DATE: 20060621
DOCKET: C44065
COURT OF APPEAL FOR ONTARIO
GILLESE, BLAIR and JURIANSZ JJ.A.
B E T W E E N :
THE TRUSTEES OF THE ONTARIO SERVICE EMPLOYEES UNION PENSION TRUST FUND, individually and on behalf of all other persons similarly situated
Joseph M. Steiner and Christopher P. Naudie for the appellants
Kirk Baert and Celeste Poltak for
Applicant (Respondent in Appeal)
the respondent, The Trustees of the
Ontario Service Employees Union
- and -
Pension Trust Fund
RICHARD CLARK, MARK WAYLAND and DELOITTE & TOUCHE LLP
Respondents (Appellants in Appeal)
Jennifer Teskey for the respondent Nortel Networks Corp.
- and -
NORTEL NETWORKS CORP.
Respondent (Respondent in Appeal)
Heard: January 24, 2006
On appeal from the Judgment of Justice Mary Anne Sanderson of the Superior Court of Justice, dated July 25, 2005.
R.A. BLAIR J.A.:
Overview
[1] The Trustees of the Ontario Service Employees Union Pension Trust Fund (“OPT”) are the plaintiffs in a U.S. federal securities fraud class proceeding commenced in New York against Nortel Networks Corp. (“Nortel”) and certain individuals. Deloitte & Touche LLP (“Deloitte”) is Nortel’s independent auditor.
[2] OPT applied for, and obtained, letters rogatory in the U.S. Class Action requesting the cooperation of the Superior Court of Justice in Ontario in compelling the production of a wide range of documentation from Deloitte, as well as the viva voce examination of Richard Clark and Mark Wayland. Mr. Clark was the lead audit partner with Deloitte and Mr. Wayland was the audit manager with respect to the Nortel engagement. On July 25, 2005, Justice Sanderson granted an order enforcing the letters rogatory in their entirety.
[3] Deloitte appeals that order.
Facts
[4] In the U.S. Class Action, OPT alleges that Nortel made false or misleading public statements concerning its financial condition and performance during the period October 24, 2000 to February 15, 2001 (“the class period”). It is alleged that when Nortel subsequently disclosed its true financial condition, the value of its shares declined substantially and OPT suffered significant losses. OPT states that Nortel caused its public statements to be false or misleading by the deliberate use of five improper financial reporting and accounting practices in relation to its third and fourth quarters of 2000, namely:
• Improper vendor financing – inadequately reserving for vendor-financed loans and artificially inflating and improperly recognizing revenues;
• Improper inventory valuation – failing to take adequate charges against earnings to reflect the diminished value of its products recovered after defaults on vendor-financed loans, thereby inflating inventory value;
• Improper revenue recognition – inflating revenues by improperly and prematurely recognizing revenue;
• Failure to Account for Uncollectible Receivables; and
• Goodwill impairment – failing to recognize and report billions of dollars in goodwill impairment.
[5] Deloitte audited Nortel’s year-end financial statements and reviewed its quarterly financial statements in the years 2000 and following. On December 23, 2003, Nortel issued a restatement of its financial statements for 2000, 2001, 2002 and certain quarters of 2003 (“the 2002 Restatement”). Later, in January 2005, it also re-filed audited financial statements for 2003 (“the 2003 Restatement”).
[6] OPT wants to examine the audit documentation pertaining to these restatements and audits. It tried unsuccessfully to get access to the Canadian documentation through Deloitte U.S. OPT then subpoenaed Deloitte in the U.S. proceedings, but Deloitte did not respond to the U.S. subpoena. On the heels of these failed attempts it resorted to, and obtained, the letters rogatory from Magistrate Judge Dolinger of the United States District Court, Southern District of New York, on September 21, 2004.
[7] The contested provisions are paragraphs 11 and 15 of the letters rogatory. Paragraph 11 requests the production of the two representatives of Deloitte, Messrs. Clark and Wayland, for examination. Paragraph 15 requests the following documentation (the “Requested Documents”):
(a) All working papers and other documents concerning Deloitte’s audit of Nortel’s financial statements for year-end 2000 and year-end 2001.
