RECENT DEVELOPMENTS IN CANADIAN SECURITIES AND BANKING LAW A LITIGATOR S PERSPECTIVE

Transcription

1 RECENT DEVELOPMENTS IN CANADIAN SECURITIES AND BANKING LAW A LITIGATOR S PERSPECTIVE Prepared for: COMBAR North American Committee Meeting Venice, Italy March 31, 2016 F. Paul Morrison Hovsep Afarian PO Box 48, Suite 5300 Toronto-Dominion Bank Tower Toronto ON M5K 1E6 Canada Tel: Fax:

2 2 RECENT DEVELOPMENTS IN CANADIAN SECURITIES AND BANKING LAW A LITIGATOR S PERSPECTIVE F. Paul Morrison & Hovsep Afarian 1 A. Securities Cases (i) Facilitation of Securities Claims by Eliminating the Need to Prove Reliance The legal landscape in Canadian securities law has recently undergone significant changes. Although the implementation of class actions legislation in Canada over the last two decades spawned a wave of securities class actions, these actions have historically faltered on the need to prove individual reliance, which is a constituent element of the common law tort of negligent misrepresentation. To address this perceived obstacle, many Canadian legislatures have enacted statutory causes of action for misrepresentation which dispense with the need to prove reliance. However, in order to avoid strike suits, Canadian legislatures have simultaneously enacted a requirement to obtain judicial leave before such claims can proceed. This leave requirement serves an important gatekeeping function and helps to ensure that by jettisoning the reliance requirement, the statutory cause of action for misrepresentation does not lead to frivolous claims. (ii) Establishing a Leave Requirement to Avoid Vexatious Claims The Supreme Court of Canada (the SCC ) had occasion to define the standard to apply to the leave test in two recent decisions. The Theratechnologies 2 case involved the Quebec Securities Act (the QSA ). The defendant Theratechnologies Inc. ( Thera ) was awaiting FDA approval of a new drug to reduce excess abdominal fat in HIV patients. The application which was pending Thera regularly informed its shareholders of any developments in the FDA process and provided updates on the results of its clinical trials testing the safety and efficacy of the drug, which indicated that the benefits of the drug could be achieved without significant side effects. As part of the approval process, the FDA referred a number of questions about the drug, including questions about potential side effects, to an expert Advisory Committee. The FDA published these questions on its website. Once these questions were publicized by stock quotation enterprises, Thera s shares suffered a drop in price. Thera chose not to react publicly since it believed that the briefing documents it had previously submitted to the FDA and the clinical trials it had already made public to its investors provided a comprehensive response to 1 F. Paul Morrison is a senior Partner in the Litigation Group at. Hovsep Afarian is Counsel in the Opinions Group at. The assistance of Avi Bourassa, Student-at-Law at McCarthy Tétrault LLP, is gratefully acknowledged. 2 Theratechnologies Inc. v Canada Inc., [2015] 2 S.C.R. 106

