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Employers Be Aware: OSC Proposes Incentive-Based Whistleblower Program

The Ontario Securities Commission (the OSC) recently published “OSC Staff Consultation Paper 15-401” which sets out a proposed framework for an incentive-based whistleblower program. This program aims at incentivising whistleblowers to report Securities Act violations by offering a share of any monetary sanction or settlement resulting from the disclosure. With this publication, the OSC has also opened a 90 day comment period which ends on May 4, 2015.

Under the proposed framework, the OSC has discretion to grant eligible whistleblowers a financial award of up to 15% of monetary sanctions or settlements, to a maximum award of $1,500,000.00. Unlike similar regimes in other jurisdictions, the proposed framework grants awards based on the quantum of the final disposition, rather than on monies collected. The OSC hopes to encourage greater reporting by providing whistleblowers greater assurance that they will receive their reward.

In addition to the proposed whistleblower incentive payment, the OSC has also indicated it intends to request the Ontario government amend the Securities Act to provide specific whistleblower protection. This protection would include three new provisions providing:

  1. that whistleblower retaliation would violate the Securities Act, allowing OSC staff to commence a proceeding under section 127;
  2. that the whistleblower would have a civil right of action against a retaliatory employer; and,
  3. that contractual provisions designed to silence whistleblowers are unenforceable.

If enacted, these provisions would grant the OSC broad enforcement powers. On a finding of guilt under a section 127 proceeding, the OSC’s powers would include ordering the offender amend their workplace policies and practices, and pay a penalty up to $1,000,000.00. The civil right to action would allow a whistleblower to bypass the Ontario Labour Relations Board and seek punitive and restorative damages. The third provision could potentially make many confidentiality or non-disparagement clauses in employment contracts unenforceable. The OSC has further indicated a desire to extend these protections to whistleblowers who solely use internal reporting mechanisms.

In its current form, the framework penalizes companies which have ineffective internal whistleblower programs. The consultation paper proposes that a company’s failure to adequately address an internal complaint may eliminate credit they may otherwise get for cooperating with the OSC, and be used as an aggravating factor when recommending sanctions. The OSC is also specifically inviting comments on whether to require that whistleblowers must exhaust internal mechanisms before reporting to the OSC.

Despite no other Canadian securities regulator having published a comparable framework, the size of Ontario’s market means this initiative will have broad-reaching effects. Any company listed on the TSX, or which makes filings to the OSC, may be subject to this initiative when it comes into force. A similar regime by the Securities Exchange Commission in the United States launched in 2011 has already generated over 10,000 tips. If this is any indication, it is likely that once finalized this initiative will generate a significant number of new investigations for the OSC.

Please feel free to contact Jordan Deering of our Fraud, Corruption & Asset Recovery Group or Correna Jones of our Employment & Labour Group if you would like to discuss the application of this proposed framework to your particular circumstances.

Employers Be Aware: OSC Proposes Incentive-Based Whistleblower Program

Lack of Full Disclosure: Special Costs in Failed Anton Piller Order

In recent years, employers have increasingly sought and obtained Anton Piller Orders (“APO”) where a departing employee leaves with confidential information. The strategy is often extremely effective: the employer recovers the confidential information and obtains significant leverage in the litigation, usually prompting settlement. While effective, APOs are not for the uninitiated – the Courts have referred to this remedy as one of the “nuclear weapons” of litigation. Employers and their counsel must exercise extreme caution when using APOs.

The British Columbia Supreme Court’s recent decision in Pierce v Jivraj, 2014 BCSC 926 represents a warning for employers and their counsel in seeking an APO. In that case, the Court ordered special costs personally against the plaintiff’s counsel for failure to meet the high burden of full disclosure in the APO application.

The action originated as a defamation suit by Mr. Pierce against Mr. Jivraj. Mr. Pierce alleged that Mr. Jivraj improperly published statements that various securities exchange commissions had imposed regulatory sanctions against Mr. Pierce for ‘ill-gotten gains’ from stock manipulation. Mr. Pierce brought an ex parte application for an APO to preserve evidence on Mr. Jivraj’s personal computer relating to the defamation suit. At the ex parte hearing, the Court made inquiries of Mr. Pierce’s counsel concerning regulatory sanctions and fines against Mr. Pierce. Counsel was “evasive at best” concerning these inquiries. The Court granted the APO, directing a search of Mr. Jivraj’s personal residence and seizure of his computer.

