In my recent set of articles on the Ontario Securities Commission and the question of legislative oversight of democratic safeguards, the question has been essentially academic. Generally, I've pointed out how the powers could be misused, and how some other people seemed to raising red flags.

But apparently I'm behind the curve on this one. The issue is already being debated in a high profile court case involving one of the Canada's more famous corporations, troubled Nortel, and former CEO Frank Dunn:

A former CEO of Nortel Networks Corp. who was fired is refusing to co-operate with the Ontario Securities Commission, which is investigating him. A lawyer representing Frank Dunn has asked Ontario Superior Court to forbid the OSC to question his client for fear it would divulge his testimony to the U.S. Securities Exchange Commission, which also is investigating him. For its part, the U.S. justice department is conducting a criminal investigation of Mr. Dunn. His lawyer says the Canadian Charter of Rights protects him from self-incrimination. The same court rejected a similar demand by former newspaper magnate Conrad Black last year. Nortel fired Mr. Dunn and several other executives in April 2004 after accusing them of rigging the company's accounts to trigger a bonus plan. Shareholders filed several class-action suits against Nortel, two of which it settled out of court earlier this year by paying $2.5 billion US in cash and shares.

What I've got is a set of the actual court documents, and they make for fascinating reading. They also reveal that the OSC is seen by at least one judge as an entity fully capable of subverting the Charter rights of Canadians. That is a huge deal, and I'll be getting back to it later.

But first, here is an index of documents, in chronological sequence:

1. 1988 MOU (SEC and OSC) [7-January-1988]
2. Notice of Application [8-March-2006]
3. Applicant Factum [31-March-2006]
4. Respondent Factum [31-March-2006]
5. Decision [25-April-2006]
6. Addendum [27-June-2006]
7. Cross Appeal [31-July-2006]
8. Appellant Factum [15-September-2006]
9. Amended Notice [18-September-2006]

Let's start with the second, the original Notice of Application, in which Frank Dunn and his lawyers apply to quash an attempt to have Dunn submit to questioning by the OSC:

(2) A declaration pursuant to ss. 7 and 24(1) of the Canadian Charter of Rights and Freedoms (the "Charter") that the Applicant cannot be compelled to testify under oath pursuant to a Summons to Witness, dated March 1, 2006 (the "Summons"), issued by the Investigator appointed under two order pursuant too ss. 11 and 13 of the Securities Act, R.S.O. 1990, c. S. 5 (the "Act") on June 18, 2004, and February 22, 2006 (the "Orders")

The sections of the Securities Act are the following:

Investigation order

11. (1) The Commission may, by order, appoint one or more persons to make such investigation with respect to a matter as it considers expedient,

(a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or

(b) to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction. 1994, c. 11, s. 358.

Contents of order

(2) An order under this section shall describe the matter to be investigated. 1994, c. 11, s. 358.

Scope of investigation

(3) For the purposes of an investigation under this section, a person appointed to make the investigation may investigate and inquire into,

(a) the affairs of the person or company in respect of which the investigation is being made, including any trades, communications, negotiations, transactions, investigations, loans, borrowings or payments to, by, on behalf of, or in relation to or connected with the person or company and any property, assets or things owned, acquired or alienated in whole or in part by the person or company or by any other person or company acting on behalf of or as agent for the person or company; and

(b) the assets at any time held, the liabilities, debts, undertakings and obligations at any time existing, the financial or other conditions at any time prevailing in or in relation to or in connection with the person or company, and any relationship that may at any time exist or have existed between the person or company and any other person or company by reason of investments, commissions promised, secured or paid, interests held or acquired, the loaning or borrowing of money, stock or other property, the transfer, negotiation or holding of stock, interlocking directorates, common control, undue influence or control or any other relationship. 1994, c. 11, s. 358.

Right to examine

(4) For the purposes of an investigation under this section, a person appointed to make the investigation may examine any documents or other things, whether they are in the possession or control of the person or company in respect of which the investigation is ordered or of any other person or company. 1994, c. 11, s. 358.

Minister may order investigation

(5) Despite subsection (1), the Minister may, by order, appoint one or more persons to make such investigation as the Minister considers expedient,

(a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or

(b) to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction. 1994, c. 11, s. 358.

Same

(6) A person appointed under subsection (5) has, for the purpose of the investigation, the same authority, powers, rights and privileges as a person appointed under subsection (1). 1994, c. 11, s. 358.

