Spork et al. v. Ontario Securities Commission

[Indexed as: Spork v. Ontario Securities Commission]

Ontario Reports

Ontario Superior Court of Justice, Divisional Court, Himel, Sachs and Hennessy JJ. May 5, 2014

120 O.R. (3d) 241 | 2014 ONSC 2467

Case Summary

Securities regulation — Jurisdiction — Two-member panel of commissioners deciding that appellants had contravened securities law — One commissioner's appointment expiring before sanctions hearing and other commissioner proceeding on his own to determine issues of sanctions and costs — Section 4.4(1) of Statutory Powers Procedure Act permitting Ontario Securities Commission to override quorum requirements of s. 3(11) of Securities Act in order to proceed expeditiously — Decision to proceed as single-member panel not resulting in loss of jurisdiction — Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, s. 4.4(1) — Securities Act, R.S.O. 1990, c. S.5, s. 3(11).

Securities regulation — Offences — Fraud — Commission finding that appellant perpetrated fraud in relation to securities contrary to s. 126.1 of Securities Act — Appellant's appeal dismissed — Evidence establishing that appellant had direct knowledge of impugned actions — Subjective awareness of their intended consequences properly inferred from actions themselves — Securities Act, R.S.O. 1990, c. S.5, s. 126.1.

Securities regulation — Offences — Sanctions — Commission finding that one appellant committed fraud in relation to securities contrary to s. 126.1 of Securities Act and that all appellants breached their duties as investment fund managers, failed to act fairly, honestly and in good faith, and acted contrary to public interest — Commission imposing sanctions which included disgorgement orders of up to $6,350,000 — Disgorgement orders appropriate — Securities Act, R.S.O. 1990, c. S.5, s. 126.

A two-member panel of commissioners found that the appellant OS and his companies perpetrated a fraud relating to securities contrary to s. 126.1 of the Securities Act and that all of the appellants breached their duties as investment fund managers contrary to s. 116 of the Act, failed to deal fairly, honestly and in good faith, and acted contrary to the public interest. Before the sanctions hearing was held, one commissioner's appointment expired. The other commissioner proceeded on his own to determine the issues of sanctions and costs. The sanctions imposed included disgorgement orders ranging from $140,000 to $6,350,000. The appellants appealed.

Held, the appeal should be dismissed.

The standard of review for all issues on the appeal was that of reasonableness.

Section 4.4(1) of the Statutory Powers Procedure Act permits the commission to override the quorum requirements of s. 3(11) of the Securities Act in order to proceed expeditiously where quorum has been lost. The parties were fully heard by the panel that ultimately made the sanctions order. The decision to proceed as a single-member panel did not result in a loss of jurisdiction.

The evidence supported the finding that OS perpetrated a fraud contrary to s. 126.1 of the Securities Act. The evidence established that OS had direct [page242] knowledge of the impugned acts, and the subjective awareness of their intended consequences could be inferred from the acts themselves.

The sanctions, including the disgorgement orders, were appropriate. The Ontario Securities Commission linked the disgorgement orders to non-compliance, and reasonably held that the appellants should not be allowed to profit from breaches of Ontario securities law.

