Ontario Securities Commission v. Sextant Capital Management Inc. et al.

[Indexed as: Ontario Securities Commission v. Sextant Capital Management Inc.]

100 O.R. (3d) 706

2010 ONCA 228

Court of Appeal for Ontario,

Feldman, Cronk and Gillese JJ.A.

March 29, 2010

Securities regulation -- Directions to freeze funds -- Continuation -- Test established in Ontario (Securities Commission) v. RBC Dominion Securities Inc. continuing to apply when determining whether to continue Commission's directions to freeze funds under s. 126 of Securities Act -- Securities Act, R.S.O. 1990, c. S.5, s. 126.

The Commission issued an order under s. 126 of the Securities Act freezing two offshore funds which were owned or controlled by S (the "Offshore Directions"). A class proceeding had been brought on behalf of non-Canadian investors in the offshore funds. A Mareva injunction was sought in that action to protect the moneys held by the offshore funds in Ontario from dissipation. The Commission applied for an order continuing the Offshore Directions. The application judge granted the Mareva injunction but declined to continue the Offshore Directions. The Commission appealed the latter decision and asked the Court of Appeal to approve a new legal test ("contextual reasonableness") to be applied by a court when deciding under s. 126(5) of the Act whether to continue freeze directions made by the Commission under s. 126(1).

Held, the appeal should be dismissed.

The test established in Ontario (Securities Commission) v. RBC Dominion Securities Inc. (which was applied by the application judge) continues to be applicable when deciding whether to continue freeze directions. That test requires: (1) a strong prima facie case or a serious issue to be tried as to whether there has been a contravention of the Securities Act; (2) a close connection between the alleged [page707] misconduct and the frozen assets; and (3) evidence of potential dissipation of assets. That test is to be applied in a flexible manner with the required strength of proof of each component of the test dependent on the circumstances of the particular case. The application judge did not err in finding that a breach of the Act is a necessary requirement for a freeze order and that the evidence relied on by the Commission in this case did not establish a prima facie case of breach of the Act. The application judge may have been too stringent in his approach to th e requirements of the second branch of the test, in that he required the Commission to prove that an identifiable investor made his or her investment based on one of the misrepresentations alleged by the Commission and that the invested funds were in the frozen accounts. However, there was no error in the result reached by the application judge. He was aware of the serious wrongdoing that appeared to be the modus operandi of S in the operation of all his related entities, and he was prepared to give the appropriate interim remedy in the class action. He was not satisfied that the evidence presented by the Commission amounted to anything more than a general concern about the operation of funds held in Ontario, which was not sufficiently linked to the enforcement jurisdiction of the Commission to allow the court to continue the Offshore Directions under s. 126(5) of the Act. He did not err in rejecting the Commission's argument that the fact that the funds were operated from Ontario provided a suffici ent link.

APPEAL from the decision of Wilton-Siegel J., [2009] O.J. No. 881 (S.C.J.) dismissing an application to continue directions made by the Ontario Securities Commission.

Cases referred to Ontario (Securities Commission) v. RBC Dominion Securities Inc. (2001), [2001 27979 (ON SC)], 54 O.R. (3d) 767, [2001] O.J. No. 2834, [2001] O.T.C. 534, 28 B.L.R. (3d) 134, 106 A.C.W.S. (3d) 936, 50 W.C.B. (2d) 392 (S.C.J.), apld Other cases referred to Klyties's Development Inc. (Re), 2006 LNABASC 623, 2006 ABASC 1763 (Alta. Sec. Comm.); Ontario (Securities Commission) v. 1367682 Ontario Ltd. (c.o.b. De Freitas & Associates), [2008] O.J. No. 2020, 167 A.C.W.S. (3d) 825 (S.C.J.); Ontario (Securities Commission) v. von Anhalt, [2005] O.J. No. 247, [2005] O.T.C. 59, 136 A.C.W.S. (3d) 769 (S.C.J.); Workum (Re), [2005] A.S.C.D. No. 594, 2005 LNABASC 811, 2005 ABASC 425 (Alta. Sec. Comm.) Statutes referred to Canadian Charter of Rights and Freedoms Securities Act, R.S.O. 1990, c. S.5, ss. 9(1), 111, 126 [as am.], (1) [as am.], (a), (b), (5) [as am.], (6), (7), 126.2 [as am.], 128(4)

Philip Anisman, Susan Kushneryk and Matthew Britton, for appellant. Kevin Richard, for respondents Otto Spork and Sextant Capital Management A Islandi EHF.