Power of investigator or examiner

13. (1) A person making an investigation or examination under section 11 or 12 has the same power to summon and enforce the attendance of any person and to compel him or her to testify on oath or otherwise, and to summon and compel any person or company to produce documents and other things, as is vested in the Superior Court of Justice for the trial of civil actions, and the refusal of a person to attend or to answer questions or of a person or company to produce such documents or other things as are in his, her or its custody or possession makes the person or company liable to be committed for contempt by the Superior Court of Justice as if in breach of an order of that court. 1994, c. 11, s. 358; 2006, c. 19, Sched. C, s. 1 (1).

Rights of witness

(2) A person or company giving evidence under subsection (1) may be represented by counsel and may claim any privilege to which the person or company is entitled. 1994, c. 11, s. 358.

Inspection

(3) A person making an investigation or examination under section 11 or 12 may, on production of the order appointing him or her, enter the business premises of any person or company named in the order during business hours and inspect any documents or other things that are used in the business of that person or company and that relate to the matters specified in the order, except those maintained by a lawyer in respect of his or her client's affairs. 1994, c. 11, s. 358.

Authorization to search

(4) A person making an investigation or examination under section 11 or 12 may apply to a judge of the Ontario Court of Justice in the absence of the public and without notice for an order authorizing the person or persons named in the order to enter and search any building, receptacle or place specified and to seize anything described in the authorization that is found in the building, receptacle or place and to bring it before the judge granting the authorization or another judge to be dealt with by him or her according to law. 1994, c. 11, s. 358; 2006, c. 19, Sched. C, s. 1 (2).

Grounds

(5) No authorization shall be granted under subsection (4) unless the judge to whom the application is made is satisfied on information under oath that there are reasonable and probable grounds to believe that there may be in the building, receptacle or place to be searched anything that may reasonably relate to the order made under section 11 or 12. 1994, c. 11, s. 358.

Power to enter, search and seize

(6) A person named in an order under subsection (4) may, on production of the order, enter any building, receptacle or place specified in the order between 6 a.m. and 9 p.m., search for and seize anything specified in the order, and use as much force as is reasonably necessary for that purpose. 1994, c. 11, s. 358.

Expiration

(7) Every order under subsection (4) shall name the date that it expires, and the date shall be not later than fifteen days after the order is granted. 1994, c. 11, s. 358.

Application

(8) Sections 159 and 160 of the Provincial Offences Act apply to searches and seizures under this section with such modifications as the circumstances require. 1994, c. 11, s. 358.

Private residences

(9) For the purpose of subsections (4), (5) and (6),

"building, receptacle or place" does not include a private residence. 1994, c. 11, s. 358.

Notice that under Section 11, the OSC makes the determination that an investigation is required, authorizes that investigation, and then assigns the investigators. Those investigators have a great deal of power and discretion.

Keep that in mind.

Now when Dunn is under investigation by both the OSC in Ontario and the Securities and Exchance Commission (SEC) in the United States. And there's the rub.

In 1998, the SEC and the OSC entered into a relationship. The Memorandum of Understanding that provides for information sharing. Sounds like a good idea in a world where criminals move money across borders. But the problem is that jurisdictional differences can unfairly affect a person's rights:

3. The testimony of persons will be taken in the same manner and to the same extent as in investigations or other proceedings in the jurisdictions of the requested Authority. Notwithstanding any other provision of this Memorandum of Understanding, any person giving testimony as a result of a request made under this Memorandum of Understanding will be entitled to all the rights and protections of the laws and jurisdiction of the requested Authority.

So when the SEC is investigating Frank Dunn but the OSC is conducting the investigation, the investigation is executed with the powers of the OSC and not the SEC, and Frank Dunn has the rights of a Canadian, not an American.

When the OSC investigates Frank Dunn for its own investigation, will the results of that investigation go to the SEC? Should it?

But if the SEC were sole investigative body interested in Dunn, and if the MOU did not exist, then the SEC would have to interview him, in the United States, and Dunn would be afforded the protections of the US Constitution. The lawyers for Dunn are arguing that the combined investigation weakens Dunn's constitutional protections on both sides of the border:

(16) There is significant likelihood that any evidence that the Applicant is compelled to give in response to the Summons could be used against him in a criminal proceeding in the United States;

(17) The use or potential use of the Applicant's compelled evidence against him would render meaningless the Applicant's right against self-incrimination, protected by the Fifth Amendment to the United States Constitution and s. 7 of the Charter.

