With the trial of top former Enron Corp. executives Ken Lay and Jeff Skilling having resulted in numerous convictions, directors and officers in the U.S. continue to be apprehensive about the intensity with which the Securities and Exchange Commission has prosecuted securities law violators since the turn of the century. And Canadians, who have watched these developments south of the border believing they have nothing to fear, are sadly mistaken.

Under Ontario securities laws, the Ontario Securities Commission has the authority to order investigations to assist in the administration of securities laws in other jurisdictions, including the U.S. There are a number of agreements between the OSC, the SEC and others to encourage and facilitate this international co-operation in securities matters. These include the 1988 Memorandum of Understanding between the SEC, the OSC, the former Commission des valeurs mobilières du Québec and the B.C. Securities Commission; the May 2002 International Organization of Securities Commissions agreement, to which there are a much larger group of signatories, as well as formal and informal information-sharing arrangements among various exchanges.

Most recently, the OSC started to issue investigative orders to allow SEC investigators, who otherwise would have no jurisdiction north of the border, to carry out investigations in Canada. Once an SEC staff member is named in an OSC investigative order, he or she is subject to the provisions of the Ontario Securities Act, which only moderately constrains the manner in which the investigation is conducted. To our knowledge, there are virtually no extra procedural measures built into investigative orders to protect the rights of Canadians under SEC investigation in Canada. The obvious question, for which we have no answer, is why?

In comparison to securities investigations, the Mutual Legal Assistance in Criminal Matters Treaty entered into between Canada and the U.S. in 1990 has a structured process for sharing information in criminal matters. For example, the U.S. must seek the authority of a Canadian judge to gather information in Canada, not just seek the authority of a regulatory body. In addition, the judge is given the opportunity to issue procedural restraints on the manner in which the evidence is obtained to protect the interests of the person being investigated.

The Supreme Court of Canada in the Global Securities case dealt with the issue of whether or not it was constitutional for a securities commission to assist in the administration of securities laws of another jurisdiction. The Supreme Court of Canada rejected the possibility of using provisions such as those found in the MLAT for securities regulation. The Supreme Court stated that the “formal” and “cumbersome” set of procedures in the MLAT lack the “efficiency” required for the co-operation of securities regulating bodies.

The Supreme Court also found that, because a securities commission can legitimately conduct an investigation into the violation of foreign securities laws, it can also choose to have the same task carried out by a foreign regulator, “which is presumably better positioned to conduct such an investigation.” It is not clear how far this can go as the court did not consider whether the SEC could carry out the investigation in Canada.

A recent case worthy of consideration involves Mr. A., who turned out to be former Nortel Networks Corp. CEO Frank Dunn. In April, he brought an application to the Ontario Superior Court of Justice against the OSC in an attempt to prevent it from forcing him to submit to questioning arising out of an investigation into Nortel. He argued that if he was compelled to give evidence to the OSC, that testimony would be passed on to the SEC, which could also use it to further a criminal investigation in the U.S.

Justice Colin Campbell denied Dunn’s request and ruled that his Charter of Rights and Freedoms rights would be fully protected. He also noted the Securities Act prohibits the OSC from disclosing testimony to U.S. authorities without giving him notice and opportunity to object at a hearing. Campbell did not agree that the investigative regime of the Ontario Securities Act, requiring Mr. A’s testimony, would necessarily result in his testimony being given to the SEC in circumstances in which he would lose his Fifth Amendment protection from self-incrimination. He made it clear that Dunn might be successful if he ever challenges the OSC’s assumed delivery of his testimony to the SEC. And Campbell strongly encouraged the OSC to have two investigative teams involved: one with SEC staff members and one without.

@page_break@Individual Canadians need to keep in mind that the OSC has the power to make an investigation order to assist the SEC in conducting investigations in Canada. And, until someone challenges otherwise, it can allow SEC staff to conduct the investigation in Canada.

All market participants should wonder, parenthetically at least, whether the federal government was consulted. And there are no clear procedural safeguards built into the Securities Act to definitely protect the rights of Canadians under investigation by the OSC (or SEC in Canada) from making statements that the SEC (or U.S. Department of Justice) could potentially use against them in a U.S. proceeding. Until this area of the law is settled, that “friendly” face across an investigation table may not be so friendly after all.



Joseph Groia is a securities litigator and principal of Groia & Co. Professional Corp. in Toronto.