The judgment of the court was delivered by

[1] FELDMAN J.A: -- The Ontario Securities Commission (the "Commission") appeals from the decision of the application judge, Wilton-Siegel J., not to continue directions made by the [page708] Commission under s. 126 of the Securities Act, R.S.O. 1990, c. S.5 to freeze two offshore funds held in Toronto by a fund-holding agent, Newedge Canada Inc. (the "Offshore Directions"). The Commission asks this court to approve a new legal test to be applied by a court when deciding under s. 126(5) whether to continue freeze directions made by the Commission under s. 126(1).

Factual Background

[2] The named respondent parties in this application are not the owners of the funds targeted by the Offshore Directions that the Commission seeks to have continued in the instant appeal. They are Canadian entities owned or controlled by the same man who owns or controls the targeted funds, Otto Spork (the "Sextant Canadian entities"). The targeted funds are the Sextant Strategic Hybrid Hedge Resource Fund Offshore Ltd. (the "Sextant Hybrid Fund") and the Sextant Strategic Global Water Fund Offshore Ltd. (the "Sextant Water Fund"), together referred to as the "Offshore Funds" or the "Funds". The Offshore Funds were incorporated under the laws of the Cayman Islands and have a stated net asset value of approximately US$100 million. Importantly for this proceeding, according to the Notice of Application, they have no Canadian investors.

[3] Accounts of the Sextant Canadian entities held in Ontario were also frozen by the Commission and those freeze directions were continued by order of the Superior Court under s. 126(5) of the Securities Act. Subsequently, at the request of the Commission, a receiver of the Sextant Canadian entities was appointed because of perceived fraud in the operation of those entities and the fear that their funds would be removed from Ontario by Mr. Spork if they were not protected. The receiver did not take part in this appeal, having determined, after examining the records of the entities under receivership, that it did not appear to have any interest in the Offshore Funds.

[4] The Commission's concern with respect to all of the Spork entities arose out of a class proceeding brought by Squirrel Trust No. 1 on behalf of non-Canadian investors in the Offshore Funds, where a Mareva injunction was sought to protect the moneys held by the Offshore Funds in Ontario from dissipation, pending the class action.

[5] Wilton-Siegel J. heard the two applications, one for the Mareva injunction in the class action and the other by the Commission for an order continuing the Offshore Directions, on two consecutive days. On February 27, 2009, he released his reasons granting the Mareva injunction. On March 2, 2009, he released his reasons declining to continue the Offshore Directions. [page709]

The Mareva Injunction Application

[6] The basis of the class action claim was that while the Offshore Funds had exercised a forced redemption of the Class A and Class F shares held by the Squirrel Trust No. 1 as of September 30, 2008, they had not followed through with that redemption. The assets in Ontario were insufficient to satisfy any judgment in respect of the redemption of the shares. The basis for the Mareva injunction application was that the value of the Offshore Funds had been falsely inflated in a manner I will explain below, in order to allow another Spork entity to pay itself significant performance-based management fees. There was, therefore, a serious concern that the Offshore Funds would continue to be dissipated by Spork if they were not protected by a court-ordered injunction.

[7] In applying the respective steps of the Mareva test, the application judge first concluded that the plaintiff class had made out a strong prima facie case that the Offshore Funds were legally required to redeem the shares in the Squirrel Trust No. 1 at the price and in accordance with the forced redemption action that they took on September 30, 2008.

[8] Next, the application judge considered whether there was a genuine risk of dissipation of the assets of the Offshore Funds held in Ontario by Newedge. The evidence of the risk of dissipation took several forms and is important for understanding the Commission's concern regarding the operation of the Offshore Funds.

[9] The first matter relied on was Spork's attempt to transfer US$220,000 from the Sextant Hybrid Fund account at Newedge to another Sextant Hybrid Fund account at the Bank of Bermuda, also managed by the manager of the Offshore Funds, another Spork company called Sextant Capital Management a Islandi ehf (the "Manager"), an Icelandic corporation. This attempted transfer was made in the face of the class action proceeding and shortly after the funds in the accounts of the Sextant Canadian entities had been frozen by the Commission. The application judge found this sufficient, in the absence of a business explanation for the transfer, to establish a significant risk of dissipation of the assets in the Offshore Funds accounts.

