After five years spent at ground zero of a spreading financial disaster known as the Hollinger newspaper swap, Elizabeth DeMerchant was acutely aware of its toxicity. As the Torys LLP counsel watched from the sidelines, the reputations of one director, auditor, or legal counsel after another had been laid waste by scandal or suspicion.
Still, DeMerchant was dizzy with shock on the day in 2006 when she opened a letter from the Law Society of Upper Canada informing her that she was being investigated for her conduct in connection with the Hollinger transactions. She and Darren Sukonick, a junior colleague DeMerchant mentored, had allegedly failed to declare a conflict of interest during the complex series of commercial transactions. “It was like being hit with a ton of bricks,” says DeMerchant. “I was apoplectic.”
The timing could scarcely have been worse. Two weeks earlier, DeMerchant had quietly announced her impending retirement. Living through the slow-motion Hollinger implosion had been a searing experience.
DeMerchant had exceeded her career goals and then some. Now, she was ready for the simple, stress-free pleasures of home, garden, and family.
The Hollinger affair had dominated business pages since 2000, when the group undertook to sell batches of newspapers to Canwest Global Communications Corp. and Osprey Media Group for a total of almost $4 billion. As part of the sale, Canwest had paid $80 million in non-competition agreements to preclude the vendors setting up new publications to compete with those it had sold. Complicating matters was a bewildering welter of tax considerations, set-offs, promissory notes, and varying time periods.
By 2004, U.S. authorities were actively investigating Hollinger’s principal executives — Conrad Black, David Radler, Jack Boultbee, and Peter Atkinson — for allegedly failing to obtain informed consent from independent directors in connection with the non-compete payments. Radler and Black would be convicted of fraud-related charges in Chicago. Two years after the Chicago trial, the ripples were washing up Bay Street. Law society investigators were looking into whether DeMerchant and Sukonick had improperly provided advice to the Hollinger executives without informing public shareholders at Hollinger International Inc. — a company within the group — that they had a potential interest in the matter. Dead certain that it would blow over, DeMerchant and Sukonick settled in to wait out the investigation.
DeMerchant abhorred the media spotlight. Born in the village of Bath, N.B., in 1957, she retained small town values of privacy and humility. Growing up, she lived in a small apartment located in the basement of the local school. Her mother taught at the school. Her father was the janitor. By the end of high school, DeMerchant had yet to go to a movie theatre or have an alcoholic drink.
She gravitated toward big city life more through happenstance than by design. After winning a scholarship, she had enrolled in a business program at Queen’s University. When the prospect of being an accountant began to bore her, she took law at the University of Toronto. She emerged with a husband — Sean Gosnell, currently a litigation partner at Borden Ladner Gervais LLP — and an articling position at Torys. In 1990, she became a partner, specializing in tax and corporate law.
Just an inch or two above diminutive, DeMerchant has a grandmotherly appearance that belies her cut-to-the-chase manner. She quickly became a go-to counsel on complicated deals. It was a tribute to her skills that in 1998, the Hollinger Group — a major client since the 1980s — was put under her care. Her duties consisted of a stimulating array of mergers and acquisitions, lendings, and offerings involving Hollinger’s multiple media holdings. Led by Black himself, a man with a legendary ego, media presence, and intellect, the Hollinger account required a manager with considerable savvy, patience, and a steady hand.
Sukonick, in contrast, was an ambitious live wire with a confidently brash manner. Raised in Toronto, he studied math and science at McGill University before returning home to Osgoode Hall Law School. He was called to the bar in 1996. Sukonick spent the summer of 1994 at Torys. He went from there to Palo Alto, Calif., where he worked with a technology firm for two years before returning to Torys in 1998. Sukonick fits a certain Bay Street image; a hyper-alert ball of energy who might run a triathlon between client meetings, his attention glued to a BlackBerry. Sukonick had already attracted his first major client to the firm. The promise of big money lay ahead.
Life was exciting — at least, until the law society’s investigation brought his career to a shuddering halt. He soon found himself in the purgatory of Torys’ back offices, helping administer its pro bono program and planning a massive office renovation.
Unbeknownst to the outside world, Torys had taken a dramatic step in January 2006, reaching a $30-million settlement with Hollinger to ensure the firm would not become a target of litigation as the case got messier. As DeMerchant said a year later, the move eliminated a source of potential worry for the firm. “At the heart of the settlement was a very bare financial calculation. You can quickly imagine how winning could cost more than settling. If your option is to settle with no admission of wrongdoing and move on, it begins to look good.”
To hawk-eyed investigators at the law society, however, the settlement amounted to a tacit admission of fault.
What had Torys done wrong to prompt the settlement? And who was responsible? It aimed to find out.
