CITATION: Phillips v. Ontario Securities Commission, 2016 ONSC 7901

DIVISIONAL COURT FILE NO.: 617/15

DATE: 20161216

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

SWINTON, H. SACHS and PATTILLO JJ.

BETWEEN:

David Charles Phillips and John Russell Wilson

Appellants

– and –

Ontario Securities Commission

Respondent

Alistair Crawley and Bruce O’Toole, for the Appellants

Yvonne Chisholm, Catherine Weiler and Christina Galbraith, for the Respondent

HEARD at Toronto: September 22, 2016

H. Sachs J.:

Introduction

[1] On January 14, 2015, the Ontario Securities Commission (the “Commission”) found that the Appellants had defrauded investors by selling and overseeing sales of almost $19 million in securities while withholding certain information. The Commission also found that the Appellants made misrepresentations contrary to the Securities Act, R.S.O. 1990, c. S.5 (the “Act”) and that the Appellants failed to deal with their clients honestly, fairly and in good faith.

[2] On October 28, 2015, the Commission made a number of orders against the Appellants, including ordering them to disgorge to the Commission all the proceeds realized from their misconduct (less the sum of distributions to investors from a court-supervised wind-up), a total amount of just over $16.5 million.

[3] This is an appeal from the fraud finding, the misrepresentation finding and the disgorgement order. The Appellants do not appeal the finding that they failed to deal with their clients honestly, fairly and in good faith.

[4] On this appeal, the Appellants submit that the Commission committed an error of law by failing to ask itself whether a reasonable person would stigmatize what the Appellants had done as dishonest, a fundamental aspect of the test for fraud “by other fraudulent means.”

[5] The Appellants also argue that the Commission breached the rules of natural justice by grounding its finding of misrepresentation on conduct not alleged in the amended Statement of Allegations and committed an error of law in failing to find that establishing reliance by the investor was essential to a finding of misrepresentation under the Act.

[6] Finally, the Appellants submit that the Commission erred in its application of the test for disgorgement when it ordered the Appellants to disgorge amounts that they had not actually obtained for themselves and when those amounts had gone to entities that were not named respondents in the Commission proceedings.

[7] For the reasons that follow, I would dismiss the appeal.

Factual Background

[8] First Leaside Group (“FLG”) was a group of companies founded by the Appellant, Mr. Phillips, in the 1980s that was in the business of selling investment products to the public and offering brokerage and financial planning services. The investment products offered by FLG included, among other things, debt and equity offerings invested directly or indirectly within FLG, and the operation and development of commercial properties.

[9] By August of 2011, FLG was comprised of 161 companies and Canadian and U.S. limited partnerships (“LPs”) formed to acquire and own real estate and to provide tax write-off opportunities. One of FLG’s main investment vehicles was the Wimberly Apartments LP (“WALP”), a U.S. limited partnership that consolidated FLG’s Texas real estate holdings. At that time, FLG had approximately 1,000 investors.

[10] Mr. Phillips was the founder of FLG and the CEO, president and a director of FLG’s parent company, First Leaside Wealth Management (“FLWM”). Mr. Phillips owned all the common shares of FLWM. As a directing mind of FLG, Mr. Phillips directed all significant aspects of the business and growth of FLG, including capital raising, deal origination, negotiation and structuring, and internal administration. His role also included selling directly to investors. He was a salesperson and the ultimate designated person with First Leaside Securities Inc. (“FLSI”), an FLG entity through which sales were made. He was registered in various capacities with the Commission, including as a salesperson, trading officer, director and shareholder.

[11] Mr. Wilson was a director of FLWM and a senior salesperson employed by FLSI. He was registered with the Commission as a salesperson and a dealing representative.

Commission Staff Develop Concerns

[12] In late 2010 or early 2011, FLG provided Commission staff with third-party valuations of WALP’s Texas properties. These valuations caused staff to be concerned about FLG’s financial viability. As a result, in March of 2011, staff asked that a viability study of FLG be conducted. FLG’s lawyers engaged Grant Thornton LLP to conduct that study.

[13] On March 18, 2011, Mr. Phillips undertook that during Grant Thornton’s review of FLG, and for a one-week period after delivery of Grant Thornton’s report, no sales would be made to any investors of any debt or equity in WALP or any of its subsidiaries.

