Crowe et al. v. Ontario Securities Commission [Indexed as: Crowe v. Ontario Securities Commission]

108 O.R. (3d) 410

2011 ONSC 6918

Ontario Superior Court of Justice,

Divisional Court,

Pardu, Aitken and Swinton JJ.

December 5, 2011

Securities regulation -- Costs -- Ontario Securities Commission finding that appellants had breached ss. 25(1)(a), 53(1) and 129.1 of Securities Act and ordering costs in amount of $117,441.51 -- Costs order affirmed on appeal -- Commission not increasing costs merely because appellants had raised issue of constitutional jurisdiction -- Constitutional issue not one of first impression -- Appellants' constitutional challenge causing significant delays and being unsuccessful -- Costs order not unreasonable.

Securities regulation -- Jurisdiction -- Appellants' corporations selling shares only to offshore investors -- Corporations not filing prospectus in Ontario or registering with Ontario Securities Commission -- Appellants being Ontario residents and corporations having their registered offices in Ontario -- Share certificates issued in Ontario through use of Ontario transfer agent -- Some of funds received in payment for shares deposited into Ontario bank accounts -- Ontario Securities Commission having jurisdiction over appellants' offshore distributions as there was substantial connection between appellants' activities and Ontario.

The appellants' corporations had their registered offices in Ontario. The appellants were Ontario residents. The corporations' transfer officer was located in Ontario, and the appellants issued Treasury Directions in Ontario. Securities of the corporations were sold only to offshore investors. There was no evidence that any of the securities sold came to rest in Ontario, except for shares issued to the founders and their family members. Some of the funds received in payment for the shares were deposited into bank accounts in Ontario. The corporations did not file a prospectus in Ontario or register with the Ontario Securities Commission. The Commission found that the appellants had breached ss. 25(1)(a), 53(1) and 129.1 of the Securities Act, R.S.O. 1990, c. S.5 and imposed various sanctions. The Commission also ordered costs in the amount of $117,441.51. The appellants appealed, arguing that the Commission had no jurisdiction because the distribution of shares occurred outside Ontario and that the Commission erred in making the costs order.

Held, the appeal should be dismissed.

A province is not limited to protecting the interests of domestic investors from unfair or fraudulent activities. Provincial securities legislation can also be [page411] applied to regulate corporations or individuals within the province in order to protect investors outside the province from unfair, improper or fraudulent activities. Where the Commission is regulating trades that have an extraprovincial character, the question is not the location of the investors; rather, it is whether there is a sufficient connection between Ontario and the impugned activities and the entities involved to justify regulatory action by the Commission. The Commission did not err in finding that there was a substantial connection between the appellants' activities and Ontario. Interpretation note 1 to former Commission Policy 1.5"Distribution of Securities Outside of Ontario", did not assist the appellants. Paragraph 5 to the note states that "the Commission will not hesitate to intervene, to the extent of its powers, in distributions of securities outside of Ontario which negatively impact upon the integrity of Ontario capital markets". The Commission expressly found that the appellants' activities were harmful to Ontario capital markets.

The Commission did not award additional costs merely because the appellants had raised a constitutional issue. Rather, the Commission concluded that the constitutional issue was not one of first impression, the constitutional challenge caused significant delays and it was unsuccessful. The costs order was not unreasonable.

APPEAL from a decision of the Ontario Securities Commission.

