Rowan et al. v. Ontario Securities Commission; The Attorney General of Ontario, Intervenor [Indexed as: Rowan v. Ontario Securities Commission]
103 O.R. (3d) 484
2010 ONSC 7029
Ontario Superior Court of Justice,
Divisional Court,
Ferrier, Molloy and Herman JJ.
December 22, 2010
Securities regulation -- Duty to supervise -- Section 3.1 of Ontario Securities Commission Rule 31-505 imposing obligation to supervise others in order to ensure their compliance with Ontario securities law -- Failure to adequately supervise obligations of director to file insider reports as required under s. 107 of Securities Act constituting failure to comply with Ontario securities law -- Imposition of administrative penalties for such failure to supervise being lawful -- Securities Act, R.S.O. 1990, c. S.5, s. 107.
Securities regulation -- Offences -- Securities Commission's finding that appellant had breached s. 107 of Securities Act predicated on determination that he had "control or direction" of certain trust accounts [page485] -- Commission not erring in holding that "control or direction" of shares can be direct or indirect -- "Direct or indirect" referring to both ownership and control and not merely to ownership -- Securities Act, R.S.O. 1990, c. S.5, s. 107.
Securities regulation -- Penalties -- Securities Commission not erring in finding that administrative monetary penalty in Securities Act is constitutional -- Commission finding that appellant repeatedly breached s. 107 of Act and that he engaged in other conduct that was contrary to public interest -- Commission aware that administrative penalty can only be imposed for conduct that has not complied with Ontario securities law and that only findings that amounted to breach of Ontario securities law were those with respect to s. 107 of Act -- Commission entitled to take into account all surrounding circumstances in determining administrative penalty, including other conduct of appellant that was contrary to public interest -- Securities Act, R.S.O. 1990, c. S.5, s. 107.
R was an investment advisor and a director of Biovail, a publicly traded company. The Ontario Securities Commission made the following findings in relation to R's handling of Biovail shares held in three trust accounts: (i) R breached s. 107 of the Securities Act by failing to file insider reports in respect of trades in Biovail securities he executed in the accounts of the trusts; (ii) R engaged in conduct contrary to the public interest by failing to disclose to Biovail the Biovail securities he held in certain trust accounts over which he exercised control or direction; (iii) R engaged in conduct contrary to the public interest by trading in Biovail securities during blackout periods imposed by Biovail; and (iv) W. Inc., C and M failed to adequately supervise R. Administrative penalties were imposed against R, C and W Inc. R, W. Inc., C and M appealed.
Held, the appeal should be dismissed.
In finding that R had breached s. 107 of the Act, the Commission did not err in holding that the control or direction of shares referred to in the legislation can be direct, indirect or shared. "Direct or indirect" refers to both ownership and control and not only to ownership.
The Commission did not err in finding that R acted contrary to the public interest by trading in Biovail securities during blackout periods, despite the fact that blackout periods do not have the force of law. The Commission did not find R in breach of securities law with respect to those trades. The Commission's rejection of the submission that blackout periods are solely a matter between the issuer and its insiders and that this was a matter that related to the integrity of the capital markets of Ontario was reasonable.
The Commission did not err in failing to find that the administrative monetary penalty provision in the Act is unconstitutional.
The Commission did not err by imposing an administrative penalty against R in respect of conduct which was found to be contrary to the public interest, but which was not a breach of Ontario security law. The Commission was fully aware that the only findings that amounted to a breach of Ontario security law were those with respect to s. 107 of the Act. The Commission's primary focus in determining the appropriate administrative penalty under s. 127(1)(9) of the Act was R's repeated breach of s. 107 of the Act. It was open to the Commission in determining the administrative penalty to take into account all of the surrounding circumstances, including other conduct of R that was contrary to the public interest. [page486]
The Commission did not err in imposing an administrative penalty on the other appellants. Section 3.1 of Ontario Securities Commission Rule 31-505 imposes an obligation to supervise others in order to ensure their compliance with Ontario securities law. The Commission's reasoning supported the conclusion that the other appellants were in breach of s. 3.1. Further, the Commission found that the other appellants had specifically failed to adequately supervise R's obligations to file insider reports as required under s. 107 of the Act. There was ample support for the conclusion that the other appellants were not themselves in compliance with Ontario securities law and that it was in the public interest to impose administrative penalties on them.
