CITATION: Deutsche Bank Securities Limited v. Ontario Securities Commission, 2012 ONSC 1576
DIVISIONAL COURT FILE NOS.: 492/11 and 493/11
DATE: 20120404
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
LEDERMAN, SWINTON and HARVISON YOUNG JJ.
B E T W E E N:
DEUTSCHE BANK SECURITIES LIMITED Applicant
- and -
ONTARIO SECURITIES COMMISSION Respondent
Nigel Campbell and Ryan Morris, for the Applicant Swapna Chandra and Yvonne Chisholm, for the Respondent Ontario Securities Commission Christopher D. Bredt and Caitlin R. Sainsbury, for the Respondent Investment Industry Regulatory Organization of Canada
HEARD at TORONTO: February 10, 2012
Swinton J.:
Overview
[1] The applicant Deutsche Bank Securities Limited (“DBSL”) seeks judicial review of a decision of the Ontario Securities Commission (“the Commission”) dated September 30, 2011, in which the Commission dismissed DBSL’s application for hearing and review of a decision of a Hearing Panel of the Investment Industry Regulatory Organization of Canada (“IIROC”) dated October 13, 2010. The Hearing Panel had refused to dismiss or stay a Notice of Hearing against DBSL at the outset of its proceedings.
[2] For the reasons that follow, I would dismiss the application for judicial review on the grounds that the Commission reasonably concluded that the application before it should be dismissed because of prematurity.
Background Facts
[3] The securities regulatory framework in Ontario involves both the Commission and non-statutory self-regulatory organizations (“SROs”). On the application of a self-regulatory organization, the Commission may recognize that entity as an SRO if satisfied that it is in the public interest to do so. Recognition of an SRO is done in writing and is subject to such terms and conditions as the Commission may impose (Securities Act, R.S.O. 1990, c. S.5, as amended (“the Act”), s. 21.1).
[4] IIROC was recognized as an SRO by the Commission in a recognition order dated May 16, 2008, effective June 1, 2008. Prior to June 1, 2008, one of its predecessors, the Investment Dealers Association of Canada (“the IDA”), was recognized as an SRO. The IIROC Recognition Order requires IIROC to set rules, policies and other instruments governing its members and others subject to its jurisdiction and to administer and monitor compliance by its members and their approved persons with IIROC’s rules and securities legislation.
[5] IIROC’s jurisdiction over its members is contractual. Members agree to submit to IIROC’s jurisdiction and to be bound by its by-laws, rules and regulations. IIROC regulates the standards of practice and business conduct of its members in the interests of the public.
[6] DBSL is a Toronto-based securities dealer and a member of IIROC. It deals only with sophisticated institutional buyers and has no retail operations.
[7] On August 13, 2007, the Canadian market for non-bank sponsored asset-backed commercial paper (“ABCP”) froze. By May 2008, the Commission and IIROC had begun a joint investigation into the causes of the freeze. They were subsequently joined in their efforts by the Autorité des Marchés Financiers (“AMF”), the regulator in Quebec. In Ontario, summonses were issued pursuant to a series of Commission investigation orders to compel document production by various entities and interviews of their representatives. Through the joint investigation, IIROC staff obtained extensive evidence as a result of the sharing of documents and witness interview transcripts. Acting alone, IIROC staff would not have had the power to compel production of such evidence. Of importance in this application is also the fact that, unlike IIROC, both the Commission and AMF have the power to summons non – IIROC members as witnesses to the hearing.
[8] On December 7, 2009, IIROC issued a Notice of Hearing to DBSL alleging two contraventions of the Rules of the IDA: DBSL failed to act fairly, honestly and/or in good faith to its clients by not disclosing information relating to the United States subprime and the liquidity risk in third party ABCP, and it failed to ensure proper regulatory compliance oversight of third party ABCP, contrary to Policy 5.
[9] Around the same time, the Commission instituted proceedings against other ABCP market participants, as did the AMF with respect to Quebec-based market participants. Some of these proceedings resulted in settlements, while one pertaining to Coventree Inc. resulted in a Commission hearing.
