CITATION: Xanthoudakis v. Ontario Securities Commission, 2011 ONSC 4685
DIVISIONAL COURT FILES NO.: 71/09 & 439/10
DATE: 20111031
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
JENNINGS, ASTON & LEDERER JJ.
BETWEEN: COURT FILE NO.: 71/09
JOHN XANTHOUDAKIS and DALE SMITH
Appellants
– and –
ONTARIO SECURITIES COMMISSION
Respondent
Alistair Crawley, for the Appellants
Sean Horgan, Pamela Foy & Trevor Guy, for the Respondent
COURT FILE NO.: 439/10
AND B E T W E E N:
JOHN XANTHOUDAKIS and DALE SMITH
Appellants
- and -
ONTARIO SECURITIES COMMISSION
Respondent
Alistair Crawley, for the Appellants
Sean Horgan, Pamela Foy & Trevor Guy, for the Respondent
HEARD: June 21 & 22, 2011
LEDERER J.:
INTRODUCTION
[1] This matter involves two appeals. First, the court is asked to consider an appeal of a decision of the Ontario Securities Commission (“OSC”), dated February 3, 2009, refusing to stay its proceeding. On the motion, heard by the OSC, it was argued that the stay was required because the OSC was biased. Second, the court is asked to consider an appeal of the decision of the OSC on the merits of the same proceeding, dated March 8, 2010. At the hearing, the OSC determined that the appellants had violated the Rules of the OSC, the Securities Act, R.S.O. 1990, Ch. S.5 and the regulations.
The First Appeal: Reasonable Apprehension of Bias
[2] On Sunday, November 23, 2008, the Chair of the OSC was interviewed on television. During the course of the interview, the Chair made the following comment:
The OSC wants to allow people to do business. So we clear prospectus[es] so people can pursue earning a living by managing other people's money in the capital markets, and 99% of the time they're good people that aren't fraudulent people. Norshield was run by people who were not honest. That's what happened in Norshield.
[Emphasis added]
[3] “Norshield” referred to the investment scheme that was at the centre of proceedings being undertaken by the OSC. The scheme was identified as the Norshield Investment Structure. The appellants, John Xanthoudakis and Dale Smith, were found to be the directing minds of the Norshield Investment Structure. At the time the interview took place, a hearing considering whether allegations that John Xanthoudakis and Dale Smith, and others, were in breach of the Securities Act, R.S.O. 1990, c. S. 5 was underway.
[4] Because of the televised comments made by the Chair, counsel for the appellants argued that there was a reasonable apprehension of bias on the part of the OSC. On this appeal, orders setting aside the decision made by the OSC, following the completion of the hearing and permanently staying the proceedings, are sought. While what the Chair said was unfortunate, the issue for this court is whether it led to a circumstance where the decision made by the OSC was infected by bias, as that term is understood in law, and whether any new hearing would be similarly contaminated.
The Second Appeal: The Decision on the Merits
[5] In a decision, released on March 8, 2010, the OSC found that the appellants had failed to deal honestly with investors (OSC Rule 31-505, ss. 2.1(1) and 2.1(2)), failed to keep proper records (Securities Act, s. 19 and O. Reg. 1015, s. 113), misled OSC investigative staff (Securities Act, s. 122(1)(a) and acted contrary to the public interest. This was followed by a decision, dated August 6, 2010, by which the OSC imposed a range of sanctions, including a permanent cease trade order, a permanent ban on registration, a permanent ban on acting as a director and officer, fines of $4,000,000 and costs of $295,000.
[6] The appeal of the decision finding the appellants were in breach of the Securities Act, the regulations and the rule is grounded in a series of submissions beginning with broad principles and ranging to specific findings. It is argued that there has been a denial of natural justice and procedural fairness. This is said to arise from the limited investigation undertaken by the OSC, late disclosure and an inappropriate reliance on the work of the Receiver appointed after the collapse of the Norshield Investment Structure. The appeal moves on to suggest that the decision failed to properly apply a rule, promulgated by the OSC, which the appellants were found to have breached (Rule 31-505). The appeal ends with the submissions that the OSC erred when it found that the appellants were the directing minds of the Norshield Investment Structure and that they intentionally misled the OSC staff.
[7] No submissions were made in respect of the penalties as imposed.
[8] We observe that, if the appellants were successful on the first appeal, there would be no purpose in proceeding to the second. As it is, that is not the case.
BACKGROUND
[9] This situation concerns an investment scheme which failed. The investment structure offered access to a portfolio of hedge fund managers who would not otherwise be available to retail investors, at least at the level of investment required to take part in what was being offered. The fund managers were distinguished by the investment strategies they employed.
[10] Norshield Financial Group was a trade name for the overall corporate structure. The structure was complex. It was designed to raise and manage retail and institutional funds. Retail investors were generally issued shares in Olympus United Funds Corporation (“OUF”). Institutional investments were made through Olympus Univest Limited (“OUL”). Within the structure, the investments raised through OUF were then invested along with the institutional investments in OUL. Once in OUL, investments from retail and institutional investors were to be directed into various investment funds corresponding to the investors' chosen strategies. Standing between OUF and OUL was Olympus United Bank and Trust SCC (“OUB”), a licenced bank based in the Barbados. Retail investor funds were to flow from OUF into “segregated asset cells” of OUB. Under Barbados company law, segregated asset cells are used to protect assets from creditors with respect to obligations arising from transactions involving other segregated assets and non-cellular assets. Investing through OUB was meant to provide tax advantages to Canadian retail investors.
[11] Norshield Asset Management (Canada) Ltd. (“NAM”) provided portfolio management services to OUF. It did not accept investor funds, but was engaged in the selection and monitoring of the fund managers. As described, on behalf of the appellants, it was the process for the selection of fund managers that was the centrepiece of the marketing of OUF to retail investors. Olympus United Group Inc. (“OUG”) is a Canadian federal corporation registered as a mutual fund dealer and limited market dealer. It provided marketing services to OUF.
[12] The appellants were both officers of NAM. John Xanthoudakis was President, Chief Executive Officer and a director. He was President and a director of OUG. Dale Smith was Secretary-Treasurer of NAM and an officer of OUG. He was also a director of OUB and, beginning in January 2003, was its Chairman and Chief Executive Officer. The level of involvement of both John Xanthoudakis and Dale Smith in the Norshield Investment Structure was at issue before the OSC. Counsel for the two men submitted that the only office held by either of them, “below OUB”, was by Dale Smith, who served as a director in OUL beginning in 2003. The OSC found that they were the “directing minds and management of the Norshield Investment Structure as a whole” (see: Ontario Securities Commission: Merits Decision at para. 125).