3 3 the FDA s questions. The plaintiff, a Thera shareholder that sold its shares when the price dropped, sought leave under the QSA to bring a class action for damages against Thera. The plaintiff claimed that the FDA s questions regarding side effects amounted to a material change in Thera s business, operations or capital, and that Thera breached its obligation under the QSA to disclose those changes. The motion court at first instance and the Court of Appeal allowed the action to proceed, finding that the leave test had been met. The SCC concluded that the leave test was not met and so reversed the lower court decisions. The SCC commented on the interaction between the statutory regime and the leave test. Since the statutory regime for liability for secondary market disclosure makes it easier for investors to bring claims against issuers by dispensing with the need for proof of reliance on a misrepresentation, there needs to be a mechanism in place to prevent unmeritorious claims. This is the purpose of the leave test. The SCC noted that a similar approach existed in other provinces across Canada. In addressing the leave test, the SCC held that a Court must undertake a reasoned consideration of the evidence to ensure that the case has merit, although the Court is not supposed to conduct a mini-trial or a full analysis of the evidence. Rather, there must be a reasonable or realistic chance that the action will succeed. There must be a plausible analysis of the applicable legislative provisions, and some credible evidence in support of the claim. The SCC ultimately concluded that the plaintiff had not met this threshold for obtaining leave. The plaintiff failed to point to any evidence that could be used to establish a change that would fulfill the statutory definition of material change in the QSA. The results of the clinical trials, including potential side effects, were disclosed to shareholders as they became available. When the FDA raised the drug s side effects in its briefing materials, there was no new information about the side effects of the drugs that required timely disclosure. There was no evidence to suggest that the questions posed by the FDA went beyond its usual process for drug approval. The SCC thus injected robustness into leave test in order to vet unmeritorious claims. Shortly after its decision in Theratechnologies, the SCC revisited the leave test in the Green decision. 3 The Green case (emanating from the common law province of Ontario rather than the Civil Law province of Quebec) involved a securities claim against C.I.B.C., one of Canada s largest chartered banks, for allegedly failing to record and disclose the extent of its exposure to and position in the U.S. residential mortgage market as the subprime mortgage crisis unfolded. The plaintiff in Green asserted, inter alia, a statutory misrepresentation claim under Ontario s Securities Act (the OSA ) in respect of shares trading in the secondary market. The SCC confirmed the Theratechnologies standard for obtaining leave i.e., there must be a reasonable or realistic chance the action will succeed. Although the SCC did not expressly comment on whether the standard in Theratechnologies is higher than the standard being applied in Ontario, 3 Green v. CIBC, 2015 SCC 60.

4 4 the standard set out by the SCC in Theratechnologies, and confirmed in Green, appears to be a higher standard for plaintiffs to meet than the standard previously applied by the lower courts in cases based upon the statutory cause of action for secondary market disclosure. (iii) Jurisdictional Issues in International Securities Claims Another issue which Canadian courts are grappling with is jurisdiction in securities claims which cross borders. In Kaynes v. BP, PLC 4, for instance, an Ontario shareholder alleged, on behalf of a class, that BP (which is headquartered in the U.K.) had, inter alia, made misrepresentations to its shareholders regarding the company s operations and safety programs surrounding the 2010 Deepwater Horizon oil spill, which adversely affected its share prices. Although the plaintiff purchased his shares on an American stock exchange, he received BP s financial disclosure in Ontario. The Ontario Court of Appeal found that it had jurisdiction over the claims of class members who purchased their shares abroad, but decided that the claims should be stayed because the U.S. or the U.K. would be a more appropriate forum. Even though BP was not a reporting issuer in Ontario and its shares were no longer listed on the Toronto Stock Exchange, the Court of Appeal found that the Ontario Court had jurisdiction over BP since the company had undertaken to make disclosure to its Ontario shareholders, which meant that the documents containing the alleged misrepresentations were bound to make their way into Ontario. The Court reasoned that that by releasing a document outside of Ontario which BP knew it was required to send to shareholders in Ontario, BP committed an act with sufficient connection to Ontario to qualify as committing a tort in Ontario. Significantly, despite finding that it had jurisdiction, the Ontario court declined to assume such jurisdiction on the basis that Ontario was not the convenient forum. The Court agreed with BP that the plaintiff's claim must be considered in the full international context of the relevant securities regimes. The court noted that, by statute, both the U.S. and the U.K. regimes assert jurisdiction on the basis of the exchange where the securities are traded. The Court wrote: Asserting Ontario jurisdiction over the plaintiff's claim would be inconsistent with the approach taken under both US and UK law with respect to jurisdiction over claims for secondary market representation. [ ] In these circumstances, the principle of comity strongly favours declining jurisdiction. Ontario is not, of course, obliged to follow slavishly the jurisdictional standards of other countries. However, the principle of comity requires the court to consider [the] implications of departing from the prevailing international norm or practice, particularly in an area such as the securities market where cross-border transactions are routine and the maintenance of an orderly and predictable regime for the resolution of claims is imperative. Moreover, where, as here, the plaintiff's claim rests to a significant degree on foreign law, the case for assuming jurisdiction is considerably weakened ONCA 580, leave to appeal to the SCC denied, 2015 CanLII (SCC). 5 At para. 48.

