COURT OF APPEAL FOR ONTARIO
McMURTRY C.J.O., ARMSTRONG J.A., BLAIR R.S.J. (ad hoc)
B E T W E E N:
HER MAJESTY THE QUEEEN
Jay Naster, for the appellant
Appellant
- and -
GLEN HARVEY HARPER
Brian H. Greenspan and Peter Copeland, for the respondent
Respondent
HEARD: June 9-10, 2003
BLAIR R.S.J. (ad hoc):
Overview
1This is an appeal by the Crown from a sentence imposed in an “insider trading” case. The appeal raises questions relating to the interpretation of subsections 122(1), (4), (5) and (6) of the Securities Act R.S.O. 1990, c. S.5.
2The Respondent, Glen Harvey Harper, was convicted by Mr. Justice P. Sheppard of the Ontario Court of Justice on two counts of insider trading on July 21, 2000. He was sentenced to one year’s imprisonment on each count, concurrent, and to a fine of $3,951,672.00.
3The trading in question related to shares in Golden Rule Resources Inc., a junior mineral exploration company listed and trading on the Toronto Stock Exchange. Mr. Harper was the President and Chairman of the Board of Directors of that company.
4Golden Rule had an interest in a property in Ghana, West Africa, known as the “Stenpad Concession”. It hoped the site could be developed into a profitable gold mine. In the months of October and November 1996, the Company released information regarding the results of exploration at Stenpad, including extremely positive assay results from both trench and soil sampling. The public was advised that “the gold zone has the potential to host a multi-million ounce deposit”. Golden Rule shares rose in value from $2.15 in October to a peak of $13.80 on January 27, 1997 and $12.40 on March 14, 1997.
5Between January 3 and May 6, 1997 – the period covered by the Information – Golden Rule obtained additional assay results that were not disclosed to the public, namely:
a) assay results of approximately 800 soil samples (received by the Company on January 2 and 3, 1997) which related to wide areas of the Stenpad property and which had returned extremely low results in contrast to the extremely positive soil sample results that had been reported previously; and,
b) assay results of 37 samples (received on March 12, 1997) taken by a third party, Teck Exploration Ltd., from the same locations as the soil samples that had previously yielded the reported positive results, but which returned comparatively low values.
6The trial judge found that the results from the 800 soil samples and the Teck samples were material facts that were not generally disclosed to the public. He also found that the Respondent had had knowledge of the material facts, and rejected the defense that Mr. Harper had held an honest and reasonable mistaken belief regarding the materiality of those samples. He therefore convicted Mr. Harper on both counts.
7The relevant portions of section 122 of the Securities Act are outlined in full below. In general, they provide for a maximum term of imprisonment of two years and/or a basic fine of up to $1 million for contravention of Ontario securities law. Despite the general provision, however, the section also imposes liability to a fine that is a function of “the profit made or loss avoided . . . by reason of the contravention” to a maximum of triple that amount. If the profit made or loss avoided cannot be determined, the section states that the general fine provision applies.
8During the period covered by the Information, Mr. Harper conducted trades in the shares of Golden Rule on his own behalf, on behalf of a company wholly owned by him (Brigand Resources Inc.), on behalf of his wife, and on behalf of a company the shares of which were owned by his wife in trust for their four children (Jaguar Exploration Corp.). The particulars of these trades are as follows:
a) Shares personally held: 101,400 shares were sold for $929,465; 60,000 shares were purchased on the market for $304,250; as well, 184,000 shares were purchased for $377,200 through the exercise of an option;
b) Shares in Brigand Resources Inc.: 50,000 shares were purchased on January 30, 1997 for $479,575 and subsequently sold on March 14, 1997 for $595,555;
c) Shares on account of Debbie Harper, the Respondent’s wife: 5,000 shares were sold on January 27, 1997 for $65,165; 25,000 shares were purchased on May 5, 1997 for $156,600 and subsequently sold on May 6, 1997 for $221,765; and,
d) Shares on account of Jaguar Exploration Corp.: 243,302 shares were sold for $2,295,684.50; on February 6, 1997, 10,000 shares were purchased for $101,000.
9As indicated, the trial judge imposed a custodial sentence of one year, concurrent, on each count. He also imposed a fine. The fine was based upon the “loss avoided” through the trades made while Mr. Harper was suppressing material information, which the trial judge calculated at $3,592,160 ($1,817, 257 in relation to count 1 and $1,774,903 in relation to count 2), plus a “further deterrence” factor of 10%, resulting in a total fine of $3,951,672.
