Court Information

Information No.: 16-193 Date: June 7, 2017 Ontario Court of Justice

Her Majesty the Queen v. Sunil Tulsiani

Before: The Honourable Justice J. Stribopoulos Location: Brampton, Ontario Date of Hearing: June 7, 2017

Appearances

• C. Watson – Counsel for the Ontario Securities Commission
• B. O'Toole – Counsel for Sunil Tulsiani
• N. Vandervoort – Counsel for Sunil Tulsiani

Reasons for Sentence

STRIBOPOULOS, J. (Orally):

Guilty Pleas and Admissions

Mr. Tulsiani pled guilty before me to two counts of violating section 122(1)(c) of the Ontario Securities Act, R.S.O. 1990, c. S.5. That provision makes it an offence to contravene Ontario securities law. Through his guilty pleas, Mr. Tulsiani has acknowledged two such violations.

First, he has admitted that a joint venture agreement that he entered into with Joe Pupic, on November 14th, 2013, in connection with a real estate transaction, given the terms of that agreement, qualified as an "investment contract," and therefore, constituted a "security" under the Act. Therefore, by entering into that agreement, without being registered to trade in securities as required by the Act, Mr. Tulsiani has acknowledged that he violated the Act, and, thereby, committed an offence under section 122(1)(c).

Second, he has admitted that while he was the subject of a Cease Trade Order, issued by the Securities Commission under section 127(1) of the Act, he breached that order by entering into a promissory note agreement with Joe Beitz, and a similar agreement with respect to Baljinder Khabra.

In the circumstances in which those promissory notes were negotiated, Mr. Tulsiani acknowledges that they constituted "securities" under the law. Therefore, his conduct in relation to those promissory notes amounted to trading in a security, which Mr. Tulsiani was barred from doing by reason of the Cease Trade Order. He thereby committed an offence under section 122(1)(c).

Circumstances of the Offences

Mr. Tulsiani committed these offences as a result of his business activities. Through business entities that he essentially controlled as an officer and director, Mr. Tulsiani purchased real estate in the United States. These properties were then promoted for sale in Canada.

In doing so, Mr. Tulsiani routinely mentioned his status as a former Ontario Provincial Police officer. It is rather obvious that this would have been done in order to engender trust on the part of the prospective purchasers. And, given the esteem with which members of the community hold the police, these references would undoubtedly have had that effect.

It would appear that in selling these properties to potential investors Mr. Tulsiani also made a number of assurances to them. For example, he told some investors that through his efforts, and the efforts of the property management companies he had in place, that everything was set up for the investors and that the properties were "turn-key" for one year. He promised several investors that all they needed to do was invest their money and that the property management company would take care of everything else for the first year, including: carrying out necessary repairs and renovations, securing tenants, paying taxes and insurance. In short, investors were told that all they would need to do after investing their money is wait for their cheques to begin arriving.

I am told that as many as 15 Canadian investors purchased investment properties in the United States through Mr. Tulsiani. They purchased the properties because of Mr. Tulsiani's promises that the properties were "turn-key" and because they trusted him. A number of the investors borrowed the money necessary to make these investments. The investors each had varying degrees of education and investment experience.

Promissory Note Agreements

Two of the investors entered into promissory note agreements with entities controlled by Mr. Tulsiani. One involved a loan of $50,000 from Mr. Beitz to a business entity controlled by Mr. Tulsiani. The agreement was entered on August 13, 2014 and was to be for three to six months. The agreement was extended on March 19, 2015, and then again on August 28, 2015.

Ultimately, Mr. Beitz was required to sue Mr. Tulsiani to collect on the agreement. The lawsuit was settled in August 2016. Under its terms, Mr. Tulsiani agreed to pay Mr. Beitz $65,967.00 U.S., which was inclusive of principal, interest, and costs. As of today, I am told that the total amount still outstanding, inclusive of interest, is $66,855.84 Canadian.