APPEAL from the orders of the Ontario Securities Commission.
Cases referred toCartaway Resources Corp. (Re), [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22, 2004 SCC 26, 238 D.L.R. (4th) 193, 319 N.R. 1, [2004] 8 W.W.R. 62, J.E. 2004-954, 195 B.C.A.C. 161, 28 B.C.L.R. (4th) 1, 14 Admin. L.R. (4th) 190, 130 A.C.W.S. (3d) 192; Rowan (Re), 2008 ONSEC 12, 2008 LNONOSC 473, 31 OSCB 6515 (Sec. Comm.); Rowan (Re), 2009 ONSEC 46, 2009 LNONOSC 941, 33 OSCB 91 (Sec. Comm.) Statutes referred to Securities Act, R.S.O. 1990, c. S.5, ss. 1, 107, 127(1) para. 9 [as am.] Authorities referred to Ontario Securities Commission Rule 31-505, s. 3.1
Nigel Campbell, Ryder Gilliland and Peter Hogg, for appellants. Johanna Superina, Alexandra Clark and Usman Sheikh, for respondent. S. Zachary Green, for intervenor the Attorney General of Ontario.
The judgment of the court was delivered by
[1] MOLLOY J. (orally): -- This is an appeal from the orders of the Ontario Securities Commission (the "Commission") dated June 20, 2008 2008 ONSEC 12, [2008 LNONOSC 473, 31 OSCB 6515 (Sec. Comm)] (the "Merits Decision") and December 21, 2009 2009 ONSEC 46, [2009 LNONOSC 941, 33 OSCB 91 (Sec. Comm.)] (the "Penalty Decision").
[2] There had been eight allegations of wrongdoing before the Commission. All relate to the role of Roger Rowan ("Rowan"), who was an investment advisor with Watt Carmichael Inc. and also a director of a publicly traded company ("Biovail") in relation to his handling of Biovail shares held in three trusts.
[3] In the Merits Decision, the Commission dismissed four of those allegations, but made findings against the appellants on the other four allegations as follows: [page487] (i) Rowan breached s. 107 of the Securities Act, R.S.O. 1990, c. S.5 by failing to file insider reports in respect of trades in Biovail securities he executed in the accounts of the trusts. (ii) Rowan engaged in conduct contrary to the public interest by failing to disclose to Biovail the Biovail securities he held in certain trust accounts over which he exercised control or direction. (iii) Rowan engaged in conduct contrary to the public interest by trading in Biovail securities during blackout periods imposed by Biovail. (iv) Watt Carmichael Inc., Carmichael and McKenny failed to adequately supervise Rowan.
[4] In its Penalty Decision, the Securities Commission imposed various sanctions against the appellants, including administrative monetary penalties against Rowan, Carmichael and Watt Carmichael Inc. in the amounts of $520,000, $250,000 and $450,000 respectively.
[5] The appellants submit that the Commission decisions should be set aside on the following grounds: (i) Virtually all of the findings are predicated on a determination that Rowan had "control or direction" over the trust accounts and the Commission erred in holding that such control or direction could be indirect or shared. (ii) The Commission erred in finding that Rowan engaged in conduct contrary to the public interest by failing to disclose to Biovail his control over Biovail shares held in the Congor and Sundridge trusts, given the fact that senior Biovail personnel already knew about the trusts. (iii) The Commission erred in concluding that Rowan engaged in conduct contrary to the public interest by trading Biovail shares during a blackout period, given the fact that blackout periods were voluntarily imposed by Biovail itself and were not required by law. (iv) The Commission erred in failing to find that the administrative monetary penalty provision in the Act is unconstitutional. (v) The Commission erred in imposing an administrative monetary penalty against Rowan in respect of conduct which was found to be contrary to the public interest, but which was [page488] not a breach of Ontario security law as required by s. 127(1) para. 9 of the Act. (vi) The Commission erred in finding that Watt Carmichael Inc., Carmichael and McKenny failed to properly supervise Rowan. (vii) The Commission erred in imposing an administrative penalty on Watt Carmichael Inc. and Carmichael in the absence of a finding that they were in breach of Ontario security law. (viii) The penalties imposed on all appellants were excessive and unreasonable. (ix) The costs award was unreasonable.