10On appeal, Mr. Justice Roberts, the summary conviction appeal judge, reduced the term of imprisonment to 6 months, concurrent, on each count, and the fine to $1 million on each count. He reduced the fine because, in his view, the Crown had not proved the cause of the fluctuation in the market price was “by reason of the contravention”, there having been other factors that affected the market price of gold exploration shares during the relevant trading period (not the least of which was the infamous Bre-X situation). It was therefore “not possible to conclude that the profits made or loss avoided [by Mr. Harper were] by reason of the contravention”, and it was necessary to revert back to the general fine provisions of section 122(1).
11Leave to appeal was granted by McMurtry C.J.O. only in respect of the fine, on the basis that:
It is . . . essential and in the public interest in relation to the regulation of the securities markets that leave to appeal be granted in relation to the application of the fine provisions of the Securities Act (subsections 122(1), (4), (5) and (6)) following a conviction for Insider Trading.
12For the reasons that follow, I would allow the appeal.
The Statutory Provisions
13The appellant was charged with contravening subsections 76(1) and 122(1)(c) of the Securities Act, and sentenced following conviction pursuant to subsections 122(4), (5), and (6). The relevant portions of those provisions are as follows:
s. 76(1) No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.
s. 122(1) Every person or company that,
(c) contravenes Ontario securities law . . .
is guilty of an offence and on conviction is liable to a fine of not more than $1,000,000 or to imprisonment for a term of not more than two years, or to both.
(4) Despite subsection (1) and in addition to any imprisonment imposed under subsection (1), a person or company that is convicted of contravening subsections 76(1), (2) or (3) is liable to a fine of not less than the profit made or loss avoided by the person or company by reason of the contravention and not more than the greater of,
(a) $1,000,000; and
(b) an amount equal to triple the profit made or loss avoided by the person or company by reason of the contravention.
(5) If it is not possible to determine the profit made or loss avoided by the person or company by reason of the contravention, subsection (4) does not apply but subsection (1) continues to apply.
(6) In subsections (4) and (5),
“loss avoided” means the amount by which the amount received for the security sold in contravention of subsection 76(1) exceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change; (“perte évitée”)
“profit made” means,
(a) the amount by which the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change exceeds the amount paid for the security purchased in contravention of subsection 76(1),
(b) in respect of a short sale, the amount by which the amount received for the security sold in contravention of subsection 76(1) exceeds the average trading price of the security in the twenty trading days following general disclosure of the material fact or the material change, or
(c) the value of any consideration received for informing another person or company of a material fact or material change with respect to the reporting issuer in contravention of subsection 76(2) or (3). (“profit réalisé”)
The Issues
The Appellant’s Issue
14The primary issue raised on this appeal, and the appellant’s issue with respect to which leave was granted is this:
Did the appeal judge err in interpreting the words “by reason of the contravention” in (4) of the Securities Act to mean, in effect, “by reason of the effect of the material non-disclosure on the market price of the shares”?
Respondent’s Issues
15The Respondent raises several concerns of his own with respect to the trial judge’s calculation of the loss avoided and in support of the summary conviction appeal judge’s decision. They are the following:
a) whether the trial judge erred in failing to hold that the loss avoided could not be calculated because the relevant material facts (i.e., the 800 soil sample results and the Teck results) had never, in fact, been generally disclosed;
b) alternatively, whether, if general disclosure had been made, the trial judge erred in failing to hold that the disclosure had been made by means of a Golden Rule press release of May 15, 1997 (as opposed to the press release of July 15, 1997, which the trial judge found to have constituted the general disclosure);
c) whether the trial judge erred in failing to hold that in calculating the loss avoided only trades relating to shares beneficially owned by the Respondent should be considered; and,
d) whether the trial judge erred in failing to hold that the cost of shares purchased during the time frame of the Information should be factored into the calculation of the profit made or loss avoided.
16The Respondent raised an additional issue as well. He argued that the trial judge and the summary conviction appeal judge erred in failing to exercise the court’s jurisdiction pursuant to subsection 59(2) of the Provincial Offences Act R.S.O. 1990, c. P.33, as amended. That provision permits a sentencing judge to impose a fine that is less than a statutorily imposed minimum in light of exceptional circumstances in the case, including whether the Respondent’s net worth demonstrated an inability to pay the fine imposed. Leave to appeal was not granted with respect to this issue, and it need not be pursued further. In any event there was evidence before both the trial judge and the appeal judge which supported the exercise of their discretion, and I can see no basis for interfering with their decisions in this regard.
