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An Ontario court has tossed out a proposed $275-million lawsuit brought by legendary investment banker, Scott Paterson, against Royal Bank of Canada, RBC Dominion Securities Inc. (RBC DS), and several former senior executives at RBC DS, alleging that they pushed regulators to bring enforcement action against him more than 20 years ago. At the same time, the court left the door open for the action to potentially continue, and declined to award costs in the case.

According to a decision of the Ontario Superior Court of Justice filed on Monday, in 2022, Paterson launched legal action against the bank, the brokerage firm and several executives alleging that they “engaged in a campaign to defame” him, allegedly by pressuring the Ontario Securities Commission (OSC) to investigate him for possible regulatory violations more than 20 years ago.

Paterson worked at RBC DS predecessor, Dominion Securities Pitfield, before it was acquired by the bank in 1987. At that point, he moved on to a series of firms on Bay Street, eventually joining Yorkton Securities Inc. in 1995, where he was made chair and CEO in 1998.

In 2001, the OSC brought an enforcement case against Paterson and Yorkton, alleging that they violated securities law. They settled the allegations.

According to the court’s decision, the lawsuit now alleges that the OSC was pushed to take that action back in 2001 as part of a campaign against him by executives at RBC DS. It seeks damages for “civil conspiracy, defamation, injurious falsehood, and interference with economic relations based on allegedly secret conduct that he says the defendants engaged in between 1995 and 2002,” the court said.

The defendants sought to strike the claim on several grounds, including that it “amounts to a collateral attack on the OSC order and settlement agreement, is an abuse of process, [and] is time-barred” as it relates to events that took place more than 20 years ago.

The court sided largely with the defendants, agreeing to strike out the claim, but also granted leave to amend it.

While the court ruled that the claim doesn’t represent an attack on the OSC proceedings since it doesn’t seek to set aside the regulator’s order or the settlement agreements that were reached in the case, the court said the claim does “amount to an abuse of process because it implicitly challenges the factual findings” that the OSC order is based on.

In particular, the court found that the action amounts to an abuse of process for three reasons — it questions the integrity of the OSC’s process, it seeks to re-litigate the facts underlying the settlements with the regulator, and it seeks to transfer the financial consequences of the regulatory resolution onto the defendants.

“The overall thrust of the claim is to suggest that the OSC was the pawn of the defendants. It alleges that only the defendants’ improper pressure led to an investigation and a proceeding against Paterson,” the court said. “This attacks the integrity of the OSC process. It would require the court to investigate the OSC process to determine whether the OSC made decisions on its own or whether it was subject to improper pressure from the defendants.”

While this type of claim could be made, the court said this would usually be in a case seeking a judicial review of a regulatory proceeding, which would make the regulator a party in the case, with a right to make submissions of its own. “That is not the case here,” the court said.

“Assessing Paterson’s allegations about the OSC process requires an assessment of conduct that occurred 24 years ago and a determination of whether that conduct justified the OSC’s exercise of its public interest jurisdiction,” the court said, adding that this is difficult, given that the events occurred long ago, the defendants are in their 80s, other potential witnesses will have moved on or died, and documents will likely have been lost or destroyed.

“On the present constitution of the action, the court would be required to embark on this inquiry without giving the OSC the chance to defend itself because it is not a party. All, at the end of the day, to impugn the validity of a settlement agreement that Paterson consented to and in respect of which he agreed not to make any inconsistent public statement,” the court said, adding, “balancing the interests of finality against the interests of justice in the individual case comes down decidedly in favour of finality.”

It also found that the claim violates the 15-year ultimate limitation period on civil litigation, rejecting the argument that the alleged harm only came to light when the anonymous tip was received in 2020.

“The statement of claim pleads many facts of which the plaintiff was aware at the time they occurred which gave him a cause of action,” it said. The court added that the claim “contains no allegations of conduct by the defendants after 2002” — implying that the ultimate limitation period expired in 2017, five years before the suit was filed.

While the court struck out the claim as an abuse of process, and as being time-barred, it also left the door open to a possible revision of the claim that would allow it proceed.

“Although I do not believe that those flaws can be corrected by an amendment, the strong inclination of courts is to grant leave to amend when striking a statement of claim even if the court is doubtful about the ability of amendments to remediate the defects,” it said in striking out the claim, but with leave to amend.

The court also said that each side should bear its own costs in the case.

“Although I have found that the statement of claim amounts to an abuse of process with respect to the OSC proceeding and have found that Paterson knew he had a cause of action in the early 2000s, at the same time, the [anonymous tip] suggests that there was a level of animus towards Paterson that should not be rewarded with costs,” it concluded.