MAY 2013
PIERCING THE CORPORATE VEIL
The Alberta Court of Appeal has recently released a decision that adds much
needed clarity to when an officer or director of a corporation will be personally
liable for torts committed by a corporation. In Hogarth v. Rocky Mountain Slate Inc.,
2013 ABCA 57, the Court was tasked with determining whether certain promotional
materials created to solicit investments constituted negligent misrepresentations,
and to what extent the individual directors who assisted in the preparation of those
promotional materials could be personally liable for their actions.
BROKERS’ REPORT
At trial, the Alberta Court of Queen’s Bench held
that the statements made in the promotional
materials were negligent misrepresentations and
where an individual director or officer was involved
in communicating the misrepresentations, the
‘corporate veil’ could not shield that individual
from liability.
After a lengthy review of the common law in the
area of the personal liability for directors and
officers, the Court of Appeal reversed the trial
Judge’s decision, finding that the lower court
failed to properly consider the economic and
societal importance of the notion of a limited
liability corporation. Specifically, the Court of
Appeal determined that there are important policy
reasons for the use of limited liability corporations,
namely the ability for individuals to raise capital
and take entrepreneurial risks without fear of legal
repercussions if the business venture is ultimately
unsuccessful. For an individual director or officer
to be found liable for a tortious act they have
committed in the course of their duties, the act
must be such that it was made an on independent,
individual basis. Where it is clear that the director
or officer was clearly acting on behalf of the
corporation, and all relevant parties understood
that the director or officer was acting on behalf of
the corporation, and not in their personal capacity,
generally no personal liability will be found.
AUTHOR
Landon M. Miller
Calgary
403.232.9771
[email protected]
INSIDER TRADING – BETTER SAFE
THAN SORRY
A series of recent Alberta Securities Commission decisions recently underscored the
inherent dangers of buying or selling securities of companies in which one is an insider.
The risk is that while the insider may legitimately believe they have no undisclosed
material information when they trade, a regulator can later take a different view of the
same information.
In its April 10, 2013 decision Re Stan, the
respondent insiders were acquitted of insider
trading or tipping after a 14-day hearing, but
incurred defence and expert witness costs reputed
to be in seven figures. The allegedly undisclosed
material information involved internal sales and
BROKERS’ REPORT | MAY 2013
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production forecasts. ASC staff believed the
internal information to be sufficiently material
to preclude trading but the respondents (and
the Panel) disagreed.
The Panel undertook a detailed review of the
information, concluded some of it was at a certain
point material and determined some of the trades to
have contravened the Securities Act.
In Re Keith, a 2012 decision in which BLG acted for
one of the respondents, insiders and family members
were similarly acquitted of insider trading and tipping
arising out of a corporate takeover. The allegedly
improper trading took place in the period immediately
prior to the announcement of the takeover. There,
too, ASC staff believed that the insiders had certain
material information not yet generally disclosed. The
Panel found that the insiders did not have as much
information about the takeover as Staff alleged
and what they did have was not material.
The lesson is “better safe than sorry”. Insiders always
know something that the public doesn’t, so if there is
the slightest doubt of whether information is material,
the company should consider disclosing it, absent
which insiders should think very hard about whether
to trade even if they believe they have no undisclosed
material information.
An example of a different outcome was Re Kapusta
in which insiders traded while in possession of
certain information pertaining to an oil discovery.
Staff contended the information was material and
the respondents countered that the information
was contingent, speculative and not material to the
company as a whole in any event.
AUTHOR
John D. Blair, Q.C
Calgary
403.232.9723
[email protected]
THE ROLES OF THE UDP AND CCO –
PERFECTION IS NOT THE STANDARD
The importance of a working understanding of compliance and supervisory obligations of
IIROC-regulated entities or Dealer Members cannot be underestimated. In particular, the
roles and responsibilities of the Ultimate Designated Person (the “UDP”) and the Chief
Compliance Officer (“CCO”) have been scrutinized in recent decisions of the Investment
Industry Regulatory Organization of Canada (“IIROC”). For example, IIROC released two
decisions in 2012 in which the UDP and/or the CCO of IIROC-regulated entities faced
disciplinary proceedings in relation to compliance and supervision. BLG was involved in
both decisions including securing an acquittal on behalf of top officers of an investment
firm. The first, Re Carbonelli & Conway, 2012 IIROC 56 (“Conway & Carbonelli”), was
decided on October 5, 2012 and featured the BLG-represented UDP and the CCO of
Evergreen Capital Partners Inc. (“Evergreen”). The Notice of Hearing alleged failures on
the parts of the UDP and the CCO to establish and maintain adequate internal controls for
the use and operation of Evergreen’s client accumulation accounts, contrary to IIROC’s
Dealer Member Rule 17.2A.