5 5 As most of the trades had occurred abroad and there was already an extant class action in the U.S., the Ontario Court declined to take jurisdiction over the case, thus avoiding multiple proceedings. The Ontario Court of Appeal s decision in the BP case demonstrates that by examining a proposed securities class action in its international context, it is open to Ontario courts to find that claims against public issuers are more appropriately pursued in the jurisdiction where the securities are traded, even though there may be some connection to Ontario sufficient to give the Court jurisdiction. Jurisdictional issues were also at the heart of the recent securities law decision of the Ontario Superior Court of Justice in Abdula v. Canadian Solar 6. The Abdula decision was the first in Ontario to consider and grant certification for a misrepresentation claim by a global class of shareholders against a corporation whose shares were traded only on a foreign exchange. Even though Canadian Solar s shares were only traded abroad and its principal place of business was in China, the Court of Appeal had found, in an earlier decision, that the company had a real and substantial connection to Ontario due to the facts that it: had offices; held annual meetings; was involved in solar projects; raised capital; and released shareholder documents all in Ontario. The Ontario Court of Appeal had also noted that a company does not need to be publicly traded in Ontario in order to be considered a responsible issuer under the OSA. In considering the global nature of the class and their connection to Ontario, the Superior Court explained that there would be a presumptive connecting factor, establishing a real and substantial connection to Ontario, if an Ontario court had territorial jurisdiction over both the defendant and the representative plaintiff, and if there were common issues as among the representative plaintiff and the non-resident class members. The Court found this presumptive factor to have been established by the plaintiff class. It is worthwhile to note that the Court in Abdula also considered the class action in its international context, like in BP. Since the equivalent action in the U.S. had been dismissed, the Court remarked that the Canadian class action was the only avenue of redress for foreign plaintiffs (aside from individual actions). This is in contrast with the factual scenario in BP, where there was a competing US class action. The globalization of securities disputes thus continues to test and transform the evolving contours of conflicts of law principles in Canada. B. Banking Cases (i) Liability in the Securities Context Canadian banks continue to be targets of novel claims which seek to expand their liability. As the Green case (discussed above) foreshadows, financial institutions have not been unscathed by the recent surge in securities class actions. Securities lawyers have also sought to expand the scope of liability for banks which provide traditional banking services to companies who are ONSC 53.

6 6 then implicated in an alleged misrepresentation. In Goldsmith v. National Bank of Canada 7, the plaintiff sought to impose liability on the defendant bank on the basis that it was a promoter under the OSA, even though the bank had simply performed the ordinary functions discharged by banks. The relevant facts of the Goldsmith case were as follows. Poseidon Concepts Corp. admitted that it had materially overstated revenues and accounts receivable, and then filed for protection from its creditors. Poseidon was de-listed from public offering and its share price plummeted. The Bank had provided conventional banking services, but its subsidiary had played the role of a financial advisor and later as an underwriter on the public offering for Poseidon. The OSA provides for a right of action against an influential person who knowingly influenced the release of a document containing a misrepresentation. The plaintiff argued that National Bank was liable for those misrepresentations because its subsidiary was a promoter and therefore an influential person that knowingly influenced the release of the documents containing alleged misrepresentations. The Court concluded that the pertinent sections of the OSA, and their context and purpose, support the conclusion that a person or company who only provides advice for or assists during an issuer s organization or reorganization cannot be a promoter. Rather, the Court ruled, a promoter is someone who plays a vital or leading role in the organization or reorganization of an issuer s business. An overbroad definition of promoter, the Court cautioned, would capture ordinary activities of many capital market participants. Something more was required before a bank could be found as a promoter for example, the plaintiff would need to show that the bank took steps, directly or indirectly, to found or organize the business in question, such as organizing the board of directors, managing the company or making key business decisions. (ii) Liability under Provincial Consumer Protection Legislation Although the bank s narrow interpretation of promoter under the securities legislation prevailed in the National Bank case, banks in Canada have been facing burgeoning liability under consumer protection legislation. This onslaught of consumer protection litigation against banks can be expected to continue in light of a trilogy of recent cases: Bank of Montreal v. Marcotte 8, Amex Bank of Canada v. Adams 9 and Marcotte v. Federation des Caisses Desjardins du Quebec 10 (altogether, the Marcotte Trilogy ). This triad of cases involved allegations that various financial institutions breached their disclosure obligations regarding charges imposed on credit card transactions made in a foreign currency. The Marcotte Trilogy confirmed that as a matter of Canadian constitutional law, provincial consumer protection legislation could apply to financial institutions, even though they are federally regulated. The SCC reasoned that the power to regulate disclosure of conversion charges does not lie at the core of federal jurisdiction over banking and that the pertinent consumer protection provisions, although related to bank ONCA 22. successfully represented the National Bank in this case SCC SCC SCC 57.

