CITATION: North American Financial Group Inc. v. Ontario Securities Commission, 2018 ONSC 136

DIVISIONAL COURT FILE NO.: DC-14-000495

DATE: 20180105

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

Sachs, Spies and Fitzpatrick JJ.

BETWEEN:

North American Financial Group Inc., North American Capital Inc., Alexander Flavio Arconti and Luigino Arconti

Appellants

– and –

Ontario Securities Commission

Respondent

Ronald Chapman, James Cooper, Paul Pape and Shantona Chaudhury, for the Appellants

Michelle Vaillancourt and Derek Ferris, for the Respondent

Sean Dewart and Mathieu Belanger, for the Intervenors, Ian Ross Smith, Scott Fenton Professional Corporation and Fenton, Smith

HEARD at Toronto: September 19 and 20, 2017

H. Sachs J.

Introduction

1On December 11, 2013, after a twelve-day hearing, the Ontario Securities Commission (the “Commission”) found (among other things) that the Appellants had committed securities fraud by misrepresenting their financial position to investors in brochures, failing to disclose material facts to investors and by using “new” investor money to pay “old” investors ( the “Merits Decision”).

2On September 11, 2014, the Commission imposed sanctions on the Appellants, including lifetime trading bans, disgorgement of over $3,000,000, administrative penalties of $600,000 each for North American Capital Inc., Luigino Arconti and Alexander Flavio Arconti and costs of $200,000 (the “Sanctions Decision”).

3This is an appeal from both of these decisions. On this appeal the Appellants argue that the Commission’s finding of fraud and its penalty decision were unreasonable. They also submit that the decisions should be set aside because the Commissioner who presided over the hearings was biased, as he had made three interim orders against the Appellants prior to the commencement of the hearing. Finally, they argue that the decisions should be set aside because of the conduct of the lawyer who represented them at the hearing. First, according to the Appellants, that lawyer had a conflict because his firm also represented the Respondent in unrelated matters. This fact was not disclosed to the Appellants. Second, the Appellants allege that their lawyer was incompetent in his conduct of the case.

4The appellants also brought a motion for leave to file fresh evidence on the issues touching on the conduct of their lawyer at the hearing (who was a different lawyer than the lawyers on this appeal).

5For the reasons that follow, I would dismiss the appeal.

6Before beginning my reasons I wish to note that after the appeal was argued a letter was sent to the panel with no return address purporting to be from “NAFG Investors”. The letter was not read by any members of the panel. The panel advised the parties that we had received the letter, that it had not been read and that it would form no part of our deliberations.

Factual Background

The Parties and the Businesses

7Luigino (“Gino”) and Alexander Flavio (“Flavio”) Arconti are brothers. In 1994, they began a used car dealership business known as Prestige Motors (“Prestige”). As many of Prestige’s customers were unable to obtain bank approval for car loans, in 1996 the Arcontis incorporated North American Financial Group (“NAFG”) to provide lease financing to customers. Initially, they used their own money to fund these leases. NAFG purchased cars from Prestige to lease to customers. When a lease was terminated, NAFG would re-possess the car and sell it back to Prestige.

8In order to expand their business the Arcontis decided to raise funds from individual investors. They began advertising in Toronto newspapers, seeking investments from “accredited” investors. In these advertisements they promised returns of as much as 15%. They received a number of responses and began selling NAFG non-prospectus qualified securities to investors.

9During the period from July of 2005 to September of 2010, NAFG raised $5.7 million by issuing shares.

10In 2008, the Arcontis incorporated another company, North American Capital Inc. (“NAC”), to service investors who requested a particular type of product. As of 2009 the Arcontis began selling NAC non-prospectus qualified securities to investors. From July of 2009 to April of 2010 NAC raised $1,042,000 by issuing shares. These funds were transferred to NAFG.

11In 2007, the Arcontis incorporated Carter Securities Inc. (“Carter”) to act as NAFG’s registered dealer. Carter was initially registered as a dealer in the category of “Limited Market Dealer” and the Arcontis also became registrants with the Commission. In 2009, by operation of law, Carter became registered as an Exempt Market Dealer and both Arcontis were registered as dealing representatives of Carter. After NAC started issuing securities, Carter also acted as its registered dealer.

12Throughout this period the Arcontis jointly owned and were the actual and/or de facto officers and directors of NAFG, NAC, Carter and Prestige.

NAFG’s Financial Situation

13During the period from 2007 to 2010, Prestige and NAFG experienced financial difficulties. In 2007, the total revenue received from leasing interest payments was $495,843. In 2008, this revenue rose by just under $100,000, but in 2009 it dropped again to $362,079. In 2010, it was down to $232,509. Further, as of January 2010, 80% of NAFG’s current receivables were in the “91 plus” day default category.

14In 2007, NAFG experienced a loss of $68,047, bringing its cumulative deficit to $336,405. In 2008, the net loss for the year was $524,727 and the cumulative deficit had increased to $861,132. In 2009, the net annual loss was $396,103 and the cumulative deficit at the end of the year had increased to $1,257,235. In 2010, NAFG experienced a loss of $1,338,767 and by the end of the year its cumulative deficit had grown to $2,596,002.

15NAFG also lent money interest free to Prestige. Gino testified that when cars were repossessed as a result of money owed to NAFG by leasing customers who were in default, Prestige kept the money from the sale of the repossessed cars instead of transferring it to NAFG and the amount was added to the loan amount owed to NAFG. By the end of 2008 Prestige owed NAFG approximately $1.2 million. By the end of 2009 that amount had grown to $2 million and by September 30, 2010 the amount owing on that loan was $2,503,608.43.

16During the period from January 1, 2009 to September 24, 2010 NAFG had two primary sources of funds – new money from investors and lease payments. For this period the net receipts from investors of NAFG and NAC amounted to $2,567,392. The total amount received from other sources of revenue (primarily lease payments that also included principal repayments) was $1,333,334.53. In the same period NAFG paid $1,642,413.28 to its investors, approximately $300,000 more than the amount it received from sources other than new investor money.

The Brochures

17When Carter began offering NAFG securities to the public the Arcontis invited interested investors to attend at NAFG’s offices, located within the Prestige dealership, to take a tour and to complete the client forms. Flavio also prepared marketing brochures for NAFG, which were distributed by Gino. There were different versions of the brochure, but the version that was most widely distributed was the 2009 Brochure, which was used from early 2009 to the middle of 2010.

The 2009 Brochure

18The 2009 Brochure contained the following statements:

(a) In the section headed “Background of North American Financial Group” the company is described as being “[h]eadquartered in Toronto” and as performing all collections and servicing from “its central facility located in the central area of Toronto.” In fact, NAFG only ever had one office and one facility.

(b) Under the section headed “The Concept” the Brochure states, “Our management model recognizes the nature of the credit risk and mitigates the risk via pro-active measures and prudent management practices.”

(c) In the section headed “Management Team Biography”, the following sentence appears: “Through diligent customer service and deployment of innovative technology, North American Financial Group has grown to become a leader in the automotive finance market”.

(d) In the section headed “Interest Rates and Returns” there is a graph comparing the rate of returns that NAFG will provide with the rate of returns provided by Canada Savings Bonds and GICs. The Brochure states that investing in NAFG offers an “investment opportunity” to earn a rate of return of “15% per annum”.

(e) In the section entitled “Risk/Asset Management Model” the following statement appears: “North American Financial has implemented a pro-active, no nonsense risk reducing strategy which has proven to be both efficient and highly effective.” The Brochure then goes on to describe how a GPS locator module that is installed in every car allows NAFG to track and locate their cars at any time. Further, “[t]he GPS unit allows us to turn the car on/off (ground the starter). If payments are not made or repossession is required, we can block the usage of the vehicle and seize the car virtually immediately. This is an extremely effective tool to preserve values and encourage timely debt service payments.”

(f) In the same section of the Brochure the following statement is made:

Our portfolio management system and structure is a practical, sensible, and workable approach to protecting our security interests, maintains and enhances the quality of cash flow payment streams, encourages our clients to act reasonably and responsibly and improves the quality of the aggregate lease portfolio. It continues to be a winning strategy and time tested proven asset management formula for ongoing success.

Other Brochure

19Another version of the brochure that was distributed less widely refers to NAFG’s business as a “winning strategy and time tested proven asset management formula for ongoing success” and states the following in its summary:

Given our 20 year history operating in the automotive industry, management practices, procedures, and techniques demonstrate our professional capabilities, confirmation of our commitment to ongoing success and an attractive safe high yield income generating investment for the investor.

Take advantage of this passive, profitable fixed rate income investment today and start enjoying a fixed real dollar monthly interest income payment within 30 days. [Emphasis added.]

The First Compliance Review

20In early 2009, Carter came up for a compliance review by the Commission. The Arcontis contacted their lawyer who advised them to retain a securities compliance expert, David Gilkes, who had formerly been the Manager of Registrant Regulation at the Commission.

21The Arcontis fully cooperated with the review, following which Commission Staff sent Carter a deficiency report. This report listed two primary concerns: a lack of Know Your Client and suitability procedures, and a lack of procedures to determine if prospectus exemptions were available. The Arcontis immediately took steps to address these concerns and retained Mr. Gilkes and their lawyer to help them do so.

The Second Compliance Review and the Suspension

22At the beginning of 2010, the Commission began to conduct a second compliance review. Unlike the first review, this review involved an examination of the financial situation of NAFG, Carter, NAC and Prestige. Again, the Arcontis cooperated with this review.

23At the end of this review, on June 23, 2010, Commission Staff wrote to the Arcontis (the “Suspension Letter”) advising them that they had recommended Carter’s suspension to the Director. In that letter Staff explained that they were making this recommendation because of the following conduct that they had identified:

(i) While Carter had represented to investors that their funds would be used to finance auto leases, in fact, the funds had been diverted to related parties. In particular, Staff alleged that it was inappropriate to use investor funds to provide funds to related parties and that Carter had failed to disclose to investors that NAFG had given an interest-free loan to a party that was also owned by the Arcontis, namely, Prestige.

(ii) Carter failed to disclose to investors the serious financial difficulties that NAFG was suffering from.

(iii) The marketing materials that Carter was distributing to investors contained “misleading, unsupported or inaccurate” material. In particular, the investor presentation material did not state “that investor funds are invested in unsecured, non-interest bearing related party loans”, the material compared “the stated returns of NAFG’s products, which are high risk investments, to the returns of low risk products such as Canada Savings Bonds”, and the material stated that “once a loan is advanced we continue to regularly monitor the borrower and the asset until the loan is repaid” when a very high percentage of NAFG’s lease receivables had been outstanding for more than 90 days as of December 31, 2009.