As the professional regulator of Ontario’s 44,000 lawyers and 4,000 paralegals, the law society cannot go after law firms; it can only prosecute individual lawyers. Disciplinary action is almost always complaint-driven, but not in this case, and decidedly not a job for the thin-skinned. When the LSUC is not being slain in the press for purportedly favouring the interests of lawyers, it is undergoing attack from within the profession for being as vigilant and cold-blooded as an income tax auditor having a bad day. Critics frequently condemn it for focusing on Little Guys and leaving Big Law alone. Yet, on many occasions where it has tried to go after big game, prosecutions turned into ongoing nightmare proceedings that blow up in its face.
Added to that, those who care about the institution are ever aware that the spectre of government regulation hovers in the background should the law society appear to be incapable of minding its affairs. Amid this unending debate, the Hollinger protection was freighted with import.
To proceed to a full hearing, a case must first obtain the approval of a panel of benchers on the law society’s Proceedings Authorization Committee. Somewhat akin to a grand jury, the PAC decides if there is sufficient evidence to ground a prosecution. DeMerchant and Sukonick had pinned their hopes on the PAC perceiving the case as dangerously thin. However, as inches-thick books of interrogatories kept arriving at Torys and weeks turned into months, the two lawyers felt increasingly queasy. “The tone of the interrogatories revealed a mindset that was antagonistic,” DeMerchant recalls. “They were asking for production of every document or e-mail ever produced.”
To their horror, the PAC approved a prosecution. DeMerchant, who had already begun to use the services of a fellow U of T law student from her year, Phil Campbell, in connection with the Chicago case, asked Campbell to act in the law society matter.
A burly man who appears more biker than barrister, Campbell had vaulted up the ranks of the criminal law bar based on a rare combination of dogged research, skillful writing, and tactically superb oral advocacy. He accelerated his immersion into a staggeringly complex case in a field of law about which he had known virtually nothing. At the same time, Campbell recommended Sukonick hire Ian Smith, an equally strong advocate and writer who had been a provincial prosecutor in the ’90s, prior to four years at the Ontario Securities Commission.
Their opponents were law society investigator Jay Naster, a tenacious investigator and prosecutor whom Smith had worked with at the Crown Law Office; and Paul Stern, a well-respected lawyer known for his even temper and considerable experience in most areas of criminal law.
The hearing was launched on April 26, 2010, with a series of mind-numbing legal motions. And from there, it went steadily downhill. The prosecution strategy relied on documents obtained through disclosure, which Stern used to probe and extract admissions under cross-examination. Campbell and Smith opted to put DeMerchant up first, believing Stern would find her tough and unflappable. She would be followed by a string of corporate officials, experts on conflict and, lastly, Sukonick.
DeMerchant ended up being on the witness stand for 32 days spread out over an excruciating eight-month period — two days more than Sukonick would testify. Her anxiety, impatience, and sense of outrage ramped up steadily.
Stern’s questions struck her as being tortuously repetitive, irrelevant and, at times, downright insulting. “It was like being forced to sit at a never-ending Mad Hatter’s Tea Party where you can’t stop it and you can’t get away from the table,” she said. “Day after day, they tried to find a smoking gun. Sometimes, it seemed to me, they would concoct new theories overnight.”
Each time Stern insinuated that DeMerchant had acted as an enabler for underhanded shenanigans it cut her to the bone. “I felt that I was being treated like a dirty lawyer,” she said. “To suggest that we would have given advice that was wrong in the hope it would never be caught was just a ridiculous argument.”
Ever polite and methodical, Stern hammered away at the defendants’ failure to have directly notified Hollinger’s independent audit committee that they had a potential conflict of interest. They countered that their main liaison at Hollinger, Peter Atkinson, had routinely acted as a conduit for information that ought to go to shareholders.
Campbell and Smith were becoming increasingly alarmed that the prosecution had misidentified ordinary transactions as being somehow spurious. In addition, they were expected to remember every detail. “Putting together a deal like the sale of Hollinger assets to Canwest, with hundreds of moving parts, was an enormous achievement for any lawyer,” Campbell observed. “It was day-and-night work with a to-do list that would stagger most litigators.”
The defence team were flabbergasted that Naster and Stern had not come up with experts to guide them through the nuances of corporate law. They were equally appalled officials at Canwest and Osprey, who could have shed valuable light on the case, had not been interviewed. Instead, the prosecution seemed to be using the hearing as an investigation through inquisition in hopes that a viable case would emerge.
To the defence team, the day of Nov. 15, 2011, is known as, “Beth’s Dark Day.” In the morning session, DeMerchant had responded to a steady drizzle of questions that seemed redundant and uncomprehending of her explanations. Increasingly, her crisp responses invoked the image of a teacher educating an avid, but none-too-bright, pupil: “Think about it, Mr. Stern . . . My God, Mr. Stern.”