Cases referred to

Alberta (Information and Privacy Commissioner) v. Alberta Teachers' Assn., [2011] 3 S.C.R. 654, [2011] S.C.J. No. 61, 2011 SCC 61, 2011EXP-3798, J.E. 2011-2083, 424 N.R. 70, 339 D.L.R. (4th) 428, 28 Admin. L.R. (5th) 177, 52 Alta. L.R. (5th) 1, [2012] 2 W.W.R. 434, 519 A.R. 1, 208 A.C.W.S. (3d) 434; Anderson v. British Columbia (Securities Commission), [2004] B.C.J. No. 8, 2004 BCCA 7, [2004] 4 W.W.R. 81, 192 B.C.A.C. 119, 23 B.C.L.R. (4th) 182, 128 A.C.W.S. (3d) 185 [Leave to appeal to S.C.C. refused [2004] S.C.C.A. No. 81]; Axcess Automation LLC (Re), 2013 LNONOSC 173, 36 OSCB 2919; Barrington v. Institute of Chartered Accountants of Ontario, [2011] O.J. No. 2378, 2011 ONCA 409, 279 O.A.C. 148, 333 D.L.R. (4th) 401, 21 Admin. L.R. (5th) 216, 202 A.C.W.S. (3d) 393 [Leave to appeal to S.C.C. refused [2011] S.C.C.A. No. 367]; Donnini v. Ontario (Securities Commission) (2005), 76 O.R. (3d) 43, [2005] O.J. No. 240, 250 D.L.R. (4th) 195, 194 O.A.C. 29, 1 B.L.R. (4th) 101, 136 A.C.W.S. (3d) 828 (C.A.); 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, 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, 164 A.C.W.S. (3d) 727; Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 2003 SCC 20, 223 D.L.R. (4th) 577, 302 N.R. 1, J.E. 2003-713, 257 N.B.R. (2d) 207, 48 Admin. L.R. (3d) 33, 31 C.P.C. (5th) 1, 121 A.C.W.S. (3d) 172; Limelight Entertainment Inc. (Re) (2008), 2008 ONSEC 28, 31 O.S.C.B. 12030; McLean v. British Columbia (Securities Commission), [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67, 2013 SCC 67, 347 B.C.A.C. 1, 452 N.R. 340, 2013EXP-3911, J.E. 2013-2131, EYB 2013-230152, 366 D.L.R. (4th) 30, [2014] 2 W.W.R. 415, 53 B.C.L.R. (5th) 1, 64 Admin. L.R. (5th) 237, 235 A.C.W.S. (3d) 290; MRS Sciences Inc. (Re) (2011), 2011 ONSEC 34, 34 O.S.C.B. 12288; Nest Acquisitions and Mergers (Re), 2013 LNONOSC 333, 36 OSCB 4628; Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708, [2011] S.C.J. No. 62, 2011 SCC 62, EYB 2011-199662, 2012EXP-65, 2012EXPT-54, J.E. 2012-46, D.T.E. 2012T-7, 424 N.R. 220, 340 D.L.R. (4th) 17, 317 Nfld. & P.E.I.R. 340, [2012] CLLC Â220-008, 213 L.A.C. (4th) 95, 38 Admin. L.R. (5th) 255, 97 C.C.E.L. (3d) 199, 208 A.C.W.S. (3d) 435; R. v. Théroux, [1993] 2 S.C.R. 5, [1993] S.C.J. No. 42, 100 D.L.R. (4th) 624, 151 N.R. 104, J.E. 93-793, 54 Q.A.C. 184, 79 C.C.C. (3d) 449, 19 C.R. (4th) 194, 19 W.C.B. (2d) 212; Sextant Capital Management Inc. (Re), 2012 ONSEC 17, 2012 LNONOSC 384, 35 OSCB 5213; Sextant Capital Management Inc. (Re), 2012 LNONOSC 298, 35 OSCB 4304; Sextant Capital Management Inc. (Re), 2011 LNONOSC 389, 34 OSCB 5863; Simply Wealth Financial Group Inc. (Re), 2013 LNONOSC 357, 36 OSCB 5099; Taub v. Investment Dealers Assn. of Canada (2009), 98 O.R. (3d) 169, [2009] O.J. No. 3552, 2009 ONCA 628, 311 D.L.R. (4th) 389, 255 O.A.C. 126, 180 A.C.W.S. (3d) 6; Taylor v. Ontario (Securities Commission), [2013] O.J. No. 4988, 2013 ONSC 6495, 317 O.A.C. 164 (Div. Ct.); Volochay v. College of Massage Therapists of Ontario (2012), 111 O.R. (3d) 561, [2012] O.J. No. 3871, 2012 ONCA 541, 295 O.A.C. 164, 40 Admin. L.R. (5th) 307, 355 D.L.R. (4th) 518, 220 A.C.W.S. (3d) 240 [page243]

Statutes referred to

Securities Act, R.S.O. 1990, c. S.5, ss. 3(11), 3.5(3), 116 [as am.], 126.1 [as am.], (1)(b), 127 [as am.], (1)10 [as am.], 127.1

Statutory Powers Procedure Act, R.S.O. 1990, c. S.22 [as am.], ss. 2 [as am.], 4.4(1), 32 [as am.]

Authorities referred to

Ontario Securities Commission, OSC Rule 31-505, s. 2.1

APPEAL from orders of the Ontario Securities Commission.

Jay L. Naster, for appellants.

Tamara B. Center, Pamela Foy and Scott Hutchison, for respondent.

The judgment of the court was delivered by

1HENNESSY J.: — This is an appeal by Otto Spork, Konstantinos Ekonomidis and Natalie Spork (the "appellants") from three orders of the Ontario Securities Commission (the "commission" or "respondent") pursuant to ss. 127 and 127.1 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"):

the merits decision dated May 17, 2011 [2011 LNONOSC 389, 34 OSCB 5863];

the jurisdiction motion dated April 27, 2012 [2012 LNONOSC 298, 35 OSCB 4304]; and

the sanctions decision dated June 1, 2012 2012 ONSEC 17, [2012 LNONOSC 384, 35 OSCB 5213].

2The appellants seek to set aside the order made on June 1, 2012 or, in the alternative, to have the order varied.

3The appeal raises the following issues:

(1) Did the commission fail to comply with the quorum requirements under the Act for the sanctions hearing and thereby have no jurisdiction to make the orders dated June 1, 2012?

(2) Did the commission err in the application of the appropriate test for fraud and thereby render an unreasonable decision?

(3) Did the commission unreasonably conclude that Konstantinos Ekonomidis was acting as an investment manager and was required to comply with the duties of an investment fund manager?

(4) Did the commission impose unreasonable sanctions as against each of the three appellants? [page244]

The Allegations and the Decision

4The allegations before the commission included that Otto Spork, Sextant Capital Management Inc. ("SCMI") and Sextant Capital GP Inc. ("Sextant GP") committed non-criminal fraud during the period from July 2007 to December 2008 in three ways:

(1) they sold investments fund units with falsely inflated values;

(2) they took millions of dollars in fees based on falsely inflated values; and

(3) they directly misappropriated money from investment funds.

