Breaking News - In the case of Poonian v. The BC Securities Commission;
The following is a copy of a recent BC Supreme Court decision against the BCSC in the case of Poonian v. BCSC. The BCSC will have thirty days from time of ruling to respond and appeal to the Supreme Court of Canada should it choose.
This is the same case in which the BCSC withheld 700 pieces of evidence from the accused in order to attempt to make their case. The BCSC even refused orders from the Office of Information and Privacy Commissioner to release said documents.
See Office of Info orders below,
BCSC Withholds Evidence
This case is related to another case we reported on which the BCSC has tried to scrub from BC Supreme Court record, see link here for details
The Missing File - Case #43449
We will expand on this case further in due time for now we are simply posting the ruling by the BC Supreme Court.
Suffice to say the BCSC cannot simply make blanket bans and fines in regards to breaches of Section one
***************************
COURT
OF APPEAL FOR BRITISH COLUMBIA
Citation:
|
Poonian v. British
Columbia Securities Commission,
|
|
2017 BCCA 207
|
Date:
20170531
Docket:
CA42714; CA42715; CA42718
Docket:
CA42714
Between:
Thalbinder
Singh Poonian and Shailu Sharon Poonian
Appellants
And
British
Columbia Securities Commission and the
Executive Director of the
British Columbia Securities Commission
Respondents
-
and -
Docket:
CA42715
Between:
Manjit
Sihota and Perminder Sihota
Appellants
And
British
Columbia Securities Commission and the
Executive Director of the
British Columbia Securities Commission
Respondents
-
and -
Docket:
CA42718
Between:
Michael
Patrick Lathigee and Earle Douglas Pasquill
Appellants
And
British
Columbia Securities Commission and the
Executive
Director of the British Columbia Securities Commission
Respondents
Corrected
Judgment: The text of the judgment was corrected at
paragraphs 164
and 167 on June 1, 2017.
Before:
|
The
Honourable Madam Justice Saunders
The
Honourable Madam Justice A. MacKenzie
The Honourable
Mr. Justice Fitch
|
On
appeal from: Orders of the British Columbia Securities
Commission
dated March 13, 2015 (Re
Poonian,
2015 BCSECCOM 96) and
March 16, 2015 (Re
Lathigee, 2015
BCSECCOM 78)
Counsel for the
Appellants (CA42714):
|
J. Narwal
and M. Magaril
|
Counsel for the
Appellants (CA42715):
|
A. C.
Luchenko
|
Counsel for the
Appellants (CA42718):
|
O. Ahmed
|
Counsel for the
Respondent,
the Executive Director of the
British
Columbia Securities Commission:
|
L. T. Doust,
Q.C. and D. A. Hainey
|
No one appearing for the
Respondent, the British Columbia Securities Commission
|
|
Place and Date of
Hearing:
|
Vancouver,
British Columbia
March 29 and
30, 2017
|
Place and Date of
Judgment:
|
Vancouver,
British Columbia
May 31, 2017
|
Written Reasons by:
|
The Honourable Madam
Justice MacKenzie
|
Concurred in by:
|
|
The
Honourable Madam Justice Saunders
The Honourable Mr.
Justice Fitch
|
Summary:
The
Commission found the appellants contravened s. 57 of the Securities
Act, and pursuant to s. 161(1)(g) of that Act, made joint and several
orders to disgorge. The appellants appeal from the s. 161(1)(g)
orders on these grounds: (1) the statutory language does not permit
orders for joint and several liability; (2) the Commission had not
established each of the appellants obtained an amount subject to
disgorgement; and alternatively (3) the orders were unreasonable and
punitive. The Poonians further contend that certain amounts should be
deducted from any amount they are ordered to disgorge. HELD: the
Lathigee appeal (CA42718) is dismissed; the Poonian (CA42714) and
Sihota (CA42715) appeals are allowed and the matter remitted to the
Commission. The statutory language only permits s. 161(1)(g) orders
where the particular wrongdoer has obtained an amount, or avoided a
payment or loss, directly or indirectly, as a result of that
wrongdoer’s contravention. A wrongdoer may be found to have
obtained an amount “indirectly” if he had control and direction
over the person(s) with whom he is held jointly and severally liable.
Further, the “amount obtained” does not contemplate deductions or
import a profit element. The joint and several disgorgement orders
imposed upon Lathigee and Pasquill were proper as the Commission
found they had control and direction over the corporate entities that
obtained the amount ordered disgorged. The Commission made no finding
as to what amount each of the Poonians and Sihotas obtained, directly
or indirectly. The s. 161(1)(g) orders imposed against them are set
aside, and the matter is remitted to the Commission to make the
necessary factual findings to determine whether a s. 161(1)(g) order
should be made against each of them.
.Table
of Contents
|
Paragraph
|
INTRODUCTION........................................................................
|
[1]
|
BACKGROUND
FACTS..............................................................
|
[7]
|
|
|
[8]
|
|
|
[19]
|
ISSUES.....................................................................................
|
[26]
|
STANDARD
OF
REVIEW............................................................
|
[30]
|
INTERPRETATION
OF S. 161(1)(G)...........................................
|
[54]
|
Guiding
Principles....................................................................................
|
[55]
|
|
|
[57]
|
PARTIES’
POSITIONS...............................................................
|
[65]
|
DISCUSSION.............................................................................
|
[69]
|
|
|
[70]
|
The
Statutory
Text...................................................................................
|
[83]
|
Profit
................................................................................................
|
[84]
|
“Amount
obtained”...................................................................................
|
[94]
|
|
|
[116]
|
|
|
[130]
|
|
|
[139]
|
Summary.................................................................................................
|
[143]
|
APPLICATION...........................................................................
|
[144]
|
Poonians/Sihotas.....................................................................................
|
[146]
|
Lathigee...................................................................................................
|
[154]
|
DISPOSITION............................................................................
|
[163]
|
Reasons
for Judgment of the Honourable Madam Justice MacKenzie:
[1] Before
this Court are three appeals from orders of the British Columbia
Securities Commission (the “Commission”) made pursuant to
s. 161(1)(g) of the Securities
Act,
R.S.B.C. 1996, c. 418 (the “Act”),
commonly referred to as disgorgement orders. The central issue on
appeal is the interpretation of s. 161(1)(g), which provides:
161. (1)
If the commission or the executive director considers it to be in the
public interest, the commission or the executive director, after a
hearing, may order one or more of the following:
…
(g)
if a person has not complied with this Act, the regulations or a
decision of the commission or the executive director, that the person
pay to the commission any amount obtained, or payment or loss
avoided, directly or indirectly, as a result of the failure to comply
or the contravention;
[2] Two
of these appeals, Poonian (CA42714)
and Sihota (CA42715),
arise from the same facts. The Commission found the Poonians and
Sihotas contravened s. 57(a) of theAct,
commonly referred to as the market manipulation provision. The third
appeal, Lathigee (CA42718),
arises from different facts. There, the Commission found Messrs.
Lathigee and Pasquill committed fraud, contravening s. 57(b) of
the Act.
Section 57 provides:
57
A person must not, directly or indirectly, engage in or participate
in conduct relating to securities or exchange contracts if the person
knows, or reasonably should know, that the conduct
(a)
results in or contributes to a misleading appearance of trading
activity in, or an artificial price for, a security or exchange
contract, or
(b)
perpetrates a fraud on any person.
[3] Liability
is not in dispute on appeal.
[4] The
Commission ordered, inter
alia,
the Poonians and Sihotas to disgorge, pursuant to s. 161(1)(g),
$7,332,936 on a joint and several basis: Re
Poonian,
2015 BCSECCOM 96 [“Poonian
Sanctions”].
Similarly, the Commission ordered Lathigee and Pasquill to disgorge
$21.7 million jointly and severally with certain other corporate
entities controlled by them and involved in the fraud: Re
Lathigee,
2015 BCSECCOM 78 [“Lathigee
Sanctions”].
[5] Pursuant
to s. 167(1) of the Act,
the appellants sought leave to appeal the respective orders of the
Commission. Madam Justice Fenlon only granted leave to appeal the
s. 161(1)(g) orders.
[6] All
three appeals were heard together and concern principally the
interpretation of s. 161(1)(g) of the Act,
and fundamentally whether the Commission may make joint and several
orders pursuant to that subsection.
[7] In
that the liability findings are not in dispute, I will only outline
the salient facts. The details of the transactions and the other
evidence before the Commission are provided in the liability
decisions: Re
Poonian,
2014 BCSECCOM 318 [“Poonian
Liability”];
and Re
Lathigee,
2014 BCSECCOM 264 [“Lathigee
Liability”].
[8] The
Poonians and Sihotas were involved in the market manipulation of the
shares of a publicly traded corporation, OSE Corp. (“OSE”). The
Poonians and Sihotas, with a number of acquaintances and relatives
(the “Secondary Participants”) and a friend, Mr. Leyk,
orchestrated, first, the acquisition of a majority position (88%) in
OSE (primarily through two private placements in September and
November 2007), and secondly, an increase in OSE’s share price by
trading mostly between the Poonians’, the Sihotas’, and the
Secondary Participants’ accounts. OSE’s share price increased
from $0.29 in November 2007 to $2.00 at the end of January 2008.
Nothing else occurred around that time to explain the price
increase.
[9] The
Phoenix Group is a group of individuals and entities primarily
engaged in debt management services helping debtors – often
referred by collection agencies or creditors – access funds in
their locked-in RRSPs and retirement accounts. Generally, the Phoenix
Group advised and facilitated these unsophisticated individuals in
unlocking their funds and using them to invest in higher-return
products. The Phoenix Group recommended OSE shares, and earned
commissions from the Poonians and Sihotas for these sales.
Essentially, the Phoenix Group facilitated the appellants’
offloading of these shares at inflated prices to unsophisticated
individuals with financial problems.
[10] OSE’s
share price continued to close around $2.00 between February and
September 2008; from October to December 2008 the share price
declined to $1.50; the share price then declined steadily to close at
$0.08 on March 31, 2009. Phoenix clients suffered an estimated total
book loss of around $7.1 million.
[11] Based
on trading records over the relevant period of September 10, 2007 to
March 31, 2009, the brokerage accounts of the Poonians, the Sihotas,
Mr. Leyk and the Secondary Participants had aggregate net
trading gains of $7,332,936.
[12] The
Commission made findings on the extent of the involvement of each of
the Poonians and Sihotas (Poonian
Liability at
paras. 149–162).
[13] As
to Mr. Poonian, the Commission found he was the mastermind. He
arranged the private placements to obtain control of a majority of
OSE’s shares, funded those purchases through various accounts,
traded those shares in various accounts, and entered agreements with
Phoenix Group members to pay them commissions for inducing Phoenix
clients to buy OSE shares.
[14] As
to Ms. Poonian, the Commission found she was actively and
extensively involved in many aspects of the market manipulation. She
acquired OSE shares, sold OSE shares to Phoenix clients, made and
received payments to other participants in the scheme, and paid
commissions to the Phoenix Group.
[15] Regarding
both Sihotas, the Commission found they funded payments to Secondary
Participants’ accounts, made and received payments to other
participants, and indirectly paid commissions to the Phoenix Group.
[16] As
to Mr. Sihota only,
the Commission found, as an officer of OSE he signed treasury orders
to issue shares in the two private placements, he received OSE
shares, traded OSE shares, received a transfer of OSE shares from a
Secondary Participant, and received cheques from the Poonians and
Mr. Leyk’s company.
[17] Respecting
Ms. Sihota only, the Commission found she received shares from
the second private placement, acquired additional OSE shares by
exercising warrants from the private placements, received cheques
from Ms. Poonian, and allowed OSE shares to be bought and sold
in her accounts as a nominee for Mr. Poonian.
