Ontario Securities Commission v. Tiffin et al.

Court and Parties

Ontario Reports Ontario Superior Court of Justice Charney J. September 26, 2018 143 O.R. (3d) 476 | 2018 ONSC 5419

Counsel: Jonathon T. Feasby and Vivean Lee, for appellant. Glen Jennings and Alex Zavaglia, for respondents.

Case Summary

Securities regulation — Offences — Sanctions — T soliciting interest-bearing loans from investment clients to keep business afloat and cover personal expenses while prohibited from trading in securities — T and his company TFC issuing promissory notes secured against property of TFC which constituted "securities" as defined in Securities Act — T and TFC convicted of trading in securities without registration, distributing securities without filing prospectus and trading in securities while prohibited — Financial penalty alone not appropriate — T sentenced to six months' imprisonment — Two-year probation order and restitution order imposed on T and TFC.

While T and his company TFC were subject to a cease trade order, T solicited interest-bearing loans totalling $700,000 in principal from existing investment clients to cover personal expenses and keep his business afloat. T and TFC issued promissory notes to the lenders secured against property owned by TFC. The promissory notes constituted "securities" as defined in the Securities Act, R.S.O. 1990, c. S.5. T and TFC were convicted of trading in securities without registration, distributing securities without filing a prospectus and trading in securities while prohibited from doing so by an order of the Ontario Securities Commission.

Held, T should be sentenced to six months' incarceration; restitution orders and probation orders should be imposed on T and TFC.

The aggravating factors were as follows: T was in a position of trust and took advantage of that position to borrow money from his clients for his own personal gain; some of the money borrowed was used to pay for personal loans on luxury items; T was a repeat offender; substantial amounts of principle and interest were still owing on the loans; and T had paid only $17,000 of the $557,000 in restitution, costs and administrative penalty ordered against him in a previous matter that gave rise to the cease trade order. The mitigating factors were as follows: five of the six lenders filed letters of support; T and TFC had repaid part of the loan; T did not attempt to defraud or deceive his clients; and T was remorseful. In the circumstances, a financial penalty alone would not be appropriate. A restitution order would do no more than order T to do what he already had a legal obligation to do -- repay the money he had borrowed. A custodial sentence of six months was appropriate for T. T and TFC were placed on probation for two years and were ordered to make restitution of the amount outstanding on the notes.

Introduction

CHARNEY J.: —

[1] On May 15, 2018, I overturned the acquittal of the respondents, Daniel Tiffin ("Tiffin") and Tiffin Financial Corporation ("TFC"), on charges under s. 122(1)(c) of the Securities Act, R.S.O. 1990, c. S.5 (the "Act"), and substituted convictions (Ontario Securities Commission v. Tiffin (2018), 142 O.R. (3d) 223, 2018 ONSC 3047 (S.C.J.)). The respondents were convicted of

(1) trading in securities without registration as required by s. 25(1) of the Act;

(2) distributing securities without filing a prospectus as required by s. 53(1) of the Act;

(3) trading in securities while prohibited from doing so by an order of the Ontario Securities Commission.

Facts

Background

[2] Mr. Tiffin is a financial advisor licensed to sell insurance and insurance-based investments through TFC. Mr. Tiffin is the sole officer, director and owner of TFC. He had been registered with the Ontario Securities Commission ("OSC") to trade in securities from 1983 to 1999, but at the time these promissory notes were issued he was subject to a "cease trade order" ("CTO") issued by the commission.

[3] A temporary cease trade order was issued by the OSC on December 22, 2009 in relation to promissory notes issued in relation to the Rezwealth Financial Services Inc. ("Rezwealth") investment scheme, which purported to engage in foreign exchange ("FX") trading. The promissory notes were traded by TFC and Tiffin.

[4] On July 8, 2014, the OSC issued its final decision and order in the Rezwealth proceedings. The sanctions against Tiffin and TFC for issuing and trading in Rezwealth included five-year prohibitions on trading in securities or relying on exemptions in Ontario securities law. In addition, the Rezwealth final order imposed an administrative penalty of $25,000 and disgorgement of $517,000 in proceeds. Funds are "disgorged" to the OSC by order of the commission but are then typically redistributed to the investors. The final order prohibited Tiffin and TFC from trading in securities or relying upon any exemption in Ontario securities law.