Conway & Carbonelli involved a complex fact
scenario. In brief, Evergreen, through its Carrying
Broker, conducted a large volume of trades with
relatively high purchasing costs, for institutional
clients. The time to fill each trade order would
customarily extend over a period of time, resulting
in partially filled trade orders being recorded in an
average price inventory account (an “API”). The
ordinary process would be for the partial orders to
stay in the API accounts until they were filled and
booked out through the Carrying Broker. This became
problematic when large sums began to remain in
the API accounts and were not being booked out.
The growing value of the un-booked amounts in
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the API accounts, combined with the significant
economic downturn in 2008 proved disastrous when
the securities were eventually marked to market
and the clients rejected the trades as unauthorized.
Ultimately, it was discovered that the head trader
of Evergreen had perpetrated a fraud that, together
with the un-booked trades accumulated in the API
accounts and the market downturn, created the
“perfect storm” for Evergreen’s collapse.
With respect to the responsibilities of the UDP and the
CCO of Evergreen, the IIROC Hearing Panel concluded
that “the standard to be applied to the Respondents
is not one of perfection”. Specifically, the Panel stated
that “[t]he standard to be applied is not whether or
not the Respondents could have done something
that might have provided a better result. Instead, the
standard expected of the Respondents is that they act
as reasonably proficient and diligent individuals…”
The counts against the UDP and CCO in Conway &
Carbonelli were ultimately dismissed.
A month later, on November 10, 2012, the disciplinary
decision, Re Northern Securities, 2012 IIROC 63
(“Northern Securities”) was decided involving a
UDP and CCO that had both failed in many respects
in their supervisory and compliance obligations.
BLG represented IIROC in this proceeding which saw
sanctions levied on the UDP and CCO in question.
Conway & Carbonelli and Northern Securities were
decided based on the Dealer Member Rules and in
particular Dealer Member Rule 38 which provides the
framework for Compliance and Supervision generally.
Since these decisions, though, IIROC has made
recent statements which elaborate on and clarify
the responsibilities of specific individuals which it
appears to view as manning the compliance and
supervisory frontlines. On December 17, 2012, IIROC
issued a Dealer Member Rule Rules Notice 12-0379
entitled “The Role of Compliance and Supervision”
(the “Rules Notice”) which instructed that it was to
be read in conjunction with Dealer Member Rule
38. The Rules Notice expressly maintains that the
responsibility for compliance generally, extends
to “each individual acting on behalf of a firm”.
Notwithstanding this shared responsibility however,
the Rules Notice makes it clear that titles such
as UDP, CCO and CFO carry specific compliance
obligations. In brief, these specific obligations
include but are not limited to the following:
UDP:
•Supervision of the compliance-related activities
of the Dealer Member and individuals acting on
its behalf;
•Promotion of compliance by the Dealer Member
and individuals acting on its behalf;
•Establishment and maintenance of an effective
compliance system and a compliance culture
at the firm;
•Communication and reinforcement of the
importance of compliance within the firm;
•Ensuring that all staff understand the
importance of consulting with the Compliance
Department;
•Ensuring that effective procedures for
identifying and escalating all instances of noncompliance are in place; and
•Ensuring the timely resolution of all instances
of non-compliance.
CCO:
• Establishment and maintenance of policies and
procedures for assessing compliance by the
Dealer Member and individuals acting on its
behalf;
• Monitoring and assessing the Dealer Member’s
compliance with its requirements and
applicable securities laws and reporting of
the results of the assessment to the board of
directors at least annually;
• Reporting of all material incidents of noncompliance to the UDP;
• Provision of the board of directors with
reasonable assurance that all standards and
requirements of applicable securities laws
and regulations and the Dealer Member’s
requirements are met; and
• Identification and discussion of material
findings contained within IIROC compliance
reports, early warning designations, gatekeeper
reports, disciplinary actions, compliance risk
trend report results and other relevant items in
the CCO’s annual report.
CFO:
• Establishment and maintenance of policies and
procedures for the Dealer Member relating to
financial requirements; and
• Monitoring adherence to the Dealer Member’s
policies and procedures
as necessary to provide reasonable assurance
that it complies with all relevant requirements.
The Rules Notice ultimately serves as a concise culmination of statements
made and themes captured in Conway & Carbonelli and Northern Securities.
It, along with Conway & Carbonelli, Northern Securities and Dealer Member Rule 38
are surely required reading for IIROC-regulated UDPs and CCOs in terms of
compliance and supervision.
AUTHOR
Loni da Costa
Calgary
403.232.9696
[email protected]
EDITOR
David Di Paolo
Toronto
416.367.6108
[email protected]
BORDEN LADNER GERVAIS
LAWYERS | PATENT & TRADE-MARK AGENTS
SECURITIES LITIGATION GROUP LEADERS
National Leader
James D.G. Douglas Toronto 416.367.6029 [email protected]
Regional Leaders
John D. Blair 403.232.9723 [email protected]
Georges R. Thibaudeau Montréal Calgary 514.954.2560 [email protected]
Larry A. Elliot Ottawa 613.787.3537 [email protected]
David Di Paolo Toronto 416.367.6108 [email protected]
Gordon R. Johnson Vancouver 604.640.4117 [email protected]
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