Quadrexx Hedge Capital Management Ltd. et al. v. Ontario Securities Commission

[Indexed as: Quadrexx Hedge Capital Management Ltd. v. Ontario Securities Commission]

Ontario Reports

Ontario Superior Court of Justice

Divisional Court, D.L. Corbett, Perell and Gordon JJ.

July 29, 2020

151 O.R. (3d) 709 | 2020 ONSC 4392

Case Summary

Administrative law — Appeals — Standard of review — Appellants found to have engaged in fraudulent conduct regarding three distributions of securities, and subjected to significant sanctions — Appellants identifying 19 errors of fact and three errors of mixed law and fact, plus procedural unfairness — Standard of review for question of law and procedural unfairness was correctness, and for question of fact was palpable and overriding error — Commission's reasons were adequate — Sanctions decision consistent with facts — Appeal dismissed.

Administrative law — Boards and tribunals — Sufficiency of reasons — Appellants found to have engaged in fraudulent conduct regarding three distributions of securities, and subjected to significant sanctions — Appellants submitting that commission's reasons were inadequate — Commission engaged in analysis at every step of decision within coherent and logical framework — Appeal dismissed.

Administrative law — Procedural fairness — Appellants found to have engaged in fraudulent conduct regarding three distributions of securities, and subjected to significant sanctions — Appellants submitting that they were denied procedural unfairness — Commission explained why it rejected appellants' evidence on some issues and doing so did not deny procedural fairness — Appeal dismissed.

Securities regulation — Administrative proceedings — Standard of review — Appellants found to have engaged in fraudulent conduct regarding three distributions of securities, and subjected to significant sanctions — Appellants identifying 19 errors of fact and three errors of mixed law and fact, plus procedural unfairness — Standard of review for question of law and procedural unfairness was correctness, and for question of fact was palpable and overriding error — Commission's reasons were adequate — Sanctions decision consistent with facts — Appeal dismissed.

Securities regulation — Offences — Fraud — Sanctions — Appellants found to have engaged in fraudulent conduct regarding three distributions of securities, and subjected to significant sanctions — Appellants identifying 19 errors of fact and three errors of mixed law and fact, plus procedural unfairness — Standard of review for question of law and procedural unfairness was correctness, and for question of fact was palpable and overriding error — Commission's reasons were adequate — Sanctions decision consistent with facts — Appeal dismissed.

The Ontario Securities Commission found that the appellants, N and S, and their corporations, had engaged in fraudulent conduct in connection with three distributions of securities contrary to s. 126.1 of the Securities Act, R.S.O. 1990, c. S.5. The commission found that the appellants did not deal with investors justly or in an equitable manner, that they deceived investors and took advantage of their trust, that they did not observe reasonable commercial standards of fair dealing, and that they defrauded investors and took unconscionable advantage of them. Following a second hearing on sanctions, the commission directed that the appellants were permanently prohibited from trading or acquiring securities, were permanently prohibited from acting as director or officer of any issuer or registrant, were ordered to pay an administrative penalty of $600,000, were jointly ordered to disgorge specified amounts in relation to each of the three frauds, and were ordered to pay costs. The appellants appealed.

Held, the appeal should be dismissed.

While the appeal was under reserve, the Supreme Court of Canada changed the standard of appellate review for decisions of administrative tribunals. With securities regulation being a highly specialized activity requiring specific knowledge and expertise, historically the standard of review applicable to decisions of the Ontario Securities Commission had been reasonableness. The Supreme Court reaffirmed that standard unless legislation specified a different standard. The wording of the Securities Act did not imply deference on appeal beyond that described by the Supreme Court. Where a ground of appeal raised an issue of law alone, the standard of review was correctness. Where a ground of appeal raised a question of fact, the appellate court had to pay substantial deference to it by applying a standard of palpable and overriding error. Matters of mixed fact and law lay on a spectrum: a clear error in principle could be characterized as an error of law and subjected to a correctness standard; where the legal principle was not readily extricable, the matter was subject to a standard of palpable and overriding error. In light of the discretion and flexibility respecting processes before administrative tribunals, the standard of review for issues of procedural fairness was correctness.

The commission did not make palpable and overriding errors of fact. The appellants submitted that there were 19 errors of fact. However, the commission carefully and thoroughly reviewed the evidence and made credibility and factual findings available on the record.

The commission did not err in findings of mixed fact and law. The appellants submitted that there were three such errors but there was no error of fact finding and no demonstrated error in the application of the law.

The appellants were not denied procedural fairness. They submitted that the unfairness arose from the manner in which the commission used hearsay evidence and handwritten notes to make adverse credibility findings against them. They submitted that their evidence was subjected to a higher degree of scrutiny than the evidence of the commission's witnesses. The commission explained why it accepted evidence of commission staff on some issues; rejecting the appellants' evidence on those issues was not a denial of procedural fairness.

The reasons of the commission were not inadequate. The commission engaged in analysis at every step of its decision within a coherent and logical framework. Its line of reasoning was clear, from the issues before it, through the findings of fact and credibility, the statement and application of the law, to the conclusions. Within the context of the record, the issues, and the submissions of the parties, the judgment was sufficiently intelligible to show that the commission understood the substance of the matter and addressed the necessary and critical issues.

The commission did not err in its sanctions decision. The commission had a broad discretion in determining what was in the public interest for the purpose of ordering sanctions. The sanctions decision was consistent with applicable principles on the basis of the facts found in the merits decision.

Canada (Minister of Citizenship & Immigration) v. Vavilov, [2019] S.C.J. No. 65, 2019 SCC 65, 441 D.L.R. (4th) 1, 59 Admin. L.R. (6th) 1, 69 Imm. L.R. (4th) 1, apld

Other cases referred to

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(3d) 1, 82 Admin. L.R. (4th) 1; Canadian Broadcasting Corp. Pension Plan (Trustee of) v. BF Realty Holdings Ltd., 2002 44954 (ON CA), [2002] O.J. No. 2125, 214 D.L.R. (4th) 121, 160 O.A.C. 72, 26 B.L.R. (3d) 180, 35 C.B.R. (4th) 198 (C.A.); Cartaway Resources Corp (Re), 2004 SCC 26, [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22, 238 D.L.R. (4th) 193, 319 N.R. 1, [2004] 8 W.W.R. 62, 195 B.C.A.C. 161, 28 B.C.L.R. (4th) 1, 14 Admin. L.R. (4th) 190; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132, [2001] S.C.J. No. 38, 2001 SCC 37, 199 D.L.R. (4th) 577, 269 N.R. 311, 146 O.A.C. 201, 29 Admin. L.R. (3d) 1, 14 B.L.R. (3d) 1; Cornish v. Ontario (Securities Commission), [2013] O.J. No. 1233, 2013 ONSC 1310, 306 O.A.C. 107 (Div. Ct.); Donnini v. Ontario Securities Commission, [2003] O.J. No. 3541, 37 B.L.R. (3d) 48, 177 O.A.C. 59 (Div. Ct.); Dovbush v. Mouzitchka (2016), 131 O.R. (3d) 474, [2016] O.J. No. 2627, 2016 ONCA 381, 399 D.L.R. (4th) 69, 349 O.A.C. 383 (C.A.); Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, 329 N.B.R. (2d) 1, 291 D.L.R. (4th) 577, 372 N.R. 1, 64 C.C.E.L. (3d) 1, 69 Admin. L.R. (4th) 1, 69 Imm. L.R. (3d) 1, [2008] CLLC para. 220-020, 170 L.A.C. (4th) 1, 95 L.C.R. 65; Finkelstein v. Ontario (Securities Commission) (2018), 139 O.R. (3d) 161, [2018] O.J. No. 489, 2018 ONCA 61, 421 D.L.R. (4th) 278 (C.A.); Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1; L. (H.) v. Canada (Attorney General), [2005] 1 S.C.R. 401, [2005] S.C.J. No. 24, 2005 SCC 25, 251 D.L.R. (4th) 604, 333 N.R. 1, [2005] 8 W.W.R. 1, [2005] R.R.A. 275, 262 Sask. R. 1, 24 Admin. L.R. (4th) 1, 29 C.C.L.T. (3d) 1, 8 C.P.C. (6th) 199; Law Society of Upper Canada v. Neinstein (2010), 99 O.R. (3d) 1, [2010] O.J. No. 1046, 2010 ONCA 193, 317 D.L.R. (4th) 419, 1 Admin. L.R. (5th) 1 (C.A.); London (City) v. Ayerswood Development Corp., 2002 3225 (ON CA), [2002] O.J. No. 4859, 167 O.A.C. 120, 34 M.P.L.R. (3d) 1 (C.A.); MacDonald v. Chicago Title Insurance Co. of Canada (2015), 127 O.R. (3d) 663, [2015] O.J. No. 6350, 2015 ONCA 842, 341 O.A.C. 299, [2016] I.L.R. para. -5826, 61 R.P.R. (5th) 1, 392 D.L.R. (4th) 463, 56 C.C.L.I. (5th) 267, 52 B.L.R. (5th) 26 (C.A.); McLean v. British Columbia (Securities Commission), [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67, 2013 SCC 67, 347 B.C.A.C. 1, 452 N.R. 340, 366 D.L.R. (4th) 30, [2014] 2 W.W.R. 415, 53 B.C.L.R. (5th) 1, 64 Admin. L.R. (5th) 237; Mission Institution v. Khela, [2014] 1 S.C.R. 502, [2014] S.C.J. No. 24, 2014 SCC 24, 455 N.R. 279, 64 Admin. L.R. (5th) 171, 351 B.C.A.C. 91, 307 C.C.C. (3d) 427, 306 C.R.R. (2d) 66, 9 C.R. (7th) 1; National Gallery of Canada v. Lafleur de la Capitale Inc. (2017), 137 O.R. (3d) 481, [2017] O.J. No. 4589, 2017 ONCA 688, 72 C.C.L.I. (5th) 50, [2018] I.L.R. para. I-5992 (C.A.); Northern Securities Inc. v. Ontario (Securities Commission), [2015] O.J. No. 2924, 2015 ONSC 3641 (Div. Ct.); Ontario Securities Commission v. MRS Sciences Inc. (2015), 128 O.R. (3d) 414, [2015] O.J. No. 7025, 2015 ONSC 63 17 (Div. Ct.); Ottawa (City) Police Services v. Ottawa (City) Police Services, [2016] O.J. No. 4331, 2016 ONCA 627, 352 O.A.C. 310 (C.A.); Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58, 114 D.L.R. (4th) 385, 168 N.R. 321, [1994] 7 W.W.R. 1, 46 B.C.A.C. 1, 92 B.C.L.R. (2d) 145, 22 Admin. L.R. (2d) 1, 14 B.L.R. (2d) 217, 4 C.C.L.S. 117; Quadrexx Hedge Capital Management Ltd. (Re), 2017 LNONOSC 47, 2017 ONSEC 3, 40 O.S.C.B. 1308 (Ont. Securities Comm.); Quadrexx Hedge Capital Management Ltd. (Re), 2018 LNONOSC 32, 2018 ONSEC 3, 41 O.S.C.B. 1023 (Ont. Securities Comm.); R. v. M. (R.E.), 2008 SCC 51, [2008] 3 S.C.R. 3, [2008] S.C.J. No. 52, 235 C.C.C. (3d) 290, 83 B.C.L.R. (4th) 44, [2008] 11 W.W.R. 383, 260 B.C.A.C. 40, 60 C.R. (6th) 1, 380 N.R. 47, 297 D.L.R. (4th) 577; R. v. Sheppard, [2002] 1 S.C.R. 869, [2002] S.C.J. No. 30, 2002 SCC 26, 210 D.L.R. (4th) 608, 284 N.R. 342, 211 Nfld. & P.E.I.R. 50, 162 C.C.C. (3d) 298, 50 C.R. (5th) 68; R. v. Walker, [2008] 2 S.C.R. 245, [2008] S.C.J. No. 34, 2008 SCC 34, [2008] 6 W.W.R. 1 310 Sask. R. 305, 294 D.L.R. (4th) 106, 57 C.R. (6th) 212, 231 C.C.C. (3d) 289, 375 N.R. 228; R. v. Walle, [2012] 2 S.C.R. 438, [2012] S.C.J. No. 41, 2012 SCC 41, 94 C.R. (6th) 296, 348 D.L.R. (4th) 375, 433 N.R. 1, [2012] 10 W.W.R. 213, 284 C.C.C. (3d) 153, 533 A.R. 1; Re:Sound v. Fitness Industry Council of Canada, [2014] F.C.J. No. 215, [2015] 2 F.C.R. 170, 2014 FCA 48, 455 N.R. 87, 120 C.P.R. (4th) 287, 72 Admin. L.R. (5th) 1 (Fed. C.A.); Roulston v. McKenny (2017), 135 O.R. (3d) 632, [2017] O.J. No. 26, 2017 ONCA 9, 23 E.T.R. (4th) 187, 407 D.L.R. (4th) 157 (C.A.); Rowan v. Ontario (Securities Commission) (2012), 110 O.R. (3d) 492, [2012] O.J. No. 1375, 2012 ONCA 208, 290 O.A.C. 159, 350 D.L.R. (4th) 157 (C.A.); Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1; Schwartz v. Canada, 1996 217 (SCC), [1996] 1 S.C.R. 254, [1996] S.C.J. No. 15, 133 D.L.R. (4th) 289, 193 N.R. 241, 17 C.C.E.L. (2d) 141, 10 C.C.P.B. 213, [1996] 1 C.T.C. 303, 96 D.T.C. 6103; Todorov v. Ontario Securities Commission (2018), 142 O.R. (3d) 578, [2018] O.J. No. 3940, 2018 ONSC 4503 (Div. Ct.); Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201, 44 B.L.R. (3d) 165 (C.A.); West Van Inc. v. Daisley (2014), 119 O.R. (3d) 481, [2014] O.J. No. 1424, 2014 ONCA 232, 55 C.P.C. (7th) 61, 317 O.A.C. 294 (C.A.)