[10] The second matter was the calculation and payment of the performance fees based on the inflated values attributed by Spork to the Offshore Funds.

[11] The following is the background to the values. Each of the Offshore Funds made a significant investment in two private Luxemburg entities founded by Spork: Iceland Glacier Products [page710] S.a.r.l. ("IGP") and Iceland Global Water 2 Partners SCA ("IGW"). [See Note 1 below] IGP had no revenue-producing business operations and no current assets other than an alleged 95-year exclusive lease to take water from a glacier in Iceland for commercial sale; nor was there evidence of any prospect for revenue-producing business operations in the future. Notwithstanding these facts, the Offshore Funds ascribed a market value of $226 million to IGP as of November 28, 2008. The application judge rejected the evidence tendered on behalf of the Offshore Funds that purported to be third-party valuations that supported the alleged value.

[12] The offering memoranda of the Offshore Funds provided that the Manager was to be paid performance fees monthly in an amount equal to 20 per cent of the increase in value of the "Class Net Asset Values" of the Class A and Class F shares of the Offshore Funds since the previous month-end. From June 2007 to November 2008, the net asset values of the two Offshore Funds were alleged to have increased by 506 per cent and 519.2 per cent respectively, and performance fees were paid based on those increases. The increases were essentially attributable to the increase in market value of the IGP shares held by the two funds.

[13] The application judge found that the market value of the IGP shares was not justifiable. To the contrary, he found that there was no evidence that the value of the IGP shares was anything other than the value of the investment by the Offshore Funds in IGP to purchase those shares. Therefore, there was no basis for the payment of the performance fees during 2007 and 2008. The application judge concluded that

The facts demonstrate a clear propensity on the part of these parties . . . to appropriate assets of the Funds to the detriment of the shareholders of the Funds. The evidence indicates that the Manager and Spork have pursued a course of action that involved furthering the interests of IGP at the expense of honouring their fiduciary and contractual obligations to the shareholders of the Funds, including any judgment that may hereafter be obtained in this proceeding. These circumstances therefore establish a genuine risk that assets of the Funds will be dissipated in the absence of the requested relief.

[14] Having concluded that he would grant the requested Mareva injunction, the application judge made two further observations about the operation of the Spork entities based on the evidence before him that further supported his conclusion. The first was that the Offshore Funds' investment in IGP and [page711] IGW was disproportionate relative to the total assets of the funds and could not be justified "as reasonable investments under recognized investment criteria on the record before the Court".

[15] The second significant observation by the application judge was that the Offshore Funds, along with the Sextant Strategic Opportunities Hedge Fund L.P. (the "Canadian Hedge Fund"), "have essentially become funding vehicles for IGP and IGW" and that those companies could not have conducted any business activities in 2007 and 2008 without the investments by the Offshore Funds and the Canadian Hedge Fund. Finally, as the benefit of these investments accrued to Spork as the only other substantial shareholder of IGP and IGW,

[t]he evidence therefore suggests a serious likelihood that Spork would cause the Funds to direct any remaining monies in the Funds' accounts to IGP to attempt to preserve the value of his investment in IGP.

The Commission Application for an Extension of the Offshore Directions

[16] The second application before the application judge was for an order pursuant to s. 126(5) of the Securities Act to continue directions issued by the Commission on December 17, 2008 to freeze the Offshore Funds. To understand properly the process that the Securities Act provides for the Commission to issue directions to freeze certain assets and for the Superior Court to continue those directions by order, I find it convenient to recite the relevant provisions of s. 126:

126(1) If the Commission considers it expedient, (a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or (b) to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction,

the Commission may direct a person or company having on deposit or under its control or for safekeeping any funds, securities or property of any person or company to retain those funds, securities or property and to hold them until the Commission in writing revokes the direction or consents to release a particular fund, security or property from the direction, or until the Superior Court of Justice orders otherwise. . . . . .

(5) As soon as practicable and not later than seven days after a direction is issued under subsection (1), the Commission shall apply to the Superior Court of Justice to continue the direction or for such other order as the court considers appropriate. [page712]

(6) A direction under subsection (1) may be made without notice but, in that event, copies of the direction shall be sent forthwith by such means as the Commission may determine to all persons and companies named in the direction.