After lunching alone, as usual, DeMerchant asked to address the panel. “I am alone,” she said, her voice wracked with frustration. “I am in isolation. I don’t know where the questions are going to come from. I have deep concerns about the sometimes duplicative nature of them; the probative value of them; the misstatements.” The incident could not have failed to make an impression on the hearing panel. It left a lingering sense that a significant, invisible threshold had somehow been crossed.
In a series of letters commencing in 2012, the defence implored Stern to ask a PAC panel to reassess his faltering case. “Can it really be supposed that PAC intended to approve a 100-day hearing ruinous to the careers of its two subjects, in order to establish, at best, a technical violation of poorly understood and highly controversial rules which countless lawyers applied in the same way as Ms. DeMerchant and Mr. Sukonick?” they wrote.
On Bay Street, lawyers who had once looked upon the Torys defendants with suspicion began to shake their heads in disbelief. Whatever relevance the case originally had was quickly fading. Most large firms had long since designated conflict specialists to flag potential trouble. “I can show you dozens of messages saying: ‘There, but for the grace of God, go I,” says Sukonick. “The law society could have charged a thousand people, but they had picked us.”
In a jocular effort to retain their sanity, he and DeMerchant began collecting metaphors about what they were enduring. One of Sukonick’s favourites was likening the prosecution to building an airplane in the air. DeMerchant was fond of portraying Stern as an ice fisherman who puts his line down one hole and, bringing his hook up empty, goes to another.
The hearing ground to a close on July 16, 2013, leaving the defendants to reflect on the fact that being found guilty on even one of the six charges would be enough to destroy what was left of their reputations. Months later, DeMerchant was shopping at a suburban Eddie Bauer outlet when an e-mail bearing the decision in an attachment popped into her inbox. Her hands shaking, she scanned it to grasp the end result. Within moments, she and Sukonick were on the phone sharing their jubilation at being completely exonerated.
The decision — a blinding compendium of facts, figures, and minutiae — found that the prosecution had initially been warranted, but was incomplete. It faulted the law society for not reassessing it as it started to falter: “The Law Society knew it had no evidence to counter that already called and should have ended the hearing, at least by the time it received the letter on behalf of the Lawyers dated May 8, 2012.”
The panel said that in their dealings with the Hollinger Group, DeMerchant and Sukonick had followed general practices that involved no conflict of interest. “The clients are all considered to be sophisticated,” it said. “Before there is a finding of conflict of interest, there should be some evidence that counsel preferred the legal interests of one or more clients to the detriment of the others. There was none.”
In the wake of their exoneration, DeMerchant and Sukonick felt little animus toward Stern and Naster. “Stern did the best job he could,” says DeMerchant. “I do not think he’s an evil person or a bad person. But if I were a litigation lawyer, I’d like to think I would be more surgical, efficient, selective.” She seems more upset at what happened to Sukonick than to herself. “There is no doubt that I was the partner in charge. If they wanted one person, it should have been me.” For his part, Sukonick is dismissive of suggestions his mentor ought to have reached a plea agreement that included dropping the charges against him. “It would have meant facing the rest of your life knowing you had sold out; that you had effectively lied.”
In formal and informal responses since the case ended, Paul Pape, a lawyer who represented the Law Society of Upper Canada in its appeal of the decision, insists it would have been negligent not to probe behind the circumstances of the Hollinger deals.. He points to the $30-million settlement as a linchpin moment: “A regulator cannot ignore a $30-million admission like that,” says Pape, who conducted the law society’s appeal of the decision. He notes the LSUC cannot shirk its responsibility to govern and help educate the profession. “This will reoccur. Leaving aside the circumstances of this case, whoever would want to have to stand up to Conrad Black? There are going to be other Conrad Blacks around. . . .You are dealing with powerful people who are the controlling group of a closely held company. You are dealing with significant legal fees paid out over a long-term relationship.”
But Campbell maintains it is “indefensible” for anyone to argue that the prosecution can be in any way justified on the basis of clarifying the law or educating the profession. “While failing to confront the law head on, they spent four years trying to show that Beth and Darren had sold out their clients’ interests — a project in which they failed miserably,” he says. “That’s why the case, which lent itself to a fairly straightforward analysis once the basic facts were established, became such a rampaging beast, gulping down resources and trampling reputations.”
In arguing for costs, Campbell and Smith said they each spent 4,000 hours of preparation and 118 hearing days. Adding in disbursements, the cost of the defence reached nearly $4 million. DeMerchant and Sukonick were ultimately awarded $250,000 each, apparently the largest cost awards ever made against the LSUC. It is under appeal.