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 49 [as am.]

Securities Act, R.S.O. 1990, c. S.5, ss. 9 [as am.], (1) [as am.], (5), 126 [as am.], 126.1(1)(b), 127(1) [as am.]

Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, s. 15(1)

APPEAL from liability and sanctions decisions by the Ontario Securities Commission.

Jay Naster, for appellant Tony Sanfelice.

Miklos Nagy, self-represented.

Derek Ferris and Michelle Vaillancourt, for respondent.

The judgment of the court was delivered by

D.L. CORBETT AND PERELL JJ.: —

A. Introduction

[1] In a decision dated February 6, 2017, following a 42-day hearing, the Ontario Securities Commission ("OSC" or the "Commission") found that Miklos Nagy and Tony Sanfelice had breached the Ontario Securities Act.[^1] The Commission found fraud in three different securities offerings that cost investors over $3 million. Mr. Sanfelice and Mr. Nagy appeal the Commission's decision.[^2] They also appeal the sanctions imposed by the Commission in a decision dated January 23, 2018, which followed a two-day sanctions hearing.[^3]

[2] Mr. Nagy's and Mr. Sanfelice's appeals were argued in the Divisional Court on September 26, 2019 and judgment was reserved. On December 19, 2019, while the appeal was under reserve, the Supreme Court of Canada released its decisions in Canada (Minister of Citizenship and Immigration) v. Vavilov[^4] which as we shall explain below changed the standard of appellate review for decisions of the OSC. After the release of the Vavilov decision, the parties were asked for further written submissions, which were received by the end of February 2020. In light of the Covid-19 pandemic, there was a further delay in releasing this court's decision.

[3] For the reasons that follow, Mr. Nagy's and Mr. Sanfelice's appeals are dismissed.

B. Overview

[4] Between July 2008 and January 2013, Mr. Nagy and Mr. Sanfelice were the directing minds of (1) Quadrexx Hedge Capital Management Inc.; (2) Quadrexx Asset Management Inc.; and (3) Quadrexx Secured Assets Inc. They were also the owners of shares in Canadian Hedge Watch Inc.

[5] After an investigation and a hearing, the OSC found that Mr. Nagy and Mr. Sanfelice had perpetrated fraud in three separate transactions; namely, (a) the DALP acquisition of Canadian Hedge Watch shares at an inflated valuation (the alleged "DALP fraud"); (b) the misuse of the proceeds of the sale of Quadrexx Asset Management preference shares (the alleged "QAM II fraud"); and (c) the misappropriation of the proceeds of the sale of Quadrexx Secured Assets (the alleged "QSA fraud").

(a) With respect to the DALP fraud, in 2009, Mr. Nagy and Mr. Sanfelice arranged for a sale of shares of Canadian Hedge Watch to Diversified Assets LP ("DALP"). Quadrexx Hedge Capital Management was the general partner of DALP. Quadrexx Asset Management was the investment adviser. DALP sold securities to finance its acquisition of Canadian Hedge Watch. The Commission concluded that the price paid by DALP for Canadian Hedge Watch shares was inflated because Messrs. Nagy and Sanfelice had manipulated the valuation process.

(b) With respect to the QAM II fraud, in 2011 and 2012, Quadrexx Asset Management sold its own shares without disclosing to investors that it was using some of the proceeds to pay prior investors dividends that it did not have sufficient funds to pay. The Commission found that by directing these activities, Messrs. Nagy and Sanfelice engaged in a fraudulent course of conduct.

(c) With respect to the QSA fraud, the Commission found that in 2012, when Quadrexx Asset Management was having business difficulties and required working capital, it misappropriated funds that had been raised in an offering of securities by its wholly owned subsidiary, Quadrexx Secured Assets. The Commission found that Messrs. Nagy and Sanfelice had the subsidiary pay its parent $185,397 more than it was entitled to receive under the terms of the offering memorandum.

[6] On June 18, 2013, Quadrexx Asset Management filed an assignment in bankruptcy under s. 49 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

[7] On January 30, 2014, Commission staff filed a statement of allegations, alleging fraudulent conduct and several other violations of Ontario securities law.

[8] On February 6, 2017, after a 42-day hearing, the Commission found that Mr. Nagy, Mr. Sanfelice, and their corporations had engaged in fraudulent conduct in connection with three distributions of securities, contrary to s. 126.1(1) (b) of the Securities Act, which states:

Fraud and market manipulation

126.1(1) A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

(a) [. . .]

(b) perpetrates a fraud on any person or company.

[9] The Commission further found that Mr. Nagy, Mr. Sanfelice, and Quadrexx Asset Management committed other contraventions of the Act. The Commission found fraudulent misconduct in respect of the DALP fraud, the QAM II fraud, and the QSA fraud. The Commission found that Mr. Nagy and Mr. Sanfelice (a) did not deal with investors justly or in an equitable manner; (b) deceived investors and took advantage of their trust; (c) were not faithful in discharging their contractual and legal duties to investors; (d) did not observe reasonable commercial standards of fair dealing; and (e) defrauded investors and took unconscionable advantage of them.

[10] In particular, the Commission found that

(a) Quadrexx Asset Management failed to report a working capital deficiency, contrary to s. 12.1 of National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant obligations) (NI 31-103).

(b) Quadrexx Asset Management failed to deal fairly, honestly and in good faith with its clients, contrary to s. 2.1(1) of OSC Rule 31-505 (Conditions of Registration).

(c) Quadrexx Asset Management acted contrary to the public interest by causing DALP to make a loan to it indirectly to avoid the Act's prohibition against making the loan directly.

(d) As directors and officers Messrs. Nagy and Sanfelice were deemed, by s. 129.2 of the Securities Act, to have themselves breached the securities law that their corporations had contravened.

(e) Messrs. Nagy and Sanfelice breached their obligations as Quadrexx Asset Management's Ultimate Designated Person ("UDP") and Chief Compliance Officer ("CCO") in contravention of NI 31-103, ss. 5.1 and 5.2.

[11] On January 23, 2018, following a second hearing on sanctions, the Commission directed, among other things, that

(a) Messrs. Nagy and Sanfelice were permanently prohibited from trading or acquiring securities.

(b) Messrs. Nagy and Sanfelice were permanently prohibited from acting as a director or officer of any issuer or registrant and from acting as a registrant, investment fund manager or promotor.

(c) Messrs. Nagy and Sanfelice were each ordered to pay an administrative penalty of $600,000.

