Court File and Parties
SUPERIOR COURT OF JUSTICE - ONTARIO
(Divisional Court)
RE: Jack Banks (Appellant) AND Ontario (Securities Commission) (Respondent)
BEFORE: Justices Greer, Epstein and Swinton
COUNSEL: Edward L. Greenspan, Q.C., and Vanessa V. Christie, for the Appellant Karen Manarin, for the Respondent
HEARD at Toronto: November 17, 2005
ENDORSEMENT
1Jack Banks appeals from the decision of the Ontario Securities Commission dated April 23, 2003 in which the Commission held that it was necessary to make an order in the public interest under s. 127 of the Securities Act, R.S.O. 1990, c.S. 5. The Commission went on to impose sanctions that included that Banks resign any positions he holds as a director or officer of any issuer, that he permanently cease trading in securities and that he be reprimanded.
2The issue in the proceeding was whether Banks met the standards of business conduct expected of a market participant who had the corporate governance responsibilities that Banks had as the CEO of Laser Friendly Inc. ("LFI").
3The background to the matter can be briefly summarized as follows. LFI, a publicly traded company that manufactures print products for the lottery and gaming industry, entered into a transaction referred to as a Regulation S Stock Subscription Roll Program (the "Roll Program"). In paragraph 33 of their Reasons, the Commission summarized the elements of the program as follows. "Helix and Delta [the two parties that entered into the subscription agreements with LFI] were agents of major European banks. The banks wanted to improve their balance sheets. Helix and Delta would subscribe for large amounts of LFI shares. The shares would not be paid for or officially issued for a year. Share certificates would be held in escrow during that time and the purchase price for the shares would be secured by an interest-bearing debenture. At the end of the year, LFI could cancel the share certificates but keep the interest payments. Everyone would profit from LFI's participation in the Roll Program: the balance sheets of the banks would look better, Farrell [a representative of Helix and Delta] and his colleagues would receive commissions and LFI would be able to keep millions of dollars in interest payments. Pursuant to Regulation S under The Securities Act of 1933 and comparable provisions of Canadian securities law, the transaction would be exempt from registration and prospectus requirements."
4The Commission found that the Roll Program had no commercial justification. It only made sense if the share certificates were used for an improper purpose.
5The Commission recognized that its public interest jurisdiction extended to corporate governance and examined Banks' conduct in relation to the standard of business conduct expected of him.
6The Commission found that as the CEO of LFI, Banks had primary responsibility for its business and operations. All other officers reported to him. He was a hands-on manager in a small tightly-knit management team.
7Against this background, the Commission proceeded to determine what a reasonably prudent person in such a position would have done in the circumstances. The circumstances, briefly put, were that there were subscription agreements entered into on November 10, 11 and December 5, 1994 respecting 45 million shares. No payment was received for the shares. There were no escrow agreements entered into for these shares, at least one of which was pledged by an unrelated third party as collateral for a loan with a bank.
8Furthermore, between December 5 and 16,1994 LFI was in receipt of various communications to the effect that someone was trying to pass share certificates through a US brokerage firm, the SEC was making a preliminary inquiry into a possible violation of federal securities laws, both the Delta and Helix transactions were being examined and LFI's US counsel had withdrawn after having given advice that LFI should withdraw from the Roll Program.
9It is noteworthy that on December 16, 1994 the LFI Board passed a resolution, backdated to December 5, authorizing the third subscription.
10The Commission found that Banks knew the manner in which the Roll Program was operating and failed to meet his duty of care to ascertain the commercial viability of the program. Furthermore, he should have taken steps to ensure that adequate safeguards had been established so the shares would not be released into the marketplace. Then, when he had information that the SEC was investigating the matter and US counsel had resigned from the file, he failed to take immediate steps to contain a dangerous situation.
11The Commission went on to find that if Banks did not know all the events, then his lack of knowledge was "all the more egregious". If he was unaware of the all the problems that emerged, then he performed his duties with "reckless abandon".
12In the end, the Commission had the following to say about Banks, "Banks' conduct in connection with the Roll Program was egregious and fell short of the standard expected of him. It showed a careless disregard for harm which was reasonably foreseeable and ultimately occurred. It spoke volumes about his fitness to continue as a director or officer of an issuer."
13Mr. Greenspan, on behalf of Mr. Banks, challenges the Commission's decision primarily on the basis that the Commission's findings of fact were not supported by the evidence. The thrust of Mr. Greenspan's position is that LFI was essentially being run by Larry Weltman, the executive vice president and CFO of LFI, and that Banks was justifiably relying on the advice from his experienced team of advisors, including Weltman, Ms. Swartz, LFI's secretary and general counsel, and Mr. Stein, an experienced securities lawyer practising with a major Toronto law firm.
14Specifically, counsel for Mr. Banks advances the following arguments.
15First, Mr. Greenspan argues that the Commission made its order on erroneous findings of fact and inferences drawn from the evidence.
16In our view, there was ample evidence to support the Commission's key finding that Banks was in control of LFI's operations at the material time. While he surrounded himself with experienced people who regularly advised him, the record is clear that he knowingly participated in the key decisions for LFI to enter into and continue its participation in the Roll Program.
17The law as set out in Re Cartaway Resources Corp. (2000), 9 A.S.C.S. is clear:
The CEO will normally be held to a higher standard than the board and the rest of management because the CEO bears direct responsibility for establishing the standards of behaviour and processes of the corporation. The CEO may delegate duties to the rest of management, but the CEO will always remain primarily responsible for overseeing the performance of such duties, especially in junior companies that generally lack documented procedures.
18The standard of review of the Commission's decision is reasonableness.
19Given the Commission's unassailable finding as to Banks as a hands on manager, it concluded that in the circumstances of this case Banks failed in his duty as a director and officer of LFI such that his conduct called for an order in the public interest. This conclusion was reasonable.
20However, we note that Mr. Greenspan also raised the fact that the Commission failed to mention the evidence of several individuals. We find no merit in this argument. It is not necessary that the trier of fact make specific reference to the evidence of every witness.
21Finally, Mr. Greenspan argues that the Commission incorrectly admitted and considered Mr. Stein's evidence, treating it as direct evidence, not opinion evidence. Mr. Stein testified as to his observations as LFI's counsel. The Commission's treatment of Mr. Stein's evidence was reasonable. We also note that it was supported by other evidence with respect to Banks' role.
22For these reasons the appeal as to the merits is dismissed.
23With respect to the issue of the sanctions the Commission imposed, it is common ground that the matter should be remitted back to the Commission to allow the parties to make submissions. The only issue is whether the matter should be remitted to a new panel. We leave that decision to the Commission.
24Banks' appeal with respect to sanctions is therefore allowed. The sanction is set aside, and the matter is referred back to the Commission for a new hearing on sanctions.
25If the parties are unable to agree as to costs, they may make submissions in writing within 20 days.
Epstein J.
Greer J.
Swinton J.
DATE: November 21, 2005