[6] For the reasons that follow, we find no error by the Commission. Further, we consider the Commission's reasons to be careful and thorough. The conclusions reached by the Commission are both correct in law and reasonable in light of the evidence and the public interest. Issue 1 -- Control or Direction
[7] In finding that Rowan breached s. 107 of the Act, the Commission held that the control or direction of shares referred to in the legislation could be direct, indirect or shared. We do not agree with the appellant's submission that the language of s. 107 compels a conclusion that "direct or indirect" refers only to ownership and that "control or direction" must therefore be interpreted as direct and exclusive. On the contrary, the plain and grammatical meaning of the words would apply "direct or indirect" to both ownership and control. The different use of the words "direct or indirect" in the definition of "insider" in s. 1 of the Act reinforces that view. Further, the submission that control or direction must be exclusive rather than shared is not required by the language of the Act and would render the protections of the Act inapplicable any time two or more persons had joint control of an account. That is antithetical to the purpose of the legislation. In any event, it was open to the Commission to determine the meaning of "control or direct" in a manner consistent with the purpose of the legislation. This is a matter squarely within the expertise of the Commission and is entitled to deference. In our view, the Commission's interpretation is both reasonable and correct. [page489] Issue 2 -- Trading During a Blackout Period
[8] The appellants argue that the Commission erred in finding Rowan to have acted contrary to the public interest by trading in Biovail securities in the trust accounts during Biovail's blackout periods because blackout periods do not have the force of law and failing to comply with them cannot be an offence.
[9] This misses the point. The Commission did not find Rowan in breach of securities law with respect to these trades. It held that his conduct was contrary to the public interest. The purpose of blackout periods is to safeguard against trading based on inside information. The Commission rejected the submission that blackout periods are solely a matter between the issuer and its insiders and held that this was a matter that related to the integrity of the capital markets of Ontario.
[10] This is an issue squarely within the Commission's special expertise and entitled to deference. We find the Commission's analysis and conclusions to be reasonable and see no basis to interfere. Issue 3 -- Failure to Disclose to Biovail
[11] The Commission's reasons on this point are careful and thorough. The Commission's conclusion is amply supported by the evidence. In particular, Rowan disclosed his personal share holdings and the shares he controlled in the Conset Trust. Those interests were then disclosed by Biovail in its management information circulars. Rowan did not disclose his interest in the Congor or Sundridge Trusts and those were not included in the management information circulars. That provides a sufficient causal link to invoke the public interest, assuming such a link is even required.
[12] The Commission's findings on this point are issues of fact, or mixed fact and law, are policy-driven and fall squarely within its special area of expertise. Deference is required. The Commission's decision meets the reasonableness standard. We see no basis to interfere. Issue 4 -- Constitutionality of the Administrative Monetary Penalty
[13] This is a pure question of law upon which the Commission is required to be correct.
[14] In its Penalty Decision, the Commission dealt with this issue and found the legislation to be constitutional.
[15] We are in complete agreement with the Commission's conclusion on this point and also with its reasoning. [page490] Issue 5 -- Administrative Penalty Against Rowan
[16] The appellant Rowan argues that the Commission erred in its consideration of an administrative penalty against him by conflating its findings of breaches of Ontario securities law with its separate findings with respect to conduct that was contrary to the public interest. He submits that the Commission failed to recognize the difference between the two and, in particular, erred in imposing an administrative penalty with respect to conduct which was not a breach of Ontario security law.