[18] The
Commission considered Mr. Poonian’s conduct to be the most
egregious, and Ms. Poonian’s and Mr. Sihota’s conduct
to be the next most serious, essential to the scheme. It found
Ms. Sihota to be the “least involved directly” in the market
manipulation, but noted her effort to “cover up for the other
respondents” as an aggravating factor.
[19] Lathigee
and Pasquill jointly directed a group of companies called the
“Freedom Investment Club” (the “FIC Group”) which purported
to provide members a chance to learn and develop investment skills
while presenting them with the opportunity to participate in
investments offered by the FIC Group.
[20] The
FIC Group’s primary business was real estate development, mostly in
Alberta, of which the largest project was Genesis on the Lakes, a
residential development (“Genesis”). In May 2007, TD Bank
provided a $22.1 million credit facility to FIC Group entities for
Genesis. As part of the security for the loan, TD required, among
other things, that it be assigned an investment portfolio held by
0760838 BC Ltd. (“076”), an FIC Group company. The market value
of the portfolio was to be maintained at a minimum value of $9
million for the life of the Genesis project.
[21] Genesis
faced difficulties, including $10 million in cost overruns. In
February 2008, contractors had filed liens against the development,
violating a term of the TD loan prohibiting subsequent encumbrances.
By early March 2008, 076 also had a $2.2 million tax bill due. The
market value of the 076 portfolio fell well below $9 million – by
the end of March it was at $5.9 million, at the end of April its
value was $7.9 million, and by the end of May 2008, it fell to only
$4.9 million. The Commission found Lathigee and Pasquill knew of
the breaches of the terms of the TD credit facility, they knew that
FIC would be “doomed” if TD called its loan, and they knew that
it was a real possibility that could happen.
[22] Email
communications and meeting minutes indicated the FIC Group faced
severe cash flow problems. From February 1 through August 21, 2008,
the FIC Group, through three of its investment companies, proceeded
to raise $21.7 million.
[23] On
March 7, 2008, Lathigee held a conference call and webcast, primarily
with FIC members, to promote the distribution of promissory notes to
investors in FIC Real Estate Projects Ltd. (“FIC Projects”), an
FIC Group company which invested in Alberta real estate, and the
issuance of shares in WBIC Canada Ltd. (“WBIC”). From the
issuance of promissory notes in March, April and July 2008, $9.8
million was raised. An additional $2 million was raised in April and
May 2008 through the issuance of the WBIC shares. The Commission
found that what Lathigee said in the conference call was untrue and
grossly misleading, and that he omitted any mention of the important
fact of FIC Group’s cash flow problems and financial condition.
This dishonesty and failure to disclose FIC Group’s financial
condition formed the basis for the first finding of fraud against
Lathigee and Pasquill.
[24] Another
FIC Group investment was FIC Foreclosure Fund Ltd. (“FIC
Foreclosure”), which was promoted as investing in foreclosures of
residential properties in the United States. In statements contained
in a subscription agreement, an offering memorandum, and in another
conference call in April 2008, Lathigee promoted his expertise and
reasons for investing in U.S. foreclosures through FIC Foreclosure.
From February through August 2008, FIC Foreclosure raised $9.9
million. However, instead of making investments in foreclosure
properties in the U.S., Lathigee and Pasquill used at least part of
these funds to meet their short-term cash needs by extending
unsecured loans to other FIC Group companies to pay liabilities that
included Genesis’s contractors and 076’s tax liability. This
misuse of funds formed the basis for the second finding of fraud
against them.
[25] The
Commission noted in Lathigee
Sanctions at
para. 8, “The magnitude of the fraud perpetrated in this case
is among the largest in British Columbia history.”
[26] The
appellants all advance the argument that s. 161(1)(g) does not
permit the Commission to make joint and several orders. The
appellants also argue s. 161(1)(g) requires the Commission to
establish that the person against whom the order is made in fact
obtained the amount ordered to be disgorged. Some of the appellants,
namely the Poonians, further submit that amounts related to trading
expenses and amounts paid to the Commission by the Secondary
Participants under a separate settlement order should be deducted
from the amount the Poonians are ordered to pay.
[27] Alternatively,
the appellants variously say the Commission’s orders were
unreasonable, punitive, clearly wrong, inequitable, unsupported by
the evidence, or otherwise inappropriate in the circumstances of
their cases. For example, the Sihotas argue there was no finding they
ever obtained any amount as a result of their failure to comply with
or contravention of the Act,
regulations or decision of the Commission. The Poonians contend they
received less than the ordered amount, if anything, and the
Commission failed to consider that a substantial sum was recovered
from other participants (primarily, members of the Phoenix Group).
Lathigee and Pasquill similarly argue they never received any of the
amounts ordered, save for a much smaller sum paid to them as salary.
[28] Common
to all three appeals are the threshold statutory interpretation
issues concerning joint and several disgorgement orders, who obtained
any amount, and whether deductions are allowed. There are also the
respective complaints about the particular orders based on the
circumstances of each appellant.
[29] Therefore,
I find it useful to reframe the issues as follows:
1.
Does s. 161(1)(g) of the Act permit
certain amounts to be deducted from the amount ordered to be
disgorged?
2.
Does s. 161(1)(g) require the “amount obtained” to be
obtained by the person against whom the order is made?
3.
Does s. 161(1)(g) permit joint and several orders, and if so,
under what circumstances?
4.
Were the orders made in these cases otherwise appropriate?
[30] The
parties agree there is a presumption that the reasonableness standard
applies where the issue concerns an administrative tribunal’s
interpretation of its home statute:Edmonton
(City) v. Edmonton East (Capilano) Shopping Centres Ltd., 2016
SCC 47 at
para. 22. The presumption of reasonableness may be rebutted if
the context indicates the Legislature intended correctness to
apply: Edmonton
(City) at
para. 32.
[31] The
appellants submit the presumption of reasonableness is rebutted here,
and the applicable standard of review is correctness. They rely
on Rogers
Communications Inc. v. Society of Composers, Authors and Music
Publishers of Canada,
2012 SCC 35, for the proposition that where the legislation provides
concurrent jurisdiction to both the tribunal and the court to
consider the same legal question at first instance, there is an
inference the legislative intent was not to recognize the tribunal’s
superior expertise in respect of that question.
[32] The
appellants point to s. 155.1(b) of the Act,
which provides:
155.1 If
the court finds that a person has committed an offence under section
155, the court may make an order that
…
(b)
the person pay to the commission any amount obtained, or payment or
loss avoided, directly or indirectly, as a result of the offence.
[33] The
appellants submit the language in s. 155.1(b) is analogous to
that in s. 161(1)(g). In essence, s. 155.1(b) is the “court
version” of a disgorgement order. The appellants contend it is
clear the Legislature conferred jurisdiction on both the court and
the Commission to make orders on the same terms. The congruent
language used in both sections, central to the question on this
appeal (“the person pay to the commission any amount obtained, or
payment or loss avoided, directly or indirectly, as a result of…”)
suggests the sections should be interpreted consistently. The
appellants also note a contravention of s. 57 of
the Act constitutes
an “offence” under s. 155 for the purposes of s. 155.1(b).
[34] The
Executive Director of the British Columbia Securities Commission
submits the standard of review is reasonableness and Rogers is
distinguishable. The Executive Director argues the issues raised by
s. 161(1)(g) are distinct from those under s. 155.1(b)
because an order may be made, in the opening language of s. 161(1),
“If the commission or the executive director considers
it to be in the public interest…”
For its part, s. 155.1 does not require the court to consider
the public interest. The Executive Director argues this signals a
different “statutory context”.
[35] The
Executive Director submits Rogers addressed
a specific situation unique to the Copyright Board’s structure.
Unlike the Copyright Board, the Commission is a “discrete and
special administrative regime”, charged under the Act to
protect the public interest in relation to investors and capital
markets. (See Rogers at
para. 15.)
[36] The
Executive Director relies on McLean
v. British Columbia (Securities Commission),
2013 SCC 67. The Executive Director submits
that Justice Moldaver, for a majority of the Court, confirmed that
the Commission has the discretion to resolve any statutory
uncertainty in s. 161(1)(g) by adopting “any interpretation
that the statutory language can reasonably bear” (McLean at
para. 40).
[37] I
cannot agree with the Executive Director’s characterization of the
reasoning in McLean. Moldaver
J., for the majority, rejected an argument, premised on Rogers,
that correctness applied to a review of the Commission’s
interpretation of s. 159 (which concerns limitation periods) as
applied to s. 161(6)(d) (which concerns proceedings against
persons who have entered settlement agreements) – s. 161(1)(g)
was not discussed. In McLean,
the interpretive exercise involved whether “the events” that
trigger the running of the limitation period in the context of
settlement agreements are (i) the underlying misconduct giving
rise to the settlement agreement, or (ii) the settlement
agreement itself (McLean at
para. 3). Moldaver J. distinguished Rogers:
[24]
This case is different. As Rothstein J. made clear in Rogers,
it was the fact that both the tribunal and the courts “may each
have [had] to consider the
same legal questionat
first instance” that “rebutt[ed] the presumption of
reasonableness review” (para. 15 [emphasis of Moldaver J.]).
Here, the
legal question is the interpretation of s. 159 as it applies to
s. 161(6)(d) — and it is solely the
Commission that is tasked with considering that matter in the first
instance. Accordingly, there is no possibility of conflicting
interpretations with respect to the question actually at issue.
The logic of Rogers is
thus inapplicable.
[Emphasis in bold
added.]
[38] In
my view, the situation in McLean is
distinguishable from the present one.
[39] The
Executive Director takes the emphasized statement in para. 24
of McLean to
say that here only the
Commission is tasked with interpreting the words in s. 161(1)(g).
While it is true s. 161(1)(g) only concerns the Commission, and
in the same way s. 155.1(b) only concerns the court, what is
also true is that virtually the same language – “may order …
the person pay to the commission any amount obtained, or payment or
loss avoided, directly or indirectly, as a result of” – appears
in both sections and are both intended to provide jurisdiction to
order certain persons to surrender ill-gotten amounts. The
Legislature expressly chose the same language to delineate the
contours of this type of order – whether made by the Commission or
the court – and the issue of what those contours are, as a matter
of statutory interpretation, would be before both forums as a matter
of first instance. Thus, it isnot solely
the Commission that is tasked with considering that legal
interpretive question in the first instance.
[40] To
be clear, the issue to be resolved on this appeal is not whether a
disgorgement order would be in the public interest, nor is the issue
whether there has been non-compliance with the Act.
Those requisite elements of a s. 161(1)(g) order are not before
this Court. The issue before this Court is: what does the statutory
language allow and require? Does it allow joint and several orders?
Does it require the Commission to establish that the person subject
to the order obtained the amount to be disgorged? These questions of
statutory interpretation are questions of law.
[41] In
other words, the identical interpretive issue arises whether the
appeal is, as here, from the Commission’s orders under
s. 161(1)(g), or from a court’s order under s. 155.1(b).
[42] As
noted above, the Executive Director submits the “statutory context”
of each of these provisions is different because of the public
interest requirement in s. 161, and says the tribunal and court
“cannot share concurrent jurisdiction over free-floating statutory
wording … extracted from various provisions and divorced from its
relevant statutory context.”