The Grant Thornton Report

[14] The Grant Thornton Report (the “Report”) was delivered on August 19, 2011. It contained the following key findings:

(a) The future viability of FLG was contingent on its ability to raise new capital. This conclusion was based on the assumption that FLG would follow the “Base Model” – a financial model based on a number of assumptions and projections provided by FLG management that constituted a major departure from the manner in which the company had conducted business in the past. Among other things, under the Base Model, FLG would have to ensure that funds were siloed in each LP, and would have to stop its practice of moving cash between LPs and using new investor money to fund existing projects. The Report stated that “[i]f the FL Group was restricted from raising new capital, it would likely be unable to continue its operations in the ordinary course, as it would have insufficient revenue to support its infrastructure, staffing costs, distributions, and to meet their funding requirements for existing projects.”

(b) In its analysis, Grant Thornton “sensitized” certain assumptions in the Base Model because there was not enough information in historical trends to fully support them. The Report concluded that “once the Base Model was sensitized [FLG] has a cash flow deficiency of approximately $15.9M over the three year period from 2011 to 2013.” The Report also concluded that if FLG implemented certain “management levers” identified in the Report, those levers would have “an aggregate positive impact” of approximately $16.7 million over the same period.

(c) Using the highest third-party valuation figures available for the WALP properties, the FLG assets had an equity value of $67 million, while FLG had raised equity of approximately $200 million, resulting in a significant shortfall.

[15] The Report contained a number of recommendations, including a recommendation that FLG management take immediate steps to implement the Base Model and consider strict board oversight and/or third-party supervision of the implementation.

Events Following the Release of the Report

[16] On September 1, 2011, FLG’s lawyers and Grant Thornton met with Commission staff to discuss the Report. At the end of the meeting, Commission staff advised FLG’s lawyers that Commission staff had not yet accepted the Base Model, but that they had no immediate plans to take further steps.

[17] Following the release of the Report, the Appellants continued raising capital for investment in FLG entities. The total value of investments sold by the FLG sales team during the period between August 22 and October 28, 2011 (the “Sales Period”) was $18,765,168, with Mr. Wilson selling a total of $8,945,865 of units and Mr. Phillips selling a total of $3,388,626 of units. Neither the fact of the review by Grant Thornton, nor the Report was disclosed to the investors who invested during the Sales Period.

[18] On October 28, 2011, Commission staff advised FLG that they intended to commence a proceeding against FLG and intended to bring an application for an immediate cease trade order. On November 7, 2011, FLG wrote to investors and advised them, for the first time, about the Report. FLG also indicated that it had voluntarily ceased trading.

[19] In February of 2012, a substantial part of FLG sought creditor protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. As part of the CCAA proceeding, a chief restructuring officer took control of FLG.

[20] A Statement of Allegations was filed by Commission staff on June 4, 2012. An amended Statement of Allegations was filed on April 25, 2013 and the hearing on the merits was held over 12 days between June 5 and September 25, 2013.

The Commission’s Decisions

The Fraud Finding (Breach of s. 126.1 of the Act)

[21] The Commission found that the Grant Thornton Report and, in particular, the important facts contained in the Report, ought to have been, but were not, disclosed to investors who invested during the Sales Period. The Commission also found that the Appellants knew that the Report contained important facts, in particular:

(a) That the FLG LPs could not continue to cover FLG’s stated distributions.

(b) That an asset valuation had disclosed a significant equity deficit.

(c) That FLG would have a cash flow deficiency of approximately $15.9 million over the three-year period of 2011 to 2013.

[22] The Commission found that the failure of the Appellants to disclose this important information constituted a dishonest act that “caused deprivation by putting the financial or pecuniary interests of FLG Sales Investors at risk” (Commission Merits Decision, at para. 201).

[23] The Commission correctly set out the principles in the Supreme Court’s decision in R. v. Théroux, 1993 134 (SCC), [1993] 2 S.C.R. 5, 100 D.L.R. (4th) 624 as follows:

(i) Proof of a prohibited act and deprivation caused by the prohibited act are sufficient to make out the actus reus of the offence of fraud (Théroux, at p. 20).

(ii) Proof of subjective knowledge of the prohibited act and subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which can be in the form of knowing that the victim’s pecuniary interests will be put at risk) establishes the mental element of fraud (Théroux at p. 20).

[24] The Commission found that the Appellants knew that the Report contained important facts that they did not disclose to investors during the Sales Period and knew that the likely consequence to these investors of this non-disclosure would be deprivation or the risk of deprivation.

[25] Thus, the Commission found that the Appellants committed fraud.