24The Arcontis requested an opportunity to be heard by the Director and worked with their lawyers and Mr. Gilkes to try to address the concerns raised in the Suspension Letter. They also took steps to contact investors to ask them to agree to a reduced rate of interest and they got in touch with a business known as HDL to discuss raising equity and going public.

25The hearing before the Director took place over two days in August of 2010 and the Director suspended Carter’s registration on September 22, 2010.

Events Following the Suspension

26On October 15, 2010, NAFG filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act.

27On November 10, 2010, the Commission issued a temporary cease trade order on an ex parte basis. The order was extended twice on consent. Both the first order and the two consent orders were made by Commissioner Carnwath, the same commissioner who presided over the hearing that led to the decisions that are the subject of this appeal.

28An arrangement was agreed upon in the bankruptcy proceedings. As a result of that arrangement, most of the investors in NAFG and NAC received about half of their investment back.

The Hearing Before the Commission

29The hearing before the Commission began in April of 2013 and extended into May and September of 2013.

Summary of the Staff’s Evidence

30During the course of the hearing Commission Staff called Maria Carelli, a senior accountant in the Compliance and Registration Regulation Branch of the Commission; Amy Tse, another Commission employee; and Marcel Tillie, a senior forensic accountant in the Enforcement Branch of the Commission. In addition, Commission Staff called five people who invested in NAFG.

31Ms. Carelli testified about the events leading up to the decision to suspend Carter, including the two compliance reviews. Ms. Tse testified about her contact with NAFG in June of 2010 when she posed as an individual who was responding to an advertisement in the Toronto Star that was advertising an investment in NAFG. According to Ms. Tse, Gino made it clear to her that the investment was for “accredited” investors only and that an accredited investor had to have “assets over $1 million.” He also told her that if she decided to invest he would ask a lot of questions to ensure suitability. Ms. Tse testified about her involvement in getting NAFG and NAC to produce documents in June of 2010.

32Marcel Tillie provided an analysis of the bank accounts for NAFG and NAC. It was his evidence that produced the figures as to the funds received from investors during the relevant period of time, the funds received from other sources (such as lease payments) and the amounts paid out to investors during the same period of time.

33J.B. was an investor who invested $60,000 in NAFG after seeing an ad promising to pay him a 15% return on his investment. He testified that at the time he made the investment he had an annual income of $60,000 and assets (including real estate) of $300,000. However, on his application form he estimated his net worth to be $1,050,000. He stated that he did so because Flavio told him that the only way he could proceed with the investment was to show that he was an “accredited investor”, that is, that he had investments of $1,000,000 or more (in fact, to be an “accredited investor” an investor must have a net worth, excluding real estate, of at least $1,000,000). He also alleged that Flavio told him that this was only a formality. J.B. invested a total of $132,000 in NAFG in five instalments from February of 2008 to August of 2010. His last investment of $20,000 was made after the Suspension Letter in June of 2010. In each case he was promised a return of 15%. He testified that he was warned of the risks of investing and that he was told that the underlying basis for the business he was investing in was loaning money at high interest rates (he was told 30%) to people with poor credit.

34L.F. invested $22,000 in NAFG in September of 2010. In return he was to receive annual interest of 12%. At the time, he was not told of NAFG’s financial difficulties and he testified that if he had known that the company was experiencing financial problems he would not have made the investment. He confirmed he knew that the investment he was making was a high-risk investment. He understood that his money would be used to finance the daily operations of NAFG and its affiliates, including Prestige Motors.

35J.S. approached NAFG about investing in January of 2010. He was retired at the time, with a combined family income of $90,000 and net assets of less than $600,000. On his application form, which the Commissioner found appeared to be filled out by Gino, the value of his investments was stated to be $1,500,000. J.S. confirmed that he told the Arcontis he was an accredited investor, but he did not know that this meant he had to exclude the value of his house. He disagreed that he told the Arcontis he was seeking a high-risk, high-return investment even though that is what the box on his application form stated. He stated that he would have told them that he was seeking a medium-risk, medium-return investment. J.S. was not told anything about the financial condition of NAFG when he invested with them. In September of 2010, the Arcontis approached J.S. with a view to converting his original investment of $40,000 into units of NAFG. According to J.S. he was told by the Arcontis that NAFG could no longer pay the annual rate of 15% to investors and so “they were doing some footwork to lower it” to 5%, while keeping the investors in place. J.S. agreed, but he alleged that when he did so he was not told that NAFG was experiencing financial difficulties.

36R.B. invested in NAFG in March of 2010. At the time, his salary was $16,000 per year and his wife was earning approximately $50,000. Including his house, he estimated his net worth to be $1,200,000. Excluding his house, his net worth was between $600,000 and $700,000. When he applied to be an investor he understood that he needed a total net worth of over $1,000,000. R.B. and his wife made two investments in NAFG in March of 2010: $70,000 at an annual rate of return of 15% and a further $14,500 with a return of 12%. Before he made his investment he read the material sent to him by NAFG and formed the impression that it was a “pretty solid company”. No one told him of its financial difficulties nor of the fact that the money he was investing would be loaned to a car dealership owned by the Arcontis. In August or September of 2010, he was contacted by the Arcontis and asked to enter into an arrangement with lower interest rates. According to R.B., he asked if NAFG was insolvent and he was told that it was not. He also asked if the Commission was involved with them and he was told it was not. R.B. refused to enter into a new loan agreement.

37D.M. met with the Arcontis about investing in NAFG on September 18, 2010. He was given a brochure that contained information that made him confident that NAFG was a worthwhile investment. He signed an application form indicating that he and his wife had a net worth of over $1,000,000. This was not true, but he said that it was as he was told that otherwise he could not participate in the investment. On September 24, 2010, the Arcontis processed D.M.’s investment cheque for $50,000. According to D.M., at no time did the Arcontis tell him that NAFG was in financial difficulty. What he was told was that they were planning to take the company public in January of 2011 and his investment would be converted into shares of a public company, with the potential of a significant increase in value. D,M. confirmed that he was looking for a high-risk, high-return investment.

Summary of the Respondents’ Evidence

38The Respondents at the hearing (NAFG, NAC, Flavio and Gino) called six witnesses: Flavio and Gino; Stefano Picone, an accountant that NAFG retained in May of 2010; David Gilkes, the certified fraud examiner and former Commission employee who was hired by the Arcontis after the Commission started the 2009 Compliance Review; and two investors, C.S. and N.B.

39Flavio testified as to his history in the used car business and the founding of Prestige. He also described the founding of NAFG, NAC and Carter. He emphasized that when the Commission began its compliance review in 2009 he and his brother immediately hired David Gilkes to advise them on what to do. When the Commission identified deficiencies at the end of that review they took steps, with Gilkes’ assistance, to correct those deficiencies and to bring themselves into compliance. When the second compliance review commenced in 2010 they again called Mr. Gilkes to assist them in meeting any concerns that the Commission had. Instead of giving Carter a chance to address those concerns, the Commission simply suspended Carter in June of 2010, which shocked him, his brother and Mr. Gilkes.

40Flavio admitted that he knew of NAFG’s financial situation as of the end of 2009, including the loan to Prestige, the accumulated deficit and the fact that 80% of the lease receivables were in the 91 plus day default category. However, Mr. Gilkes had told them that there was no requirement to provide financial information to the investors.

41With respect to the brochures, Flavio stated that he was never aware that there was a problem with the brochures until the Commission sent its Suspension Letter in June of 2010. While he admitted that the language in the brochures could be interpreted differently than he understood it to mean, he stated that after the problem was identified they hired Mr. Gilkes to help them redraft those brochures. He admitted that the investor, R.B., received the brochure that described the investment in NAFG as “an attractive safe high-yield … investment”, but stated that this brochure had never been approved for distribution and that the use of the word “safe” was a drafting error.

42With respect to the other investors, Flavio denied ever having any contact with L.F. He admitted that with J.B. he should have “dug a little deeper to identify the source of these financial assets”, but stated that all the information about net worth was supplied by the investors and not by him. He denied ever stating that the need for a net worth of $1,000,000 was just a formality or that this requirement was not an important one. He stated that if asked he would have told investors that the $1,000,000 could not include the investor’s principal residence. He pointed out that the vast majority of the people who responded to the ads did not qualify as investors.

43When pressed on the company’s financial situation, Flavio was clear that while the business was not profitable at the time, the Arcontis believed that they had a good plan in place to make it profitable. To that end they had hired Mr. Picone and had signed a contract with HDL to raise further capital. It was only when HDL found out that Carter had been suspended that it refused to proceed under the contract. Thus, according to Flavio, if it had not been for the Commission’s actions they would have been able to turn the business around.

44Gino’s evidence on the history and formation of the businesses, the retention of experts and the efforts to cooperate and comply with the Commission during both compliance reviews was very much the same as Flavio’s. Gino confirmed that he was the one who dealt with most investors and that he took his obligation to make sure that investors were accredited seriously. Any figures about net worth were supplied by the investors who were never told that this requirement was a formality.

45With respect to the marketing brochures Gino accepted Staff criticism that the brochure that was most widely distributed tended to leave the impression that NAFG was a “bigger player” than it really was in the automotive financing industry. Once this criticism was made he retained Mr. Gilkes to redraft the brochures. He confirmed that the brochure that described investments in NAFG as a “safe” investment was never authorized for distribution and was not widely distributed.

46With respect to disclosure obligations, Gino testified that there was no obligation to provide a prospectus and since Carter was operating in the exempt market it did not have to provide financial information to its investors. The investors were all told that their investment was a high-risk one, which was why when he was soliciting investments he made sure that the investors were accredited.

47Gino agreed that on September 28, 2010 he repaid his cousin, M.G., the $116,853.41 that she had invested with NAFG. She requested the return of her investment to buy a cottage. When it was put to Gino that the money paid to M.G. was, in part, D.M.’s and L.F.’s money, Gino replied, “[I]f we look at [it] this way and you want to interpret it that way, yes.”

48Gino agreed that by March of 2010 he would have known that the total revenue generated by NAFG was not enough to pay the interest owing to investors.

49With respect to the financial situation of the companies, Gino disagreed with the suggestion that it was “severe”. According to him, it was reparable and they had a plan in place which would have turned the business around. Gino admitted that when he signed the contract with HDL he had not told it about NAFG’s difficulties with the Commission, but denied that he withheld this information because he was concerned that HDL would not sign a contract with him if it knew this fact.

50Mr. Gilkes testified as to his efforts to help the Arcontis during both compliance reviews. He helped them work with the Commission to correct the deficiencies identified after the 2009 Compliance Review. During the 2010 review he helped address concerns and supply information. He thought that at the end of the review the Arcontis would be given a deficiency letter and a chance to correct those deficiencies. Instead, much to his surprise, Carter was suspended.