(d) Messrs. Nagy and Sanfelice were jointly ordered to disgorge $2,495,277, in relation to the QAMII and QSA fraud.

(e) Mr. Nagy was ordered to disgorge $482,666.67 in relation to the DALP fraud.

(f) Mr. Sanfelice was ordered to disgorge $323,382.28 in relation to the DALP fraud.

(g) Messrs. Nagy and Sanfelice were ordered to pay costs in the amount of $300,000 jointly and severally, $150,000 jointly and severally with Quadrexx Hedge Capital and $100,000 jointly and severally with Quadrexx Secure Assets.

C. The DALP Fraud

[12] Messrs. Nagy and Sanfelice and three other individuals were the initial shareholders of Canadian Hedge Watch. Mr. Sanfelice was the president and CEO. Canadian Hedge Watch is a publisher of reports for the financial services sector, including but not limited to publications in respect of hedge funds.

[13] Mr. Sanfelice is 54 years old. In 1987, he graduated with a B.A. in mathematics. In 1994, he was designated as a certified management accountant. In 2001, he took the mutual fund course, and in 2006, he took the securities course. In 2007, he took the partners, directors, and officers' course. Mr. Sanfelice met Mr. Nagy in 1994 when he retained him as a personal financial advisor.

[14] Mr. Nagy is 58. He was born in Hungary where he studied mathematics. He moved to Switzerland in 1982 as a political refugee and came to Canada in 1986 with his wife and children as landed immigrants. He obtained a B.Sc. (Hons.) in econometrics in 1992 while working as a computer programmer at Credit Suisse, Canada. Following graduation, he worked as a financial advisor, selling mutual funds and insurance. He obtained his Chartered Financial Analyst designation in 2000 and a Certified Financial Planner designation in 2001.

[15] While at Canadian Hedge Fund, Messrs. Nagy and Mr. Sanfelice decided to establish a hedge fund, and they established Quadrexx Asset Management in 2003. Mr. Sanfelice took the lead role in respect of Canadian Hedge Watch and Mr. Nagy had the lead role at Quadrexx Asset Management.

[16] In 2008, Messrs. Nagy and Sanfelice decided to divest their interest in Canadian Hedge Watch and they retained Michael Sharp, an experienced securities lawyer, as their lawyer. On June 13, 2008, DALP was established as a limited partnership. Quadrexx Hedge Capital was the general partner. Mr. Nagy was a director and the president of DALP, and Mr. Sanfelice was a director and the secretary.

[17] An offering memorandum dated June 16, 2008 was prepared to capitalize DALP. The first DALP offering memorandum stated that the initial equity investment made by DALP would be the acquisition of some or all of the issued and outstanding shares of Canadian Hedge Watch:

[DALP] intends to purchase CHW shares from its existing shareholders for a total price not to exceed $2.65 million in total. Prior to June 30, 2009, the General Partner will engage a third party "business valuator" firm to valuate the fair market value of CHW. The price [DALP] pays for acquiring CHW (either fully or partially) may be adjusted downward should the valuation of CHW be less than $2.65 million. The costs of the valuation will be paid by the General Partner. Such valuation will be based on a "dividend discount" valuation or pricing model.

[18] As envisioned by the offering memorandum, in November 2008, Mr. Sanfelice engaged Steven Polisuk, a senior manager in the business valuation group of Deloitte, to provide an estimate of the fair value of all of the issued and outstanding shares of Canadian Hedge Watch. Tom Strezos was the partner in charge of the engagement. The engagement letter set out the valuation methodology. Mr. Polisuk along with Farouk Mohamed, a manager in Deloitte's business valuation group, would prepare the valuation report.

[19] On December 22, 2008, Mr. Sanfelice provided Deloitte with Canadian Hedge Watch's business plan. The business plan included audited revenues and expenses for 2007 and 2008 and five-year forecasts of revenues, expenses, EBITDA (earnings before interest, taxes, depreciation, and amortization), and income before taxes for the years 2009 to 2013. The business plan was prepared by Mr. Sanfelice.

[20] Internally, Deloitte thought that Canadian Hedge Watch's revenue forecasts were too high and too aggressive, and on January 9, 2009, there was a conference call amongst Mr. Sanfelice, Mr. Polisuk and Mr. Mohamed.

[21] On January 12, 2009, Mr. Mohamed prepared a draft valuation report with Mr. Polisuk's assistance. The draft report estimated that the fair market value of all of the issued and outstanding shares of Canadian Hedge Watch at the valuation date of October 31, 2008 had a mid-point value of $3.5 million. Mr. Strezos provided comments, and the mid-point was reduced to $3.1 million.

[22] On January 14, 2009, Mr. Mohamed sent the revised draft valuation to Iseo Pasquali, the Deloitte partner responsible for its valuation practice in Toronto area. Mr. Polisuk felt that the report was a greater than normal risk and would therefore require the approval of a second partner.

[23] On January 16, 2009, Mr. Pasquali discussed the draft valuation report during an internal conference call with Messrs. Polisuk and Mohamed. He summarized his concerns in an e-mail that went to Mr. Mohamed and Mr. Polisuk. As a result of Mr. Pasquali's concerns, the schedules to the draft valuation report were revised. The adjustments had the effect of reducing the mid-point of the valuation to $1.535 million.

[24] A few days later, on January 19, 2009, Mr. Polisuk spoke to Mr. Sanfelice by telephone and then he sent him an e-mail message requesting support for Canadian Hedge Watch's internal $2.6 million valuation. Mr. Polisuk asked for documentation relating to share redemptions and for support for the education revenues in the financial projections.

[25] Later that day in two e-mails, Mr. Sanfelice provided details of a recent sale of Canadian Hedge Watch's shares. He provided a summary of share redemptions by Messrs. Nagy and Sanfelice. He provided the projections that Mr. Polisuk had requested. Mr. Sanfelice provided three different revenue streams of $3.3 million, $3.67 million, and $4.08 million, respectively.

[26] The next day, January 20, 2009, Mr. Sanfelice and Mr. Polisuk spoke by telephone. Mr. Polisuk cannot recall the details of the phone call, but from some notes he testified that he told Mr. Sanfelice that the revenue projections could not be substantiated beyond around $1.53 million. Mr. Polisuk cannot recall whether he gave Mr. Sanfelice an evaluation, but Mr. Polisuk was certain that he indicated that the valuation would not be close to $2.65 million. Later that day, Deloitte's retainer was terminated.

[27] Mr. Nagy later explained the reason for the termination. He testified that he and Mr. Sanfelice were concerned with the delays in obtaining the valuation from Deloitte and that costs were escalating with no end in sight. He said that these concerns were the reason that Deloitte's engagement was terminated. The Commission, however, later found that the Deloitte retainer was cancelled because Deloitte would not provide a valuation at around $2.65 million. The Commission concluded that Deloitte's retainer was not terminated because of concerns about delay or expense.

[28] Messrs. Nagy and Sanfelice needed to retain a new evaluator, and on January 23, 2009, they met with Harry Figov of HJF Financial Inc. to discuss a retainer to value Canadian Hedge Watch. They had the previous year considered retaining Mr. Figov and had met with him.

[29] At their meeting with Mr. Figov and in the following weeks, they provided Mr. Figov with revenue forecasts. The forecasts were revised from the forecasts that had been provided to Deloitte.

[30] Michael Ho, a senior forensic accountant in the Enforcement Branch of the OSC compared the forecasts in the Initial Business Plan provided to Deloitte to the revised forecasts in the Second Business Plan that were provided to Mr. Figov. Mr. Ho testified that the revised forecasts reflected increases in EBITDA in each year of the five-year forecast. The aggregate increase in EBITDA was $1,656,450 over the five years, which resulted from an increase in revenues totaling $627,250.

[31] Mr. Nagy testified that the forecasts had been revised and updated because the acquisition of Henton Information Systems Ltd. ("Henton"), an education (e-learning) company, had become very likely in January 2009 and because he had just received Canadian Hedge Watch's 2008 audited statements. The Henton acquisition had not been mentioned to Deloitte.

[32] Based on the information that he received from Mr. Nagy and Mr. Sanfelice, on March 1, 2009, Mr. Figov provided them with a valuation report with a mid-point valuation of $2,535,668, which is the amount that was used in the Second DALP offering memorandum. The second DALP offering memorandum stated:

[DALP] is purchasing these CHW shares from its prior shareholders for a total price of $2,535,688 in total [sic]. The General Partner has engaged a third party "business valuator" firm, to valuate the fair market value of CHW. The price [DALP] will pay for acquiring all of the issued and outstanding shares of CHW [sic] $2,535,688 for a full purchase which is at the midpoint of the valuation determined by the valuator. The costs of the valuation will be paid by the Partnership.

[33] Mr. Nagy and Mr. Sanfelice were paid $1,223,035.43 and $819,432.80, respectively, for their Canadian Hedge Watch shares. The sale proceeds were based on Mr. Figov's valuation. If the shares had been sold to DALP investors based on the last Deloitte draft valuation, they would have received $740,374.76 and $496,050.52, respectively. As part of its sanctions, the Commission ordered the disgorgement of the differences between the amount received and the amount that ought to have been received by Mr. Nagy and Mr. Sanfelice. The disgorgement amounts of $482,660.67 and $323,382.28 for Mr. Nagy and Mr. Sanfelice, respectively, represented 39.4 per cent of the amounts paid to them for their shares.

[34] The Commission found that Mr. Nagy and Mr. Sanfelice created the revised forecasts for the sole purpose of improving Canadian Hedge Watch's EBITDA to support a valuation that would come close to the $2.65 million reflected in the first DALP offering memorandum. It found that the Henton Information Agreement was not a plausible explanation for justifying the changes to the initial forecasts. The Commission accepted Mr. Ho's forensic analysis evidence that the increase in Canadian Hedge's Watch's anticipated revenues (its EBITDA) over the five-year forecast was $1,656,450 and that the increase was attributed to an increase in revenues of $627,250 and a decrease in expenses of $1,029,200. Of the increase of revenues only $41,250 was attributable to an increase in education company revenue. Mr. Ho testified that the decrease in expenses related to a decrease in personnel expenses. The Commission accepted Mr. Ho's evidence and noted that Mr. Nagy and Mr. Sanfelice had not demonstrated that there was anything wrong with Mr. Ho's financial analysis.