5The commission convened a panel comprised of two commissioners ("Carnwath" and "Perry", or the "panel") to hear the allegations. The panel heard evidence over 16 days of hearings between June 2010 and December 2010. The panel issued its reasons for the merits decision on May 17, 2011. In the decision, the panel found that each of the appellants engaged in contraventions of Ontario securities law. Specifically, the commission concluded that Otto Spork perpetrated a fraud relating to securities contrary to s. 126.1 of the Act. The panel also found that all of the appellants

breached their duties as investment fund managers contrary to s. 116 of the Act;

failed to deal fairly, honestly and in good faith contrary to s. 2.1 of the Ontario Securities Commission ("OSC") Rule 31-505, Conditions of Registration ("Rule 31-505"); and

-- acted contrary to the public interest.

6By the time of the sanctions hearing, Commissioner Perry's appointment had expired. Thus, Commissioner Carnwath proceeded on his own to determine the issues of sanctions and costs.

The Companies

7For a helpful list of the definitions and structures of the relevant funds and related companies, see Schedule A of the merits decision. [page245]

Factual Background

8In 2006 and early 2007, Otto Spork created three investment funds: the Sextant Strategic Opportunities Hedge Fund in Ontario (the "Canadian fund"), the Sextant Strategic Hybrid Hedge Resource Fund (the "hybrid fund") and the Sextant Strategic Global Water Fund (the "water fund"). The hybrid fund and the water fund were offshore funds.

9The Canadian fund was structured as a limited partnership and managed by its general partner, Sextant GP. SCMI was its investment advisor.

10Otto Spork owned 100 per cent of SCMI and 100 per cent of Sextant GP. He was a registered under the Act as an officer and director and ultimate responsible person for SCMI from February 2006 to June 2008. Konstantinos Ekonomidis, Otto Spork's brother-in-law, was the vice-president of corporate development for SCMI and was registered under the Act as a salesperson with SCMI at the relevant time. Natalie Spork, Otto Spork's daughter, was given the title of president and secretary of SCMI on May 28, 2008. On July 7, 2008, she was also registered as an officer and director and ultimate responsible person for SCMI.

11The limited partnership agreement under which the Canadian fund operated (the "agreement") restricted the fund from investing more than 20 per cent of its portfolio in shares of one company, based on the net asset value ("NAV") of the fund. It also restricted the fund from purchasing securities from any firm in which any principal of the investment advisor may have a direct or indirect material interest. The agreement provided compensation to the fund's general partner and investment advisor in the form of management and performance fees calculated as a percentage of the NAV. The offshore funds had similar compensation terms.

12In 2007, all the funds heavily invested in Iceland Glacier Products ehf ("IGP"), the private company that was intended to carry on a sales business of melted glacier water in Iceland. Otto Spork was a director of and substantial shareholder in IGP through companies he controlled.

13The Canadian fund first purchased shares in IGP for an average cost of [EUR]0.163 per share in July 2007, and the investments exceeded the 20 per cent limit allowed in the agreement. Within the same month, the portfolio valuation for the Canadian fund indicated that the market value of the IGP shares was [EUR]0.321 per share. [page246]

14Over the course of July 2007 to December 2008, Otto Spork reported a steady increase in the value of IGP shares to the Canadian fund's fund accountant, IAS. In turn, IAS used the value obtained from Otto Spork to calculate NAV for the Canadian fund. From July 31, 2007 to December 31, 2007, the reported value of the Canadian fund jumped from $3,233,000 to $7,959,000. The market price continued to increase in 2008. By November 30, 2008, the average cost of IGP shares was [EUR]2.45. The value of the IGP shares had increased 15-fold since July 2007. As a result, the Canadian fund paid $601,831 in management fees and $6,331,356 in performance fees to SCMI and Sextant GP from July 31, 2007 to December 31, 2008. Moreover, by December 31, 2008, the total market value of investment in IGP as a percentage of NAV for the Canadian fund was 94 per cent, for the hybrid fund was 107 per cent and for the water fund was 98 per cent.

15As indicators of IGP's value, Otto Spork relied, inter alia, upon valuations and claims that IGP continued to meet and make progress in its business plan. The valuation reports assumed that IGP's business plan, financial statements and projections were accurate. There was no independent verification of the information.

16Monthly reports were distributed to investors that showed the ever-increasing NAV and performance of the Canadian fund. Investors were invited to add "to your existing position" or "initiate an investment now". These reports were relied upon by investors. None of the performance reports disclosed to investors the holdings of the Canadian fund nor the concentration of IGP shares in the portfolio. The panel found that the performance report for July 2008 underlined how Otto Spork's inflation of IGP's market value and the Canadian fund's NAV allowed him to mislead investors and enrich himself.