Making False or Misleading Statements (Breach of s. 44(2) of the Act)

[26] The Commission found that both Appellants made statements during the Sales Period “with respect to FLG that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship with each of the [Appellants], which statements were untrue or omitted information necessary to prevent the statements from being misleading in the circumstances” (Commission Merits Decision, at para. 231).

[27] In coming to this conclusion, the Commission found that the following statements were false or misleading:

(a) The Appellant Phillips made a PowerPoint slide presentation at a September 17, 2011 meeting with investors that contained statements that this was “the time for new opportunities,” that FLG had a “sound financial position” and that the “partnership’s exposure to market risk is unchanged.” During the same meeting, and to a particular investor outside of the meeting, Mr.Phillips made the statement that it was “business as usual” at FLG. In view of the conclusions in the Report these statements were untrue or omitted information necessary to prevent them from being false or misleading in the circumstances. The Commission found, at para. 238:

As the directing mind of FLG, Phillips knew that … the recommendations in the Grant Thornton Report indicated that FLG’s financial viability is contingent on the ability of FLG to raise the Special Financing to prevent a cash flow deficiency, that FLG stop the movement of funds, that new funds be siloed within each of the new investment entities and [that] the Base Model represented ‘a major or drastic departure from the manner in which [FLG] conducted business in the past’.

(b) The FLG website contained statements that the FLG real estate portfolio was “one of Canada’s fastest growing”; that within 18 years FLG had proved “that buying underperforming D grade properties in established neighborhoods and then repositioning them in the market could be very profitable”; that since 1992 FLG partners had “received continuous monthly cash distributions”; and that FLG investors had experienced an “exceptional investment return over the past two decades.” The website did not disclose that the valuation of the FLG properties was less than the total amount outstanding on the mortgages and the promissory notes that FLG had issued. It also did not report that the cash flow of FLG was in a negative position. Finally, the FLG paper marketing materials valued the assets held by WALP at $100 million when in fact the valuations obtained of the properties did not total more than $68.8 million.

(c) On September 9, 2011, the Appellant Wilson sent a group email to investors with a view to drumming up sales in the Special Notes LP and Venture LP offerings. In that email, he described the offerings as “compelling investment opportunities.” In respect of the Venture LP, Mr. Wilson wrote: “For partners who can utilize a substantial tax deduction in 2011 and 2012, this new LP is ideal! This has the potential to be our best deal in 20 years, given the high deductions, and the substantial portfolio of real estate acquired.” These statements misled investors as to the true state of affairs at FLG. Mr. Wilson also made particular statements to particular investors, such as inducing one investor and his wife to invest in FLG by offering them an incentive he knew that FLG could not meet.

Dealing Fairly, Honestly and in Good Faith with Clients

[28] Both Appellants were registered as dealers with the Commission. As such, they had a duty to deal fairly, honestly and in good faith with their investors, who were their clients, during the Sales Period. The Commission found that they both breached their duties in this regard. The Appellants do not appeal these findings.

Sanctions and Costs

[29] The Commission imposed a number of sanctions on the Appellants, including prohibiting them permanently from becoming or acting as registrants, investment fund managers or promoters; ordering Mr. Phillips to pay an administrative penalty of $700,000 for his non-compliance with Ontario securities law; ordering Mr. Wilson to pay an administrative penalty of $400,000 for his non-compliance; ordering both of them jointly and severally to disgorge $7,817,739 that was obtained as a result of their non-compliance with securities law (the value of securities Mr. Wilson personally sold to FLG investors, less the maximum distribution to those investors from the court-ordered wind-up); ordering Mr. Phillips to disgorge an additional $8,779,515 (the additional amount sold during the Sales Period in contravention of the Act, less the maximum distribution from the wind-up – Mr. Phillips, as the directing mind of the fraudulent scheme, was held responsible for the full amounts sold); and awarding $340,867.50 by way of costs.

[30] During the penalty phase of the hearing, the Appellants submitted that the Commission had no authority to order disgorgement of funds that were received by FLG entities that were not named as respondents in the Commission proceeding. The Commission dismissed this argument and the Appellants appeal this aspect of the sanctions order.

Issues Raised on This Appeal

[31] There are five issues raised on this appeal:

(i) What is the applicable standard of review?

(ii) Did the Commission err in its application of the test for fraud?

(iii) Did the Commission breach the rules of natural justice and procedural fairness by grounding its findings of a breach of s. 44(2) of the Act (misrepresentation) on conduct not alleged in the amended Statement of Allegations?

