CITATION: Hung v. Ontario Securities Commission, 2018 ONSC 6729

DIVISIONAL COURT FILE NO.: DC 489/17

DATE: 20181126

ONTARIO SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

ALFRED HUNG, ALBERT IP, GEORGE HO, and ALLEN CHAN

Appellants

– and –

ONTARIO SECURITIES COMMISSION

Respondent (Moving Party)

Adam D.H. Chisholm and Guneev Bhinder, for the Appellants

Matthew Britton and Carloalberto Rossi, for the Respondent (Moving Party)

HEARD at Toronto: October 29, 2018

c. horkins J.

Background

[1] This is a motion for security for costs.

[2] The Appellants appeal the Reasons and Decision of the Ontario Securities Commission (“Commission”) dated July 13, 2017 (“Merits Decision”) and the Reasons and Decision on Sanction and Costs dated July 9, 2018 (“Sanctions and Costs Decision”).

[3] After a merits hearing that lasted 188 days, a hearing panel (the Merits Panel) found that the Appellants orchestrated an elaborate, premeditated, and coordinated fraud, to overstate the assets and revenue of Sino-Forest Corporation (“Sino-Forest”). It was one of the largest frauds in Canadian history resulting in the loss of approximately US$6 billion in market capitalization.

[4] The Merits Panel also found that the Appellants, as senior officers of Sino-Forest, authorized, permitted, or acquiesced in the company making misleading statements in its mandated public disclosure documents and misled Staff of the Commission during their investigation. In addition, the Merits Panel found that the Appellant, Allen Chan, committed fraud in the sale of his undisclosed interest in Greenheart Resources Holdings Limited (Greenheart) to Sino-Forest.

[5] The Commission seeks an order for security for costs because it says this appeal appears to be frivolous and vexatious and the Appellants have insufficient assets in Ontario to pay the costs of the appeal. The Appellants are ordinarily resident outside of Ontario. The Commission has an order against the Appellants for the costs of the hearing totaling more than $5 million. The costs order is in full force and effect and the Appellants have paid nothing toward its satisfaction.

[6] The Commission also states there is "other good reason" for the court to order security for costs in this appeal, arising from the powerful and compelling findings of fraud against the Appellants which are firmly based on the evidence called at the hearing. Also, the Appellants obtained millions of dollars as a result of their fraudulent activity which the Appellants have placed outside the reach of the Commission. As a result, the Commission states that an order for security for costs in this appeal would be just. Unless the court makes such an order, the Commission states that it will incur substantial costs in responding to this appeal, without effective recourse to recovery.

[7] The Commission seeks an order requiring the Appellants to post $100,000 as security for the costs for the hearing before the Commission and the appeal.

Summary of the Merits decision

[8] The Merits Panel made extensive findings of fact in a lengthy 278 page decision that is summarized below.

[9] The Merits Panel found that the Appellants engaged in a planned and deliberate effort to mislead Sino-Forest investors and the investing public. Through the Standing Timber Fraud, investors were misled regarding Sino-Forest's ownership of assets valued at over US$2.4 billion and revenue in excess of US$3.3 billion. Through his fraudulent concealment of interest in the Greenheart transactions, Allen Chan earned secret profits of nearly $40 million.

[10] Mr. Chan was a co-founder of Sino-Forest in 1992. He was Chairman of the Board and CEO during the material time. He was deeply involved in the daily operations of Sino-Forest. He was the ultimate decision maker and no significant decision was made without his knowledge and approval.

[11] Messrs. Ip, Hung, and Ho were each senior officers of Sino-Forest that reported directly to Mr. Chan.

The Standing Timber Fraud

[12] The Merits Panel found that the Standing Timber Fraud was an "elaborate scheme to defraud investors" and that each of the Appellants engaged in fraud in connection with the Standing Timber Fraud, with full subjective knowledge in which they knew their conduct was deceitful and dishonest and that investors' pecuniary interests were at risk.

[13] The Standing Timber Fraud consisted of three core elements: (1) undisclosed control of purported arm's length parties; (2) a deceitful documentation process; and (3) undisclosed internal controls. The Merits Panel found that all "three elements combined created the necessary infrastructure for the continued perpetration of the fraud in this case over the Material Time."

Undisclosed Control over Customers and Suppliers

[14] The Merits Panel found that Sino-Forest controlled or had significant influence over customers and suppliers it held out to be at arm's length.