[43] With
respect, I cannot agree with the characterization of these words as
“free-floating”. In my view, it is no coincidence the Legislature
expressly used the same language in these two provisions, both of
which provide for a particular order that has the same purpose:
divesting a wrongdoer of ill-gotten amounts. While it is true the
condition precedent of “public interest” is not found in the
language of s. 155.1, and there are differences between what
constitutes an offence in s. 155.1 and what misconduct may give
rise to a s. 161(1)(g) order, those differences are not the
issue here. (I note that a breach of s. 57 is captured by both
s. 155.1 and s. 161(1)(g).) The question is not about
“when” such an order may be made, but about “what” that order
can contain. Different considerations inform the “when”,
but the same question of “what” would
concern both forums in respect of the same statutory language as a
matter of first instance.
[44] I
also note that exact language is used in only one other section of
the Act.
Apart from ss. 155.1(b) and 161(1)(g), it is also used in
relation to an order for compliance under s. 157(1)(b):
157 (1)
In addition to any other powers it may have, if the commission
considers that a person has contravened or is contravening a
provision of this Act or of the regulations, or has failed to comply
or is not complying with a decision, and the commission considers it
in the public interest to do so, the commission may apply to the
Supreme Courtfor
one or more of the following:
…
(b)
an order that the person pay to the commission any amount obtained,
or payment or loss avoided, directly or indirectly, as a result of
the failure to comply or the contravention;
[Emphasis added.]
[45] Section
157(1)(b) is another example of where the statutory language in
question would be squarely before the court as a matter of first
instance. The Supreme Court, on a s. 157(1)(b) application,
would be required to interpret that language and determine what it
may order. Indeed, the Legislature clearly contemplates
the Commission putting
that interpretive issue before the court for determination at first
instance. Further, the “contextual” prerequisite the Executive
Director relies on to differentiate s. 161(1)(g) from
s. 155.1(b) (public interest consideration) is also present
here.
[46] This
language does not appear anywhere else in the Act.
In all three instances where it appears, it confers on the court or
the Commission the power to do the same thing: order someone to pay
to the Commission ill-gotten amounts. In my view, it is clear the
Legislature intended the court to interpret this language as a matter
of first instance. It cannot be that, on an appeal to this Court, the
Supreme Court’s interpretation in making a s. 157(1)(b) order
is reviewed on a correctness standard while the Commission’s
interpretation of that same language in making a s. 161(1)(g)
order is reviewed on a reasonableness standard.
[47] Rothstein
J., for a majority of the Court in Rogers, articulates
the concern about inconsistency as follows:
[13]
… The court will examine the same legal issues the Board may be
required to address in carrying out its mandate. On appeal,
questions of law decided by the courts in these proceedings would be
reviewed for correctness: Housen
v. Nikolaisen, 2002
SCC 33, [2002] 2 S.C.R. 235, at para. 8.
[14]
It would be inconsistent for the court to review a legal question on
judicial review of a decision of the Board on a deferential standard
and decide exactly the same legal question de
novo if
it arose in an infringement action in the court at first instance.
It would be equally inconsistent if on appeal from a judicial review,
the appeal court were to approach a legal question decided by the
Board on a deferential standard, but adopt a correctness standard on
an appeal from a decision of a court at first instance on the same
legal question.
[48] The
same troubling prospect of inconsistency that concerned Rothstein J.
in Rogers would
arise here were this Court to review the Commission’s
interpretation on a standard of reasonableness. If the Commission
determined the language permitted a joint and several order, and this
Court were to review that interpretation on a reasonableness
standard, the result would not be reconcilable with a case where the
court interpreted the language in ss. 155.1(b) or 157(1)(b) as
not permitting joint and several orders, and this Court reviewed that
interpretation on the correctness standard. The same language in the
same statute used in provisions with the same purpose should be read
consistently. To this extent, the statutory context is not different
just because the body making the order is different, or where the
conditions precedent (the “when”) are arguably different.
[49] I
recognize the Commission’s important public interest mandate that
informs the Commission’s exercise of discretion to make an order
under s. 161(1), which provides a host of tools to the
Commission to use alone or in combination. I also acknowledge the
Commission’s superior expertise in determining what would be in the
public interest, including how the Act should
be interpreted to further those policy considerations: Re
Cartaway Resources Corp., 2004
SCC 26 at para. 46.
[50] I
also agree with the Executive Director that the Copyright Board is in
a unique situation distinct from the discrete and specialized nature
of the Commission. The Commission is often the preferable arbiter in
most issues concerning the Act,
including having the interpretive upper hand, given its specialized
expertise. The role of the court under the Act is
limited, reflecting the Legislature’s assignment of issues and
disputes in this specialized area to a specialized body. However, in
the very rare instances the Act grants
the court power to make certain orders, and the language defining the
scope of those orders is the same as the language defining the scope
of the same type of order the Commission may make, the statutory
interpretation exercise defining that scope must be done in a
consistent manner.
[51] Unlike
the provision and statutory language at issue in McLean, the
present question is one of those rare instances where the
Legislature, through its adoption of express language identical in
its material respects, grants both the Commission and the court the
ability at first instance to order a person to “pay to the
commission any amount obtained, or payment or loss avoided, directly
or indirectly, as a result of” a violation of s. 57 of
the Act.
The situation in Rogers arises.
Whether that language means such an order – by whichever body
making it – can be a joint and several order and whether it
requires establishing the person against whom the order is made
obtained the amount, are questions of law, reviewable on the
correctness standard.
[52] I
also recognize the fact this is a statutory appeal requiring leave
does not in itself lead to a correctness review: Edmonton
(City).
Instead, the exercise is to determine whether the Legislature
intended the standard of review to be correctness. For the reasons
explained, I conclude the Legislature did so intend.
[53] Therefore,
I agree with the appellants that Rogers is
determinative in this case, and the proper standard of review on the
statutory interpretation question is correctness.
Interpretation
of s. 161(1)(g)
[54] This
is a case of statutory interpretation. Therefore, I propose first to
review the guiding principles on statutory interpretation generally
and in the securities regulation context specifically. I will then
turn to the Commission’s case law on s. 161(1)(g).
[55] This
Court recently summarized the seminal principles in British
Columbia v. Philip Morris International, Inc.,
2017 BCCA 69:
[23]
… The correct approach to statutory interpretation is long settled.
It was recently expressed in B.C.
Freedom of Information and Privacy Association v. British Columbia
(Attorney General), 2017
SCC 6:
[21]
…This follows from the application of our long-accepted approach to
statutory interpretation, namely that “the words of an Act are
to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of
the Act, and the intention of Parliament”: Bell
ExpressVu Limited Partnership v. Rex,
2002 SCC 42, [2002] 2 S.C.R. 559, at para. 26, quoting both
E. A. Driedger, Construction
of Statutes (2nd
ed. 1983), at p. 87, and Rizzo
& Rizzo Shoes Ltd. (Re),
[1998] 1 S.C.R. 27, at para. 21.
[24]
In Canada
Trustco Mortgage Co. v. Canada, 2005
SCC 54, the Court said at para. 10:
[10]
…The interpretation of a statutory provision must be made according
to a textual, contextual and purposive analysis to find a meaning
that is harmonious with the Act as a whole. When the words of a
provision are precise and unequivocal, the ordinary meaning of the
words play a dominant role in the interpretive process. On the other
hand, where the words can support more than one reasonable meaning,
the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive
process may vary, but in all cases the court must seek to read the
provisions of an Act as a harmonious whole.
[56] Although
primarily concerned with the definition of “security” in the Act,
the Court’s comments in Pacific
Coast Coin Exchange v. Ontario Securities Commission,
[1978] 2 S.C.R. 112, on the remedial and protective nature of
securities legislation and the requirement for broad construction
sensitive to economic reality are instructive (at 126–27):
I have alluded to the policy of the
legislation. It is clearly the protection of the public as was said
by Hartt J. in Re Ontario
Securities Commission and Brigadoon Scotch Distributors (Canada)
Limited [[1970]
3 O.R. 714] at p. 717:
…the basic aim or
purpose of the Securities Act, 1966, … is the
protection of the investing public through full, true and plain
disclosure of all material facts relating to securities being issued.
* * *
Such remedial legislation must be construed
broadly, and it
must be read in the context of the economic realities to which it is
addressed. Substance, not form, is the governing factor.
As noted in Tcherepnin
v. Knight [389
U.S. 332 (1967)], at
p. 336:
…in searching for
the meaning and scope of the word ‘security’ in the Act, form
should be disregarded for substance and the emphasis should be on
economic reality.
[Emphasis added.]
The
Commission’s Jurisprudence on s. 161(1)(g)
[57] The
Commission has considered and made s. 161(1)(g) orders in many
cases: see e.g., Re
Streamline Properties Inc.,
2015 BCSECCOM 66; Re
HRG Healthcare Resource Group, 2016
BCSECCOM 5; Re
SPYru Inc.,
2015 BCSECCOM 452; Re
Michaels,
2014 BCSECCOM 457; Re
VerifySmart Corp., 2012
BCSECCOM 176; Re
Oriens Travel & Hotel Management Corp.,
2014 BCSECCOM 352.
[58] The
Commission has repeatedly held that s. 161(1)(g) permits joint
and several orders without the requirement of establishing the
particular wrongdoer was the one who obtained the amount.
In Michaels, a
unanimous panel of the Commission (including Vice Chair Cave)
reviewed past cases of the Commission and summarized the principles
as follows:
[42]
To summarize, these are the principles that are relevant under
section 161(1)(g):
a)
the focus of the sanction should be on compelling the respondent to
pay any amounts obtained from the contravention(s) of the Act;
b)
the sanction does not focus on compensation or restitution or act as
a punitive or deterrent measure over and above compelling the
respondent to pay any amounts obtained from the contravention(s) of
the Act;
c)
the section should be read broadly to achieve the purposes set out
above and should not be read narrowly to either limit orders:
(i) to
amounts obtained, directly or indirectly, by
that respondent;
or
(ii) to a
narrower concept of “benefits” or “profits”, although
that may be the nature of the order in individual circumstances.
[43]
Principles that apply to all sanction orders are applicable to
section 161(1)(g) orders, including:
a)
a sanction is discretionary and may be applied where the panel
determines it to be in the public interest; and
b)
a sanction is an equitable remedy and must be applied in the
individual circumstances of each case.
[Emphasis in
original.]
[59] In
essence, the Commission is of the view that a broad interpretation of
s. 161(1)(g) is required to achieve the purpose of ensuring the
respondent does not retain any amount obtained from contravening
the Act.
[60] Vice
Chair Cave has also repeatedly dissented on the s. 161(1)(g)
issue: Streamline at
paras. 70–111; SPYru at
paras. 126–142.
[61] In
the opinion of Vice Chair Cave, joint and several liability is not
consistent with the purpose of s. 161(1)(g), which is to divest
a wrongdoer of ill-gotten amounts. Further, he opines that an order
under s. 161(1)(g) can only follow after a finding that the
“amount obtained” was obtained by the
person who failed to comply.
In his view, aside from the situation of, for example, a person and
his corporate alter
ego (e.g., Michaels), a
joint and several order would result in a person being ordered to pay
amounts that person did not obtain (e.g., obtained by another
person). This would constitute a punitive order going beyond
the scope of s. 161(1)(g).
[62] In
Vice Chair Cave’s view, the plain reading of s. 161(1)(g) and
its ordinary, grammatical sense support this interpretation.
In Streamline,
he put it this way in his dissenting reasons:
[86]
Section 161(1)(g) must be interpreted to mean that an order under
that subsection is limited to:
(a) the amount
a person obtained, that was
(b) directly or
indirectly a result of that
person’s misconduct.
[87]
This is based on the language in the subsection:
(g) if
a person has not complied with
this Act, the regulations or a decision of the commission or the
executive director, that the person pay to the commission any amount
obtained, or payment or loss avoided, directly or indirectly, as a
result of the
failure to comply or
the contravention
The phrase
“the failure
to comply” can only refer to the opening phrase of the section “if
a person has not complied with the Act”. The “amount
obtained” referred to in the subsection must be based on that
person’s failure to comply, not the failure of anyone else.
