Marrone v. Ontario Securities Commission, 2024 ONSC 4750

CITATION: Marrone v. Ontario Securities Commission, 2024 ONSC 4750

DIVISIONAL COURT FILE NO.: 219/23 DATE: 20240828

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

Matheson, O’Brien, and Leiper JJ.

BETWEEN:

AURELIO MARRONE

Appellant/Respondent in Cross-Appeal

Christopher Afonso, for the Appellant/Respondent in Cross-Appeal

– and –

ONTARIO SECURITIES COMMISSION

Respondent/Appellant in Cross-Appeal

Johanna Braden, for the Respondent/Appellant in Cross-Appeal

HEARD at Toronto: August 19, 2024

MATHESON AND LEIPER JJ.:

Introduction and Background

1This is an appeal by Aurelio Marrone (“Mr. Marrone”) from a decision of the hearing panel of the Ontario Securities Commission (the “Merits Panel”), that he breached his duty as a registered mutual fund salesperson to his vulnerable client and close friend, MU by placing himself in a conflict of interest and failing to take appropriate steps. Mr. Marrone also appeals from the sanctions imposed by the Capital Markets Tribunal (the “Tribunal”) as a result of the finding by the Merits Panel. At the relevant times, Mr. Marrone was registered with the Mutual Fund Dealers Association (the “MFDA”)¹

2The Respondent, Ontario Securities Commission (the “Commission”) cross-appeals from the decision of the Tribunal declining to order disgorgement of amounts which Mr. Marrone may stand to receive arising from being named testamentary beneficiary by his client, MU.

3In brief, MU was a long-time client and friend of Mr. Marrone, who served as her financial adviser after her husband passed away. MU was not financially sophisticated. In the final days of her life, while in hospital for advanced pancreatic cancer, MU named Mr. Marrone as her power of attorney (“POA”) for property and health, alternative executor of her will, and the sole beneficiary of her estate which has been valued at approximately $1.8M. In the days leading up to her death, Mr. Marrone was involved in the process of finalizing her affairs.

4After a hearing into these circumstances, the Merits Panel found that Mr. Marrone had violated his obligations under Ontario securities law, in particular Commission Rule 31-505, which requires registrants including Mr. Marrone, to “deal fairly, honestly and in good faith with their clients.”

5The Merits panel disagreed with Mr. Marrone’s submission that the issues in this case should be left to the ongoing estates litigation regarding the will.

6In considering whether Mr. Marrone had breached Rule 31-505, the Merits Panel first found that Mr. Marrone:

i. Breached MFDA Rule 2.3.1 (a)(i) which prohibited him from accepting a Power of Attorney for property from his client MU;

ii. Breached MFDA Rule 2.3.1(a)(ii) which prohibited him from accepting the role of executor of his client MU’s estate;

iii. Failed to comply with Rule 2.1.4 as to reporting and management of conflicts of interests as established by the MFDA, and

iv. Failed to comply with the policies of his employer, IPC Investment Corporations (“IPC”) with respect to conflicts of interest, provisions which mirrored MFDA Rule 2.1.4 in relation to conflicts of interest.

7The Merits Panel characterized Mr. Marrone’s breaches as “serious” and rejected his submissions that there were merely “technical” breaches. The Merits Panel found the breaches informed the finding that Mr. Marrone had breached Rule 31-505. They were not alone sufficient to amount to a breach of that Rule 31-505 but, considering the vulnerability of MU, the materiality of the amounts at stake, Mr. Marrone’s failure to place his client’s interests above his own, and the seriousness of the breaches, they found Mr. Marrone had failed to act fairly, honestly and in good faith.

8In between the Merits hearing and the penalty hearing, the Securities Act, R.S.O. 1990, c. s. 5 was amended to create a Tribunal which is independent of the Commission. As a result, a differently composed panel of the Tribunal presided over the sanctions hearing based on the findings of the Merits Panel.