51Mr. Gilkes stated that he first learned of NAFG’s financial difficulties when he saw the June 2010 Suspension Letter. Prior to that he only knew that NAFG was a going concern.

52Mr. Gilkes testified that his impression during his dealings with the Arcontis was that they understood their disclosure obligations as set out in the Carter Policies and Procedures Manual. He also understood that they would deal and communicate with the public on the basis of truthfulness and fair dealing. He confirmed that he was never present during any meetings that the Arcontis had with investors.

53Mr. Picone testified that he became a chartered accountant in the fall of 2009 and that he started working for NAFG in May of 2010. He was hired to help NAFG and Prestige examine the cause of their financial difficulties. He confirmed that there were various plans put in place to revive the two businesses, which failed when the Commission suspended Carter’s registration. However, he felt that the issues facing NAFG could still be resolved and worked with the Arcontis to create plans to do so. After NAFG made a proposal in bankruptcy his primary responsibility became liaising with the trustee in bankruptcy.

54C.S. testified that he was an accredited investor who invested a total of $130,000 in NAFG. On September 1, 2010, he converted his investment into a convertible debenture. He was clear that he knew the risks involved with his investment with NAFG and that he received interest payments on his loans. N.B. purchased a convertible debenture from NAFG for $40,000 on September 1, 2010.

55The Arcontis’ position before the Commission was that while their material (including their brochures) could be construed to imply that their businesses were profitable when they were not and while they did use money from new investors to pay old investors, at all times they were acting in good faith, with no intent to defraud. They were not sophisticated people with experience in the investment field. At all times they relied on qualified professionals to help them do things properly. They did not understand that they had an obligation to disclose their financial position to investors.

56They had a business that they genuinely believed they could turn around and might have turned around were it not for the intervention of the Commission. When the Commission began doing compliance reviews, they cooperated fully with the Commission and hired a certified fraud examiner and former Commission employee to help bring their businesses into compliance. They also hired an expert, Mr. Picone, to help them turn their business around and make it profitable. They signed a contract with HDL, who would have helped them raise equity were it not for the Commission’s involvement. They did their best to ensure that the people who invested with them were “accredited investors” and it was not their fault if people chose to mislead them about their net worth. The vast majority of people who responded to their ads were not accepted as investors. They made it clear to their investors that the investment was a high-risk one.

The Commission’s Merits Decision

57The Commission found that it believed the investor witnesses who were called by Commission Staff. In contrast, the Commission found the evidence of the Arcontis to be “evasive and unresponsive.” The Commission accepted the evidence of Mr. Tillie about the “financial disarray of NAFG,” which put “considerable pressure on the Arcontis to obtain new and further investments at all costs.” In many instances, documents were prepared by NAFG and submitted to investors for signature with no apparent attempt to be satisfied that the investors met, or continued to meet, the definition of an accredited investor.

58The Commission found that the existence of the loan to Prestige and NAFG’s financial position were not disclosed to investors until the Arcontis tried to get investors who had already invested to convert to a debenture at a lower interest rate.

Breach of the Suitability Obligation

59Commission Staff alleged and the Commission accepted that the Respondents did not take reasonable steps to ensure that the purchase of NAFG securities was suitable for its clients. In this regard the Commission found the following:

[T]he Arcontis made no attempt to investigate their investors’ financial circumstances. In each instance, the question was asked by the Arcontis about their qualification as accredited investors. In each case, they received an affirmative answer and made no further inquiries about the actual circumstances of each individual investor.

60The Commission also explicitly rejected the Arcontis’ position that they did not understand their obligation to disclose to investors the negative financial information about NAFG. In this regard the Commission found that their evidence was not credible given the following:

(i) The provision of Carter’s own Policies and Procedures Manual (which included an obligation not to make false or misleading statements or to fail to state material facts);

(ii) The letter from Staff to Flavio on September 3, 2009 ,which Flavio acknowledged reading and which explicitly referred to Carter’s suitability obligations;

(iii) Mr. Gilkes’ evidence that he went through Carter’s policies and procedures manual with the Arcontis and thought that the Arcontis understood their obligations; and

(iv) The Appellants’ concession during their testimony that the loan between Prestige and NAFG and the fact that the lease payments could not cover the interest payments to investors was information that resulted in risks that should have been disclosed to investors.

61Thus, the Commission found that the Appellants had breached their suitability obligation.

Duty to Act Fairly, Honestly and in Good Faith

62Registered dealers have a duty to deal fairly, honestly and in good faith with their clients. The Commission found that Carter failed to disclose to investors the financial state of NAFG and by failing to do so it breached this duty. In this regard the Commission explicitly rejected the suggestion by the Appellants that NAFG’s financial difficulties were not severe. According to the Commission, they were “catastrophic.”

Director and Officer Liability

63The Commission found that the Arcontis were the directors, officers and shareholders of Carter. It also found that they were active participants in its activities and authorized its conduct. As such, they were liable for Carter’s breaches as described above.

Securities Fraud

64The Commission found that during the period from January 1, 2009 to September 24, 2010 (the “Fraud Period”) the Appellants had engaged in fraudulent conduct.

65The Commission stated that the marketing brochures implied that NAFG was a profitable business when it was not. According to the Commission, “[t]his constitutes an act of deceit, falsehood or some other fraudulent means.”

66The Commission also found that the Appellants admitted that they did not tell investors in NAFG or NAC “that their funds would be used either in whole or in part to pay interest, dividends or principal to other NAFG or NAC investors”. Mr. Tillie’s evidence, which the Commission accepted, demonstrated that “new” investor money was used to pay “old” investors, conduct that the Commission found to be “an act of deceit, falsehood or some other fraudulent means.”

67Given the incontrovertible evidence that as a result of these deceits, falsehoods or other fraudulent means, investors were deprived of at least half of their investments, the Commission concluded that the actus reus of fraud had been made out.

68With respect to the mens rea of fraud, the Commission found that each of the Arcontis knew of NAFG’s lack of profitability and the unsecured interest-free loan to Prestige. The Commission also found the following:

Each of the Arcontis transferred their interest in their residence to their spouses in May 2010. Each had an explanation for why they did so, which I do not accept. The transfers were made within days of each other and the timing of the transfers coincided with the increasing losses of the NAFG group of companies. This persuades me that the reason for the transfers was to place whatever value there might be in the residences out of the reach of potential creditors.

69The Commission noted that the Appellants admitted that the Arcontis were the directing minds of NAFG, NAC, Carter and Prestige and that “returns to investors were funded in part by new investment in NAFG and/or NAC”.

70Thus, the Commission found that each of the Arcontis had the requisite mens rea for fraud and “NAFG and NAC knew that the representations to investors regarding NAFG’s financial situation and the use of investor funds were false and misleading and would cause deprivation to investors by exposing them to risks not contemplated by them.”

71As directors and officers of NAFG and NAC, the Commission also found the Arcontis liable for securities fraud.

Trading Without Registration

72On September 22, 2010, Gino Arconti was suspended as a dealing representative of Carter. As a result, he was not registered in any capacity with the Commission after that date.

73The Commission found that Gino’s act of depositing D.M.’s cheque for $50,000 into NAFG’s account on September 24, 2010 constituted an “act in furtherance of a trade”. Thus, the Commission concluded that Gino violated the Securities Act, R.S.O. 1990, c. S.5 (the “Act”) by trading in securities without registration.

The Commissioner’s Sanctions Decision

74The Commission began its analysis on penalty by pointing out its mandate, which is to “(i) provide protection to investors from unfair, improper or fraudulent practices; and (ii) foster fair and efficient capital markets”. It further noted that when it comes to sanctions its role is to protect the public interest by removing those whose conduct in the past is such that their conduct in the future could continue to be detrimental to the integrity of the capital markets and to restrain future conduct that is likely to be prejudicial to the public interest. Unlike the courts, the role of the Commission is not to punish.

75The Commission reviewed the relevant sanctioning factors as set out in the case law and found that the following applied to the Appellants:

(a) The findings against the Appellants were very serious. In particular, fraud is one of the most egregious securities violations, which is an “affront” to the investors who were targeted and a threat to the confidence and efficiency of the market.

(b) Contrary to the submission of the Appellants, the Commission found that the Appellants were experienced in the marketplace. The Arcontis were registrants for three years and the fraudulent scheme spanned a period of more than 20 months.

(c) A total of almost $4,000,000 was raised from the investors, which are losses that the Commission found were not at the most serious or the least serious end of the spectrum. They did, however, “have the capacity to result in a substantial loss of investor confidence in the integrity of the capital markets.”

(d) The Commissioner found the Appellants’ admissions at the hearing to be neutral factors. He did not consider their failure to take responsibility for their actions or their lack of remorse to be aggravating factors. He found that the majority of the mitigating factors put forward by the Appellants went to the merits of the case. In particular, he did not accept that the Appellants did not understand that their disclosure obligations included disclosing significant investment risks to investors or that their conduct in not doing so could be laid at the feet of their advisor, David Gilkes.

(e) The Commission found that “[a] message must be sent to the [Appellants] and like-minded individuals that fraudulent schemes similar to the one involved in this case will result in severe sanctions.” As noted by the Commission, the Supreme Court of Canada has recognized that general deterrence is an important factor in imposing sanctions in the securities context. The Commission accepted the following:

Orders removing the [Appellants] from the capital markets, imposing significant administrative penalties and requiring disgorgement of funds not returned to investors are proportionate to the [Appellants’] misconduct, and will send a message to like-minded individuals that involvement in this type of misconduct will result in severe sanctions.

76After considering these factors, the Commission imposed the following sanctions:

(i) A permanent trading, acquisition and exemption application ban, with no carve-outs to the Arcontis for personal trading. A permanent director and officer ban was also imposed on the Arcontis.

(ii) Each of the Arcontis was ordered to pay an administrative penalty of $600,000, as was NAC. In view of NAFG’s bankruptcy status no monetary sanctions were sought against it.

(iii) The Arcontis submitted that they should only be ordered to disgorge the amount they personally received as management fees, namely, $175,000. The Commission ordered the Arcontis to disgorge the amount of $2,052,691.16 to the Commission on a joint and several basis. It arrived at this amount by taking the $2,908,170 that was received from investors of NAFG and netting out the amount that was repaid to NAFG investors either in the insolvency arrangement or in redemption payments. In making this deduction the Commission accepted the Arcontis’ evidence that of the $1,642,413.28 that was categorized as “Interest Paid to Investors”, $388,701.26 was received by way of redemption payments. The Commission found that its disgorgement order would have a “significant general and specific deterrent effect” and was therefore appropriate.