(iv) Did the Commission err in finding that the Appellants were guilty of misrepresentation without finding reliance?

(v) Did the Commission err in its application of the test for disgorgement?

Jurisdiction and Standard of Review

[32] Section 9(1) of the Act provides for an appeal to the Divisional Court from a final decision of the Commission.

[33] The Appellants submit that the Commission’s finding of fraud must be reviewed on a standard of correctness, as fraud is a question of general law of central importance to the legal system as a whole and it is a question that is outside the Commission’s area of expertise.

[34] I disagree. Securities fraud is codified in s. 126.1(b) of the Act, the Commission’s home statute. There is a presumption that a tribunal that is interpreting and applying its home statute is entitled to deference, and its decisions are reviewable on a reasonableness standard (see McLean v. British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 S.C.R. 895, at paras. 21-22 and 33). In order to rebut the presumption on the basis of the “general law” exception, the question must be both of central importance to the legal system and outside the tribunal’s area of expertise.

[35] In a series of cases, the Commission has looked to the Supreme Court of Canada’s fraud jurisprudence, including the Théroux case, to formulate the legal test that it applies to the evidence before it. The fact that the Commission applied jurisprudence developed at common law is not sufficient to make the question it was addressing one of central importance to the legal system as a whole.

[36] This point was made by the Supreme Court in McLean. The case concerned the British Columbia Securities Commission’s interpretation of a limitations period that applied to proceedings before it. While the Supreme Court agreed that “limitation periods, as a conceptual matter, are generally of central importance to the fair administration of justice,” it found that it did not follow that the Commission’s decision in that instance had to be reviewed on a standard of correctness. The Commission’s decision was described as a “nuts-and-bolts question of statutory interpretation confined to a particular context” and, as such, was not a question of law of central importance to the legal system as a whole (McLean, at para. 28).

[37] In the case at bar, the Commission was applying developed jurisprudence to the facts before it. Further, the consideration of whether securities fraud has been carried out squarely engages the Commission’s expertise and is a determination that the Commission is called upon to make on a regular basis. Thus, the presumption has not been rebutted and the applicable standard of review is reasonableness.

[38] The parties agree that the other aspects of the Commission’s decision are to be reviewed on a standard of reasonableness, except for the allegation concerning a breach of procedural fairness. When the issue is whether a breach of natural justice or procedural fairness occurred, the courts in Ontario will not engage in a standard of review analysis. A proceeding is either procedurally fair or it is not.

Was the Commission’s Fraud Finding a Reasonable One?

[39] The Appellants’ appeal with respect to the Commission’s fraud finding is focused on its analysis concerning the actus reus of fraud, an essential element of which is proving a prohibited act, be it an act of deceit, a falsehood or some other fraudulent means. The Commission correctly stated that where, as here,

it is alleged that the actus reus of a particular fraud is ‘other fraudulent means’, the Supreme Court of Canada [has] held that the existence of such means is ‘determined objectively, by reference to what a reasonable person would consider to be a dishonest act’. The concept of ‘other fraudulent means’ is intended to encompass all other means, other than deceit or falsehood, which can be properly characterized as dishonest[.] ‘Other fraudulent means’ includes the non-disclosure of important facts. [Commission Merits Decision, at para. 182; citations omitted.]

[40] According to the Appellant, the Commission’s reasons do not disclose that it ever undertook this objective analysis. It simply went from a finding of non-disclosure of important facts to a finding of fraud by “other fraudulent means.” It never asked itself the question whether a reasonable person would consider the non-disclosure in this situation to be a dishonest act. This failure, the Appellants argue, caused the Commission to ignore significant evidence that established that the non-disclosure in this case would not be considered dishonest by a reasonable person. This evidence consisted of the following:

(a) The Grant Thornton Report concluded that FLG was viable and was, thus, reasonably considered by the Appellants to be a positive report.

(b) FLG and the Appellants had legal advice that FLG could not disclose the Report on the basis that disclosure would breach s. 16 of the Act.

(c) The Appellants did disclose the relevant information referenced in the Report to investors. In particular, the Appellants disclosed the fact of the equity deficit and the negative cash flow of specific entities at the annual general meeting.

(d) According to the Report, if FLG was to remain viable, it needed to implement the Base Model, which clearly involved the raising of capital. If FLG did not raise capital, it would be brought to an end. None of the other directors or FLG’s counsel saw an issue with FLG raising capital without disclosing the Report.