[35] The Commission found that Messrs. Nagy and Sanfelice knowingly undertook acts which were deceitful and that they knew would prejudice the economic interests of the DALP investors by abruptly terminating the Deloitte engagement to preclude the risk of receiving a low valuation and by immediately retaining a different business valuator who was provided with artificially enhanced economic forecasts. The Commission found that by manipulating the valuation process, Messrs. Nagy and Sanfelice enriched themselves as the owners of more than 80 per cent of Canadian Hedge Watch's shares by causing DALP investors to pay a higher price for the shares than they would have paid had Deloitte delivered its valuation report.

D. The QAM II Fraud

[36] Quadrexx Asset Management experienced losses from 2007 to 2011. It lost $2,154,373 in 2010 and $2,310,279 in 2011. Its deficit grew from approximately $4.2 million in 2007 to $12.9 million by December 31, 2011

[37] From March 2011 to June 2012, Quadrexx Asset Management issued and sold Class II Preference Shares raising approximately $4.1 million. The shares offered dividends at the rate of 12 per cent per annum, payable at 6 per cent on June 30 and December 31 each year. This share offering followed an earlier offering of Class I Preference Shares that raised $7,097,000. That earlier offering offered dividends at the rate of 13.5 per cent per annum, payable 6.75 per cent on June 30 and December 31 each year.

[38] The Class II Preference share offering memorandum dated March 8, 2011 stated that monies raised would be used for working capital to fund the growth plan. Under the heading "Short Term Objective and How We Intend to Achieve It", the offering memorandum stated that Quadrexx Asset Management planned to expand its distribution network through hiring of additional sales personnel and the acquisition of financial advisory businesses. In Item 8, entitled "Risk Factors", the offering memorandum stated: "There can be no assurance that Quadrexx will, or will be permitted under applicable corporate law to, pay dividends on the Quadrexx Asset Management Class II Shares in the stated amounts or at the stated times."

[39] Notwithstanding its business losses, during the period July 1 to September 16, 2011, Quadrexx paid a June 30, 2011 dividend to the Class I and II investors of $585,292.50. During the period January 24 to March 23, 2012, Quadrexx paid a December 31, 2011 dividend of $712,702.50 to the Class I and II investors. Following an analysis of Quadrexx Asset Management's bank accounts and bank statements, Mr. Ho testified that of the $3,514,444.93 deposited from the sale of Class II shares, all but $472.92 was transferred to the Quadrexx Corporate Account. Mr. Ho testified that $585,292.50 was disbursed from the Corporate Account to pay the June 2011 dividends. He testified that a total of $282,363.56 from other sources was deposited into the Corporate Account and that these funds and the opening balance of $43,916.88 was insufficient to pay for the June 2011 Dividends. Mr. Ho concluded that Class II preference share proceeds were used to pay for the difference of $259,000 for the June 2011 Dividends.

[40] From his analysis of Quadrexx's bank accounts, Mr. Ho testified that during the period from January 24 to March 23, 2012, $690,020 was transferred from the QAMII Account to the Quadrexx Corporate Account and $685,515 of the December 2011 Dividends, including a single June 2011 Dividend payment of $1,678.50, were disbursed from the Corporate Account. The Corporate Account had $368,078.48 from sources other than the share account which, together with the opening balance of $67,050.43, was insufficient to fund the dividends.

[41] Mr. Ho concluded that some of the payment of $685,515 for December dividends was made from proceeds of the sale of the Class II preference shares. The Commission so found, though it did not make a finding of the precise amount of QAMII proceeds used to pay December dividends.

[42] The Commission found that after July l, 2011, Mr. Nagy and Mr. Sanfelice knew that QAM II Proceeds were being used, in part, to pay dividends. The payment of dividends was delayed and staggered given cash flow problems. Throughout investors were being told in the QAMII offering memorandums and brochures that preference share proceeds would be primarily used for the expansion of the business. The Commission concluded that the representations contained in the Class II offering memorandum and the brochures created a misleading picture.

[43] On June 24, 2011, staff of the Compliance and Registrant Regulation Branch of the Commission initiated a compliance review of Quadrexx Asset Management for the period June 2010 to May 2011. Susan Pawelek, an accountant in the Branch, met with Mr. Nagy and Mr. Sanfelice throughout 2011.

[44] The 2011 Compliance Review took place while the Class II Offering was ongoing. It took place while Mr. Nagy and Mr. Sanfelice were making a decision about declaring dividends for the preference shareholders. Ms. Pawelek and Chris Caruso, another accountant with the Branch, testified that during the initial meeting with Mr. Nagy and Mr. Sanfelice, no mention was made that Quadrexx Asset Management was selling preferred shares to the public.

[45] Ms. Pawelek testified that in September 2011, she took part in an interview with Mr. Nagy and Mr. Sanfelice to go over the deficiencies that would be included in the compliance report. It was only later that Ms. Pawelek reviewed an anonymous complaint indicating that Quadrexx Asset Management was offering preferred shares for sale.

[46] From October 5 to 26, 2011, Ms. Pawelek sent six separate requests to Mr. Sanfelice requesting information about preferred shares. However, Mr. Sanfelice provided information only regarding the Class I Offering, which had closed by that time. Although asked direct questions about other share offerings, he did not mention the Class II offering.

[47] It is clear that Ms. Pawelek felt that Mr Nagy and Mr Sanfelice were less than candid with her about Quadrexx Asset Management's situation. However, it was established the disclosure had been made to the Commission about QAMII, and that a review of Commission files by staff would have shown this disclosure. Commissioner Portner did not make findings -- either for or against Mr Nagy and Mr Sanfelice -- in respect to this aspects of their dealings with Ms. Pawelek and other Commission staff. In "not making findings", the Commissioner neither accepted nor rejected staff's views on these issues: he did not rely on these events in reaching his own conclusions, but he did not find that Commission staff had been unreasonable in their reaction to Mr Nagy's and Mr Sanfelice's failure to mention the QAMII offering to them, given the overall context of dealings.

[48] In April 2012, Ms. Pawelek learned that that Quadrexx was planning to purchase the assets of Mineralfields Fund Management Inc., Pathway Investment Counsel Inc., and Limited Market Dealer Inc. (the "Mineralfields transaction"). She reviewed Quadrexx's unconsolidated December 31, 2011 financial statements and discovered that over $3.3 million of Class II shares had been issued in 2011. Separate meetings with each of Mr. Nagy and Mr. Sanfelice were then set up for May 10, 2012, for the purpose of gathering more information.

[49] Through the Mineralfields transaction, Quadrexx proposed to take on the business of other registrants with serious compliance issues at a time when staff had concerns about Quadrexx arising from the 2011 Compliance Review and about Quadrexx's use of investor proceeds to pay dividends. As a result, in June 2012, staff objected to the Mineralfields transaction pursuant to s. 11.9(5) of National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) (NI 31-103) on the basis that it was (a) likely to hinder Quadrexx Asset Management in complying with securities legislation; (b) inconsistent with an adequate level of investor protection; and (c) otherwise prejudicial to the public interest.

[50] Among other findings, the Commission found that (a) from July l , 2011, Mr. Nagy and Mr. Sanfelice knew that QAMII proceeds were being used, in part, for the payment of the June 2011 Dividends and the December 2011 Dividends; (b) Mr. Nagy and Mr. Sanfelice represented to potential investors that the proceeds would be used primarily for business growth; (c) they failed to amend the provisions of the first offering memorandum and the Class II marketing brochure to reflect the change in the intended use of the proceeds by at least July l, 2011 and they failed to inform prospective investors of the change in use of the proceeds after they had become aware that they would be needed to pay the December 2011 dividends; (d) investors were not apprised of the altered risk profile of the Class II Offering since Mr. Nagy and Mr. Sanfelice did not inform them of the use of the proceeds or the cash flow problems experienced by Quadrexx; and (e) since Quadrexx subsequently filed an assignment in bankruptcy there was no prospect that the investors would recover any part of their investments.

[51] The Commission concluded that Mr. Nagy, Mr. Sanfelice and Quadrexx perpetrated a fraud on QAMII investors contrary to s. 126 of the Securities Act and contrary to the public interest.

E. The QSA Fraud

[52] The Quadrexx Secure Assets offering memorandum was an offering of notional units comprised of 20 Class A Shares having an issue price of $5 per share and a promissory note in the principal amount of $900, for a total cost of $1,000 per unit. The maximum amount of the offering was $40 million, and the minimum offering was $250,000.

[53] Quadrexx Asset Management was to be responsible for managing the assets of Quadrexx Secure Assets. A sub-advisor was to manage the proceeds. Pursuant to its agreement with the sub-advisor, 14 per cent of the amount raised would be used to pay Quadrexx for agents' commissions, legal expenses, marketing, etc.

[54] Mr. Nagy and Mr. Sharp, Quadrexx's securities law solicitor, prepared an offering memorandum dated August 15, 2011. It included a chart describing the use of proceeds from the sale of the units. The chart indicated that 14 per cent of the gross proceeds would be taken as fees, that is, 4 per cent in offering costs and 10 per cent in sales commissions. The offering costs were stated to be $10,000, assuming the minimum offering of $250,000 and $1.6 million assuming the maximum offering of $40 million. A footnote to the use of proceeds chart described the 4 per cent in offering costs and stated:

[QSA] will be responsible for paying 4% of the gross proceeds realized to [Quadrexx] in respect of all legal, accounting, audit, printing, some Directors' compensation, design, marketing, travel and other costs associated with the setting up of [QSA], as well as the other costs of Offering. Any costs in excess of this amount will be borne by [Quadrexx].

[55] Mr. Nagy testified that he and Mr. Sanfelice decided they would recover the costs associated with the offering from the outset by amending the offering memorandum to permit Quadrexx Asset Management to take the $187,000 from the first money raised rather than simply recovering the costs from the 4 per cent fee. To amend the offering memorandum Mr. Nagy sent Mr. Sharp an e-mail on August 1, 2012 that stated:

One additional thing [Mr. Sanfelice] wanted to clarify more clearly is that we want the 4% onetime initial charge classified as for reimbursement of expenses, marketing and otherwise and an [sic] an extra fee for Quadrexx. We don't want to be accused on use of proceeds hence we want to add this minor clarification to the [offering memorandum].

