COURT FILE NO.: 523/04
DATE: 20050405
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
CUNNINGHAM ACJ, LANE and FERRIER JJ.
B E T W E E N:
DELOITTE & TOUCHE LLP
Appellant
J.L. McDougall, Q.C. and Susan J. Kushneryk for the appellant
- and -
ONTARIO SECURITIES COMMISSION
Karen Manarin and Judy Cotte for the Respondent
Respondent
Heard: December 8, 2004
THE COURT:
Overview
[1] Deloitte & Touche LLP was the auditor of Philip Services Corp. The staff of the Ontario Securities Commission (“Staff”) commenced a proceeding against Philip and several of its officers and directors under s.127 of the Ontario Securities Act, R.S.O. 1990, c.S.5, as amended (the “Act”). On July 20, 2004, asserting its duty to make pre-hearing disclosure, Staff obtained an order from the Commission under s.17 of the Act authorizing Staff to disclose certain written information obtained from Deloitte (referred to by the Commission as the “Deloitte Response”) to the respondents in the Philip proceeding. Deloitte now appeals that order to this Court.
[2] This appeal concerns the balancing of Deloitte’s asserted right to keep information it has produced to the Ontario Securities Commission confidential, with the right of respondents in a Commission proceeding to have all relevant information disclosed to them in order for them make full answer and defence.
[3] In the course of Staff’s investigation of Philip, Deloitte produced to Staff documents in its possession relevant to the audits for 1995, 1996 and 1997. Six Deloitte partners who were involved in the 1997 audit were examined under oath. The documents and testimony from Deloitte will be referred to collectively as the “Compelled Material.” Eventually, the investigation of Philip was expanded to include an investigation of Deloitte.
[4] In early 2000, Staff advised Deloitte that it would need to conduct further examinations of Deloitte representatives as part of Staff’s investigation of Deloitte. Deloitte expressed concern about the time and expense that would be spent if Staff conducted further interviews. At Deloitte’s invitation, Staff agreed to proceed by way of written questions. These questions and the answers provided by Deloitte constitute the Deloitte Response.
[5] On October 27, 2000 the Commission ordered that all of the Compelled Material should be disclosed to each of the Philip respondents (the “First Disclosure Order”). That order did not include the Deloitte Response because the investigation of Deloitte was still ongoing, so Staff had not yet sought to disclose it.
[6] Deloitte appealed the decision of the Commission, ultimately to the Supreme Court of Canada. On October 31, 2003, the Supreme Court upheld the First Disclosure Order, finding that all of the Compelled Material is relevant to the Philip respondents and necessary to enable them to make full answer and defence.
[7] In the case at bar, in its reasons dated September 3, 2004 (the “Reasons”), the Commission found that the Deloitte Response was also relevant and should be disclosed to the Philip respondents. Deloitte appeals on the basis that the Deloitte Response is not relevant.
[8] Deloitte also appeals on the basis that it is not in the public interest to disclose the Deloitte Response. In this respect, at issue is whether the Commission properly balanced the confidentiality interests of Deloitte with the right of the Philip respondents to make full answer and defence.
[9] Finally, Deloitte appeals on the basis that the Deloitte Response is privileged. In its Reasons, the Commission found as a fact that as a condition of receiving the Deloitte Response, prior to reviewing it, Staff specifically cautioned Deloitte that it might have to be disclosed to the Philip respondents. Deloitte accepted that condition. Deloitte asserts that the Commission was wrong in concluding that the Deloitte Response did not originate in confidence and was not privileged.
[10] For the reasons which follow, the court is of the view that the appeal should be dismissed.
Background
[11] Philip was a public company trading on the Toronto Stock Exchange. On November 6, 1997, Philip made a public offering of approximately 20 million common shares, 15 million of which were sold in the United States and 5 million of which were sold in Canada and internationally. The offering raised approximately (U.S.) $364 million. On November 6, 1997, Philip filed with the Commission a prospectus, audited financial statements for the years 1995 and 1996, and unaudited financial statements for the first nine months of 1997. The Act required Philip to make full, true and plain disclosure of its financial affairs in the material filed with the Commission in support of the public offering.
[12] Deloitte, who was Philip’s auditor from 1990 to December 1999, audited all of the financial statements.
[13] In January 1998, two months after the public offering, Philip made the first of a series of announcements that negatively altered the financial picture set out in the material Philip had filed with the Commission. The disclosures significantly reduced Philip’s earnings for 1995 and 1996, and substantially altered its 1997 financial picture. Following these disclosures, the price of Philip shares dropped dramatically. Philip was subsequently de-listed and sought bankruptcy protection.