17The analysis of the staff of the commission showed that a total of $30 million was deposited into the accounts of the Canadian Fund from January 1, 2007 to December 31, 2008, and during that same period $29 million was disbursed from those accounts. The appellants raised about $23 million by way of subscriptions from approximately 250 third party investors. Otto Spork did not testify at the hearing, filed no affidavit evidence and did not call any witnesses.

Findings with Respect to Otto Spork

18Following a lengthy and complex hearing, the panel issued its reasons for decision on May 17, 2011. The summary of [page247] findings that follows comes from the commission's factum, modified as necessary.

19The panel found that Otto Spork and the corporate respondents,^1 of which Otto Spork was the directing mind, orchestrated a fraudulent scheme by committing several acts of fraud. In particular, the panel found that Otto Spork wrongfully inflated the market price of IGP the business of which was intended to be the sale of melted glacier water in Iceland and the business in which Otto Spork's investment funds had significant holdings. The panel held Otto Spork knew or ought reasonably to have known that the increases he ascribed to the market value of IGP shares (from [EUR]0.321 to [EUR]2.450 in a period of 16 months that resulted in fee payments to Otto Spork of almost $7 million) were "totally unreasonable and were not based on any formal independent valuations", and that "these payments made to Otto Spork constitute acts of fraud" contrary to s. 126.1 of the Act.

20The panel also found that SCMI (the investment advisor to the Canadian fund) took advances of over $4 million in 2008 at the direction of Otto Spork, and that these advances were prohibited loans taken by Otto Spork for his benefit to the detriment of investors. The panel held that in taking prohibited loans, Otto Spork committed acts of fraud.

21In addition, the panel found that the US$1,258,000 payment made by all the investment funds to Riambel Holdings S.A., Otto Spork's private holding company, was prejudicial to the economic interest of the unit holders by creating a risk of economic loss, and that this action was a fraud. At the insistence of the auditors, this transaction was eventually booked as a loan owed by IGP to the investment funds.

Findings with Respect to Konstantinos Ekonomidis

22The panel found that Konstantinos Ekonomidis as vice-president of SCMI was second in command to Otto Spork and was engaged in selling fund units. He acted contrary to the public interest by misrepresenting the state of affairs of the funds to investors, which was contrary to s. 116 of the Act and s. 2.1 of Rule 31-505.

Findings with Respect to Natalie Spork

23As of May 28, 2008, Otto Spork's daughter became the president and director of SCMI and became registered with the [page248] commission as the ultimate responsible person with SCMI. The panel found that she took no steps to learn about or discharge her obligations in these roles and ultimately failed in her duties to act in good faith toward investors, which was contrary to s. 116 of the Act and s. 2.1 of Rule 31-505.

24Following the release of the reasons, the appellants were notified that Commissioner Perry would not be able to participate in the sanctions hearing and that Commissioner Carnwath would complete the hearing on his own. The appellants brought a motion for an order that the commission lacked jurisdiction to proceed with a sanctions hearing with a single member. Commissioner Carnwath ruled that he had the jurisdiction to proceed as a single member and imposed sanctions.

Standard of Review

25The parties agree that the standard of review on an appeal for questions arising from the merits decision and the sanctions decision is reasonableness.

26On the issue of the quorum for the sanctions decision, the appellants submit that this issue goes to jurisdiction and concerns a question of central importance to the legal system as a whole. Therefore, it is subject to the standard of correctness.

27The commission submits that the standard of review for all issues including the issue of quorum for the sanctions panel is one of reasonableness and that this case poses no question that is an exception to the reasonableness standard.

28Reasonableness is concerned to a great extent with the existence of justification, transparency and intelligibility in the decision-making process. It is also concerned with deference and whether the decision falls within the range of possible, acceptable outcomes which are defensible in respect of the facts and the law. True questions of jurisdiction are exceptional: see Alberta (Information and Privacy Commissioner) v. Alberta Teachers'Assn., [2011] 3 S.C.R. 654, [2011] S.C.J. No. 61, 2011 SCC 61; and Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9.

29In Volochay v. College of Massage Therapists of Ontario (2012), 111 O.R. (3d) 561, [2012] O.J. No. 3871, 2012 ONCA 541, at paras. 57-60, Laskin J.A. held that even issues of procedural fairness are not true questions of jurisdiction.

30In Taylor v. Ontario (Securities Commission), [2013] O.J. No. 4988, 2013 ONSC 6495 (Div. Ct.), this court recently confirmed that on all issues, other than procedural fairness issues, the commission's decision is subject to review on the standard of reasonableness citing [page249] Taub v. Investment Dealers Assn. of Canada (2009), 98 O.R. (3d) 169, [2009] O.J. No. 3552, 2009 ONCA 628. In Taub, the court noted, at para. 21, that the issue "determined by the OSC was the interpretation of its home statute, the Securities Act, a subject that falls squarely within its expertise". The court upheld the Divisional Court's conclusion that a reasonableness standard applied: see Taub (C.A.), at para. 21. The Supreme Court of Canada in McLean v. British Columbia (Securities Commission), [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67, 2013 SCC 67 has also held that a reasonableness standard applies to a decision of a securities commission interpreting its home statute or statutes closely connected to its function.