9The Tribunal imposed sanctions as follows:

i. Any registrations granted to Marrone under Ontario securities law is terminated permanently, pursuant to paragraph 1 of s. 127(1) of the Act;

ii. Marrone shall immediately resign any position that he holds as a director or officer of an issuer, pursuant to paragraph 7 of s. 127(1) of the Act;

iii. Marrone is prohibited permanently from becoming or acting as a director or officer of any issuer, pursuant to paragraph 8 of s. 126(1) of the Act;

iv. Marrone is prohibited permanently from becoming or acting as a director or officer of any registrant, pursuant to paragraph 8.2 of s. 127(1) of the Act;

v. Marrone is prohibited permanently from becoming or acting as a director or officer of any investment fund manager, pursuant to paragraph 8.4 of s. 127(1) of the Act;

vi. Marrone is prohibited permanently from becoming or acting as a registrant, an investment fund manager or a promoter, pursuant to paragraph 8.5 of s. 127(1) of the Act;

vii. Marrone shall pay an administrative penalty of $500,000, pursuant to paragraph 9 of s. 127(1) of the Act;

viii. Marrone shall pay Staff’s costs of the investigation and the hearing in the amount of $85,000, pursuant to s. 127.1 of the Act.

10Commission Staff also sought a reprimand and order for disgorgement of any amounts that Mr. Marrone might receive as a result of being made the sole beneficiary of MU’s estate. The Tribunal declined to order a reprimand on the basis that the reasons for decision by the Merits Panel had sufficiently condemned the misconduct, and because the sanctions imposed were significant and thus, sufficient.

11The Tribunal declined to order disgorgement based on the findings of the Merits Panel. The Tribunal noted that despite the point being argued by the Commission, the Merits Panel had not found that Mr. Marrone’s receipt of a benefit by his designation as beneficiary was itself a breach of the MFDA Rules or IPC policies, or a breach of Ontario securities law. This finding was based on the evidence in this case. The Tribunal declined to find certain facts “[b]ased on the available record.”

12As a result, the Tribunal concluded that the Merits Decision did not find or conclude that Mr. Marrone had obtained his interest as sole beneficiary of MU’s estate as a result of non-compliance with Ontario securities law as required by s. 127(1) of the Securities Act, and did not order disgorgement.

Issues on the Appeal and Cross-Appeal

13Mr. Marrone raises four issues on appeal in support of his submission that the findings of both the Merits Panel and the Tribunal should be set aside:

i. Did the Merits Panel lack jurisdiction to make findings concerning breaches of MFDA and IPC Rules?

ii. Did the Merits Panel err in finding that Mr. Marrone failed to act honestly, fairly and in good faith contrary to Rule 31-505?

iii. Did the Tribunal err in imposing an administrative penalty of $500,000?

iv. Did the Tribunal err in imposing a costs order of $85,000?

14The issue on the Commission’s cross-appeal is whether the Tribunal erred by declining to order that Mr. Marrone disgorge any monetary benefit he may realize from being a beneficiary under MU’s will.²

15For the reasons that follow, we would dismiss the appeal and the cross-appeal.

Standard of Review

16The Securities Act provides a right of appeal from final orders of the Tribunal. Appellate standards of review apply: Quadrexx Hedge Capital Management Ltd. v. Ontario Securities Commission, 2020 ONSC 4392 (Div. Ct.) at paras. 74-81; Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [2019] 4 S.C.R. 653, at para. 37.

17Questions of law and extricable questions of law from questions of mixed fact and law attract a correctness standard of review. For questions of fact and mixed fact and law, the standard of review is palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 8, 34-37.

18Sanctions decisions by regulatory tribunals should only be set aside if they are demonstrably unfit or are based on errors of law or of principle: Cabot v. College of Nurses of Ontario, 2023 ONSC 2977 (Div. Ct.) at para. 23, citing Budarick v. the Corporation of the Township of Brudewell, Lynch and Raglan (Integrity Commissioner) 2022 ONSC 640 (Div Ct.) at para. 40.

19This court has recognized that a specialized tribunal’s decisions on penalty, including costs awards, will be accorded “considerable deference”: Kitmitto v. Ontario (Securities Commission), 2024 ONSC 1412 at para. 29. These decisions will only be set aside if they do not fall within a range of legally and factually defensible outcomes: Kitmitto at para. 169 citing Peirovy v. College of Physicians and Surgeons of Ontario, 2018 ONCA 420, 143 O.R. (3d) 596 at para. 38.