[14] In May 1998, Staff commenced an investigation authorized by the Commission under s. 11 of the Act into the adequacy of the disclosure made by Philip in support of the public offering. Staff was concerned that Philip was aware of the negative financial information in November 1997 but chose not to disclose it until after the public offering was completed.
[15] In furtherance of its investigation, Staff exercised the powers conferred by Part VI of the Act to compel production of thousands of pages of documents including working papers and other business records from Deloitte, and interviewed various Deloitte partners. The documents and interview transcripts (the "Compelled Materials") are evidence of Deloitte's professional work for Philip and contain Deloitte’s knowledge of facts concerning Philip.
[16] Staff obtained an order from the OSC dated November 30, 2000 authorizing disclosure of the Compelled Materials to the Philip Respondents, which order was ultimately affirmed by the Supreme Court of Canada. In seeking disclosure of the Compelled Materials, Staff made it clear that it did not seek to disclose the Deloitte Response, although both the Compelled Materials and the Deloitte Response were in Staff's possession at that time.
[17] The Compelled Materials evidence the contemporaneous work completed by Deloitte in the course of its audit of Philip. The detailed notes, memoranda, correspondence, calculations and data contained in the Compelled Materials, along with the recollections of Deloitte partners regarding the details of Deloitte’s work with Philip as recorded in the interview transcripts, evidence the precise steps taken by Deloitte throughout its work in respect of Philip. The Compelled Materials include the observations and conclusions made by Deloitte staff members throughout their time at Philip's premises and in the course of their meetings with Philip staff, Directors and Philip's Audit Committee, as well as in the course of internal Deloitte meetings and discussions.
The Production of the Deloitte Response
[18] As noted above, during the course of its investigation of Philip, Staff also began to investigate the conduct of Deloitte. Staff examined all of the documents and transcripts that had been gathered regarding the Philip investigation. However, Staff was of the view that it was necessary to follow up with further questions of Deloitte personnel that were more specific to the issue of Deloitte’s conduct in performing its audit of Philip and issuing certain consent and comfort letters.
[19] As an auditor of a public company, Deloitte has its own professional duties and obligations pursuant to the Act, separate from those of the company. These include the various professional duties and obligations set out in the relevant statutes and other rules and regulations for public accountants, including the requirements of Generally Accepted Accounting Standards ("GAAS"), Generally Accepted Accounting Procedures ("GAAP") and the provisions of the Canadian Institute of Chartered Accountants Handbook ("CICA Handbook").
[20] In order to investigate Deloitte’s professional activities, separate from the investigation of the Philip Respondents, Staff obtained an order from the OSC dated February 8, 1999 which provided as follows:
[I]n addition to the matters set out in the Original Order, each of Karen Manarin, Larry Masci and Tom Petroff (the 'Investigators') is appointed to investigate and inquire into the affairs of Deloitte & Touche, auditors of Philip, and/or other agents and/or other financial advisors including without limitation, any of its or their employees and officers, past or present, for the purpose of determining whether there has been conduct not in compliance with Ontario securities law and/or conduct otherwise contrary to the public interest.
[21] Staff advised Deloitte of the purpose of its investigation in a letter dated February 2, 2000:
The principle [sic] focus of this investigation is to determine the adequacy of the 'examinations' conducted by D&T, as required by s. 78(3) of the Act, that enabled D&T to render the audit reports for [Philip]'s 1995, 1996 and 1997 financial statements. A secondary focus is on the adequacy of the process followed by D&T that enabled D&T to render the letters of consent and comfort required by sections 34 and 65 of the Regulations, in connection with the [Philip] prospectus offering of November, 1997.
[22] Staff consulted with D&T to arrive at a mutually agreeable procedure to enable Staff to obtain answers to outstanding questions regarding the “adequacy of the process followed by D&T”. In a letter to Deloitte’s counsel dated February 2, 2000, Staff states as follows:
At a meeting on August 26, 1999, we discussed the status of Staff’s investigation. You advised that significant time and resources had been expended by D&T in connection with Staff’s investigation of PSC [Philip] and you, quite reasonably, expressed concern over the prospect of having to dedicate similar time and resources to address the investigation of D&T. In particular, we discussed the fact that a number of D&T personnel involved in the audit of PSC, located in Canada and elsewhere, had already been interviewed by Staff at considerable cost to D&T. You stressed that in addition to the time required to conduct the interviews, significant time and expense had been incurred in having to prepare the witnesses for the examination. I assured you at our meeting on August 26, 1999 that every effort would be made by Staff to accommodate your concerns in this regard. One option that was discussed was for Staff to submit their questions in writing.