[13] To fully understand the Norshield Investment Structure, it is helpful to understand the part that was “below” OUL. Where were the investments actually placed? Funds from OUL were invested in Mosaic Composite (U.S.) Inc. (“MC”), a corporation with share classes that corresponded to each of the nine OUL investment funds. OUL and MC had an investment agreement. Pursuant to this agreement, which was never produced to the OSC, there was “a notional separation” of MC assets into two categories, “hedged assets” and “non-hedged assets”. The hedged assets included an option from the Royal Bank of Canada that increased or decreased in value based on the performance of the underlying hedge fund portfolios. Within the Northfield Investment Structure, this was referred to as the SOHO Option. The SOHO Option was a derivative purchased from the Royal Bank with a portion of investors' funds to provide the returns that would otherwise have been achieved if the funds were directly invested in a portfolio of different hedge fund managers. The bulk of the remainder of the funds was invested in the non-hedged assets, primarily a portfolio of equity investments through four Bahamian funds (the “Channel Funds”). Any remaining funds were either dispersed or were invested in other assets.
[14] In the decision of the OSC, the structure was shown as in Appendix “A” to these reasons.
[15] During the year 2005, there was a sustained increase in redemptions. There was insufficient liquidity in OUL to meet the redemption requests from institutional investors and from OUF. As a result, on April 25, 2005, the redemptions of OUF funds were halted. On May 19, 2005, OUL appointed a voluntary liquidator. Between May 16 and May 20, 2005, staff of the OSC and their Quebec counterparts from the “Autorité des marches financiers” conducted a compliance audit at the offices of NAM. As part of the audit, the appellants were interviewed. So far as the staff of the OSC was concerned, no clear accounting of the funds of the investors was provided. On May 20, 2005, the registration of NAM was suspended, pursuant to the Securities Act, s. 127. On June 29, 2005, pursuant to an order of the Superior Court of Justice, a Receiver was appointed in respect of NAM, OUF and OUB and other Canadian entities related to the investment structure. The appointment was continued by a further order, made on July 14, 2005.
[16] It appears that the problem at the root of the collapse of the Norshield Investment Structure was one of valuation. The “hedged assets” of MC, particularly the SOHO Option, were heavily leveraged. For example, as of March 31, 2004, the SOHO Option had a premium of US $53 million, exposure of US $353 million, and leverage of US $287 million. In practical terms, this meant that for a payment of US $53 million, MC had access to US $353 million of the Royal Bank’s investment funds for investment in respect of hedge funds of its choosing. The difference between the two amounts constituted the leverage.
[17] In these appeals, there is no dispute that the net asset value that was used to sell and redeem shares in OUF was, at all material times, calculated based on the hedged assets of MC without regard to the leverage. In other words, the value attributed to shares in OUF assumed that MC owned all of the funds to which it was exposed through the SOHO Option. In taking this position, the appellants relied on an alleged agreement between MC and OUL, pursuant to which MC assumed all of the responsibility of OUL for the outstanding leverage relating to the SOHO Option. This is the agreement that was not produced. In essence, under the agreement, MC guaranteed the leverage relating to the SOHO Option. On this basis, for the net asset value to be accurate, any non-hedged assets of MC (the Channel Funds) had to be sufficient to support the leverage related to the hedged assets (the SOHO Option). The OSC concluded that the value of the Channel Funds was inflated. The OSC found that the appellants not only knew this, but were directly involved in inflating this value.
[18] Following the appointment of the Receiver, the investigation into the operation of the Norshield Investment Structure continued. On October 11, 2006, the OSC issued a Notice of Hearing commencing the proceeding from which the two appeals are taken. On the same day, the OSC issued a Statement of Allegations informing the appellants of the case against them. On October 27, 2008, the hearing commenced before a panel of three Commissioners of the OSC.
[19] This is not the first time this matter has been to court.
[20] By November 17, 2008, the hearing into whether the appellants had breached the Securities Act had proceeded to the point where the evidence was complete. It had adjourned to December 8, 2008, for argument. After the televised comments made by the Chair, but before argument, the appellants commenced an application for judicial review. It sought an order for prohibition against the OSC on the basis that it had lost jurisdiction. The appellants moved, within that proceeding, for a stay of the hearing being conducted by the OSC until the judicial review was determined. At the same time, the OSC brought a cross-motion to quash the application as premature. These motions were heard by Mr. Justice Ferrier on December 5, 2008 and decided by him on that day. Both motions were dismissed.
[21] Having failed to obtain an interim stay from the Court, the appellants moved for a stay before the panel of the OSC conducting the hearing. The motion was based on the argument that the OSC lacked jurisdiction to hold a hearing because of a reasonable apprehension of bias rising from the comments made by the Chair during the television interview. It was heard on December 11, 2008. The decision was released on February 3, 2009. The motion for a stay was dismissed.
[22] The appellants seek to appeal that decision of the OSC. This is the first of the two appeals to which these reasons refer. The Notice of Appeal is dated February 13, 2009. It was perfected on March 11, 2009. At that point, closing submissions in the hearing before the OSC were scheduled for May 9, 2009. A fresh motion for a stay of the proceeding before the OSC was brought, this time pending the results of the appeal. The OSC argued that the motion should not proceed. It submitted that, in view of the decision of Mr. Justice Ferrier, the principle of issue estoppel applied and that the motion was an abuse of process. Madam Justice Karakatsanis, then of this Court, determined that the circumstances had changed, the matter, as it came before her, had a full record and the motion should proceed, albeit not without regard for some of the findings made by Mr. Justice Ferrier. She dismissed the motion for a stay. She concluded:
In my view the public interest favours the continuation of this proceeding to allow timely determination of the proceedings. The OSC has an important public interest mandate in regulating the financial markets. These are important public interest proceedings that have been outstanding for two years and are near completion. The Divisional Court could address the issues raised in this appeal, together with any other grounds of appeal, in one hearing after the OSC proceedings have been concluded on the merits.
(Xanthoudakis v. Ontario Securities Commission 2009 30146 (Div. Ct.), at para. 39)
[23] It is as a result of this decision that the hearing conducted by the OSC was completed and the decision rendered on March 8, 2010. The second appeal to which we have referred is from that decision. It was commenced by a Notice of Appeal, dated September 2, 2010.
ANALYSIS
The First Appeal: Standard of Review
[24] An allegation of institutional or apprehended bias by its nature challenges the integrity of the agency involved and its members. It runs to whether the decision-maker has irrevocably lost jurisdiction. Where the question is as to the “true jurisdiction” of the decision-maker, there is no standard of review to be applied.
The First Appeal: Reasonable Apprehension of Bias
[25] It is important to understand the breadth of this appeal. As a result of what was said by the Chair, during the television interview, the appellants ask that the decision on the merits be set aside and the proceedings permanently stayed. There would be no new hearing. In effect, they seek a determination that no panel of Commissioners could conduct a hearing into the allegations made without there being a reasonable apprehension of bias.