(iv) The Commission awarded costs in the amount of $200,000 on a joint and several basis as against NAC and both Arcontis. In making this order the Commission took into account the complexity of the matter, the fact that the Respondents were notified that the Staff would be seeking an order of costs against them, the seriousness of the conduct, the length of the hearing, the fact that the Respondents did make certain admissions, the fact that the Respondents cooperated with Staff during the investigation of the matter, the fact that Staff did not seek to include costs associated with certain adjournment requests by the Respondents that were granted and the fact that Staff took a conservative approach to the assessment of costs.

Issues on this Appeal

77The only findings of the Commission that were challenged on appeal were its findings with respect to fraud and penalty. Thus the issues to be determined on appeal are as follows:

(1) Should the decisions of the Commission be set aside on the basis of bias?

(2) Should the Appellants be granted leave to call fresh evidence relating to allegations that their counsel at the merits hearing had a conflict of interest and was incompetent?

(3) If the answer to the second question is “yes” should the decisions of the Commission be set aside on either or both of these bases?

(4) Was the Commission’s finding with respect to fraud reasonable?

(5) Was the Commission’s penalty decision reasonable?

Should the decisions of the Commission be set aside on the basis of bias?

78On November 10, 2010, Commissioner Carnwath (the same Commissioner who made the orders that are the subject of this appeal) issued a 15-day temporary cease trade order against the Appellants. That order was made without notice on the basis of a Commission memorandum that contained a summary of the investigation against the Appellants. The test for making the order was that allowing the Appellants to continue trading and issuing securities until the conclusion of the merits hearing could cause harm to investors and prejudice the public interest.

79On November 23, 2010, Commissioner Carnwath extended the cease trade order until December 3, 2010 with a carve-out for personal trading. This order was made on consent. In support of its application for the order, the Staff of the Commission filed an 11-page affidavit from the primary investigator in the investigation against the Appellants. That affidavit summarized the investigation against the Appellants. On December 2, 2010, Commissioner Carnwath extended the temporary cease trade order (with the personal carve-out) on consent to January 10, 2011. Following these three orders eleven further temporary orders were made against the Appellants by other commissioners.

80According to the Appellants, the fact that Commissioner Carnwath presided over the merits and penalty hearings after issuing the orders described above violated the provisions of s. 3.5(4) of the Act, violated the provisions of the Commission’s “Guide to Enforcement Proceedings” and raised a reasonable apprehension of bias. The Appellants also argue that there were two instances in the hearing where the Commissioner demonstrated actual bias. All of these arguments are being raised by the Appellants for the first time on this appeal.

Section 3.5(4) of the Act

81Section 3.5(4) of the Act provides as follows:

No member who exercises a power or performs a duty of the Commission under Part VI, except section 17, in respect of a matter under investigation or examination shall sit on a hearing by the Commission that deals with the matter, except with the written consent of the parties to the proceeding.

82The Appellants contend that since they did not consent to Commissioner Carnwath sitting on the hearing this section precluded him from doing so.

83I disagree. Commissioner Carnwath never exercised a power or performed a duty under Part VI of the Act, which deals with investigations and examinations. The Commissioner issued a temporary cease trade order in the context of a proceeding that had been commenced against the Appellants under the Act. In doing so he was exercising a power under s. 127 of the Act, which is in Part XXII of the Act.

84Thus, there is no merit to the submission that s. 3.5(4) precluded him from presiding over the merits hearing.

The Guide to Enforcement Proceedings Guideline

85The Appellants point out that the Commission’s Guide to Enforcement Proceedings that the Commission distributes to the public states the following:

Panel members are unbiased adjudicators who decide the matter based only on the evidence that is submitted at the hearing. They have no involvement in, or knowledge of, the investigation or the background to the Statement of Allegations.

86Contrary to this provision, Commissioner Carnwath did have knowledge of the investigation as he was provided with this knowledge when he granted the temporary cease trade orders.

87The Commission acknowledges that this is what the Guide says, but argues that it is only a guide. It is not a statutory instrument that precludes a commissioner who has issued a temporary order in the proceeding from participating in a hearing.

88The Commission also points to the fact that it is in fact the practice of the Commission to have commissioners involved in the adjudicative phase of a case throughout its life cycle. This practice is outlined in the “Restated Notice From the Office of the Secretary, Re: Interim Orders, Pre-Hearing Conferences and Interlocutory Motions”, first posted on July 28, 2009, and restated on April 15, 2014. The Restated Notice states, in part, the following:

Effective as of July 28, 2009, the Commission implemented a practice of assigning a single commissioner (the “designated commissioner”), where practicable, to each adjudicative matter at its commencement to preside over and to hear and determine all matters leading up to the hearing on the merits. The designated commissioner will be authorized to hear and make orders on any case management and interlocutory matters such as applications for interim orders and motions….

89Later on in the Restated Notice it is made explicit that one of the issues that may be heard and determined by a designated commissioner is the issuing and extension of cease trade orders. The Restated Notice is also distributed to the public.

90The section of the Guide relied upon by the Appellants contradicts the terms of the Restated Notice. However, both are just guidelines and neither can be used on its own to determine the question that must be determined in this case, namely, whether Commissioner Carnwath’s conduct raises a reasonable apprehension of bias.

Reasonable Apprehension of Bias

91The basis for the Appellants’ argument on reasonable apprehension of bias is that when Commissioner Carnwath issued the interim cease trade orders he reviewed evidence about the investigation and decided to act on that evidence, at least to the extent of issuing a temporary cease trade order.

92In this regard it is important to note that the original order was made on an ex parte basis and comes to no conclusion about whether the Appellants had, in fact, engaged in misconduct. The other two orders were made on consent and also come to no conclusion on the issue. Thus, it is not the case that by issuing the prior orders the Commissioner had already made the same findings that he was going to be called upon to make in the merits hearing.

93If the argument is that Commissioner Carnwath was exposed to evidence that he might not hear during the merits hearing, then that argument fails on the basis that individuals acting in a judicial capacity disabuse themselves all the time of matters that they find were not properly in evidence before them. In the criminal context, judges hearing criminal trials may hear pretrial motions that expose them to the fact that the accused before them had a gun on him when he or she was arrested or that he or she made a full confession to the police. Based on Charter or voluntariness considerations these extremely prejudicial pieces of evidence may not be admitted by the trial judge, who is then expected to not allow the evidence to form any part of his or her deliberations on the case. In fact, on some of these motions, if the accused testifies, the trial judge may make adverse findings of credibility against that accused. This does not mean that the trial judge must recuse himself or herself from the trial.

94In Brosseau v. Alberta Securities Commission, [1989] 1 S.C.R. 301, the Supreme Court of Canada dealt with an allegation of reasonable apprehension of bias against the Chairperson of the Alberta Securities Commission who presided at a merits hearing in a case where he had received investigative materials. However, the focus of that case was not on the fact that the Chairperson had received information about the investigation, but that he did so while he was acting in an investigative capacity. As pointed out at p. 309 of the decision, the appellant in Brosseau objected to the Chairperson’s “participation at both the investigatory and adjudicatory levels.” The Supreme Court goes on to explain the following:

The maxim nemo judex in causa sua debet esse underlies the doctrine of “reasonable apprehension of bias”. It translates into the principle that no one ought to be a judge in his own cause. In this case, it is contended that the Chairman, in acting as both investigator and adjudicator in the same case, created a reasonable apprehension of bias. As a general principle, this is not permitted in law because the taint of bias would destroy the integrity of proceedings conducted in such a manner.

95One of the issues that the parties addressed in Brosseau was the extent to which the Chairperson was the one who was directing the investigation. The respondent contended that it was not the Chairperson who did so, but the Director. In the end the Supreme Court decided that it was not necessary to decide this issue, because the statute before them authorized the Chairperson to perform both investigatory and adjudicative functions.

96In the case at bar, Commissioner Carnwath never performed an investigatory function. Nor would he have been permitted to do so under s. 3.5(4) of the Act and still preside at the merits hearing. In this case the maxim “nemo judex in causa sua debet esse” has no application.

97In Brosseau at pp. 313-15 the Supreme Court makes another point that the pre- and post-Brosseau case law has recognized as important when conducting reviews and appeals involving administrative tribunals:

Certain other factors should be taken into consideration along with the question of statutory authorization. For example, in a specialized body such as the Commission, it is more than likely that the same decision-makers will have repeated dealings with a given party on a number of occasions and for a variety of reasons….

Securities commissions, by their nature, undertake several different functions. They are involved in overseeing the filing of prospectuses, regulating the trade in securities, registering persons and companies who trade in securities, carrying out investigations and enforcing the provisions of the Act. By their nature, they will have repeated dealings with the same parties. The dealings could be in an administrative or adjudicative capacity….

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.

This protective role, common to all securities commissions, gives a special character to such bodies which must be recognized when assessing the way in which their functions are carried out under their Acts.

So long as the Chairman did not act outside of his statutory authority, and so long as there is no evidence to show involvement above and beyond the mere fact of the Chairman’s fulfilling his statutory duties, a “reasonable apprehension of bias” affecting the Commission as a whole cannot be said to exist. [Emphasis added.]

98In this case Commissioner Carnwath did not act outside his statutory authority when he issued the three cease trade orders and presided over the merits hearing. The Appellants’ position would require a new commissioner, completely devoid of any previous knowledge, for each interim order, pre-hearing conference, interlocutory motion or merits hearing for each different case. The amount of time and resources required to meet this standard could undermine the mandate of the Commission, which is to provide timely, efficient and cost-effective adjudication so as to fulfill its primary objective of protecting the public.

99For these reasons I find that the Appellants have not met their burden of establishing a reasonable apprehension of bias on the part of Commissioner Carnwath.

100In making this finding I do not need to have reference to the case law that makes it clear that allegations of bias should be raised at the earliest possible opportunity and not after the hearing has taken place. Thus, there is no need to explore whether the Appellants knew or should have known what information the Commissioner reviewed before he issued the interim cease trade orders.

Actual Bias

101In their factum the Appellants point to two excerpts from the transcript that they allege demonstrate actual bias. The first refers to a motion that was brought early on in the merits hearing by Appellants’ counsel seeking to exclude the Director’s Decision from evidence at the hearing. In the first excerpt, Commissioner Carnwath indicates that he is granting the Appellants’ motion. In the second excerpt, Commission counsel refers to the fact that pursuant to the Commissioner’s decision they have removed the Director’s Decision from the hearing record submitted to the Commission.

102Neither of these excerpts demonstrates any bias towards the Appellants. In fact, in both excerpts, the Commissioner is simply granting the relief that the Appellants requested.

Conclusion on the Question of Bias

103I find that there is no merit to the Appellants’ bias argument. This argument also forms one of the bases for alleging incompetence of counsel. Since the argument could not succeed, Appellants’ counsel appropriately decided not to pursue it.

Should the Appellants be granted leave to call fresh evidence on the basis of allegations that their counsel had a conflict of interest and/or was incompetent?