17The first two matters raised by the Respondent do not address legal questions relating to the application of the fine provisions in section 122. It is accepted that a finding of general disclosure must be made before the profit or loss avoided can be calculated, because each requires a computation of the average trading price in the twenty trading days “following general disclosure of the material fact or the material change”. The trial judge made factual findings that (a) there had been general disclosure of the material facts, and (b) that the disclosure took place by means of Golden Rule’s July 15, 1997 press release. There was an evidentiary basis to support those findings and this Court cannot interfere with them.
18The rest of these Reasons will therefore focus on the main issue raised on the appeal by the Appellant and the two Respondent’s issues regarding the need for beneficial ownership of the traded shares by the convicted person or company and the question whether the cost of shares purchased during the Information period should be factored into the calculation.
Analysis
“By Reason of the Contravention”
19The summary conviction appeal judge found no error in the trial judge’s calculation of the amount of the fine in accordance with the formula set out in the Securities Act. He concluded, however, that a condition precedent to the utilization of subsection 122(4) had not been met and that the trial judge had therefore erred in applying the profit made/loss avoided formula rather than reverting back to the general penalty provisions of subsection 122(1).
20The condition precedent the appeal judge read into the section, on his analysis of the words “by reason of the contravention”, was the requirement that there be evidence of the effect of the suppression of the material facts on the market. He held it is not enough that the contravention contribute to the profit made or loss avoided. Rather, there must be a direct causal linkage between the material non-disclosure and those results. The appeal judge pointed to the penal effects of subsection 122(4) as the rationale for this interpretation. The relevant portions of his decision in this regard are the following:
In his Reasons for Sentence, the learned trial judge does not address the question of “by reason of the contravention”. In my view it is necessary to do so before applying the provisions of (4) of the Securities Act.
In order to analyze what “by reason of the contravention” means in the section, the court must read subsection (5) of the section 122. “If it is not possible to determine the profit made or loss avoided by the person or company by reason of the contravention, subsection (4) does not apply but subsection (1) continues to apply.”
It is clear from this wording that the legislature intended that the crown must prove more than the simple profit or loss incurred in the prohibited trades. The contravention is not simply the result of trades carried out, but is linked to the material facts withheld. There must be evidence of the effect of such suppression of material facts on the market. This is so because of the stringent and onerous results of section 122(4).
In many cases, the crown will have to rely on the general provisions of section 122(1)(c), which provides for a maximum fine of $1,000,000 on each count.
In the case before me on appeal, I accept the submissions of counsel for the appellant that there was not sufficient evidence before the learned trial judge for him to come to the conclusion that the cause of the fluctuation in the market was “by reason of the contravention”. The contravention being the trade by Mr. Harper while suppressing material information. The evidence disclosed for example, that at the same time this trading was going on, the infamous Bre-X scam was greatly affecting the market price of gold exploration mines such as Golden Rule. In addition, there were during the relevant times a number of press releases made by the independent Ghanaian Commission, which were negative. At least two of those being released on May 15, 1997 and July 15, 1997. There was certainly evidence before the court of other factors affecting stock prices at this time. This was a speculative gold stock in the early stages of exploration. No drill holes had been sunk or assayed prior to those referred to in the July, 1997 report of the Ghanaian Commission. Such stocks are notoriously volatile.
In my view, on the evidence before the court it was not possible to conclude that profits made or loss avoided by Mr. Harper were ”by reason of the contravention”. It is not sufficient to say that the contravention contributed to such profits or loss avoidances and in my view, the condition precedent to the imposition of a fine pursuant to section 122(4) has not been met. That would, therefore, bring into play the provisions of section 122(5) which refer the sentencing court back to the general provisions for sentencing found in section 122(1) “… and on conviction is liable to a fine of not more than $1,000,000 or imprisonment for a term of not more than two years or to both.”
(underlining in original; italics added)
21Respectfully, in my opinion, the learned summary conviction appeal judge erred in his analysis and interpretation of the words “by reason of the contravention” in subsection 122(4), which he appears to have concluded meant “by reason of the effect of the material non-disclosure on the market price of the shares”. That is not what the provision says, however. It says “by reason of the contravention.”
22The “contravention”, as the summary conviction appeal judge noted, is ”the trade by Mr. Harper while suppressing material information”. Put another way, the contravention is the trading with knowledge of undisclosed material facts while an insider in relation to the shares being traded. When this concept is imported into the language of subsection 122(4), the pertinent provision becomes “profit made or loss avoided by reason of the trading with knowledge of undisclosed material facts while an insider”. This is not the language of cause and effect.
23In my view the phrase “by reason of the contravention” means “by virtue of the insider having engaged in the impugned trading”. Mr. Harper traded in the Golden Rule shares when he had knowledge of material facts that had not been disclosed to the market. By doing so he avoided a loss. The loss was avoided “by reason of the contravention”.