(7) A person or company directly affected by a direction may apply to the Commission for clarification or to have the direction varied or revoked.

[17] The Offshore Directions of concern were originally issued by the Commission on December 17, 2008. They followed similar directions issued by the Commission on December 8, 2008 that froze the accounts of the Sextant Canadian entities. Those directions were continued by the Superior Court on December 17, 2008.

[18] The application judge used the test first established by Farley J. in Ontario (Securities Commission) v. RBC Dominion Securities Inc. (2001), 2001 27979 (ON SC), 54 O.R. (3d) 767, [2001] O.J. No. 2834 (S.C.J.) to be applied by the Superior Court when determining whether to continue directions of the Commission to freeze funds. It is a three-part test similar to the test for a Mareva injunction: (1) a strong prima facie case or a serious issue to be tried, as to whether there has been a contravention of the Securities Act; (2) a close connection between the alleged misconduct and the frozen assets; and (3) evidence of potential dissipation of assets.

[19] The first issue was whether the Commission could point to any breach of the Securities Act by or in relation to the Offshore Funds. The Commission was initially relying on alleged breaches of s. 111 of the Act by the Canadian Hedge Fund but by the time of the application, it could not link any such alleged breaches to the Offshore Funds. Similarly, the Commission was also initially relying on questions regarding the propriety of certain payments by the Canadian Hedge Fund into the Sextant Water Fund, but again, the Commission could not identify any breach of the Act relating to the payments. Accordingly, on the hearing of the application, the Commission was relying on only two grounds that it submitted could satisfy the first part of the RBC test and justify continuation of the Offshore Directions.

[20] The first ground was based on a January 2009 e-mail request received from the Cayman Islands Monetary Authority, stating that there may be some breaches of the Cayman Islands laws by the Offshore Funds and requesting continuation of the Offshore Directions on that basis under s. 126(1)(b). The application judge rejected the extension order on this ground. First, he found that as the original Offshore Directions had been made under s. 126(1)(a), they could not be continued on a totally new [page713] ground under s. 126(1)(b). Second, the vague, non-specific allegations of breach made by the Cayman Islands Monetary Authority were not sufficient to meet the first or second prongs of the RBC test and to ground an order.

[21] The second ground was based on two alleged misrepresentations or untrue statements concerning the Offshore Funds, which were said to constitute breaches of s. 126.2 of the Securities Act. That provision states:

126.2(1) A person or company shall not make a statement that the person or company knows or reasonably ought to know, (a) in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and (b) would reasonably be expected to have a significant effect on the market price or value of a security.

[22] The first allegation was that the net asset values of the shares of the Offshore Funds that were set out in Internet- posted performance charts for the Funds to September 2008 were misleading. The application judge agreed that the net asset values could indeed be misleading, based on his findings in the Squirrel Trust No. 1 application relating to the underlying value of IGP. However, the Commission conceded that no Canadian residents owned shares in the Funds, and therefore there was a serious issue whether any breach of the Act had occurred. Furthermore, regarding the second branch of the test, the Commission had not established any connection between the alleged misrepresentations and any moneys in the accounts or that any investor had acquired shares based on the performance charts. In that regard, the evidence was that a password was required to access these charts on the Manager's website.

[23] The second allegation of misrepresentation or untrue statements was that the offering memoranda of the Offshore Funds did not disclose that 50 per cent of the assets of each of the Funds would be invested in IGP and IGW, two start-up companies in the water business associated with Spork, the founder of the Offshore Funds. The application judge concluded that this ground as well did not meet the RBC test. First, he found that there was no clear misrepresentation based on the wording of the offering memoranda, which did state that the investments would be in the water business, nor did they identify ratios of proposed public versus private investments. Second, even if the disclosure was untrue at the date of the application, there was [page714] no evidence that the statements in the offering memoranda were untrue when they were made.

[24] The application judge was also of the view that to succeed on the second branch of the RBC test, a sufficiently close connection between the alleged breaches and the Funds must be established by showing that one or more investors relied on specific misrepresentations in the offering memoranda when they made the decision to buy shares in the Funds and that the subscription proceeds were deposited into the frozen accounts. The Commission asked the court to draw the inference that some investors were misled and that their subscription moneys were paid into the frozen accounts.