The arguments and counter-arguments are outlined in the Factums dated March 31. One particular argument by Dunn's lawyers is interesting:

8. In considering the Applicant's constitutional rights, it must be remembered that the OSC is a government agency. It is not a Court. The Court cannot grant to the Applicant, nor can it enforce, the constitutional safeguards that would be available if the testimony was taken under the aegis of the Court. It cannot effectively control the use of the testimony by the OSC, or by others to whom the testimony may be given, including American authorities. In those circumstance, it is submitted that this Court will not force the Applicant to give evidence.

In this argument, Dunn's lawyers make the point that the OSC is not an extension of the Court. A interrogation by police is done under the "aegis of the Court", but an OSC interrogation is outside the scope of the Court system.

If that argument holds up, it is a scary thing.

The OSC disagrees...somewhat:

91. The respondent submits, with respect, that this position fails to recognize the statutory securities regime and the deference courts have afforded the Commission in controlling its process. It also fails to recognize that the Commission does not operate without restraint or in a vacuum. Any order of the Commission is appealable to this Court.

92. The primacy of the Commission's jurisdiction to regulate the securities market and the high degree of curial deference to be shown the Commission is without question.

The question raised is whether the OSC derives its investigative powers from the courts, not whether the OSC orders are appealable. Police powers are an expression of courts powers, which is why warrants and subpoenas are court documents. That means the question of Charter protections is inherent in the decision to sign those documents, since the court's highest responsibility is to safeguard Charter rights. The OSC is equivalent to a court as per 13(1) of the Securities Act. A court is being asked to intervene in the actions of an organization that has a strange sibling-like existence to the court. The OSC's own argument refers to the "deference" the courts give to the OSC, deference that is given "without question".

That deference is where Dunn's lawyers get nervous.

What does the OSC think ought to happen?

103: The respondent requests that this application be dismissed with costs. In the alternative, the respondent seeks a declaration confirming the validity of the summons issued to the applicant and deferring to the Commission, following the completion of the summoned interview, any question relating to the disclosure of the evidence obtained.

In other words, get out of the way and let the Commission do its job. But if the Court feels the need to keep an eye on things, then after the interview, the Court can watch the Commission double-check that the Commission is acting responsibly -- because, you know, the Court needs to defer to the Commission in these matters.

On April 25, the Court rendered its decision. First, Justice Colin Campbell decided that the OSC could be trusted:

[48] I do not accept either the OSC cannot be trusted or that the investigative regime following on the s.11(a) Orders directed to Mr. A will necessarily result in his testimony under oath being "given" to U.S. authorities in circumstances where he would lose Fifth Amendment protection.

Justice Campbell also believes the OSC understands how certain activities must be kept apart:

[54] In carrying out that mandate, the OSC has an administrative and regulatory role and function apart from its investigative and prosecutorial roles.

That perceived separation is important--keep it filed away.

Finally, the Court suggests to the OSC that it ought to keep a wall between the various arms of this Nortel investigation:

[61] The OSC may wish to considre that it would appear more transparent to have separate investigative teams to deal with the testimony from Mr. A. and the material being reviewed under the s. 11(1)(b) Order with SEC officials. Obviously the SEC officials will not be part of the 11(1)(a) Order involving Mr. A.

That paragraph just overflows with "deferrence".

Looks like Dunn is done for. Certainly this Nortel blog thought so, in this entry dated April 29:

Poor Frank Dunn. He wants to avoid testifying before the Ontario Securities Commission because he's afraid OSC will turn over his information to the SEC. Earlier this week, Justice Colin Campbel rejected Dunn's request to avoid answering questioning about Nortel's accounting problems. We'll see you in court, Frank.

But that's not the end of the story. On June 27, we had an Addendum.

Addendum. Sounds like a document that crosses a "t" or dots an "i" that was missed, not something that turned the decision on its head, and in doing so, establishes some very interesting points that could have serious repercussions down the road.

First, on the matter of Charter rights being protected, well, not so much:

[2] At the time of the hearing, there was a concession by counsel for the OSC that given the differing immunity regimes in Canada and the United States, Mr. A was at some risk in respect of his Charter values in responding to a compulsory summons to take his evidence.

I don't have those transcripts, but this is a very significant concession. If the conflicting rules put Dunn's rights at risk, then either the rules have to be modified, or a regime to safeguard those rights has to be implemented. That's where the problem lies. Remember that suggestion for separate teams?

[3] In the rasons of April 24, 2006, I had in anticipation of coopertation with regards to the legitimate concerns of Mr A, suggested but not directed that there be some separation of between the persons conducting the investigation under s. 11(1)(a) and s. 11(1)(b) of the Securities Act. I am satisfied, based on the written submissions, of the impracticality of requiring at this time separate investigative teams in respect to an investigation that has been underway since March 2004. However, that does not end the issue.