[5] Following those financial penalties, Mr. Tiffin solicited funds from his insurance investment clients for personal use and to keep his business operating. He told them about the OSC investigation and order and the impact on his finances. Six clients agreed to loan funds to TFC on terms set out in promissory notes. The notes were signed by Tiffin on behalf of TFC.

The TFC Promissory Notes

[6] Six clients agreed to advance funds to TFC on terms set out in 14 promissory notes. The notes were signed by Tiffin on behalf of TFC. The total value of funds obtained was $700,000.

[7] Twelve of the 14 notes require that TFC pay principal and a single interest payment on a given maturity date. The interest on the notes ranges from 10 per cent to 25 per cent on the one-year term.

[8] The notes state:

9. Lender and Borrower intend that the relationship created an [sic] evidenced by this note shall be solely that of debtor and creditor. Nothing in this Note shall be construed as creating a joint venture, partnership, tenancy in common, or joint tenancy between Lender and Borrower.

[9] The notes all refer to the Securities Act: "This note shall utilize the accredited investor exemption available in Ontario has [sic] modified from time to time by the Ontario Securities Commission."

[10] All funds received for the promissory notes were deposited into TFC's corporate account. Funds from that account were disbursed "for general business purposes" and to cover Mr. Tiffin's personal expenses.

[11] The TFC promissory notes represented loans from six families totalling $700,000 in principal. TFC owed a further $144,300 in interest at maturity. The term of the notes varied; three were less than 12 months and the remaining 11 were for over 12 months, with two having indefinite terms. Each of the notes provided for penalty interest at 2 per cent per month in the event of non-payment, plus interest on all amounts owing upon default "at the highest rate allowable by law".

[12] Each of the lenders was an existing TFC client who had purchased insurance or investment products from Tiffin or TFC previously.

[13] The notes were secured against a "toy soldier collection" owned by TFC and alleged by Tiffin to be worth $540,000.

Trial Decision

[14] At trial Tiffin and TFC admitted that they were not registered to trade in securities, did not file a prospectus in relation to the transactions at issue and at the material times were prohibited from trading in securities by order of the Ontario Securities Commission. Accordingly, the trial judge began by stating that the sole issue at trial was "were the promissory notes simple private loan agreements not subject to the Securities Act or were they securities as defined by that statute"?

[15] The trial judge found that the promissory notes were not securities within the meaning of the Securities Act and dismissed the charges.

Appeal Decision

[16] On appeal by the OSC, the sole issue before the court was whether the TFC promissory notes were "securities" as defined by the Securities Act. I held that the trial judge erred in law and that the promissory notes in issue were "securities" and subject to the Securities Act. Accordingly, the appeal was allowed and, since the facts were not in dispute, a conviction was substituted for the acquittal. Pursuant to s. 121(b)(ii) of the Provincial Offences Act, R.S.O. 1990, c. P.33, a finding of guilt was entered followed by sentencing submissions by the parties on August 15, 2018.

Position of the OSC

[17] The OSC takes the position that the appropriate sentence is 12-15 months in jail, followed by 24 months probation and a restitution order in the amount of the TFC notes, less any payments back to investors.

[18] At the date of these submissions it was agreed that Tiffin and TFC had repaid $90,500 of the principal amount of the loans, and that the balance owing is $624,500. The restitution order requested would cover the principal amount only, and not any interest owing. At the date of the submissions, Tiffin and TFC had also paid $263,000 in interest, for total payments of $353,500.

[19] The OSC argues that a fine or monetary restitution alone is not appropriate because Tiffin and TFC have been unwilling or unable to pay previous financial penalties. Tiffin has paid only $17,000 of the $557,000 in restitution, costs and administrative penalty ordered against him in the Rezwealth matter on July 8, 2014. As such, an additional fine or financial penalty would likely have no effect.

[20] The OSC argues that Tiffin's offences are particularly serious in that the promissory notes used in this case were almost identical to the notes used in the Rezwealth case. This conduct was specifically drawn to his attention as illegal and harmful to investors in the Rezwealth proceeding just prior to his repeating it with TFC, including borrowing money from the same people.

[21] The OSC argues that Tiffin's and TFC's conduct in this matter exhibit a flagrant disregard for the requirements of the Securities Act and the orders of the OSC.

[22] The first promissory note in this case was issued while Tiffin and TFC were under a temporary cease trade order.