[Emphasis in
original.]
[63] Significantly,
Vice Chair Cave reconciled his view in Streamline with
the view he shared with the other panel members in Michaels on
the basis there was, in effect, only one respondent, explaining:
[84]
The Michaels decision
provided that an order for disgorgement of the full amount obtained
through contraventions of the Act can be made without having to
establish that the amount obtained through the contravention was
obtained by that respondent.
[85]
The Michaels case
dealt, effectively, with only one respondent (the corporate
respondent was the alter ego of the individual respondent). Where
there are multiple respondents, as in this case, the principle set
out above must be refined.
[Emphasis in
original.]
[64] In
Vice Chair Cave’s view, a s. 161(1)(g) order cannot be made on
a joint and several basis, except when the persons being held jointly
and severally liable are, in effect, one person, such as where one is
the corporate alter
ego of
the other. In either case, Vice Chair Cave was of the opinion that
the Commission must establish that the amount ordered to be paid was
obtained by the person(s) against whom the order is made. For
example, the Commission must establish that either Mr. Michaels
or his corporate alter
ego obtained
the amount. Apart from such situations, Vice Chair Cave opined that a
joint and several s. 161(1)(g) order is impermissible.
[65] The
appellants essentially advance Vice Chair Cave’s reasoning. In
their submission, the plain language of s. 161(1)(g) requires
the “amount obtained” be obtained by
the person who
failed to comply. Not having this requirement would result in persons
paying amounts they did not obtain, or which other persons obtained.
The result, they argue, is a punitive or compensatory order, which is
beyond the permissible scope of the purpose of s. 161(1)(g).
[66] The
Poonians further argue the Commission failed to consider amounts
disgorged from other parties related to the scheme. The Poonians
point to a settlement between Phoenix Group entities whereby those
entities paid back certain amounts to the Commission (approximately
$2.7 million). The Poonians submit those amounts should be deducted
from any amount they must disgorge.
[67] The
Executive Director essentially advances the opinion of the majority
in the Commission’s cases. The Executive Director stresses the
important and specialized role of the Commission in crafting
sanctions that are in the public interest in the particular
circumstances of the case before it. The Executive Director contends
that limiting s. 161(1)(g) by adding language that is not there
(“by
that person”)
is untenable because it would essentially allow wrongdoers to benefit
from the complexity and opaqueness of their schemes. In other words,
by making it difficult, if not impossible, to trace and prove that
person actually got
the money,
the Commission’s ability to protect the public interest would be
unduly limited. The Executive Director points to the use of offshore
banking and nominee entities as examples.
[68] The
Executive Director argues the Legislature deliberately left the
language open to permit the Commission to choose the proper language
to fulfill its mandate. Any requirement that that
person be
the one obtaining the amount would be against the Commission’s
established jurisprudence and jurisprudence from other provinces.
[69] I
will first review the purpose of s. 161(1)(g). With this purpose
in mind, I will then turn to the text of the provision to answer the
following questions:
1.
Does the provision require the amount to be “profit” or permit
deductions?
2.
Does the “amount obtained” have to be obtained by
the person against whom the order is made?
3.
Does the provision allow joint and several orders?
[70] It
is clear, in my opinion, that the purpose of s. 161(1)(g) is
neither punitive nor compensatory. This view is held consistently
among the various decisions of the Commission and the securities
commissions of other provinces: Poonian
Sanctions at
para. 80; Michaels at
paras. 39-40; Fischer
v. IG Investment Management Ltd., 2012
ONCA 47 at para. 52; Re
Planned Legacies Inc.,
2011 ABASC 278 at para 71; Re
Sabourin, 2010
LNONOSC 385 at para. 65; and Re
Arbour Energy Inc., 2012
ABASC 416 at para. 37.
[71] It
is noteworthy that in Michaels
a unanimous panel (including Vice Chair Cave) held:
[40]
We agree that compensation
or restitution is not the purpose of an order under section
161(1)(g).
Although the Act, in section 15.1, sets out that any monies collected
from an order under 161(1)(g) may be subject to a claim by those
persons who have suffered loss as a result of the wrongdoer’s
actions, any analysis of restitution would arise under this section
of the Act, not under 161(1)(g).
[Emphasis added.]
[72] Sections
15 and 15.1 of the Act address
what the Commission may do with funds received under s. 161(1)(g).
Subsections 15(3) and 15(3.1) require, in effect, the Commission to
put aside moneys received under ss. 155.1(b), 157(1)(b),
161(1)(g) or 162. Section 15.1 and the corresponding regulations
(Securities
Regulation, B.C.
Reg. 196/97, Part 3) provide a notice and claims procedure for
persons who have suffered pecuniary loss as a direct result of
misconduct that resulted in an order under s. 155.1(b),
157(1)(b) or 161(1)(g); the notice is to be posted until the earlier
of three years from the date it is first posted, or the date on which
all the money has been paid out. After the requisite period of time
has expired, the Commission may use any remaining funds only for
educating securities market participants and the public about
investing, financial matters or the operation or regulation of
securities markets (s. 15(3)).
[73] The
Executive Director characterizes this procedure under s. 15.1 as
an “expeditious” mechanism for victims to receive compensation
for losses suffered as a result of conduct giving rise to a
s. 161(1)(g) order. Therefore, the Executive Director says,
s. 161(1)(g) has a compensatory purpose: the order produces
money that must be used to compensate victims (or if not paid on
adjudicated claims, for public education purposes).
[74] The
appellants submit s. 15.1 is a financial administration
provision setting out how moneys collected under those provisions are
used. However, the analysis of the purpose of s. 161(1)(g)
should focus on the provision itself.
[75] I
agree with the passage from Michaels at
para. 40, quoted above. In my view, it does not follow that just
because moneys collected under certain sections may be used for
“compensation”, the sections giving rise to orders to pay those
moneys (ss. 155.1(b), 157(1)(b), 161(1)(g), and 162) have a
compensatory purpose. I recognize the modern approach to statutory
interpretation requires consideration of the context and the statute
as a harmonious whole, which includes other provisions of the statute
relating to the provision at issue, such as s. 15.1. However,
considering the extensive case law discussing the purpose of
s. 161(1)(g) and its nature as a sanction, I would endorse the
view of the Commission inMichaels at
para. 42, which concluded that: “the sanction does not focus
on compensation or restitution or act as a punitive or deterrent
measure over and above compelling the respondent to pay any amounts
obtained from the contravention(s) of the Act”.
[76] While
“compensation” may well be a possible effect of a s. 161(1)(g)
order, I cannot say that is its purpose. Any analysis of
restitution would arise under s. 15.1, not s. 161(1)(g).
Although not determinative, I note s. 15.1 is contained in
“Part 3 – Financial Administration” of the Act.
Section 161(1)(g) (under “Part 18 – Enforcement”) does not
refer to “compensation” or “restitution”. Nor do ss. 15
and 15.1, or Part 3 of the Securities
Regulation,
refer to “restitution”. The only reference to “compensation”
is in s. 7.4(3)(a) of theSecurities
Regulation,
requiring the Commission to consider, in adjudicating a claim,
“whether the applicant received or is entitled to receive
compensation from
other sources”
[emphasis added].
[77] This
conclusion is also consistent with the observation that generally the
power to order a person who has contravened the Act to
pay compensation or restitution is reserved for the courts (ss.
155.1(a) and 157(1) (i) and (j)). While a victim may receive money
from the s. 15.1 mechanism, that is distinct from the power to
order restitution. First, notice to the public under this
“expeditious” method is only made after money
has been received through an order. If no money is received, the
mechanism is not engaged. Second, the victim has no enforceable order
against the wrongdoer, whereas ss. 155.2(1) and (3) give the
person to whom the court awards compensation all the usual
enforcement tools available for court orders.
[78] I
also find persuasive Vice Chair Cave’s explanation
in Streamline (in
dissent) as to why compensation or restitution is not the purpose of
a s. 161(1)(g) order:
[77]
Compensation or restitution to investors is not the purpose of a
disgorgement order. Only the BC Supreme Court can order
compensation or restitution under the Act, pursuant to sections
155.1(a) or 157(1)(i). Since these two provisions specifically
refer to compensation and restitution, it would be incorrect to
interpret section 161(1)(g) as also being a compensation or
restitution provision.
[78]
The wording of section 161(1)(g) shows it is not a compensation or
restitution provision. The goal of restitution is to restore
the victim to his or her original position, which requires the court
to consider victims’ losses. In contrast, section 161(1)(g)
requires the panel to consider the amount obtained as a result of
misconduct. These are two different things.
[79]
For example, a court order for compensation or restitution may
include more than what an investor actually invested (and a
respondent obtained), such as interest payments or loss of
opportunity. A respondent would not have obtained these amounts
as a result of misconduct and consequently an order under section
161(1)(g) that included these amounts would be broader than what that
section allows.
I
note further the Commission is expressly prohibited from including
loss of opportunity and interest on the loss in determining an
applicant’s loss under the Part 3, s. 15.1 claims
mechanism: Securities
Regulation, s. 7.4(3)
[79] I
agree with the following discussion in Re
Limelight Entertainment Inc. (2008)
31 OSCB 12030 about the origins of the disgorgement remedy in
Ontario, and find those observations applicable to interpreting
s. 161(1)(g), which is similarly worded:
[48]
The Five Year Review Report referred to the United States Securities
and Exchange Commission (“SEC”) disgorgement powers and noted
that the following principles have been established in SEC decisions:
(a)
the SEC has ruled that disgorgement is “an equitable remedy
designed to deprive [respondents] of all gains flowing from their
wrong, rather than to compensate the victims of the fraud” (In
the Matter of Guy P. Riordan [Doc.
3-12829 (U.S. S.E.C. July 28, 2008)], Initial Decision, 2008 SEC
LEXIS 1754 at p. 68.);
(b)
the SEC has ruled that “any risk of uncertainty [in calculating
disgorgement] should fall on the wrongdoer whose illegal conduct
created that uncertainty” (In
the Matter of Pritchard Capital Partners, LLC et al. [Doc.
3-12753 (U.S. S.E.C. July 10, 2008)], Initial Decision, 2008 SEC
LEXIS 1593 at p. 51); and
(c)
the SEC has ruled that once the SEC has established a disgorgement
figure, the burden shifts to the respondent to disprove the
reasonableness of that number (In
the Matter of Thomas C. Bridge et al. [Doc.
3-12626 (U.S. S.E.C. March 10, 2008)], Initial Decision, 2008 SEC
LEXIS 533 at p. 99).
Although we are not
bound by SEC decisions, we agree with these general principles,
subject to the comments below.
[80] I
also agree with the decisions of securities commissions in British
Columbia and across the country concluding s. 161(1)(g), or its
counterparts, is not compensatory in nature:Michaels at
paras. 42–43; Limelight at
paras. 47–48; Streamline at
paras. 77–82, 88 (dissent); Sabourin at
para. 65; Planned
Legacies at
para. 71; Poonian
Sanctions at
para. 72; Re
Schmidt,
2013 ABASC 320 at paras. 65–66; SPYru at
para. 80.
[81] The
purpose of s. 161(1)(g) is to compel a wrongdoer to give up any
ill-gotten amounts. (While the purpose has been described in the
cases as “ill-gotten gains”,
I find it more accurate to refer to them as “amounts”, as the
statute provides, and because, as discussed below, there is no
“profit” element.) In Streamline, for
example, the majority of the Commission said:
[55]
… The purpose of a section 161(1)(g) payment is to remove from a
respondent any amounts obtained through a violation of the Act. Given
that, how a respondent spent the funds raised is not relevant for
such purpose. Also, a respondent’s ability to pay the amount is not
relevant for such purpose.