Having regard to the fact that Staff’s investigation is into the conduct of D&T, as distinct from any individual employees of D&T, and bearing in mind the concerns we discussed at our August 26 meeting, Staff have determined that the most thorough, efficient and fair means of furthering this investigation is to set out in detail the issues of concern identified by Staff, together with a series of related questions, and to seek a comprehensive written response from D&T.
[23] In the same letter, Staff forwarded to Deloitte a series of written questions covering several aspects of the audit where further information or explanation was required regarding the conduct of Deloitte.
[24] On July 14, 2000, Deloitte provided Staff with the Deloitte Response. In a letter of July 14, 2000, counsel for Deloitte set out his understanding of the potential for disclosure of the Deloitte Response:
The process which led to the Response being prepared commenced with summonses issued well prior to the amendment to s. 17 of the Securities Act which occurred in December of 1999. Consequently, I understand that it is Staff’s position that an order of the OSC would be required before disclosure of the Response could be made. I further understand that Staff would oppose the granting of any order under s. 17 which resulted in disclosure of the Response for use in collateral proceedings, including proceedings by the OSC against parties other than Deloitte & Touche. Finally, I understand that it is Staff’s view that it would be contrary to the public interest should this information, provided in the course of Deloitte & Touche’s efforts to co-operate with the investigation, result in prejudice to it in the ongoing civil proceedings.
[25] Staff was concerned that counsel for Deloitte misunderstood the potential for disclosure of the Deloitte Response. Out of an abundance of caution, Staff sealed the response and by letter dated August 4, 2000, Mr. Naster on behalf on Staff, set out the terms under which Staff was prepared to receive the response. The relevant portions of the letter are as follows:
As you are aware, I was away from the office until July 17, 2000. Upon reviewing your letter and, in particular, the terms under which D&T supplied the Response, I became concerned that Staff may not be able to comply with each of the terms suggested by you. Consequently, on July 18, 2000, I instructed Michael de Verteuil to place the Response and the two copies which were made (as well as the disc containing an electronic version of the Response) in a sealed box until such time as an agreement can be reached respecting the terms under which the Response is being provided to Staff.
As I understood that you were away from the office during the week of July 17, I did not notify you of these developments until July 26, 2000. I advised you at that time of my concerns and that the Response had been placed in a sealed box until such time as an agreement respecting the terms could be reached. I further advised that I wanted to discuss the matter with the Director of Enforcement (who was away from the office that week) before responding to your letter of July 14, 2000.
Please be advised that Staff proposes that the following terms apply in respect of the Response:
That the Response is being provided to Staff pursuant to a summons issued by Staff pursuant to Part VI of the Securities Act, R.S.O. 1990, c.S.5, as amended (the “Act”) prior to the amendment to Part VI of the Act which came into force on December 15, 1999.
Should Staff believe that it is necessary, in the public interest, to disclose the Response, Staff will apply for an order from the Commission pursuant to s.17(1) of the Act and that, pursuant to s.17(2), D&T will receive notice of that application and be given an opportunity to be heard by the Commission on whether it is in the public interest to make the order requested by Staff.
Should Staff seek an order under s.17(1), it will be Staff’s position that any order made by the Commission should include terms and conditions pursuant to s.17(4) that prohibit the use of the Response and/or any information derived from the Response for any purpose other than the express purpose for which the disclosure order is being made.
Staff acknowledge that disclosure of the Response could be significantly prejudicial to D&T in connection with outstanding civil proceedings. Staff will only seek an order to disclose where Staff believe that it has a legal obligation to make such disclosure (e.g. where disclosure is required for the purposes of complying with Staff’s duty to disclose relevant information to a respondent/defendant in connection with proceedings initiated by the Commission or Staff).
Staff will oppose any request which may be made by a third party for disclosure of the Response, in the absence of a legal obligation requiring the order to be made. In particular, Staff will oppose any request for disclosure of the Response for the purpose of using the Response and/or information contained therein in connection with outstanding civil proceedings.