Cases referred to Gregory & Co. v. Quebec (Securities Commission), 1961 75 (SCC), [1961] S.C.R. 584, [1961] S.C.J. No. 38, 28 D.L.R. (2d) 721, consd Burns Foods Ltd. v. Manitoba (Attorney General), 1973 194 (SCC), [1975] 1 S.C.R. 494, [1973] S.C.J. No. 151, 40 D.L.R. (3d) 731, 1 N.R. 147, [1974] 2 W.W.R. 537, distd Other cases referred to Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, 329 N.B.R. (2d) 1, 64 C.C.E.L. (3d) 1, 164 A.C.W.S. (3d) 727, EYB 2008-130674, J.E. 2008-547, [2008] CLLC Â220-020, 170 L.A.C. (4th) 1, 372 N.R. 1, 69 Imm. L.R. (3d) 1, 291 D.L.R. (4th) 577, 69 Admin. L.R. (4th) 1, 95 L.C.R. 65, D.T.E. 2008T-223; Global Securities Corp. v. British Columbia (Securities Commission), [2000] 1 S.C.R. 494, [2000] S.C.J. No. 5, 2000 SCC 21, 185 D.L.R. (4th) 439, 252 N.R. 290, [2000] 5 W.W.R. 1, J.E. 2000-807, 134 B.C.A.C. 207, 74 B.C.L.R. (3d) 1, 95 A.C.W.S. (3d) 978; Unifund Assurance Co. v. Insurance Corp. of British Columbia, [2003] 2 S.C.R. 63, [2003] S.C.J. No. 39, 2003 SCC 40, 227 D.L.R. (4th) 402, 306 N.R. 201, [2003] 9 W.W.R. 1, J.E. 2003-1355, 16 B.C.L.R. (4th) 1, 176 O.A.C. 1, [2003] I.L.R. I-4209, 124 A.C.W.S. (3d) 61; XI Biofuels Inc. (Re), 2010 ONSEC 6, 2010 LNONOSC 217, 33 OSCB 3077, 71 B.L.R. (4th) 118 (O.S.C.); XI Biofuels Inc. (Re), 2010 LNONOSC 866, 33 OSCB 10963 (O.S.C.) Statutes referred to Constitution Act, 1867, s. 92(13) Securities Act, R.S.O. 1990, c. S.5, ss. 1(1) [as am.], 25 [as am.], (1), (a), 53 [as am.], (1) [as am.], 127.1 [as am.], 129.2 [as am.]

Andrew K. Lokan, for appellants. Michelle A. Vaillancourt, for respondent. [page412]

The judgment of the court was delivered by

SWINTON J.: -- Overview

[1] The appellants, Ronald Crowe and Vernon Smith, appeal from the decision of the Ontario Securities Commission (the "Commission") dated March 31, 2010 2010 ONSEC 6, [2010 LNONOSC 217, 71 B.L.R. (4th) 118 (O.S.C.)] finding that they breached ss. 25(1) (a), 53(1) and 129.2 of the Securities Act, R.S.O. 1990, c. S.5 (the "Act"). They also appeal the order of November 17, 2010 imposing various sanctions and costs [2010 LNONOSC 866, 33 OSCB 10963 (O.S.C.)]. They argue, in this appeal, that the Commission had no jurisdiction because the distributions of shares that led to the decision and order occurred outside the Province of Ontario. They also take issue with the Commission's order as to costs.

[2] For the reasons that follow, I conclude that the Commission had jurisdiction, and its costs order was reasonable. Therefore, the appeal should be dismissed. Background Facts

[3] Mr. Crowe is president and director of Xiiva Holdings Inc., which carries on business as Xiiva Holdings Inc., XI Energy Company, XI Energy and Biofuels (collectively "Xiiva"). He is the sole director of XI Biofuels Inc. ("XI Biofuels").

[4] Mr. Smith was formerly a director of Xiiva and has been a director of Biomaxx Systems Inc. ("Biomaxx") since 2001.

[5] Xiiva was incorporated in Ontario in 1995. It is quoted on the Pink Sheets under the symbol XIVAF, and it is also quoted on the Xetra Exchange operated by the Deutsche Börse. XI Biofuels was incorporated in Ontario in 2007.

[6] Biomaxx was incorporated in Ontario in 2001. It is quoted on the Pink Sheets under the symbol BMXSF. It is also quoted on the Xetra Exchange operated by the Deutsche Börse.

[7] The corporations have their registered offices in Ontario, and Mr. Smith and Mr. Crowe are Ontario residents. The transfer agent for Xiiva and Biomaxx, Heritage Transfer, is also located in Ontario, and the appellants issued Treasury Directions in the province.

[8] Securities of the corporations were sold only to offshore investors. There is no evidence that any of the securities sold came to rest in Ontario, except for shares issued to the founders and their family members. None of the corporations ever filed a prospectus in Ontario or registered with the Commission. [page413]

[9] On November 22, 2007, the Commission ordered a freeze direction over funds held in an Ontario bank account. That order was continued by two court orders.

[10] On May 21, 2008, the corporations were petitioned into bankruptcy by Heritage Transfer. The Applicable Legislation

[11] The corporations and the appellants were alleged to have engaged in trades and distributions under the Act. The corporations were alleged to have contravened ss. 25 and 53 of the Act, while the appellants were alleged to have authorized, permitted or acquiesced in the corporations' non-compliance with the Act, contrary to s. 129.2.