Mr. Baljinder Khabra also advanced funds to another business controlled by Mr. Tulsiani under the terms of a promissory note. The amount advanced was $40,000 Canadian on December 22, 2007. That note was renewed on two subsequent occasions; in 2010, and then again in 2012. A second note was entered into on September 25, 2008, also in the amount of $40,000 Canadian. That note was also renewed twice; once in 2010, and then again in 2012. There are outstanding amounts owing with respect to both promissory notes. As of today's date, I am told that with respect to the two notes the total amount owed to Mr. Khabra is $141,440.13 Canadian.

Property Conditions and Investor Outcomes

As it turns out, many of the properties that investors purchased were actually in very poor condition and were never renovated. Several investors also never received the full rental income that was promised, and it appeared that some of the properties never had tenants in place.

All of that said, there is no suggestion that Mr. Tulsiani believed any of the representations he made to the investors to be false at the time that he made them. Rather, in time, Mr. Tulsiani was unable to deliver on some of the promises that he made. In other words, the representations were apparently made in good faith.

Circumstances of the Offender

I move from the circumstances of these offences to the circumstances of this offender. Although, he was the subject of a previous Cease Trade Order, Mr. Tulsiani comes before the Court as a first offender. He has no prior record of offences under the Securities Act, and apparently, he has no prior criminal record either.

I note that although the Cease Trade Order involved the activities of a number of the same companies that Mr. Tulsiani used in committing the offences before the Court, it would appear that the activities that culminated in the Cease Trade order were actually quite different.

Submissions on Sentencing

Emphasizing the need to protect the investing public by sending a clear message that contraventions of the Securities Act will be punished severely, counsel for the Securities Commission, Mr. Watson, argues in favour of a 90-day custodial sentence, followed by a period of probation. Counsel for the Commission also seeks restitution for Mr. Beitz and Mr. Khabra; $66,855.84 for Mr. Beitz, and $141,440.13 for Mr. Khabra.

In urging a custodial sentence, Mr. Watson emphasized what he characterized as significant aggravating features in this case. First, that Mr. Tulsiani exploited his prior position as a police officer to gain the trust of the investors. In doing so, he argues that the conduct involved here is akin to a breach of trust.

Second, although Mr. Tulsiani has no prior convictions under the Act, he was the subject of a prior Cease Trade Order. Given that order, Mr. Tulsiani was clearly on notice that he should proceed with caution when dealing with the investing public. By charging ahead with his business activities without exercising due diligence to ensure that he was complying with the Act, despite his prior Cease Trade Order, his conduct is far more egregious, submits Mr. Watson.

In contrast, counsel for Mr. Tulsiani, Mr. O'Toole, argues that a custodial sentence would be inappropriate in all of the circumstances of this case. He submits that there is an absence of aggravating features, and a number of mitigating considerations strongly counsel in favour of a non-custodial sentence. These include the absence of any prior record and the fact that Mr. Tulsiani pled guilty, taking responsibility for his actions, and sparing the administration of justice the time, energy and expense of a trial. And, finally, there is evidence of Mr. Tulsiani's prior good character.

Given all of this, counsel for Mr. Tulsiani argues that an appropriate sentence would be a fine of $5,000, followed by two years of probation, including a probationary term requiring that Mr. Tulsiani perform a substantial amount of community service. Counsel for Mr. Tulsiani takes no issue with the restitution orders being sought.

Statutory Framework and Sentencing Principles

The Securities Act provides limited guidance in arriving at an appropriate sentence. Under its terms, the Court would appear to have relatively broad discretion. Subsection 122(1) provides that anyone who contravenes the Act "is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both."

In terms of guidance, I am mindful of the purposes of the Act, which are identified in section 1.1 as being:

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

(b) to foster fair and efficient capital markets and confidence in capital markets.

In terms of general sentencing principles, one must look to the case law. The parties have carefully reviewed a number of the leading authorities during the course of their submissions before me. In these brief oral reasons, crafted after a long day of oral argument, I do not intend to review the various cases in very much detail.

That said, I do want to highlight what I take to be a number of key sentencing principles that appear to apply when fashioning an appropriate sentence for a violation of the Act.