(e) Commission staff were aware or ought to have been aware that FLG was selling securities during the Sales Period. It was reasonable to interpret Commission staff’s silence in August, September and October of 2011 as indicating that there was no restriction on sales of securities by FLG.

[41] It is important to emphasize that when a reasonable basis for the decision under review is apparent to the reviewing court, it is generally unnecessary for that court to set aside the decision and remit it to the tribunal. Under the standard of reasonableness, a tribunal is not required to cover every issue raised by the parties in its reasons and a reviewing court is entitled to look beyond the reasons to the record in assessing whether the decision before it is reasonable (Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61, [2011] 3 S.C.R. 654; McLean; Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, [2011] 3 S.C.R. 708).

[42] While it is true that, on a strict reading, the Commission’s reasons do not disclose a portion where the Commission specifically undertook the analysis upon which the Appellants base their appeal, read as a whole and in light of the parties’ submissions, I find that the Commission’s implicit conclusion is that the non-disclosure in this case would be regarded by a reasonable person as dishonest and, therefore, its conclusion that the allegations were made out was reasonable.

[43] The basis for the Commission’s fraud finding was not just that the Appellants failed to disclose the Report to potential investors, but also that they then went ahead and sold securities to those investors. Deciding not to disclose the Report was one decision, but deciding to sell securities without disclosing the Report or the significant information in it was another decision. Thus, the question is not whether a reasonable person would regard it as dishonest not to disclose the Report, but whether a reasonable person would regard it as dishonest to sell securities to an investor without disclosing the Report.

[44] The Commission found that the Report contained significant information that could adversely affect the pecuniary interests of anyone who invested in FLG, namely that FLG could not meet its stated distributions, that it had a significant equity deficit and that it had a cash flow deficit. The Commission also found that the Appellants knew that the Report contained this important information and knew that this information could have an adverse effect on the pecuniary interests of investors. In the face of these findings, it is reasonable to conclude that a reasonable person would regard it as dishonest to sell someone securities in FLG without disclosing the Report and the information contained in that Report.

[45] There is no merit to the Appellants’ submission that the Commission ignored relevant evidence in coming to its conclusion on the fraud finding. As outlined below, the Commission considered and rejected each of the five bases advanced by the Appellants for their argument that their actions in selling securities without disclosing the Report would not be regarded as dishonest by a reasonable person.

[46] The Report Was Positive. The Appellants submit that the Report was a positive report because it ultimately concluded that FLG was viable. At paras. 192-93 of its Merits Decision, the Commission canvassed the evidence on this issue and found, based on that evidence, that the Report did not conclude that FLG was viable. Rather, the Report found that FLG’s ability to be viable was contingent on a number of factors, including its ability to raise new capital.

[47] The fact that the Appellants or the FLG board may have interpreted the Report as a positive one does not assist the Appellants once the Commission found that the Report contained important facts that were not disclosed to investors and that the Appellants knew were important. The point is not how the Appellants chose to interpret the Report, but the right that investors who were buying FLG securities had to judge for themselves, by being told of the Report and the important information it contained.

[48] Legal Advice. The Appellants argue that the Commission ignored the evidence that they had received legal advice that disclosing the Report would violate the Act. Again, the Commission considered and canvassed the evidence concerning what legal advice was given about whether the Report could be disclosed. At paras. 220-24 of its Merits Decision, the Commission accepted the evidence of the person who had allegedly given the advice (Mr. Dunne). Mr. Dunne testified that he did not provide any legal advice or opinion that FLG could proceed to sell securities to investors without disclosing the Report. In this regard, it is important to note again that even if the Appellants believed that they were given legal advice that they could not disclose the Report without violating the Act, this does not address the real problem with their conduct, which is the fact that they proceeded to sell securities without disclosing the Report.

[49] Disclosure of Relevant Information. The Appellants testified that they disclosed certain negative facts to investors at the annual general meeting. The information referred to by the Appellants does not in any way equate to the disclosure to investors of the Report. At paras. 168-69 of the Merits Decision, the Commission reviewed the evidence about what was said to investors at the annual general meeting on September 17, 2011 and noted that Mr. Phillips did present an overview of certain WALP financial statements and WALP’s real estate properties. However, Mr. Phillips did not, in any way, disclose the Report and in the same PowerPoint presentation that presented the negative facts referred to above, there were references to “new cycles of opportunity” and the “sound financial position” of FLG. Further, “[w]hen one investor asked a question about the going concern note contained in the financial statements, Phillips indicated that there were matters in dispute, and that they were trying to have the going concern note removed from the financials” (Commission Merits Decision, at para. 169).