Analysis of the Issues

I) Did the Merits Panel lack jurisdiction to make findings concerning breaches of MFDA and IPC Rules?

20Mr. Marrone submits that the MFDA had sole jurisdiction to determine questions of breach of its Rules, by virtue of s. 21.1(3) of the Securities Act, which provides:

21.1.(3) A recognized self-regulatory organization shall regulate the operations and the standards of practice and business conduct of its members and their representatives in accordance with its by-laws, rules, regulations, polies, procedures, interpretations and practices.

21Mr. Marrone submits that the Merits Panel’s jurisdiction is limited to only making orders arising from breaches of “Ontario securities law” pursuant to ss. 127 and 127.1 of the Securities Act. He submits that the definition found in section 1 of the Securities Act of “Ontario securities law” does not include rules enacted by self-regulatory organizations such as the MFDA.³ Thus, he argues that the MFDA is the only body empowered to make findings as to the scope and extent of its rules.

22We disagree. First, Ontario securities law as defined includes Commission Rule 31-505, which requires registrants to deal fairly honestly and in good faith with their clients. This was the overarching allegation before the Merits Panel, and it found that Mr. Marrone breached this Rule. He did so by failing to follow MFDA Rules and IPC policies in a manner that the Merits Panel found was serious and that in all the circumstances amounted to a breach of Rule 31-505. The question of his breach of the duty within Rule 31-505 was intertwined with the underlying facts and his obligations under the Rules to which he was subject. This was squarely within the Merits Panel’s jurisdiction.

23Second, in what we are told are unusual, if not unique, factual circumstances in this case, the Merits Panel heard evidence that after receiving the complaint about Mr. Marrone’s conduct, the MFDA sought the assistance of the Commission. The MFDA sought that assistance to compel the estates lawyer who drafted the will and POAs to produce MU’s client file. The MFDA did not have the power to compel production of that file. The MFDA and the Commission worked together to address the issues of misconduct before the Merits Panel and the Tribunal.

24This choice aligns with the regulatory scheme by which self-regulatory organizations such as the MFDA are “recognized” by the Commission pursuant so s. 21.1(1) of the Securities Act and made subject to terms and conditions imposed by the Commission, as part of its legislative mandate. Further, within that same section, the Commission is specifically empowered to “make any decision, if it is satisfied that to do so would be in the public interest, make any decision with respect of any by-law, rule, regulation, policy, procedure, interpretation or practice of a recognized self-regulatory organization.” This subsection gives the Commission jurisdiction to take the steps it did here as part of its mandate under the Securities Act.

25This interpretation of s. 21.1 accords with the purposes of the legislation as defined in s. 1.1 of the Securities Act, which are:

(a) to provide protection to investors from unfair, improper or fraudulent practices;

(b) To foster fair, efficient and competitive capital markets and confidence in capital markets;

(b.1) to foster capital formation; and

(c) to contribute to the stability of the financial system and the reduction of systemic risk.

26In addition, the MFDA’s regulatory functions were governed by the Commission’s Order recognizing the MFDA as an SRO in accordance with ss. 21.1(1) and (2) of the Securities Act. The MFDA Recognition Order is consistent with our finding that the MFDA and the Commission have concurrent and overlapping jurisdiction with respect to the MFDA’s regulatory functions:

7. Compliance by Members with MFDA Rules

(A) The MFDA shall enforce, as a matter of contract between itself and its members, compliance by its members and their Approved Persons with the rules of the MFDA and, to assist the Commission with carrying out its regulatory mandate, the MFDA shall cooperate with the Commission in ensuring compliance with applicable securities legislation relating to the operations, standards of practice and business conduct of members and Approved Persons, without prejudice to any action that may be taken by the Commission under securities legislation [Emphasis added].

27Further, among the fundamental principles that the Commission is to consider in pursuing these purposes, are the requirements for “the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants.”: Securities Act, s. 2.1. 2. By definition, a registrant such as Mr. Marrone is a “market participant”: Securities Act, s. 1(1).