Please confirm that these proposed terms are acceptable to D&T. [Emphasis added]
[26] By letter dated August 14, 2000, Mr. McDougall advised, “I am pleased to report that I have been instructed to advise you that the terms proposed in your letter are acceptable to Deloitte & Touche, LLP.” [Emphasis added]
The First Disclosure Order
[27] Staff commenced proceedings against Philip and several of its directors and officers under s. 127 of the Act by way of Notice of Hearing and Statement of Allegations dated August 30, 2000. Deloitte was not named as a respondent. The Statement of Allegations includes the claim that the Philip respondents failed to disclose material financial information to Deloitte.
[28] On November 30, 2000, the Commission issued the First Disclosure Order authorizing Staff to disclose the Compelled Material to the Philip respondents.
[29] The Commission concluded that the purposes of the Act were best served by a full and fair inquiry into the merits of the allegations made against the Philip respondents and that those interests “far outweigh Deloitte’s right to confidentiality”: In the Matter of Philip Services Corp., (OSC) Nov. 7, 2000, at pp.18-20.
[30] The First Disclosure Order included terms prohibiting the Philip respondents and their counsel from using the Compelled Material for any purpose other than making full answer and defence in the Philip proceeding and prohibiting it from being used for any collateral or ulterior purpose: Deloitte & Touche LLP v. Ontario Securities Commission, 2003 SCC 61, [2003] 2 S.C.R. 713 at pp.726-727.
[31] Deloitte appealed the Order to the Divisional Court, the Court of Appeal and the Supreme Court of Canada. On October 31, 2003, the Supreme Court upheld the First Disclosure Order, holding that the Commission’s decision to order the disclosure of the Compelled Material was reasonable and sound: Deloitte & Touche LLP v. Ontario Securities Commission, (S.C.C.), supra, at p.723
[32] By letter dated December 1, 2000, Staff advised counsel for Deloitte that they would not proceed further with the investigation of Deloitte.
[33] Once Staff determined that it would not initiate proceedings against Deloitte, Staff took the position that it was obliged to make disclosure of the Deloitte Response in accordance with R. v. Stinchcombe, [1991] 3 S.C.R. 326 (S.C.C.).
The conduct of Deloitte is put in issue
[34] In the weeks leading up to the commencement of the Philip proceeding, counsel for one of the respondents advised Staff in writing that his client would be placing the credibility of Deloitte and its audit at issue in making full answer and defence to any formal allegations made against him.
[35] Similarly, counsel for five other respondents advised the Commission during the first appearance that Deloitte’s activity as Philip’s auditors would “clearly” be relevant to his clients’ defence and there would be issues relating to their activities as auditors.
[36] On July 20, 2004, the Commission made the order under appeal, authorizing disclosure of the Deloitte Response.
Standard of Review
[37] The Supreme Court has held that the standard of review of a decision of the Commission to order disclosure in the public interest is one of reasonableness: Deloitte & Touche LLP v. Ontario Securities Commission, [2003] 2 S.C.C. 713 at p.723.
[38] In considering whether the Commission’s decision is reasonable, it is to be noted that the issue of whether disclosure should be ordered in the public interest requires the Commission to exercise a broad discretionary power. The exercise of that power must be consistent with the public interest but it is for the Commission to determine the public interest since the Act does not define the term. It is apparent that the Legislature intended to give the Commission such a broad discretion.
[39] In the appeal of the First Disclosure Order, Doherty J.A. found that “[t]he Commission is entitled to substantial leeway in deciding what meaning should be given to the ‘public interest’ in s.17”: Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.172.
[40] In Pezim v. British Columbia (Superintendent of Brokers), the Supreme Court considered a decision of a securities commission involving the commission’s interpretation of the public interest and the commission’s constituent legislation. The Court concluded that having regard to the nature of the securities industry and securities commissions’ specialized expertise and policy development role, such decisions warrant considerable deference: Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 at 595-596.
[41] This Court has previously held that in determining the standard of review applicable to decisions of the Commission under s. 17 of the Act, “considerable deference should be accorded to the Commission ruling on how the public interest test should be applied”: Coughlan v. WMC International Ltd., [2000] O.J. No. 5109 (Div. Ct.) at pp.11-12.
Relevance
[42] In the appeal arising out of the First Disclosure Order, the Ontario Court of Appeal applied the above principles to Staff’s disclosure obligations.
Relevant material in the Stinchcombe, supra, sense includes material in the possession or control of Staff and intended for use by Staff in making its case against the Philip respondents. Relevant material also includes material in Staff’s possession which has a reasonable possibility of being relevant to the ability of the Philip respondents to make full answer and defence to the Staff allegations. This latter category includes material that the Philip respondents could use to rebut the case presented by Staff; material they could use to advance a defence; and material that my assist them in making tactical decisions…: Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C. A.), supra, at p. 174, para. 40.