[50] Given the above, it cannot be said that the Commission ignored this aspect of the evidence. Rather, it reasonably found that, taken in context, the evidence at issue did not affect its conclusion that the Appellants’ selling of securities without disclosing the Report was conduct that a reasonable person would find to be dishonest.

[51] FLG’s Need to Raise Capital. The fact that FLG needed to raise capital to save its business is irrelevant to the question of whether the Appellants were entitled to act dishonestly in order to raise this capital. There was no objective imperative or requirement that FLG save its business, particularly if, in order to do so, it had to raise more than $18 million from unwitting investors who were deprived of important negative information about FLG’s financial situation.

[52] Commission Staff Did Not Object. The Appellants argue that they reasonably interpreted Commission staff’s silence during the Sales Period as indicative of their view that there was no restriction on sales of securities by FLG. The problem with this argument is that there is no evidence that the Appellants told Commission staff that they were proceeding to sell large amounts of securities to investors without disclosing the Report to those investors. Further, even if Commission staff had known about the Appellants’ misconduct, this does not absolve the Appellants from the consequences of that misconduct.

Did the Commission Breach the Rules of Natural Justice or Procedural Fairness?

[53] The Appellants submit that they were denied procedural fairness with respect to the findings under s. 44(2) of the Act (misrepresentation) because in making these findings, the Commission relied on allegations or evidence that was not specifically referred to in the Statement of Allegations.

[54] The Statement of Allegations in a prosecution under the Act is not to be treated in the same manner as a criminal information or indictment. This is because of the Commission’s public interest jurisdiction. In Commission hearings, “fairness requires sufficient particularization of the allegations to define the issues, prevent surprise and to enable the parties to prepare for the hearing” (YBM Magnex International Inc. (Re) (2000), 23 O.S.C.B. 1171, 2000 CarswellOnt 443, at para. 6; see also Taylor v. Ontario Securities Commission, 2013 ONSC 6495, 317 O.A.C. 164 (Div. Ct.), at para. 68).

[55] In this case, the Statement of Allegations did allege, at para. 33, misrepresentation on the part of the Appellants. Paragraph 33 reads:

Phillips and Wilson each made statements a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship, which statements were untrue or omitted information necessary to prevent the statements from being false or misleading in the circumstances in which they were made, contrary to subsection 44(2) of the Securities Act.

[56] Thus, the Appellants knew that one of the issues the Commission was going to be examining was whether they had breached s. 44(2) of the Act.

[57] The Statement of Allegations did not refer to the specific evidence that the Commission was going to be relying on to establish the breach of s. 44(2). However, the question remains whether this failure on the part of the Commission put the Appellants in a position where they did not know the case they had to meet and did not have an opportunity to meet that case.

[58] In answering this question, the following facts are relevant. First, the evidence that the Commission relied upon to make its finding of a breach of s. 44(2) was evidence that was generated by and was in the possession of FLG. Second, while the Commission rules provide for a motion for particulars, the Appellants did not bring such a motion. Third, as the merits hearing unfolded, the Appellants raised no objection to the calling of the evidence regarding the allegation. Fourth, the Appellants were given lots of opportunity to call evidence regarding the allegation. Fifth, the Appellants, during their oral closing submissions at the merits hearing, made no objection to the Commission relying on the evidence. Furthermore, after the Merits Decision was issued, the Commission held a separate sanctions hearing. At the sanctions hearing, the Appellants raised no objection to the Commission’s finding with respect to s. 44(2).

[59] Given this course of conduct on the part of the Appellants, it cannot be said that they did not know the case they had to meet or that they were not given a meaningful opportunity to meet that case. If a party has a procedural objection, the time to raise it is at the hearing, not on an appeal after the party has lost (Xanthoudakis v. Ontario Securities Commission, 2011 ONSC 4685, 286 O.A.C. 286 (Div. Ct.), at para. 77; Kozak v. Canada (Minister of Citizenship and Immigration), 2006 FCA 124, 267 D.L.R. (4th) 54, at para. 66).

Was the Finding That the Appellants Breached s. 44(2) of the Act Reasonable?

[60] The Appellants submit that it was unreasonable for the Commission to find that the Appellants breached s. 44(2) of the Act (the misrepresentation section) without making a finding that the investors relied on the Appellants’ false statements as the substantial reason for making their investments. In support of their argument, the Appellants rely on the Commission’s decision in Energy Syndications Inc. (Re) (2013), 2013 ONSEC 24, 36 O.S.C.B. 6500, 2013 LNONOSC 452, in which the Commission equated s. 44(2) with the tort of negligent misrepresentation.

