There can't be a more common practice in the business world than seeking broad sign-off on a crucial decision to ensure, among other things, that there are lots of places to point fingers if things go wrong.
But an Ontario Divisional Court decision released Wednesday delivers a blow to butt-coverers everywhere, especially if they happen to be managing investment funds or otherwise working in jobs where they have a fiduciary duty to act in the best interests of others.
In essence, the court affirmed that Bay Street fund manager Wayne Pushka could not justify his conflict of interest in a lucrative deal by arguing the transaction had been approved by lawyers and his board of directors. The court said no amount of approval could overcome the self-dealing and harm to investors. In other words, blatant conflicts of interest cannot be fixed by getting others to approve them, no matter who gives the stamp of approval.
The concept isn't new, but it is spelled out unusually bluntly in an appeal decision of an Ontario Securities Commission case involving Mr. Pushka, who was found to have breached his duty to investors in a 2009 deal to buy management contracts for 13 Citadel investment funds with more than $1-billion in assets under management.
The OSC ruled in 2014 that Mr. Pushka, CEO of investment fund management firm Crown Hill Capital Corp., acted in an "appalling" fashion when it borrowed $28-million from one of the investment funds it managed – Crown Hill Fund – to finance Crown Hill Capital's purchase of a new contract to manage the Citadel funds. The investment represented 60 per cent of Crown Hill Fund's assets under management, and was completed even before Crown Hill sent a circular to unitholders about a vote to approve the transaction.
Mr. Pushka appealed the OSC decision, arguing he had the right to rely on approvals by his board of directors, the fund's independent review committee and two outside law firms. He argued the deal was a matter of business judgment, so he should be protected by the "business judgment rule," which is a principle that prevents a court from second-guessing a board's reasonable business decisions if they turn out to have been a bad idea in hindsight.
Justice David Corbett of the Ontario Divisional Court rejected the arguments entirely, however, saying "the breach of fiduciary duty was overwhelming."
Justice Corbett said the transaction was "self-dealing on a grand scale," noting Mr. Pushka and his company effectively used an investment fund they were managing "as a bank to finance their own purchase of management agreements." The business judgment for buying the contracts was irrelevant, he said. The issue was the conflict of interest.
He agreed with the OSC's conclusion that Mr. Pushka and Crown Hill Capital "could not breach their duties of good faith and loyalty by acting in conflict of interest, even if independent financial professionals told them otherwise."
The OSC had noted in its decision that a reliance on legal advice is not entirely irrelevant. It could be a mitigating factor in setting sanctions in a case, and in determining the degree to which conduct is "contrary to the public interest" under securities rules.
In this case, however, the regulator found that Mr. Pushka gave inadequate information to directors and the fund's investor review committee (IRC) about the conflicts and the nature of the legal advice he had sought, even misleading them on some points. Justice Corbett's appeal decision put it more bluntly, saying he "manipulated the board and the IRC around the critical issues respecting the conflicts of interest."
In the end, Mr. Pushka was ordered to pay $18.2-million to "disgorge" part of the gains he earned, as well as a $1.9-million administrative penalty, for total penalties of $20.1-million.
Crown Hill Capital has gotten out of the business of managing investment funds. Mr. Pushka has surrendered his registration and is not working in the industry.
Business executives could be forgiven for protesting if the ruling meant they could face penalties for following well-intentioned legal advice about complex matters involving conflicts of interest. The Crown Hill case, however, does not test that scenario because the OSC found Mr. Pushka didn't inform the board or lawyers about key relevant details.
History will never know whether Mr. Pushka would have received the same approvals if the full nature of the deal had been laid out squarely for lawyers and directors to consider. But if a similar situation comes before another board or lawyers in the future, the ruling reinforces the established principle that the advice should be a resounding "no" when it involves a blatant conflict of interest by a fund manager with a fiduciary duty to others.
And if a board somehow still approves it? The executive has no legal leg to stand on, however many approvals he has tucked in his back pocket.