[12] At the time of the proceedings, s. 25(1) of the Act stated that no person or company shall (a) trade in a security or act as an underwriter unless the person or company is registered as a dealer, or is registered as a salesperson or as a partner or as an officer of a registered dealer and is acting on behalf of the dealer[.]

[13] "Trade" or "trading" is defined in s. 1(1) of the Act to include (a) any sale or distribution of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise . . . . . . . . (e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of the foregoing[.]

[14] Section 53(1) of the Act states that no person or company shall trade in a security on his, her or its own account or on behalf of any other person or company where such trade would be a "distribution" of such security unless a preliminary prospectus and a prospectus have been filed and receipts therefor have been obtained from the director. "Distribution" is defined in s. 1(1) as "(a) a trade in securities of an issuer that have not been previously issued . . .". The Commission Decisions

[15] The Commission gave detailed reasons for its decision on the merits, finding that the corporations had engaged in trades and distributions of securities, and they had contravened the Act because the shares were traded without qualifying them under a prospectus, and no prospectus or registration exemption was available. The appellants authorized, permitted or acquiesced in the corporations' non-compliance with Ontario [page414] securities law. Therefore, the Commission found contraventions of both s. 25(1)(a) by trading in the corporate shares without registration and s. 53(1) by distributing the shares without qualifying them under a prospectus.

[16] The Commission found that the appellants engaged in trades and distributions by engaging in acts in furtherance of trades in Ontario, including signing Treasury Directions and share certificates in Ontario, attending at the transfer agent's offices in Toronto to pick up share certificates, opening bank accounts in Ontario in the names of the corporations and depositing investor funds in them, and creating and maintaining the corporations' websites (Reasons, paras. 80 through 121).

[17] The Commission also found that the appellants acted contrary to the public interest: first, by engaging in illegal trades and distributions of shares; and second, by making false or misleading statements on two websites, failing to account for the disposition of investor funds and transferring or attempting to transfer funds offshore (Reasons, paras. 153-54).

[18] The Commission rejected the appellants' argument that the Act did not apply to their offshore trading. In coming to this conclusion, the Commission found that the conduct of the appellants had a "sufficient and substantial connection" to Ontario so that the Act applied to their conduct. It identified a number of connections between the appellants' conduct and Ontario (Reasons, para. 214):

-- the registered offices of the corporations are in Ontario;

-- the appellants, the directing minds of the corporations, are Ontario residents;

-- Heritage, the transfer agent for Xiiva and Biomaxx, is located in Ontario;

-- the appellants issued Treasury Directions in Ontario, instructing the transfer agent to issue Xiiva and Biomaxx shares;

-- the appellants regularly picked up the share certificates at Heritage's Toronto office;

-- funds for the purchase of some Xiiva treasury shares were deposited in Ontario bank accounts;

-- funds for the purchase of some or all or Biomaxx treasury shares were sent to a bank account in Cyprus for the benefit of PCAMT, and PCAMT frequently wired funds from Cyprus to Biomaxx's bank accounts in Ontario. [page415]

[19] The Commission also described the respondents before them as engaging in "a sophisticated multi-jurisdictional scheme in order to avoid regulatory oversight". It concluded that it had jurisdiction to intervene because the conduct of the corporations and the appellants had negatively affected the reputation and integrity of Ontario's capital markets (Reasons, para. 216).

[20] In its order, the Commission imposed significant sanctions on the appellants, including a permanent order to cease trading in securities, except for the account of their RRSPs, RRIPs, RESPS or TFSAs under certain conditions. They were also permanently prohibited from becoming or acting as a director or officer of any issuer, registrant or investment fund manager and from becoming or acting as a registrant, an investment fund manager or a promoter. They were ordered to pay an administrative penalty of $200,000 and to disgorge certain funds.

[21] The Commission also ordered costs of $117,441.51. In doing so, it rejected the appellants' argument that they had "legitimately tested" the Commission's constitutional jurisdiction (Sanction Reasons, para. 96 [2010 LNONOSC 866, 33 OSCB 10963 (O.S.C.)]). The Issues on Appeal

[22] There are three issues raised on this appeal by the appellants: (1) What is the appropriate standard of review? (2) Did the Commission err in concluding that it had constitutional jurisdiction over the appellants' offshore distributions? (3) Did the Commission err in principle in awarding additional costs because the appellants raised the constitutional issue? The Standard of Review

[23] Both parties agree that the standard of review of the issue concerning the constitutional jurisdiction of the Commission is correctness (Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, at para. 58).