[56] At the hearing, Mr. Nagy testified that that while his e-mail may not have been as clear as it could have been, it was an instruction to Mr. Sharp to amend the offering memorandum to permit Quadrexx Asset Management to take the $187,000 as a one-time additional fee from the first proceeds.

[57] Mr. Sharp did prepare a second offering memorandum dated August 1, 2012 with a footnote about the one-time additional fee, but this offering memorandum was not provided to prospective investors. A third offering memorandum dated August 31, 2012 was prepared, and it was provided to investors. A fourth offering memorandum dated November 30, 2012 was also prepared, and it was provided to investors. The third and fourth offering memorandum contained a footnote which stated:

[QSA] will pay 4% of the issue price of the Units ($40 per Unit) to Quadrexx. The first $187,749 so received by Quadrexx shall be treated as the repayment of amounts advanced by Quadrexx to [QSA], and thereafter shall be treated as a one-time management fee to Quadrexx. Out of such repayment and management fee, Quadrexx will be responsible for all of the costs of establishing [QSA], including all legal, audit and accounting fees, for compensating some of [QSA]'s Directors and for marketing the offering of Units. Any costs in excess of this amount will be borne by Quadrexx.

[58] The use of proceeds chart in the Second, Third and Fourth offering memorandums were not changed from the first offering memorandum and did not reflect any immediate deduction of the additional fee.

[59] A similar situation existed with the marketing material. The initial marketing brochure dated September 2011 stated that the "Total Initial Costs/Fees" would be 14.0 per cent (10 per cent to selling agents, 4 per cent for legal, marketing, printing etc.)" and "Other Fees None". The Brochure was amended in September 2012 and again in October 2012. The description of "Total Initial Costs/Fees" in these subsequent versions was identical to the disclosure in the First QSA Brochure. There was no reference to any additional fee or to the subject matter of the footnote.

[60] On November 30, 2012 Mr. Nagy and Sanfelice certified that the fourth offering memorandum contained no misrepresentations. However, by this time, Quadrexx Asset Management had paid itself approximately $221,024 of the approximately $321,000 raised, which use was inconsistent with use of proceeds charts in the Second, Third and Fourth offering memorandums.

[61] The Commission found that Quadrexx Asset Management was in serious financial distress by October 2012 and that the proceeds of the offering were the only new source of funds available to it. The Commission found that Mr. Nagy and Mr. Sanfelice determined that they could divert the initial proceeds from the offering to repay Quadrexx for the start-up costs just on the basis of the footnote. The Commission found that Mr. Nagy and Mr. Sanfelice intentionally used the proceeds in a manner other than for the purposes represented to prospective investors. The Commission concluded that their conduct conveyed a misleading picture to investors in the Third and Fourth offering memorandums and in the brochures.

[62] The Commission found that Mr. Nagy and Mr. Sanfelice were aware that at the end of October 2012 Quadrexx Secure Assets had only raised $109,330. The Commission found that Mr. Nagy and Mr. Sanfelice transferred monies to meet cash flow requirements while continuing to market the QSA Units without advising either existing or prospective investors of the diversion.

[63] The Commission did not accept Mr. Nagy's and Mr. Sanfelice's testimony that the failure to amend the brochures to reflect the use of proceeds to pay the additional fee was a mistaken oversight. The Commission rather concluded that there was no mistake and the reality was that disclosing the diversion of the additional fee with a minimum offering of only $250,000 would likely have precluded further sales of the Quadrexx Secure Asset units to properly informed investors.

[64] The Commission assessed Quadrexx Asset Management's entitlement to proceeds at the end of each of October and November 2012 and as of the end of the offering and concluded that the payments exceeded Quadrexx's entitlement and were made by Mr. Nagy and Mr. Sanfelice deceitfully and dishonestly.

[65] The Commission found that Mr. Nagy's and Mr. Sanfelice's failure to disclose the payment of the additional fee from the initial proceeds was egregious. It noted that by November 30, 2012, only $109,186 remained for investment purposes after Quadrexx had paid itself approximately two-thirds of the funds raised from the QSA Offering and prospective investors would have wanted to be aware of this important fact.

F. Other Findings of the Ontario Securities Commission

[66] The Commission explained that it considered whether the evidence of Messrs. Nagy and Sanfelice was in harmony with the preponderance of probabilities disclosed by the facts of the case and provided an explanation for why specific testimony was not accepted:

(a) When cross-examined with respect to delays in the distribution of cheques for payment of the December 2011 dividends, Mr. Sanfelice changed his explanation to an admission that sufficient monies to pay dividends were not in the account in December 2011.

(b) Notwithstanding their submission that the Henton Agreement had a high degree of certainty, neither Mr. Nagy nor Mr. Sanfelice used it to justify the revenue projections for education when requested by Deloitte on January 19, 2009.

(c) Mr. Sanfelice retracted his evidence provided during his compelled examination and this raised credibility issues given that his retracted evidence was more consistent with facts of this case than his testimony at the hearing.

(d) Contrary to Mr. Nagy's and Mr. Sanfelice's testimony about the timing and the delivery of the Deloitte valuation report, the Commission found that (a) there was no reason to conclude that the Deloitte valuation would not have been delivered by January 31, 2009; and (b) by the date of the termination of the Deloitte engagement, Deloitte had only incurred fees of $18,800. These facts were inconsistent with Mr. Nagy's and Mr. Sanfelice's testimony.

(e) In relation to (a) the request by Deloitte for further information; (b) the termination of Deloitte; and (c) the preparations of the Revised Forecasts provided to Mr. Figov, the Commission found Mr. Nagy's and Mr. Sanfelice's account of the events to be improbable.

[67] The Commission made the following non-fraud findings: (a) Quadrexx Asset Management breached its working capital obligations pursuant to s. 12.1(1) and (2) of NI 31-103; (b) Quadrexx Asset Management failed to deal fairly, honestly and in good faith with clients contrary to s. 2.1(1) of OSC Rule 31-505; (c) Mr. Nagy and Mr. Sanfelice breached their obligations as Quadrexx Asset Management's UDP and CCO respectively pursuant to ss. 5.1 and 5.2 of NI 31-103; and (d) Mr. Nagy and Mr. Sanfelice, as officers and directors of Quadrexx Asset Management, authorized, permitted or acquiesced in the breaches of s. 12.1(1) and (2) of NI 31-103 and s. 2.1(1) of OSC Rule 31-505.

G. Mr. Nagy's and Mr. Sanfelice's Submissions

[68] Mr. Nagy and Mr. Sanfelice submit that in respect of each finding of fraud, the OSC committed palpable and overriding errors that require its decision to be set aside. They submit that the Commission erred in law and also denied them procedural fairness. In addition, they submit that the Commission's reasons in respect of crucial issues are so inadequate as to foreclose meaningful appellate review.

[69] Mr. Nagy and Mr. Sanfelice submit that the Commission made the following six errors with respect to the DALP transaction [which errors we have classified]:

(a) The Commission erred in finding that Mr. Mohamed confirmed the testimony of Mr. Polisuk in connection with the communication on January 19, 2009 regarding the reason why Deloitte was terminated, where Mohamed was not a party to and could not, as a matter of law, provide any confirmation (issue of fact).

(b) The Commission erred in relying on handwritten notes of Mr. Polisuk, in respect of the communication on January 19, 2009, where such notes neither refreshed the witness' recollection, nor were confirmed to be a record of any communication, and with no regard for the inherent unreliability of the notes, nor how the notes were improperly used by Commission staff in the examination of the witness (issue of fact).

(c) The Commission erred in relying on the hearsay evidence of Mr. Mohamed to corroborate the hearsay evidence of Mr. Polisuk in respect of a communication they had with Mr. Pasquali, who was not called as a witness, on January 16, 2009. This reliance was inherently unfair because Mr. Nagy and Mr. Sanfelice were denied any right of cross-examination of Mr. Pasquali on a pivotal issue (issue of fact and issue of procedural fairness).

(d) The Commission erred in relying on the opinion evidence of Mr. Ho, in respect of the reasonableness of the revised forecasts, where Mr. Ho was not qualified to render an opinion and where he admitted to having no expertise to render an opinion (issue of fact).

(e) The Commission erred in finding that there was no evidence to support Mr. Nagy's and Mr. Sanfelice's reasons for terminating Deloitte's engagement. The Commission ignored evidence that supported their explanation of why Deloitte was terminated (issue of fact).

(f) The Commission erred in making adverse findings of fact based on speculation to reject Mr. Nagy's and Mr. Sanfelice's evidence, in respect of (a) the progress of discussions respecting the Henton Transaction; and (b) when and why the revised forecasts were prepared (issue of fact).

[70] Mr. Nagy and Mr. Sanfelice submit that the Commission made the following nine errors with respect to the QAMII Share transaction:

(a) The Commission erred in failing to consider whether the payment of 6.3 per cent of the proceeds for the purpose of making the June 2011 dividend payments, constituted a material change which required an amendment to the March 8, 2011 offering memorandum. The OSC erroneously relied on the bald proposition that there is no de minimis exception to compliance with the disclosure obligations (issue of mixed fact and law).

(b) The Commission misapprehended the evidence of Mr. Ho on the issue that no proceeds were required to make the December 2011 dividend payments; instead, the Commission referred, without any explanation, to staff's submission that this mischaracterizes Mr. Ho's evidence (issue of fact).

(c) The Commission erred in misapprehending the evidence of Mr. Ho, who had confirmed Mr. Nagy's and Mr. Sanfelice's evidence that in the period in which cheques were issued to pay both the June 2011 and December 2011 dividends (i.e., July 1, 2011 to May 1, 2012), Quadrexx Asset Management had earned sufficient gross revenue to have paid the dividends, independent of any proceeds from the QAMII share offering (issue of fact).

(d) The Commission erred in failing to consider, as relevant to the issue of mens rea, Mr. Nagy's and Mr. Sanfelice's belief that the payment of dividends was a permissible use of working capital, and therefore, even if mistaken, their failure to disclose the payment of dividends as one of many particular uses of the proceeds raised for working capital was not an intentional deceit or falsehood (issue of mixed fact and law).