Role of General Deterrence

To begin, general deterrence has an important role to play in sentencing those who violate securities legislation. If the purposes of the Securities Act are to be realized the sentences imposed must send a strong message that violations will be punished severely.

In fact, although the utility of general deterrence remains hotly debated, the sort of deliberate behaviour that necessarily precedes a violation of securities law undoubtedly lends itself to deterrence.

Of course, this requires that the penalties imposed are sufficiently onerous that prospective offenders conclude that the potential costs simply outweigh any potential benefits. It is for this very reason that the case law counsels against sentences that are likely to be seen as little more than a licence for or cost of doing business.

Other Sentencing Objectives

Although deterrence appears to be the primary sentencing objective, the cases are also replete with references to the other sentencing objectives that operate in the context of sentencing those who have violated the criminal law. For example, specific deterrence, denunciation and rehabilitation are all objectives that would appear to have some role to play in deciding upon the appropriate sentence for a violation of the Securities Act.

Analysis of Aggravating and Mitigating Factors

With those very general principles in mind, I turn to the specifics that are most at issue in this case. What essentially divides the parties here is whether or not a custodial sentence is necessary in light of the aggravating and mitigating features in this case.

In resolving that question, the parties are agreed that Rex v. Bowman and Thibaudeau (1949), 92 C.C.C. 380 (Ont. Mag. Ct.) continues as relevant and binding authority. I quote from page 381 of that very brief judgment, wherein Justice Hanrahan wrote:

When breaches of the Act such as these occur, dealing with the failure to register or to file required reports designed to protect the investing public, the dividing line between imprisonment and monetary punishment as the appropriate penalty must be in which class the offender falls — the merely careless or the designedly evasive delinquent, who is bent on defrauding the public unhindered by the watchful supervision of the Commission's investigators.

In other words, the "merely careless" offender merits a fine, whereas, the "designedly evasive" offender who is "bent on defrauding the public" is deserving of jail.

In the end, what ultimately divides the parties in this case is where along the spectrum Mr. Tulsiani's conduct falls, in terms of his violations of the Act.

General Observations from Case Law

In deciding where to place Mr. Tulsiani I have carefully considered the cases that the parties reviewed in their submissions, the facts in those cases, how the conduct in each was characterized, and the sentences imposed as a result. From that review, I make the following additional general observations.

First, custodial sentences have often been imposed where an offender has a prior history of disregarding the requirements of the Act. The more extensive, and the more closely related the prior record, the greater the justification for a jail sentence. In such cases the need to specifically deter the recidivist offender counsels strongly in favour of a sentence of imprisonment.

Second, custodial sentences have also been imposed in cases where the conduct involved is deliberate and tantamount to a criminal theft or fraud. In such cases, depending on the degree of culpability and the harm caused, a custodial sentence is necessary not only to specifically and generally deter, but also to strongly denounce the offender's wrongdoing.

Finally, in those cases involving first-time offenders, whose offences are closer to the regulatory end of the spectrum of wrongdoing under the Act, jail is ordinarily, and not surprisingly, not imposed.

Application to This Case

I turn then to the circumstances of this case.

I begin with the suggestion that by taking advantage of his prior position as a former police officer to gain the trust of investors, Mr. Tulsiani's conduct amounted to a breach of trust. I have carefully considered this submission.

To be sure, I accept that Mr. Tulsiani told potential investors about his police background in order to gain their trust. However, I do not believe that by doing so his conduct in violating the Act resulted in a "breach of trust", as that term is understood within the sentencing jurisprudence. Simply put, Mr. Tulsiani was never in a special relationship with any of the investors in this case because he was formerly a police officer. In that regard, the circumstances here are markedly different than those in a case like R. v. Williams, [2007] O.J. No. 1604 (SC), cited by Commission counsel.

I turn next to the significance of the prior Cease Trade Order. Based on the precedents, if I were satisfied that the offence before the Court represented a continuation of the very same conduct that Mr. Tulsiani engaged in that led to the Cease Trade Order, a jail sentence would undoubtedly be warranted.