[26] The test to establish bias is well-known. It does not require a finding of actual bias. The issue to be determined is whether the comments made would cause a reasonable person, who is informed of the facts, to conclude that the OSC had pre-judged the conduct of the appellants and that they did not and would not receive an impartial hearing.
[27] An examination of the prospect of bias in this case begins with the observation that there is no suggestion of bias in the actions or statements of any of the three Commissioners who conducted the hearing. There could not be. There is no evidence that would support such a submission. Furthermore, there is nothing in the record to indicate that the Chair communicated in any way with the members of the OSC panel concerning the investigation, the hearing or any other aspect of the proceeding in which the activities of the appellants were examined. In short, the allegation of bias arises solely from the comments of the Chair made in the course of the television interview. The proposition is that a fair-minded and informed member of the public would believe that the Chair was expressing an opinion that represented the viewpoint of the OSC, as represented by its members and its Board of Directors. In other words, the informed member of the public would understand the Chair to have been speaking on behalf of the OSC as a whole.
[28] The concern is manifested in the suggestion that the comments made by the Chair are demonstrative of a conflict which engages the OSC as an institution. The interview was directed to suggesting that the OSC was failing in its responsibilities to investors in Ontario and that the collapse of the Norshield Investment Structure was an example of that failure. It was submitted by counsel for the appellants that the loyalty the members and directors of the OSC would feel to the institution would conflict with the appellants’ right to a fair hearing. That is to say: the informed member of the public would perceive that the concern for the reputation of the OSC, as evidenced by the comments of the chair, could affect the fairness of the hearing or any subsequent hearing that might take place. In making this submission, counsel for the appellants relied on Curtis v. Manitoba (Securities Commission), [2006] M.J. No. 490 (C.A.). In that case, the board of directors of a “venture capital corporation created by provincial statute” became concerned with respect to the valuation of its portfolio. The Manitoba Securities Commission commenced an investigation. A notice of hearing was issued by the staff of the Commission. Serious allegations were made that the directors had failed to comply with their obligations. The board resigned. The Manitoba Securities Commission successfully applied to have a Receiver appointed. Shortly thereafter, a Statement of Claim was issued asserting a class action. Included in the class action were claims against the Manitoba Securities Commission alleging that it had breached its duties to the members of the class.
[29] As a result, an application was made for a stay of the Commission hearing, based on the proposition that there was a reasonable apprehension of bias. The Manitoba Securities Commission refused to grant the stay. Its order was appealed. The Court of Appeal ordered the stay. It determined that there was “a real possibility of a conflict between the interests of the Commission and its duty to hold a fair and proper hearing” (see: Curtis v. Manitoba (Securities Commission), supra, at para. 38). The circumstances in the case before this court are sufficiently different that this concern does not arise. There is no lawsuit attacking the actions of the OSC or the Chair. There is just the challenge and innuendo in the questions of the television interviewer. In Curtis, the court observed that it is critical that “the public's confidence in the impartiality integrity of governmental administrative agencies be maintained… If a reasonable member of the public would perceive that a person whatever may be the circumstances, has become a judge in their own cause, this imperative is in jeopardy” (see: Curtis v. Manitoba (Securities Commission), supra, at para. 40). In this case, there is no “cause”. There is only the comment of the Chair upon being confronted by the interviewer.
[30] The Chair’s comment, while inappropriate, is reflective of the organization and structure of the OSC, a structure put in place by the Securities Act. The OSC undertakes the investigation of possible breaches of the Act, its regulations and its Rules. The OSC also conducts the hearing of any allegations that result. It is an “integrated” agency. The overlapping of the investigative and adjudicative functions does not, in itself, give rise to a reasonable apprehension of bias (see: E. A. Manning Limited v. Ontario Securities Commission, 1995 1706 (ON CA), [1995] 23 O.R. (3d) 257 at p. 7). The comments of the Chair were demonstrative of the outcome of the investigation completed following the collapse of the Norshield Investment Structure. The question is whether these remarks extend to prejudice the outcome of the hearing that was underway at the time or any subsequent hearing that could arise from a ruling of this court.
[31] This perspective was recognized in Curtis v. Manitoba (Securities Commission), supra, where the Manitoba Securities Commission attempted to draw a distinction between Commission staff and the Commissioners who conduct the hearings and make the decisions. The court dispensed with this submission on the basis that there were not two separate legal entities. There was only one. While recognizing the integrated nature of the responsibilities of the Commission, the case does not deal with any systemic or inherent conflict between the responsibility to investigate and the mandate to decide. It simply suggests that, given the facts of the particular case (where an action had been commenced against the Commission in the face of the hearing by the Commission), it was a circumstance where there was such a conflict.
[32] The case of Brosseau v. Alberta (Securities Commission), 1989 121 (SCC), [1989] S.C.J. No. 15, [1989] 1 S.C.R. 301 is of more assistance. There was a concern that Brosseau, as a solicitor, had been involved in preparing a prospectus that contained false and misleading statements. The staff of the Alberta Securities Commission reviewed the files and concluded that there had been no violation of the Securities Act. The R.C.M.P. undertook a separate investigation. It resulted in criminal charges being laid. The Assistant Deputy Minister of the Department of Consumer and Corporate Affairs informed the Chair of the Commission that litigation was pending which named the Alberta government as a party. The government felt that any liability that attached to it would be as a result of the negligence of the Alberta Securities Commission. The Chair forwarded the materials received from the Assistant Deputy Minister to the Deputy Director, Enforcement of the Commission. The Deputy Director directed the Commission staff to investigate the matter. The Chair was given a copy of the report of the staff. Thereafter, a notice of hearing was issued by the Commission.
[33] The criminal charges were dismissed. The limitation for the swearing of the information “had lapsed”.
[34] After the acquittal, an order was sought that, in the circumstances, the Alberta Securities Commission did not have jurisdiction to hold a hearing. The Commission refused the application. An appeal to the Alberta Court of Appeal was dismissed. The matter was then taken to the Supreme Court of Canada. Among the issues considered was whether a reasonable apprehension of bias existed such that it precluded the Alberta Securities Commission from holding the hearing.
[35] The suggestion that there was a reasonable apprehension of bias arose from the fact that the Chair had received the report of the investigation and was designated to sit on the panel that would hear the matter. The root of the objection was that the Chair would participate in both the investigation and the adjudication. He would be a judge in his own cause. “As a general principle, this is not permitted in law because the taint of bias would destroy the integrity of proceedings conducted in such a manner” (see: Brosseau v. Alberta (Securities Commission), supra, at para. 19). The court observed that there are exceptions to this principle. One such exception is where the overlap of functions which occurs has been authorized by statute (see: Brosseau v. Alberta (Securities Commission), supra, at para. 20). It said:
Administrative tribunals are created for a variety of reasons and to respond to a variety of needs. In establishing such tribunals, the legislator is free to choose the structure of the administrative body. The legislator will determine, among other things, its composition and the particular degrees of formality required in its operation. In some cases, the legislator will determine that it is desirable, in achieving the ends of the statute, to allow for an overlap of functions which in normal judicial proceedings would be kept separate. In assessing the activities of administrative tribunals, the courts must be sensitive to the nature of the body created by the legislator. If a certain degree of overlapping of functions is authorized by statute, then, to the extent that it is authorized, it will not generally be subject to the doctrine of ‘reasonable apprehension of bias’ per se.