(e) The Commission erred by adopting a blanket proposition of law that the payment of any new investor money to prior investors is an act of deceit, falsehood, or other fraudulent means, without regard to the disclosure made, or to an assessment of materiality in the context of that disclosure (issue of mixed fact and law).

(f) The Commission erred in relying, as some evidence of mens rea, on the highly prejudicial evidence of Ms. Pawelek respecting the honesty and integrity of Mr. Nagy and Mr. Sanfelice premised on a patently false allegation that they had misled Commission staff during the course of a compliance review (issue of mixed fact and law and issue of procedural fairness).

(g) The Commission erred in rejecting as irrelevant evidence respecting the Mineralfields Transaction, a transaction that was stopped by OSC staff based on the mistaken conclusion that Mineralfields occurred well after the matters which are central to this proceeding. The Commission erred by making adverse findings that (a) staff's letter dated June 20, 2012 rejecting Mineralfields based on 12 separate compliance concerns (none of which were alleged in the proceedings) supported staff's conclusion that Mr. Nagy and Mr. Sanfelice do not have the integrity required of securities professionals; (b) despite the stated purpose of the offering memorandum, Quadrexx Asset Management did not acquire any financial advisory business; and (3) that the bankruptcy of Quadrexx on June 18, 2013 was evidence of the risk of deprivation (issue of fact and issue of procedural fairness).

(h) The Commission erred in misapprehending the evidence that, as the only two members of the Quadrexx Board, Mr. Nagy and Mr. Sanfelice had the authority, as expressly disclosed in the offering memorandum, to reallocate all or any portion of the proceeds to the payment of dividends for sound business reasons (issue of fact).

(i) The Commission erred in finding that Mr. Nagy and Mr. Sanfelice conveyed a misleading picture of what investors were buying into and what was happening with their money without any regard for what was in fact disclosed to investors regarding what they were buying into and what was happening with their money, and without regard for whether the omitted disclosure in the circumstances constituted a material change (issue of fact).

[71] Mr. Nagy and Mr. Sanfelice submit that the Commission made the following eight errors with respect to the Quadrexx Secure Asset transaction:

(a) The Commission erred in refusing to consider independent evidence of the investor JS that was corroborative of Mr. Nagy's and Mr. Sanfelice's position that they honestly believed that the amendment they made to the offering memorandum disclosed to investors their intention to recover $187,749 of costs from the initial proceeds of the offering[^5] (issue of fact).

(b) The Commission erred in making adverse findings against Mr. Nagy and Mr. Sanfelice for having failed to amend a brochure provided to investors, while rejecting the import of evidence that the amendment to other documents, specifically the Risk Acknowledgement, provided to investors the disclosure, on the grounds that the investors did not read that disclosure (issue of fact).

(c) The Commission erred in relying on speculation and conjecture as a basis to reject the evidence regarding the amendment to the offering memorandum; specifically, that (a) had the truth been disclosed, it would have likely precluded any further investment; and (b) had the truth been disclosed this would have likely raised issues in Mr. Sharp's mind (issue of fact).

(d) The Commission erred in adopting staff's theory as to why the amendment to the offering memorandum was made as a basis to reject Mr. Nagy's and Mr. Sanfelice's evidence. The Commission failed to consider the evidence that was clearly inconsistent with staff's theory (issue of fact).

(e) The Commission erred in rejecting Mr. Nagy's and Mr. Sanfelice's belief that the Quadrexx Secure Assets offering would be successful as unrealistic and unreasonable because of mixed to very poor results in previous offerings, without providing any reasons why mixed to very poor results for offerings of other products would be inconsistent with their belief respecting the prospects of Quadrexx Secure Assets and without regard to the evidence that they were relying on as the basis for their belief (issue of fact).

(f) The Commission erred in relying on hindsight as to how the Quadrexx Secure Assets' offering actually performed as a basis to infer that Mr. Nagy and Mr. Sanfelice had the requisite intent to defraud (issue of fact).

(g) The Commission erred by repeatedly applying a higher or stricter level of scrutiny to the evidence of Mr. Nagy and Mr. Sanfelice than to the evidence called by Commission staff, including (a) rejecting their evidence on the ground that it was evasive, while providing no particulars, while accepting the evidence of staff witnesses also found to be evasive; (b) rejecting the evidence of Mr. Nagy and Mr. Sanfelice for having failed to communicate a matter of importance in a more memorable manner, while accepting the evidence of Mr. Polisuk regarding the communication of a valuation for which he had no record in circumstances where he was professionally obliged to have communicated in writing; and (c) rejecting the evidence of Mr. Nagy and Mr. Sanfelice respecting communications they had with their auditor in respect of Quadrexx Secure Asset by requiring corroboration while accepting the evidence of staff witnesses in the absence of corroboration (issue of fact).

(h) The Commission erred by concluding that evidence respecting the Mineralfields transaction was not relevant because it occurred well after matters central to the proceeding (which is incorrect) and did not form any part of the statement of allegations, while permitting staff to make highly prejudicial allegations of being misled about the Mineralfields transaction that did not form any part of the statement of allegations (issue of fact).

[72] In respect of the sanctions imposed by the OSC, Mr. Nagy and Mr. Sanfelice submit that the sanctions imposed, and, in particular, the monetary sanctions, were demonstrably unfit, based on an error of principle, or are otherwise unreasonable.

[73] Further, Mr. Nagy and Mr. Sanfelice submit that the Commission's reasons for rejecting their evidence about the three alleged frauds are so deficient as to constitute an error of law.[^6] They submit that although Commission gave lengthy reasons for its decision, in respect of the crucial issues in the case that formed the heart of the their defence, the Commission either failed to consider the issues at all, or if considered, it failed to consider the issues in context with the evidence relied on by them.

H. Standard of Appellate Review

[74] Mr. Nagy and Mr. Sanfelice have a statutory right of appeal, pursuant to s. 9 of the Securities Act, which states:

Appeal of Commission's decision

9(1) A person or company directly affected by a final decision of the Commission, other than a decision under section 74, may appeal to the Divisional Court within thirty days after the later of the making of the final decision or the issuing of the reasons for the final decision.

Powers of court on appeal

(5) Where an appeal is taken under this section, the court may by its order direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper, having regard to the material and submissions before it and to this Act and the regulations, and the Commission shall make such decision or do such act accordingly.

[75] Securities regulation is a highly specialized activity that requires specific knowledge and expertise in the complexities of capital and financial markets,[^7] and with an exception for matters of procedural fairness, historically the standard of review applicable to decisions of the Ontario Securities Commission has been reasonableness.[^8] In Canada (Minister of Citizenship and Immigration) v. Vavilov,[^9] the Supreme Court of Canada revisited the standard of review of the decisions of administrative tribunals and it reaffirmed the reasonableness standard - unless the Legislature or Parliament specifies a different standard. The Supreme Court held that if the Legislature provides for statutory appeals, this signifies a different standard than reasonableness. At paras. 36-37, 44 and 46 of the majority's judgment, the court stated:

We have reaffirmed that, to the extent possible, the standard of review analysis requires courts to give effect to the legislature's institutional design choices to delegate authority through statute. In our view, this principled position also requires courts to give effect to the legislature's intent, signalled by the presence of a statutory appeal mechanism from an administrative decision to a court, that the court is to perform an appellate function with respect to that decision. Just as a legislature may, within constitutional limits, insulate administrative decisions from judicial interference, it may also choose to establish a regime "which does not exclude the courts but rather makes them part of the enforcement machinery": Seneca College of Applied Arts and Technology v. Bhadauria, 1981 29 (SCC), [1981] 2 S.C.R. 181, at p. 195. Where a legislature has provided that parties may appeal from an administrative decision to a court, either as of right or with leave, it has subjected the administrative regime to appellate oversight and indicated that it expects the court to scrutinize such administrative decisions on an appellate basis. This expressed intention necessarily rebuts the blanket presumption of reasonableness review, which is premised on giving effect to a legislature's decision to leave certain issues with a body other than a court. This intention should be given effect. As noted by the intervener Attorney General of Quebec in its factum, [translation] "[t] he requirement of deference must not sterilize such an appeal mechanism to the point that it changes the nature of the decision-making process the legislature intended to put in place": para. 2.

It should therefore be recognized that, where the legislature has provided for an appeal from an administrative decision to a court, a court hearing such an appeal is to apply appellate standards of review to the decision. This means that the applicable standard is to be determined with reference to the nature of the question and to this Court's jurisprudence on appellate standards of review. Where, for example, a court is hearing an appeal from an administrative decision, it would, in considering questions of law, including questions of statutory interpretation and those concerning the scope of a decision maker's authority, apply the standard of correctness in accordance with Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 8. Where the scope of the statutory appeal includes questions of fact, the appellate standard of review for those questions is palpable and overriding error (as it is for questions of mixed fact and law where the legal principle is not readily extricable): see Housen, at paras. 10, 19 and 26-37. Of course, should a legislature intend that a different standard of review apply in a statutory appeal, it is always free to make that intention known by prescribing the applicable standard through statute.

More generally, there is no convincing reason to presume that legislatures mean something entirely different when they use the word "appeal" in an administrative law statute than they do in, for example, a criminal or commercial law context. Accepting that the word "appeal" refers to the same type of procedure in all these contexts also accords with the presumption of consistent expression, according to which the legislature is presumed to use language such that the same words have the same meaning both within a statute and across statutes: R. Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at p. 217. Accepting that the legislature intends an appellate standard of review to be applied when it uses the word "appeal" also helps to explain why many statutes provide for both appeal and judicial review mechanisms in different contexts, thereby indicating two roles for reviewing courts[.]

The first reason is conceptual. In the past, this Court has looked past an appeal clause primarily when the decision maker possessed greater relative expertise -- what it called the "specialization of duties" principle in Pezim, at p. 591. But, as discussed above, the presumption of reasonableness review is no longer premised upon notions of relative expertise. Instead, it is now based on respect for the legislature's institutional design choice, according to which the authority to make a decision is vested in an administrative decision maker rather than in a court. It would be inconsistent with this conceptual basis for the presumption of reasonableness review to disregard clear indications that the legislature has intentionally chosen a more involved role for the courts. Just as recognizing a presumption of reasonableness review on all questions respects a legislature's choice to leave some matters first and foremost to an administrative decision maker, departing from that blanket presumption in the context of a statutory appeal respects the legislature's choice of a more involved role for the courts in supervising administrative decision making.