(b) All workpapers and other documents concerning Deloitte’s review of Nortel’s financial statements for the third and fourth quarters of 2000 and the first quarter of 2001;
(c) All workpapers and other documents concerning Deloitte’s review of Nortel’s financial statements for the second and third quarters of 2001, to the extent that such documents are related to a financial charge/write-down, in excess of $12 billion, as announced in Nortel’s Form 10-Q for the quarterly period ending June 30, 2001, filed with the SEC on or about August 8, 2001;
(d) All documents relating to Nortel’s analysis of whether or not any transaction, customer, contract, arrangement or other such entry ([…]) during the class period included in Nortel’s 2000 consolidated financial statements as originally filed with the SEC on March 31, 2001, was considered, and/or formed the basis for, any restatement of Nortel’s financial statements…; and
(e) All indices and/or inventories of work papers relating to any engagement or service performed by Deloitte for Nortel.
[8] Compliance with the demand for the Requested Documents will entail considerable time and effort, and expense, by Deloitte. Their affiant, Mr. Morrison, deposed that the requested documents number in the hundreds of thousands of pages, and possibly exceed a million pages. The documents are both in hardcopy and electronic form and are stored at various locations. Those relating to the 2000 and 2001 financial statements include over 400 working paper files, consisting mostly of documents in electronic form. Deloitte generates and stores documents in electronic form using a software program (Audit System 2), which does not allow text searching across multiple documents or records. Users must open documents individually before examining and/or printing them. The requested documents also include more than a hundred thousand pages of personal desk files that are not organised by subject matter. Mr. Morrison estimated a minimum of fifteen hundred person-hours by Deloitte to conduct a file-by-file and document-by-document review for the purpose of identifying and segregating the relevant documents from the irrelevant materials.
[9] For its part, as noted by the application judge, OPT has offered to contribute up to $100,000 towards Deloitte’s costs in this regard.
The Positions of the Parties
[10] The application judge ordered that the letters rogatory were to be enforced, subject to certain preconditions. The preconditions were that OPT and its counsel were to give their written undertakings:
(a) that the documents and evidence produced pursuant to the judgment enforcing the letters rogatory would be used only for the purposes of the U.S. Class Action and not for the purposes of (i) adding Deloitte and/or Clark or Wayland as a party defendant to that action, or (ii) commencing any new proceedings against Deloitte and/or Clark or Wayland, or (iii) otherwise advancing any new claim against Deloitte and/or Clark and/or Wayland; and
(b) that OPT and its counsel shall not provide documents and/or evidence produced pursuant to the judgment to any other person unless that other person acknowledges and undertakes to be bound by the foregoing provision.
[11] Deloitte asserts that most of the requested documents are not relevant, either temporally (they do not relate to the class period) or in subject matter (they do not relate to the improper accounting practices raised in the U.S. Class Action). Deloitte therefore seeks to set aside the judgment of Sanderson J. to the extent that it orders production of the work papers and other documents listed in subparagraphs (a) through (c) of the letters rogatory on the basis that it would require a massive and burdensome effort to review, identify, separate and produce relevant documents. Alternatively, Deloitte requests – for the first time on appeal – that sub-paragraphs 15(a) through (c) be narrowed to require production of only those particular sections of the working papers that have been identified as potentially containing relevant documents and that would not be burdensome for Deloitte to produce. In short, Deloitte submits that the letters rogatory “are unjustifiably overbroad, unduly burdensome, and should not be enforced”.[^1]
[12] OPT argues that the evidence sought by it through the enforcement of the letters rogatory is of particular relevance to the U.S. Class Action, that the evidence is not otherwise obtainable, does not violate principles of Canadian public policy, was defined with reasonable particularity, and would not be unduly burdensome to Deloitte to produce. The respondent therefore submits that the application judge properly exercised her discretion to enforce the letters rogatory issued by the U.S. District Court. Nortel took no position at the application to enforce the letters rogatory and takes no position on this appeal.
[13] For the reasons that follow, I would dismiss the appeal.
Law and Analysis
[14] The court’s authority to enforce letters rogatory is derived from s. 60 of the Ontario Evidence Act[^2] and from s. 46 of the Canada Evidence Act.[^3] The order is discretionary in nature.