(Brosseau v. Alberta (Securities Commission), supra at para. 22)
[36] The integrated role of the Securities Commission in both investigating and adjudicating matters under its jurisdiction was authorized by the Securities Act in Alberta as it is in Ontario. On its own, this is not a basis for finding there is a reasonable apprehension of bias. The statutory authorization of the overlapping functions and its impact in abrogating what might otherwise have pointed to a perception of bias was not an issue in the appeal before this court. The appellants agreed that the OSC is, generally, shielded from the principles of reasonable apprehension of bias to the extent that it arises from conduct the statute authorized. Nonetheless, the integrated nature of the OSC sets the context for any consideration of the suggested presence of a reasonable apprehension of bias.
[37] The shielding is not absolute. It has limits. The Chair must act within the authority the Securities Act provides:
…So long as the Chairman did not act outside his statutory authority, and so long as there is no evidence to show involvement above and beyond the mere fact of the Chairman’s fulfilling his statutory duties, a ‘reasonable apprehension of bias’ affecting the Commission as a whole cannot be said to exist.
(Brosseau v. Alberta (Securities Commission), supra, at para. 37)
[38] In Brosseau, it was argued that the investigation was directed solely at the initiative of the Chair. The court concluded that it was not clear that this was so, but that it was not necessary for it to determine the issue. The statute required that an investigation could only be ordered by the Commission and that there was no statutory authority for the Chair to do so. The court determined that, before any formal investigation was commenced, it was logical that the Commission would first investigate the facts. If no wrong-doing was found, there would be no need to proceed further. The Securities Act provided that the Chair was the Chief Executive Officer of the Commission. As such, the Chair would necessarily have the authority to receive information, pass it on to the Director and require him to verify the allegations and complaints and receive a report of a review made by the Director. In other words, there was authority inferred from the general responsibility, held by the Chair, as provided in the statute.
[39] In Ontario, the purposes of the Securities Act are described as:
(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.
[Emphasis added)
(Securities Act, s. 1.1)
[40] In pursuing the purposes of the Securities Act, the OSC is to have regard to the following principles, which the legislation refers to as fundamental:
Balancing the importance to be given to each of the purposes of this Act may be required in specific cases.
The primary means for achieving the purposes of this Act are,
i. requirements for timely, accurate and efficient disclosure of information,
ii. restrictions on fraudulent and unfair market practices and procedures, and
iii. requirements for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants.
Effective and responsive securities regulation requires timely, open and efficient administration and enforcement of this Act by the Commission.
The Commission should, subject to an appropriate system of supervision, use the enforcement capability and regulatory expertise of recognized self-regulatory organizations.
The integration of capital markets is supported and promoted by the sound and responsible harmonization and co-ordination of securities regulation regimes.
Business and regulatory costs and other restrictions on the business and investment activities of market participants should be proportionate to the significance of the regulatory objectives sought to be realized.
[Emphasis added]
(Securities Act, s. 2.1)
[41] In Ontario, the Chair is an officer of the OSC (Securities Act, S. 1(1)). He or she is the Chief Executive Officer of the OSC and is required to devote his or her full time to its work (Securities Act, S. 3(7)). As we see it, the broad responsibilities of the Chair as the Chief Executive Officer of the OSC, the requirement that the OSC be open and the disclosure of information be efficient demonstrates that the Chair will be a principal spokesman for the OSC and that it is within his statutory authority to speak publically on matters that may affect “confidence in the capital markets”. This would include being interviewed for television or other media. In the same way that, in Brosseau, the court inferred that the Chair had the authority to initiate an investigation of the facts in advance of any formal investigation, so in this case “it would seem logical” (Brosseau v. Alberta (Securities Commission), supra, at para. 28) that the authority of the Chair would include being interviewed for television.
[42] This understanding is underscored by a document entitled, “Ontario Securities Commission, Mandate of the Chair”, which was approved by the Board of Directors of the OSC on March 20, 2007. The Board of Directors is “composed of the members of the Commission” and oversees “the management of [its] financial and other affairs” (Securities Act, s. 3.1(1) and (2)). The Board of Directors has the authority to assign functions and duties to the chair (Ontario Securities Commission: By-law No. 1, s. 5 (2)). It did so through the “Mandate of the Chair”, which includes:
…[The Chair] acts as the Commission's principal spokesperson and communicates with a wide range of constituencies on Commission policies, practices, initiatives and on matters that affect or have the potential to affect the Ontario capital markets
[43] We find that, in making the comments to the television interviewer, the Chair was acting within his statutory authority.
[44] This does not answer any question that may arise from the nature of the comments made; that is, from the words used.
[45] It is the position of the appellants that the comments of the Chair refer specifically to them and to the very conduct that was at issue in the hearing. The Statement of Allegations which formulate the complaints against the appellants states that they “failed to deal fairly, honestly and in good faith with clients…” (see: Statement of Allegations, para. 41(a)). The appellants say that the comments made by the Chair referred directly to the honesty of the appellants and showed a pre-judgment of the fundamental issues of the hearing in advance of its completion.
[46] We do not accept that this is what an informed and fair-minded member of the public would think.
[47] The comment is a general one and does not point to any specific allegation made by the staff of the OSC. Moreover, the submission of the appellants does not take into account the overall structure and organization of the OSC. The structure makes clear that any member of the Commission, who is involved in an investigation, cannot take part in any subsequent hearing. The Securities Act states:
No member who exercises a power or performs a duty of the Commission under Part VI, except section 17, in respect of a matter under investigation or examination shall sit on a hearing by the Commission that deals with the matter, except with the written consent of the parties to the proceeding.
(Securities Act, s. 3.5(4))
[48] This section points to the separation of the investigatory function and the decision- making authority of the OSC. It is confirmed by the “Charter of Governance Roles and Responsibilities” adopted by the OSC on April 18, 2006. In delineating some of the adjudicative functions of the members, it states:
Members perform their adjudicative function by individually serving on adjudicative panels that conduct hearings and render decisions independently of the Commission as a whole.