[43] The Court of Appeal agreed with the Commission’s approach, finding that:
This disclosure application turned in large measure on whether the compelled material was relevant. Relevance occurs where the nature of the allegations and the contents of the material in possession of Staff intersect. The Commission possessed detailed information concerning the nature of the allegations and the factual context in which those allegations were made. A reading of the Statement of Allegations leaves no doubt that the relationship between Deloitte and Philip, as it related to disclosure of financial information in the 1995, 1996 and 1997 audits, will be central to the s. 127 proceeding against the Philip respondents. That Statement of Allegations is replete with claims that material financial information was not disclosed or was disclosed in a misleading way. It is alleged that these non-disclosures and misleading disclosures found their way into the financial information provided in support of the public offering. According to the allegations made by Staff, the blame for the misleading quality of the financial information provided to the Commission rested with the Philip respondents who failed to make proper disclosure to Deloitte or who actually misled Deloitte concerning the nature of the financial transactions.
Given these allegations, the flow of information and advice back and forth between Philip and Deloitte as it related to the many transactions referred to in the Statement of Allegations could well be important to determining both the accuracy of the financial information provided to the Commission and any blame attributable for inaccuracies in the information. Both of these issues would inevitably be front and centre in the s.127 proceeding: Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.175, paras.44-45.
[44] In the decision under appeal, the Commission reasonably applied the above principles to conclude that the Deloitte Response is relevant. The Commission found that when the Supreme Court upheld the First Disclosure Order, the Court,
…makes it quite clear that any information that speaks to Deloitte’s “process of auditing” is relevant to the issues to be heard in the Philip matter….
During the course of the hearing, we received the opportunity to consider the Deloitte Response and we are of the opinion that many of the issues that form the subject matter of the response are also matters that will be relevant to the Philip hearing based on our review of the Statement of Allegations. In particular, we note that the Deloitte Response contains information regarding Deloitte’s approach to audits in general as well as specific details regarding the Philip audit. Also, the Deloitte Response contains information regarding the nature of the Deloitte audit engagement with Philip and information concerning Deloitte’s policies and procedures at that time with regard to its performance of audits. It also goes into great details regarding certain of the documents that were included in the Compelled Material. There is also information as to what Deloitte knew about certain transactions, how and when they came to know this information and why they accounted for certain transactions in a specific fashion: Reasons of the Ontario Securities Commission, dated September 3, 2004, supra at pp.21-22.
[45] The Commission did not have the benefit of any submissions from the Philip respondents whose right to make full answer and defence would be directly affected by a decision limiting disclosure. However, the proceedings arising out of the First Disclosure Order make it clear that the some or all of the Philip respondents will be putting the conduct of Deloitte at issue. As the Court of Appeal noted:
In deciding whether material in its possession could reasonably be relevant to the Philip respondents, Staff was obliged to take a generous view of relevance. Staff was not privy to defence strategies or tactics, or to material in the possession of the Philip respondents.
While Staff was obviously limited to the extent to which it could speak for the Philip respondents (who were under no obligation to disclose their positions), Staff did refer to submissions made by counsel for one of the respondents in an earlier appearance before the Commission, and to a letter sent to Staff by counsel for another of the Philip respondents. The submissions and the letter made it clear that Deloitte’s conduct in the course of the audits would be very much in issue in the s.127 proceeding: Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.174, para.41; p.176, para.50.
[46] The Supreme Court made a similar finding, commenting that,
…the nature of the allegations is such that both the substance of the Deloitte audit as well as the process of auditing are issues in the s. 127 hearing. Or, as the Court of Appeal and the OSC put it, what Deloitte knew (the substance) and when it knew (the process) will be central to the determination of the issues before the OSC: Deloitte & Touche LLP v. Ontario Securities Commission, (S.C.C.), supra, at p.718, para.9.
[47] Similarly, the Deloitte Response would also be useful to the Philip respondents in deciding how to conduct their defence or whether to call evidence on certain issues. It will likely assist the Philip respondents in making tactical decisions about their defence, which is sufficient to demonstrate relevance. As stated by the Supreme Court:
One measure of the relevance of information in the Crown’s hands is its usefulness to the defence: if it is of some use, it is relevant and should be disclosed…This requires a determination by the reviewing judge that production of the information can reasonably be used by the accused either in meeting the case for the Crown, advancing a defence or otherwise in making a decision which may affect the conduct of the defence such as, for example, whether to call evidence: R. v. Egger, [1993] 2 S.C.R. 451 at p.467; Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.174, para.40.
