Ruling limits powers of Quebec securities regulator to impose gag orders
Days before the former head of Canada’s largest engineering firm was formally charged with fraud, SNC-Lavalin Group Inc. won a key legal battle against the provincial securities regulator who unsuccessfully tried to keep details of an investigation it was conducting into the scandal-ridden engineering powerhouse from the firm’s audit committee and external auditors.
In a ruling that limits the powers of the Quebec securities regulator to impose gag orders, the Quebec Court of Appeal clarified the procedures the Autorité des marchés financiers must follow when issuing non-disclosure orders. The appeal court also upheld a decision by a specialized tribunal that oversees the securities watchdog, which allowed an SNC-Lavalin executive under investigation to provide details to the company’s audit committee and its external auditors Deloitte & Touche.
“The Quebec Court of Appeal seems to have given the AMF a lot of latitude to use its discretionary powers but if it becomes excessive it will place limits,” observed Yves Robillard, a Montreal securities lawyer with Miller Thomson LLP.
The Montreal firm was shaken by a series of scandals involving alleged fraud and unethical behavior by top officials. Former CEO Pierre Duhaime, who was arrested last November by Quebec’s anti-corruption squad, was recently charged with fraud, conspiracy to commit fraud and issuing false documents stemming from a contract involving the building of the multibillion-dollar McGill University Health Centre in Montreal. Riadh Ben Aïssa, a former SNC executive responsible for global construction projects now being held in a Swiss jail since last April as part of an international probe into alleged corrupt payments in North Africa, too faces the same charges. Both Duhaime and Ben Aïssa left the company last March amid allegations involving $56-million in undocumented payments to commercial agents. The company is also facing allegations that some of its employees bribed government officials in Bangladesh in order to secure a $10-million contract.
The engineering firm is also being investigated by Quebec’s securities watchdog. Last year the AMF issued an investigative order to an SNC executive, which prohibits the person from disclosing – except to his counsel and in in this case the head of SNC – the name of any witness, any information or evidence obtained or sought to be obtained. The order, however, did authorize the executive to inform the company’s board of directors, its audit committee and Deloitte & Touche of the existence of the investigation, but forbade him from providing further details.
Securities commissions like the AMF issue non-disclosure orders to protect the integrity of investigations, explained Yan Paquette, a Quebec City securities lawyer with Langlois Kronström Desjardins, L.L.P. who was the AMF’s former director of inspections and investigations. Besides thwarting collusion among witnesses, gag orders are issued to prevent prejudice against the reputation of a person or company – especially publicly-traded companies — before a decision is made to proceed with an enforcement proceeding.
The accounting firm, however, informed SNC-Lavalin that without knowing the nature of the AMF investigation, it would not be in a position to approve the fiscal 2012 financial statements. That would “create confusion,” affect the company’s share price, and could lead to “dramatic harm” to the company and the shareholders, argued SNC-Lavalin.
An independent administrative tribunal specialized in securities, called the Bureau de décision et de révision en valeurs mobilières, agreed. The Bureau granted the SNC-Lavalin executive under investigation the authorization to provide the company’s audit committee and external auditors information on the nature and scope of the AMF investigation. It also allowed the audit committee to be able to discuss and review responses the executive under investigation would provide in response to the AMF’s requests for information and documents.
In upholding the ruling by the Bureau, Quebec Court of Appeal Justice Pierre Dalphond points out that there are two competing obligations at play in this case: the legal obligation of the AMF to conduct investigations in camera, and the obligation of SNC-Lavalin, a publicly-traded company, to issue audited financial statements. “In the presence of such a conflict and of the real possibility of serious harm to the company and its shareholders if the filing of the financial statements were delayed, the Bureau reached the conclusion that it was necessary to find a balance and as a result relaxed the non-disclosure order, which was reasonable,” said Justice Dalphond in the 19-page ruling. He also noted that there was no conclusive evidence of a risk of collusion.
“The appeal court is in essence saying that the power the AMF has to impose a non-disclosure order is not absolute, and that it should be used only when it is justified, which is a bit surprising,” said Paquette. “What’s odd is that the appeal court appears to be asking for evidence that the investigation was prejudiced when the whole point behind a non-disclosure order is to prevent from such a thing from happening.”
Paquette also finds it peculiar that the appeal court upheld the Bureau’s order that allowed the external auditor to be privy to the nature and scope of the AMF investigation. “How can external auditors evaluate the impact of an investigation on a company’s financial statements?” asked Paquette rhetorically. “What will have on an impact is if the regulatory body proceeds with sanctions against the company.”
Robillard believes that publicly-traded companies will benefit from the ruling. By allowing the audit committee, and by extension external auditors, to be able to exchange information with the AMF, it will “facilitate their task” when faced with an investigation by the securities commission.