[82] The
taking away of any amounts obtained or payment or loss avoided
deprives a person who fails to comply of any benefit. Therefore, the
person is deterred from non-compliance. In that sense, s. 161(1)(g)
also has a deterrence purpose. This purpose is consistent with
the Act’s
overarching remedial and protective nature.
[83] It
is convenient to repeat the statutory provision at issue:
161. (1)
If the commission or the executive director considers it to be in the
public interest, the commission or the executive director, after a
hearing, may order one or more of the following:
…
(g)
if a person has not complied with this Act, the regulations or a
decision of the commission or the executive director, that the person
pay to the commission any amount obtained, or payment or loss
avoided, directly or indirectly, as a result of the failure to comply
or the contravention;
[84] I
start with the first question of whether the “amount obtained”
refers to profits. Another way of putting this question is to ask
whether the “amount obtained” is a “net” amount that allows
for deductions of losses and expenses. For instance, the Poonians
argue in their factum that buying and selling securities carries “a
number of carrying charges and other related expenses; at the very
least, the [Poonians] would have had to pay a commission for every
trade…” They argue the Commission erred in not allowing
deductions for these amounts.
[85] I
reject this argument. The words of the provision do not support a
“profit” interpretation. The words the Legislature chose, “any
amount obtained”, refer to any amount received. They do not
contemplate any deductions. If the Legislature had intended to import
a profit element, it could have used the word “profit”, or “net”,
or some other language that connotes allowance for losses or
expenses.
[86] Two
further reasons support the interpretation that s. 161(1)(g) is
not profit-driven. First, there is the alternative of “payment or
loss avoided”. This clearly contemplates a contravention that
benefits wrongdoers, not by a positive enrichment, but by allowing
them to avoid a loss. For example, a person may contravene the Act by
committing insider trading. The person may have sold securities at a
higher price, with knowledge of material non-public information that
would negatively affect the security’s price. By selling before the
price decreases in response to the public dissemination of that
information, the person avoids a loss. Clearly, that benefit, being
the loss avoided, may be disgorged under s. 161(1)(g), even if
the price at which the person sold the shares was lower than the
price at which the person bought them (i.e., he did not make money –
or “profit” – from the sale).
[87] Nor
does it accord with common sense to permit the insider trader to
deduct the trading costs associated with illegally selling his shares
before the price drops. The payment of such expenses is what enabled
the wrongdoer to obtain the benefit in the first place.
[88] Secondly,
the purpose of s. 161(1)(g) also has a deterrence component.
Deterrence is a proper consideration for imposing administrative
sanctions: Cartaway at
para. 60. One way to deter is to remove the incentive for
non-compliance. However, if the disgorgement amount is based on
profits, then wrongdoers would not be deterred from contravening, or
attempting to contravene. They would only face the risk of having to
disgorge amounts if
their schemes succeeded.
However, the public is still harmed. A profit-oriented interpretation
would undermine the statute’s remedial and protective purpose. The
failure to “turn a profit” on the wrongdoing should not prevent
the regulator from requiring the wrongdoer to give up money received
from the wrongdoing.
[89] I
agree with the following conclusion reached by the Commission
in McCabe, 2014
BCSECCOM 512:
[75]
McCabe also said that the circumstances of this case are very
different from Michaels and
necessitate that an order for disgorgement, if any, be limited to net
rather than gross proceeds. He sought to distinguish the two
cases on a number of grounds including the seriousness of the
misconduct, the nature of the deductions sought, the source of the
monies subject to disgorgement and the evidence of loss by the
investors.
[76]
None of the factors identified by McCabe support limiting a section
161(1)(g) order to net, rather than gross, proceeds. It is
clear from Michaels that neither the source of the monies subject to
the order nor the nature of the deductions sought are determinative.
[77]
The panel in Michaels stated
that the focus of the sanction should be on compelling the respondent
to pay any [emphasis
[of the Panel]] amounts obtained from the contravention of the Act…
[90] For
similar reasons, I do not accept the Poonians’ submission that
amounts paid to the Commission under settlement orders with other
participants in the scheme should reduce the amount the Poonians must
disgorge. In my view, those are separate proceedings dealing with the
misconduct of different persons or entities and amounts those persons
obtained as a result of their contraventions. How those persons
are sanctioned does not change the fact of how much
the Poonians obtained
as a result of their contraventions.
[91] There
is a clear exception to the general “no deductions” principle.
Amounts the wrongdoer has returned to the victims (e.g., the
investors) should properly be deducted from the disgorgement amount.
This is consistent with the purpose of s. 161(1)(g) of removing
ill-gotten amounts: no amount obtained remains when the amount has
been returned to the victim(s). I would agree with Vice Chair Cave’s
comment (in dissent but not on this point) in Streamline at
paras. 92–97, and in particular, the comments at paras. 92–94:
[92]
Section 161(1)(g) should be read to refer to the financial benefits
respondents continue to have at the time the order is made. Amounts
returned to investors should be deducted from the amount of the
disgorgement order.
[93]
This is consistent with the purpose of a disgorgement order, namely
to deprive a respondent of wrongly obtained benefits. If an order
requires disgorgement of a benefit a respondent no longer has, then
it will not serve the purpose of removing wrongly obtained benefits,
and instead will simply be a penalty.
[94]
The OSC [Ontario Securities Commission] consistently has deducted
amounts returned to investors when fashioning disgorgement orders.
For example: North
American Financial Group Inc. (Re) 2014
LNONOSC 580; Rezwealth
Financial Services Inc. (Re) 2014
LNONOSC 450; Empire Consulting
Inc. (Re) 2013
LNONOSC 132;McErlean
(Re) 2012
LNONOSC 782; Maple Leaf
Investment Fund Corp. (Re) 2012
LNONOSC 196.
[92] I
pause to note this analysis does not mean the Commission
may never permit
deductions in other circumstances. The provision is clear that the
Commission may order the person to pay any (not
necessarily all) amounts obtained to the Commission. The Commission’s
jurisprudence is well established that in some circumstances
deductions may be permitted: Michaels at
para. 35. One example noted in Michaels is
where the respondents have unequal degrees of culpability. Of course,
how much to deduct (if any) is within the discretion of the
Commission in its determination of what would be in the public
interest in the circumstances of each case.
[93] In
sum, I conclude s. 161(1)(g) does not require the amount
obtained to be “profit” or that there be a “netting” or
deduction of expenses, costs, or of amounts paid to the Commission by
other persons.
[94] I
now turn to the question of whether the “amount obtained” means
the amount obtained by the person who failed to comply with the Act.
Related to this issue is whether and when a joint and several order
may issue.
[95] I
find it helpful in the present exercise to reiterate some
well-established principles of statutory interpretation.
[96] First,
the court must read the words of the statute in their plain, ordinary
and grammatical sense. Secondly, the court must be informed by the
context, which includes the surrounding wording in other parts of the
provision or other provisions, and the scheme of that provision and
the statute as a whole. This context includes the purpose of the
provision specifically, and of the statute generally.
[97] Turning
first to a plain reading of the text, I note the “amount obtained”
has to be obtained by someone.
As a matter of plain meaning and common sense, an amount cannot be
obtained if no one obtains it.
[98] The
interpretive challenge arises from the language of s. 161(1)(g),
which omits explicit reference to who is doing the obtaining. In
other words, the present interpretive exercise is to determine whom
the Legislature intended, implicitly, to do the “obtaining”. The
appellants contend it is the person
who has failed to comply. The Executive Director submits that no
words should be added, and essentially the “obtaining” is by
anyone who contributed to the failure to comply or whose wrongful act
contributed to the amount being obtained. In other words, as long as
the person has contravened the Act or
failed to comply, and the Commission considers it in the public
interest, that person may be subject to a joint and several order
despite not having directly or indirectly obtained any amount.
[99] Read
grammatically, the clause “that the person pay to the commission
any amount obtained” is the object of the verb “order”. It
refers to the order that may be made. It is also obvious from “if a
person has not complied with this Act…the person pay to the
commission any amount obtained” who the person
is, what is being paid, and to whom it is being paid.
[100] It
follows that the phrase “any amount obtained” refers to amounts
obtained directly or indirectly by the person
who is to pay pursuant to the order, because the person
contravened the Act. The fact that “amount obtained” must also be
causally connected to (“as a result of”) the contravention
(or failure to comply) of the person
further supports this interpretation as the consistent, plain, and
ordinary meaning.
[101] This
interpretation appears to be understood by other securities
commissions. In Limelight,
the Ontario Securities Commission said (using “respondent” rather
than “person”):
[49]
We note that paragraph 10 of subsection 127(1) of the Act provides
that disgorgement can be ordered with respect to “any amounts
obtained” as a result of non-compliance with the Act. Thus, the
legal question is not whether a
respondent “profited”
from the illegal activity but whether
the respondent “obtained amounts” as
a result of that activity.
[Emphasis added.]
The
panel in Limelight further
said:
[52]
In our view, the Commission should consider the following issues and
factors when contemplating a disgorgement order in circumstances such
as these:
(a)
whether an amount was obtained by
a respondent as
a result of non-compliance with the Act;
…
(c)
whether the amount that
a respondent obtained as
a result of non-compliance with the Act is reasonably ascertainable;
…
[53]
Staff has the onus to prove on a balance of probabilities the amount
obtained by
a respondent as
a result of his
or her non-compliance with
the Act. Subject to that onus, we agree that any risk of uncertainty
in calculating disgorgement should fall on the wrongdoer whose
non-compliance with the Act gave rise to the uncertainty.
[Emphasis added.]
[102] For
its part, in summarizing the underlying principles of disgorgement,
the Alberta Securities Commission explained in Arbour
Energy:
[37]
This Commission discussed the underlying principles of disgorgement
in Re
Planned Legacies Inc.,
2011 ABASC 278 at paras. 71-75, referring there to several other
cases. As noted in Planned
Legacies,
disgorgement is another tool that may be used to achieve specific and
general deterrence. The Commission stated there (at para. 71)
that disgorgement “reflects the equitable policy designed to remove
all money unlawfully obtained by
a respondent so
that the
respondent does
not retain any financial benefit from breaching the Act. It is
not a compensation mechanism for victims of the wrongdoing.”
In Planned
Legacies,
the Commission accepted the principle from the Ontario Securities
Commission’s decision in Re
Limelight Entertainment Inc. (2008),
31 O.S.C.B. 12030 at para. 53 that Staff bear the initial burden
of proving the amount obtained by
a respondentthrough its non-compliance
with the Act, with the burden then shifting to the respondent to
disprove the reasonableness of that amount. We also note that
the relevant amount is that “obtained”, not the amount retained,
the profit, or any other amount calculated by considering expenses or
other possible deductions.
[Emphasis added.]
Both
“disgorgement” provisions in the Alberta and Ontario securities
legislation (Securities
Act,
R.S.A. 2000, c. S-4, s. 198(1)(i); Securities
Act,
R.S.O. 1990, c. S.5, s. 127(1)(10)) use wording similar to
the British Columbia statute (although the Ontario provision uses the
word “disgorge”). Like the British Columbia provision, the
Alberta and Ontario provisions also do not explicitly have the words
“by the respondent [person]” after the words “any amounts
obtained”.
[103] This
interpretation also appears to be understood in academic texts,
including David Johnston, Kathleen Rockwell and Cristie
Ford, Canadian
Securities Regulation,
5th ed. (Markham, Ont: LexisNexis Canada, 2014):
¶14.31 This
power is intended to prevent a person or company from retaining
financial benefits that were received by contravening securities
laws.