[23] Five of the promissory notes in this case, totalling $360,000, were issued after the Rezwealth hearing commenced in October 2012, and Tiffin and TFC had formally admitted to trading in securities in breach of ss. 25 and 53 of the Securities Act.

[24] The OSC issued its reasons and decision in the Rezwealth case on July 17, 2013, finding Tiffin and TFC had traded in securities without registration. On July 30, 2013, Tiffin issued a further promissory note for $100,000.

[25] The victims were all existing clients of Tiffin's business as a financial advisor, and Tiffin was in a position of trust. The OSC argues that Tiffin took advantage of this position of trust and his knowledge of his clients' financial circumstances to sell them unregistered securities for his own personal gain.

Position of the Respondents

[26] The respondents agree that a restitution order is appropriate, but take the position that a custodial term is unnecessary and counterproductive in this case because it will interfere with Tiffin's ability to work and repay his clients. Instead, the respondents propose a period of community service followed by 24 months' probation and a restitution order.

[27] The respondents submit that although Tiffin was in violation of the Act, the evidence indicates that he did not attempt to defraud anyone. He approached his clients, who are also his friends, and fairly and honestly set out his own desperate financial situation and sought a personal loan. These actions, while in violation of the Act, do not reflect a high degree of moral culpability. His violation of the Act was more a matter of carelessness than design. It was an error in judgment rather than an attempt to deceive. In these circumstances a custodial term is not the appropriate disposition.

[28] While Tiffin did not plead guilty, there was an agreed statement of facts, and the issue of guilt really turned on a question of statutory interpretation. Tiffin did not deny what he had done, but argued that his conduct did not infringe the purposes of the Act.

[29] Moreover, the respondents argue, this case is not like the Rezwealth case. Rezwealth was clearly an investment scheme to raise money for Rezwealth by issuing notes and pooling investor funds. In this case Tiffin was open about his need to borrow money from his clients. While the "paper" issued in both cases is similar in language, the substance of the transactions was very different. There is no allegation of fraud or dishonesty, or any allegation that any of the lenders were misled by any statements or assurance made by Tiffin when he candidly sought to borrow money from them.

[30] The respondents have filed letters of support from five of the six clients who advanced funds on the promissory notes at issue in this proceeding. Each of these clients wrote to support their friend, Daniel Tiffin, in relation to this sentencing hearing. The letters state that, from the lenders' perspective, the promissory notes at issue in this case were personal loans to a friend in need rather than an investment. Each confirms that Tiffin was candid about his financial troubles. Each letter confirms the writers' confidence that Tiffin will make every effort to repay the loan, and expresses concern that if he is sent to jail his ability to repay the loan will be compromised.

Analysis

[31] Section 122(1)(c) of the Securities Act provides:

122(1) Every person or company that,

(c) contravenes Ontario securities law,

is guilty of an offence and on conviction 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.

[32] In considering the appropriate sentence, I have taken into account the following aggravating and mitigating factors.

[33] Aggravating factors:

(1) Mr. Tiffin was in a position of trust and took advantage of this position of trust and his knowledge of his clients' financial circumstances to borrow money from them for his own personal gain.

(2) Some of the money borrowed was used to pay for personal loans on luxury items such as a Jaguar automobile. This contradicts Mr. Tiffin's position that he was motivated by need rather than greed. Repaying his friends/clients does not appear to have been his first priority.

(3) Mr. Tiffin is a repeat offender and was acting in direct defiance of an OSC order. He was under a temporary cease trade order when the first loan was made, five of the promissory notes were made after Tiffin and TFC had formally admitted to trading in securities in breach of ss. 25 and 53 of the Securities Act, and Tiffin issued a further promissory note after the OSC issued its reasons and decision in the Rezwealth case finding that Tiffin and TFC had traded in securities without registration.

(4) Substantial amounts of principal and interest are still owing on the loans.

(5) Tiffin has paid only $17,000 of the $557,000 in restitution, costs and administrative penalty ordered against him in the Rezwealth matter.

[34] Mitigating factors:

(1) The letters of support filed by five of the six lenders in this case should be considered as a mitigating factor. While the perspective or understanding of the lenders is not relevant to the question of whether Tiffin infringed the Securities Act (Tiffin, supra, at para. 49), victim impact is a relevant consideration under sentencing. While each of the lenders expects to be repaid with interest, at least five of six have written in support of Mr. Tiffin. In this case, the letters of support from the victims count as a mitigating factor.