Test for the Admission of Fresh Evidence

104An appellate court will exercise its discretion to admit fresh evidence when (1) the tendered evidence is credible, (2) it could not have been obtained prior to trial by the exercise of reasonable diligence and (3) the evidence, if admitted, will likely be conclusive of an issue in the appeal (Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208 (C.A.), at pp. 210-11).

105The proposed fresh evidence in this case could not have been obtained before the hearing. Thus, the issue is whether it is credible and will likely be conclusive of an issue in the appeal.

Conflict of Interest

106Ian Smith was the Appellants’ counsel at the merits hearing. At the same time that Mr. Smith was acting for the Appellants in the proceeding brought against them by the Commission, Mr. Fenton, his partner, was acting for the Commission in a totally unrelated proceeding. In addition, a number of years before being retained by the Appellants, Mr. Smith had acted for the Commission in another unrelated proceeding. The Appellants had no knowledge of any of these retainers until after the hearings that are the subject of this appeal.

107According to the Appellants, these retainers created a conflict of interest between Mr. Smith and themselves. This is particularly so because the written retainer agreement between the Commission and Fenton, Smith states that the Deputy Director of the Enforcement Branch of the Commission is to supervise the work of the firm in relation to their retainer with them. Thus, while Mr. Smith was acting for them, the firm was under the supervision of the Commission in relation to another retainer.

108The Appellants argue that this conflict of interest caused Mr. Smith to fail in his duty of loyalty to them. He preferred his own interests, particularly his interests in keeping the work of the Commission, over that of the Appellants. This caused him to compromise his defence of the Appellants in a number of ways that are dealt with in detail below.

109A lawyer, and by extension a law firm, owes a duty of loyalty to clients. That duty has three dimensions: a duty to avoid conflicting interests, a duty of commitment to the client’s cause and a duty of candour (R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631 and Canadian National Railway v. McKercher LLP, 2013 SCC 39, [2013] 2 S.C.R. 649).

110When a breach of the duty of loyalty is raised for the first time on appeal as a ground to set aside a trial judgment, “the test is more onerous because it is no longer a matter of taking protective steps but of asking for the reversal of a court judgment” (Neil, at para. 38).

111On appeal the appellate court is examining a completed trial after the fact. It has a full record and can assess the effect, if any, of any alleged conflict (R. v. Widdifield (1995), 25 O.R. (3d) 161 (C.A.), at pp. 175-76):

Unlike the trial court, the appellate court is not concerned with prophylactic measures intended to avoid the potential injustice which may flow from compromised representation. Instead, the appellate court must determine whether counsel’s representation was in fact compromised in such a way as to result in a miscarriage of justice. The concern on appeal must be with what happened and not with what might have happened. It makes no more sense to find ineffective representation based on the possibility of a conflict of interest, than it does to find ineffective representation based on the mere possibility of incompetent representation. [Emphasis added.]

112Thus, for the Appellants to succeed in setting aside the Commission’s orders on the basis of conflict of interest they must demonstrate not only that such a conflict did exist, but that the existence of that conflict actually caused a miscarriage of justice.

113In Neil, at para. 29, Binnie J. found that there is a “bright line” that precludes a firm from doing the following:

[A] lawyer may not represent one client whose interests are directly adverse to the immediate interests of another current client – even if the two mandates are unrelated – unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other.

114The nature of the Commission’s mandate (acting in the public interest) lends force to the argument that Mr. Smith, acting for the Appellants on a totally unrelated retainer, would not have put his firm in a position of conflict where it was also acting for clients whose interests were also adverse to each other.

115In this case, when Mr. Smith’s partner, Mr. Fenton, acted for the Commission he had no interests that were directly adverse to the immediate interests of the Appellants. He could prosecute the people he was prosecuting on behalf of the Commission to the full extent of the law without in any way affecting the interests of the Appellants.

116However, the Appellants base their conflict argument on the duty of loyalty, a duty that Binnie J. in Neil describes as one that encompasses the duty of a lawyer not to “soft peddle” his or her defence of a client out of concern for another client. The issue then is whether or not Mr. Smith could be reasonably perceived by them as zealously representing them in their defence against the Commission charges when at the same time his firm was acting for the Commission on another matter.

117I do not find it necessary to resolve this issue as even if it could be argued that the Appellants’ concern about Mr. Smith’s firm’s concurrent retainers was a reasonable one, the Appellants must still demonstrate that the existence of a conflict actually caused a miscarriage of justice. For the reasons that follow I find that they cannot do so.

118The Appellants do make specific allegations in this regard. However, the instances they point to overlap with, but are not as extensive as, the allegations they make that their appeal should be allowed based on ineffective assistance of counsel. As discussed in further detail below, in order to succeed on an appeal on the basis of ineffective counsel an appellant must also demonstrate a miscarriage of justice. Thus, I will deal with the specific allegations concerning their counsel’s conduct in the section that is focused on ineffective counsel.

Legal Test for Setting Aside a Decision on the Basis of Ineffective Assistance of Counsel

119To succeed in setting aside a decision on appeal on the basis of ineffective assistance of counsel the Appellants must demonstrate (1) that there are facts that underpin the claim, (2) that counsel’s representation was incompetent and (3) that the incompetent representation caused a miscarriage of justice (R. v. Joanisse (1995), 102 C.C.C. (3d) 35 (Ont. C.A.)).

120In assessing the competence of counsel’s representation it is important to remember that the proper role of counsel is not simply to bring forth every argument or piece of evidence that the client wants. Nor is counsel required to get the approval of the client before taking any action during the course of the trial. Counsel “is expected and required to exercise independent judgment” (R. v. DiPalma, [2005] 2 C.T.C. 132 (Ont. C.A.), at para. 38).

121In reviewing counsel’s performance, incompetence is measured against a reasonableness standard. Doherty J.A. explained the following in R. v. Archer (2005), 202 C.C.C. (3d) 60 (Ont. C.A.), at para. 119:

That assessment is made having regard to the circumstances as they existed when the impugned acts or omissions occurred. Hindsight plays no role in the assessment. Allegations of incompetent representation must be closely scrutinized. Many decisions made by counsel at trial will come to be seen as erroneous in the cold light of a conviction. The reasonableness analysis must proceed upon a “strong presumption that counsel’s conduct fell within the wide range of reasonable professional assistance.” [Citations omitted.]

122In Archer the Court also pointed out that there is a wide range of professional judgment that can be considered reasonable in a particular set of circumstances. Different counsel will have different approaches to the same problem, all of which may be reasonable. Citing R. v. White (1997), 32 O.R. (3d) 722 (C.A.), at p. 745, the Court stated at para. 119 that “[t]he art of advocacy yields few, if any, absolute rules,” that “[i]t is a highly individualized art” and that “[w]hat proves effective for one counsel may be ineffective for another.”

123The Court in Archer also stated the following at para. 121 about what should happen where an appellant makes an allegation of ineffective counsel on appeal:

[T]he court should first consider whether the alleged incompetence resulted in a miscarriage of justice. If the claim fails on this ground, there is no need to assess the adequacy of counsel’s performance. This approach recognizes that it is the appellate court’s function to determine whether a miscarriage of justice has occurred and not to grade counsel’s performance.

The Incompetence Alleged in this Case

Preparation, Defence Strategy and Admissions

124The Appellants allege that they were never told by their counsel what the defence strategy was. They only discerned what their lawyer had in mind when they saw the “rushed admissions” that were sent to the Commission only two days before the hearing was to begin. According to the Appellants, these admissions, made as they were without context, resulted in a defence strategy that was doomed to failure. The Appellants also allege that their counsel was not prepared for the hearing. Witnesses had not been interviewed and a strategy had never been discussed. As a result, they requested that their counsel seek a 60-day adjournment of the hearing, a request that their counsel ignored.

125Mr. Smith, the Appellants’ counsel, gave evidence and was cross-examined on that evidence. He produced his dockets, which demonstrated that he was in contact with the Appellants throughout the period after he was retained and that his preparation began in earnest in February of 2013, with a steady increase in time spent in the four weeks leading up to the commencement of the hearing on April 29, 2013. There are no credible facts to support the assertion that Mr. Smith did not spend enough time on the Appellants’ case during the course of his retainer.

126Mr. Smith also gave evidence about the Appellants’ request that he apply for an adjournment. He stated that he had no doubt that the Appellants wanted to delay matters, but that none of the reasons they advanced would justify an adjournment. He addressed all of these matters with the Appellants prior to the commencement of the hearing.

127Mr. Smith also deposed that from the beginning the Appellants concurred with a defence strategy that involved portraying the Appellants as somewhat careless and inexperienced business people whose mistakes were due to their inexperience. When the mistakes were pointed out, they hired the best experts they could to deal with them. While they could be accused of carelessness, they could not be accused of dishonesty or lack of integrity. To achieve this goal the Appellants agreed that they should candidly admit to the errors that the Staff were certain to prove in any event.

128Mr. Smith produced copies of emails with the Appellants concerning the admissions that were made at the commencement of the hearing. These demonstrate that an exchange occurred about these admissions, which resulted in an email from the Appellants confirming that the admissions were “good to go.” Nothing in these emails suggest that at any time the Appellants were surprised, pressured or coerced.

129At one point the Appellants did take the admissions and “add context”. However, they never withdrew the admissions that they made. For example, one admission was to the effect that NAFG filed a proposal under the Bankruptcy and Insolvency Act. This was a matter of public record that Staff would have had no difficulty proving. The Appellants wished to supplement the admission by adding language that blamed the Commission for having sent a warning letter to investors, which they claimed started “a run on the bank”. Mr. Smith stated that as a matter of advocacy, while evidence could be led during the hearing to make the point that the Appellants wish to make, the document in which the admissions were made should not include finger-pointing or excuses. This would undermine the intent of the document, which was to demonstrate to the Commission that the Appellants were honest and cooperative people who were willing to admit their mistakes. This call on Mr. Smith’s part is precisely the kind of judgment call that an appellate court should not be second-guessing.

130The admission that the Appellants focused on the most in their argument on appeal was the admission that “returns to investors were funded in part by new investment in NAFG and/or NAC.” According to the Appellants, this admission formed one of the bases for the fraud finding. Thus, by allowing them to make this admission, their counsel was effectively allowing them to admit to fraud. The problem with this submission is that six months prior to retaining Mr. Smith, Gino Arconti had made a similar admission in his earlier compelled testimony held in August of 2011, which Staff read into the record at the merits hearing. Thus, in advising the Arcontis to make the admission in question Mr. Smith was doing nothing more than confirming something his clients had already admitted under oath.

131In my view, the Arcontis’ evidence concerning their counsel’s failures with respect to preparation and defence strategy is not credible and does not meet the first prong of the test for admission as fresh evidence on the appeal.