¶14.32 The
legislative provisions refer to “amounts obtained”.
Therefore, the
relevant amount is what a respondent obtained through
misconduct, not what the respondent retained or spent
inappropriately. …
[Emphasis added.]
[104] In
essence, I agree with Vice Chair Cave’s analysis at para. 87
of Streamline:
The phrase
“the failure
to comply” can only refer to the opening phrase of the section “if
a person has not complied with the Act”. The “amount
obtained” referred to in the subsection must be based on that
person’s failure to comply, not the failure of anyone else.
[Emphasis in
original.]
[105] By
contrast, the Executive Director relies on the Commission’s recent
decision in Re Wong,
2017 BCSECCOM 57, where the Commission opined:
[90]
The purpose of section 161(1)(g) is to remove from a respondent any
amounts obtained through a violation of the Act. Notably,
section 161(1)(g) does not limit an order to any amount obtained
by a respondent.
In our view, this omission is intentional and makes clear that we can
make an order against a respondent with respect to all the money
illegally obtained from investors as a result of that respondent’s
misconduct, and we are not limited to the ill-gotten gains obtained
by that specific respondent. The plain wording of section 161(1)(g)
supports our interpretation. To hold otherwise would be
tantamount to importing into section 161(1)(g) a requirement that
payment be limited to benefits, personal gains or some notion of
profits enjoyed by a respondent.
[Emphasis in
original.]
With
respect, I do not agree with that view. First, I do not consider the
phrase “omission is intentional and makes clear” supports the
Executive Director’s position because there is no omission in a
real or grammatical sense. Instead, there is simply a grammatical
construction in which “the person” against whom the order is made
is implied or understood to be the recipient of the “amount
obtained”, as earlier discussed. Something that is implicit in the
plain and ordinary meaning of a phrase cannot be said to be
intentionally omitted.
[106] Further,
the Commission in Wong sidesteps
the issue of who does
the obtaining, and instead addresses from
whom the
amounts are obtained (i.e., investors). I think this analysis is
inaccurate. The provision does not limit the persons from whom the
moneys may be obtained, and indeed, should not. For example, the
wrongdoer may obtain money from investors (e.g., in an illegal
distribution), from other innocent market participants (e.g., from
someone who buys shares sold by a person committing insider trading),
or from other wrongdoers (e.g., a tipper who is paid
remuneration by a trader for providing material non-public
information). All of these amounts may properly be characterized as
“amounts obtained” as a result of a contravention of the Act for
the purposes of s. 161(1)(g). Indeed, these amounts should all
be caught to achieve the goal of deterrence by removing the incentive
for non-compliance.
[107] Second,
I cannot agree that, “To hold otherwise would be tantamount to
importing into section 161(1)(g)…some notion of profits...” The
notion of profits is clearly displaced by the express choice of the
word “amount”, and for the other reasons explained earlier. To
require the amount be obtained by
the respondent only
means that the amount must have been received by
that respondent. It does not import the notion that there is a
“netting” of expenses to arrive at benefits, gains, or profits.
[108] I
recognize the Commission’s concern, as expressed in Wong, that
a requirement the amount be obtained by
the respondent would
insert a restriction that would impair the effectiveness of
s. 161(1)(g) in capturing all ill-gotten
amounts because of the complexity and opacity of certain schemes.
However, in my view, that concern is answered by the use of the words
“or indirectly” in s. 161(1)(g). This enlarges the scope of
the “amount obtained by a respondent” to include amounts other
than amounts that arrived directly into his or her pocket. It could
include and even overlap with, in an appropriate case, moneys
obtained by a co-respondent, where that co-respondent is essentially
receiving the amount for the contravener (i.e., the contravener
obtained the amount indirectly through
the co-respondent). I will return to the role of “indirectly”
later in this judgment.
[109] This
practical concern of the Commission is also addressed by the burden
of proof in such cases, a point to which I will also return.
[110] In
my view, the ordinary grammatical reading is that the “amount
obtained” is the amount obtained by the person
who failed to comply or committed the contravention, and the
provision captures amounts so obtained, directly
or indirectly.
[111] This
reading is also consistent with the purpose of the provision: to
deter persons from non-compliance by removing the prospect of
receiving and retaining moneys from non-compliance. It is also
consistent with what is not the
primary purpose of the provision: it is not to punish or compensate.
[112] Section
161(1)(g) must be read in the context of its neighbours in ss. 161
and 162. As Stratas J.A. put it in Burchill
v. Canada,
2010 FCA 145 at para. 11, referring to theIncome
Tax Act, R.S.C.,
1985, c. 1 (5th Supp.), “Subsection 56(1)(a)(i) does not stand
in splendid isolation in the Act; rather, it is part of an
interconnected web of provisions.” Section 161(1)(g) must be
recognized as one in a list of enforcement tools open to the
Commission. The Commission has a broad arsenal of sanctions to enable
it to discharge its public interest mandate. Each tool, however,
takes a specific form to achieve a specific purpose. Disgorgement is
a specific tool, and the Commission must not, in the name of the
public interest, use that tool in such a way as to extend it beyond
its specific, permissible purpose. Its purpose is to prevent
wrongdoers from retaining amounts obtained from their wrongdoing. It
is not to punish or compensate, although those aims are achievable by
other means in the Act, or
in conjunction with other sections of the Act.
[113] In
my view, the suggestion that limiting the scope of s. 161(1)(g)
conflicts with the Act’s overarching
protective goal erroneously conflates the discrete and recognized
purposes of a s.161(1)(g) “disgorgement” order with the general
purposes of the Act overall,
which are achieved by the availability of the vast array of different
enforcement tools employable in concert. This interpretation is not
disharmonious with the remedial and protective nature of the Act.
Instead, it recognizes that the Act’s overarching
goals are achieved by a host of specific measures, which themselves
may have different purposes and be informed by different principles
(e.g., punishment, compensation, specific and general deterrence,
removal of incentives for non-compliance, etc.). Indeed, the
Commission’s public interest jurisdiction is not punitive, as the
Court noted in Committee
for the Equal Treatment of Asbestos Minority Shareholders v.
Ontario (Securities
Commission),
2001 SCC 37:
[42]
… I agree with Laskin J.A. [(1999), 43 O.R. (3d) 257] that “[t]he
purpose of the Commission’s public interest jurisdiction is neither
remedial nor punitive; it is protective and preventive, intended to
be exercised to prevent likely future harm to Ontario’s capital
markets” (p. 272). … It is also consistent with the objective of
regulatory legislation in general. The focus of regulatory law is on
the protection of societal interests, not punishment of an
individual’s moral faults…
[114] I
agree with Vice Chair Cave that where a s. 161(1)(g) order is
made to require someone to pay an amount to the Commission that
person did not obtain, the only purpose of such a payment is
punishment or compensation. It is not to surrender ill-gotten amounts
because the amounts surrendered were not obtained in the first place.
See also Limelight at
para. 63, where the Ontario Securities Commission recognized
that “it would be unfair and inconsistent with the principles
underlying the disgorgement remedy for the aggregate amount ordered
to be disgorged by Canadian securities regulators or courts to exceed
the amounts obtained by [the respondents] from investors.”
[115] Finally,
I turn to whether s. 161(1)(g) permits a joint and several
order.
[116] The
appellants rely on Cinar
Corporation v. Robinson,
2013 SCC 73, which
addressed disgorgement of profits under s. 35 of the Copyright
Act,
R.S.C. 1985, c. C-42, the relevant part of which reads:
35 (1) Where a
person infringes copyright, the person is liable to pay…such part
of the profits that the infringer has made from the infringement and
that were not taken into account in calculating the damages as the
court considers just.
[117] The
appellants submit that Cinar stands
for the proposition that disgorgement orders, which are not intended
to compensate, cannot be made on a “solidary” or “joint and
several” basis. They rely on the following passage from Cinar:
[86]
… Disgorgement of profits under s. 35 is designed mainly to
prevent unjust enrichment, although it can also serve a secondary
purpose of deterrence: Vaver [Intellectual
Property Law: Copyright, Patents, Trade-marks,
2d ed. (Toronto: Irwin Law, 2011)], at p. 650. It is not
intended to compensate the plaintiff. This remedy is not
subject to the principles that govern general damages awarded under
Quebec’s law of extra-contractual liability, whose aim is
compensatory. Consequently, solidarity of profits ordered disgorged
under s. 35 of the Copyright
Act cannot
be inferred from art. 1526 of the CCQ [Civil
Code of Québec,
S.Q. 1991, c. 64], which makes co-authors of a fault solidarily
liable for the “obligation to make reparation for
injury caused to another”.
[87]
Disgorgement under s. 35 of the Copyright
Act goes
no further than is necessary to prevent each individual defendant
from retaining a wrongful gain. Defendants cannot be held
liable for the gains of co-defendants by imposing liability for
disgorgement on a solidary basis.
[Emphasis in
original.]
[118] The
Executive Director argues Cinar is
distinguishable because s. 35 of the Copyright
Act includes
the clause “profits that the infringer has made”, whereas
s. 161(1)(g) does not expressly state who obtained
the amounts. Further, the Executive Director argues s. 35 deals
with civil liability in the copyright context, where, unlike the
securities context, there is no public interest concern.
[119] In
my view, the Executive Director reads too narrowly the Supreme
Court’s reasoning in Cinar. I
consider the decision in Cinar to
be authoritative on this issue. While s. 35 of the Copyright
Act expressly
refers to “profits”, the reasoning applies with necessary
modifications to
“amounts obtained”. Further, although s. 35 uses the express
words “that the infringer has made”, as discussed above, it is
clear and grammatically understood by the wording of s. 161(1)(g)
that the amounts were obtained by
the person who
has failed to comply with or contravened the Act (in other words, the
person who has “infringed” the Act).
[120] More
importantly, I read Cinar as
standing for broader principles on the nature of the disgorgement
remedy. That a wrongdoer may not benefit from wrongdoing (a theme
first developed in equitable jurisprudence on unjust enrichment) is a
basic legal principle. It is one of fairness and justice. The
Executive Director argues the copyright context does not admit of
“any public interest” consideration. However, while the presence
of public interest informs the Commission’s decisions, it cannot
expand the Act’s permissible
scope of what the Commission may do. The public interest is not
unlimited. In my opinion, disgorgement may not go further than
required to prevent each wrongdoer from retaining an amount obtained,
directly or indirectly, as a result of the wrongdoing. Nor does
deterrence require more.
[121] The
Executive Director submits that a person who contravenes
the Act ought
not to benefit from the complexity and sophistication of their
illicit schemes, and cites Re Samji,
2015 BCSECCOM 29 at para. 42, where the Commission said,
“respondents always bear responsibility for any uncertainty with
respect to the amount retained by them. It is not in the public
interest that they benefit from any such uncertainty.”
[122] The
Executive Director also notes the comment of the United States Court
of Appeal for the District of Columbia Circuit that “you can’t
reward complicated byzantine frauds that by their very nature conceal
paper and money trails”: SEC
v. Whittemore,
659 F.3d 1 at 6; 198 U.S. App. D.C. 67; 2011 U.S. App. LEXIS 21907.
[123] I
agree with these observations. As noted earlier, securities
regulation statutes are remedial and protective in nature, and
therefore should be construed in a manner sensitive to economic
reality. The economic reality is that the increased complexity of
schemes and transactions – and the Executive Director points to a
few examples – may make it difficult, if not impossible, to trace
exact funds from a contravention into the pockets of the wrongdoer.
But tracing is not required: Re Manna
Trading Corp Ltd., 2009
BCSECCOM 595 at para. 43.