(2) Tiffin and TFC have repaid $90,500 of the principle amount of the loan, and $263,000 in interest, for total payments of $353,500.

(3) Mr. Tiffin did not attempt to defraud or deceive anyone. The evidence indicates that he honestly revealed his desperate financial situation when he sought a personal loan from his friends/clients.

(4) Mr. Tiffin has expressed remorse and an intention to repay the loans. As indicated, he does not oppose the restitution order.

[35] In the present case, a restitution order hardly qualifies as a penalty. It does no more than order the respondent to do what he already has a legal obligation to do -- and what he has already promised his friends and clients he would do -- repay the money that he borrowed from them. Indeed, since the restitution order does not cover interest payments, it orders him to do less than what he is already legally obliged to do.

[36] In addition, given the amount still outstanding on the restitution, costs and administrative penalty ordered against Mr. Tiffin in the Rezwealth matter, I agree that a financial penalty alone is not an appropriate sentence in this case. Financial penalties alone are often criticized as nothing more than a "licence fee", i.e., the cost of doing business. If a fine goes unpaid it does not even qualify as a licence fee, and does not meet the principles of sentencing.

[37] While these are regulatory, not criminal, offences, both general and specific deterrence require that persons who violate the Securities Act understand that serious penalties will be imposed on individuals who abuse their position of trust and violate the law: Cartaway Resources Corp. (Re), [2004] 1 S.C.R. 672, 2004 SCC 26, at paras. 55, 60-62; R. v. Von-Anhalt, [2007] O.J. No. 2745 (C.J.), at para. 39; R. v. Castaneda, [2008] O.J. No. 712, 2008 ONCJ 69, at para. 32; R. v. Tulsiani, [2017] O.J. No. 3304, 2017 ONCJ 430, at para. 25: "[G]eneral 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."

[38] The cases relied on by the OSC confirm that in cases such as this one, involving a repeat offender who was already under a temporary cease trade order when the violations occurred, a custodial sentence is appropriate. The OSC has filed a chart indicating that the typical range of sentences imposed for similar offences in Ontario is three to nine months following a guilty plea, and up to 24 months following a trial.

[39] In the present case, Mr. Tiffin was under a cease trade order when the various promissory notes were issued. Indeed, the promissory notes in question included many of the same terms and provisions as the notes at issue in the Rezwealth case. Notwithstanding these similarities, I am satisfied that the promissory notes at issue in this case represented a different kind of transaction. While Mr. Tiffin should have taken greater care before borrowing money from his clients, the offence before the court was not simply a continuation of the very same conduct that Mr. Tiffin engaged in with Rezwealth, and which led to the cease trade order: Tulsiani, at para. 39.

[40] While Mr. Tiffin did not plead guilty, he did acknowledge that he engaged in the conduct complained of, and his defence was based on a question of statutory interpretation. While not quite a mitigating factor, it places this case closer to the guilty plea category than some of the longer sentence cases relied on by the OSC.

[41] Mr. Tiffin is now 66 years old. I am satisfied that, given the opportunity, he will continue to make effort to repay his clients. I am influenced by the letters of support from his clients, although I recognize that it is in their financial interest to write these letters given the fact that a custodial term may temporarily interfere with his ability to make full restitution.

[42] Since these are not first offences the range usually begins at nine months (R. v. Da Silva, [2012] O.J. No. 2073, 2012 ONCJ 279, at para. 29), although some cases have provided for shorter sentences in these circumstances.

[43] The respondents argue that the violation of the Securities Act in the present case is more akin to the "careless" or "technical" violations that generally attract monetary penalties or shorter custodial terms of less than six months, rather than the deliberate or fraudulent violations that attract longer terms. In this regard, the respondents rely on the frequently cited decision of Rex v. Bowman and Thibaudeau, where Hanrahan J. wrote, at p. 381 C.C.C.:

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.

[44] As recognized in subsequent cases (see, for example, Tulsiani, at paras. 30-31), these are not always distinct categories, and many cases, including the present one, fall somewhere on the spectrum and exhibit elements of both. Mr. Tiffin was in a position of trust when he borrowed money from his clients, and given his previous violations of the Securities Act, his repeated violation of the Act cannot go unpunished. That said, the evidence indicates that Mr. Tiffin did not attempt to defraud anyone.

