Ontario Court of Appeal upholds enforcement of Canadian
Plaintiff’s request for Letters Rogatory in U.S. securities fraud class action
which orders production of voluminous accounting documents by Canadian branch
of accounting firm
The Trustees of the Ontario Service Employees Union Pension
Trust Fund (OPT) brought a securities fraud class action against Nortel Networks
Corp, a client of Deloitte & Touche, LLP, in a New York federal court. OPT
alleged that, between October 2000 and February 2001, Nortel was making false
or misleading public statements about its financial condition.
According to OPT, Nortel used five improper financial
reporting and accounting practices to make the false or misleading statements.
These allegedly consisted of improper vendor financing, improper inventory
valuation, improper revenue recognition, failure to account for uncollectible
receivables, and goodwill impairment. Later on, when Nortel did own up to its
less than rosy financial situation, the value of its shares dropped, causing
major losses to OPT.
One of Nortel’s defenses was that it had depended on the
guidance of its outside advisors in putting together its financial statements.
Deloitte had audited Nortel’s year-end and quarterly financial statements for
2000 and later years. In December 2003, Nortel issued revised statements for
2000 through 2003.
OPT wanted to examine the documents underlying the
restatements and audits. Since Deloitte of the U.S. failed to reply to a
subpoena for that purpose, OPT then obtained international Letters of Request
from the U.S. district court in September 2004 directed at Deloitte of Canada.
Deloitte first objected to certain provisions of the Letters
that required Messrs. Clark and Wayland, two Deloitte representatives, to be
deposed. Mr. Clark was the lead audit partner with Deloitte and Mr. Wayland was
the audit manager of the Nortel account. It also resisted the production of
working papers dealing with Nortel’s financial statements and with whether or
not certain transactions took place based on Nortel’s 2003 restatements.
Deloitte also contested the production of all work papers
inventories. According to the deposition of a Deloitte representative, the
requested documents could well amount to more than a million pages demanding a
minimum of 1500 person-hours to collect and examine them at different
locations. Deloitte also claimed that most of the documents sought were not
relevant either as to timeliness or as to subject matter. OPT offered to donate
$ 100,000 to defray some of Deloitte’s costs of production.
The application judge exercised her discretion to enforce
the letters rogatory issued by the U.S. District Court. Deloitte appealed. The
Ontario Court of Appeal, however, dismisses Deloitte’s appeal in an opinion
handed down on June 21. [N.B. Nortel took no position at the application to
enforce the letters rogatory and takes no position on this appeal.]
OPT argued that the evidence sought by it through the
enforcement of the letters rogatory is of particular relevance to the U.S.
Class Action, that the evidence is not otherwise obtainable, does not violate
principles of Canadian public policy, was defined with reasonable
particularity, and to turn over the documents would not unduly burden Deloitte.
The Appellate Court agrees. “Here, ... the allegations of
false and misleading statements pertain directly to Nortel’s financial
statements, and its restatements. The complaint alleges that Nortel issued
false and misleading public statements that overstated its financial condition
and performance during the class period, and further that the statements
included false and misleading information with respect to the nature and extent
of the actual sales made by Nortel—all resulting in the artificial inflation of
Nortel’s stock price.”
“Thus, allegations relating to improper financial reporting
and accounting practices—as encapsulated in the five complaints referred to
above—are at the heart of the U.S. Class Action. Deloitte prepared both the
financial statements and the restatements that are in issue and was directly
involved in the restatement process. Moreover, Nortel specifically defends on
the grounds that it relied on the advice of its advisors, thus putting the
contents of Deloitte’s working papers and other documentation in issue, as the
application judge noted.” [¶ 20].
“I do not accept the appellants’ criticism that the application
judge accorded too much deference to the U.S. court’s order. She correctly
observed that she was not bound by the conclusions of the requesting judge, but
that ‘his observations and conclusions are entitled to deference and respect.’
I agree with her view that an Ontario court should ‘give full faith and credit’
to the orders and judgments of a U.S. court unless it is of the view that to do
so would be contrary to the interests of justice or would infringe Canadian
sovereignty’ [Cites]. At the end of the day, she arrived at her own findings
and conclusions, as summarized above.”
“The unseverable mix of relevant and irrelevant documents
amongst the Requested Documents, together with the sheer volume of the
production sought, is admittedly troubling in this case .... However, Deloitte
is a major financial audit and consulting firm, worldwide. The application
judge noted that it is obliged by professional standards to compile and secure
its working papers in a manner in which they can be made available to
regulatory entities and successor auditors.”
“It should follow that the documentation is not impossible
to prepare for production. Requests for the production of voluminous
documentation, in electronic and hard copy form, are hardly unknown in today’s
world of complex general and class action litigation. In that sense, there is a
certain ‘cost of doing business’ element in the call for Deloitte to respond to
the letters rogatory—an offset to the undoubtedly considerable revenues that
the appellant earns from providing high level and complex auditing services to
companies such as Nortel.” [¶¶ 22-23]
“The application judge was satisfied that the Requested
Documents had been identified by subject matter and time frame, and that this
was sufficiently specific in the circumstances. She was also satisfied that the
requests for documents and for the testimony of Messrs. Clark and Wayland were
not unduly burdensome or prejudicial to Deloitte, particularly in light of the
undertakings given by OPT and the conditions that the application judge
intended to impose.”
“Applying the specific criteria set out in [prior
precedent], she concluded [that]: ‘I am of the view that justice requires the
production of the Specified Documents and Specified Evidence. I am satisfied
that an order enforcing the letters rogatory in the form of Magistrate Judge
Dolinger’s order of September 21, 2004 is in the interests of justice.”
“The evidence is indeed relevant, crucial and otherwise
unavailable. Its production in the manner ordered will not be unduly burdensome
to Deloittes (sic). Given the undertakings of the Applicants and the
pre-existing confidentiality agreements and protective orders, Deloittes’
interests will not be unduly prejudiced in a manner that would infringe
Canadian sovereignty.”
“This was a discretionary decision and is entitled to
considerable deference. I see no palpable or overriding error on the part of
the application judge in the findings she made and no error in principle
justifying interference on the part of this court.” [¶¶ 25-26].
Citation: Ontario Public Service Employees Union
Pension Trust Fund (Trustees of) v. Clark [2006] O. J. No. 2475; 2006 ON. C.
LEXIS 2387 (Ont. Ct. App. 2006). [Editors’ Note: As of January 1, 2005, Canada
was not listed as one of the 40 parties to the Hague Convention on the Taking
of Evidence Abroad in Civil or Commercial Matters, 23 U.S.T. 2555; T.I.A.S.
7444; 847 U.N.T.S. 231 (in force as of October 7, 1972)].
**** Mr. Richard Ehrlich is a specialist in Corporate, Estate and Personal Financial Planning in Florida. In the course of his career, he has prepared hundreds of estate plans and helped hundreds of small businesses navigate the various issues involving insurance, retirement and employee retention. He has helped numerous families deal with the difficulties of taking care of elderly relatives and assisted with all of their long-term planning and long-term care needs. Finally, he has helped investors with their losses in unsuitable investments. LinkedIn Profile: https://www.linkedin.com/in/richard-ehrlich-777b513/; Attorney Profile: http://www.eldercounsel.com/profile/richard-ehrlich-ehrlich-law-center-pa/; Attorney Profile: https://solomonlawguild.com/richard-ehrlich%2C-esq; Attorney News: https://attorneygazette.com/richard-ehrlich%2C-esq#c35a1098-f039-43ab-b0dc-06cff6dabf61