Witnesses

132The Appellants complain that Mr. Smith failed to deal with witnesses effectively. In some cases it is because he failed to call them; in others it is because of what he asked them. At the outset it should be noted that the “decision whether to call a particular witness is generally that of the defence counsel, not of the client” (R. v. White (1997), 32 O.R. (3d) 722 (C.A.), at p. 751).

Maria Carelli

133Ms. Carelli was involved in the 2009 Compliance Review on behalf of the Commission. At one point she and her father purchased vehicles from Prestige. The Appellants allege that this put her in a position of conflict and that Mr. Smith should have objected to her evidence on this basis. Mr. Smith did not do so, choosing instead to use the evidence on cross-examination to establish that Prestige was an operating business, thus distinguishing it from many “Ponzi” schemes.

134There is no credible basis on which to challenge Mr. Smith’s judgment in this regard. The fact that Ms. Carelli bought a car from Prestige was irrelevant to her evidence and could not have provided a basis for challenging her evidence.

Marcel Tillie

135Marcel Tillie was a forensic accountant at the Commission’s Enforcement Branch. The Appellants allege that Mr. Smith should have objected to his evidence on the basis that it was opinion evidence and that Mr. Smith should have insisted that their own accountant review Mr. Tillie’s report. When the report was reviewed after the merits hearing it was discovered that Mr. Tillie “miscalculated approximately $379,425” in his report and that this evidence would have negated the finding that the Appellants were running a Ponzi scheme.

136Mr. Tillie was not presented as an expert witness, nor did he offer any opinion during his evidence. His evidence simply laid out the movement of funds in and out of NAFG’s main bank account. In R. v. Tang, 2015 ONCA 470, 122 W.C.B. (2d) 411, leave to appeal to S.C.C. refused, 36754 (April 2016), the Court of Appeal found that evidence as to the movement of funds in and out of accounts based on banking and related documents constitutes factual and not opinion evidence.

137As detailed earlier, Mr. Tillie categorized $1,642,413.28 as “Interest Paid to Investors”. In fact, by the time of the penalty hearing it was established that $379,425 of this money was paid to investors on account of principal. However, whether the payments by NAFG to “old” investors were on account of principal or interest would not have made a difference to the result. This is clear from both the Commission’s decisions. The key factor in the Merits Decision is that at no time did the Appellants advise investors in NAC or NAFG “that their funds would be used either in whole or in part to pay interest, dividends or principal to other NAFG or NAC investors” (at para. 310, emphasis added). The calculation was important for the quantum of the disgorgement order in the Penalty Decision, but, as detailed above, the principal paid was taken into account in calculating the quantum of that order: see paras. 63-64 of the Commission’s Penalty Decision.

138Since the new evidence regarding Mr. Tillie could not affect the result on appeal it is not admissible.

Stefano Picone

139Stefano Picone was a chartered accountant who was retained to assist the Appellants in devising a business plan to make NAFG and NAC profitable. In April of 2013, just before the hearing was to start, Mr. Picone prepared a financial model designed to demonstrate what the Appellants’ financial results would have been if the Commission had not imposed a cease trade order in September of 2010. The model made several assumptions and was revised at the direction of the Arcontis. Mr. Picone was called to testify, but the model was not introduced into evidence.

140Mr. Smith made the professional judgment not to try to introduce the model into evidence. In his view, it was not admissible as it was not prepared during the time period at issue in the hearing and was based on assumptions that had no basis in the evidence. As such it was entirely speculative. Mr. Smith’s judgment in this regard does not fall outside the bounds of reasonableness and thus does not meet the threshold necessary to establish incompetence of counsel.

141In terms of the test for the admission of fresh evidence, the evidence at issue does not raise a sufficient level of credibility to merit its admission on appeal. Furthermore, there is no credible argument that it could affect the result on appeal. The Commissioner heard and considered Mr. Picone’s evidence. He found that his answers to some questions did “not inspire confidence” and he did not accept Mr. Picone’s evidence that “NAFG and Prestige Motors could be rescued.” It cannot reasonably be argued that this view would have been changed if a model prepared after the fact and based on assumptions that had no basis in the evidence had been put before the Commissioner.

142As such the evidence should not be admitted on the appeal.

Margaretha Widjojo

143Ms. Widjojo was the Appellants’ bookkeeper. The Appellants allege that Mr. Smith should have called her as a witness as she would have testified that the interest-free loan from NAFG to Prestige was a “receivable balance” rather than a loan.

144Mr. Smith gave evidence that he interviewed Ms. Widjojo and decided not to call her as a witness. In his judgment she presented as “difficult to deal with”, “disorganized” and her recordkeeping was poor. According to Mr. Smith, the Appellants agreed with his decision at the time.

145Deciding which witnesses to call is precisely the kind of judgment call that counsel should be able to make without being second-guessed by an appellate court. However, even if she had been called, Ms. Widjojo’s evidence would not change the result on appeal. The conduct at issue has to do with the fact that NAFG investors were not told that a large amount of NAFG money had been given to Prestige on an interest-free basis. This was an indication of the financial distress the Appellants’ businesses were in. Whether this advance is referred to as a “loan” or “receivable balance” does not change this essential fact.

146Thus, this evidence is also not admissible under the test for the admission of fresh evidence on appeal.

Tyler Lang

147Tyler Lang was the principal of HDL. The Appellants allege that Mr. Smith should have called Mr. Lang to demonstrate that NAFG was viable.

148Mr. Smith gave evidence that Mr. Lang was very reluctant to testify. Further, if he had testified, his evidence would not have been helpful. While it was true that HDL was prepared to consider investing in NAFG, HDL changed its mind once it learned of NAFG’s regulatory problems, problems which the Arcontis had never disclosed to HDL.

149Instead of calling Mr. Lang, Mr. Smith filed evidence about HDL, including their Letter of Engagement through the Arcontis. Thus, the Commission was aware of the fact that HDL was part of the Arcontis’ plan to turn their business around.

150First, there is no credible basis upon which Mr. Smith’s judgment with respect to Mr. Lang could be classified as incompetent. Second, even if Mr. Lang thought that NAFG was viable in the last month of the material time period (which is when HDL was retained) this would not have affected the essential findings in this case.

151Thus, this evidence should not be admitted on the appeal.

NAFG Investors

152The Appellants submit that Mr. Smith’s failure to call NAFG investor witnesses amounted to incompetence. In support of this allegation they filed an affidavit from one investor called J.F. J.F. had also invested in another company that had regulatory difficulties with the Commission. Unlike NAFG, this company was able to resolve its regulatory issues with the Commission. J.F., who is not a lawyer, opined that NAFG should have been able to do the same. Mr. Smith concluded that J.F.’s anticipated evidence was irrelevant. He was correct.

153Mr. Smith spoke to some other investor witnesses, most of whom were not willing to testify. Of the ones who were, their evidence was unhelpful and of little relevance. Other than J.F., the Appellants gave no facts to support their allegation that investor evidence should have been called. Thus, this evidence also does not meet the test for the admission of fresh evidence.

The House Transfer

154As already indicated, both Arcontis were cross-examined by Commission Staff about the fact that they had transferred their interests in their jointly-owned matrimonial homes to their wives. Both transfers were effected in May of 2010, within days of each other. This took place in the period during which Carter was undergoing a second compliance review. Within six months of these transfers, NAFG filed for bankruptcy protection.

155The Appellants allege that their counsel should have objected to the admission of any evidence of the house transfers on the basis that no mention of the transfers was made in the Statement of Allegations filed by the Commission and because Staff only provided Mr. Smith with a copy of the house transfer documents on May 3, 2013.

156Mr. Smith deposed that he did not object to the house transfers being put to the Arcontis on cross-examination. First, he did not agree that there was a need to put the house transfers in the Statement of Allegations as they were not a particular of the fraud being alleged; they were just evidence. Second, the Arcontis had notice of the transfers prior to testifying and had ample time to consider their positions in regard to the transfers. Mr. Smith deposed that he discussed the transfers with both Arcontis before they testified and advised them that they could expect to be questioned with respect to same.

157The house transfers were documents that the Arcontis signed and would have been aware of. The Arcontis were alerted to the fact that the Commission was aware of the house transfers before either of them testified. There is no reason to question Mr. Smith’s judgment that there was no basis to object to the Arcontis being cross-examined on these documents.

158Further, both Arcontis explained why they effected the transfers in question. Neither has put forward any different explanation on the appeal. Thus, there is no factual basis for any suggestion that the Arcontis were prejudiced by being asked about the house transfers on cross-examination because they did not have sufficient time to prepare their explanations regarding the transfers. They gave their explanations, which were considered by the Commissioner and not accepted.

159Since the evidence in respect of the house transfer complaint could not affected the result on appeal, it should not be admitted.

Officially Induced Error

160The Appellants submit that Mr. Smith should have argued a defence he did not argue, namely, officially induced error. The basis for this submission is the fact that David Gilkes, who was hired by the Appellants to assist them once the Commission instituted its first compliance review, had signed and approved Carter’s license approval when he was still employed by the Commission. During that approval process, according to the Appellants, Mr. Gilkes would have seen the “Risk Acknowledgment Form” that each NAFG investor was required to sign, a form that required the investors to acknowledge that NAFG or NAC “does not have to publish financial information or notify the public of changes in its business” and that investors “may not receive ongoing information” about the business. The form also disclosed that the investments were subject to risk.

161According to the Appellants, Mr. Gilkes reviewed and approved these forms on behalf of the Commission when he approved Carter’s application. The Appellants submitted that they instructed Mr. Smith to question Mr. Gilkes about this and to raise the defence of officially induced error. The Appellants argued that Mr. Smith did not do so because he was afraid of alienating the Commission. As such he was both incompetent and preferred his interests to that of his clients.

162In support of this alleged defence the Appellants also rely on the following language that was contained in Carter’s risk disclosure statement, which was submitted to the Commission at the time that Carter was approved for registration as a limited market dealer:

The issuer of your securities is a non-reporting issuer:

A non-reporting issuer does not have to publish financial information or notify the public of changes in its business.

163The Commission found that the Appellants’ brochures were misleading. The Appellants submit that they provided Commission Staff with the NAFG brochures in early 2010 and the Staff did not immediately complain about the brochures, thereby allowing the Appellants to believe that they were fine. According to the Appellants, if this belief was in error, it was induced by the Commission.

164The elements of the defence of officially induced error were set out by the Supreme Court of Canada in Lévis (City) v. Tétreault, 2006 SCC 12, [2006] 1 S.C.R. 420, at para. 26. They are as follows:

(1) That an error of law or of mixed fact and law was made;

(2) That the person who committed the act considered the legal consequences of his or her actions;

(3) That the advice came from an appropriate official;

(4) That the advice was erroneous; and

(5) That the person relied on the advice in committing the act.