[48] Similarly, in Dixon the Supreme Court held that,
… all relevant information in its possession must be disclosed, so long as the material is not privileged. Material is relevant if it could reasonably be used by the defence in meeting the case for the Crown… . Clearly, the threshold requirement for disclosure is set quite low. As a result, a broad range of material, whether exculpatory or inculpatory, is subject to disclosure…The right to disclosure of all relevant material has a broad scope and includes material which may have only marginal value to the ultimate issues at trial: R. v. Dixon, [1998] 1 S.C.R. 244 at pp.256, 257.
Public Interest
[49] Section 3.4 of the Commission’s Rules of Practice requires Staff to make pre-hearing disclosure to the Philip respondents of all documents and things in its possession or control which are “relevant to the allegations”, including transcripts of all witness interviews. However, disclosure must not violate the confidentiality provisions of s.16 of the Act. Section 16 of the Act provides that, subject to the disclosure mechanism set out in s.17, “no person or company” is permitted to disclose the nature of an investigation conducted under s.11, the fact that they have been summoned under s.13 of the Act to provide testimony and documents, or the nature and content of any testimony and documents that they provide to the investigators under such a summons.
[50] Section 17(1) of the Act permits the Commission to order disclosure of compelled material when the Commission considers that it is in the “public interest” to do so. Section 17(4) permits the Commission to attach such terms and conditions to the disclosure order as may be necessary to give effect to the public interest, as occurred with the First Disclosure Order, and as the Commission did in the decision under appeal.
[51] In order to determine whether it is in the public interest to order disclosure, the competing interests of the purposes for which the disclosure is sought, on the one hand, and the harm resulting from disclosure to the confidentiality interests, on the other, must be weighed and balanced: Deloitte & Touche LLP (S.C.C.), supra, at pp.719 and 726; Smolensky v. British Columbia Securities Commission (2004), 2004 BCCA 81, 236 D.L.R. (4th) 262 (B.C.C.A.) at 271, leave to appeal dismissed, [2004] S.C.C. No. 274.
[52] The Court of Appeal for Ontario considered the importance of confidentiality to parties subject to investigation in determining the public interest issue:
It seems self-evident that, as part of the balancing of the public interest and this highly intrusive inquiry into a private citizen's business affairs, those persons subject to investigation should at the least be protected from public disclosure of their involvement in the inquiry where no wrongdoing on their part is disclosed: Ontario Securities Commission v. Crownbridge Industries Inc. (1989), 70 O.R. (2d) 506 (C.A.) at 508 to 509.
[53] In exercising its discretion under s. 17(1) of the Act, the Commission is to consider the purpose for which the evidence is sought and the specific circumstances of the case. In Coughlan, the Commission recognized that it,
must consider the purpose for which the evidence is sought and the specific circumstances of the case. … [I]n determining whether to order disclosure it must balance the continued requirement for confidentiality with its assessment of the public interest at stake, including harm to the person whose testimony is sought: Coughlan v. WMC International Ltd., supra, at p.12, at para.38; Quoted with approval in Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.168, para.15, p.172, para.31.
[54] In the decision under appeal, the Commission properly considered the purpose for which disclosure was sought and concluded that “[w]e consider that the disclosure of relevant evidence to respondents in such a hearing meets a goal of substantial importance which is ensuring public confidence in the regulation of capital markets.”: Reasons of the Ontario Securities Commission, dated September 3, 2004, supra, at p.16, para.51.
[55] The Supreme Court has recognized that effective enforcement of securities regulation is essential to achieving the purposes of the Act. In Pezim, the Supreme Court affirmed that it was the legislatures’ intention to give securities commissions broad powers with respect to investigations, audits, hearings and orders - the very tools of enforcement - and a broad discretion to determine what is in the public interest in the course of exercising those powers: Pezim, supra, at pp. 593-594; p. 595, para. e-h.
[56] In the case of British Columbia Securities Commission v. Branch, the Supreme Court noted the practical importance of securities commissions being able to obtain - and use in their proceedings - information which, given the nature of the securities industry, will generally be in the hands of private parties and must of necessity be gathered under summons: British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3 per Iacobucci J. at pp.27-28.