[17] It is common ground between the parties that the breach of s. 107 of the Act is a breach of Ontario security law and that the other findings against Mr. Rowan are not. We agree with that position. We also agree that before an administrative penalty can be imposed under s. 127(1) para. 9 of the Act, there must be conduct that has not complied with Ontario securities law and the Commission must be satisfied that it is in the public interest to make such an order.
[18] An analysis of the Commission's Penalty Reasons demonstrates that the Commission was fully aware of the distinction between conduct that breached Ontario securities law and conduct that was merely contrary to the public interest. This is apparent from its recital of the allegations, its summary of the positions of the parties and its analysis of the issues. In particular, the Commission was clear in its analysis that the failure to file insider reports was an actual breach of security law and it also found this was contrary to the public interest. With respect to the other misconduct, the Commission was clear in restricting its findings to the public interest.
[19] For example, at para. 11(b) of the Penalty Reasons, the Commission noted staff had alleged that Mr. Rowan's conduct in failing to provide certain information to Biovail was both contrary to the public interest and contrary to Ontario securities law. However, in referring to the actual findings against Mr. Rowan, the Commission correctly noted, at para. 12(b), that this conduct was contrary only to the public interest.
[20] The appellant points to para. 161 of the Penalty Reasons as indicating that the Commission erred by referring to all the misconduct of Mr. Rowan as being a failure to comply with Ontario securities law. I agree that if this paragraph is looked at in isolation, that would be a reasonable interpretation of it. However, the Penalty Decision is 51 pages long. It is not reasonable to take one paragraph out of context and disregard everything that came before it. Paragraph 161 is merely a summary of findings previously made. Looked at in context and in light of [page491] what preceded it, it is abundantly clear that the Commission was fully aware that the only findings that amounted to a breach of Ontario security law were those with respect to s. 107.
[21] Other references by the Commission in its reasons to multiple violations of securities law are, in my view, more reasonably interpreted as a reference to the fact that the Commission found that Mr. Rowan repeatedly violated s. 107 over an extended period of time. Indeed, the Commission found that there were 7,410 such breaches.
[22] It is also apparent from the Commission's reasons that its primary focus in determining the appropriate administrative penalty under s. 127(1) para. 9 was the repeated breach by Mr. Rowan of s. 107 of the Act. At para. 96 of the Penalty Reasons, the Commission referred to there being 7,410 breaches, but also said that only 3,690 (being 52 per cent of the total breaches) occurred after the administrative penalty provisions came into force. The Commission held that this provision should not be applied retrospectively and therefore ruled that any administrative penalty it imposed against Mr. Rowan would only be 52 per cent of the penalty it would have imposed if all of the conduct under s. 107 were taken into account. In para. 166 of its reasons, the Commission did just that. It imposed an administrative penalty of $520,000 and then stated that but for its decision on retrospectivity, the penalty would be $900,000 to $1 million. It is therefore clear that the Commission tied the administrative penalty directly to the s. 107 breaches.
[23] In any event, it was open to the Commission in determining the administrative penalty to take into account all of the surrounding circumstances including other conduct of Mr. Rowan that was contrary to the public interest (see Cartaway Resources Corp. (Re), 2004 SCC 26, [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22, at para. 63). The Commission was aware of this law and made specific reference to it in its reasons.
[24] Accordingly, even if correctness is the appropriate standard (which is by no means clear), we find no error of law on this issue by the Commission. Further, the conclusion reached by the Commission with respect to the imposition of the administrative penalty on Mr. Rowan was reasonable in every respect. Issue 6 -- Failure to Supervise
[25] The Commission found that Carmichael, McKenny and Watt Carmichael Inc. failed to adequately supervise Rowan. Its findings in that regard were largely factual and policy based. They were within the special expertise of the Commission and the [page492] reasonableness standard therefore applies. The Commission's findings easily meet that standard and we would not interfere. Issue 7 -- Administrative Penalty Against Watt Carmichael Inc. and Carmichael
[26] The appellants argue that there is no basis in law for imposing an administrative penalty on Carmichael or Watt Carmichael Inc. because there was no finding by the Commission that their failure to supervise Rowan was itself a breach of Ontario security law so as to trigger the applicability of s. 127(1) para 9. In particular, the appellants advance an interpretation of s. 3.1 of Ontario Securities Commission Rule 31-505 that they say is fatal to the applicability of the administrative penalty provision. This is not an argument that was made to the Commission, but rather was raised for the first time, in this form, in the Divisional Court.