[61] Section 44(2) reads as follows:

No person or company shall make a statement about any matter that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship with the person or company if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.

[62] In the case at bar, the Commission relied on the test articulated in another Commission decision, Winick (Re) (2013), 2013 ONSEC 31, 36 O.S.C.B. 8202, 2013 CarswellOnt 11071, at para. 156 (released one and a half months after Energy Syndications), which essentially tracks the language of s. 44(2) in articulating the appropriate test.

[63] Nowhere in s. 44(2) does the legislature indicate that to establish a breach of this section the investor to whom the statement was made had to have relied on the statement in making his or her investment. All that is necessary is to establish that a reasonable investor would consider the statements relevant to his or her decision about whether to make the investment.

[64] It was reasonable for the Commission in the case at bar to rely on a test that mirrors the text in the relevant statutory provision as opposed to a test that imports words into the provision that are not there.

Was the Disgorgement Order Reasonable?

[65] The Appellants submit that it was unreasonable for the Commission to have ordered the Appellants to disgorge amounts that were not obtained by them personally and were obtained by entities that were not named as respondents in the proceeding. In this case, the amounts were invested with FLG entities and the FLG entities in question were not named respondents in the proceeding. In its Sanctions Decision, the Commission accepted that Commission staff chose not to name these entities as they were all parties to a court-supervised CCAA wind-up and staff wished to avoid depleting these entities’ assets.

[66] In its Sanctions Decision, the Commission addressed the Appellants’ argument and rejected it. Relying on several past decisions, the Commission found that “the Commission’s authority to order disgorgement is not limited to ordering an individual respondent to disgorge amounts he or she obtained personally” (Commission Sanctions Decision, at para. 29) and that the Commission had the authority to order the Appellants “to disgorge the funds obtained in contravention of the Act in circumstances where the FLG entities that ultimately received the funds are not respondents in [the] proceedings” (at para. 30). The Commission concluded (at para. 54) that a disgorgement order was “appropriate in these circumstances because ascertainable amounts have been obtained as a result of the non-compliance of the [Appellants] with Ontario securities law and such an order will deter the Respondents and other market participants from similar conduct.”

[67] According to the Appellants, by requiring the Appellants to disgorge funds that they had not actually obtained for themselves, the Commission went beyond the purpose of a disgorgement order. According to the Appellants, a disgorgement order is prophylactic in nature, designed to ensure that a wrongdoer does not benefit from his or her conduct.

[68] The Appellants cite the Supreme Court’s decision in Strother v. 3464920 Canada Inc., 2007 SCC 24, [2007] 2 S.C.R. 177 in support of this proposition. Strother concerned a civil lawsuit for breach of fiduciary duty where disgorgement was sought as a remedy. In that context, the purposes of the equitable remedy of disgorgement were discussed, and one of those purposes was identified as prophylactic.

[69] I agree with the Respondent that Strother is of limited use in this case. The focus in Strother was on how best to approach compensating a client who was suing its lawyers for breach of fiduciary duty. It was not on how an administrative tribunal should be crafting sanctions in the public interest.

[70] Section 127(1)10 of the Act provides the authority for a disgorgement order. It reads:

127. (1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders:

128. If a person or company has not complied with Ontario securities law, an order requiring the person or company to disgorge to the Commission any amounts obtained as a result of the non-compliance.

[71] On its face, the wording of the section is broad. Disgorgement can be ordered of “any amounts obtained.” There is no limitation based on the individual’s use of the funds obtained.

[72] In Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132, the Supreme Court of Canada described the scope and purpose of the Commission’s jurisdiction under s. 127 of the Act. At para. 42, the Supreme Court cited with approval the following statement by Laskin J.A. in the decision under appeal:

The purpose of the Commission’s public interest jurisdiction is neither remedial nor punitive; it is protective and preventive, intended to be exercised to prevent likely future harm to Ontario’s capital markets.

[73] In Cartaway Resources Corp. (Re), 2004 SCC 26, [2004] 1 S.C.R. 672, at para. 60, the Supreme Court found that there was nothing “inherent in the Commission’s public interest jurisdiction … [that] prevents the Commission from considering general deterrence in making an order.” As put by the Supreme Court, the notion of general deterrence is one that is neither remedial nor punitive; it is aimed at discouraging others from engaging in similar behaviour. The Supreme Court concluded its remarks on this point as follows, at para. 62:

It may well be that the regulation of market behaviour only works effectively when securities commissions impose ex post sanctions that deter forward-looking market participants from engaging in similar wrongdoing. That is a matter that falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets.

