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Securities - Investigation. Furtado v. Underwriter
In Furtado v. Underwriter (Ont CA, 2024) the Ontario Court of Appeal dismisses an insurer's appeal, here "denying him coverage, or relief from forfeiture under his Directors and Officers insurance policy".
Here the court illustrates a December 2019 change in securities investigation law [Securities Act, s.16(1)], and related OSC procedures in this case:[3] Mr. Furtado appeals from a decision of the application judge, denying him coverage, or relief from forfeiture under his Directors and Officers insurance policy (the “Policy”). The policy period was from October 6, 2018, to October 25, 2019.
[4] In March 2019, during the term of the Policy, the Ontario Securities Commission (“OSC”) made an inquiry regarding certain of the business activities of Go-To Developments Holdings Inc. (“Go-To”) and sought production of information and documents.
[5] In May 2019, Mr. Furtado was summonsed to an examination at the OSC offices and told to produce documents pursuant to s. 11 of the Securities Act, R.S.O. 1990, c. S. 5 (the “Act”). In the May 2019 letter, he was told that s. 16(1) of the Act prohibited him from disclosing the nature or content of the order to anyone except his counsel.
[6] The Policy provided that Mr. Furtado was not required to notify the insurer of an investigation while he was legally prevented from doing so (the “Suspension Clause”). As such, Mr. Furtado did not advise the Insurer of the OSC investigation at that time.
[7] The law changed in December 2019[1] to permit him to advise the Insurer of the investigation, but again, he did not advise of the investigation at that time.
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II. The OSC Investigation
[23] On March 29, 2019, Mr. Furtado received an inquiry from the OSC about certain of Go-To’s business activities. In May 2019, he was summonsed to an examination at the OSC’s offices and told to produce documents pursuant to s. 11 of the Act, as the OSC had opened an investigation. The parties agree that this was a circumstance that might reasonably be expected by Mr. Furtado to give rise to a claim.
[24] The May 2019 correspondence also brought to Mr. Furtado’s counsel’s attention s. 16(1) of the Act, which prohibited a person subject to an order under s.11 from disclosing the nature or content of the order to anyone except his or her counsel, except in accordance with s. 17, which is discussed below.
[25] On the advice of counsel not to disclose the summons to any third party, Mr. Furtado did not disclose the summons to the Insurer.
III. Changes to the Act to Enable Notification to the Insurer
[26] On December 10, 2019, s. 16(1.1) of the Act was enacted to permit disclosure to insurance companies and insurance brokers if advance notice of the intended disclosure was given to the OSC along with prescribed information regarding the insurer/broker and a written acknowledgment was obtained from the insurer/broker that it was advised that it was bound by the Act’s confidentiality requirements.
[27] The full text of ss. 16(1) and (1.1) reads as follows:Non-disclosure
16 (1) Except in accordance with subsection (1.1) or section 17, no person or company shall disclose at any time,
(a) the nature or content of an order under section 11 or 12; or
(b) the name of any person examined or sought to be examined under section 13, any testimony given under section 13, any information obtained under section 13, the nature or content of any questions asked under section 13, the nature or content of any demands for the production of any document or other thing under section 13, or the fact that any document or other thing was produced under section 13.
Exceptions
(1.1) A disclosure by a person or company is permitted if,
(a) the disclosure is to the person’s or company’s counsel; or
(b) the disclosure is to the person’s or company’s insurer or insurance broker, and the person or company, or his, her or its counsel,
(i) gives written notice of the intended disclosure to a person appointed by the order under section 11 at least 10 days before the date of the intended disclosure,
(ii) includes in that written notice the name and head office address of the insurer or insurance broker and the name of the individual acting on behalf of the insurer or insurance broker to whom the disclosure is intended to be made, as applicable, and
(iii) on making the disclosure, advises the insurer or insurance broker that the insurer or insurance broker is bound by the confidentiality requirements in subsection (2) and obtains a written acknowledgement from the insurer or insurance broker of this advice. [Emphasis added.] [28] Section 17 of the Act, which was in force when the investigation started in 2019, provides a mechanism that allowed a person to seek an order from the Capital Markets Tribunal authorizing the disclosure to any person or company of, among other things, the nature or content of an order under ss. 11 or 12.