24It is a basic principle of statutory interpretation 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 the Legislature: Rizzo & Rizzo Shoes Ltd. (Re), 1998 837 (SCC), [1998] 1 S.C.R. 27, per Iacobucci J. at paragraph 21. It is also a principle of statutory interpretation that where the liberty of the subject is affected and there are two reasonable statutory interpretations available, the interpretation favouring the accused should be adopted: see R. v. McIntosh, 1995 124 (SCC), [1995] 1 S.C.R. 686, per Lamer C.J., at paragraph 29. In my view, however, the language of subsection 122(4) is not open to two reasonable interpretations.
25The interpretation advanced here is consistent with the language of subsection 122(4). Reading the words “by reason of the contravention” to mean “by virtue of the insider having engaged in the impugned trading” fits with the ordinary and grammatical sense of the words, having regard to what constitutes “the contravention”. Reading the words as having cause and effect meaning in relation to the effect of the material non-disclosure on market price, does not.
26The interpretation advanced here is also consistent with the scheme and object of the Act, which is to recapture profits made or losses avoided by insiders trading in contravention of Ontario securities law. The interpretation advanced by the Respondent makes it practically impossible to affect that purpose. The overall object of this aspect of the Securities Act is to police trading to ensure fairness in the securities marketplace and to sanction contraventions. The clear legislative intent reflected in the language of the subsection is to provide a simple formula by which to quantify the extent of the loss which the Respondent avoided by reason of having contravened the law. As the Appellant puts it, in its factum, “any ‘amount’ which the Respondent received by illegally selling the securities of Golden Rule which exceeded what he would have received had he waited until he was legally entitled to sell those securities is a loss which the Respondent avoided ‘by reason of the contravention’”.
27This interpretation enhances the purposes and objects of the Act, whereas the narrow interpretation advanced by the Respondent and adopted by the appeal judge undermines those goals, in my opinion. Indeed, the interpretation adopted by the appeal judge renders the provisions of subsection 122(4) pointless or futile, in practical terms. Rare would it be that the Crown could show a direct and sole causal connection between the failure to disclose the material facts and the profit made or loss avoided. There are a myriad of factors that routinely affect the price of publicly traded securities at any given time – particularly the market in junior gold mining stocks. These include such things as fluctuation in interest rates, the price of gold, world developments, announcements by other companies, and rumours. It would seldom, if ever, be possible for the Crown to isolate, and quantify, the effect of the suppression of the material facts on market price and to exclude from the subsection 122(4) calculation the effect that those other factors had on the average trading price and, therefore, on the loss avoided.
28Moreover, as the Appellant submits, the interpretation adopted by the appeal judge could well undermine the objective of regulating insider trading, namely to foster the disclosure of material information and to prevent unfair gains by those “in the know”. That interpretation could operate as a disincentive to disclosure, because the longer the insider suppresses the material facts the greater the likelihood of the “other factors” impacting on the stock price.
29Some meaning must be given to the insertion of subsections (4) and (6) in section 122. The Legislature could not have intended to put in the statute a provision that is ineffective in practical terms and operates as a disincentive to disclosure. Were that the intention, the Legislature might as well have left the section with nothing more than the general fine and imprisonment mandate of subsection 122(1). It did not do so.
30I would therefore give effect to the Appellant’s argument on this point and allow the appeal in that regard.
31With respect to the remaining Respondent’s issues, I am satisfied that one of them is of no consequence to the determination of this appeal but that the second of them has a significant impact on the final disposition of the sentence. I turn to those issues now.
The Cost of Purchases During the Charge Period
32Mr. Harper made various purchases of Golden Rule shares during the charge period, as well as the sales that are the subject of the proceedings. The Respondent submits that the cost of the shares purchased should be factored into the “loss avoidance” calculation. These purchases during the period of non-disclosure, it is argued, formed part of the contravention and should be taken into account. Some of them actually resulted in a profit, as opposed to a loss avoided.
33I do not accept this submission.
34The thrust of the fine calculation formula contained in subsection 122(4) is to deprive the person or company convicted of insider trading of the profits made or losses avoided by reason of the insider engaging in the prohibited trading. The definitions of “loss avoided” and “profit made”, contained in subsection 122(6) of the Act, make it clear that the benchmarks are the amount by which the amount received from the sales exceeds the twenty-day average trading price following general disclosure (loss avoided) and the amount by which that twenty-day average trading price exceeds the amount paid for the security (profit made).