[76] There is no privative language in the Act qualifying the right of appeal to this court. Subsection 9(1) of the Act creates the right of appeal; s. 9(5) restricts the remedial authority of this court to directing the Commission "to make such decision or do such act" that the Commission is "authorized or empowered to do" that "the court considers proper". These restrictions on the remedial power of the court -- common in administrative law -- do not imply deference on appeal beyond the deference that applies under the "appellate standard of review" described in Vavilov.

[77] Where a ground of appeal raises an issue of law alone, the standard of review is correctness.

[78] Where the ground of appeal raises a question of fact, the appellate court must pay substantial deference to it. Here, the appellate court cannot set the decision aside simply because it views the evidence as showing a different probability from that found below. Before it may properly interfere, the appellate court must conclude that the submitted error amounts to a "palpable and overriding error". The word "palpable" means "clear to the mind or plain to see",[^10] and "overriding" means "determinative"[^11] in the sense that the error "affected the result".[^12] The Supreme Court has held that other formulations capture the same meaning as "palpable error": "clearly wrong", "unreasonable" or "unsupported by the evidence".[^13]

[79] Examples of palpable error include (a) findings made in the complete absence of evidence (this could also amount to an error in law); (b) findings made in conflict with accepted evidence; (c) findings based on a misapprehension of the evidence; (d) findings of fact, drawn from primary facts, that are a result of speculation rather than inference; and (e) findings of fact based on evidence that has no evidentiary value because it has been rejected by the trier of fact.[^14]

[80] Matters of mixed fact and law lie along a spectrum; where the error of the decision-maker can be traced to a clear error in principle, it may be characterized as an error of law and subjected to a standard of correctness; where the legal principle is not readily extricable, then the matter is subject to standard of palpable and overriding error.[^15]

[81] The standard of review for issues of procedural fairness is sometimes stated to be "correctness".[^16] It is also characterized as a review as to "whether the rules of procedural fairness or the duty of fairness have been adhered to".[^17] These formulations of the standard of review are generally taken to mean the same thing: there is discretion and flexibility respecting process before administrative tribunals, and so it cannot be said there is always a single "correct" view of the procedures to be followed. However, administrative discretion must be exercised in a way that is procedurally fair. In assessing procedural fairness in a particular case, the court uses the factors set out in Baker v. Canada (Minister of Citizenship and Immigration).[^18]

I. Did the Commission Make Palpable and Overriding Errors of Fact?

[82] Mr. Nagy and Mr. Sanfelice submit that the Commission made six errors with respect to the DALP fraud, nine errors with respect to the QAM II fraud, and eight errors with respect to the QSA fraud. Of these 23 submitted errors: 19 are issues of fact, of which three are also matters of procedural fairness, and three are issues of mixed fact and law, one of which is also a matter of procedural fairness.

[83] With respect to the 19 submitted errors of fact, in our opinion, none are palpable and overriding errors of fact.

[84] The Commission did not ignore or misapprehend Mr. Nagy's and Mr. Sanfelice's version of the facts. It rejected their evidence on key points and explained why it did so.

[85] With respect to the alleged DALP fraud, the Commission did not misapprehend that Mr. Nagy and Mr. Sanfelice testified that they dismissed Deloitte because of concerns about the cost and timing of the valuation. The Commission understood this explanation, but the explanation was far less plausible than the explanation that Deloitte was dismissed for a different reason. There was more than a clue in the circumstances in December 2008 and January 2009 that Mr. Nagy and Mr. Sanfelice were going to be disappointed in the price that they would receive for their interest in Canadian Hedge Watch if Deloitte finished its valuation. Further, the Commission did not misapprehend that Mr. Nagy and Mr. Sanfelice provided Mr. Figov with different revenue projections than the projections that had been provided to Deloitte and the Commission understood that Mr. Nagy and Mr. Sanfelice's explanation that the difference in the net revenue projection was connected to the suggested ripening of the Henton transaction and new financial statements. The Commission, however, was within the province of its fact-finding to disbelieve Mr. Nagy's and Mr. Sanfelice's explanation.

[86] It is true that there was evidence that the Commission could have used to infer or to find as a fact that Mr. Figov's engagement was not an attempt to preserve the price that Mr. Nagy and Mr. Sanfelice hoped for but could not secure from Deloitte, but it is also true that there was evidence upon which the Commission could come to different inferences. Mr. Nagy and Mr. Sanfelice conflate ignoring evidence with giving it no weight. In the immediate case, applying the standards of appellate review, it is not for this appellate court to retry the case, reweigh the evidence and substitute for the reasonable inference of the Commission another inference of its own.[^19]

[87] In Finkelstein v. Ontario (Securities Commission),[^20] the Court of Appeal made this very point about appeals from the Commission, at para. 101:

The function of a reviewing court, such as the Divisional Court, is to determine whether the tribunal's decision contains an analysis that moves from the evidence before it to the conclusion that it reached, not whether the decision is the one the reviewing court would have reached: Ottawa Police Services, at para. 66. With due respect to the Divisional Court, it failed to do so in the case of the Panel's decision . . .. Instead, it impermissibly re-weighed the evidence and substituted inferences it would make for those reasonably available to the Panel. That was an error. The findings of fact made and inferences drawn by the Panel . . . were reasonably supported by the record.

[88] With respect to the alleged DALP fraud, it was incontestable that Deloitte had serious misgivings about a valuation approaching the $2.65 million sought by Mr. Nagy and Mr. Sanfelice who together would receive approximately 75 per cent of the money. The evidence from Deloitte's witness was said by the Commission to be evasive about whether Deloitte had expressed its value opinion but there was ample evidence that Deloitte had conveyed the fact that there would be a large monetary gap between its opinion and the aspirational $2.65 million. It was in this context that Deloitte was fired.

[89] The Commission disbelieved Mr. Nagy's and Mr. Sanfelice's evidence that there were other reasons for Deloitte's dismissal. However, it was not the case that the Commission ignored Mr. Nagy's and Mr. Sanfelice's evidence. The Commission considered that evidence and found it unbelievable. The Commission reviewed the evidence relating to the original cost estimate and the original time estimate provided by Deloitte. The Commission found that Deloitte's fee was $18,800 at the time the retainer was terminated, which was well below Deloitte's initial fee estimate of $30,000 and that there was no reason to believe that the valuation report would not have been delivered by the due date of January 31, 2009.

[90] In their factum, Mr. Nagy and Mr. Sanfelice emphasize that, apart from Commission staff's opinion, there was no evidence that there was anything improper in them engaging Mr. Figov to provide a valuation after terminating Deloitte, and they note that the Commission invited Commission staff to lead evidence in this regard. The Commission, however, did not base its decision on it being wrong per se to change valuators. The Commission, rather, disbelieved that Deloitte was being dismissed for tardiness and cost. And the Commission did note that Mr. Nagy and Mr. Sanfelice did not communicate the change of valuators and the pertinent information about this change to DALP investors (merits decision, para. 99).

[91] Mr. Nagy and Mr. Sanfelice provided Mr. Figov with a different set of revenue projections than they provided to Deloitte. Once again, there was no palpable and overriding error in the Commission drawing the inference that these revised projections could not be explained by the solidifying of the Henton transaction or by the information obtained from the recently released 2008 financial statements.

[92] Mr. Nagy and Mr. Sanfelice submitted that the Commission erred by relying on Mr. Ho's opinion evidence about the revenue forecasts when Mr. Ho was not qualified to give an expert opinion. There was, however, no error in relying on Mr. Ho's evidence, which was forensic fact-based evidence and not the expression of an opinion. The Commission reviewed the evidence on this issue in great detail (merits decision, paras. 110-129, 145-156). It did not accept the appellants' explanations for the revised forecasts and gave extensive reasons for its conclusion that "the Revised Forecasts were not prepared in good faith and that the purported reliance by the Respondents on the Henton Agreement as the primary justification for the improved financial forecasts of CHW was dishonest and deceitful" (merits decision, para. 156).

[93] There was convincing evidence that Deloitte had formed a strong preliminary view internally that their valuation would not come close to $2.65 million. Mr Polisuk, Deloitte's client contact with the appellants, could not recall the precise language he used in his telephone conversation on this topic with Mr Sanfelice, nor could he be certain what his contemporaneous handwritten rough notes meant. This can be no surprise with a witness asked to recall details six years after the fact. But he clearly recalled telling Mr. Sanfelice that Deloitte's valuation was not going to come close to $2.65 million. One of the purposes of the phone call was to convey this information, so it is no surprise that Mr. Polisuk would remember that much, even six years after the fact. It was open to the Commission to find, as it did, that this information was conveyed to Mr. Sanfelice by Mr. Polisuk immediately before the appellants terminated Deloitte's retainer. The rest of the Commission's findings on these factual issues flowed reasonably from this core finding: Deloitte told the appellants that the valuation would come in low, and the appellants terminated Deloitte's retainer immediately thereafter.

[94] The Commission's thorough review of the evidence amply supports its conclusion on the DALP fraud:

The Respondents' dishonest and deceitful conduct and the deprivation suffered by the investors establish the actus reus of fraud and it is not an answer to the foregoing for the Respondents to assert that Deloitte had never issued its report on value and that they did not think that they were "doing [any]thing wrong or because of a sanguine belief that all will come out right in the end." In addition, by abruptly terminating the Deloitte engagement to preclude what Nagy and Sanfelice viewed as an unacceptable risk of receiving a valuation that was adverse to their personal interests and by immediately retaining a different business valuator who was provided with artificially enhanced economic forecasts, Nagy and Sanfelice knowingly undertook acts which were deceitful and which they knew would prejudice the economic interests of the DALP investors. The foregoing conduct by Nagy and Sanfelice establishes the mens rea of fraud.

