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Canada

International investors beware of foreign securities laws

The new era of global investing makes it difficult for investment managers to ensure that they do not inadvertently trip over foreign securities laws. One investment manager has learned that lesson the hard way.

The Ontario Securities Commission recently published its reasons for decision and related settlement agreement involving The Crabbe Huson Group. Crabbe Huson is an investment management firm based in Portland, Oregon and registered as an investment advisor in the US. During the relevant period it had over $4 billion of assets under management. Crabbe Huson admitted contravening the early warning, take-over bid and insider reporting requirements of the Securities Act (Ontario) in connection with the acquisition of common shares of Lytton Minerals Limited from 1996 through 1998. The terms of settlement approved by the Commission required Crabbe Huson to make:

  • a $120,000 contribution (representing its profit from management fees charged) to the Commission for allocation to such third parties as the Commission may determine, to be used for purposes that will benefit investors in Ontario; and
  • a C$40,000 ($27,000) contribution towards the costs of Commission staff's investigation.

In April 1996 Crabbe Huson began purchasing common shares of Lytton on behalf of its fully managed accounts. By April 30 1997 Crabbe Huson had acquired an aggregate of 9,805,900 shares of Lytton and on May 8 1997 it acquired an additional 1,274,000 shares, thereby giving Crabbe Huson control or direction over more than 10% of the then outstanding shares of Lytton. At this point, Crabbe Huson was required under the Act to issue and file a news release containing prescribed information concerning the number of securities held and its purpose in acquiring the securities, including any future intention to increase its position, and within two business days, file an early warning report containing the same information as in the news release.

Crabbe Huson continued to acquire common shares of Lytton on behalf of its managed accounts and, by May 4 1998, had accumulated 29,872,000 shares representing approximately 26% of the total number outstanding. These acquisitions contravened several requirements of the Act. First, the Act requires further press releases and early warning reports upon the acquisition of each additional 2% or more of the outstanding securities of the class (plus a moratorium on purchases for one business day from the date the early warning report is filed). Second, at the point where the 20% threshold was reached, each purchase constituted a take-over bid under the Act and, absent an exemption, should have been made to all holders of securities of the class. Finally, the Act requires insider reports to be filed within 10 days of the month following the month when the 10% threshold is reached and within 10 days of the month following any month in which a change occurs.

Crabbe Huson issued a press release on June 23 1998 and filed an early warning report and an insider report on the same day.

In considering the appropriate order the Commission stated that it ought to take into account not only the effect of the order on the respondent, but also the "prophylactic purpose" that can be served by deterring conduct by others that is likely to be prejudicial to the public interest having regard to a number of factors, including the seriousness of the allegations, the respondent's experience in the market place, whether there has been a recognition of the seriousness of the improprieties and any mitigating factors.

In the Commission's view, inadvertence does not excuse participants in the Ontario capital markets from their responsibility to inform themselves of the requirements of Ontario securities law. In this case the terms of settlement were in the public interest because:

  • the responsible portfolio manager and compliance officer of Crabbe Huson were aware that accounts managed by Crabbe Huson held more than 10% of the outstanding shares of Lytton in May 1997 and more than 20% in January 1998;
  • Crabbe Huson did not take steps to inquire as to the requirements of Ontario securities law until June 1998;
  • Crabbe Huson is a sophisticated US investment management firm;
  • Crabbe Huson was unaware of the early warning reporting provisions, take-over bid provisions and insider reporting requirements of the Act;
  • the failure by Crabbe Huson to comply with the requirements of the Act was inadvertent; and
  • Crabbe Huson admitted its contraventions of the Act and that such conduct was contrary to the public interest.

The result in Crabbe Huson may be compared to a situation in which our firm was subsequently involved where an international investment manager inadvertently accumulated more than 20% of the outstanding securities of a listed issuer on behalf of a number of mutual funds it managed. In this case, early warning reports had been filed with the Commission but the investment manager was unaware of the 20% take-over bid threshold. In its home jurisdiction and in other jurisdictions with which it was familiar, the threshold was higher than is the situation in Canada. Upon seeking our advice, we recommended an immediate meeting with Commission staff where all relevant factual information was provided. Ultimately, Commission staff decided to take no action.

The message in Crabbe Huson is clear. There are significant differences in reporting, filing and take-over bid requirements in securities laws of various jurisdictions. It is far less costly in terms of both money and damage to one's reputation to seek legal advice in a foreign jurisdiction before accumulating large positions in its securities markets.

Leslie T Gord, Nicholas E J Dietrich and Tina M Woodside

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