[24] With respect to the costs award, the standard is reasonableness, as the awarding of costs is discretionary and is entitled to deference. [page416] The Commission's Jurisdiction

[25] The appellants do not challenge the constitutionality of the Securities Act. Rather, they argue that the Act cannot apply because the province does not have jurisdiction to regulate extraprovincial trading activity.

[26] The province's jurisdiction to regulate securities trading is found in s. 92(13) of the Constitution Act, 1867, which allows it to legislate with respect to "Property and Civil Rights in the Province". The appellants describe the pith and substance of provincial securities laws as the regulation of the domestic or intraprovincial market for securities. They argue that the province does not have legislative competence to regulate interprovincial or international trades because there is a territorial constraint on provincial jurisdiction (Burns Foods Ltd. v. Manitoba (Attorney General), 1973 194 (SCC), [1975] 1 S.C.R. 494, [1973] S.C.J. No. 151, at pp. 502-503 S.C.R.). In this case, they argue, the Commission has no jurisdiction because it is attempting to regulate trades in securities that occurred outside the province, a matter that is beyond provincial authority.

[27] The Supreme Court of Canada dealt with a challenge to the extraterritorial application of Quebec securities law in Gregory & Co. v. Quebec (Securities Commission), 1961 75 (SCC), [1961] S.C.R. 584, [1961] S.C.J. No. 38. The appellant, Gregory & Co., had its head office and two branch offices in Montreal, from which it promoted four mining companies operating in Quebec. It also published a weekly bulletin on securities. After its registration as a broker was cancelled by the Quebec Commission, the appellant continued its business, leading the Commission to take action against it. Gregory then sought injunctive relief against the Commission. The appeal to the Supreme Court was argued on the assumption that the appellant was dealing only with clients outside Quebec and its weekly bulletin was sent only to recipients outside the province.

[28] The Supreme Court of Canada did not deal with issues of constitutional validity. The only issue argued in the case was the authority of the Commission to regulate Gregory's activities, given the manner in which Gregory was carrying on its business.

[29] I disagree with the appellants' submission that the Gregory case can be distinguished because it dealt with an issue of statutory interpretation. As in the present case, while the constitutionality of the Quebec legislation was not considered, its applicability was the central issue, given the extraprovincial nature of Gregory's activities. The Supreme Court concluded [page417] that the Quebec Commission did have jurisdiction, even if Gregory was acting for clients outside the province (at para. 10). At para. 11, the court stated:

The paramount object of the Act is to ensure that persons who, in the province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to protect the public, in the province or elsewhere, from being defrauded as a result of certain activities initiated in the province by persons therein carrying on such a business.

[30] The Supreme Court distinguished a line of marketing cases in which the provinces were held to have exceeded their jurisdiction by regulating extraprovincial trade, describing securities legislation as having a different purpose (at para. 15):

In order to protect the public against fraud, it provides for the establishment and operation of a control and supervision over the conduct, in the Province of Quebec, of persons engaged therein, in carrying on the business of trading in securities or acting as investment counsel.

[31] The Supreme Court of Canada has dealt more recently with provincial jurisdiction over securities regulation in Global Securities Corp. v. British Columbia (Securities Commission), 2000 SCC 21, [2000] 1 S.C.R. 494, [2000] S.C.J. No. 5. In that case, the issue was the authority of the B.C. Commission to legally gather information for securities regulators outside the province. The request for information from the United States Securities and Exchange Commission concerned possible misconduct in the United States by a British Columbia resident corporation. The Supreme Court referred to Gregory for the proposition that provincial authority over securities regulation is not limited to purely intraprovincial matters (at para. 41). It went on to hold that the B.C. Commission had jurisdiction to gather the information, given its authority over domestic securities regulation and "the clearly interjurisdictional nature of securities regulation in general" (at para. 43).

[32] The appellants in the present case focus on the fact that the trades with investors occurred outside the province. However, that does not prevent the Commission from asserting jurisdiction on the facts of the present case. As Gregory makes clear, and contrary to what the appellants assert, a province is not limited to protecting the interests of domestic investors from unfair or fraudulent activities. Provincial securities legislation can also be applied to regulate corporations or individuals within the province in order to protect investors outside the province from unfair, improper or fraudulent activities. Where the Commission is regulating trades that have an extraprovincial character, the question is not the location of the investors; [page418] rather, it is whether there is a sufficient connection between Ontario and the impugned activities and the entities involved to justify regulatory action by the Commission.