[15] These relationships enabled Sino-Forest to falsify purchase and sale documentation and engage in set-off arrangements that were incapable of independent verification, facilitating the Standing Timber Fraud.

[16] The Merits Panel found that:

• Mr. Chan knew Sino-Forest controlled or was related to purportedly independent customers and suppliers. He hid this from investors and others responsible for Sino-Forest's disclosure.

• Mr. Ip oversaw aspects of the business controlled by or related to Sino-Forest. He sub-certified Sino-Forest's disclosure when he knew it was not accurate.

• Like Mr. Ip, Mr. Ho was involved in Sino-Forest's control over customers and suppliers. He also sub-certified the disclosure when he knew it was not accurate. He was also part of the Disclosure Committee. The Disclosure was established "to assist the Senior Officers in fulfilling their responsibility for oversight of the completeness, accuracy, and timeliness of the disclosures made by the Corporation [Sino-Forest]." The Disclosure Committee's policy statement stated that: "The Corporation [Sino-Forest] is committed to a policy of full, true and plain public disclosure of all material information in a timely manner, in order to keep shareholders and all members of the investing public equally informed about the Corporations operations." Yet Mr. Hung permitted this misleading disclosure to be issued by the company.

Deceitful Documentation Process

[17] The Merits Panel found that Sino-Forest engaged in a deceitful documentation process that called into question all the assets and revenue recorded in one of the two business models (the BVI Model) that Sino-Forest used in its standing timber operations. The Merits Panel stated:

This Deceitful Documentation Process calls into question the assets and revenue Sino-Forest recorded in the BVI Model during the Material Time. This significantly put the pecuniary interest of Investors at risk….approximately 70% of the total timber holdings by hectare that Investors were led to believe they owned through Sino-Forest and approximately 70% of the revenue the company recognized between 2007 and 2010 cannot be verified.

[18] The Merits Panel found that Messrs. Chan, Ip, and Hung were the architects of the deceitful documentation process.

Undisclosed Internal Control Weaknesses

[19] The Merits Panel found that Sino-Forest dishonestly concealed internal control weaknesses which obscured the true nature of the transactions in the BVI Model and prevented the detection of the deceitful documentation process. In particular, Sino-Forest failed to disclose the extent to which the duties were centralized in Mr. Hung who effectively controlled the entire documentation process underlying the BVI Model.

[20] Mr. Chan was found to have been directly responsible for the failure to remediate the internal control deficiency. Mr. Hung knew about his own role in overseeing the deceitful documentation process, but did nothing to disclose it.

Four Examples of Fraudulent Transactions

[21] The Merits Panel found that the Appellants engaged in fraud in four transactions (the Four Frauds). These transactions provide examples of the Appellants' involvement in the Standing Timber Fraud.

[22] In the Dacheng Transaction, Sino-Forest recorded the sale of the same assets in the BVI Model, and WFOE model (the other business model Sino-Forest used). The BVI subsidiaries' purchase of these assets inflated Sino-Forest's reported assets in the 2008 financial statements by US$30 million. The sale of the assets in the BVI Model was also false and resulted in an overstatement of Sino-Forest's revenue in the 2009 financial statement by approximately US$48 million. The Merits Panel found that Messrs. Ip and Ho participated in orchestrating this fraud.

[23] In the 450 Transactions, Sino-Forest reverse-engineered purchase and sale transactions in the WFOE Model and used a circular flow of funds to support fictitious transactions. The 450 Transactions resulted in the overstatement of revenue by approximately US$30 million in Q4 2009. Messrs. Ip and Ho were closely involved in the reverse-engineering of the 450 Transactions and executing the circular flow of funds. Mr. Chan was closely involved in the 450 Transactions and knew that the circular flow of funds resulted in transactions that resulted in no economic substance.

[24] In the Gengma # 1 Transactions, Sino-Forest created fictitious purchase contracts in the BVI Model to inflate the value of the assets on its financial statements in 2007, 2008, and 2009. Sino-Forest then created fictitious sales contracts that inflated its revenue in 2010 by US$231 million. Messrs. Chan and Ip's involvement in the Gengma #1 Transactions was clear.