[25] The application judge rejected this submission because it did not meet the standard of proof required by the RBC test. Given that a s. 126 freeze order is an extraordinary remedy involving the seizure of assets prior to the completion of an investigation by the Commission, the standard of proof requires at least a serious issue to be tried regarding a specific breach. In this case, drawing the inference that an unspecified investor was misled at some unspecified time could not amount to such a serious issue.

Issues

[26] The appellant raises four issues: (1) whether this court should approve the RBC standard for a court to apply on a s. 126(5) application or accept the submission of the Commission that the standard should be "contextual reasonableness" and, if so, whether the application judge erred by failing to apply that standard; (2) in the alternative, whether the application judge erred in his application of the RBC test; (3) in the further alternative, whether the application judge erred in failing to find misleading or untrue statements capable of constituting a breach of s. 126.2 of the Act; [and] (4) whether the Offshore Directions should be continued.

Analysis

(1) The standard to be applied for continuing a direction to freeze accounts

[27] The legislative mandate under consideration is contained in s. 126(1) and (5) of the Securities Act, which I recite again for ease of reference: [page715]

126(1) If the Commission considers it expedient, (a) for the due administration of Ontario securities law or the regulation of the capital markets in Ontario; or (b) to assist in the due administration of the securities laws or the regulation of the capital markets in another jurisdiction,

the Commission may direct a person or company having on deposit or under its control or for safekeeping any funds, securities or property of any person or company to retain those funds, securities or property and to hold them until the Commission in writing revokes the direction or consents to release a particular fund, security or property from the direction, or until the Superior Court of Justice orders otherwise. . . . . .

(5) As soon as practicable and not later than seven days after a direction is issued under subsection (1), the Commission shall apply to the Superior Court of Justice to continue the direction or for such other order as the court considers appropriate.

[28] The intent of s. 126(1)(a) is to give the Commission the power to act quickly to preserve property as soon as it has concerns about the possible dissipation of that property out of Ontario and to do so based on a standard of expediency "for the due administration of Ontario securities law or the regulation of the capital markets in Ontario". Clearly, the standard of proof for the Commission to issue freeze directions is very low, as it is anticipated that the Commission staff may only be commencing an investigation when they believe a direction is necessary. However, having acted with expedience, the Commission must then seek a court order within seven days to continue the freeze and to be able to complete the investigation.

[29] Subsection (5) does not use the term "expedient". In fact, the wording of the section gives little guidance as to the standard the court is to apply when determining whether to continue the freeze. The Commission has explained in its factum that the purpose of inserting a court continuance process into the legislative scheme in the 1994 amendments was to ensure that a continuing order is made in accordance with Canadian Charter of Rights and Freedoms rights.

The Commission's position

[30] The appellant argues that when s. 126 is read as a whole, including the ability of an affected person to apply to the Commission under s. 126(7) for clarification or to vary or revoke its directions, and that that decision can be appealed to the Divisional Court under s. 9(1), "it is apparent that s. 126(5) was not intended to substitute the court for the Commission, but only to ensure a mechanism for court consideration of the issuance of [page716] the direction". The appellant proposes that the proper role for the court is to also apply the expediency standard when deciding whether to continue a freeze order under s. 126(5) by considering whether it is reasonable on the evidence for the court to conclude that it is expedient to continue the Commission's direction.

[31] The appellant submits that applying such a "contextual reasonableness standard" would allow the court to consider all relevant factors, including the stage of the Commission's investigation, the strength of the evidence, whether a proceeding has been initiated and any other circumstances.

Analysis

[32] The Commission is seeking to displace the three-part test propounded in 2001 in Ontario (Securities Commission) v. RBC Dominion Securities. I will set out the test again here for ease of reference: (1) a strong prima facie case or a serious issue to be tried, as to whether there has been a contravention of the Securities Act; (2) a close connection between the alleged misconduct and the frozen assets; and (3) evidence of potential dissipation of assets.