[57] When considering the term “public interest” in s.17(1) of the Act, the Commission must balance all relevant and competing interests. The Commission must evaluate the extent to which the policies of the Act are served by the purpose for which disclosure is being sought and the harm done by disclosure to confidentiality interests.
[58] Deloitte argues that it will be prejudiced if disclosure is made, and takes the position that:
(i) Deloitte is adverse in interest to each of the Philip Respondents. In particular, various disputes arose between Deloitte and the Philip Respondents as a result of the failure of Philip in 1999.
(ii) Philip, as part of a Plan of Compromise and Arrangement under the Companies' Creditors Arrangement Act, R.S.C. 1985, c.C-36, retained the right to bring any claims or to pursue any causes of action that Philip might have against Deloitte. In addition, Philip and its various lenders provided releases to a number of the individual Philip Respondents that are revocable if those respondents do not reasonably cooperate in any litigation against Deloitte.
(iii) A number of civil actions against Deloitte, including various class actions, have been commenced in Canada and the U.S. by the Philip Respondents or involve the Philip Respondents as third parties. The claims in these actions allege that Deloitte failed to meet its professional duties and obligations and seek payment of damages from Deloitte in the billions of dollars.
(iv) Deloitte is concerned that the Deloitte Response not be disclosed to the Philip Respondents in these circumstances. The Deloitte Response provides a detailed and comprehensive inside look into Deloitte's professional work. This information could potentially be used against Deloitte by the Philip Respondents in the various ongoing disputes with Deloitte concerning Deloitte’s professional work.
[59] In the decision under appeal, the Commission properly weighed the desire of Deloitte to keep the Deloitte Response confidential against the right of the Philip respondents to make full answer and defence. The Commission reasonably concluded that the injury of non-disclosure to the Philip respondents outweighed any injury to Deloitte. At para.94:
We have considered the harm that Deloitte alleges would be caused by disclosure of the Deloitte Response. We have also considered the disclosure obligations of Staff as dictated by Stinchcombe, the right of the Philip respondents to make full answer and defence, the need to foster fair and efficient capital markets through public confidence in the system and the statutory framework which provides for disclosure of unprivileged and relevant documents. With all of these considerations in mind, we have decided that the balance tips clearly in favour of disclosure of the Deloitte Response.
[60] The nature of the audit process is such that the sharing of information between auditor and client is essential to the performance of the auditor’s task. In these circumstances, where Philip was Deloitte’s own client, and it would have already shared relevant information with it, the Court of Appeal dealing with the First Order concluded that Deloitte’s expectation of privacy as against its own client would be minimal: Deloitte & Touche LLP v. Ontario Securities Commission, (Ont. C.A.), supra, at p.178, para.58.
[61] The same is true of the Deloitte Response. Staff is seeking to make disclosure to Philip and seven of its principal officers and directors. Philip was Deloitte’s own client and as the Court of Appeal has pointed out, its confidentiality expectations as against its own client must be minimal. The final results of the audit process - the financial statements of Philip - were filed with the Commission in support of a public offering of securities. The financial statements were provided to prospective investors to assist them in evaluating the merits of the public offering. As noted by the Ontario Divisional Court in A. Co v. Jay Naster (2001), 143 O.A.C. (Ont.Div.Ct.) at p.360, paras.14-15:
One cannot accept the obligation to provide honestly, fully and accurately information required by the Commission before it grants permission for the public solicitation of funds raised against the assets of a corporation, and then be heard to complain that it is an invasion of privacy to have to disclose whether one abided by that obligation.
Given the nature of the industry, and the nature of the information gathered, Mr. X can have had virtually no expectation of privacy in what he divulged upon his examination.
Privilege
[62] For a document to be privileged, it must fall within a recognized class of privilege, in which case there is a presumption that the document should be protected. In circumstances where the document does not fall within a recognized class of privilege, it must be determined by applying the “Wigmore test”, in which case there is a presumption that the document should not be protected: R. v. Gruenke, [1991] 3 S.C.R. 263 at 286.
[63] The Commission properly concluded that the Deloitte Response does not fall into any recognized class of privilege. Thus there is a presumption that it should not be protected.
[64] Four conditions are necessary to establish the privilege for confidential communications (the "Wigmore Criteria"):
(1) The communications must originate in a confidence that they will not be disclosed.
(2) This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties.
(3) The relation must be one which in the opinion of the community ought to be sedulously fostered.
(4) The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.
