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Subscribe today and receive: • Unlimited access to the Law Times digital editions and to our digital edition archives...FREE • Canadian Legal Newswire, a weekly e-newsletter from the editors of Law Times and Canadian Lawyer...FREE April 26, 2010 • lAw Times Goldman case sparks debate on fiduciary standard BY MICHAEL McKIERNAN Law Times A q Send me 1 year of Law Times for only $159.00 (Total with GST: $166.95) Name: __________________________________________________________________________ Company: _______________________________________________________________________ Address: ________________________________________________________________________ City: ____________________________ Prov: _______________ Postal Code: __________________ Tel: ( ) _______________________ Fax: ( ) ______________________ Email: ____________________________________________________________________________ q Payment enclosed q Charge my: q Visa q Mastercard q American Express Card #: __________________________________ Expiry Date: ___ / ___ (mm/yy) Signature (required): ________________________________________________ Date: ________________ 240 Edward St. Aurora, ON. L4G 3S9 Tel: (905) 727-0077 Fax: (905) 841-4357 Mail or fax this form to Law Times Canadian securities ex- pert is hoping the Gold- man Sachs Group Inc. fraud case in the United States will ignite a debate about fi ducia- ry standards north of the border. Ermanno Pascutto, execu- LT Sub ad - 1-4-3X.indd 1 5/26/10 11:09:06 AM tive director of the Canadian Foundation for Advancement of Investor Rights, says there are parallels between the defence Goldman will likely mount and the defence Canadian fi nancial companies make when they clash with their investor customers. "It appears Goldman's de- fence is going to be essentially that it's caveat emptor, and they have no fi duciary obliga- tion," Pascutto says. "If there's no fi duciary obligation, it falls down to suitability require- ments, which is the same stan- dard that we have in Canada." Currently in Canada, courts determine fi duciary obligation on a case-by-case basis. "We have to get ourselves to the position where it is ab- solutely clear that a fi nancial adviser has a duty to put his or her fi nancial clients fi rst and a duty to resolve any confl icts in the client's best interests. Th e vast majority of investors would assume that's the law right now. But when it comes to a dispute, the vast majority of fi rms in Canada argue they don't have a fi duciary obliga- tion," Pascutto says. Th e U.S. Securities and Ex- change Commission alleges Goldman defrauded investors out of more than $1 billion by marketing a fi nancial instru- ment that was designed to fail. In particular, it says Goldman failed to notify investors that a large hedge fund, Paulson & Co., was involved in the selec- tion of the portfolio and that Paulson had an economic in- centive to pick assets that would fail. Th e regulator also claims Paulson eff ectively shorted the portfolio by entering into credit default swaps with Goldman. Philip Anisman, a securities law- At Kent Legal we know not just anybody can do the job. That's why we've taken extensive measures, like using the latest technology, tools and top recruiters to ensure we not only match the right applicant for your position, but that we do it in the best response time. We provide seamless placement services for legal secretaries, law clerks, office clerks, administrative management as well as e-discovery experts. We also understand the internal culture and hiring needs of every client we serve – whether it's for one expert, a team, direct hire, temporary or contract. Kent Legal – the most trusted name in legal recruiting. Call us today. (416) 363-7227 • Fax: (416) 363-6125 • kentlegal.com Kent legal monkey (LT 1-3x3).indd 1 www.lawtimesnews.com 2/17/10 1:45:10 PM yer based in Toronto, says the case boils down simply to disclosure. "Th e key element is a failure to disclose information related to the instrument that Gold- man created for Paulson," he says. "All the allegations turn on the materiality of the informa- tion that was not disclosed." Ed Waitzer, director of the Hennick Centre for Business and Law and a senior partner at Stikeman Elliott LLP, says the case struck him as weak at fi rst glance but adds he needs more information before he forms a solid opinion. "You have sophisticated par- ties on both sides, and securities Philip Anisman regulation historically exempts sophisticated parties. And while there wasn't disclosure of Paul- son's role in choosing the collat- eral, there was complete disclo- sure of what went in." Waitzer says the complexity of the product meant that even though investors knew exactly what they were buying, they weren't able to recognize the danger of the investment. "Th at may be the SEC's case: that disclosure isn't suffi cient when you're dealing with instru- ments that are this complex." Anisman was struck by the SEC's approach compared to similar proceedings in Canada where, he says, a regulator such as the Ontario Securities Commis- sion would take disciplinary ac- tion rather than fi ling a civil suit. "It's interesting to me that in the U.S., it's being character- ized as fraud. In Canada, one wouldn't, from a regulatory perspective, have to character- ize it that way. Under our rules, a dealer like Goldman Sachs is obligated to act fairly, honestly, and in good faith with respect to their clients. Th e Ontario Secu- rities Commission could require them to disgorge all their profi ts under our Securities Act and it also has the ability to impose an administrative fi ne of up to $1 million per violation of the act." But for Waitzer, a fi duciary standard would be a better so- lution. "If Goldman Sachs were under some kind of obligation to put the clients' interest fi rst, this wouldn't have happened," he says. "Th ere would have been full disclosure because the way to get out of the fi duciary standard is to put all your cards face up on the table." He adds the SEC action could be an attempt to advance the cause of a fi duciary stan- dard or some other fi nancial rule at a time when such mat- ters are on the political agenda, something he would like to see happen here as well. "I think there's regulatory fatigue in Canada. We don't have the same enforcement culture, and the debates about this kind of stuff aren't nearly as robust." LT www .lawtimesnews.com Includes a FREE digital edition!