Canadian Securities Regulators Moving Ahead with US-Style No-Contest Settlements
Dimitri Lascaris: Canadian regulators are planning to implement no-contest practices that US judges are criticizing
SHARMINI PERIES, TRNN PRODUCER: This is The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
Canadian securities regulators are forging ahead with a controversial U.S.-style policy that allows alleged violators of securities law a chance to settle the case without admitting guilt. This is the kind of practice that allowed CEOs and executives of major banks in the U.S. to get away with alleged criminal activity on Wall Street without ever stepping foot in a courtroom. The use of no-contest settlements by Canadian security regulators is a new development.
Here with us to discuss this is our guest, Dimitri Lascaris. Dimitri is a partner with the Canadian law firm Siskinds, where he heads the firm’s securities class action practice. He is also a member of The Real News Network’s board.
Thank you for joining us, Dimitri.
DIMITRI LASCARIS, SECURITIES CLASS ACTIONS LAWYER, CANADA: Thank you, Sharmini, for having me.
PERIES: Dimitri, until recently, the Canadian regulators had a different procedure. Why are the Canadians following the U.S. practice?
LASCARIS: Well, it’s important to clarify that we have a fragmented securities regulatory regime in Canada relative to the U.S. In the U.S., there is a federal securities regulator, which is the principal enforcer of the securities laws in the entire country. Here, despite efforts by some governments to set up a federal securities regulator, there remain in place separate securities regulators for each province and territory in Canada. So it’s important to distinguish between the practices of these various regulators.
Up until very recently, all of them had a policy of requiring admissions in settlements with defendants in enforcement proceedings. Only one of them has thus far departed from that policy, but regrettably it is probably the most important of the securities regulators in Canada, and that is the Ontario Securities Commission. And I say it’s the most important because Toronto is the venue of the Toronto Stock Exchange, Canada’s largest stock exchange by far, and also it is the city in which most major companies in this country are headquartered. So what the Ontario Securities Commission does is very important from a securities regulatory perspective in this country, even though it is not a national securities regulator.
PERIES: Dimitri, essentially this allows guilty parties to preempt legal proceedings. Is that right?
LASCARIS: Well, what happened was in October 2011, the OSC, the Ontario Securities Commission, published a proposal–they wanted to test the waters, and understandably so–for departing from its prior practice and allowing defendants in enforcement proceedings to settle without making admissions, and it invited comment. Its timing was unintentionally exquisitely poor, because within a matter of weeks a U.S. judge vehemently criticized the use of a no-contest settlement by the Securities and Exchange Commission in a case, a major case against Citigroup. The judge in question was Judge Jed Rakoff, and since then he became a very vocal critic of these types of settlements. And his essential criticism is that there is a lack of transparency in settlements of that nature into what actually transpired, and without transparency, courts are not well positioned to judge whether the settlement is reasonable or fair, and neither is the public, for that matter, and the result is an absence of accountability. So his very vocal criticisms caught favor with some other judges of the U.S. federal bench. Before long, it became a hot-button issue with various members of Congress. So all of this resulted in a move, albeit a modest one, away from no-contest settlements in the United States while the principal securities regulator in Canada was heading towards them.
A number of constituencies, including other securities regulators in the country and a former director of enforcement of the Ontario Securities Commission came out quite strongly against no-contest settlements, as did I and other members of my firm. And the reason is we just were not persuaded by the rationale that was advanced for adopting them. And the rationale was basically this, that if defendants are confronted with the prospect of having to make admissions, they won’t settle regulatory proceedings, because they will then be confronted by a class action in which the admissions will be used to extract large amounts of compensation from them.
Now, there are a variety of problems with this rationale. The first is that as a factual matter, very few enforcement proceedings in this country are followed by class actions. And the statistics bear this out abundantly clearly. Over 90 percent of enforcement proceedings do not result in a class action, despite the presence of admission and settlement agreements.
And reason, I think, is quite simply that many of these admissions are put into these settlement agreements after prescriptions for pursuing civil claims have expired. You know, there are limitation periods within which private litigants have to act, and many times these settlement agreements are years after the fact, and so there’s no ability of a private litigant to pursue the individuals in question.
The second is, regrettably, regulators in this country have had a tendency to go after small fry. They don’t generally go after big players, and when they do, the record of success, including, for example, in the Nortel case, has not been a positive one. And therefore there is very little impetus for private litigants to go after these defendants, because they simply don’t have the assets necessary to satisfy a significant judgment. A lot of these defendants in these regulatory proceedings are, you know, boiler room types, petty scam artists, and no one in their right mind is going to pursue them in a class action, because at the end of the day, even if liability is proven, there is not going to be a pool of assets to satisfy the judgment.
Quite apart from all of that, the question that critics have asked of the OSC’s proposal is: what’s wrong with enabling harmed investors to obtain compensation by using admissions in regulatory proceedings? Shouldn’t securities regulators be, in fact, striving to create a playing field in which obtaining meaningful compensation from well-heeled defendants is a prospect that is enhanced?
So at the end of the day, there was a great deal of criticism directed at this proposal. And recently the OSC announced that it was in fact going to adopt one, but in much watered down form. And effectively what it has decided to do is to allow them in cases where–in all cases where–except those where the defendant has not engaged in fraudulent or criminal conduct, the person’s misconduct has resulted in investor harm which has been addressed in a satisfactory manner, and the person has not misled or obstructed staff during the investigation by the regulator. So, if those three conditions are satisfied, then and only then, according to the new policy, will the regulator allow a no-contest settlement.
Interestingly, the SEC has moved in the other direction since the Rakoff criticisms became prominent. And, in fact, in some very notable cases, including one involving JPMorgan, the SEC required admissions as part of a settlement agreement. So you have, you know, sort of two ships passing in the night in the United States and Canada, and it remains to be seen exactly how the OSC’s new policy is going to play out in practice.
PERIES: Are there any contests going on in terms of this procedure? Is there any evidence that the Canadians might be rethinking what’s going on, based on what’s happening in the U.S.?
LASCARIS: Well, I think that the debate in the United States certainly contributed to the ultimate no-contest policy adopted by the OSC being, as I said watered down, but it’s too early to say to what extent the debate in the United States has impacted the attitude of enforcement staff at the Securities Commission, because to my knowledge they haven’t actually used a no-contest settlement in a significant case. And, you know, the rubber’s going to hit the road when an actual settlement agreement is proffered for approval by the Commission, and as yet that hasn’t happened.
So I think this is very much a work in progress. And I and other critics of this proposal are hopeful that the OSC is going to use no-contest settlements very sparingly.
PERIES: Well, Dimitri, thank you for joining us on The Real News Network, and I wish you will come back and keep us updated on what’s going on on this front in Canada.
LASCARIS: Thank you. Will do.
PERIES: And thank you for joining us on The Real News Network.
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