31A general question of law that is both of central importance to the legal system as a whole and outside the adjudicator's specialized area of expertise is an exception to the reasonableness standard of review: see McLean, at paras. 25-26. Counsel for the commission argued that the question of panel composition is not caught by this exception. The commission submits that the Act specifically gives this responsibility to the commission, which must apply the provisions of the Act within the parameters of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22 ("SPPA"). The commission argues that the commission's expertise extends beyond the substantive content of their legislation and includes the administration of their Act and the relationship between the Act and the SPPA.

32In McLean, at para. 31, Moldaver J. reaffirmed the view that courts "may not be as well qualified as a given agency to provide interpretations of that agency's constitutive statute that make sense given the broad policy context within which that agency must work" (citations omitted). How the commission deals with the issue of appointment of commissioners to hearings within the context of fixed term appointments for commissioners is not a question of general importance to the legal system as a whole.

33I am not persuaded that the interpretation of the statutory requirements for the composition of a panel for a sanctions hearing is of central importance to the legal system as a whole or constitutes an issue outside the expertise of the commission.

34I find that the standard of review for all issues on this appeal is reasonableness.

The Jurisdiction Motion Decision

35The panel that convened on June 1, 2012 to determine the matter of sanctions and costs was Commissioner Carnwath sitting alone. Although Commissioners Carnwath and Perry sat on the hearing of the merits in 2010, by the time the parties [page250] convened for the hearing on sanctions Commissioner Perry's appointment had expired.

36The appellants brought a motion prior to the sanctions hearing seeking an order that the commission did not have jurisdiction to proceed with the hearing with only a single member of the commission. Commissioner Carnwath heard and dismissed that motion with reasons, dated April 27, 2012.

37The appellants argue that the commission had no jurisdiction to hold a sanctions hearing before a single-member panel and, as such, the order made on June 1, 2012 was ultra vires.

38The appellants argue that s. 3(11) of the Act applies, which prescribes that two members of the commission constitute a quorum. They also argue that s. 3.5(3) of the Act, which permits a single member of the commission to preside over a contested hearing on the merits, does not apply because it was enacted after the merits hearing commenced.

39The appellants submit that s. 4.4(1) of the SPPA does not modify or derogate from the quorum requirement of the Act. It provides as follows:

4.4(1) If a member of a tribunal who has participated in a hearing becomes unable, for any reason, to complete the hearing or to participate in the decision, the remaining member or members may complete the hearing and give a decision.

40The appellants argue that the merits hearing and the sanctions hearing was a single, complete hearing and dispute the contention that the sanctions hearing was a discrete, separate hearing. It is the position of the appellants, therefore, that a single member of the commission did not have jurisdiction to complete the hearing that was commenced in 2010.

41The appellants further argue that s. 32 of the SPPA does not assist the commission in its argument. They submit that it does not specifically address the issue of quorum requirements and that the SPPA must be read to include the presumption that statutory quorum is maintained. They argue that the SPPA does not authorize the commission to proceed in the absence of quorum. Moreover, the appellants argue that the principle of audi alteram partem requires that the quorum seized of the matter must decide the matter.

42The commission argues that the commission has authority to constitute a hearing panel and if that authority is exercised reasonably, its decision should stand.

43The commission contends that Commissioner Carnwath sitting alone was properly constituted as a sanctions panel, either because he was convened as such for a new and discrete [page251] hearing in accordance with s. 3.5(3) of the Act or by operation of law under s. 4.4(1) of the SPPA.

44The commission argues that the constitution of a panel is a decision of the commission with respect to how it exercises its statutory authority and is entitled to deference. In any event, they argue that in view of the statutory provisions for constituting a hearing panel, the decision to convene the sanctions hearing with a single member was reasonable. Further, the commission argues that the principle of audi alteram partem was satisfied in this case. The principle does not require that the sanctions panel be composed of all of the same commissioners who presided at the merits hearing. The panel that decided the sanctions and costs did hear all of the evidence and submissions of the parties.

45While the commission has held in the past that a sanctions hearing is a separate hearing from the merits hearing (see MRS Sciences Inc. (Re) (2011), 2011 ONSEC 34, 34 O.S.C.B. 12288), it is not necessary to deal with this issue in view of my findings with respect to s. 4.4(1) of the SPPA.

46Section 2 of the SPPA requires that the Act shall be liberally construed to secure the just, most expeditious and cost-effective determination of every proceeding on its merits. In my view, a plain reading of s. 4.4(1) of the SPPA grants authority to the commission to resolve the problem of losing statutory quorum as the result of the incapacity of a member, unless there is something in another Act or regulation that specifically deals with the circumstances of loss of quorum. That narrow exception does not apply here. Section 4.4(1) specifically permits the commission to override s. 3(11) of the Act in order to proceed expeditiously in the circumstances where quorum has been lost.

47In the circumstances of this case, the principle of audi alteram partem was fully met. Commissioner Carnwath, who was present at the merits hearing and at the sanctions hearing, made the decision with respect to sanctions. The parties were fully heard by the panel that ultimately made the order.