[33] In Unifund Assurance Co. v. Insurance Corp. of British Columbia, 2003 SCC 40, [2003] 2 S.C.R. 63, [2003] S.C.J. No. 39, the Supreme Court set out a four-part test for determining the constitutional applicability of provincial legislation. Two parts of that test are significant here. First, the territorial constraint on provincial legislation prevents the application of provincial law to matters not sufficiently connected to it. The court then stated that "[w]hat constitutes a 'sufficient' connection depends on the relationship among the enacting jurisdiction, the subject matter of the legislation and the individual or entity sought to be regulated by it" (at para. 56).

[34] In the present case, the Commission found a substantial connection between the appellants' activities and the Province of Ontario, as described earlier in these reasons. The individuals and the entities that the Commission sought to regulate are Ontario residents and Ontario companies. The majority of the Biomaxx and Xiiva shares were held by Ontario residents.

[35] The appellants did a number of things within the province in furtherance of the offshore trades of the corporations' shares. Share certificates were issued in Ontario through the use of an Ontario transfer agent. Some of the funds received in payment for the shares were deposited into bank accounts in Ontario, which the appellants had opened. The appellants, as directing minds of Xiiva and Biomaxx, provided instructions from Ontario to the transfer agent regarding the issuance of the shares from treasury. They also maintained websites for the corporations which some of the investors had consulted.

[36] In the circumstances, given the significant connection between the appellants' activities and Ontario, the Commission was correct in concluding that it had jurisdiction to regulate their trading and distribution of securities. This is not a case like Burns Foods, above, where the province sought to regulate a sales transaction occurring outside its borders by making it subject to provincial marketing board legislation. That was held to be beyond provincial jurisdiction because it was a direct interference with interprovincial trade.

[37] The appellants also relied on interpretation note 1 to former Commission Policy 1.5"Distribution of Securities Outside of Ontario", arguing that it "reflects the OSC's own understanding that to fall within its constitutional and regulatory jurisdiction there must at the very least be a prospect that the securities issued will come to rest in Ontario". That note does not assist [page419] the appellants for two reasons. First, the distributions of the Xiiva and Biomaxx shares were not effected entirely outside Ontario, as shares were issued to the founders and their families, and the majority of shares were held by Ontario investors. Second, the appellants did not put forth evidence at the hearing to show they took reasonable precautions and restrictions in the distribution to ensure that the securities would not be distributed or redistributed into Ontario, and that the securities would come to rest outside Ontario.

[38] Moreover, para. 5 of the note states that "the Commission will not hesitate to intervene, to the extent of its powers, in distributions of securities outside of Ontario which negatively impact upon the integrity of Ontario capital markets". The note goes on:

Where the Commission becomes aware of distributions abroad by Ontario issuers that bring the reputation of Ontario's capital markets into disrepute, the Commission is of the view that it has the jurisdiction, for the due administration of the Act and in order to preserve the integrity of the Ontario capital markets, to exercise its cease trade powers or to take other appropriate action against issuers, underwriters and other participants so distributing securities abroad.

[39] In this case, the Commission expressly found that the activities of the appellants were harmful to Ontario's capital markets. The assertion was not "merely speculative", as the appellants argue, but was based on a series of findings about the conduct of the appellants, its connection to Ontario and the harm to investors. Again, given the Commission's findings, there was a significant connection to Ontario, with the result that the Commission was correct in finding that it had jurisdiction over the appellants' conduct. The Reasonableness of the Costs Award

[40] Section 127.1 of the Act permits the Commission to order that a person or company pay the costs of the investigation and the hearing, if the Commission is satisfied that the person or company has not complied with the Act or has not acted in the public interest. In the present case, staff did not seek costs of the investigation.

[41] I disagree with the appellants' argument that the Commission awarded "additional costs because the Appellants raised a constitutional issue". There is nothing in the reasons to suggest that is the case. Rather, the Commission ordered the appellants to pay costs for the period from October 16, 2008 to May 1, 2009, refusing to reduce those costs because of the constitutional issue raised. The Commission concluded that the constitutional [page420] issue was not a case of first impression, the appellants did not succeed with this argument and the constitutional challenge caused significant delays in the proceeding.

[42] The Commission concluded that the quantum of costs sought by staff was proportionate and reasonable in the circumstances. That was a matter within its discretion. Its decision on costs was a reasonable one deserving of deference from this court. Conclusion

[43] For these reasons, the appeal is dismissed. As agreed by the parties, costs to the Commission are fixed at $7,000, all inclusive.

Appeal dismissed.