[15] The application judge correctly, and succinctly, articulated the test to be applied in a proceeding for the enforcement of letters rogatory. Indeed, counsel before her agreed on the test. She said:
All counsel agree on the criteria this Court should use in deciding whether or not the letters rogatory should be enforced. The evidence sought must be relevant, not otherwise obtainable and identified with reasonable specificity. The Canadian enforcement order must be consistent with Canadian public policy and must not be unduly burdensome. OptiMight Communications Inc. v. Innovance Inc., 2002 41417 (ON CA), [2002] O.J. No. 577 (C.A.) at para. 22, relying on Re Friction Division Products Inc. and E.I. DuPont de Nemours & Co. et al. (No. 2) (1986), 1986 2827 (ON SC), 56 O.R. (2d) 722 at 732 [underlining added].
[16] This test is consistent with the principles also enunciated by this court in Fecht v. Deloitte & Touche (1997), 1997 1799 (ON CA), 32 O.R. (3d) 417 (C.A.) and in France (Republic) v. De Havilland Aircraft of Canada (1991), 1991 7180 (ON CA), 3 O.R. (3d) 705 (C.A.). See also Zingre v. R., 1981 32 (SCC), [1981] 2 S.C.R. 392. In Fecht, the court noted that the exercise of judicial discretion in the context of enforcing letters rogatory “requires the balancing of two broad considerations: the impact of the proposed order on Canadian sovereignty and whether justice requires that the taking of commission evidence be ordered” (p. 419). Impact on Canadian sovereignty in this sense refers to the imposition of an unfair burden on, or prejudice to, the non-party citizen of the requestee state who is the target of the request.
[17] The application judge considered and weighed all of the foregoing factors. She reviewed the submissions of the parties in relation to each of them and thereafter conducted her own analysis of those factors based on the record before her. Having done so, she found that:
(a) the Requested Documents were “clearly relevant” and of “paramount evidentiary importance to the U.S. Class Action”;
(b) the requested testimony of Messrs. Clark and Wayland was “highly relevant” and that they possessed “unique and specific knowledge touching on the matters complained of”;
(c) the Requested Documents and Testimony were “crucial to the determination of the issues in the U.S. Class Action”;
(d) it would be unfair to the plaintiffs to require them to proceed to trial without the Requested Documents and the testimony and justice required the enforcement of the letters rogatory;
(e) the Requested Documents were identified with sufficient specificity;
(f) the documents generated by Deloitte in the course of the audits and restatements touching on the issues set out in the complaint “will be unique to Deloitte”, and are therefore not available from other sources; and
(g) the request for the documents was not unduly burdensome for Deloitte in the manner she ordered and subject to the undertakings given by OPT.
[18] On behalf of Deloitte, Mr. Steiner relies heavily on the decision at first instance, and on appeal, in Fecht. He submits the case cannot be distinguished from the present litigation. And, indeed, there are similarities. Fecht involved letters rogatory from the same U.S. District Court, in relation to a U.S. class proceeding alleging that a predecessor of Nortel had made falsely optimistic public statements about the company’s performance, as a result of which its share prices had fallen dramatically. The letters rogatory sought the production of a wide-ranging set of documents from the same auditors, Deloitte & Touche. The request for an order enforcing the letters rogatory was declined on the basis that the relevancy of the requested documentation had not been established (they were said only to be “potentially” relevant), that the request was overly burdensome on Deloitte, and that the applicant had not established a sufficiently substantial link to the foreign jurisdiction (Ontario) to conclude that justice required the enforcement of the letters rogatory. The decision was upheld on appeal.
[19] Fecht is distinguishable from the present case, however. In Fecht, the allegedly false and misleading statements related to primarily non-financial matters. There was one specific accounting related issue involving the write-down of goodwill, but it was held that the request for production was overly broad to respond to that particular issue. In short, Deloitte’s link to the issues in the Fecht U.S. proceeding was nothing more than that it was Northern Telecom’s general auditor, and some information in relation to the audit was “potentially relevant” to the lawsuit.
[20] Here, however, the allegations of false and misleading statements pertain directly to Nortel’s financial statements, and its restatements. The complaint alleges that Nortel issued false and misleading public statements that overstated its financial condition and performance during the class period, and further that the statements included false and misleading information with respect to the nature and extent of the actual sales made by Nortel – all resulting in the artificial inflation of Nortel’s stock price. Thus, allegations relating to improper financial reporting and accounting practices – as encapsulated in the five complaints referred to above – are at the heart of the U.S. Class Action. Deloitte prepared both the financial statements and the restatements that are in issue and was directly involved in the restatement process. Moreover, Nortel specifically defends on the grounds that it relied on the advice of its advisors, thus putting the contents of Deloitte’s working papers and other documentation in issue, as the application judge noted.