[Emphasis in the original]
(Ontario Securities Commission: Charter of Governance Roles and Responsibilities, at p. 4)
[49] Similarly, the mandate and make-up of the “Adjudicative Committee” of the OSC encourages the separation of the Chair of the OSC from the adjudicative role. The committee was established by resolution of the OSC on May 14, 2002. Its mandate is to review and evaluate the adjudicative procedures and practices of the OSC. As such, it oversees the decision-making function (see: Ontario Securities Commission: Guidelines for Members and Employees Engaging in Adjudication, Article 6.3). In this capacity, it makes recommendations to the OSC and the chair of the OSC, but has no independent decision-making authority (the Chair of the OSC may authorize the committee to make decisions regarding the Rules of Procedure of the OSC and other adjudicative policies and procedures (see: Adjudicative Committee Mandate at p. 2)). Pursuant to the mandate of the “Adjudicative Committee”, the Chair of the OSC recommends nominees for the positions of the Chair and the members of the committee for appointment by the OSC as a whole. The Chair of the OSC cannot be the Chair of the committee.
[50] This separation is confirmed by the “Guidelines for Members and Employees Engaging in Adjudication”. It was approved and adopted by the OSC on April 1, 2008. Among other things, it prescribes who has responsibility for selecting the members of panels to hear the various matters the OSC is called upon to adjudicate. Generally, it is the secretary of the OSC, subject to the review and direction of the Adjudicative Committee, who makes the assignment although the OSC may issue directives to the secretary in this regard. The “Guidelines” make it clear that, while the secretary may, in his or her discretion, consult with other members, no one including the chair of the OSC shall attempt to influence or participate in the selection of a panel (see: Ontario Securities Commission: Guidelines for Members and Employees Engaging in Adjudication, Article 6.1(1) and (3)).
[51] We find that a reasonable person, informed of the facts would recognize the separation of the Chair from the adjudicative function, and would not conclude that, as a result of the comments made by the Chair, the OSC had pre-judged the conduct of the appellants and that they did not and would not receive an impartial hearing.
[52] This is consistent with the approach taken in E.A. Manning v. Ontario Securities Commission, supra. The OSC issued a policy statement and expressed a concern that there were abuses in the sale practices of dealers selling penny stocks. An action was commenced and an order made declaring the policy statement to be outside the jurisdiction of the OSC. Subsequently, in two Notices of Hearing, the OSC alleged that a dealer in penny stocks, and some of it directors, officers or salespersons, acted contrary to the public interest in the sale of securities. One week prior to the issuance of the first notice, the newly-appointed Chair of the OSC was quoted as saying that dealing with penny stock dealers was a “perennial priority” of the OSC and that “[t]here will always be marginal players in the securities industry…. Our task is to get these players into the self-regulatory system or get them out of the jurisdiction” (see: E.A. Manning v. Ontario Securities Commission, supra, at p. 6). The Divisional Court found that there was a reasonable apprehension of bias on the part of the Commissioners who had been involved in the adoption of the policy statement and on the part of the new Chair because of his public comments. The hearings could proceed before a panel of new Commissioners who were not touched by the preparation of the policy or the comments of the Chair. The dealer appealed, arguing that the adoption of the policy statement and the comments of the Chair had so tainted the entire Commission that even newly-appointed Commissioners should be excluded from sitting on the hearings.
[53] In dealing with the comments of the Chair, the Court of Appeal noted that they were prepared in the context of a series of articles that were printed in the same issue of an identified publication and reflected his overall view of issues confronting the industry. The comments did not, in any way, relate to the subject-matter of the complaints made against the dealer in the proceedings being considered. The court concluded that “even if statements by a regulator relate to the very matters which he or she is considering that, in itself, is not a basis for concluding that the regulator has prejudged the matter” and that “even if it could be said that the statements of the Chair exhibited some bias against the appellants that, in itself, would not disqualify the other Commissioners from conducting the hearings” (see: E. A. Manning v. Ontario Securities Commission, supra, at p. 14).
[54] These conclusions from the Court of Appeal fit this case. The general nature of the comments made by the Chair removes them from the specific allegations with which the hearing was concerned. This is confirmed by the separation of the Chair of the OSC from the adjudicative function. The comments were not made in that context. In any event, there is nothing that would call for the extension of any allegation of bias arising from these comments to each and every member of the OSC such that no proper hearing could be conducted.
[55] We find that there is no reasonable apprehension of bias.
The Second Appeal: Standard of Review
[56] The second of the two appeals considers the decision on the merits of the misconduct allegations.
[57] The issues raised on the appeal were summarized in the factum of the appellants as follows:
(a) Were the appellants denied natural justice and procedural fairness due to inadequate and late disclosure and due to the lack of viva voce testimony of fact witnesses at the hearing?
(b) Did the commission err in law in the manner of its reliance on the receiver's reports and testimony?
(c) Did the commission err in finding that the appellants were the directing minds of the "Norshield Investment Structure"?
(d) Did the commission err in finding that the appellants breached OSC Rule 31-505?
(e) Did the commission err in finding that the appellants intentionally misled commission staff?
[58] Because of differences in the issues, the applicable standard of review will vary.
[59] For issue (a), the court does not apply a standard of review. A denial of procedural fairness may constitute a breach of natural justice and, like reasonable apprehension of bias, it goes to the root of the tribunal’s jurisdiction. The court is not engaged in the application of a standard of review. Instead, the court determines whether a breach of procedural fairness constitutes a denial of natural justice. If so, the decision cannot stand. The duty of procedural fairness is context dependant and therefore variable. The context is set by a consideration of the five factors identified in Congrégation des témoins de Jéhovah de St-Jérôme-Lafontaine v. Lafontaine (Village), 2004 SCC 48, [2004] 2 SCR 650 at paragraph 5: (1) the nature of the decision, (2) the nature of the legislative scheme, (3) the importance of the decision to the individual affected, (4) the legitimate expectations of the person challenging the decision, and (5) the nature of the deference accorded to the statutory decision maker.
[60] At its root, issue (b) also raises a question of procedural fairness. As put by the appellants, the decision of the OSC was based on an incomplete record. The proposition is that, while it was the responsibility of the OSC to conduct an investigation, it failed to conduct a full examination of the available people and material, preferring to rely on the work undertaken by the Receiver whose mandate was the recovery of assets and not the investigation of possible breaches of the Securities Act. The appellants say that the result was “inconsistent with a competent OSC investigation”. The restricted investigation led to an absence of relevant material impairing the ability of the appellants to make “full answer and defence”. Without, for the moment, commenting on the validity of this submission, viewed in this way, the issue raised goes to whether the hearing was procedurally fair. For issue (b), the court does not apply a standard of review. It is necessary to consider whether issues (a) and (b) constitute a denial of procedural fairness when taken together, even if neither on its own amounts to a denial of natural justice.