[4] I am now advised that the very same individuals have been appointed under both subsections and that he investigations are sufficiently advanced that it would be difficult, if not impossible, to separate them at this time.

So the OSC's actions in this case, including the MOU with the SEC, constitute "legitimate concerns" when it comes to Charter rights. That's a big problem for the OSC. Worse yet, the people helping the SEC are the same ones who are going to take evidence from Dunn. Remember that if the SEC gets that evidence from the OSC, that evidence will not be considered self-incriminating in a US court, and so can't be challenged under the Fifth Amendment.

Justice Campell thought the OSC understood this and appreciated this. He admits he was wrong when it comes to gauging just how much the OSC worries about these things:

[7] I had thought, in error as it now appears, that there was a recognition by the OSC and its counsel that a statutory body that is regulatory, investigative and adjudicative and which can and does operate (quote properly) in a high degree of confidentiality and secrecy, would have an interest in transparently and efficiently dealing with a recognized risk and that expeditious access to the Court would be help to both sides.

I'm not a lawyer, but this sounds like a major finding. First, the OSC is seen to be legislative, executive and judiciary, all rolled into one body that operates under a great deal of secrecy. That this is now established by legal finding as opposed to my own musings is very important, inasmuch as few people listen to me. But even more significant is that the judge has found that the OSC, despite that dangerous melding of powers into one body, seems uninterested in doing what is necessary to protect people from the misuse of those powers. Such a blabbing to the SEC:

[10] A Charter risk can arise when an individual such as Mr A provides testimony that itself is not directly conveyed, but later events show can only have come into the hands of investigators from Mr A. This is more than an illusory risk.

[12] If an investigator, who has responsibility under s. 11(1)(a) and s. 11(1)(b) were to be direclty involved in the examination of Mr. A, no one outside of the OSC would ever know whether information was inappropriately conveyed. This is not to suggest an investigator would purposely do so. The risk of inadvertent as well as purposeful disclosure is worthy of Charter protection even where these is no direct evidence of breach, but only the risk of a breach.

Of course, as long as the OSC keeps all these functions and all the investigative teams rolled up into one undifferentiate mass, that risk remains.

So despite the OSC's protestations to the contrary, the judge insists that the teams be separated. He will issue an order that will be drawn up with the help of the opposing counsels, an order that will spell out the separation of the teams.

Faced with this blow, the OSC did the next logical thing. It hired former Liberal Party heavyweight Allan Rock as co-counsel.

In response, Dunn's lawyers fired off a cross appeal on July 31.

Dunn's appeal was based on what are alleged to have been mistakes in law by Justice Campbell. In particular, the judge did not take into account that the OSC blocked the deposition of Michelle McLaughlin, one of the OSC investigators, on the question of whether the evidence to be collected during Dunn's interview was destined the US. The judge also made the mistake of not perceiving that the OSC and the SEC were joined at the hip in this investigation, and that this was a not a potential danger but a realized one. The Orders from the OSC included not only directions to assist the SEC, but it authorized three SEC investigators to participate in the the inestigation.

Remember that the investigative team was not separated, so even if the SEC investigators weren't in the room with Dunn during the interview, they would presumably have had access to all the results of the interview.

Sure sounds like a joint investigation to me. I'm surprised myself that the judge did not cover this point in his decision.

Led by Allan Rock, the OSC weighed in on September 15, demanding that the onerous order to separate the teams be removed:

The Commission will argue on appeal that those conditions ought to be removed because they are unnecessary, inconsistent with the Commission's role and authority, and inimical to the Commission's ability to fulfill its important function in the public interest.

First, the issue of the interest by the United States:

3. The question has significant implications for the Commission and for securities regulation in Ontario. If the Court stops or limits the Commission's examination on the grounds urged by Mr A, then whenever the subject matter of a Commission investigation is also being looked at by authorities in another country, the Commission may be unable to effectively fulfill its statutory mandate to protect Ontario investors and the Ontario capital markets.

I hope Justice Campbell sees this for the specious argument that it is. The question is not whether foreign regulatory bodies are looking into a related matter in another country. The problem is when those foreign regulatory bodies are looking into a related matter in our country. The MOU essentially gives the SEC the ability to conduct an American investigation on Canadian soil using Canadian agents. If the SEC were forced to go after Dunn by itself, none of this would matter.

On the matter of separate teams, the counter-argument is that the OSC doesn't have to. So there!