48The decision on the issue of quorum did not result in a loss of jurisdiction to the commission. It was a reasonable decision, which allowed the proceeding to continue in a just, expeditious and cost-effective manner.

The Appropriate Test for Fraud

49In its decision issued on May 17, 2011, the panel concluded that Spork committed acts of fraud. The appellants submit that the commission erred in applying the mens rea element of fraud when they held that Otto Spork knew or ought reasonably to [page252] have known that the share values were totally unreasonable and were inflated. They argue that the commission failed to consider and discuss in the reasons the relevant evidence known to Otto Spork that is inconsistent with the finding of fraud.

50The appellants further argue that the finding that the advance payments were fraudulent was unreasonable in that there was no evidence that at the time Otto Spork took the advances, he was aware the advances were prohibited.

51The commission submits that the reasons for finding Otto Spork perpetrated fraud were justifiable, transparent and intelligible when read as a whole. They argue that the commission thoroughly analyzed the evidence, gave sufficient reasons and, in any event, is not required to refer to each item of evidence.

52The commission further argues that the mens rea standard for fraud applied by the commission was based on the test in R. v. Théroux, [1993] 2 S.C.R. 5, [1993] S.C.J. No. 42 and was established on the evidence.

Analysis

53With respect to the argument on the sufficiency of reasons, I am satisfied that the thorough and detailed analysis provided by the merits panel demonstrates that it considered the evidence and the arguments made by the appellants. The panel specifically listed many of the explanations for the value ascribed to IGP shares provided by the appellants based on their corporate minutes. The merits panel noted certain explanations provided in the merits decision. This list was not intended to be exhaustive, hence the words, "the explanations included . . .". The panel is not required to address every item of evidence so long as the justifications provided by the panel were reasonable: see Barrington v. Institute of Chartered Accountants of Ontario, [2011] O.J. No. 2378, 2011 ONCA 409, 333 D.L.R. (4th) 401, at para. 114, leave to appeal to S.C.C. refused [2011] S.C.C.A. No. 367. There was ample evidence on which the panel could come to the conclusions it reached.

54In Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708, [2011] S.C.J. No. 62, 2011 SCC 62, the Supreme Court of Canada emphasized that a reviewing court is to focus on whether the tribunal has offered an adequate explanation for the decision it has reached. The decision does not have to be optimal. The court stated as follows, at para. 16:

Reasons may not include all the arguments, statutory provisions, jurisprudence or other details the reviewing judge would have preferred, but [page253] that does not impugn the validity of either the reasons or the result under a reasonableness analysis. A decision-maker is not required to make an explicit finding on each constituent element, however subordinate, leading to its final conclusion. In other words, if the reasons allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes, the Dunsmuir criteria are met.

(Citations omitted)

55It is well established that reasons will be sufficient if they enable the reviewing court to understand the logical reasoning behind the decision-maker's conclusion based on the evidence before it and the applicable legal principles. The Supreme Court of Canada stated in Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 2003 SCC 20, at para. 55:

A decision will be unreasonable only if there is no line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived. . . . This means that a decision may satisfy the reasonableness standard if it is supported by a tenable explanation even if this explanation is not one that the reviewing court finds compelling.

56The appellants' argument essentially invited this court to reweigh the evidence and to reassess the findings of the panel. That is not the function of this court, particularly where the commission has specific expertise it was called upon to apply during the course of its deliberations: see Donnini v. Ontario (Securities Commission) (2005), 76 O.R. (3d) 43, [2005] O.J. No. 240 (C.A.), at paras. 43-44.

57I am satisfied that the reasons of the panel provide an adequate explanation of the basis on which the decision was reached and also satisfy the Dunsmuir criteria of justification, transparency and intelligibility. The reasons articulate the evidence that is relevant and significant to the decision.

58The test for fraud involving securities is found under s. 126.1(1)(b) of the Act, which states as follows:

126.1(1) A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

(b) perpetrates a fraud on any person or company.

59"Fraud" is not defined in the Act. In interpreting the term "fraud", the commission has adopted the test for fraud established by the Supreme Court of Canada in Théroux: see, e.g., Nest Acquisitions and Mergers (Re), 2013 LNONOSC 333, 36 O.S.C.B. 4628, at para. 53. [page254] The Théroux test was also applied in Anderson v. British Columbia (Securities Commission), [2004] B.C.J. No. 8, 2004 BCCA 7, 23 B.C.L.R. (4th) 182, at para. 27, leave to appeal to S.C.C. refused [2004] S.C.C.A. No. 81.

60The appellants rely on para. 24 of Anderson for the proposition that the commission must prove "a guilty state of mind" in order to meet the test for fraud under the Act. The commission argues that the mens rea of fraud can be derived from findings on the actus reus, i.e., once there has been a finding of a prohibited act and prohibited consequence, such as a dishonest act and a deprivation including a risk of deprivation, one applies those findings to the question of mens rea. In Théroux, the Supreme Court, at pp. 19-20 S.C.R., established that the mens rea of fraud consists of the subjective knowledge of the prohibited act and the subjective knowledge that the prohibited act could have as a consequence the deprivation or risk of deprivation of another. Once this is shown, "the crime is complete".