7 7 lending, do not impair the activities that are vital or essential to banking, and are therefore constitutionally sound. As provincial consumer protection statutes exist across Canada and such statutes impose liability that is broader than a bank s liability at common law, the net effect of the Marcotte Trilogy is that Canadian banks can continue to expect a steady stream of proceedings based on alleged violations of consumer protection regimes. 11 (iii) Liability as a Vehicle For Fraud by Third Parties Another area of growing liability arises from banks being used as a vehicle for the perpetration of a fraud by a third party. Approximately two decades ago, the Supreme Court of Canada confirmed that financial institutions can be liable for so-called knowing assistance to a breach of trust, or the related cause of action knowing receipt of funds in breach of trust. 12 These causes of action continue to implicate banks in frauds committed by third parties. On a related note, Canadian courts continue to expand the duties in tort owed by a bank to parties who are not its customers in the context of frauds which adversely affect the non-customers. For instance, in Dynasty 13, TD Bank was a primary provider of correspondent banking services to Stanford International Bank Ltd. ( SIB ) an Antiguan offshore bank that sold certifications of deposit to investors around the world. The Chairman, Allen Stanford, was responsible for an $8 billion Ponzi scheme against SIB and its creditors. Some creditors commenced a claim against TD Bank alleging breach of a duty of care. The Court initially struck important portions of the claim. However, the plaintiffs were given an opportunity to revise the claim (to allege constructive knowledge of fraudulent dealings for the purposes of establishing that TD Bank breached its duty of care) and the claim as amended was permitted to proceed. There is also a related action against TD Bank by the Antiguan liquidators of SIB arising from the same Ponzi scheme. In this latter action, the liquidators allege that TD Bank was negligent and failed to conduct proper due diligence in permitting the accounts to be opened and in ignoring red flags. 14 Financial institutions have unwittingly been implicated in other frauds as well: see, for instance, the class proceeding launched against Royal Bank of Canada in Jer v. Royal Bank of Canada 15, and Lalani v. Reeves For a recent example of such a case, please see Jiang v. Peoples Trust Company et al, 2016 BCSC 368. provided insurance advice to one of the financial institutions involved in this class action. 12 Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R Dynasty Furniture Manufacturing Ltd. v. Toronto-Dominion Bank, 2015 ONCA 137; see also 2010 ONCA acts for TD Bank in both of these actions BCCA ONSC 424.

8 8 Recently, the Ontario Court of Appeal further enlarged the scope of a financial institution s liability arising from another s fraud by recognizing that a bank can passively provide knowing assistance: Carriere Industrial Supply Limited v. Toronto-Dominion Bank. 17 The constituent elements of a claim for knowing assistance of a breach of trust are (i) a breach of trust by a trustee; and (ii) knowing participation in the breach of trust by a third party. The knowledge requirement for this type of liability is actual knowledge. Recklessness or willful blindness will also suffice. In Carriere, the Court ruled that the Bank had the power to freeze the accounts of the offending party and the bank s failure to do so constitutes assistance or participation in the third party s breach. The Court concluded that [b]y permitting [the third party] continued access to electronic banking facilities, the Bank afforded [the third party] the means to perpetrate a fraudulent breach of trust 18. Such conduct, the Court ruled, goes beyond a mere failure to act. 19 The Carriere decision represents an expansive interpretation of the assistance requirement in knowing assistance cases. When a fraudulent scheme leaves a trail of victims behind who do not have an effective remedy against a perpetrator who has either absconded from the jurisdiction, or is incarcerated or otherwise impecunious, the victims will continue to turn for redress to the financial institution that was allegedly a knowing conduit or vehicle for the fraud. The decision in Carriere indicates that Canadian Courts will subject financial institutions to heightened scrutiny in imposing liability in these circumstances ONCA At para At para. 33.

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