10. In exercising its investigative authority under the Act, the Commission is entitled to deploy its staff on teams as it sees fit. Commission staff members are entitled to know all information gleaned in any investigation. The issue is not what the Commission staff members know. The issue is disclosure to the SEC, and that may only happen in this case following due process, on notice to Mr A.

But the judge already asserted that this was not good enough. With the presence of SEC investigators on a combined team, the risk on inadvertent disclosure is what was worrying and what he thought was worthy of Charter protection. The OSC's counter-argument is that no mistakes will happen. Ever.

The next argument bothers me too:

11. Mr A was a voluntary participant, for his own profit, in a licensed activity, the effective regulation of which is essential to substantial and pressing societal interests. He enjoyed the benefits of participation in both the Canadian and US markets, and knew perfectly well that his conduct was subject to scrutiny by both Canadian and US regulators. He cannot be heard to complain when both regulators co-operate with each other to investigate why a public company signficantly restated financial results for a period during which he held its most senior offices.

Dunn isn't complaining that the OSC and SEC are investigating him. He is complaining that they are investigating together, and in his opinion, using each other to do end runs around legislative and constitutional safeguards. If the judge finds that to be the case, and he is already leaning in that direction, then he does have the right to be heard.

Of course, the weakest argument is the one that says doing the wrong thing is better than doing nothing:

12. In all these circumstances, there is no justification for the Commission to reconstitute its investigation teams. To do so would disqualify all those who have been involved in the investigation to date from participating in Mr A's examination, and would effectively end an important investigation that has been underway for more than two years.

This has the scent of blackmail. Remember those "pressing societal interests"? The judge can't be distracted by concerns of Charter protections for this individual. Too much has been invested. It makes me wonder just how long an investigation has to go one before it is considered too important to tamper with.

Of course, in the opinion of some people, no investigation should be allowed to continue if it is trampling on Charter rights. Indeed, for some people, the longer and more intense the investigation, the more important is it that it be stopped if it is breaking down Charter protections.

What I find most interesting is that the OSC is seeking the June 27 Addendum be tossed out, but if that doesn't happen, that paragraphs 3 and 6 be struck. That paragraph 6 is targeted in very interesting. It suggests what the OSC is most worried about:

[6] My conclusion previously was to uphold that the validity of the OSC process as set out in the statute at this time. I have not changed from the view, despite the submission of counsel for the OSC that he only basis for this court to intervene would require a finding of a Charter breach. In my view, it is appropriate for the court to provide ongoing supervision where an investigation, although in compliance with the Securities Act, runs a risk of interference with Charter protected values even though no direct breach has been established.

The police function under this oversight all the time. But the OSC is fighting it. Whatever else happens to Dunn, the OSC does not want it established in law that the courts have a role to play in protecting Charter rights with regards to the actions of the OSC, and especially not in a monitoring role.

That is why this case is so interesting. It establishes so many elements of the concerns I have had with the OSC:

• It combines all the powers that normally are carefully compartmentalized in the legislative, executive, and judicial branches.
• It establishes rules and enters into agreements without due legislative process that would include evaluation of the suggested changes in terms of Charter compliance under the guidance of the Attorney General.
• It is very territorial, even to the point of telling the courts to stay out its business.
• It sees itself as guardians of the public good, and so beyond reproach or criticism.

As far as the OSC is concerned, oversight of the OSC by the OSC is oversight enough.

So where do we go from here? Obviously, the Dunn case is ongoing, but it looks like Dunn has made some headway, something Allan Rock and the OSC is working very hard to roll back. But coming soon is the next Ontario budget to be brought down by Dalton McGuinty's Liberal government, and there was a promise to expand the power of the OSC through the Canadian Public Accountability Board:

The government is working with other jurisdictions and the Canadian Public Accountability Board (CPAB) to maintain an effective and well-functioning oversight system for audit firms, which supports public confidence in the integrity of financial reporting by public companies.

In Quebec, we saw what this entailed:

The bill authorizes members of the Order to provide information relating to their professional activities or their clients, to the extent specified in the agreement.

Accountants would provide information to the provincial regulator about their clients, not just the audits themselves. I wrote about this issue already. But can the Ontario government proceed with this sort of expansion of OSC power, giving the OSC a view into another otherwise private domain, with the Dunn case proceeding the way it is?

It'll be interesting if the Ontario government includes legislation along the lines of Quebec's Bill 7 in the budget. At the very least, I would have expected the Attorney General, Michael Bryant, to warn the drafters of the budget that the entire issue of OSC powers and oversight is being examined in detail by the courts. I guess we'll see soon.