[61] Issue (d) deals with the application of a rule put in place by the OSC. This is not a question of whether the OSC “acted within its statutory authority in applying Rule 31-505 to the appellant’s conduct” (see: Factum of Appellants, para. 27). The question of statutory authority would apply to whether the OSC had the jurisdiction to promulgate the rule in the first place. That is not the issue being raised. It is the application of the rule that is being questioned. It is argued that it applies to the conduct of securities dealers, not to the conduct of the managers of investment funds. The interpretation and application of the rule falls within the specialized area of expertise of the OSC. Its decision attracts deference (see: Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, at paras. 68-73). The applicable standard of review is reasonableness.
[62] With respect to issue (c), the appellants argue that this is a question of law in that the OSC did not apply the right test in making the finding that the appellants were the directing minds of the Norshield Investment structure. The appellants say the applicable standard of review is correctness. This is based on the proposition that the appellants had little, if any, responsibility and held no corporate positions in the Norshield Investment Structure “below” OUL, that is to say, they were not directors or officers of MC, the Channel Funds or any other corporate entity at that level of the structure. In the factum of the appellants, this is translated into a need to find that the appellants were de facto directors of those entities before they could be determined to be directing minds of the Norshield Investment Structure. They rely on the case of R. v. Boyle, [2001] A.J. No. 1142 (Alta. Prov. Ct) as demonstrating the criteria necessary to identify de facto directors. They argue that the problem is that the decision of the OSC does not demonstrate any consideration of these requirements, thus demonstrating the error of law for which, they say, the standard review is correctness. It should be said that the circumstances in R. v. Boyle, supra, were decidedly different. There charges were laid and a criminal trial undertaken. Pursuant to the Alberta Securities Act, to be “vicariously liable”, an individual had to be a director or officer or a de facto director or officer. In the situation before this court, the question is not whether the appellants were directors, de facto or otherwise. The issue is whether they were the "directing minds" of the Norshield Investment Structure as a whole. The appellants referred to R. v. Canadian Dredge & Dock Co., 1985 32 (SCC), [1985] S.C.J. No. 28, where the Supreme Court of Canada, in considering the problem of criminal liability, stated the following in respect of what constitutes a “directing mind”:
In order to trigger its operation and through it corporate criminal liability for the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the ‘ego’, the ‘centre’ of the corporate personality, the ‘vital organ’ of the body corporate, the ‘alter ego’ of the employer Corporation or its ‘directing mind’.
(R. v. Canadian Dredge & Dock Co, supra, at para. 20)
[63] There is nothing here which requires that a “directing mind” be a director, de facto or de jure. Undoubtedly, being a director contributes to a consideration of whether a person is a “directing mind”, but it is not determinative of the issue. In any case, the appellants held positions in corporations higher in the Norshield Investment Structure. The question the OSC dealt with that is raised in this appeal is whether the appellants were directing minds of the structure. This is a question of fact or a question of mixed fact and law. The standard of review is reasonableness.
[64] The parties agree that, with respect to issue (e), the standard of review is reasonableness.
The Second Appeal: The Merits
[65] We begin this part of these reasons by observing that, as we read it, the decision of the OSC is careful, comprehensive and complete. It was careful in that it did not simply accept the positions put forward by its staff. If there was insufficient evidence in support of a finding, the OSC said so and did not accept it as established (see: Reasons and Decision of the OSC at paras. 152, 155, 156, 160, 168 and 237). The decision was comprehensive in that it dealt with the submissions made, the law that applied and analyzed the evidence presented in coming to its conclusions. The decision was complete in that it considered the circumstances that led to the hearing:
• it explained the “Background”
• it listed the “Allegations”
• it identified the “Respondents”
• it examined the “Ownership and Management of the Norshield Investment Structure” and,
• it reviewed the issues.
Was the hearing procedurally fair: (Issues (a) and (b), in para. 57 above)
[66] The appellants complain that the investigation was incomplete. They rely on the power to investigate that is provided to the OSC as found in the Securities Act. The appellants point out that they have no corresponding authority and must rely on the work done by the OSC. The appellants list parties to whom the staff should have spoken but did not. A number of these were employees or people otherwise involved in various parts of the Norshield Investment Structure. There is no suggestion that they were not available to the appellants or that any independent effort was made by or on behalf of the appellants to contact them. There is no duty requiring the breadth of the investigation to be such that it satisfied the demands of the appellants. It remains their responsibility to put together their own defence. In this case, they chose to call no evidence. They stood by and exercised their right not to testify. In the criminal law context, where the right to make full answer and defence is enshrined in the Charter of Rights and Freedoms, inadequacies in police investigations do not in-and-of-themselves constitute a denial of the rights of an accused. An accused does not have a free-standing constitutional right to an adequate investigation of the charges against him (see: R. v. Darwish, 2010 ONCA 124 at para. 29, referring to R. v. Barnes, 2009 ONCA 432, at para. 1).
[67] The appellants also complain about the evidence that was presented to the OSC. It is submitted that the OSC improperly relied on the testimony of the Receiver. He obtained information from others which was then presented, by him, to the hearing. This was hearsay. The Receiver was a buffer who stood between the appellants and those who were the source of the information. Those who provided the information were not called. Counsel for the appellants was unable to cross-examine them. It was argued that, in this way, the appellants were denied the right to make full answer and defence.
[68] The OSC was aware that the Statutory Powers Procedure Act R.S.O. 1990 c. S. 22, (“SPPA”) s. 15 allowed it to consider evidence that would not necessarily be admissible in court (see: Reasons and Decision of the OSC, at para. 84). In this case, the Receiver was called to provide information and conclusions that were part of reports that had been produced for and accepted by the court as part of the receivership. In respect of any conclusions, the evidence he provided included the documents and information he relied on in developing that understanding. It was left to the OSC to determine for itself whether the evidence provided supported the conclusion.
[69] The Receiver provided testimony for three days. He was cross-examined by counsel for the appellants. He was asked questions by the members of the panel of OSC members that conducted the hearing. He addressed five volumes of documents related to the Norshield Investment Structure.
[70] The decision of the OSC demonstrates that it did not simply accept the conclusions of the Receiver but, rather, examined the evidence to come to its own conclusions (see: Reasons and Decision of the OSC, at paras. 170-231). There were circumstances where the OSC refused to accept, adopt or agree with conclusions of the Receiver. For example, where the Receiver opined that the audited financial statements of the Channel Funds for the years 2002 and 2003 were overvalued by hundreds of millions of dollars (see: Reasons and Decision of the OSC at paras. 176 and 197), the OSC held that it did not have enough evidence to reach the same conclusion (see: Reasons and Decision of the OSC at para. 234). Similarly, the Receiver suggested that there had been “significant dissipation of investor funds” within the Norshield Investment Structure as a result of third-party payments. The OSC disagreed. It concluded that there was not enough evidence to reach this conclusion (see: Reasons and Decision of the OSC, at paras. 156-168).