[10] On September 1, 2010, DBSL brought a motion before the IIROC Hearing Panel to dismiss or stay the proceedings on the basis that DBSL would be denied procedural fairness, because a hearing panel of IIROC cannot compel the attendance of witnesses if they are not IIROC members or employees of members. As a result, DBSL argued, it would be deprived of the ability to make full answer and defence to the allegations. Had the Commission instituted proceedings against the applicant, DBSL would have been able to compel the attendance of witnesses at a hearing.
[11] The Hearing Panel dismissed the stay motion on October 13, 2010, stating that “in this case, the appropriate course is to allow the case to proceed to a hearing at which time the hearing panel will be able to assess whether prejudice has been demonstrated of such magnitude as to justify a stay” (Decision, p. 4).
The Commission Decision
[12] DBSL applied to the Commission for a hearing and review of the Hearing Panel’s decision pursuant to s. 21.7 of the Act, which entitles any individual directly affected by a decision of an SRO to a hearing and review at the Commission.
[13] The Commission applied the test from Canada Malting Co. (1986), 9 O.S.C.B. 3565 to determine whether it should intervene in a decision of an SRO. It considered whether the Hearing Panel had proceeded on an incorrect principle, erred in law or failed to consider material evidence. It also considered whether the applicant had put forward new and compelling evidence or the SRO’s perception of the public interest conflicts with that of the Commission. The Commission then concluded that the Hearing Panel had not erred in law in its application of the test for a stay, since the extent of prejudice to DBSL because of the Hearing Panel’s inability to compel non-members as witnesses could not yet be determined (Reasons at para. 71). The Commission did not address DBSL’s argument that the Hearing Panel had lost jurisdiction (Reasons at para. 65).
[14] The Commission also concluded that the application to set aside the Hearing Panel’s decision was premature. Again, the Commission emphasized that the extent of any prejudice to DBSL’s ability to make full answer and defence could only be determined during the hearing on the merits (Reasons at para. 75). Therefore, it dismissed the application, noting that DBSL retains the right to bring a motion for a stay of proceedings at a later stage of the IIROC Hearing Panel’s proceedings, as well as to bring an application for hearing and review of any future decision of the Hearing Panel (Reasons at para. 76).
The Proceedings before this Court
[15] DBSL commenced both an appeal pursuant to s. 9 of the Act and an application for judicial review to the Divisional Court. Subsequently, DBSL decided to proceed by way of appeal after the parties agreed that they would not raise any issue respecting the jurisdiction of this Court to hear the appeal.
[16] At the outset of the hearing, the Court expressed concern as to whether there was jurisdiction to hear an appeal, given that s. 9 of the Act confers a power to appeal a “final” decision of the Commission, and parties cannot confer jurisdiction by consent. However, the parties were not in a position to make full submissions on whether the order under appeal was a final order and, therefore, within the Court’s appellate jurisdiction. As a result, and in the interests of efficiency, the proceeding continued as an application for judicial review, leaving the issue of the scope of the Court’s appellate jurisdiction for another day, when the issue can be fully argued.
The Issues
[17] DBSL argues that the IIROC Hearing Panel does not have jurisdiction to proceed against it, because the Hearing Panel cannot provide DBSL with procedural fairness. More particularly, the inability of the Hearing Panel to compel the attendance of witnesses deprives DBSL of its ability to make full answer and defence to the allegations in the Notice of Hearing and results in a loss of jurisdiction. As well, DBSL argues that although IIROC has the right to participate in a joint investigation, it has no jurisdiction to hold a hearing into the allegations. The appropriate forum to determine whether DBSL has acted inappropriately is the Commission, not IIROC.
[18] DBSL also argues that the Commission erred by applying the wrong legal test to determine whether the Hearing Panel’s decision should be overturned and by wrongly finding the stay motion to be premature.
The Standard of Review
[19] The decision under review in this Court is that of the Commission. It is well established that the standard of review of a decision of the Commission applying securities legislation is reasonableness, given its expertise in matters affecting capital markets (Cartaway Resources Corp. (Re), 2004 SCC 26, [2004] S.C.J. No. 22 at para. 46; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, [2001] S.C.J. No. 38 (S.C.C.) at para. 49).
[20] However, DBSL argues that the appropriate standard of review here is correctness, as the issue is one of jurisdiction: first, the jurisdiction of IIROC to proceed with a disciplinary hearing after a joint investigation with the Commission, and second, IIROC’s loss of jurisdiction because of its inability to provide a fair hearing in the absence of an ability to compel witnesses who are not IIROC members or their employees.