[33] Importantly, the courts that have discussed or applied the test have not insisted on a rigid application of the test but have imported a measure of flexibility. In RBC itself, where Farley J. was faced with interpreting and applying s. 126(5) for the first time, he stated, at para. 13, that the test for a Mareva injunction was a useful guide but "with some adjustments". For example, the strength of the prima facie case of breach of the Act required to continue a freeze of funds may depend on whether the freeze would interfere with the operation of the account in question -- if the account could continue to operate, then a lesser case based on circumstantial evidence could suffice.

[34] The flexibility of the test was remarked on by Pepall J. in Ontario (Securities Commission) v. von Anhalt, [2005] O.J. No. 247, [2005] O.T.C. 59 (S.C.J.), a cease-trading order case under s. 128(4) of the Act. In rejecting the need for a strong prima facie case for an order under s. 128(4), Pepall J. commented, at para. 16, that the freeze order under s. 126 is a more onerous order than the cease trade order, but that even under s. 126(5), Farley J. in RBC had made it clear that a strong prima facie case of breach of the Act would not be required in every case depending on the circumstances. [page717]

[35] The last case before this one to consider the test under s. 126(5) was Ontario (Securities Commission) v. 1367682 Ontario Ltd. (c.o.b. De Freitas & Associates), [2008] O.J. No. 2020, 167 A.C.W.S. (3d) 825 (S.C.J.), another decision of Wilton-Siegel J. In that case, the court noted again that in RBC, Farley J. had anticipated the ability to apply a flexible standard regarding the strength of the prima facie case required. However, in De Freitas, the court decided that a strong prima facie case of breach was required: De Freitas, at paras. 28-31.

[36] In my view, although the jurisprudence under this section is limited, the RBC test that has been articulated and applied is cogent, fair and effective. It sets out a standard against which a court may test the evidence presented to it and based on which the court is asked to impose a very onerous order that freezes assets of a corporation operating in the financial markets in Ontario.

[37] Contrary to the submission of the Commission, the court is not being asked to approve the Commission's Offshore Directions or to review them to determine whether it was expedient for the Commission to make them in the first instance. Instead, the court is asked to make an order to continue the temporary Offshore Directions into the future, based on the record before it. Clearly, a court needs criteria to apply in order to determine whether to make any order, and the affected parties also need to know the factors that will affect their position. This is quite different from the original directions of the Commission that can be made without notice and served on the affected parties thereafter: s. 126(6).

[38] In my view, the RBC three-part test provides appropriate criteria for a court to consider when determining whether to continue freeze directions under s. 126(5). I am also of the view that the test is to be applied in a flexible manner with the required strength of proof of each component of the test dependent on the circumstances of the particular case. This would include not only the prima facie case or serious issue to be tried of breach of the Act, but also the link between the wrongdoing and the targeted fund. This is also the approach taken under the British Columbia and Alberta legislation, which provide a different procedure but seek to accomplish the same objective: see, for example, Klytie's Development Inc. (Re), 2006 LNABASC 623, 2006 ABASC 1763 (Alta. Sec. Comm.); Workum (Re), [2005] A.S.C.D. No. 594, 2005 ABASC 425 (Alta. Sec. Comm.). [See Note 2 below] [page718]

(2) Error by the application judge in applying the test

[39] The application judge found that the evidence relied on by the Commission in this case did not establish a prima facie case of breach of the Act or a sufficient connection between the alleged wrongdoing and the Funds. The Commission argues on this appeal that a breach of the Act is not a necessary requirement for a freeze order, and that the order should be issued where there is evidence of wrongful misappropriation of funds after they are invested, in order to protect investors generally.

[40] Although at first blush this argument may appear attractive, on closer consideration, it does not bear scrutiny. The purpose of a freeze direction is to give the Commission time to investigate alleged wrongdoing under the Securities Act with a view to the Commission instituting proceedings under the Act in respect of that wrongdoing. The Commission's jurisdiction flows from the Act. If the alleged wrongdoing cannot lead to any proceeding under the Act, then the freeze order would amount to a remedy in itself and not a mechanism to preserve assets pending a proper proceeding under the Act with prescribed remedies upon proof of breach of the Act.

[41] No case presented, including cases from other provinces, suggests that an apparent breach of the Act is not required as a first criterion for a freeze order. The application judge correctly required at least a prima facie case of breach of the Act. I also note that on the application hearing, the Commission itself recognized that it had to show evidence of a breach of the Act and narrowed its arguments once it became apparent that some of its alleged breaches could not be established.