[71] The appellants complain that they were unable to respond to evidence as a result of the acceptance, by the OSC, of five transcripts of the testimony of five witnesses examined under oath by the Receiver. One of the five was a transcript of evidence provided by the appellant, Dale Smith.
[72] The OSC heard submissions in respect of the admission of the transcripts into evidence. It provided a considered response. Dale Smith was a respondent to the proceeding. For that reason, the OSC refused to admit the transcript of his interview by the Receiver. In admitting the other four transcripts, the OSC observed that it was permitted by s. 15 of the SPPA to allow hearsay material into evidence. The OSC was aware of its responsibility to account for the requirements of fairness and natural justice. It noted that:
Parties are entitled to reasonable opportunity to comment on and contradict evidence. However, hearsay evidence need not be tested by cross-examination in all circumstances.
(Reasons and Decision of the OSC, at para. 88)
It went on:
If the Panel admits evidence, it must be careful not to put too much weight on the evidence when making its final decision. For example, undue weight should not be placed on uncorroborated evidence. It should also be remembered, that while the standard of proof in administrative proceedings is the civil standard of a balance of probabilities, in the interest of a fair hearing, allegations can only be proven by clear and cogent evidence, as stated in Investment Dealers of Canada v. Bouliers (2004), 27 O.S.B.C. 1597 (O.S.C.) at para.34, affirmed 2005 16629 (ON SCDC), [2005] O.J. No. 1984 (Div. Ct.).
It concluded:
As of the matter of fundamental fairness, persuasive collateral evidence is required to make adverse findings were those findings will have serious consequences for the respondent. In this decision, wherever we have relied on transcript evidence, we have only done so where it is consistent with or supported by other evidence.
(Reasons and Decision of the OSC, at para. 91)
[73] The appellants expressed particular concern for the evidence provided through the interview of Stephen Hancock. In their view, this evidence was relied on to find that the appellants were the directing minds of the Norshield Investment Structure. In keeping with its conclusion that reliance on the transcripts required that they be consistent with, or corroborated by other evidence, the OSC noted that his testimony was consistent with that of other employees within the Norshield Investment Structure who appeared as witnesses at the hearing. The OSC noted that it heard evidence from four former employees, all of whom testified that John Xanthoudakis was the ultimate decision-maker as to the investment of funds in the Norshield Investment Structure (see: Reasons and Decision of the OSC, at paras. 121 and 122). A review of the decision of the OSC reveals that it considered much more than the transcript of the interview of Stephen Hancock in finding that John Xanthoudakis and Dale Smith were the directing minds of the Norshield Investment Structure (see: Reasons and Decision of the OSC, at paras. 92 to 126).
[74] Finally, the appellants say they were denied a fair hearing as a result of the lack of disclosure of material obtained by the Receiver in the Bahamas and Barbados. It was subject to court orders that did not permit him to share the information with third parties. Although it is not entirely clear, the factum filed on behalf of the appellants suggests that some of this material remained undisclosed. On the other hand, it seems that orders were obtained that allowed for the release of at least some of it (see: Pre-hearing Transcript, Vol. 4, at pp. 4-5).
[75] The appellants complain this material was disclosed as late as August, 2008 and “during the course of the hearing”. The hearing began on October 27, 2008. This date was decided on by the OSC at a pre-hearing on August 28, 2008, after the disclosure of material in August and following submissions by counsel. Two months was provided to allow for the review of this material. Transcripts were released as the hearing commenced. They are among the five to which the appellants objected. The factum, filed on behalf of the OSC, notes that counsel for the appellants was given “additional time to assess this material after which he made no further requests”. There is nothing that was presented to the court that would suggest any prejudice to the appellants.
[76] There is no basis on which any finding could be made that the appellants were denied a fair hearing.
[77] In any event, the appellants did not suggest that any limitation in the investigation raised an issue of procedural fairness until this appeal. They made no motion or objection concerning the timing of disclosure at the outset of the hearing. Generally, it is understood that such objection should be made as soon as is reasonable. Otherwise, a party may simply wait out the hearing knowing that it has a proper basis for a review by the court. In the absence of any other submissions, this could be enough for the court to refuse to set aside the decision of the OSC. As it is, the court does not need to make that determination here.
Did the OSC err in finding that the appellants breached OSC Rule 31-505? (Issue (d), as in para. 57 above)
[78] The OSC found that the appellants had failed to deal honestly with investors and, thus, breached Rule 31-505 as promulgated by the OSC. The appellants complain that the rule has no application to this case. Section 2.1 of Rule 31-505 states:
2.1 General Duties – (1) A registered dealer or advisor shall deal fairly, honestly and in good faith with its clients.
(2) A registered salesperson, officer or partner of a registered dealer or a registered officer or partner of a registered advisor shall deal fairly, honestly and in good faith with his or her client.
[79] The appellants submit that, while the OSC has the authority to promulgate rules, this one does not form part of Ontario securities law.
[80] Section 127(1) para. 9 of the Securities Act says:
127(1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders:
(9) If a person or company has not complied with Ontario securities law, an order requiring the person or company to pay an administrative penalty of not more than $1 million for each failure to comply.
[Emphasis added]
[81] It follows that, if the rule is not part of “Ontario securities law”, no administrative penalty can be imposed for its breach.
[82] In its decision, the OSC reviewed the relevant provisions of the Securities Act. “Ontario securities law” is defined in subsection 1(1). It means:
(a) this Act,
(b) the regulations, and
(c) in respect of a person or company, a decision of the Commission or a Director to which the person or company is subject;
[83] “Regulations” is also defined. It is:
…the regulations made under this Act and, unless the context otherwise indicates, includes the rules
[84] “Rules” is said to mean:
(a) the rules made under section 143, and
(b) orders, rulings and policies listed in the Schedule.
[85] Under s. 143 of the Securities Act, the OSC has the authority to make rules relating to the conduct of registrants. Clause 2 of subsection 143(1), as it read at the material time, stated:
Rules – the Commission may make rules in respect of the following matters:
- Prescribing categories or sub-categories of registrants, classifying registrants into categories or sub-categories and prescribing the conditions of registration or other requirements for registrants for any category or sub-category, including,
i. standards of practice and business conduct of registrants in dealing with their customers and clients and prospective customers and clients,
ii. requirements that are advisable for the prevention or regulation of conflicts of interest,…
[86] The OSC indicated that the question to be determined was whether subsection 2.1(1) and subsection 2.1(2) of Rule 31-505 fall within the definition of “regulations” and are, therefore, part of “Ontario securities law” (see: Sanctions Decision of the OSC, at para. 67). It found that they are “regulations” as defined in the Securities Act, and form part of Ontario securities law. As such, it was open to the OSC to impose administrative penalties for their breach (see: Sanctions Decision of the OSC, at paras. 70-71). We can see no reason why this determination is not a reasonable one.