35Thus, it is not a matter of simply subtracting the cost of the shares from the subsequent sale price, and determining if there is a “profit”. The amount paid for the security only comes into play when the twenty-day average trading price following disclosure is greater than that amount. That is not the case here with the shares that were sold before disclosure at a price higher than the acquisition price. Therefore, what is relevant to the subsection 122(4) formula are the losses avoided. With respect to the losses avoided, what matters is the amount received from the sales, in relation to the post-disclosure twenty-day average trading price. The cost of the shares has no pertinence to this calculation.
36Accordingly, I would not give effect to this submission by the Respondent.
Beneficiaries of the Proceeds
37The Respondent argues, finally, that the trial judge erred by including in the “loss avoided” calculation the shares that were traded by Mr. Harper but which he did not beneficially own. Those shares consisted of the shares owned by Debbie Harper, the Respondent’s wife, and by Jaguar Exploration Corp., a company whose shares were owned by Mrs. Harper in trust for the couple’s four children.
38I agree with this submission. Accepting it has considerable impact on the “loss avoidance” calculation.
39The language of subsection 122(4) is clear. Where a person or company is convicted of insider trading, the fine formula set out therein relates to “the profit made or loss avoided by the person or company”.
40The Respondent does not quarrel with the inclusion in the formula calculation of the Golden Rule shares that were traded out of the account of Brigand Resources Inc., a company wholly owned by Mr. Harper. The inclusion of the shares in the Debbie Harper and Jaguar Exploration Corp. accounts is another matter, however.
41The trial judge incorporated the sales of these latter shares in the formula calculation on the basis that Mr. Harper was the controlling or “operating mind” behind the trades. That is undoubtedly true; but it is not enough, in my view. For a sale of shares to be included in the subsection 122(4) calculation, the person or company convicted must have a direct or indirect beneficial interest in the shares being sold. There is no evidence that Mr. Harper had any such interest in the shares in his wife’s account or in those in the Jaguar Exploration Corp. account, and the trial judge made no finding to that effect.
42I would therefore give effect to this submission by the Respondent. The “loss avoided” calculation must be adjusted accordingly. We are advised that if this modification is made, the loss avoided amounts to $1,364,536.00, taking both counts together, as opposed to the $3,592,285.38 arrived at by the trial judge. Imposing the same 10% deterrence factor that the trial judge applied, the total fine that would be imposed on a loss avoidance basis would therefore amount to $1,500,990.00.
43However, subsection 122(4) imposes liability to a fine of not less than the profit made or loss avoided and not more than the greater of $1,000,000 on each count and triple the profit made or loss avoided. In this case, triple the loss avoided would amount to $4,093,608. It is clear that both the trial judge and the summary conviction appeal judge were of the view that a minimum fine was not appropriate in the circumstances of this case. For one thing, it would simply constitute a recapture of the loss improperly avoided and impose no additional financial penalty at all.
44Accordingly, in all the circumstances – and notwithstanding the validity of the Respondent’s argument that the trial judge erred by including in the loss avoidance calculation the shares not beneficially owned by Mr. Harper – I would not interfere with the total fine of $2,000,000 imposed by the summary conviction appeal judge.
45Since the hearing of this appeal, counsel have made submissions regarding the applicability of the fine surcharge, which is automatically imposed by s. 60.1 of the Provincial Offences Act. In this case, the surcharge is $400,000, calculated at 20% of the fine imposed. Counsel for Mr. Harper submits that it is appropriate for the court to consider the surcharge in determining the fitness of the sentence imposed at trial: see R. v. Henry Heyink Construction Ltd., (1999), 1999 1254 (ON CA), 118 O.A.C. 261, at paragraph 11. He further argues that the fine surcharge is relevant to the issue of whether the fine should be reduced by reason of Mr. Harper’s inability to pay.
46I agree that it is appropriate for the court to consider the impact of the surcharge in determining the fitness of the sentence. However, I would not reduce the fine imposed by the summary conviction appeal judge on that basis, given the magnitude of the impugned insider trading and the fact that the Respondent was exposed to a term of imprisonment plus a potential fine of over $4 million. Mr. Harper has paid most of the $2 million fine. I am not satisfied that the record demonstrates an inability to pay the additional surcharge.
Disposition
47Accordingly, although giving effect to the Crown’s argument that the summary conviction appeal judge erred in his interpretation of the provisions of (4) of the Securities Act, I would not interfere with the sentence imposed of $1,000,000 on each count, for a total fine imposed of $2,000,000. The appeal as to sentence must therefore be dismissed.
“R. A. Blair RSJ (ad hoc)
“I agree. R. Roy McMurtry C.J.O.”
“I agree. Robert P. Armstrong J.A.”
Released: Oct. 31, 2003 “RRM”