28We conclude that none of the purposes, principles or statutory framework suggest that the legislature intended to create a bifurcated, exclusive jurisdiction for a self-regulatory organization (“SRO”) independent of the Commission. This ground of appeal must fail.

II. Did the Merits Panel err in finding that Mr. Marrone failed to act honestly, fairly and in good faith contrary to Rule 31-505?

29Mr. Marrone submits that the Merits Panel made several fundamental errors in applying the evidence before them to the question of whether he had dealt with MU “honestly, fairly and in good faith”. Those alleged errors can be summarized as follows:

i. MU’s will was made in accordance with her testamentary intention. There is no prohibition against an MFDA registrant being named as a beneficiary in the will of a client. Moreover, Mr. Marrone did not know that MU intended to name him as her beneficiary before she executed her will.

ii. The common law does not recognize any prima facie conflict of interest when an individual is named as both a power of attorney for property and the beneficiary of an estate;

iii. Mr. Marrone was not required under Rule 31-505 or by any other MFDA Rules or IPC policies to disclose his status as a beneficiary before receiving any proceeds from the estate.

iv. There was no basis in the evidence for the Merits Panel to find that Mr. Marrone had “accepted” either the role of power of attorney for property, or the role of alternate executor. Thus it was an error to find that he contravened either of Rule 2.3.1 (a)(i) or (ii) of the MFDA Rules.

30We would not give effect to any of these submissions. The Merits Panel’s findings are grounded in findings of fact that were open to them to make on the record. Among other findings, they accepted the evidence of the estates lawyer, Mr. D’Ambrosio and his law clerk, including their notes from the estates file. The Merits Panel considered the evidence, including Mr. Marrone’s testimony, and made findings of credibility against Mr. Marrone.

31The Merits Panel prefaced their findings of fact and credibility as follows:

Broadly speaking there are two stores in this proceeding. The one told by Marrone, and the one told by nearly everyone else. We do not find Marrone to be a credible witness regarding much of his key evidence in this proceeding. We do not believe the story he is telling and the only person who could corroborate his evidence is MU, who is no longer with us.

32In particular, the Merits Panel found:

i. Mr. Marrone and MU had a close friendship and that this increased her vulnerability;

ii. Mr. Marrone arranged for a lawyer to assist MU with her will beginning in April of 2017;

iii. On May 3, 2017, sixteen days before her death, Mr. Marrone was “aware” that MU had named him in her estate documents. The Merits Panel expressly rejected Mr. Marrone’s evidence that he did not look at the draft estate documents emailed to him for review by the estate lawyer on May 3, 2017;

iv. On May 4, 2017, Mr. Marrone met with MU in her hospital room, shortly before her planned meeting with the estate lawyer. On that day, MU told the estate lawyer that she was not ready to sign the will because she was tired and did not want to “mess it up.” During the conversation, the lawyer confirmed his understanding of her intention to leave her estate to Mr. Marrone. MU seemed puzzled and asked, “Why would I leave everything to [Mr. Marrone] if I have family? The will was not signed on that day. Afterward, the estate lawyer and his clerk met with Mr. Marrone in the hospital parking lot. During that conversation, Mr. Marrone said words to the effect that, “She has done a complete 360”.At no time between May 3, 2017 and May 19, 2017 did Mr. Marrone disclose his conflicts of interest despite being required by the Rules and policies to do so “immediately.”

v. Mr. Marrone’s lack of any trading pursuant to being named power of attorney for property is not a defence to breaching the Rule. The Merits Panel found that Mr. Marrone was aware of the designation, accepted it and kept this information hidden despite his responsibility to report it.

vi. Mr. Marrone was in a conflict of interest as a result of being named as a beneficiary of MU’s will, which required him to report and address the conflict by virtue of MFDA Rule 2.1.4. The Merits Panel relied on settled jurisprudence to that effect including Beckford (Re), [2015] MFDA 27 979 at paras. 3-4, 11; Taylor (Re), 2019 96741 (CA MFDAC) at paras 16, 21, 42; Levine (Re,) 372 (CA MFDAC) at para. c.