[45] In deciding the appropriate penalty in this case I have carefully considered the cases that each party has relied upon, and the various aggravating and mitigating factors listed above.

Conclusion

[46] Based on these considerations, I am of the view that a custodial sentence is required in this case, but I am satisfied that six months is sufficient in these circumstances to meet the sentencing objectives. In addition, you will be on probation for 24 months, the conditions of which will be as follows:

(1) First, 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) Second, that you will appear before the court as, and when, required.

(3) Third, that you notify the court of any change in your address.

(4) Fourth, that you report to a probation officer if and when directed to do so by the probation officer.

(5) And, lastly, that you not trade in any "securities" as that term is defined in the Securities Act.

[47] Finally, pursuant to s. 122.1(1) of the Securities Act, you are ordered to make restitution for the full amount of the Tiffin Financial Services notes sold by Daniel Tiffin and TFC, less any payments already made.

Order accordingly.

Addendum

2018 ONSC 5926 October 5, 2018

[1] CHARNEY J.: -- On September 26, 2018, I delivered my reasons for sentence in this matter (Ontario (Securities Commission) v. Tiffin, 2018 ONSC 5419 (S.C.J.)). At the conclusion of my reasons (paras. 46 and 47), I imposed the following sentence under s. 122(1)(c) of the Securities Act, R.S.O. 1990, c. S.5:

Based on these considerations, I am of the view that a custodial sentence is required in this case, but I am satisfied that 6 months is sufficient in these circumstances to meet the sentencing objectives. In addition, you will be on probation for 24 months, the conditions of which will be as follows:

1. First, 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. Second, that you will appear before the Court as, and when, required.

3. Third, that you notify the Court of any change in your address.

4. Fourth, that you report to a probation officer if and when directed to do so by the probation officer.

5. And, lastly, that you not trade in any "securities" as that term is defined in the Securities Act.

Finally, pursuant to s. 122.1(1) of the Securities Act, you are ordered to make restitution for the full amount of the Tiffin Financial Services notes sold by Daniel Tiffin and TFC, less any payments already made.

[2] On September 28, 2018, I received a letter from Mr. Feasby, counsel for the Ontario Securities Commission, asking whether the judgment omitted a sentence against the corporate respondent, Tiffin Financial Corporation ("TFC"). Mr. Feasby first brought this matter to the attention of counsel for TFC and Mr. Tiffin, who advised that he was reviewing his position on the matter.

[3] I asked my assistant to immediately advise the parties that it was my intention that the sentence (apart from the custodial term) apply to both defendants and offered to clarify any ambiguity in this regard with an addendum. The reference to "you" in paras. 46 and 47 of my reasons was intended to apply to both Mr. Tiffin and TFC.

[4] In my view, I retain jurisdiction to correct any error or ambiguity arising from an accidental slip or omission in my reasons. To the extent that my wording was ambiguous, this arose from such an accidental slip.

[5] On October 1, 2018, I received further correspondence from Mr. Feasby requesting that I provide an addendum to clarify the sentence, and, in particular, the intention that both the probation order and the restitution order apply to both Mr. Tiffin and TFC.

[6] I have not received any correspondence from counsel for the defendant in this regard, although he has been copied on all correspondence from Mr. Feasby.

[7] Having reviewed my reasons, I understand how this uncertainty arose, and, in order to clarify any ambiguity or uncertainty that might have arisen from the wording in the original reasons, I wish to provide the following amendment to paras. 46 and 47, which conforms to my intention when I issued the reasons:

[46] Based on these considerations, I am of the view that a custodial sentence is required in this case, but I am satisfied that 6 months is sufficient in these circumstances to meet the sentencing objectives. In addition, Mr. Tiffin and TFC will be on probation for 24 months, the conditions of which will be as follows:

1. First, 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. Second, that you will appear before the Court as, and when, required.

3. Third, that you notify the Court of any change in your address.

4. Fourth, that you report to a probation officer if and when directed to do so by the probation officer.

5. And, lastly, that you not trade in any "securities" as that term is defined in the Securities Act.

[47] Finally, pursuant to s. 122.1(1) of the Securities Act, Mr. Tiffin and TFC are ordered to make restitution for the full amount of the Tiffin Financial Services Notes sold by Daniel Tiffin and TFC, less any payments already made.

End of Document