In fact, Mr. Pierce had been subject to three regulatory sanctions, and was ordered to disgorge “ill-gotten” profits of over $9 million. On a motion by Mr. Jivraj, the Court set aside the APO on the basis that the merits for granting an APO were not met, in light of the new evidence regarding Mr. Pierce’s reputation: Pierce v Jivraj, 2013 BCSC 1850. Further, the Court found that it would have set aside the APO for Mr. Pierce’s complete failure to provide full and frank disclosure of the prior regulatory sanctions.

Mr. Jivraj brought a motion for special costs against Mr. Pierce and his counsel for the material non-disclosure: Pierce v Jivraj, 2014 BCSC 926. In finding counsel personally liable for special costs, the Court concluded that an APO “requires ‘fastidious’ disclosure and to be ‘profoundly fair’ in presenting facts. Neither occurred here.” The Court was particularly concerned that the APO involved entry into a personal residence.

APOs are serious and significant remedies. This decision represents an important reminder of the high standards of complete disclosure of all objectively material facts in applying for an APO.  Employers and their counsel must include all possible material facts as part of the evidence, particularly where the Order will direct a search of a personal residence. The APO is no doubt a nuclear weapon, and employers and their counsel must take care in its use.

Please feel free to contact Jordan Deering of our Fraud, Corruption & Asset Recovery Group directly if you would like to discuss the application of this decision in your particular circumstances.

Case Information

Pierce v Jivraj, 2014 BCSC 926: http://www.canlii.org/en/bc/bcsc/doc/2014/2014bcsc926/2014bcsc926.pdf

Lack of Full Disclosure: Special Costs in Failed Anton Piller Order

Alberta Court of Appeal reverses the burden of proof for employee theft

by Jordan R.M. Deering and Byron Reynolds

The Alberta Court of Appeal recently considered and clarified the nature of the relationship between employers and the employees they entrust with handling funds. As a result of the decision in 581257 Alberta Ltd. v Aujla, 2013 ABCA 16, employers may more easily recover assets stolen, converted or misappropriated by dishonest employees using a civil cause of action. The Alberta Court of Appeal found that, in cases of theft, an employee owes fiduciary obligations to its employer. In addition, the Court overturned the lower court’s decision that the plaintiff employer was responsible not only for demonstrating that a fraud or theft had occurred, but also for showing that all of the discovered loss was a result of the employee’s theft or fraudulent acts.

According to the Alberta Court of Appeal, where an employer gives an employee the responsibility for handling the employer’s funds, that employee has fiduciary obligations with respect to those funds. Employers have a strong argument that a similar fiduciary relationship exists where:

• Employees handle inventory or valuable assets.

• Employees handle cheques or transfers and have signing authority.

The fiduciary obligation does not impose obligations of non-competition or fidelity, but it shifts the evidentiary burden respecting dealings with those funds.

The Court of Appeal held that once the employer proves fraud or breach of fiduciary duty, the employer only needs to establish reasonable efforts to determine the amount taken by the thieving employee. At that point, the evidentiary burden shifts to the employee to disprove the amount and the cause of the loss. This shifting burden of proof enforces the policy that an employer should not be precluded from recovery where the employee has covered his tracks and compromised the ability of the employer to prove the quantum of loss.

In Aujla, the defendants were cashiers and shelf stockers at the plaintiff’s liquor store. The plaintiffs became suspicious that funds were going missing, but did not have sufficient evidence because their inventory system was unsophisticated and their surveillance was inadequate. The employer later installed a hidden camera, which showed the employees stealing some money from the till. This evidence established fraudulent behavior and breach of fiduciary obligations, but only proved a small quantum of thefts. However, the employee’s bank records disclosed $116,000 in funds that were not accounted for.

The shifting burden of proof of quantum of losses for breach of fiduciary or fraud dramatically reduces the difficulty faced by employers, who can only prove a few incidences of theft, but fairly believe this theft represents part of a larger pattern. Employers may be able to rely on the employee’s lifestyle, habits (such as gambling or shopping), or bank records to prove the loss.

While employers previously considered recovery impossible because of insufficient proof of the full quantum of the loss, the Alberta Court of Appeal has now leveled the playing field and provided significant recourse for employers.

Please feel free to contact Jordan Deering of our Fraud Corruption & Asset Recovery Group directly if you would like to discuss the application of this decision to your particular circumstances.

581257 Alberta Ltd v Aujla, 2013 ABCA 16

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Alberta Court of Appeal reverses the burden of proof for employee theft