[25] In the Gengma #2 Transactions, Sino-Forest created fictitious purchase contracts that inflated the value of assets in Sino-Forest's financial statements in 2007 and 2008 and created fictitious sales contracts that misstated revenue on Sino-Forest's financial statements between March 2008 and November 2009 by a total of approximately US$49 million. Like the Gengma #1 Transactions, Messrs. Chan and Ip's involvement in the Gengma #2 Transactions was clear.

Materially Misleading Statements

[26] In addition to the fraudulent conduct, the Merits Panel also found that the Appellants authorized, permitted, or acquiesced in Sino-Forest providing misleading disclosure. The Merits Panel found that Sino-Forest made materially misleading statements in its short form prospectuses, financial statements, MD&As and AIFs issued during the Material Time. The materially misleading statements fell into three categories: (i) statements regarding ownership of assets and revenue recognition; (ii) the effects of the Four Frauds on the reported revenue of Sino-Forest; and (iii) statements regarding internal controls.

[27] The Merits Panel found that:

• Mr. Chan authorized and permitted Sino-Forest's making of statements that were materially misleading;

• Messrs. Ip and Ho permitted and acquiesced in Sino-Forest's making of statements that were materially misleading; and

• Mr. Hung permitted Sino-Forest's making of statements in respect of its ownership of assets and recognition of revenue and in respect of its internal controls that were materially misleading;

Greenheart Transaction

[28] The Merits Panel found that Mr. Chan engaged in fraud by knowingly concealing his interest in a series of transactions involving the purchase of a controlling interest in Greenheart by Sino-Forest.

[29] The Merits Panel noted that:

Chan did not perpetrate this fraud on a whim. As we found above, the evidence demonstrates Chan was the beneficial owner of Fortune Universe and Montsford by at least 2005, more than a year before the First Transaction. Through his long-time executive assistant, Yosanda Chiang, he directed the establishment and organization of these companies. He chose their nominee owners and controlled the material decisions through Ms. Chiang. Even the company seals were kept in Yosanda Chiang's possession. Fortune Universe and Montsford could not conduct important business without her. Chan, through Yosanda Chiang and his nominee owners, carefully controlled the disposition of funds received from the Greenheart Transactions and the sales and use of proceeds of Sino-Forest shares belonging to Fortune Universe and Montsford received in the Second and Third Transactions. This fraud took years to plan and execute. The premeditation involved on the part of Chan is evident from the document trail created in execution of the fraud.

[30] The evidence established that Mr. Chan received approximately $40 million in cash and securities in exchange for the sale of his undisclosed beneficial interest in Greenheart.

Authorizing, Permitting and Acquiescing in Misleading Statements re: Greenheart

[31] Having found that Mr. Chan committed a dishonest act by failing to disclose his interest in Greenheart at the time of its acquisition by Sino-Forest, the Merits Panel made the further finding that Mr. Chan, as an officer of Sino-Forest, authorized, permitted, or acquiesced in its failure to disclose his 30% interest in Greenheart in its public disclosure. The Merits Panel found that the failure to disclose his interest in Greenheart by a senior officer of Sino-Forest was a non-disclosure which placed the pecuniary interest of Sino-Forest investors at risk. Mr. Chan was clearly aware of this risk.

Misleading Staff

[32] During the course of Commission Staff's interviews conducted during the investigation, the Appellants misled Staff. Messrs. Chan and Ho misled Staff regarding Sino-Forest's control over one its largest suppliers, Huaihua City Yuda Wood Co. Ltd. (Yuda Wood). The Merits Panel found that that Mr. Chan was aware that Sino-Forest, through Mr. Ho, controlled at least two of Yuda Wood's bank accounts. But Mr. Chan told Staff that no Sino-Forest employee controlled any aspect of Yuda Wood's business.

[33] The transcript of Mr. Chan's interview showed that he was asked on "numerous times and in various ways" if Sino-Forest had any control over Yuda Wood. Mr. Chan unequivocally denied that Sino-Forest had any control over the supplier when he knew that to be false. Mr. Ho misled Staff regarding the control that he had over certain aspects of the supplier's business.

[34] Messrs. Ip and Hung misled Staff about the deceitful documentation process.