Slavutych v. Baker (1975), 55 D.L.R. (3d) 224 at 228 (S.C.C.); Howe v. Institute of Chartered Accountants of Ontario (1994), 19 O.R. (3d) 483 (C.A.).
[65] The Commission also properly concluded that if the Deloitte Response failed to satisfy one of the four parts of the Wigmore test, the claim of privilege would fail. Once the Commission found that the Deloitte Response did not satisfy the first and fourth parts of the test, it reasonably concluded that it did not need to consider the other two.
[66] Moreover, the Supreme Court has made it clear that if the first part of the Wigmore test – that the document originated in confidence – is not satisfied, the claim of privilege must fail.
… it is absolutely crucial that the communications originate with an expectation of confidentiality ... Without this expectation of confidentiality, the raison d’être of the privilege is missing: R. v. Gruenke, supra, at p.292, para. a-b.
[67] The Commission applied the Wigmore criteria and reasonably concluded that the Deloitte Response did not satisfy the first criterion. The Commission found that since Staff specifically advised Deloitte that the Deloitte Response might have to be disclosed, and Deloitte chose to provide it on that basis, the Deloitte Response did not originate in confidence and therefore was not privileged: Reasons of the Ontario Securities Commission dated September 3, 2004, supra, at p.25, para.87.
[68] The appellant submits that the Deloitte Response was provided “with an expectation of confidentiality.” On the contrary, the Deloitte Response was provided on the understanding that it might be disclosed to the Philip respondents. The Commission properly concluded that since in these circumstances there was no expectation of confidentiality, Deloitte’s claim for privilege must fail: Reasons of the Ontario Securities Commission dated September 3, 2004, supra, at pp.24-25, paras.82-86.
Breach of Fairness or Natural Justice
[69] The appellant argued that the Commission erred in its application of the principles set out in the decision of this Court in Coughlan in respect of applications for disclosure pursuant to s.17 of the Act generally and in respect of principles of natural justice and procedural fairness in particular.
[70] The representations of Staff were found in Coughlan to provide the basis for the respondent's legitimate expectations in the maintenance of confidentiality:
[T]he OSC was called upon to make a discretionary decision based on its assessment of the public interest. In that context, it was not bound by the doctrine of legitimate expectations to exercise its discretion in a particular way. However, it was required to take Mr. Coughlan's expectation into account as one of the factors to be weighed in the balance. As was stated by counsel in the Coughlan factum, 'In such a case, protection of the legitimate expectations of those who gave their testimony under the protection of an existing OSC Policy and a specific assurance are values which are deserving of protection pursuant to the doctrine.' The failure of the OSC majority to take this principle into account is another factor supporting my conclusion that their decision was unreasonable: Coughlan, (Div. Ct.), supra at p.268.
[71] The appellant argues that, as in Coughlan, the Commission’s failure to take into account the legitimate expectations of Deloitte is a factor in the unreasonableness of its decision. While an exception to confidentiality is available pursuant to s.17 of the Act if in the public interest, the possibility of such an exception does not derogate from the document's confidentiality. Further, the unique nature of the document and Staff's care in respect of the protection of that confidentiality, demonstrated through its correspondence with Deloitte and its caution in reviewing the document upon receipt, all factored into Deloitte's legitimate expectation that the confidentiality of the Deloitte Response would be maintained.
[72] Finally, argues the appellant, disclosure of the Deloitte Response despite Deloitte's legitimate expectation of the maintenance of its confidentiality would be in violation of Deloitte's rights to procedural fairness and natural justice.
[73] However, as the Commission noted, Staff set out, in detail, the terms upon which it was prepared to accept the Deloitte Response. Deloitte accepted those terms. Staff complied with every term of that agreement with Deloitte. The Commission therefore properly concluded that there was no basis for Deloitte’s assertion that it had been treated unfairly. There is no basis upon which this conclusion could be considered unreasonable.
Conclusion
[74] Accordingly, the appeal is dismissed.
[75] The respondent shall deliver brief written submissions on costs within seven days and the appellant within a further five days.
Cunningham ACJ
Lane J.
Ferrier J.
Released: April 5, 2005
cc
COURT FILE NO.: 523/04
DATE: 20050405
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
CUNNINGHAM ACJ, LANE and FERRIER JJ.
B E T W E E N:
DELOITTE & TOUCHE LLP
Appellant
- and -
ONTARIO SECURITIES COMMISSION
Respondent
REASONS FOR JUDGMENT
THE COURT
Released: April 5, 2005
cc