33All of these findings were grounded in the evidence and the jurisprudence before the Merits Panel.

34Counsel for Mr. Marrone submitted that there was no evidence that he had “accepted” any of the roles granted by MU. Counsel submitted there was no foundation in the evidence for the Merits Panel’s findings of fact regarding the day that MU executed the will and POA in her hospital room on May 9, 2017, as follows:

Marrone was in the room with MU when D’Ambrosio arrived. MU wanted Marrone to stay in the room while the documents were being signed and executed, but D’Ambrosio advised her this was inappropriate. Once Marrone had left the room, D’Ambrosio went through the powers of attorney. MU asked for Marrone to re-enter the room so she could ask him to accept the power of attorney designations. Marrone agreed to be both the power of attorney for personal care and for property. After Marrone left the room once more, MU signed the powers of attorney and the will.

35Counsel for the Commission provided references in the transcript from Mr. Marrone’s evidence in which he confirmed that when he was in the hospital room with MU on May 9, 2017 he said to her “I’ll do whatever you need.” It was open to the Merits Panel to consider this evidence as part of his accepting the roles granted to him by MU in her estate.

36The Merits Panel found that Mr. Marrone agreed and accepted the designations, leading to its finding that he had breached Rule 2.3.1 (a)(i), despite the evidence that he had not acted on the power of attorney for property.

37These factual findings were available to the Merits Panel. Their findings of breach of the Rules and policies of IPC flow from those findings. We would not give effect to this ground of appeal.

38The common law prima facie rule around conflict of interest as between the role of power of attorney for property and beneficiary do not displace the additional obligations placed on market participants such as Mr. Marrone by his regulator nor by his duties of good faith as a registrant. He is subject to additional obligations because of his position of trust with his clients.

39The Merits Panel relied on MFDA jurisprudence which has found that an Approved Person who becomes a named beneficiary of a client’s estate or account is in a conflict of interest that must be reported and addressed in accordance with MFDA Rule 2.1.4.28 This finding is grounded in law and logic. We reject Mr. Marrone’s submission that he was not obliged to report any such conflict until funds were paid to him in accordance with the bequest. We agree with the Merits Panel that the conflict arose when Mr. Marrone became aware that he was a named beneficiary under MU’s will.

III. Did the Tribunal err in imposing an administrative penalty of $500,000?

40The Tribunal was empowered to order various sanctions against Mr. Marrone, including an administrative monetary penalty of not more than $1,000,000 for each breach: Securities Act, s. 127(1) 10. This form of sanction exists to deter an individual respondent from conducting themselves this way in the future, and to indicate to other market participants that the conduct involved will be sanctioned, in other words, general deterrence: Pro-Financial Asset Management (Re), 2018 ONSEC 18 at para. 78.

41The Tribunal ordered that Mr. Marrone pay an administrative penalty of $500,000. This was within an acceptable range and based on a principled analysis of the aggravating factors and circumstances of this unique case. The Tribunal found that the conflicts of interest were significantly “elevated” by virtue of several features, including,

i. MU’s vulnerability;

ii. The size of the account and the fact that it represented a significant portion of Mr. Marrone’s “book of business”;

iii. The value of the estate;

iv. Mr. Marrone’s involvement in the arrangements for the preparation and execution of the estate documents;

v. Mr. Marrone’s conduct which prevented MU and IPC from considering and addressing the conflicts of interest.

42Mr. Marrone submits that an appropriate monetary penalty, based on other decisions, would be in the range of $10,000 to $80,000.

43The Tribunal considered prior decisions on sanctions for conflicts of interest. It distinguished these decisions as not helpful. It noted that many were settlements or, crucially, decisions where the financial advisor had addressed the conflict by voluntarily renouncing any benefit arising from the conflict. This is a logical and defensible distinction. The Tribunal was entitled to exercise caution in its approach to that caselaw.

44We find no error in law or in principle in the Tribunal’s decision regarding the administrative monetary penalty imposed. Mr. Marrone has failed to show that the fine is demonstrably unfit or based on errors of law or of principle. It was supported by the factual findings and the aggravating factors and was within a range of legally and factually defensible outcomes.

