June Citigroup Appeal Decision Reinforces OSC’s New “No Contest” Settlement Approach

Ever since raising the possibility of “no contest” settlements back in 2011, the Ontario Securities Commission (OSC) has had to contend with indications that such settlements were falling into disfavour with U.S. judges asked to approve them.

No-contest settlements became controversial in the U.S. because of a highly publicized ruling by Manhattan Federal District Court Judge Jed Rakoff who, in a landmark 2011 decision, refused to approve a no-contest settlement between the SEC and Citigroup. The Rakoff decision called into question the longstanding SEC practice of entering into cooperation settlements and generated much controversy among U.S. regulators and market participants alike. The Rakoff decision was appealed. The controversy affected the reaction within Canada to the OSC proposals for reforming the settlement process.

Months before the appeal was decided, the OSC decided to proceed with no-contest settlements in Ontario, and published OSC Staff Notice 15-702 Revised Credit for Cooperation Program (the Cooperation Policy).

One reason the OSC Staff went ahead without waiting for the Rakoff appeal decision to be issued is that the settlement regimes in Canada and the U.S. are so different. The OSC had studied the Ontario implications of the original Rakoff decision, including by publishing a paper that highlighted key distinctions between the OSC and the SEC settlement regimes. In particular, the factual basis for a settlement order is more transparent to the tribunal approving it in Canada than to the judge in the U.S. The SEC might file only a complaint and a consent order when requesting judicial approval of a settlement, which led Judge Rakoff to question how he could approve a settlement based on “mere allegations”. OSC Staff, on the other hand, agree with respondents in a settlement agreement on the facts that justify the remedy sought at the settlement hearing.

The scope for no-contest settlements under the OSC’s Cooperation Policy is narrow and will ultimately depend on an evaluation of the following factors by both OSC Staff and the panel approving the settlement agreement:

  • the extent to which the respondent provided prompt, detailed and candid cooperation during Staff’s investigation;
  • the degree and timeliness of the self-reporting undertaken by the respondent in light of the circumstances of the misconduct;
  • the degree of investor harm caused by the respondent’s conduct;
  • the remedial steps taken by the respondent to address the misconduct;
  • the agreement of the respondent to pay such amounts as may be appropriate in the circumstances including, where appropriate, a payment for the benefit of third parties (such as compensation to persons affected by the misconduct) and costs of the investigation;
  • the agreement of the respondent to cease the underlying conduct and undertaking to refrain from re-offending in the future;
  • the deterrent effect of the settlement agreement on the future conduct of the respondent and others in the capital market; and
  • the agreement of the respondent to pay monetary amounts, if any, contemplated by the settlement agreement contemporaneously with the approval of the settlement agreement.

Under the OSC’s Cooperation Policy, no-contest settlements are not available at all if:

  • the respondent has engaged in abusive, fraudulent or criminal conduct;
  • the respondent’s misconduct has resulted in investor harm which has not been addressed in a satisfactory manner; and
  • the respondent has misled or obstructed Staff during its investigation.

We will be monitoring and preparing future posts reporting on the manner in which the OSC applies its new Cooperation Policy.

Citigroup Credit for Cooperation enforcement Judge Rakoff no admit no contest no deny OSC OSC Staff Notice 15-702 SEC



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