The Nova Scotia Securities Commission (NSSC) has released a decision made back in April, which found that there was no authority for commission staff to agree to put off consideration of a settlement agreement with an investment dealer for over seven years, while a complex legal proceeding has played out.
According to the decision, NSSC staff entered a settlement agreement with National Bank Financial Ltd. back in 2005, but that agreement hasn’t been considered by the commission, or publicly disclosed, because it also agreed to a subsequent “escrow agreement” that kept the deal from following the usual procedure for considering a settlement.
The agreement is coming to light now because the commission has ruled that the escrow agreement is invalid, although it also ordered that this ruling remain confidential until the settlement is to be made public. On Monday, the NSSC said that a hearing to consider the settlement will now be held on October 15.
The ruling stems from an enforcement case that began back in 2003 with an investigation into the affairs of Knowledge House Inc. (KHI), which resulted in enforcement allegations in 2006 against several KHI insiders, Dan Potter, Kenneth MacLeod, Calvin Wadden and Raymond Courtney. The decision indicates that Courtney entered into a settlement agreement with the NSSC in 2010, it discontinued its allegations against Potter in light of criminal charges being filed against him, and allegations remain outstanding against Wadden and MacLeod. Those allegations have not been proven.
According to the decision, Potter, Wadden and MacLeod have sought motions revoking the investigation order, which allege “very serious improprieties” against the regulator’s staff in conducting the investigation. In the process of discovery to litigate those motions, NSSC staff objected to a question to an investigator about why proceedings weren’t brought against NBF in the case, claiming it was irrelevant.
However, the commission has ruled that the question is relevant and has now ordered that the investigator be required to answer. Although the decision indicates that the reason there were no enforcement proceedings against the firm is because of the escrowed settlement agreement, which it has now found to be invalid.
In its April decision, the commission panel said, “My conclusion is that the effect of the escrow agreement has been a failure to protect the public interest and potential deprivation of Wadden and MacLeod’s right to make a full answer and defence to the allegations brought against them. I conclude that the escrow agreement is invalid and not permissible…”
The panel noted that there is no authority in the investigation orders, securities legislation or rules allowing regulatory staff to enter into an escrow agreement to withhold a settlement agreement from the usual procedure. “If there is no authority for staff to enter into these types of agreements, it must not be done,” the decision said, adding that there is no public interest in maintaining the escrow agreement.
“It has thwarted the established process for dealing with settlement agreements and has had the effect of keeping the settlement agreement confidential for a completely unreasonable length of time,” it said.
The NSSC suggested that this could damage confidence in regulatory authorities. “Because of the complex and technical nature of the financial markets it is increasingly difficult to ensure that the public maintains confidence that the markets will be properly regulated and that those who misconduct themselves will be identified and sanctioned in a timely fashion. It is this public confidence that comes to the fore in the present matter as the existence of the escrow agreement – which has kept a settlement agreement secret for seven years – cannot possibly be viewed by a right thinking member of the public, the man on the Clapham omnibus or any other standard of reasonableness, as something that would inspire confidence in securities regulation in Nova Scotia,” the decision said.