[21] To the extent the applicant raises issues of procedural fairness, it is not necessary to engage in a standard of review analysis. The issue for the Court to determine is whether the appropriate level of fairness was accorded.
Analysis
[22] DBSL argues that the Commission failed to address its primary argument - namely, that this application is not premature, because IIROC has irretrievably lost jurisdiction to proceed. There are two reasons put forward in support of this position. First, IIROC has no jurisdiction to proceed with the allegations against DBSL, because it obtained information through the summons power of the Commission on which it relied to implement the proceedings. DBSL describes the IIROC as an “inferior forum” and submits that the Commission is the proper forum for any proceedings against it, because IIROC relied on the Commission’s summons power to investigate. DBSL submits that it never contractually agreed to permit IIROC staff to choose to have the allegations against it determined in a forum inferior to that of the Commission (because of IIROC’s lack of a summons power) so as to deprive DBSL of natural justice. DBSL emphasizes that this is not the usual type of case heard by IIROC. It is a unique investigation, given the allegations in the Notice of Hearing, and the numerous non-member entities involved. DBSL submits that it will be prejudiced if IIROC, as opposed to the Commission, conducts the hearing of the allegations against it. Second, the lack of a power to compel the attendance of witnesses will deprive DBSL of its ability to make full answer and defence, thus resulting in a denial of procedural fairness.
[23] The applicant has also filed new evidence in this hearing derived from disclosure by IIROC staff of additional information from the joint investigation. DBSL argues that this material is compelling new evidence, unavailable to the Commission panel, that reinforces the prejudice it will experience as a result of IIROC’s inability to compel attendance of non-member witnesses and shows clearly that it will be denied procedural fairness if the IIROC hearing proceeds.
[24] I see no merit to the applicant’s argument that IIROC has no jurisdiction to proceed with the hearing because it participated in a joint investigation with the Commission and obtained information through the Commission’s power to summons during an investigation. The by-laws of IIROC contemplate that it will cooperate with and share information with other regulators. More specifically, section 13.6 of IIROC By-law No. 1 provides for the collection and exchange of information between IIROC and other regulators for the purposes of investigation and enforcement litigation. It states:
(1) The Corporation may provide assistance, including the collection and sharing of information and other forms of assistance for the purpose of market surveillance, investigations, enforcement litigation, investor protection and compensation and for any other regulatory purpose to any exchange, self-regulatory organization, securities regulator, financial intelligence or law enforcement agency or authority, or investor protection or compensation fund, whether domestic or foreign.
(2) The Corporation may enter into an agreement with any entity described in subsection (1) to collect and exchange information and to provide for any other forms of mutual assistance for the purpose of market surveillance, investigation, enforcement litigation, investor protection and compensation and for any other regulatory purpose.
[25] In addition, IIROC Rule 19.2 provides that an IIROC investigation may be instituted on the basis of a complaint to the Corporation, a direction from the Board of Directors, the request of a securities commission having jurisdiction or any information received or obtained relating to the conduct, business or affairs of the person involved.
[26] By executing a membership agreement with IIROC (and previously with IDA), DBSL agreed to be bound by the IIROC by-laws and rules. By-law No. 1 clearly contemplates that IIROC may collect and share information with the Commission and the AMF for the purposes of investigation and enforcement. Therefore, IIROC had jurisdiction to commence proceedings against DBSL in the present circumstances.
[27] The second issue raised before the Commission was the alleged denial of procedural fairness if the Hearing Panel proceeds to a hearing on the merits, because the Hearing Panel lacks the power to summons non-IIROC members as witnesses. DBSL argues that the Commission failed to consider the evidence of prejudice to it. In particular, DBSL had argued before the Hearing Panel that it would be unable to secure the following evidence in its defence:
• evidence of certain ABCP purchasers that they did not rely on the advice of dealers, and DBSL in particular, in selecting ABCP products to buy; rather, they conducted their own due diligence
• evidence of representatives of Coventree that:
(i) communications not involving DBSL occurred in late July 2007 regarding the Caisse des Dépôts et Placements du Québec (“CDPQ”) pulling back from the ABCP market and redeploying its resources, supporting DBSL’s defence that it had a good faith, reasonable belief that the ABCP market would continue;
(ii) DBSL was excluded from the group of dealers and other market participants with knowledge of the potential “liquidity event” in the days before the August 7 call
• evidence of representatives of Coventree and CDPQ that the market freeze was driven not by the subject matter of a particular email, as alleged by IIROC, but rather by external global factors
• evidence of former Coventree employees that DBSL did not play a material role in the marketing, distribution and market-making of Coventree ABCP
• evidence of DBSL’s counterparties, including CDPQ, that DBSL had a limited role in liquidity discussions and did not have a sufficient role in the market that it could impair liquidity.