IV. Notice of the Change in Legislation Enabling Disclosure to the Insurer
[29] On December 16, 2020, a summons was delivered to Mr. Furtado, care of counsel, which cited s. 16(1.1) without explanation. Three more summonses were delivered on February 16, March 31, and June 7, 2021, all of which, as stated by the application judge, “on their face, drew [Mr. Furtado’s] attention to the change in legislation” including his ability to disclose the investigation to the Insurer. These three summonses stated that: “We wish to bring to your attention subsections 16(1) and 16(1.1) of the Act.” They further stated that “[t]he person or company identified in subsection 16(1) of the Act may disclose the information associated with this matter to the [person’s] legal counsel, insurer or insurance broker, as applicable, and only in accordance with subsection 16(1.1) of the Act.”
V. Proceedings Commenced Against Mr. Furtado
[30] On December 6, 2021, the OSC froze all funds in Mr. Furtado’s primary investment account, and commenced a receivership application against Go-To, Mr. Furtado, and other affiliated Go-To entities, claiming they had breached the Act (the “Receivership Proceeding”). The receivership application was granted.
[31] On March 30, 2022, the OSC commenced an enforcement proceeding against Mr. Furtado and various Go-To entities for alleged breaches of securities laws (the “Enforcement Proceeding”).
[32] The parties agree that the Receivership Proceeding and the Enforcement Proceeding were “Claims” within the meaning of the Policy.
VI. Timing of Notification to the Insurer
[33] On January 5, 2022, Go-To’s insurance broker emailed Go-To’s head of accounting and operations about the proceedings. Go-To’s counsel began the process under s. 16(1.1) of the Act by which a person subject to a s. 11 order can notify their insurer. Steps were completed in February 2022 by which time the Insurer’s agent was notified of a claim. On or around March 31, 2022, counsel reported the Enforcement Proceeding.
[34] On September 22, 2022, the Insurer denied coverage. The Insurer summarized its position as follows:Underwriters acknowledge that [Go-To Development Holdings Inc. (“GTDH”)] and Go-To Spadina Adelaide Square Inc. (“GT Adelaide Inc.”) are “Insured Entities”, and that Mr. Furtado is an “Insured Individual” with respect to his conduct as a director or officer of those entities. However, Furtado Holdings Inc. (“FHI”) and Go-To Spadina Adelaide Square LLP (“GT Adelaide LP”) are not “Insured Entities”, and Mr. Furtado is not an “Insured Individual” with respect to his conduct as a director or officer of those entities.
The requests and Summonses issued by the Ontario Securities Commission between March 2019 and June 2021 do not constitute “Claims” under the Policies because they do not allege and are not related to any alleged “Wrongful Act”.
The OSC’s application to appoint a receiver-manager over various Insureds in December 2021 constitutes a “Claim”, as does the OSC’s issuance in March 2022 of a Statement of Allegations. However, neither of those “Claims” were first made during any of the Policies’ periods, and are thus not covered under the Policies.
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Finally, if any of the OSC’s actions were held to constitute a “Claim”, it is Underwriters’ position that the Insureds failed to satisfy a condition to Underwriters’ liability, i.e., to notify Underwriters as soon as practicable about such “Claims”. Accordingly, no such “Claims” would be covered under the Policies. [Emphasis in original.] [35] Mr. Furtado commenced an application in the Superior Court seeking relief from forfeiture with respect to his “imperfect compliance” with the Policy, and indemnification for his defence costs and loss in connection with the Enforcement Proceedings and the Receivership Proceedings.
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