OSC Approves First No-Contest Settlement – Ernst & Young LLP to Pay $8 Million
On September 30, 2014 the OSC approved a no-contest settlement agreement in a hearing held before vice-chair James Turner. Pursuant to the approved agreement between OSC Staff and Ernst & Young LLP (“Ernst & Young”), Ernst & Young will pay $8 million to settle allegations of negligence in regard to its audit work related to Sino-Forest Corp. (“Sino-Forest”) and Zungui Haixi Corp (“Zungui Haixi).
Vice-chair Turner’s decision marks the first time that the OSC has approved a no-contest settlement since OSC Staff introduced its Revised Credit for Cooperation Program in March 2014. The agreement between OSC Staff and Ernst & Young is also notable as the $8 million settlement is an unprecedented amount for an auditor to have to pay. As discussed previously on this blog, the large amount is reflective of the OSC and other Canadian regulatory bodies’ increased scrutiny on gatekeepers, including auditors.
No-contest settlements were introduced by OSC Staff to allow, in limited circumstances for OSC Staff to settle with alleged wrongdoers, without the alleged wrongdoers having to admit to any facts or liability. Specifically, no-contest settlements were not to be available when a party engaged in abusive, fraudulent or criminal conduct; when a party’s misconduct has resulted in investor harm that has not been addressed to the satisfaction of the OSC; or when a party has misled or obstructed Staff during its investigation. Additionally, OSC Staff say that they may consider several factors when determining the appropriateness of entering into a no-contest settlement, including broadly, factors related to cooperation, the degree of investor harm, and the deterrence effect of the settlement agreement on the alleged wrongdoer and others.
In determining the amount for the Ernst & Young settlement in this case, OSC Staff considered the fact that Ernst & Young has agreed to pay $119 million to settle a shareholder class action claims in regard to Sino-Forest and Zungui Haixi. Additionally, OSC Staff considerations included, the fact that it found no evidence of dishonest conduct on the part of Ernst & Young; the enhanced auditing procedures Ernst & Young has now put in place for companies in emerging, high risk markets; and Ernst & Young’s cooperation with OSC Staff during the investigation and ongoing hearing against Sino-Forest. Both the OSC Staff and Ernst & Young expressed satisfaction with the settlement. For OSC Staff, the settlement may be seen as a useful deterrent to future wrongdoers, while also allowing the OSC to avoid the prospect of lengthy and complex hearings that may not result in a finding of liability.
The introduction and now use of “no-contest” settlements has been seen by many as a major advance. They allow securities enforcers to move on with outstanding matters based on a satisfactory resolution, in the public interest, freeing up valuable resources to be deployed more strategically. It can be seen, therefore as more efficiently protecting investors and safeguarding the capital markets. Future hearings for approval will hopefully provide greater clarity as to how OSC Staff will exercise its prosecutorial discretion and the weight it gives to various factors when evaluating whether it is appropriate to recommend a no-contest settlement. How Commission panels address these matters in the future may also advance a useful dialogue as to enforcement priorities and efficiencies.
Image courtesy of Flickr by duckiemonster