[124] The
Commission’s decisions on this point often refer to Limelight as
an articulation of seminal propositions. In that case, a joint and
several disgorgement order was ultimately made against two of the
individuals (Da Silva and Campbell) and the corporation they directed
and controlled. In particular, the Ontario Securities Commission
found the two individual respondents were the directing minds of the
corporation (Limelight) and commented:
[59] Da Silva
and Campbell were the directing minds of Limelight; they were
directly involved in breaches of the Act by Limelight and its
salespersons … and they were aware of and authorized, permitted or
acquiesced in all such breaches. Da Silva and Campbell were also
the principal shareholders of Limelight. In our view, individuals
should not be protected or sheltered from administrative sanctions by
the fact that the illegal actions they orchestrated were carried out
through a corporation which they directed and controlled. In this
case, Limelight, Da Silva and Campbell acted in concert with a
common purpose in breaching key provisions of the Act.
[125] The
Executive Director here, for example, submits the Poonians and
Sihotas were each found to have been “directly involved in and
contributed to” the market manipulation scheme (Poonian
Sanctions at
paras. 82-83). This finding is not challenged on appeal.
Therefore, the Executive Director contends they all acted in concert
with the common purpose of perpetrating the manipulation scheme,
which supports the propriety of a joint and several disgorgement
order against them, as was the case in Limelight.
[126] I
cannot agree. In my view, the result reached in Limelight was
driven by the finding that the two individuals directed
and controlled the
corporate entity. This distinction is buttressed by the fact the
third individual respondent, who had no such role in the corporation,
was not part of the joint and several disgorgement order. Respondents
cannot be held jointly and severally liable for a s. 161(1)(g)
order purely on the basis they acted in concert with the common
purpose of breaching the Act. This is because the language of
s. 161(1)(g) requires the disgorged amount to be obtained,
directly or indirectly, by the person. Acting jointly is not
synonymous with obtaining amounts, directly or indirectly. As I will
explain below, however, having direction and control over another
respondent or entity may constitute indirect obtainment.
[127] The
Executive Director also urges this Court to follow the Ontario
Divisional Court’s recent decision in Phillips
v. Ontario Securities Commission,
2016 ONSC 7901. In that case, the appellants had argued that it was
not open to the Ontario Securities Commission to order disgorgement
on a joint and several basis against individuals who did not obtain
the funds ordered to be disgorged where the corporate entity that
actually obtained those funds was not named as a respondent before
the Ontario Securities Commission. In discussing the Commission’s
decision, the court said this:
[65]
The Appellants submit that it was unreasonable for the Commission to
have ordered the Appellants to disgorge amounts that were not
obtained by them personally and were obtained by entities that were
not named as respondents in the proceeding. In this case, the amounts
were invested with FLG entities and the FLG entities in question were
not named respondents in the proceeding. In its Sanctions Decision,
the Commission accepted that Commission staff chose not to name these
entities as they were all parties to a court-supervised CCAA wind-up
and staff wished to avoid depleting these entities’ assets.
[66]
In its Sanctions Decision, the Commission addressed the Appellants’
argument and rejected it. Relying on several past decisions, the
Commission found that “the Commission’s authority to order
disgorgement is not limited to ordering an individual respondent to
disgorge amounts he or she obtained personally” (Commission
Sanctions Decision, at para. 29) and that the Commission had the
authority to order the Appellants “to disgorge the funds obtained
in contravention of the Act in circumstances where the FLG entities
that ultimately received the funds are not respondents in [the]
proceedings” (at para. 30). The Commission concluded (at
para. 54) that a disgorgement order was “appropriate in these
circumstances because ascertainable amounts have been obtained as a
result of the non-compliance of the [Appellants] with Ontario
securities law and such an order will deter the Respondents and other
market participants from similar conduct.”
After
reviewing certain cases, the court concluded:
[78]
What this review establishes is that the Commission’s decision that
it had the authority to order disgorgement was consistent with the
plain wording of the legislation, the purpose of the legislation and
prior case law.
[79]
As already noted, the Commission concluded that Mr. Phillips
should disgorge $16,587,254, representing the full amounts raised by
him and others under his supervision and direction, and that
Mr. Wilson should disgorge $7,817,739, representing the amounts
Mr. Wilson personally raised from investors. Both amounts factor
in the paid and pending distributions to investors from the
court-supervised wind-up. In making these orders, the Commission
considered the following facts:
…
[80]
The Commission’s decision fell “within a range of possible,
acceptable outcomes which are defensible in respect of the facts and
law” and the reasons given were justifiable, transparent and
intelligible (Dunsmuir
v. New Brunswick,
2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47).
Given
my determination of the applicable standard of review in the three
appeals before us, I do not consider Phillips helpful.
[128] In
my view, the practical difficulty posed by a complex scheme is
addressed in two ways. First, the Legislature chose to modify the
words “any amount obtained” by the adverbs “directly or
indirectly” (these words are absent from the Ontario statute’s
corresponding section).
[129] Secondly,
securities jurisprudence has applied s. 161(1)(g) to require the
Executive Director only to prove on a balance of probabilities a
“reasonable approximation” of the amount obtained by the
wrongdoer as a result of that wrongdoer’s contravention or failure
to comply. Once that onus is met, the burden shifts to the wrongdoer
to disprove the reasonableness of the amount. Importantly, ambiguity
or uncertainty in the calculations is resolved in favour of the
Executive Director: see Limelight at
para. 48; SPYru at
paras. 139–140; Re
Zhong, 2015
BCSECCOM 383 at paras. 51–52; Schmidt at
para. 66; Streamline at
paras. 99-100 (Vice Chair Cave in dissent). I will discuss both
of the ways in which more complicated schemes are addressed, turning
first to “directly or indirectly”.
[130] In
establishing the link between the “amount obtained” and the
person subject to the order by using the words “directly or
indirectly”, the Legislature ensured the purpose of s. 161(1)(g)
was not frustrated by difficulties presented by complex schemes. As
stated, “directly or indirectly” modifies “obtain”.
[131] In
my view, the use of these explicit words indicates that the amount
need not be obtained directly by the person who has contravened
the Act (who
is also the person against whom the order to pay is made). In
addition, it could be obtained indirectly.
By using those words, the Legislature intended “amount obtained”
to capture amounts the wrongdoer obtained through indirect means
(e.g., through agents, nominees, alter
egos),
as opposed to direct means (i.e., where the money is received
directly into that wrongdoer’s “pockets” or accounts). This is
especially operative in certain types of wrongdoing such as illegal
distributions (e.g., non-exempt trading without prospectus or
registration) where, by the nature of the activity (fundraising),
the money flows not to the wrongdoer (e.g., the promoter), but to
some other entity (e.g., the corporate issuer of securities). If
s. 161(1)(g) is to function properly and achieve its goal of
deterrence by the divesting of ill-gotten amounts, then the amounts
obtained by the issuer must also be capable of being disgorged.
[132] The
Commission’s decision in Michaels is
an example of where the amount obtained was obtained indirectly.
Michaels obtained amounts through a corporate entity that was, as
stated by Vice Chair Cave in Streamline,
Michaels’ corporate alter
ego.
It was the vehicle Michaels used to receive (obtain) the funds from
his wrongdoing.
[133] The
interposition of the corporate vehicle did not prevent s. 161(1)(g)
from operating to require Michaels to disgorge the amount he and
his alter
ego obtained.
In essence, I agree with Vice Chair Cave’s comment
in Streamline that
they were effectively one person. That conclusion is not based only
on a finding of “effective personhood”. Such an order is
supportable by the express language of s. 161(1)(g) and, in
particular, the adverbs “directly or indirectly”, as well as the
purpose of s. 161(1)(g), the Act,
and the requirement that statutory construction be sensitive to
economic reality.
[134] Using
a corporate alter
ego is
but one example of a mechanism a wrongdoer may employ to indirectly
obtain funds from wrongdoing. It is impossible to imagine and
enumerate the wide variety of tactics wrongdoers may use to do so.
The critical element is that the wrongdoer and the person with whom
he or she is held jointly and severally liable were, in effect,
acting as one person. This may occur, in another example, where one
wrongdoer directs and controls the accounts of numerous other
persons, and effectively has direction and control over the activity
and assets in those accounts (e.g., using nominee accounts).
[135] Yet
another example may arise where the wrongdoer instructs the person
providing the amount to pay the amount to someone else instead of to
the wrongdoer, with that “nominee recipient” essentially holding
the amounts for the wrongdoer. This may especially be the case where
the recipient is closely related to the wrongdoer, such as a spouse
or partner: see e.g., Zhong at
paras. 16–17; see also, Streamline at
para. 91 (Vice Chair Cave in dissent). Whether someone is acting
just as a “nominee” or as an active participant in the scheme
depends on the nature and degree of the person’s direction and
control, and culpability, which are properly matters of fact for
determination by the Commission.
[136] The
Commission adopted similar reasoning in Re
Sabourin:
[70]
Having considered the relevant factors, we will order that Sabourin
and the Corporate Respondents disgorge $27,900,000, on a joint and
several basis. That amount represents the up to $33.9 million
obtained by Sabourin and the Corporate Respondents from investors
less the amount of $6 million that appears to have been returned to
investors (paragraphs 176 and 177 of the Merits Decision). We impose
joint and several liability on Sabourin and the Corporate Respondents
because, as stated in the Merits Decision, Sabourin
was the directing and controlling mind of the Corporate Respondents
and it would be impossible to treat them separately (paragraph
187 of the Merits Decision). As stated at paragraph 370 of the Merits
Decision, Sabourin
concocted and orchestrated the investment schemes.
Because of our view that the Individual Respondents are less culpable
than Sabourin and the Corporate Respondents and played distinct roles
in the investment schemes, we will not order that any of the
Individual Respondents pay, on a joint and several basis, the amounts
we order disgorged by Sabourin and the Corporate Respondents.
[Emphasis added.]
[137] I
recognize it is not the role of this Court to lay down rigid rules on
how to identify or capture illicit financial behaviour and
transactions. That expertise lies with the Commission. If the
Commission is inclined to make a s. 161(1)(g) order jointly and
severally, it is for the Commission to inquire into and determine, as
a matter of fact, whether there is sufficient direction and control
between, or of, the two or more persons or entities, such that a
joint and several order is essentially only requiring the person
who failed to comply to pay amounts he or she obtained, albeit
indirectly.
[138] The
Commission may also decide what amount to order under s. 161(1)(g),
and in certain circumstances, may order an amount different from the
total amount obtained. This was expressed in Michaels:
[35]
Other Commission decisions, including Oriens (as
it dealt with the other individual respondent, Anderson), and Pacific
Ocean Resources Corporation and Donald Verne Dyer, 2012
BCSECCOM 104, demonstrate that in other circumstances it may be
inappropriate to make a section 161(1)(g) order in the total amount
obtained. Where a
party to a contravention of the Act does not control the issuer of
the securities, has not been equally culpable with another
respondent,
or the funds obtained have clearly gone to a third party, the
Commission may issue a section 161(1)(g) order in an amount less than
the full amount obtained through contraventions of the Act.
[Emphasis added.]
Ordering
an amount less than the full amount obtained is, of course,
permissible on a plain reading of s. 161(1)(g). The amount does
not need to be the total, but it may be “any” amount obtained.
The passage from Michaels also
confirms “control” as a relevant consideration.