Summary of the Sanctions Decision and Sanctions Order

[35] After conducting a hearing and taking into consideration the findings of the Merits Panel, the Sanctions Panel issued the Sanctions Order which provided that:

(i) the Appellants permanently cease trading or acquiring securities;

(ii) the Appellants resign from any position as a director or officer of any issuer, registrant or investment fund manager;

(iii) the Appellants be permanently prohibited from becoming or acting as a director or officer of any issuer, registrant, or investment fund manager;

(iv) Messrs. Chan, Ip, Hung, and Ho pay administrative penalties in the amount of $5,000,000, $2,650,000, $2,000,000, and $2,000,000 respectively;

(v) Messrs. Chan, Ip, Hung, and Ho disgorge to the Commission $60,288,253, $1,859,710, $1,268,373, and $1,214,883, respectively;

(vi) Mr. Chan pay the costs of the Commission in the amount of $2,038,704;

(vii) Mr. Ip pay the costs of the Commission in the amount of $1,529,028 for which he shall be jointly and severally liable with Mr. Chan;

(viii) Mr. Hung pay costs to the Commission of $1,019,352 for which he shall be jointly and severally liable with Messrs. Chan and Ip; and

(ix) Mr. Ho pay costs to the Commission of $509,676, for which he shall be jointly and severally liable with Messrs. Chan, Ip, and Hung.

Grounds of Appeal

[36] The Amended Notice of Appeal lists 34 ground of appeal. For the purpose of this motion, the Appellants rely on three grounds set out below. Two grounds challenge the Merits Decision and one ground challenges the Sanctions Decision.

(1) The Commission erred in law in its mens rea analysis;

(2) The Merits Panel’s conduct gave rise to a reasonable apprehension of bias; and

(3) The Commission decided sanctions and costs issues improperly.

legal framework

[37] Rule 61.06(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, states when security for costs may be ordered:

61.06(1) In an appeal where it appears that,

(a) there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay for the costs of the appeal;

(b) an order for security for costs could be made against the appellant under rule 56.01; or

(c) for other good reason, security for costs should be ordered,

a judge of the appellate court, on motion by the respondent, may make such order for security for costs of the proceeding and of the appeal as is just.

[38] The Commission relies on rule 61.06 (1) (a), (b) and (c). The Appellants say that 61.06(1)(b) does not apply. If it does apply, then (b) is satisfied because the Appellants ordinarily reside outside Ontario and the Commission has a cost order against the Appellants that remains unpaid.

[39] The Court of Appeal has stated that a respondent on an appeal may not rely on rule 61.06(1)(b) to obtain an order for security for costs of an appeal as against a defendant/appellant. The policy rationale behind this line of jurisprudence is not to impose security for costs upon foreign or impecunious defendants who are forced into court by others to defend themselves: Donaldson International Livestock Ltd. v. Znamensky Selekcionno-Gibridny Center LLC, 2010 ONCA 137, 101 O.R. (3d) 314; Bouzari v. Bahremani, 2014 ONCA 476 at para. 7-8.

[40] The Commission argues that the policy rationale does not apply to an appeal from a regulatory body, where as in this case the Commission is enforcing a statutory mandate. There is no case law that examines if a distinction should be drawn between a defendant in a civil proceeding and a respondent in a regulatory proceeding. I see no principled basis for drawing this distinction. Just as a defendant is drawn into court to defend himself, so were the Appellants drawn to attend the hearing before the Commission to defend themselves. This leaves 61.06(a) and (c) to be considered on this stay motion.

[41] The language of rule 61.06 is permissive, not mandatory and involves a two part test. First, the Commission must demonstrate that the Appellants fall within rule 61.06(a) or (c).

[42] Under r. 61.06(1)(a), the Commission must show that it “appears” there is good reason to believe that the Appellants’ appeal is frivolous and vexatious, and that they lack sufficient assets in Ontario to pay the costs of the appeal. The lack of sufficient assets is not disputed.

[43] Assessing if there is “good reason” does not require the court to reach a definitive conclusion. As stated in York University v. Markicevic, 2017 ONCA 651 at para.24:

… “good reason to believe" does not demand that the motion judge reach a definitive conclusion. Rather, it suggests a tentative conclusion of absence of merit and insufficiency of assets. After all, the order for security for costs is neither dispositive of the appeal nor fully informed. The standard reflects an appropriate balance of competing interests, not demanding too much of the responding party or settling for too little for the moving party.

