settlements. Recent caselaw and enforcement initiatives proposed by the OSC further highlight this important and complex link and its evolving relevance.
Class Action Following OSC Settlement
In a decision rendered in December 2013, the Supreme Court of Canada confirmed that the settlement of regulatory proceedings does not bar a class action suit for the same alleged conduct. Prior to the class action proceeding in AIC Limited v. Fischer, the five impugned mutual fund managers had reached a settlement with the Ontario Securities Commission (OSC), which included the payment of $205.6 million restitution to their investors. After the settlement was approved, the investors commenced a proposed class proceeding against the same mutual fund managers for additional compensation.
In deciding whether to certify the action, the Supreme Court changed the analysis that is used to determine whether a class action is considered the “preferable procedure” for resolving class members’ claims – an analysis which typically involves considering whether the goal of access to justice would be met by certification. The Court for the first time conducted an explicit cost-benefit analysis in determining that the OSC settlement did not preclude a securities class action to be brought on behalf of the same class of investors. The Court’s reasoning focused on the fact that certain procedural access to justice deficiencies remained after the OSC proceeding given that:
- the OSC had a regulatory function;
- the OSC proceeding provided limited investor participation rights; and
- it was unclear how the OSC assessed investor compensation.
There were also facts to support the investors’ claim that they had not been fully compensated. For further analysis of this case, see our December 12, 2013 Osler Update or the Financial Post’s article on the case.
Concurrent Civil and Regulatory Proceedings
In other cases, regulatory enforcement and class action proceedings have taken place concurrently. In 2006, a class action proceeding was commenced against BMO Nesbitt Burns for the distribution of securities of FMF Capital Group during an initial public offering. A settlement was reached in March 2007. At the same time, the OSC commenced enforcement proceedings against BMO Nesbitt Burns arising out of the same set of facts, and which resulted in a settlement agreement in November 2010 totalling $3 million penalty and $300,000 in costs.
The ongoing Sino-Forest class action involves the overlap of civil and regulatory proceedings within the context of a CCAA restructuring. A class action against Sino-Forest Corporation and its auditors, including Ernst & Young, was commenced in July 2011 after Sino-Forest had filed for CCAA. In March 2013, the Ontario Superior Court approved a settlement with E&Y. Around the same time as the commencement of the class action, the OSC initiated enforcement proceedings, which have yet to be resolved.
Conclusion
Defendants should be mindful of the increased risk of defending securities claims on both the civil and regulatory front. It is now clear that the commencement or resolution of OSC proceedings, even through a substantial settlement, will not shield a defendant from a class action by the same class of grievers. This reality, and its unintended consequence on the OSC to resolve regulatory proceedings promptly, is a driving force behind a number of new OSC enforcement initiatives, which will be examined in subsequent blog posts on our new Risk Management and Crisis Response blog.