165There is no evidence that anyone from the Commission ever advised the Appellants that they had no obligation to disclose material facts to their clients at the time of the investment if those facts could cause their clients to suffer deprivation or risk of deprivation. While it is true that there is no requirement that a non-reporting issuer, such as NAFG, publish financial statements or notify the public of changes in its business, this did not relieve NAFG from its obligation to avoid misstating material facts or otherwise misleading investors. From 2007 on, Carter’s own policies and procedures manual made it clear that representatives of Carter should not make false or misleading statements or fail to state material facts in connection with a securities transaction. Mr. Gilkes testified that he took the Arcontis through Carter’s May 2009 policies and procedures and never formed the impression that the Arcontis did not understand their obligations.

166The fact that Commission Staff did not immediately complain about the brochures when they received them (although they did in the Suspension Letter once they had completed their financial investigation) does not mean that they gave the Appellants advice that their brochures were fine. Mere silence by an official following its receipt of a document in circumstances such as this does not give rise to the defence of officially induced error.

167Thus, it is apparent that the result on appeal could not be affected by an unmeritorious defence of officially induced error. Thus, any fresh evidence relating to this defence should not be admitted.

Conclusion re Miscarriage of Justice

168As already outlined, for an appeal to be allowed on the basis of either a conflict of interest or incompetence of counsel, the Appellants must demonstrate that a miscarriage of justice occurred in the proceedings below. For the reasons given above, they have failed to do so.

Was the Commission’s Finding With Respect to Fraud Reasonable?

169The Appellants concede that the Commission correctly set out the essential elements of fraud as described by the Supreme Court of Canada in R. v. Théroux, [1993] 2 S.C.R. 5. They are as follows:

(i) Proof of a prohibited act, be it an act of deceit, falsehood or some other fraudulent means, and deprivation caused by the prohibited act are sufficient to make out the actus reus 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) establish the mental element of fraud (Théroux, at p. 20).

170The Appellants’ appeal with respect to the Commission’s fraud finding is focused on its analysis concerning the actus reus of fraud and, in particular, whether the actions of the Appellants can reasonably be found to be acts of deceit, falsehood or some other fraudulent means. While the Appellants’ factum made arguments concerning whether reliance and deprivation had been established, their counsel was clear in oral argument that he was not pursuing these submissions. Their counsel was also clear that, contrary to the position taken in their factum, they were not pursuing any arguments about whether the requisite mens rea had been proved. As put by counsel in oral argument, “If you find that they were deceitful, then everything else follows.”

171As the Commission correctly found at para. 305, “The phrase ‘other fraudulent means’ encompasses all other means other than deceit or falsehood, which can properly be characterized as dishonest”. Further, as the Commission also noted, whether an act can be so characterized is to be “determined objectively, by reference to what a reasonable person would consider to be a dishonest act”. Finally, as the Commission also found, non-disclosure of important facts and the use of investor funds in an unauthorized manner have been found to be “other fraudulent means.”

172The Appellants submit that the Commission made two fundamental errors in its analysis. First, it failed to conduct an analysis with regard to what a reasonable person would consider to be a “dishonest act.” Second, it failed to weigh all the evidence. If it had it would have found that, viewed objectively, the Appellants’ actions constituted negligence, but did not rise to the level of fraud.

173With respect to the first submission, the same argument was made in Phillips v. Ontario (Securities Commission), 2016 ONSC 7901, 135 O.R. (3d) 771 (Div. Ct.). In that case, I (writing on behalf of the court) made the following observation and finding:

41It 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 (A.T.A. v. Alberta (Information & Privacy Commissioner), 2011 SCC 61, [2011] 3 S.C.R. 654; McLean; N.L.N.U. v. Newfoundland and Labrador (Treasury Board), 2011 SCC 62, [2011] 3 S.C.R. 708 (S.C.C.)).

42While 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.

174In the case at bar, the Commission was not just concerned with non-disclosure. It also found that the Appellants had misled investors by publishing false information in their brochures and had used new investor money to pay old investors, which the Commission found to be an act of “deceit, falsehood or some other fraudulent means.”

175In this case, as in Phillips, I find that even if the Commission did not explicitly categorize each act as either deceit, falsehood or other fraudulent means and did not explicitly ask itself the question whether an act that fell under “other fraudulent means” would be regarded by the reasonable person as dishonest, its decision was a reasonable one. Reading the Commission’s decision as a whole, it is clear that implicitly it found that the non-disclosure in issue objectively rose to the level of dishonesty and this finding can be easily justified on the basis of the record before it.

176I propose to elaborate on this conclusion with specific reference to the evidence and arguments that the Appellants made concerning why the Commission’s findings could not be sustained.

The Rules Were Unclear and the Appellants Relied on Professional Advice

177The Arcontis were high school graduates with no experience in the investment field. Consequently, when they chose to raise money from investors they hired professionals to help them. When Carter applied to the Commission for its license, its application was approved by David Gilkes. Part of the material that David Gilkes approved was the Risk Acknowledgment Form that had to be signed by all investors. That form made it explicit that investors would receive no ongoing financial information. David Gilkes testified that the rules for entities such as Carter were unclear prior to 2009. When the Commission started investigating them the Arcontis immediately hired David Gilkes, whom they describe as a professional fraud examiner. What fraudster, the Appellants ask rhetorically, hires a professional fraud examiner?

178The Appellants acknowledge that the Commissioner heard this evidence. Their complaint is that he did not weigh it. This is evidenced by the fact that the Commissioner made no finding of credibility against the Appellants except with respect to a finding that he preferred the evidence of the Staff investor witnesses over the evidence of the Arcontis.

179In para. 269 of its Merits Decision the Commission stated as follows:

The foregoing state of affairs compels me to conclude that where the evidence of the Arcontis is in direct conflict with investor witnesses, I prefer the evidence of the latter. I am satisfied on the balance of probabilities that the evidence of the investor witnesses is reliable.

180It is this paragraph that the Appellants rely on to support their contention that the only adverse finding of credibility against the Appellants that the Commission made was in reference to the testimony of the investor witnesses.

181I disagree. The paragraph that the Appellants rely upon is preceded by the following paragraphs:

265As indicated earlier, I found the evidence of both Arcontis to be evasive and unresponsive. Questions that called for a simple, direct answer were deflected and used as a platform to extol their confidence in their business plans of Carter and NAFG. In doing so, their refusal to acknowledge their lamentable financial circumstances indicated a tenuous, if non-existent, grasp on commercial reality.

266In several instances, both Arcontis describe what they “would have” done. This indicates a lack of specific memory coupled with an intention to justify their failures to inform or inquire about their companies’ financial situations. Having dealt with numerous investors, they had less reason to recall their interaction with individual investors. The latter are more likely to have a better recollection of events, given their financial loss.

267Independent evidence of Mr. Tillie confirms the financial disarray of NAFG, thus putting considerable pressure on the Arcontis to obtain new and further investments at all costs. In many instances, documents were prepared by NAFG and submitted to investors for signature with no apparent attempt to be satisfied that the investors met, or continued to meet, the definition of an accredited investor.

268The Arcontis have admitted that the existence of the Prestige Motor’s loan and NAFG’s financial position were not disclosed to NAFG investors initially. They allege that “later” many investors were advised that NAFG was experiencing financial difficulty. However, the investors who were told of NAFG’s financial difficulty were those who had already invested and who were asked to convert to a debenture at a lower interest rate.

182These paragraphs contain credibility findings that are not limited to an analysis of whether the investors’ evidence is to be preferred to that of the Arcontis. The Commission found the Arcontis to be evasive and unresponsive witnesses, with a lack of specific memory and an intention to justify their failures. The Commission also disbelieved the Arcontis evidence that they ever disclosed the true state of NAFG to investors at the time of their initial investment, a view that was articulated again in para. 282.

183Further, there are other parts of the decision where the Commission makes adverse comments about the credibility of the Arcontis. For example, in para. 212, the Commission states the following in relation to Gino Arconti: “I found that Mr. Arconti’s answers to the straightforward questions asked by Staff during this period were unresponsive and evasive.” These observations were echoed in relation to other parts of Mr. Arconti’s evidence in paras. 214 and 216.

184With respect to the Arcontis’ submission that the Commission did not weigh their evidence that they did not understand their obligations to disclose to investors and that their failure to disclose was due to inadequate advice or their misunderstanding of this advice, at para. 283 of the Merits Decision the Commission makes an explicit finding that this evidence was not credible. It then goes on to summarize the evidence it relies on in making this adverse finding, evidence that was summarized at para. 57 of these reasons, which is reproduced below for ease of reference.

The Commission also explicitly rejected the Arcontis’ position that they did not understand their obligation to disclose to investors the negative financial information about NAFG. In this regard the Commission found that their evidence was not credible given:

(i) The provision of Carter’s own policies and procedures manual (which included an obligation not to make false or misleading statements or to fail to state material facts);

(ii) The letter from Staff to Flavio on September 3, 2009, which Flavio acknowledged reading and which explicitly referred to Carter’s suitability obligations;

(iii) Mr. Gilkes’ evidence that he went through Carter’s policies and procedures with the Arcontis and thought that the Arcontis understood their obligations; and

(iv) The Respondents’ concession during their testimony that the loan between Prestige and NAFG and the fact that the lease payments could not cover the interest payments to investors was information that resulted in risks that should have been disclosed to investors.

185In addition to this evidence, Mr. Gilkes testified that any lack of clarity in the rules governing entities such as Carter was clarified in 2009, i.e., prior to the fraud period. Further, he also testified that he was not aware of NAFG’s true financial situation until the Suspension Letter in June of 2010. Therefore, he could not have advised the Arcontis that there was no need to disclose this situation to investors.

186Simply put, there is no merit to the suggestion that the Commission failed to weigh the Arcontis’ evidence on the points in question. The Commission weighed their evidence and did not accept it. The Appellants are asking this court to reweigh the same evidence, something that is not our task as an appellate court.

The Business Could Be Turned Around

187The Appellants argue that the Commission failed to weigh the evidence that they had a reasonable basis for believing that their business could be turned around. In fact, according to the Arcontis their business might have turned around were it not for the actions of the Commission, which caused a “run on the bank”.

188In support of this submission the Arcontis point to the fact that HDL was prepared to help them raise funds and the evidence of Mr Picone. Again, reading the Commission’s decision as a whole it is clear that the Commission weighed this evidence and did not accept that it justified the Arcontis’ stated belief that the business could be turned around. The Commission found Mr. Picone’s evidence to be unreliable and overly optimistic. As far as HDL is concerned, it is clear that HDL made its offer of help before it knew of the Arcontis’ difficulties with the Commission.