[44] The meaning of frivolous and vexatious was addressed in Pickard v. London (City) Police Services Board, 2010 ONCA 643 at para. 19:

A frivolous appeal is one readily recognizable as devoid of merit, as one having little prospect of success. The reasons may vary. A vexatious appeal is one taken to annoy or embarrass the opposite party, sometimes fuelled by the hope of financial recovery to relieve the respondent's aggravation.

[45] Alternatively, under rule 61.06(1)(c), the Commission must demonstrate that it appears for other good reason that security for costs should be granted. When relying on rule 61.06(1)(c) the Commission may not resort to what are in effect the same grounds that would support a rule 56.01 order. (Miller v. Taylor, 2010 ONCA 17, at para. 3; 635967 Ontario Ltd. v. Thompson (2006), 2006 16362 (ON SCDC), 211 O.A.C. 187 (Div. Ct), at para. 13).

[46] If the Commission proves that rule 61.06 (a) and/or (c) is satisfied, then part two of the test “triggers an inquiry into the justness of the order sought”: York University v. Mackicevic, 2017 ONCA 651 at para. 19; Yaiguaje v. Chevron Corp., 2017 ONCA 827 at paras 17-19

Analysis

Does the Appeal “Appear” to be Frivolous and Vexatious?

[47] There appears to be good reason to believe that the grounds of appeal are frivolous. The hearing lasted 188 days and the Merits Panel issued detailed reasons. Messrs. Ip, Hung and Ho testified at the Merits Hearing and findings of credibility were made against each of them. Mr Chan did not testify at the hearing. I do not accept that there appears to be good reason to believe that the appeal is vexatious. My reasons follow.

Mens Rea Ground of Appeal

[48] The Appellants argue that the Merits Panel erred because they rejected consideration of Chinese business and culture and found that there was mens rea for fraud. If the Panel had taken into consideration the Chinese business and cultural environment where the business was conducted, the Appellants say this would have led to the conclusion that mens rea was not established.

[49] There appears to be good reason to believe that this ground of appeal is frivolous. Chinese business and culture were thoroughly dealt with at the Merits Hearing. The Merits Panel heard evidence about Chinese business and culture and the ways of doing business in the natural resource sector in rural China. Nonetheless, the Merits Panel found that the manner of doing business in China did not excuse the Appellants from their legal obligation to conduct business honestly. The Merits Panel found that each of the Appellants did not behave honestly. The Merits Panel made the finding that "Chan, Ip, Ho, and Hung dishonestly concealed key facts relating to Sino-Forest's disclosure of ownership of assets and recorded revenue. They knew their conduct put the pecuniary interests of Investors at risk." The evidence supporting these findings against each of the Appellants was reviewed individually in the Merits Decision.

Apprehension of Bias

[50] In a hearing that lasted 188 days, the Appellants rely on two isolated points in the transcript to support this ground of appeal. Viewed alone or together, there appears to be good reason to believe that this ground of appeal is frivolous.

[51] First, on September 4, 2014, while the Merits Panel was familiarizing itself with how to Access an electronic hearing brief, the Chair referred to the fact that the word "false" appeared on his computer. Reference to the exchange between the Panel Chair and counsel shows that the ground appears to be frivolous.

[52] Second while Mr. Ip was being cross-examined about an email his counsel objected. Counsel said that if Mr. Ip was confused, he should be able to know which contract Commission counsel was asking him about. In ruling on the objection, the Chair stated that Staff counsel could "stick with" the witness in referring to the document. It is alleged that the statement “stick with” Mr. Ip is evidence of the Chair encouraging Commission counsel to stick with the witness in the cross-examination and not let up on the questioning. The transcript reveals that the Chair was simply ruling on the objection and directing that cross-examination could continue on the document. This appears to be a frivolous ground of appeal.

The Sanction Ground of Appeal

[53] There are two parts to this ground of appeal. First, under the Securities Act, R.S.O. 1990, c. S.5, amounts obtained as a result of non-compliance with the Act may be disgorged. The Appellants allege that the Commission's decision to order disgorgement was made “without causation”. Second, the Commission relied on the Appellants’ residence out of North America as an aggravating factor. The Appellants say that this was done without prior statutory guidance or case law. There appears to be good reason to believe that these grounds of appeal are frivolous.

