Law Times

Page 4 January 14, 2019 • Law Times www.lawtimesnews.com OSC settles with Katanga in $30 million mining case Lawyers see steep penalties in securities settlements BY ANITA BALAKRISHNAN For Law Times K atanga Mining Ltd. has paid $28.5 million, plus costs of $1.5 million, as part of a settlement agreement for "material mis- statements and failures to make adequate disclosure," accord- ing 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 in- structional of how the OSC is particularly focused on emerg- ing jurisdictions — in this case, the Democratic Republic of the Congo. "The monetary penalties were significant and compara- tively large relative to the past," Lockwood says. The Dec. 18, 2018 decision to approve the settlement, Katanga Mining Limited (Re), 2018 ON- SEC 59, said the respondents, all "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 refin- ery facilities in the Democratic Republic of the Congo, accord- ing to the decision, written by Toronto panelists and commis- sioners Timothy Moseley, M. Cecilia Williams and Lawrence Haber. The decision said Katanga was accused of a misleading disclosure surrounding its cop- per production; not adequately disclosing weaknesses in cor- porate governance and internal controls; and also the failure to disclose "risk of public sector corruption in the Democratic Republic of the Congo." In particular, "improper recording of copper cathode production resulted in misstate- ments on the order of thousands of tonnes, with resulting finan- cial misstatements of tens of millions of dollars," the decision said. "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. Their failure to discharge their obliga- tion contributed to a culture in which staff of Katanga failed to adhere to policies, and overrode internal controls." A Katanga spokesman said in an email the company would not make further statements on the settlement, but directed Law Times to an online statement which said "the actions taken by Katanga's board of direc- tors 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 Mis- takidis, declined to comment as did Blake Cassels & Graydon LLP lawyer Doug McLeod, one of the lawyers who represented Henderson. Jeffrey Haylock, associate at Polley Faith LLP and one of the lawyers who represented Galla- gher, also declined to comment. James W.E. Doris, a partner at Davies Ward Phillips and Vineberg LLP, who represented Best and Colwill, declined to comment. A lawyer for Blizzard was not available to comment. Wendy Berman, a partner at Cassels Brock & Blackwell LLP in Toronto who represented Johnny Blizzard, also declined to comment. In addition to Katanga's $30 million in settlement payments, the company must pay a consul- tant to review its policies, and each individual respondent will pay costs of $50,000 and pen- alties ranging from $350,000 to $2.45 million, the panelists wrote. Those are not trivial penalties by any means, says Toronto law- yer Al Wiens of Wildeboer Del- lelce LLP, who was not involved in the case. "I think the Ontario Securi- ties Commission is definitely trying to step up enforcement. There has always been a percep- tion that Ontario, and Canada generally, are not as hawkish with respect to securities law matters," says Wiens. The decision said, "The mis- conduct in this case was serious. It resulted in material misstate- ments and failures to make ad- equate disclosure. As Staff has submitted, these failures strike at the heart of the protections af- forded by proper disclosure, on which investors must be entitled to rely." 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 remem- ber 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 effi- ciency of these no-contest set- tlements, which is one of their underlying rationales, has been declining as they are taking lon- ger to conclude." Lockwood says he can't share too many details about the ne- gotiation but that it was hard- fought. Generally speaking, he says, any company that has business in a jurisdiction with its own business norms must also com- ply 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." The OSC's decision said that the payments and penalties, alongside a ban on defendants serving as directors and officers over the next two to six years, is important as a deterrent and for "fostering investor protec- tion and confidence in capital markets." "[T]he review to be conduct- ed by the independent consul- tant, and the implementation of necessary changes, will further protect the capital markets from harm caused by improper prac- tices," said the decision. The decision might prompt issuers to be more careful to ensure that they have sufficient internal processes in place, says Wiens. "We always tell our clients, 'The reason that we are being so careful is because you have got to be sure — things can happen.' When nothing ever happens, the response can be 'See, nothing ever happens, why did we have to spend that money?' Well, this is a case where something hap- pened and it was significant and there were significant penalties," says Wiens. "In retrospect, it might have been better for Katanga to say 'We have some material weak- nesses' than it was to not say that and have this happen." In the decision, the panelists also noted, "We have reviewed this agreement in detail, and we recently conducted a confiden- tial settlement conference with counsel for all parties." "We asked questions of coun- sel and we heard their submis- sions. With the benefit of that session and our review, we con- clude that it would be in the pub- lic interest to approve this settle- ment," said the decision. "We have also taken account of the fact that approval of this settlement would resolve the matter promptly, efficiently and with certainty," it added. "A settlement avoids the expenditure of significant re- sources that would be associated with a contested hearing." LT NEWS Legal News at Your Fingertips Sign up for the Canadian Legal Newswire today for free and enjoy great content from the publishers of Canadian Lawyer, Law Times, Canadian Lawyer InHouse and Lexpert. Visit www.canadianlawyermag.com/newswire-subscribe THE LATEST NEWS Keep abreast of essential late-breaking legal news and developments. THE BEST COMMENTARY Access trusted analysis and opinion on the cases and changes that are shaping the legal landscape. DELIVERED WEEKLY Your profession can change quickly, which is why you need the freshest, most recent information. FOR READING ON ANY DEVICE Get the news and opinions you need on any device. Whether you read at work, or on the go, the newswire adapts to your screen. Untitled-2 1 2019-01-08 3:02 PM Craig Lockwood says the monetary penal- ties in Katanga's settlement with the OSC were significant. The enforcement powers of the OSC are significant and settlements are proving to be a powerful tool for the OSC. Anita Anand

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