[42] I also observe that in its evidence, the Commission's representative stated that Commission staff intended to amend a Statement of Allegations originally issued on December 8, 2008 in support of a temporary cease-trade order that the Commission issued against the respondents. He swore in an affidavit on January 12, 2009 that staff intended to amend the statement "to [page719] include allegations with respect to the wrongful activity undertaken in Ontario in connection with the Sextant Offshore Funds". However, the record does not contain any amended statement or indicate that such amendments have, in fact, been made.

[43] Another reason for the application judge's refusal to continue the Offshore Directions was because the evidence did not establish a link from the alleged misrepresentations in the performance charts and the offering memoranda to the Offshore Funds. He required the Commission to prove that an identifiable investor made his or her investment based on one of the alleged misrepresentations and that the invested funds were in the frozen accounts.

[44] In my view, the application judge may well have been too stringent in his approach to the requirements of the second branch of the test. For example, had there been sufficient evidence of a breach of the Act, it may have been sufficient for the Commission to have been able to show that identifiable investors who had access to the impugned misrepresentations, whether or not they relied on them, invested in the Funds thereafter and that their investment moneys were at some point in the frozen accounts. Arguably, such an investor should be protected pending the Commission investigation, even if the actual moneys he or she invested had already been wrongfully removed.

[45] Having said that, I see no error in the result reached by the application judge in this case. He was well aware of the serious wrongdoing that appeared to be the modus operandi of Spork in the operation of all of his related Sextant entities, and he was prepared to give an appropriate interim remedy in the Squirrel Trust No. 1 action. He was, however, not satisfied that the evidence presented by the Commission amounted to anything more than general concern about the operation of funds held in Ontario, which was not sufficiently linked to the enforcement jurisdiction of the Commission to allow the court to continue the Offshore Directions under s. 126(5) of the Act. The Commission argues on the appeal that because the Funds are operated from Ontario, that should be a sufficient link. I agree with the application judge's reason for rejecting this assertion.

(3) Error by the application judge in his findings on the evidence

[46] I also see no palpable and overriding error by the application judge in his conclusion that he was not prepared to interpret the offering memoranda as misleading at the time they were [page720] issued. [See Note 3 below] This was a conclusion that was open to him on the record. The Commission also argues that that conclusion was not consistent with the judge's observation in the Mareva injunction ruling that the offering memoranda did not state that the Offshore Funds would invest disproportionately in IPG and IPW. I do not see any inconsistency. The application judge did not go so far as to say that the failure of the offering memoranda to state that moneys would be disproportionately invested amounted to a misrepresentation. Rather, his conclusion was focused on the fact that such an investment could not be justified as reasonable based on recognized investment criteria.

[47] The decision reached by the application judge not to continue the Offshore Directions also made practical sense in the circumstances, where the only known investors whose moneys were in the Offshore Funds held in Ontario were already protected by the Mareva injunction in the Squirrel Trust No. 1 action.

(4) Should the Offshore Directions be continued

[48] At the conclusion of the argument in this matter, counsel for the appellant confirmed that as long as the Mareva injunction in the Squirrel Trust No. 1 action continued in place, that order had the same effect in this case as a freeze order under s. 126 of the Act. He further confirmed that an arrangement had been made for the Commission to receive notice if the Mareva injunction were to be lifted, and in that event, the Commission would seek new freeze directions under s. 126(1) based on the state of its investigation at that time.

Conclusion

[49] In my view, the application judge made no error in his application of the RBC test in this case, and I would not interfere with his conclusion not to continue the Offshore Directions under s. 126(5).

[50] I would therefore dismiss the appeal, in the circumstances, without costs.

Appeal dismissed.

Notes

Note 1: 55 per cent of the Sextant Hybrid Fund and 80 per cent of the Sextant Water Fund.

Note 2: The British Columbia and Alberta legislation allow the Securities Commissions of those jurisdictions to make the freeze orders without any further court order. Although the Alberta Commission has rejected the application of the RBC test based on the strength of the evidence that may be required, it is clear that a breach of the applicable securities legislation and some link to the frozen funds will be required: see Workum (Re), at paras. 19-22; Klytie, at para. 21.

Note 3: This ground does not apply to the performance charts as the application judge had found that although they could be misleading, the application failed with respect to them because other aspects of the RBC test were not met.