61Subjective knowledge may be inferred from the acts themselves.

62Regarding the element of knowledge of the risk of deprivation, the court in Théroux commented as follows, at pp. 20-21 S.C.R.:

The accused must have subjective awareness, at the very least, that his or her conduct will put the property or economic expectations of others at risk. As noted, above, this does not mean that the Crown must provide the trier of fact with a mental snapshot proving exactly what was in the accused's mind at the moment the dishonest act was committed. In certain cases, the inference of subjective knowledge of the risk may be drawn from the facts as the accused believed them to be . . . where the accused tells a lie knowing others will act on it and thereby puts their property at risk, the inference of subjective knowledge that the property of another would be put at risk is clear.

63On this basis, the commission argues that there is ample evidence of Otto Spork's subjective awareness of the possible consequences of his acts: Otto Spork inflated the value of the IGP shares without a reasonable basis, directed those figures to be used to calculated IGP's NAV, communicated the NAV to investors in monthly reports as a means of inducing them to invest more in the funds, and, as a result, Otto Spork was enriched by almost $7 million in performance and management fees.

64Although the panel used the phrase "knew or ought reasonably to have known" throughout its reasons, the commission contends that there was ample evidence to support the conclusion that Otto Spork had direct knowledge of the facts constituting fraud and that any subjective awareness required to support [page255] the commission's finding of fraud can be and was properly inferred by the panel.

65To satisfy the Théroux test for fraud, the trier of fact may infer subjective intent from the acts themselves. In its reasons, the panel pointed out the evidence and addressed the appellants' explanations regarding the essential elements of the fraud. It found the explanations did not justify the inflation of the IGP shares or reflect the true status of the IGP.

66It is not necessary to repeat each of the commission's findings in this regard; they are set out with great particularity in the decision. The evidence supported that Otto Spork committed acts of fraud by setting the values of the IGP, by directing IAS to use the values to calculate the Canadian fund's NAV and by having this information communicated to investors through monthly reports. Otto Spork had direct knowledge of each of these actions.

67The other acts of fraud found by the commission, including advance payments and the Riambel payment, were similarly supported by evidence of subjective knowledge reasonably inferred from the facts found. These findings of fraud flowed from the principal finding of fact that the IGP shares had been deliberately and falsely inflated.

68I am satisfied that the direct knowledge of these facts and the subjective awareness of their intended consequences can be inferred from the acts themselves. In this respect, the commission's use of the phrase "knew or ought reasonably to have known" in making their finding was inclusive of both tests. The evidence supports that Otto Spork knew of his wrongful acts and knew that those acts could have as a consequence the deprivation or risk of deprivation to the investors.

Decision that Konstantinos Ekonomidis was an Investment Fund Manager

69The appellants submit that the commission unreasonably concluded that Konstantinos Ekonomidis was an "investment fund manager" within the meaning of s. 116 of the Act as the panel found that his only responsibilities were sales, not operation of the business or affairs of the funds. They argue that, in any event, his communication with W.G., a retail broker, does not provide a reasonable basis to conclude that he acted in breach of his duties as an investment fund manager.

70The commission submits that it was reasonable to conclude that Konstantinos Ekonomidis was an "investment fund manager" based on the evidence that he was involved in higher level decision-making involving the funds and that he fulfilled [page256] more than a sales function at SCMI as he assisted in the operations when Otto Spork was absent.

71In particular, the commission relies on the finding that Konstantinos Ekonomidis "concealed the high concentration of IGP in the portfolio from W.G.", and W.G. was invited to purchase units of the Canadian funds subsequent to this lack of disclosure. The commission heard evidence from W.G. that he was horrified to learn that the 95 per cent of the Canadian fund was invested in one water company.

72The panel heard viva voce evidence from W.G. at the hearing. It was in the best position to evaluate that evidence and make findings based upon it. In my view, the findings of the panel are reasonable in light of all of the evidence and should not be disturbed.

Were the sanctions imposed unreasonable?

73The following sanctions were imposed against Otto Spork:

-- termination of his registration under the Act;

a permanent prohibition against trading in and acquiring of any securities;

-- a reprimand;

resignation from all positions as a director or officer of an issuer, registrant or investment fund manager;

a permanent prohibition against becoming or acting as a director or officer of any issuer, registrant or investment fund manager;

a permanent prohibition against becoming or acting as a registrant, as an investment fund manager or as a promoter;

an administrative penalty in the amount of $1 million for third parties;

-- disgorgement in the amount of $6,350,000; and

-- costs in the amount of $350,000.

74The following sanctions were imposed against Dino Ekonomidis:

-- termination of his registration under the Act;

a ten-year prohibition against trading in and acquiring of any securities;

-- a reprimand;

resignation from all positions as a director or officer of an issuer;

a ten-year prohibition against becoming or acting as a director or officer of any issuer or registrant, or investment fund manager or promoter;

an administrative penalty in the amount of $250,000 for third parties;

-- disgorgement in the amount of $250,000; and

-- costs in the amount of $65,000.