[28] At the hearing before the Commission, DBSL adduced additional evidence of prejudice that it gathered from transcripts of the Commission hearing involving Coventree. The individuals who gave that evidence would not be compellable witnesses before IIROC.
[29] DBSL has also filed new evidence in the present application, including correspondence and notes of telephone conversations with potential witnesses who are not IIROC members, to show the prejudice it will suffer if the Hearing Panel proceeds. For example, the Alberta Treasury Board has been contacted by IIROC staff, and while it has provided information, it has declined to participate in the hearing against DBSL.
[30] In a number of criminal cases, courts have cautioned that a stay of proceedings should not be ordered unless there has been conduct that amounts to an abuse of process or there has been prejudice that cannot be cured except by a stay. Normally, in the case of missing evidence, the impact on the fairness of the trial is best assessed during the trial itself (R. v. La, 1997 309 (SCC), [1997] 2 S.C.R. 680 at para. 27; R. v. R.C., [1995] O.J. No. 210 (C.A.) at paras. 7-8; R. v. Bero, 2000 16956 (ON CA), [2000] O.J. No. 4199 (C.A.) at para. 18).
[31] DBSL argues that, unlike a criminal case, there is a detailed Notice of Hearing here, and there are specific indentified witnesses that it wishes to have summoned to the hearing. It submits that the Commission failed to assess the evidence presented on the stay motion showing the existence of known significant prejudice – rather, it just seized on the policy of administrative prematurity as the basis for its decision.
[32] Even with the new evidence tendered on this application for judicial review, the case for the extraordinary remedy of a stay of proceedings has not been made out, as the prejudice to DBSL’s ability to make full answer and defence remains speculative at this time. For example, it has not explained why its own employees would be unable to tender the evidence it wishes to put forth in its defence.
[33] Moreover, DBSL ignores the fact that the onus of proving the allegations is on IIROC staff, who may also face problems in compelling witnesses to prove the allegations. However, if such witnesses appear voluntarily, DBSL’s counsel will have the opportunity to cross-examine them.
[34] It is only after IIROC staff have put in their evidence at a hearing on the merits, that the relevance and probity of the evidence of witnesses that DBSL seeks, but is unable to call, will become apparent to the Hearing Panel and the magnitude of any prejudice may be assessed.
[35] As both the Hearing Panel and the Commission concluded, the appropriate time to determine whether the applicant is denied procedural fairness because of the inability to compel key witnesses is during the hearing on the merits. Moreover, there is no substantive prejudice to DBSL, as it can renew its stay motion at a later time when all admissible evidence has been presented by IIROC staff. There is no merit to DBSL’s argument that the Hearing Panel has irretrievably lost jurisdiction because of its inability to compel non-member witnesses. The Commission reasonably - indeed, correctly - concluded that the application for a stay is premature.
Conclusion
[36] Accordingly, the application for judicial review is dismissed.
[37] The Commission does not seek costs. If IIROC and DBSL cannot agree on costs, they may make brief written submissions through the Divisional Court Office within 30 days of the release of this decision.
Swinton J.
Lederman J.
Harvison Young J.
Released: April 4, 2012
CITATION: Deutsche Bank Securities Limited v. Ontario Securities Commission, 2012 ONSC 1576
DIVISIONAL COURT FILE NOS.: 492/11 and 493/11
DATE: 20120404
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
LEDERMAN, SWINTON and HARVISON YOUNG JJ.
B E T W E E N:
DEUTSCHE BANK SECURITIES LIMITED Applicant
- and -
ONTARIO SECURITIES COMMISSION Respondent
REASONS FOR JUDGMENT
SWINTON J.
Released: April 4, 2012