Lawyers seeing steep penalties in securities settlements

Katanga Mining Ltd. has paid $28.5 million, plus costs of $1.5 million, as part of a settlement agreement for “material misstatements and failures to make adequate disclosure,” according to reasons released by the Ontario Securities Commission Bulletin.

Lawyers seeing steep penalties in securities settlements
Craig Lockwood says the monetary penalties in Katanga’s settlement with the OSC were significant

Katanga Mining Ltd. has paid $28.5 million, plus costs of $1.5 million, as part of a settlement agreement for “material misstatements and failures to make adequate disclosure,” according to reasons released by the Ontario Securities Commission Bulletin.

Craig Lockwood, a partner at Osler, Hoskin & Harcourt LLP in Toronto who represented respondent Jacques Lubbe in the case, said the decision is instructional of how the OSC is particularly focused on emerging jurisdictions — in this case, the Democratic Republic of the Congo.

“The monetary penalties were significant and comparatively large relative to the past,” Lockwood says.

The Dec. 18, 2018 decision to approve the settlement, Katanga Mining Limited (Re), 2018 ONSEC 59, said the respondents, all of whom “exercised significant influence” over Katanga’s operations and finances, “contravened Ontario securities law in a number of ways.” The respondents were listed as Aristotelis Mistakidis, Tim Henderson, Liam Gallagher, Jeffrey Best, Matthew Colwill, Johnny Blizzard and Jacques Lubbe.

Katanga operates copper and cobalt mining and refinery facilities in the Democratic Republic of the Congo, according to the decision, written by Toronto panelists and commissioners Timothy Moseley, M. Cecilia Williams and Lawrence Haber.

The decision said Katanga was accused of a misleading disclosure surrounding its copper production; not adequately disclosing weaknesses in corporate governance and internal controls; and also the failure to disclose “risk of public sector corruption in the Democratic Republic of the Congo.”

In particular, the decision said, “improper recording of copper cathode production resulted in misstatements on the order of thousands of tonnes, with resulting financial misstatements of tens of millions of dollars.”

“A central theme in this case is the inadequacies in the tone from the top and in the culture of compliance at Katanga,” the panelists wrote. “The individual respondents admit that they were responsible for establishing and enforcing a culture of compliance, and that their conduct undermined Katanga's corporate governance and internal controls …. these failures strike at the heart of the protections afforded by proper disclosure, on which investors must be entitled to rely.”

A Katanga spokesman said in an email the company would not make further statements on the settlement, but wrote directed Law Times to an online statement which said “the actions taken by Katanga's board of directors and management since the conclusion of the Company's internal review and restatement of certain financial statements in November 2017 have helped strengthen the Company."

Lenczner Slaght Royce Smith Griffen LLP managing partner Tom Curry, one of the lawyers who represented Aristotelis Mistakidis, declined to comment as did Blake Cassels & Graydon LLP lawyer Doug McLeod, one of the lawyers who represented Tim Henderson. Jeffrey Haylock, associate at Polley Faith LLP and one of the lawyers who represented Liam Gallagher, also declined to comment. Lawyers for Jeffrey Best, Matthew Colwill and Johnny Blizzard were not immediately available to comment before time of posting.

In addition to Katanga’s $30 million in settlement payments, the company must pay a consultant to review its policies, and each individual respondent will pay costs of $50,000 and penalties ranging from $350,000 to $2.45 million, the panelists wrote. Those are not trivial penalties by any means, says Toronto lawyer Al Wiens of Wildeboer Dellelce LLP, who was not involved in the case.

“I think the Ontario Securities Commission is definitely trying to step up enforcement. There has always been a perception that Ontario, and Canada generally, are not as hawkish with respect to securities law matters,” says Wiens.

University of Toronto law professor Anita Anand says there has been a “visible push” towards settlements, including no-contest settlements, under the current OSC regime.

“The enforcement powers of the OSC are significant and settlements are proving to be a powerful tool for the OSC,” says Anand. “Settlements also send a broader message to the capital markets about behaviour that will not be tolerated. However, we must remember that settlements are not full-blown trials and there is room to negotiate behind closed doors. This fact means that settlements are not fully transparent…. my research shows that the efficiency of these no-contest settlements, which is one of their underlying rationales, has been declining as they are taking longer to conclude.” Lockwood says can’t share too many details about the negotiation but that it was hard-fought. Generally speaking, he says, any company that has business in jurisdiction with its own business norms must also comply with Canadian securities laws.

Still, he says, the unique facts of the case mean this decision alone doesn’t necessarily mark a “sea change” or a “barometer settlement” in terms of the size of settlements companies can expect.

“My own view is that there was a matrix of facts that was very unique, so we can’t be too quick to say this resets the bar. Maybe it does,” Lockwood says. “But it’s too early in terms of drawing conclusions.”

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