75The following sanctions were imposed against Natalie Spork:

-- termination of her registration under the Act;

a three-year prohibition against trading in and acquiring of any securities;

-- a reprimand;

resignation from all positions as a director or officer of an issuer;

a five-year prohibition against becoming or acting as a director or officer of any issuer or registrant;

-- a three-year prohibition against becoming a registrant;

an administrative penalty in the amount of $50,000 for third parties;

-- disgorgement in the amount of $140,000; and

-- costs in the amount of $20,000.

76All of the appellants submit that the sanctions are harsh and excessive.

Position with Respect to Otto Spork

77The appellants submit that if this court confirms the finding of fraud, it must distinguish between a person who knowingly perpetrates a fraud and a person who ought to have known they were perpetrating a fraud. They further contend that there is no basis for finding that Otto Spork knowingly perpetrated a fraud and that the commission erred in failing to give effect to this [page258] distinction when deciding on the sanction to be imposed upon Otto Spork.

78The appellants further argue that the disgorgement order was unreasonable given that the settlement made between the appellants and the receiver of the corporate entities was disclosed to the commission prior to court approval.

79The appellants also argue that with respect to the disgorgement order, the commission failed to demonstrate that the amounts were obtained as a result of non-compliance with Ontario securities law.

Position with Respect to Konstantinos Ekonomidis

80The appellants argue that the sanctions imposed on Konstantinos Ekonomidis were not proportionate and that the commission failed to distinguish between the sanctions required to be imposed as against Robert Levack, the former chief compliance officer of SCMI, and Konstantinos Ekonomidis, whose sole responsibility was marketing and sales. They further argue that the disgorgement order was premised on employment bonuses and in the absence of evidence that the amount was obtained as a result of non-compliance with Ontario securities law.

Position with Respect to Natalie Spork

81The appellants submit that the sanctions against Natalie Spork are disproportionate to her conduct. They make the same argument with respect to disgorgement as they did for Konstantinos Ekonomidis. They also argue that the administrative penalty of $50,000 is unreasonable in light of the penalty to Robert Levack. They further argue that the sanctions against Natalie Spork were unreasonable in light of the finding that she did not perform the duties of a president and was unqualified to do so.

82The commission submits that the crafting and imposition of sanctions lie at the heart of the commission's expertise and that such decisions should be given a high level of deference.

Analysis

83The commission is empowered to order sanctions if, in its opinion, it is in the public interest to do so. The commission has a very broad discretion in determining what is in the public interest.

84The commission set out the factors which it considered relevant in determining the appropriate sanctions, including

-- the seriousness of the allegations; [page259]

-- the respondents' experience in the marketplace;

-- the level of activity in the marketplace;

-- the respondents' recognition of seriousness of improprieties;

-- specific and general deterrence;

-- size of profit gained or loss avoided from illegal conduct;

effect of sanctions on respondent's ability to participate without check in capital markets; and

-- sanctions imposed on Levack who settled his case.

85Section 127(1)10 of the Act provides that a person or company that has not complied with the Ontario securities law can be ordered to disgorge any amounts obtained as a result of the non-compliance. Regarding disgorgement, the commission was guided by the principal factors set out in Limelight Entertainment Inc. (Re) (2008), 2008 ONSEC 28, 31 O.S.C.B. 12030, at para. 52.

86The commission linked the disgorgement orders to non-compliance in their decision. The commission held that the appellants should not be allowed to profit from breaches of Ontario securities law. The evidence showed a clear connection between the breaches by Otto Spork and the management fees he was paid. The commission found that Natalie Spork did nothing to merit the bonus funds paid to her.

87The disgorgement orders against Konstantinos Ekonomidis and Natalie Spork reflect the past practice of the commission dealing with amounts earned by commission or fees earned: see Simply Wealth Financial Group Inc. (Re), 2013 LNONOSC 357, 36 O.S.C.B. 5099, at para. 48; and Axcess Automation LLC (Re), 2013 LNONOSC 173, 36 O.S.C.B. 2919, at paras. 39, 47.

88The commission rejected the arguments of the Konstantinos Ekonomidis and found his conduct more egregious than that of Robert Levack. It also considered the settlement with the receiver to which they were not privy, nor involved, in crafting the sanctions order against Ekonomidis.

89The commission found that the most important factors to consider in this case were the following: (1) imposing sanctions that reflect the seriousness of the securities law violations that occurred; and (2) imposing sanctions that not only deter the appellants but also like-minded people from engaging in future conduct that violates securities law.

90In its consideration of specific and general deterrence and denunciation, the commission acted reasonably. Its decision on [page260] sanctions merits considerable deference. There is no basis for the appeal of the decision of the commission on sanctions.

Result

91In the result, this appeal is dismissed.

92If the parties are unable to agree on costs, they may file brief submissions on costs as follows:

the respondent must file within 15 days of receipt of this decision;

the appellants must file within ten days following receipt of the above.

93Reply submissions if required may be filed within five days of receipt of the respondent's submissions.

Appeal dismissed.

Notes

1 The corporate respondents did not appeal the decision of the commission.