189The suggestion that the actions of the Commission caused a “run on the bank” is inherently problematic. The Commission did not cause NAFG’s deficit, nor did it cause 80% of its leases to fall into default. The Commission also did not cause the Arcontis to raise money from investors without disclosing these material facts.

The Business was Not a “Ponzi” Scheme

190At para. 310 of its Merits Decision the Commission makes its finding that the Arcontis used “new” investor money to pay “old” investors without advising the “new” investors that this is where their money was to be going. In doing so, it makes the following comment: “This activity is often referred to as a ‘Ponzi’ scheme.”

191According to the Appellants, the Arcontis were not running a “Ponzi” scheme. They were running a real business. Further, they did not do anything unauthorized with investor funds as the funds did not go to them. The funds went to pay obligations that the business owed to its investors.

192Whether the Appellants were running a “Ponzi” scheme or not was not central to the Commission’s findings. What was central to its conclusions is the fact that the Arcontis did not tell new investors that their money was not going to be put into the business to lease more cars. Rather, it was going to be used to pay the existing investors since the business was not making enough money to pay those investors. This fact was material and should have been disclosed. Not to do so was objectively dishonest.

The Brochures were Just “Puffery”

193The Commission found that the marketing brochures implied that NAFG was a profitable business when it was not and that this constituted an act of “deceit, falsehood or other fraudulent means.” To the extent that the statements in the brochures were deceitful or false there is no need to ask what a reasonable person would conclude.

194The Commissioner reached his conclusion in the face of the following admissions by the Arcontis:

(i) Flavio Arconti conceded that some of the statements in the brochures could be interpreted differently than he interpreted them and could have been reworded;

(ii) Gino Arconti’s acceptance of Staff’s criticism that the brochures tended to leave the impression that NAFG was a much bigger player than it really was in the automotive and financing industry; and

(iii) The Appellants admitted “that some disclosure … may have had the effect of implying that NAFG was a profitable business.”

195The Appellants rely on Energy Syndications Inc. et al., 2013 ONSEC 24, at para. 88 where the Commission found that statements in a brochure indicating that the company developed “a simple, clever business model”, is “well funded” and has “capacity to plan, build and implement” were mere puffery and did not amount to misrepresentation.

196The statements in the brochures in question went beyond the statements in Energy Syndications. They did not simply describe the business model as being “clever” with a capacity to build. Rather, the 2009 Brochure describes its risk-reducing strategy as having been proven to be “both efficient and highly effective”. It also states that its “portfolio management system and structure” has improved the “quality of cash flow payment streams”, has encouraged its clients to act “responsibly” and has improved “the quality of the aggregate lease portfolio.” Finally, it makes the following statement: “It continues to be a winning strategy and time tested proven asset management formula for ongoing success.” In the face of the deficits NAFG had and the fact that by the beginning of 2010, 80% of its lease portfolio was in default for over 90 days, these statements were not true.

197The other version of the brochure contained another misleading statement, namely, that any investment made in NAFG would be “safe”.

198The Appellants argue that their advisors never told them that their brochures were a problem and that once the Commission suspended them they sought advice and took steps to change their brochures. They may have been careless, but they were not deceitful.

199Again, the Commission clearly weighed this evidence and reasonably rejected it. Mr. Gilkes did not know about NAFG’s lack of profitability until June of 2010 when the Suspension Letter was sent. Thus, he would have had no basis to suggest changes that would remove the statements that implied that NAFG was a profitable business. The Suspension Letter made it clear that the brochures were misleading. And yet, in September of 2010, D.M. was given the most misleading version of the brochure, the one that described the investment he was being asked to make as “safe”.

Conclusion

200For these reasons I reject the Appellants’ argument that the Commission’s conclusion that the Appellants committed fraud was an unreasonable one.

Was the Commission’s Sanctions Decision Unreasonable?

201The Appellants asked the Commission to consider various mitigating factors that they submitted were relevant to the penalty to be imposed. At para. 24 of its Sanctions Decision the Commission made the following comment about the Appellants’ request:

I find that the majority of the factors listed above go to the merits of Staff allegations. The Respondents had the opportunity to fully defend themselves and respond to Staff’s case at the Merits Hearing. This is not the appropriate forum to reopen the Merits Hearing or vary any findings that were made in the Merits Decision.

202The Appellants argue that the Commission’s failure to consider the mitigating factors they asked it to consider means that its decision must be set aside.

203The first mitigating factor that the Appellants asked the Commission to consider was the fact that David Gilkes never advised them that they needed to disclose their financial information and that they understood their financial obligations as it was explained to them by David Gilkes. Blaming their non-disclosure on David Gilkes and the advice they received from him was a key part of the Appellants’ defence at the merits hearing, a defence that the Commission rejected. In asking that this factor be treated as a mitigating factor for the purpose of penalty, the Appellants were essentially asking the Commission to reconsider its Merits Decision.

204The second mitigating factor that the Appellants asked the Commission to take into account was that Mr. Gilkes confirmed that the rules of disclosure were unclear in the exempt market and that neither he nor the Appellants were able to get any real guidance regarding these rules before the Suspension Letter in June of 2010. First, this submission ignores the evidence of Mr. Gilkes that by 2009 the rules were clear. Second, it too represents an attempt to have the Commission reconsider its findings in the Merits Decision.

205The third proposed mitigating factor was an argument that it was only with hindsight that it was possible to judge when NAFG’s financial difficulties were such that they had to be disclosed to investors. In making its decision on the merits, the Commission quite clearly did not accept this submission and in making it again the Appellants are seeking to do nothing more than reargue the merits.

206The fourth mitigating factor advanced was an argument about the marketing brochures and, in particular, the fact that they did not contain any express statements about profitability. This submission is another attempt to reargue the merits.

207The same is true of the fifth factor put forward as a mitigating factor – namely that the Staff did not raise any concerns about NAFG’s financial status until 2010 when it was too late to take corrective action. As the Merits Decision makes clear, it is only during the second compliance review in 2010 that Staff began investigating NAFG’s financial position. Thus, they would not and could not raise any concerns about that position until they had completed their investigation.

208The sixth factor put forward as a mitigating factor is the fact that Mr. Tillie’s analysis failed to take into account the fact that the “new” investor funds that were used to pay “old” investors did not just go to interest payments. It went to principal payments as well. As already outlined, the Commission did take this factor into account in its Sanctions Decision by reducing the disgorgement order by the amount of the redemption payments made to investors during the fraud period.

209In conclusion, there is no merit to the Appellants’ argument that the Commission’s decision was unreasonable because it failed to consider the mitigating factors they put forward.

210At the sanctions hearing the Appellants also submitted that their penalty should be less because they cooperated with the Commission during the investigation and shortened the proceedings by making certain admissions. Commission Staff, on the other hand, argued that the Appellants’ failure to show remorse for their conduct was an aggravating factor. The Commission rejected the Staff’s position and treated the Appellants’ cooperation and admissions as neutral factors when it came to penalty. However, the Commission did take both into account when assessing costs.

211In 1205676 Alberta Ltd. (Re), 2010 ABASC 544, at para. 39, the Alberta Securities Commission found that the factors that might “mitigate the harm caused by a respondent’s misconduct or the risk of future harm from the particular respondent [that] are relevant to the Commission’s consideration of potential sanctions … include … cooperation with the investigation, including agreement on facts”. At para. 40 the panel stated as follows:

Here, many of the Respondents cooperated with Staff during this matter. A respondent’s cooperation with Staff during the course of an investigation and hearing might mitigate somewhat the need for significant sanction, as such cooperation may indicate some recognition by the respondent of the fact and seriousness of the contraventions of Alberta securities laws. Cooperation with staff is also consonant with the public interest, as it assists in earlier resolution of wrongful conduct leading to earlier implementation of protective and preventative measures that will restore investor confidence in the integrity of the Alberta capital market.

212Thus, while cooperation and admissions may be taken into account in reducing penalty this does not mean that a decision not to do so is unreasonable. In this case the Commissioner did not find that the Appellants’ cooperation and admissions indicated a recognition of the seriousness of their conduct or brought about an earlier resolution, but did find that it affected the costs associated with the proceeding. This decision falls within the range of “possible, acceptable outcomes which are defensible in respect of the facts and law” (Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47).

213The Appellants also argue that the penalty the Commission imposed was too harsh given the nature of their conduct and, more importantly, the fact that the money they received from investors did not go into their own pockets.

214In assessing this submission it is important to consider the mandate of the Commission, which is to act in the public interest and to foster the fair and efficient working of the capital markets. 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 at para. 42 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.

215In Cartaway Resources Corp. (Re), 2004 SCC 26, [2004] 1 S.C.R. 672 the Supreme Court of Canada discussed the role that general deterrence plays in the orders made by securities commissions and concluded that it is to discourage others from engaging in similar behaviour. At para. 62 the Court made the following comment:

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.

216In this case the Commissioner found that the behaviour of the Appellants was very serious. He also rejected their submission that they were inexperienced in the market place and found that the amount of money raised by the Appellants from investors through their fraudulent behaviour had “the capacity to result in a substantial loss of investor confidence in the integrity of the capital markets.” To restore that confidence the Commission decided that it needed to craft a penalty that would “send a message to like-minded individuals that involvement in this type of misconduct will result in severe sanctions.” The Commission’s decision fell squarely within its expertise and should not be set aside unless it is unreasonable.

217The penalty imposed consisted of a cease trade order, an administrative penalty of $600,000 and a disgorgement order. The Appellants were also ordered to pay costs. A review of the jurisprudence indicates that there was nothing unreasonable about any of these orders. The issue of whether disgorgement orders should be limited to the amount that the fraudsters obtained personally, either directly or indirectly, has been litigated and lost: see Phillips. In the cases put forward by the Commission, the quantum of the administrative penalties imposed ranged from $250,000 to $750,000. The penalties imposed in this case may be at the high end of that range, but they are not outside that range.

218If the aim is to preserve confidence in the capital markets by ensuring that fraudulent behaviour does not occur as opposed to punishing those who commit fraud, there is less reason to focus on whether the fraudsters pocketed the money for themselves. What they did with the money does not lessen the seriousness of the effect of the behaviour when looked at through the framework of restoring confidence in the market. It is not unreasonable to decide that in order for that confidence to be restored the message must be sent that misrepresentation and non-disclosure that amounts to fraud will be punished severely. That is what the Commission did in this case.

Conclusion

219For these reasons I find that the appeal should be dismissed. The Respondent shall have ten days from the release of these reasons to make their submissions as to costs in writing. The Appellants shall have ten days following receipt of the Respondent’s submissions to file their written response. The Intervenors are not claiming costs.

Sachs J.

Spies J.

Fitzpatrick J.