Besides losing the case and having costs awarded against it, the LSUC had a new problem. It felt the hearing decision had serious misstatements about conflict law and the duties of counsel. Accordingly, Pape appealed four of the six charges that had been dismissed. On Feb. 18, 2015, the appeal tribunal upheld the dismissal of the allegations but found considerable fault with some of the reasoning in the original decision.
Not only had DeMerchant and Sukonick done nothing wrong in relation to the non-compete payments, the appeal panel said, but DeMerchant had moved “immediately and assertively” to advise her clients they had to rectify the problem once it became apparent. The decision illustrated the pressure the lawyers had been under by citing a flurry of internal correspondence over a $22-million debt one of the Hollinger companies had owed to another. In one peevish e-mail, Jack Boultbee had expressed impatience with DeMerchant and Sukonick for insisting that Hollinger International’s public shareholders might be adversely affected. “We have already been around this before,” Boultbee kvetched to a colleague, according to the appeal tribunal decision. “Can we get Torys to stop fussing about this and just complete the documentation?” The appeal decision pointed out DeMerchant had continued to red flag the problem, going so far as to warn Black that ignoring her advice could result in the executives being sued and Black “serving up his head on a silver platter.” To the relief of the LSUC, Pape did succeed in cleaning up many of the problems involving definitions and standards that were in the original decision. Still, there was no glossing over the fact the prosecution had amounted to a long, inglorious legal belly flop.
Partly in response to persistent criticisms of its disciplinary process, the LSUC has been revamping its procedures steadily over the past few years. Led by benchers Mark Sandler, Linda Rothstein, Raj Anand, and Alan Gold, it has created an independent tribunal. Physically and psychologically separate from the society’s disciplinary branch, the tribunal has more than 80 experienced adjudicators — both benchers and non-benchers — who were appointed on merit. They adhere to a code of conduct and receive mandatory education. Its permanent chairman, David Wright, has moved to shorten cases and reduce adjournments through the use of mandatory pre-hearings and case-management.
In addition, Sandler sat on every appeal panel over a period of several years to help create a badly needed body of consistent jurisprudence. “I decided we had to create a body of jurisprudence,” says Sandler. “It had conflicted at times and there wasn’t much of it.” Previously, all hearing panels were composed of benchers. “But just because you’re a bencher doesn’t mean you have the skills to be a good adjudicator. So it was best to combine both benchers and non-benchers.”
The LSUC has also extended a measure of this reformist zeal to the areas of investigations and prosecutorial oversight, and reduce the tunnel vision and lack of communication that comes of operating in separate silos.
Which is all well and good, say DeMerchant and Sukonick, but what about accountability? What about conducting a thorough post mortem of the case? “I’d like to know what was going on behind that heavy veil,” says DeMerchant. “Was this a problem with the quality of staff? Was it a lack of oversight by the benchers? Was it a one-off mess that will never happen again if we do nothing?”
The other matter that remains unresolved is whether the lives and reputations of DeMerchant and Sukonick can ever truly recover. Since leaving Torys, DeMerchant has channeled her energy into renovating a church near her hometown into a multipurpose venue for events such as concerts, exhibits, and meetings. In future, she said that she plans “to be productive and use my legal experience. I am reflecting on how to do that now that my good name has been restored.”
What happened to them also raises a Zen-like question: Did the system malfunction or has their exoneration proved that the system works?
Sukonick was particularly hard struck on account of his relative youth and career path. He spent a decade watching from the sidelines as colleagues developed rich client relationships, assumed leadership positions at the firm, and saw their incomes soar. And while during that time he married Matthew Sapera, owner of Matthew Sapera Fine Homes, he says: “It is very difficult to look back on almost 10 years of my life that should have been the most productive and brought me the most revenue. The biggest portion of my career-building years was decimated by virtue of this. It was horribly, horribly unfair.”
During this period, Sukonick has continued working on Torys’ pro bono committee and some client pricing initiatives, but hopes to take most of the summer off. He knows that self-pity will get him nowhere. “My real passion is working with clients on their deals. I am having discussions with my colleagues about opportunities to re-integration into client service.” He looks upon what happened to him at the hands of the LSUC as akin to a car accident. “You can spend years blaming somebody for your broken arm or leg. Or, you can say: ‘I have to work on healing and figure out my way forward.’”
Update July 7, 2015: This article has been updated to reflect that lawyer Paul Pape is not a bencher of the Law Society of Upper Canada; that Mark Sandler — a bencher who has has been part of an ongoing reform of the Law Society of Upper Canada discipline process — at no time took any position on whether there ought to be an investigation into lawyers Beth DeMerchant and Darren Sukonick; and the majority of adjudicators at the LSUC's new disciplines tribunal are benchers.