“Reasonable
approximation” and Shifting Burden of Proof
[139] The
limits on joint and several orders that I have described also do not
unduly hinder the Commission’s ability to carry out its public
interest mandate and ensure wrongdoers do not retain any ill-gotten
amounts from complex or opaque schemes. While the onus of proof is on
the Commission to establish the wrongdoer has obtained an amount, and
that the amount was obtained as a result of the contravention, the
required standard of proof is not certainty. Instead, the Executive
Director is required to prove a “reasonable approximation” of the
amount obtained; then the burden shifts to the wrongdoer to disprove
the reasonableness of that amount: SPYru at
paras. 139–140; Zhong at
paras. 51–52. I agree with Vice Chair Cave’s analysis at
paras. 99–100 of Streamline (in
dissent):
[99]
Both the ASC and OSC have adopted the US approach that the [sic]
once the executive director provides evidence, consistent with the
principles described above, of an “approximate” amount of
disgorgement then the burden shifts to the respondent to disprove the
reasonableness of the number: Limelight,
paragraph 48; Schmidt
(Re),
paragraph 66. I agree with this approach.
[100]
In order to assess the reasonableness of the number, it is necessary
to assess whether the proceeds of an illegal distribution were
generally used to the benefit of the investors (i.e. in furtherance
of their investment objectives) or whether they were used to the
benefit of the respondents (i.e. ill-gotten benefits). Where funds
were used for the benefit of investors it would be inappropriate to
make a disgorgement order for those funds.
[140] This
approach goes a significant distance to ensure that a sanction is not
frustrated by the complexity of the wrongdoing or the wrongdoer’s
intentional masking of their activities. It also permits flexibility
for the Commission. The degree of latitude in determining whether an
approximation is “reasonable” would depend on the circumstances,
including the complexity or opacity of the scheme. As noted above,
any ambiguity or uncertainty in calculations would be resolved
against the wrongdoer whose wrongdoing created the uncertainty. Thus,
the latitude or scope of what is reasonable would expand with the
degree of complexity of the scheme. Most importantly, this approach
respects the wording of the statute, which, for the reasons explained
above, requires proof that the amount was obtained by the person who
contravened the Act.
[141] The
Executive Director has expressed concern that reasonably foreseeable
cases may arise where the interpretation described would be unduly
restrictive and insufficient to capture complex opaque schemes of
wrongdoers acting in concert with a common purpose in breaching
the Act.
[142] In
my opinion, on the language as it is now, the elasticity of the
burden of proof is such that it will permit the acquisition of
information sufficient to impose a disgorgement order consistent with
these reasons. I observe that there remain also an array of other
financial and compliance tools available under the Act to
address schemes of wrongdoing. Ultimately, the Legislature determines
the tools available to address non-compliance with the Act.
[143] To
summarize, the following principles emerge from the discussion above:
1.
The purpose of s. 161(1)(g) is to deter persons from
contravening the Act by
removing the incentive to contravene, i.e., by ensuring the person
does not retain the “benefit” of their wrongdoing.
2.
The purpose of s. 161(1)(g) is not to punish the contravener or
to compensate the public or victims of the contravention. Those
objectives may be achieved through other mechanisms in the Act,
such as the claims process set up under Part 3 of the Securities
Regulation or
the s. 157 compliance proceedings in the Act.
3.
There is no “profit” notion, and the “amount obtained” does
not require the Commission to allow for deductions of expenses,
costs, or amounts other persons paid to the Commission. It does,
however, permit deductions for amounts returned to the victim(s).
4.
The “amount obtained” must be obtained by
that respondent, directly
or indirectly,
as a result of the failure to comply with or contravention of
the Act.
This generally prohibits the making of a joint and several order
because such an order would require someone to pay an amount that
person did not obtain as a result of that person’s contravention.
5.
However, a joint and several order may be made where the parties
being held jointly and severally liable are under the direction and
control of the contravener such that, in fact, the contravener
obtained those amounts indirectly.
Non-exhaustive examples include use of a corporate alter
ego,
use of other persons’ accounts, or use of other persons as nominee
recipients.
[144] I
now turn to apply these principles to the three appeals before this
Court. I agree with and adopt the two-step approach identified by
Vice Chair Cave in SPYru at
paras. 131–32:
[131]
The first step is to determine whether a respondent, directly or
indirectly, obtained amounts arising from his or her contraventions
of the Act. This determination is necessary in order to determine if
an order can be made, at all, under section 161(1)(g).
[132]
The second step of my analysis is to determine if it is in the public
interest to make such an order. It is clear from the discretionary
language of section 161(1)(g) that we must consider the public
interest, including issues of specific and general deterrence.
[145] In
my view, this approach accords with the words of the provision. Of
course, the second step is not at issue here, as the determination of
whether it is in the public interest to make an order is a decision
for the Commission, with its expertise. The concern here is whether
the requirements of the first step are satisfied.
[146] The
Commission found that the “amount obtained” was the aggregate net
trading gain in the accounts of the Poonians, Sihotas, and the
Secondary Participants. The appellants challenge this finding. They
argue that the Commission was required to make a finding that each of
Mr. and Mrs. Poonian and Mr. and Mrs. Sihota
obtained, personally, some amount, directly or indirectly, and that a
disgorgement order may only be made against each of them severally
for their specific amount.
[147] In
my view, the Commission’s finding that the aggregate net trading
gain is the “amount obtained” is sound. The Commission assessed
the evidence before it and concluded the relevant trading accounts
were, essentially, enriched (in the aggregate) by approximately $7.3
million. It is also uncontested that this amount resulted from the
purchase and sale of OSE shares at prices inflated by the Poonians
and Sihotas’ manipulation.
[148] Although
the Commission made findings as to the degrees of involvement of each
of the Poonians and Sihotas, the difficulty is that it made no
finding that each of these four individuals obtained
amounts personally.
Furthermore, the Commission found that each of these four individuals
participated and contributed to the manipulation scheme in different
ways, with varying degrees of culpability, but made no finding as to
the existence or degree of direction and control required for a
finding as to whether any individual indirectlyobtained
an amount.
[149] The
problem is that the order holds all four individuals jointly and
severally liable for the full
amount.
As discussed above, a joint and several order is generally not
permitted under s. 161(1)(g), the concern being that a person
would be ordered to disgorge an amount that person did not obtain
directly or indirectly.
[150] The
scheme in question involved controlling and directing trading in a
number of accounts to realize the aggregate net trading gain. It
involved making payments to others to facilitate some of those sales.
[151] The
Commission has before it the trading records of all the relevant
accounts. Some accounts belong to the Sihotas or the Poonians. It is
clear that portions of the aggregate net trading gain in those
accounts were “obtained” by those account holders. The issue is,
what portions of the aggregate net trading gain in accounts
of other persons
can be properly found to have been obtained directly or indirectly by
any of the Poonians or Sihotas?
[152] In
my view, the Commission must determine whether amounts in those other
accounts were, effectively, obtained indirectly by
one or more of the appellants in that one or all of the Poonians and
Sihotas had control and direction over those accounts. If such
control and direction were established, there would then be a finding
that the portion of the aggregate net trading gain in those accounts
was obtained indirectly by
that person. Therefore, that person could be properly held liable for
those amounts. Again, this answers the Commission’s concerns
expressed in Wong (at
para. 90), as quoted in para. 105 above. This is a factual
finding this Court cannot and should not make.
[153] The
Executive Director argues such apportionment is problematic because
“[i]f such a determination can be made, it may well be only within
the specific and unique knowledge of the respondents themselves.”
In my view, the fact-finding exercise falls within the Commission’s
province, and as explained above, the Commission does not have to
determine the proportions to a certainty. The amount each person
obtained directly or indirectly just needs to be “reasonably
approximate”. The onus is then on that person to show why such an
amount (or apportionment) is not reasonable. Any uncertainty in the
calculations is resolved in favour of the Executive Director, since a
wrongdoer should not benefit from any ambiguity arising from his or
her misconduct. Although not at issue in these appeals, I think it
clear that such determinations are factually-driven, within the
Commission’s expertise, and would attract deference on
review: Walton
v. Alberta (Securities Commission),
2014 ABCA 273 at para. 23.
[154] Lathigee
and Pasquill were held jointly and severally liable, with FIC Group
entities, for the amounts raised from the fraudulent offerings.
[155] They
argue the amounts were obtained by the corporate entities, not by
them personally, and that some funds were used for their intended
purpose.
[156] Lathigee
and Pasquill distinguish Michaels,
in part, on the basis that the corporate entity in that case was
created specifically for the fraudulent purpose. However, they note
their corporate group (FIC) pre-existed the fraudulent transactions
and did initially carry on legitimate operations and investments. I
do not agree that this is a meaningful distinction.
[157] Whether
the corporate entity was initially created for a fraudulent purpose
or later became a vehicle for fraud does not change the fact that the
corporate entity, controlled and directed by the individual
wrongdoers, was a vehicle for fraud. The critical finding is that
these entities obtained funds as a result of the fraud, and the
individuals controlling and directing them received the
funds indirectly.
[158] Lathigee
and Pasquill also contend that some of the funds fraudulently raised
were used for their intended purpose (i.e., invested in the
advertised opportunities). I cannot sustain this argument. While some
of the funds may have been used for their intended purpose, the fact
they were raised by fraudulent misrepresentations or omissions is
what constitutes the contravention.
[159] As
to the receipt of the funds by the corporate, and not the personal,
entities, this argument founders when one considers the economic
reality of raising capital. It is the nature of fraudulent
fundraising that funds raised are received (obtained) by the
corporate vehicle, and not the personal fraudster. Indeed, the entire
transaction is the exchange for money of securities of the issuer.
The money goes to the issuer, not to the individual. An
interpretation sensitive to economic reality would hold jointly and
severally liable the fraudster and the vehicle he was found to have
directed and controlled for the amounts they received because the
fraudster had indirectly received those funds.
[160] The
Commission found as a fact that Lathigee and Pasquill had jointly
directed and controlled the relevant FIC Group entities that raised
(obtained) the money: Lathigee
Liability at
para. 5. This factual finding is not challenged on appeal, and I
see no reason to disturb it.
[161] Therefore,
the Commission found that each of Lathigee and Pasquill had
“obtained” the offering “amount”, albeit indirectly through
certain FIC Group entities they directed and controlled. This accords
with the decision in Michaels because
Lathigee and Pasquill and their corporate entities were “effectively
one person”.
[162] On
that basis, I consider it was appropriate and within the scope of
s. 161(1)(g) to make the joint and several order for the full
offering amount.
[163] Subsection
167(3) of the Act provides:
(3)
If an appeal is taken under this section, the Court of Appeal may
direct the commission to make a decision or to perform an act that
the commission is authorized and empowered to do.
[164] For
the reasons explained, I would allow the appeals in CA42714 (Poonian)
and CA42715 (Sihota)
and set aside the s. 161(1)(g) orders made against those
appellants.
[165] Pursuant
to s. 167(3), I would remit the Poonians and Sihotas’ matter
to the Commission to assess the evidence already before it to make
the necessary factual findings as to whether a s. 161(1)(g)
order should be made against each of them. In my view, it is
incumbent on the Commission and properly within its expertise to make
determinations as to the conduct of each person, the existence, if
any, of each person’s direction and control over accounts
containing the “amounts obtained”, and on balance, what
proportion of the amount obtained (aggregate net trading gain) can
properly be found as having been directly or indirectly
obtained by each person. Of course, it is also for the Commission to
determine whether it is in the public interest to make any order
under s. 161(1)(g).
[166] To
be clear, leave to appeal in all these cases was only granted with
respect to the s. 161(1)(g) orders, and only those orders are
set aside. All other sanctions imposed on the appellants are not
before this Court and remain undisturbed.
[167] I
would not disturb the s. 161(1)(g) order made in the Lathigee
appeal. I would dismiss that appeal (CA42718).
“The
Honourable Madam Justice MacKenzie”
I
agree:
“The
Honourable Madam Justice Saunders”
I
agree:
“The
Honourable Mr. Justice Fitch”
*****************************
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