45We would not give effect to this ground of appeal.

IV. Did the Tribunal err in imposing a costs order of $85,000?

46The Tribunal considered several factors when making its costs order, and its order represented an almost 60% discount from the costs actually incurred.

47Mr. Marrone submits that the Tribunal did not discount the time spent at the hearing on irrelevant evidence sufficiently, a submission that he also made to the Tribunal. He seeks a reduction in the costs award.

48We would not interfere with the costs order. The Tribunal correctly identified the factors relevant to imposing costs. It addressed the submission of Mr. Marrone as to a discount and set costs at $85,000 after applying a reduction to the amount sought by the Commission.

49Costs awards are highly discretionary. The Tribunal did not err in law or in principle in its approach to the question of costs.

Issue on Cross-Appeal: Did the Tribunal err in declining to order disgorgement?

50As set out in s. 127(1) 10 of the Securities Act, the Tribunal may make an order requiring the person to disgorge to the Commission any amounts “obtained as a result of the non-compliance” with Ontario securities law. At the penalty hearing, in addition to the above $500,000 monetary penalty and other penalties, the OSC sought an order that Mr. Marrone disgorge an amount equal to any benefit that he may receive from MU’s estate. The specific amount was not known given the ongoing estate litigation. Mr. Marrone submits, both then and now, that if the will is upheld, the effect of disgorgement would be to override MU’s then proved testamentary intention and instead give her estate to the OSC.

51In the penalty decision, the Tribunal correctly set out the test under s. 127(1)10 and noted that, where met, disgorgement serves both specific and general deterrence. The Tribunal considered the requirement that Mr. Marrone obtain his interest as sole beneficiary “as a result of” his non-compliance with Ontario securities law. The Tribunal expressly found that requirement was “not met on the facts of this case.”

52On the cross-appeal, the OSC submits that the Tribunal erred. It submits that the only inference that could be drawn from the facts was that Mr. Marrone being named beneficiary was the result of his accepting a POA, becoming an alternate executor and failing to properly address the conflicts of interest that arose from those events.

53We do not agree that this was the only inference that could be drawn from the facts. We note that there was considerable evidence before the Merits Panel, which the panel was in the best position to weigh. The Merits Panel did not make an express finding that Mr. Marrone obtained his interest as sole beneficiary for those reasons. The Tribunal noted that the closest the Merits Panel came was to observe that disclosure of the conflicts “may have” put the inheritance at risk, which fell short of the necessary standard of proof.

54The OSC submits that in the absence of disgorgement, there will not be the needed general deterrence. That issue was expressly considered by the Tribunal, without any error in principle. Further both sides to this dispute acknowledge that this case is, in many respects, highly unusual. The decisions that are the subject of this appeal are also very fact specific.

55The OSC bore the burden of showing that the requirements for disgorgement were met. The Tribunal expressly found that those requirements were not met on the facts. The OSC has not shown a palpable and overriding error of fact or an error in principle in denying this order.

Conclusion

56We would dismiss the appeal and the cross-appeal. By agreement of the parties, costs are ordered in favour of the Respondent Commission on the appeal in the amount of $15,000. Costs are ordered in favour off the Respondent, Mr. Marrone on the cross-appeal in the amount of $5,000.

___________________________ Matheson J.

Leiper J.

I agree ___________________________

O’Brien J.

Date: 28 August 2024

CITATION: Marrone v. Ontario Securities Commission, 2024 ONSC 4750

DIVISIONAL COURT FILE NO.: 219/23 DATE: 20240828

Footnotes

1. 1In 2023, the MFDA merged with another regulator, IIROC, to form a single self-regulatory organization, the Canadian Investment Regulatory Organization, or “CIRO.”
2. 2The validity of MU’s will is currently the subject of other litigation.
3. 3S. 1 of the Securities Act defines “Ontario securities law” as (a) this Act, (b) the regulations, and (c) in respect of a person or company, a decision of the Commission or Director to which the person or company is subject.