[74] In Limelight Entertainment Inc. (Re) (2008), 2008 ONSEC 28, 31 O.S.C.B. 12030, 2008 CarswellOnt 7634, the Ontario Securities Commission considered the scope of its authority under s. 127(1)10 and found that it extended beyond ordering a respondent to disgorge the profit from his or her misconduct. The Commission also found that individuals cannot shelter themselves from sanctions for actions conducted through companies they control. In addition, it recognized the deterrent effect that disgorgement orders can have on respondents and other market participants. In the result, the Commission in Limelight held that it was in the public interest to order the respondents to disgorge the full amount invested by investors in Limelight as a result of contraventions of the Act.

[75] In Streamline Properties Inc. (Re), 2015 BCSECCOM 66, 2015 LNBCSC 38, the British Columbia Securities Commission imposed a disgorgement order amounting to the full amount raised as a result of the respondents’ misconduct where the proceeds raised were used for the purpose of investment and not kept for personal gain by the respondents. The relevant provision of the British Columbia legislation was found to be identical to Ontario’s disgorgement sanction provision. In imposing disgorgement, the B.C. Commission stated, at para. 55:

In light of the critical importance of investor protection, the fact that the proceeds raised were used for the stated purpose of the investments should not automatically reduce a section 161(1)(g) sanction. Whether the money raised was used for the stated purpose or not, the end result is the same – the investors have been denied the protections required by our securities laws and were harmed as a result of the misconduct.

[76] One of the Commission members dissented in Streamline. Essentially, he accepted the position being advanced by the Appellants before us, namely that a disgorgement order should be limited to the amount the respondent obtained, either directly or indirectly. To do otherwise would be punitive and inconsistent with the purpose of the provision, which is to deprive the person of his or her ill-gotten gains.

[77] In Al-tar Energy Corp. (Re) (2011), 2011 ONSEC 1, 34 O.S.C.B. 447, 2011 LNONOSC 5 and Mega-C Power Corp. (Re) (2011), 34 O.S.C.B. 1279, 2011 LNONOSC 67, the Ontario Securities Commission ordered disgorgement of the full amounts raised by individual respondents even though a large portion of the funds raised was received by entities not named as respondents. In both cases, one of the stated purposes of the orders was deterrence.

[78] What this review establishes is that the Commission’s decision that it had the authority to order disgorgement was consistent with the plain wording of the legislation, the purpose of the legislation and prior case law

[79] As already noted, the Commission concluded that Mr. Phillips should disgorge $16,587,254, representing the full amounts raised by him and others under his supervision and direction, and that Mr. Wilson should disgorge $7,817,739, representing the amounts Mr. Wilson personally raised from investors. Both amounts factor in the paid and pending distributions to investors from the court-supervised wind-up. In making these orders, the Commission considered the following facts:

(a) the Appellants were both registrants and as such, held positions of trust in the securities industry;

(b) the Appellants committed fraud, one of the most serious violations;

(c) Mr. Phillips was the founder and CEO of FLG, its directing mind and owned 100% of the shares of the parent company, FLWM; he oversaw all aspects of FLG’s business and signed off on every sale of securities during the Sales Period;

(d) Mr. Wilson was a member of FLG’s senior management team, and a director of FLWM; and

(e) The Appellants were responsible for the majority of the sales of securities during the Sales Period.

[80] The Commission’s decision fell “within a range of possible, acceptable outcomes which are defensible in respect of the facts and law” and the reasons given were justifiable, transparent and intelligible (Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47).

Conclusion

[81] For these reasons, the appeal is dismissed. As agreed by the parties, the Respondent is entitled to its costs fixed in the amount of $10,000, all inclusive.

H. Sachs J.

I agree Swinton J.

I agree Pattillo J.

Released: 20161216

CITATION: Phillips v. Ontario Securities Commission, 2016 ONSC 7901

DIVISIONAL COURT FILE NO.: 617/15

DATE: 20161216

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

Swinton, H. Sachs and Pattillo JJ.

BETWEEN:

David Charles Phillips and John Russell Wilson

Appellants

– and –

Ontario Securities Commission

Respondent

REASONS FOR JUDGMENT

H. SACHS J.

Released: 20161216