[87] Counsel for the appellants submitted that Rule 31-505 has no application to the situation as presented. The rule applies only to “clients” not “investors”. The appellants complain that the OSC has used the words “client” and “investors” interchangeably. They say this is an error, in that the client of an investment dealer is different from an investor in an investment fund or mutual fund. A client of an investment dealer looks to the dealer for investment advice and to execute trading on his or her behalf. An investor seeks to invest in the securities it purchases. The issuer of the security owes a distinct and different set of duties to the investor. The appellants refer to National Instrument 81-106, which was enacted under the authority of the OSC to regulate investment funds. It refers exclusively to “investors” and does not contain any reference to the term “clients”.
[88] The problem, as seen by the appellants, is that Rule 31-505 is general in the responsibility it imposes. In the absence of any specific set of facts against which to measure its requirements, it would be difficult to define with any precision the boundaries of dealing “fairly, honestly and in good faith” with his or her clients. This being so, the appellants say that the Rule should be narrowly interpreted, at least as to whom it is to be applied. They say “investors” are not “clients”, as referred to in the Rule, and should not be treated as such. This approach presumes that the words “clients” and “investors” are necessarily separate and independent of each other. The word “client” may be a general term of broad application. It is not unreasonable to suggest that the word “investor” is narrower in its meaning and, in certain circumstances, can be subsumed within the term “client”. This is the case here.
[89] It is important to remember that one of the benefits of the investment scheme was to provide retail investors with access to fund managers who would not otherwise be available to them. These are the investors who were issued shares in OUF. NAM provided portfolio management services to OUF. It selected and monitored the fund managers. The selection of the managers was the central to the marketing of OUF to retail investors. John Xanthoudakis and Dale Smith were both registrants under the Securities Act. John Xanthoudakis was President, Chief Executive Officer and a director of NAM. Dale Smith was, for a time, the Secretary-Treasurer of NAM. The OSC found that John Xanthoudakis and Dale Smith were the directing minds of the Norshield Investment Structure. In the circumstances, it was not unreasonable for the OSC to find that the retail investors in OUF were the clients of the appellants. They may have been investors, but they were also the end-purchasers of what the appellants were selling. It was open to the OSC to find, as it did, that the appellants were in breach of Rule 31-505. It concluded:
We therefore find that NAM, Olympus United Group, Xanthoudakis and Smith failed to deal fairly, honestly and in good faith with investors. Communicating information to investors based on artificially inflated NAVs and engaging in transactions that amounted to giving preference to particular redemption requests over others are asked in breach of the duties articulated in s. 2.1 of OSC Rule 31-505.
(Reasons and Decision of the OSC, at para. 126)
Did the commission err in finding that the appellants were the directing minds of the “Norshield Investment Structure” and in finding that the appellants intentionally misled commission staff? (Issues (c)and (e), as in para. 57 above)
[90] The appellants submitted that the evidence could not establish that they were the directing minds of the Norshield Investment Structure. The appellants say there was insufficient evidence to demonstrate that they exercised any control over those entities "below" OUB.
[91] In making the determination that the appellants were the directing minds of the Norshield Investment Structure, the OSC made findings of fact. For the court to overturn such findings, there must be a palpable and overriding error. There is none.
[92] The analysis of the OSC relied on evidence that demonstrates an involvement of John Xanthoudakis and Dale Smith “below" OUB. There was evidence that John Xanthoudakis was the ultimate decision-maker as to the investment of funds in the Norshield Investment Structure and had final approval over communications with clients and investment advisors. When RBC terminated the SOHO Option, he was copied on the notice. Dale Smith served as a director of OUF and of OUB. He sat on boards of numerous companies in which the Channel Funds has invested. Both John Xanthoudakis and Dale Smith received e-mails sent by employees regarding the Norshield Investment Structure, compliance issues and the net asset value (“NAV”) calculations.
[93] In submitting that the OSC erred in finding that the appellants intentionally misled staff of the OSC, the appellants refer to the determination that the appellants failed to inform the staff of the existence of the Channel Funds. This was misleading by omission.
[94] The Securities Act recognizes that the staff can be misled in this way. Section 122(1)(a) says:
(1) Every person or company that,
(a) makes a statement in any material, evidence or information submitted to the Commission, a Director, any person acting under the authority of the Commission or the Executive Director or any person appointed to make an investigation or examination under this Act that, in a material respect and at the time and in light of the circumstances under which it is made, is misleading or untrue or does not state a factor that is required to be stated or that is necessary to make the statement not misleading;
is guilty of an offence and on conviction is liable to 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.
[Emphasis added]
[95] The Court of Appeal has articulated the importance of providing full and accurate responses to inquiries by regulatory agencies:
The [Commission] is charged with the statutory obligation to do its best to ensure that those involved in the securities industry provide fair and accurate information so that public confidence in the integrity of the capital markets is maintained. It is difficult to imagine anything that could be more important to protecting the integrity of capital markets than ensuring that those involved in those markets, whether as direct participants or advisors, provided full and accurate information to the [Commission].
(Wilder et al. v. Ontario Securities Commission (2001), 2001 24072 (ON CA), 53 O.R. (3d) 519, at para. 22 (C.A.))
[96] The OSC did not consider this to be a situation which could be explained by reference to "other investments" held by MC as referred to by John Xanthoudakis. The OSC found the role of the Channel Funds to be crucial to the Norshield Investment Structure. The Channel Funds supported the leverage in the SOHO Option and the NAV calculations. (see: Reasons and Decision of the OSC, at para. 318). Based on the evidence before it, it was open to the OSC to find that the staff had been misled.
CONCLUSION
[97] For the reasons reviewed, both appeals are dismissed.
COSTS
[98] Pursuant to an agreement between the parties, costs are to be paid by the appellants to the respondents:
• for the first appeal (bias) - $15,000
• for the second appeal (the merits) - $25,000
LEDERER, J.
JENNINGS J.
ASTON J.
Released: 20111031
APPENDIX A
85% to 90% 10% to 15%
CITATION: Xanthoudakis v. Ontario Securities Commission, 2011 ONSC 4685
DIVISIONAL COURT FILES NO.: 71/09 & 439/10
DATE: 20111031
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
JENNINGS, ASTON & LEDERER JJ.
BETWEEN: COURT FILE NO.: 71/09
JOHN XANTHOUDAKIS and DALE SMITH
Appellants
- and -
ONTARIO SECURITIES COMMISSION
Respondent
AND B E T W E E N: COURT FILE NO.: 439/10
JOHN XANTHOUDAKIS and DALE SMITH
Appellants
- and -
ONTARIO SECURITIES COMMISSION
Respondent
REASONS FOR JUDGMENT
LEDERER J.
Released: 201110 31