[27] It is conceded that Rule 31-505 is a part of Ontario security law. Section 3.1 of that Rule provides:
3.1 Supervisory Terms -- A registered dealer shall supervise each of its registered salespersons, officers and partners and a registered adviser shall supervise each of its registered officers and partners in accordance with Ontario securities law and terms or conditions imposed by the Director or the Commission on the registration of the salesperson, officer or partner of the dealer or the officer or partner of the adviser requiring that the actions of the registered salesperson, officer or partner of the registered dealer or the registered officer or partner of the registered adviser be supervised in a particular manner.
[28] The appellants argue that this section means that the duty to supervise is subject to the further requirement that the supervision be "in accordance with Ontario securities law" and that this must necessarily refer to securities law with respect to supervision standards.
[29] We do not agree that this interpretation makes sense. If interpreted in this manner, there would be no need for s. 3.1. If there were specific securities law already in place requiring the imposition of specific supervision standards, then the breach of those provisions would constitute a breach of securities law and s. 3.1 would add absolutely nothing.
[30] In our view, s. 3.1 imposes an obligation to supervise others in order to ensure their compliance with Ontario securities law. This is in fact the approach taken by the Commission. In dealing with the issue of supervision, it first set out the applicable law, starting with s. 3.1 of Rule 31-505. It then considered the expert evidence as to industry standards and examined the supervisory conduct of McKenny, Carmichael and Watt Carmichael Inc. in [page493] relation to the activities of Rowan. The Commission made specific findings that the failure to have proper procedures and to adequately supervise included a failure to ensure Rowan's compliance with insider trading rules, among other things (see para. 345 of Merits Reasons).
[31] Given the fact that this new interpretation of s. 3.1 of the supervision Rule and how it interacts with the administration penalty provision in s. 127(1) para 9 of the Act was not argued before the Commission, it is appropriate for this court to consider all of the reasoning of the Commission and the Commission's findings to determine if the appellants can be said to be in breach of Ontario security law. We consider the Commission's reasoning to support the conclusion that these appellants were in breach of s. 3.1 of Rule 31-505. Further, we conclude that the Commission found these appellants had specifically failed to adequately supervise the obligations of Mr. Rowan to file insider reports as required under s. 107 of the Act. We are therefore of the view that there is ample support in the Commission's findings for the conclusion that these appellants were not themselves in compliance with Ontario securities law and that it was in the public interest to impose administrative penalties on them. Issue 8 -- Reasonableness of the Penalties
[32] The Commission carefully considered what the appropriate penalties should be with respect to each of the appellants. Its decision with respect to the appropriate penalties is based in large measure on its view of what is necessary to safeguard the public interest and protect the integrity of Ontario's capital markets. This is an issue upon which considerable deference is owed to the Commission's special expertise. The Commission considered all of the relevant issues and came to a reasoned decision. We see no basis to interfere. Issue 9 -- Costs
[33] For the same reason, we find no basis to disturb the Commission's order with respect to costs. The Commission addressed its mind to the fact that the appellants were successful on many of the issues raised against them. The Commission took that into account in assessing costs and reduced the award accordingly. Conclusion
[34] For the foregoing reasons, the appeal is dismissed. [page494]
[35] FERRIER J. (concurring): -- I have endorsed volume 1 of the Appeal Book and Compendium: "The appeal is dismissed for oral reasons delivered this day. Costs to the respondent Commission fixed on consent in the amount of $25,000 including H.S.T. No costs to or for the Attorney General. The current stay shall remain in place pending disposition of an application for leave to appeal to the Court of Appeal."
Appeal dismissed.