Canada: Cross-Border Securities Enforcement: OSC Affirms Importance Of Reciprocal Order Power And Refuses To Stay Enforcement Proceeding Against Conrad Black

The Ontario Securities Commission (the "OSC") has dismissed Conrad Black's request for a stay of the proceeding against him in which the OSC is seeking a reciprocal order based on the findings and convictions from criminal and regulatory proceedings in the US (the "US Proceedings"), rather than a full hearing process.

The OSC has affirmed the importance of its power to issue reciprocal orders as an effective tool to facilitate cross-jurisdictional enforcement of breaches of securities law and to enable the efficient administration of justice by eliminating duplicative proceedings based on similar evidence. Given the globalization of capital market activities, market participants should anticipate continued increased use of reciprocal proceedings and orders by Canadian securities regulators and consider the importance of a collaborative and coordinated cross-border defence strategy.

The OSC's Decision

The OSC initially commenced proceedings against Black and others in March 2005 relating to their conduct as directors and officers of Hollinger Inc. This initial proceeding was adjourned pending the resolution of the US Proceedings.

The US Proceedings were comprised of a criminal proceeding in which Black was indicted on eight counts of criminal fraud, and a civil proceeding brought by the Securities Exchange Commission in which Black was alleged to have failed to accurately disclose in securities filings circumstances surrounding various transactions to which Hollinger was a party.

The US Proceedings concluded by December 2012 with findings of criminal and civil liability against Black. Black was convicted of fraud and obstruction of justice and sentenced to 42 months of incarceration, and was also found liable in the civil proceeding for securities fraud and other violations of US securities law and was permanently barred from serving as a director or officer of a reporting issuer in the US.

In February 2013, following the conclusion of the US Proceedings, OSC Staff issued amended proceedings against Black seeking a reciprocal order based on the findings and convictions arising from the US Proceedings (the "OSC Proceeding").

In response, Black brought an application seeking an order staying the OSC Proceeding on the condition that a 2006 undertaking given by him to the OSC in which he agreed not to serve as a director or officer of a public company in Ontario (the "Undertaking") would remain in effect.   Black asserted that the continuation of the OSC Proceeding in this context was completely disproportionate and entirely unnecessary so as to be unfair and vexatious, and to constitute an abuse of process. 

The OSC firmly rejected Black's argument on both legal and policy grounds. The OSC held that the use of the reciprocal order power is "an entirely proper discharge" of the OSC's statutory mandate to protect investors and ensure fair and efficient capital markets and is not an abuse of process. The OSC found that Black's submissions "quite clearly" fail to satisfy the legal test for identifying an abuse of process, which demands, in part, that the proceeding "violate[s] the fundamental principles of justice underlying the community's sense of fair play and decency."

The OSC further held that granting the stay would defeat the public expectation that the OSC finally address and make a determination in respect of the allegations against Black in Ontario, and accordingly "bring its regulatory role into disrepute."

In the same application, as an alternative submission, Black sought direction on the scope of evidence to be presented at any hearing of the OSC Proceeding.

In considering this issue, the OSC reviewed the US Proceedings to determine whether Black was subjected to a denial of natural justice in that jurisdiction such that a reciprocal order would be inappropriate.

The OSC held that "by any measure" the US Proceedings met Canada's standards of fairness and concept of natural justice, and that the convictions and orders arising from those proceedings are a reliable basis for an enforcement proceeding against Black.

Lastly, the OSC defined the scope of evidence to be presented at the OSC Proceeding. In addition to the findings from the US Proceedings, the OSC found certain other evidence admissible as potentially relevant to the determination of an appropriate and proportionate reciprocal order, including evidence relating to the corporate governance procedures of Hollinger Inc. and Black's conduct relating to the removal of documents from Hollinger's Toronto offices.

Implications

The OSC's ruling is, in part, an expression of its commitment to cross-jurisdictional collaboration in the enforcement of securities laws. The proceeding against Black provides the OSC with a high-profile case in which to demonstrate its commitment to this enforcement mechanism.

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