However, having reviewed the Commission's decision that led to the prior Cease Trade Order it is apparent that there really are no similarities between the activities that led to that order and these offences. In that case, Mr. Tulsiani was involved in promoting and selling bonds to the investing public that were not qualified by a prospectus under the Act.

In my view, the joint venture contracts, and the promissory notes in this case, were of an entirely different nature. In other words, I do not believe that Mr. Tulsiani's prior experience before the Commission would have fixed him with knowledge that the activities that are the subject matter of these offences would run afoul of Ontario securities law.

In that regard, I think it is telling that Mr. Tulsiani used the very same business entities that were the subject matter of the earlier proceeding to commit the offences for which he is being sentenced in this case. If it occurred to him that what he was doing might be illegal I think it rather likely that he would have endeavoured to carry out these activities under the cover of a different business entity. It would have been relatively simple for him to incorporate a new company, or companies, using different business names. His failure to do so goes a long way in convincing me that he did not appreciate that the joint venture contracts or the promissory notes would qualify as "securities" under the Act. Obviously, his ignorance of the law provides him with no excuse. It does, however, I think, assist in deciding where to place his offending along the spectrum contemplated by Bowman.

In all of the circumstances, I am satisfied that Mr. Tulsiani's offences were closer to the careless end of the spectrum. On the admitted facts, there is no suggestion that Mr. Tulsiani defrauded any of the investors in this case. He made promises that did not come to fruition in many instances, but there is no basis for me to conclude, based on the admitted facts, that he knew those representations to be false at the time he made them. To be sure, he was not merely careless; in my view, he was very careless. He obviously should have been far more careful. That said, on the admitted facts, I am not satisfied that his conduct crossed the threshold of recklessness so as to be akin to an actual fraud.

Of course, in light of this proceeding, Mr. Tulsiani is now on notice. If he were to engage in similar conduct in future, and thereby commit further offences under the Act, the case law makes clear that a custodial sentence would undoubtedly be appropriate.

Sentence

Taking into account the circumstances of these offences, Mr. Tulsiani's circumstances, and the guiding principles derived from the Act and the precedents, I have concluded that an appropriate sentence in this case is as follows (at this point, Mr. Tulsiani, I am going to ask you to come forward):

For each offence you will be fined $25,000. For each, I will give you six months to pay those amounts.

In addition, you will be placed on probation for a period of 24 months, the conditions of which will be as follows:

1. That you not commit the same or any related or similar offences, or any offence under a statute of Canada or Ontario or any other province of Canada that is punishable by imprisonment.

2. That you will appear before the Court as, and when, required.

3. That you notify the Court of any change in your address.

4. That you report to a probation officer today and thereafter if and when directed to do so by the probation officer.

5. That you perform 200 hours of community service at a rate to be specified by your probation officer.

6. And, lastly, that you not trade in any "securities" as that term is defined in the Securities Act, R.S.O. 1990, c. S.5.

So, do you understand the various conditions of the probation order?

SUNIL TULSIANI: Yes, sir.

THE COURT: Did you get that, Mr. Reporter? A little louder.

SUNIL TULSIANI: Yes. Yes, Your Honour.

THE COURT: I have to caution you that failure to abide by any of these terms is a separate offence under the Provincial Offences Act for which you could go to jail, do you understand that?

SUNIL TULSIANI: Yes.

THE COURT: Will you follow the various terms of the probation order?

SUNIL TULSIANI: Yes, sir.

THE COURT: All right. Finally, pursuant to section 122.1 of the Securities Act, there will be freestanding restitution orders in the following amounts: in favour of Mr. Joe Beitz, the amount of $66,855.84. And, in the case of Baljinder Khabra, the amount of $141,440.13.

For the record, given that there was some discussion of American funds or U.S. dollars at different points, it should be clear that those amounts are in Canadian currency.

Those are my reasons for sentence.

...WHEREUPON THESE PROCEEDINGS WERE COMPLETE

Released: June 7, 2017 Justice J. Stribopoulos