[54] The ground of appeal respecting disgorgement causation appears to be without merit. While the Appellants say that the Commission ignored whether they obtained their salaries and bonuses as a result of a contravention of Ontario securities law as required by paragraph 9 of subsection 127(1), the Sanctions Panel specifically addressed this in the Merits Decision at paras. 179 and 198.

[55] The Sanctions Panel did not rely solely on the residency of the Appellants to increase the monetary penalties. To create a more deterrent order, the Panel relied on a number of facts including the Appellants’ residency outside of North America as set out in para. 104.

Appeal does not appear to be vexatious

[56] The Commission has not shown that there is good reason to believe that the appeal is vexatious. It relies on the fact that the Appellants have not paid any amount toward satisfaction of the Sanctions Order. This alone is not enough. The usual indicia of vexatiousness is not present. The Appellants have expeditiously proceeded with their appeal and there is no history of non-compliance with court and Commission orders (aside from the Sanctions order).

Some other good reason to order security for costs

[57] I find that the Commission has shown that there is some other good reason to order security under rule 61.06(1)(c). I rely on the following direction in Combined Air Mechanical Services Inc. v. Flesch, 2010 ONCA 633, 268 O.A.C. 172 (In Chambers), at para. 8, where the court explained what constitutes “other good reason”:

What constitutes "other good reason"? The court does not have a closed list of cases in which security for costs has been ordered under the residual category. The list of reasons justifying security under the residual category is open ended. However, the "other good reason" must be related to the purpose for ordering security: that a respondent is entitled to a measure of protection for costs incurred and to be incurred in the proceeding, which is now on appeal. And, the "other good reason" should be a fairly compelling reason, as the respondent cannot meet the requirements of either of the first two categories. Security for costs awards under the residual category are not to be made routinely.

[58] The Commission states that there is “other good reason” to order security for costs because the Merits Panel made “powerful findings of fraud” against the Appellants.

[59] It is accurate to say that there are many powerful findings of fraud that are supported by the findings of fact in the Merits Decision. There is evidence that the Appellants received substantial monies obtained as a result of the breach of Ontario securities law. These monies were obtained by the Appellants outside Ontario and are outside the reach of the Commission. There is also evidence that Messrs. Ho and Ip transferred real property to their respective wives after the Commission’s Statement of Allegations was filed against them.

[60] Strong findings of factual fraud constitute “other good reason” to order security, particularly when an appellant has taken steps to put his assets out of the reach of creditors. Fraud has been described as a special circumstance that merits security for costs: Hall-Chem Inc. v. Vulcan Packaging Inc. (Ont. C.A.) 1994 580 (ON CA), 72 O.A.C. 303; Royal Bank of Canada v. Hi-Tech Tool and Die Inc., 2013 CarswellOnt 5678 (In Chambers) (C.A.); Gardiner Miller Arnold LLP v. Kymbo International Inc., 2006 CarswellOnt 9436 (In Chambers) (C.A.); 798839 Ontario Ltd. v. Platt, [2014] O.J. No. 6077 (In Chambers) (C.A.); York University v. Markicevic 2017 ONCA 651).

Is it Just to order security for costs?

[61] In Yaiguaje v. Chevron Corp. at paras 23-25 the court addressed the “justness” factor and how it should be considered:

23 The Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. Courts must be vigilant to ensure an order that is designed to be protective in nature is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of rr. 56 or 61 have been met.

24 Courts in Ontario have attempted to articulate the factors to be considered in determining the justness of security for costs orders. They have identified such factors as the merits of the claim, delay in bringing the motion, the impact of actionable conduct by the defendants on the available assets of the plaintiffs, access to justice concerns, and the public importance of the litigation. See: Hallum v. Canadian Memorial Chiropractic College (1989), 1989 4354 (ON SC), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 2005 6052 (ON SC), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 46451 (ON SC), 99 O.R. (3d) 55 (S.C.); Wang v. Li, 2011 ONSC 4477 (S.C.); and Brown v. Hudson's Bay Co., 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

25 While this case law is of some assistance, each case must be considered on its own facts. It is neither helpful nor just to compose a static list of factors to be used in all cases in determining the justness of a security for costs order. There is no utility in imposing rigid criteria on top of the criteria already provided for in the Rules. The correct approach is for the court to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interests of justice to determine whether it is just that the order be made.

[62] Using a holistic approach set out in Yaiguaje v. Chevron Corp., I find that it is just to order security for costs.