[21] The case management judge in the U.S. Class Action made the order for production and testimony and requested the assistance of the Ontario court in enforcing the order on the bases, amongst others, that:
• The testimony sought is both relevant and probative, and thus it would be unfair to require the Class Plaintiffs to proceed to trial without obtaining this evidence;
• The Deloitte witnesses will have specific knowledge of facts that are directly relevant to the allegations;
• The documents and testimony sought are not otherwise available and are of paramount evidentiary importance to the case;
• Justice cannot be completely achieved among the parties without such evidence.
[22] I do not accept the appellants’ criticism that the application judge accorded too much deference to the U.S. court’s order. She correctly observed that she was not bound by the conclusions of the requesting judge, but that “his observations and conclusions are entitled to deference and respect.” I agree with her view that an Ontario court should “‘give full faith and credit’ to the orders and judgments of a U.S. court unless it is of the view that to do so would be contrary to the interests of justice or would infringe Canadian sovereignty”: see Zingre v. R., supra, at p. 401; France (Republic) v. De Havilland Aircraft of Canada, supra, at p. 715-716. At the end of the day, she arrived at her own findings and conclusions, as summarized above.
[23] The unseverable mix of relevant and irrelevant documents amongst the Requested Documents, together with the sheer volume of the production sought, is admittedly troubling in this case, as it was in Fecht. However, Deloitte is a major financial audit and consulting firm, worldwide. The application judge noted that it is obliged by professional standards to compile and secure its working papers in a manner in which they can be made available to regulatory entities and successor auditors. It should follow that the documentation is not impossible to prepare for production. Requests for the production of voluminous documentation, in electronic and hard copy form, are hardly unknown in today’s world of complex general and class action litigation. In that sense, there is a certain “cost of doing business” element in the call for Deloitte to respond to the letters rogatory – an offset to the undoubtedly considerable revenues that the appellant earns from providing high level and complex auditing services to companies such as Nortel.
[24] Deloitte took an “all or nothing” approach before the application judge, contending that it would not be feasible to narrow the request by attempting to separate the relevant from the irrelevant in the circumstances – thereby tactically strengthening its argument based on “burdensomeness”. On appeal, Deloitte attempted to resile from that position and argued that, if the court were to uphold the enforcement order, it should order one of a series of suggested options narrowing the production permitted under the letters rogatory. While it was open to the application judge to narrow the request, she was not invited to do so, on the basis that it was impracticable. In my view, fairness considerations preclude Deloitte from reversing that position now, on appeal.
[25] The application judge was satisfied that the Requested Documents had been identified by subject matter and timeframe, and that this was sufficiently specific in the circumstances. She was also satisfied that the requests for documents and for the testimony of Messrs. Clark and Wayland were not unduly burdensome or prejudicial to Deloitte, particularly in light of the undertakings given by OPT and the conditions that the application judge intended to impose. Applying the specific criteria set out in OptiMight Communications and the more general principles synthesized in Fecht and in France, she concluded (reasons, para. 94):
I am of the view that justice requires the production of the Specified Documents and Specified Evidence. I am satisfied that an order enforcing the letters rogatory in the form of Magistrate Judge Dolinger’s order of September 21, 2004 is in the interests of justice. The evidence is indeed relevant, crucial and otherwise unavailable. Its production in the manner ordered will not be unduly burdensome to Deloittes. Given the undertakings of the Applicants and the pre-existing confidentiality agreements and protective orders, Deloittes’ interests will not be unduly prejudiced in a manner that would infringe Canadian sovereignty.
[26] This was a discretionary decision and is entitled to considerable deference. I see no palpable or overriding error on the part of the application judge in the findings she made and no error in principle justifying interference on the part of this court.
Disposition
[27] I would dismiss the appeal.
[28] The respondent Trustees are entitled to their costs of the appeal, fixed in the amount of $20,000 all inclusive.
“R.A. Blair J.A.”
“I agree E.E. Gillese J.A.”
“I agree R.G. Juriansz J.A.”
RELEASED: June 21, 2006
[^1]: Deloitte factum, para 68.
[^2]: R.S.O. 1990, c. E.23.
[^3]: R.S.C. 1985, c. C-5.```