[63] The Commission is not using the motion for security for costs as a litigation tactic to prevent the appeal from being heard on the merits. The parties are working together to ensure that the appeal proceeds without delay.

[64] The Commission has good reason to be concerned about the costs of the appeal and being able to collect on a costs order that may be made if the appeal is dismissed. This is particularly so because the Appellants orchestrated an elaborate premeditated and coordinated fraud to overstate the assets and revenue of Sino-Forest. As noted, this was one of the largest frauds in Canadian history resulting in a loss of approximately US$6 billion in market capitalization.

[65] In the case of Mr. Chan, he did not testify at the Sanctions Hearing and did not file an affidavit responding to this motion. He argues that he cannot pay security for costs because his assets are frozen under a worldwide Mareva injunction order issued by Hainey J. on January 21, 2016.

[66] Mr. Chan argues that it would not be just to order security for costs against him because any attempt to comply would be a breach of the Mareva Order. While I accept that the Mareva Order exists, I have no evidence beyond this fact. There is no evidence about assets that have been seized, aside from what is noted in Hainey J.’s decision. According to that decision, $22 million in assets had been located and assets of $6.5 million were gifted to his children and girlfriend in suspicious circumstances. Mr. Chan has never revealed to the Commission what happened to all of the money that he was found to have fraudulently received.

[67] On March 14, 2018, Cosimo Borrelli, in his capacity as the trustee of the SFC Litigation Trust (the "Litigation Trust"), obtained a judgment against Mr. Chan, in the amount of $2.904 billion as damages for fraud and breach of fiduciary duty and an additional $5 million in punitive. Obviously, the amount of this judgment exceeds the value of the assets that have been seized.

[68] The Mareva Order was made because of Mr. Chan’s fraudulent conduct. Hainey J. found that there was a real risk that Mr. Chan would conceal or dissipate assets if the order was not granted. Mr. Chan now seeks to rely on the Mareva Order as a shield to this security for costs motion. To accept this argument would not be in the interests of justice.

[69] There is no evidence to show that Mr. Chan is unable to apply to access monies that may have been seized under the Mareva Order to satisfy a security for costs order and no evidence that he is unable to borrow money to satisfy a security for costs order.

[70] Messrs. Ip and Hung each filed an affidavit at the Sanctions hearing and were cross-examined. These affidavits were sworn in November 2017. They stated at that time that they have been unemployed since leaving Sino-Forest. Neither has filed an updated affidavit. They state that they have virtually no assets. However Messrs. Ip and Hung each provided nothing more than a single two page bank statement. Messrs. Ip and Hung state that given their financial circumstances, a security for costs order would be contrary to access to justice. Their evidence is insufficient to support this position.

[71] Mr. Ho has filed no evidence of his assets or alleged impecuniosity.

[72] In summary, it is just to order security for costs under rule 61.06(1)(c). I reach this conclusion after considering the justness of the order holistically, examining all the circumstances of the case and while guided by the overriding interests of justice.

[73] The Commission asks that security for costs be set at $100,000 and asks that it be left to the Appellants to decide how the order will be funded between them. This amount is not excessive given that the costs that Commission seeks to secure exceed $5 million.

conclusion

[74] I make the following orders:

(1) The Appellants shall post security for the costs of the hearing before the Ontario Securities Commission and of the appeal in the amount of $100,000.

(2) The security shall be in a form satisfactory to the respondent, Ontario Securities Commission, and shall be deposited with the Registrar of this court (or deposited in some other manner that is agreed upon) no later than January 7, 2019.

(3) The respondent, Ontario Securities Commission, shall have 60 days from the posting of the security to serve and file a factum.

(4) If the parties cannot agree on costs of this motion, they shall exchange brief written submissions and file them with the court by January 4, 2019.

___________________________ C. Horkins J.

Released: November 26, 2018

CITATION: Hung v. Ontario Securities Commission, 2018 ONSC 6729

DIVISIONAL COURT FILE NO.: DC 489/17

DATE: 20181126

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

ALFRED HUNG, ALBERT IP, GEORGE HO, and ALLEN CHAN

Appellants

– and –

ONTARIO SECURITIES COMMISSION

Respondent (Moving Party)

REASONS FOR JUDGMENT

C. Horkins J.

Released: November 26, 2018