(merits decision, para. 162)

[95] Turning to the alleged QAM II fraud, the Commission made no palpable and overriding error with respect to the evidence of Mr. Ho as to the use being made of the proceeds from the sale of the Class II preference shares. Some of the funds were used to pay dividends. The Commission found that Mr. Nagy and Mr. Sanfelice admitted in their written submissions and during Mr. Sanfelice's oral closing submissions that the proceeds were used to pay part of the June 2011 dividends. Mr. Ho's evidence during cross-examination that the dividends could have been paid if sufficient loans had been made to the partnership is not uncontradicted evidence to the contrary. The Commission's key finding is amply supported by the evidence:

Although the Respondents dispute that any QAM II Proceeds were used to pay any part of the December 2011 Dividends, the Respondents' Written Submissions and Sanfelice's counsel, when making his oral closing submissions, acknowledge that QAM II Proceeds were used to pay part of the June 2011 Dividends and do not seriously dispute Ho's determination that approximately $259,000 of the QAM II Proceeds were used for this purpose. On the basis of Ho's analysis and testimony, which I find persuasive, I am satisfied and find that QAM II Proceeds were also used to pay at least part of the December 2011 Dividends.

(Merits decision, para. 229)

[96] The Commission did not make an error with respect to the evidence regarding the Mineralfields transaction and did not misuse it. The Commission found as follows:

The MineralFields Transaction occurred well after the matters which are central to this proceeding and which I address below and does not form any part of the allegations set out in the Statement of Allegations. The Respondents have, however, raised the circumstances relating to the MineralFields Transaction as further evidence of their repeated allegations that they were unfairly treated by staff, and by one member of the staff in particular, which effectively precluded the realization of Quadrexx''s fading hopes of salvaging its business. Although the MineralFields Transaction is not relevant to these Reasons (and, as acknowledged by the Respondents, the CRR Branch was not obligated to approve the MineralFields Transaction), I should observe that the evidence clearly establishes that Quadrexx and its advisors were relegated to a regulatory no man's land by the CRR Branch and the Enforcement Branch. Quadrexx and its advisors Gilkes and Sharp, both of whom were experienced professionals, were doing everything possible to consummate the MineralFields Transaction in the long-term interests of Quadrexx's investors while each of the CRR Branch and the Enforcement Branch clung to its respective area of responsibility without jointly taking steps to ensure that Quadrexx's compliance and other issues were addressed on a comprehensive basis to ensure that the interests of the investors were protected to the maximum extent possible.

(Merits decision, para. 224)

[97] It was the appellants who raised the Mineralfields transaction. They argued that it showed a negative animus against them by staff, particularly by Ms. Pawelek. This is a common enough defence tactic: attacking the prosecution. The Commission reasonably found that the Mineralfields transaction post-dated the relevant allegations against the appellants: the DALP fraud and the QAMII fraud had taken place by the time of the Mineralfields transaction. In the appellants' minds, it seems, the Mineralfields transaction was the culmination of many years of work, and, if it had been permitted to proceed, could have salvaged Quadrexx's business. Commissioner Portner did not reject this argument, and criticized the OSC's siloed response that placed Quadrexx in "a regulatory no man's land". Clearly, Commissioner Portner felt that the Commission should have "jointly tak[en] steps . . . to ensure that the interests of investors were protected. . .". But none of this changes the findings that the appellants committed frauds that pre-dated the Mineralfields transaction. In simple terms, the ends (the Mineralfields transaction) do not justify the means (the QAMII fraud, among other things), and the Commission made no error in concluding that the Mineralfields transaction was not relevant to whether fraud had already occurred,

[98] In our opinion, the Commission did not make an error in relying on the evidence of Ms. Pawelek respecting the honesty and integrity of Mr. Nagy and Mr. Sanfelice, premised on the allegation that they had misled Commission staff during the course of the Compliance Review. The Commission in its reasons ultimately does not make negative credibility findings against either Mr. Sanfelice or Mr. Nagy based on their failure to refer to the QAM II Offering in their oral or written discussions with Commission staff during the 2011 Compliance Review (merits decision, para. 251). The Commission did not rely on opinion evidence from staff respecting the honesty and integrity of Mr. Nagy and Mr. Sanfelice. Rather, the Commission drew its own conclusions based on its findings of fact respecting the appellants' conduct: see merits decision, paras. 252-56.

[99] In respect to the QSA fraud, the appellants' submissions mischaracterize the Commission's central findings. QSA was seeking to raise as much as $40 million for investment in mortgage-backed securities. Investors were told that funds invested would be subject to a 10 per cent sales commission and a 4 per cent payment to Quadrexx for start-up costs and management fees.

[100] At the time QSA was offered to investors, Quadrexx was in a poor financial situation. In desperate need of funds, the appellants caused QSA to pay Quadrexx far more than four per cent on investment proceeds -- at one point as much as two-thirds of offering proceeds (merits decision, paras. 301, 328). The appellants' primary argument is that they decided Quadrexx would be paid its start-up costs of about $187,000 from the first proceeds received from investors and instructed their counsel to amend the offering memorandum and related documents accordingly. They acknowledge that the language used to describe this change is not as clear as it might be, but payment up-front had been their intention, and they did not act dishonestly by paying the up-front costs to QAM when they did.

[101] The Commissioner's decision on this issue turned on the various versions of the offering memorandum and other disclosure documents: the "plain meaning" of the text, consistent with other descriptions provided to investors, was that Quadrexx would receive four per cent. The first $187,749 "so received" would be treated as repayment of start-up costs, and any further payments would be treated as a one-time management fee payable to Quadrexx (merits decision, para. 314). This finding is anchored in the text of the documents provided to investors. In respect to intent, the Commission used its good common sense to conclude that the transaction, as characterized by the appellants, would have been grossly unconscionable to investors if only the minimum offering of $250,000 was achieved (leaving net investment proceeds in the fund of only $27,000). Reasoning from this observation, the Commission found that properly informed investors would not have purchased units if they had understood that this could be the result, a finding that is a matter of obvious business judgment within the province of the Commission.

[102] Quadrexx was entitled to receive four per cent of investment proceeds. It took far more because it needed the money and it expected that total proceeds would eventually be sufficient to entitle Quadrexx to the fees paid to it prematurely. This, the Commission found, was fraud: "[t]he timing and amounts of the transfers of funds from QSA to Quadrexx were far more consistent with Quadrexx's need for cash flow than the repayment of amounts due and payable from, and to the extent of, the 4% charge" (merits decision, para. 315). We see nothing infirm in this conclusion.

[103] The Commission carefully and thoroughly reviewed the evidence and made credibility and factual findings available on the record. We see no palpable and overriding errors of fact.

J. Did the Commission Err in Findings of Mixed Fact and Law?

[104] As noted above, Mr. Nagy and Mr. Sanfelice allege three errors that we have categorized as errors of mixed fact and law.

[105] The first of the submitted errors of mixed fact and law is the submission that the Commission erred in failing to apply the law respecting amendments to an offering amendment. Mr. Nagy and Mr. Sanfelice submit that in respect of the alleged QAM II fraud, the Commission failed to consider whether the appellants were obliged, as a matter of law, to file an amendment to the offering memorandum disclosing that 6.3 per cent of the proceeds of the offering were used to pay a dividend. They submit that according to NI45-106CP, s. 3.8(3), an amendment to an offering memorandum is only required for material changes that occur in the business after delivery of the offering memorandum. In the immediate case, Mr. Nagy and Mr. Sanfelice submit that the Commission did not do a material change analysis and rather held there is no de minimis exception to compliance with the disclosure obligations under Ontario securities law and that a fraud had occurred in the immediate case.

[106] The Commission addressed the material change argument, at paras. 240-242 of its decision, as follows:

3. Disclosure Obligations

The investors in QAM II Shares were entitled to rely on the representations by Quadrexx set out in the First QAM II OM and the QAM II Brochure. At no time were existing investors apprised of the use of the QAM II Proceeds to pay dividends to prior investors and neither the First QAM II OM nor the QAM II Brochure was amended to reflect this fact. In addition, Nagy admitted to continuing to sell QAM II Shares in 2012 at approximately the same time as the staggered delivery of the cheques in payment of the December 2011 Dividends without advising prospective investors that there had been delays in the payment of the December 2011 Dividends as the result of Quadrexx's cash flow issues. The diversion of the QAM II Proceeds to a use of which investors and prospective investors had not been informed clearly created an increased financial risk and prejudiced their economic interests.

When testifying at the Hearing, both Nagy and Sanfelice acknowledged that the QAM II Proceeds used to pay dividends could not be used by Quadrexx for the growth of its business, as the Respondents had represented to investors. I do not accept the submission by Sanfelice that Quadrexx was not obligated to amend Quadrexx's disclosure documents as the amount of the QAM II Proceeds that was diverted to the payment of dividends was relatively small and did not constitute a material change. I agree with the position of the CRR Branch set out in the CRR Objection in which they suggested, among other things, that it appeared that the disclosure to investors by means of the First QAM II OM and the QAM II Brochure omitted information necessary to prevent the statements set out in such documents from being false or misleading in the circumstances. The accurate disclosure of information is one of the basic tenets of Ontario securities law and is equally applicable to exempt market dealers. There is also no de minimis exception to compliance with the disclosure obligations under Ontario securities law.

By using QAM II Proceeds in an undisclosed fashion, the Respondents diminished Quadrexx's ability to remain a viable enterprise and thereby increased the risk of economic loss to investors. The conduct of the Respondents also placed the pecuniary interests of the investors at significantly increased risk.

[107] In our opinion, there is no error of fact here and no error in the application of the law. The point that the Commission was making was that a false representation had been made to the investors about what use was to be made of the proceeds. QAM's inability to make its dividend payments, and its recourse to QAMII funds to make those payments, was inherently material. Once it is concluded that the event is material, it does not cease to be so on the basis of a de minimis principle. We see no error of law in this reasoning.

[108] Further, in our view the appellants seek to minimize their responsibility for this conduct by focusing on the smaller misuse of funds to pay the June dividends, to the exclusion of the continuing misuse of funds to pay December dividends. The offering memorandum said that management intended to use the funds to grow the business. Instead, it used some of the funds to pay prior investors. The QAMII proceeds used to pay the June dividends were 6.3 per cent of the total proceeds raised. The appellants place great weight on this statistic for their argument that misuse of funds was "de minimis". It was not. First, the percentage of misused funds was greater at the time of the June dividends: QAMII continued to be sold after those dividends were paid. Second, viewed as a percentage of the dividend obligation, the percentage was much higher: total June 2011 dividends paid were $585,292.50. The Commission found that about $259,000 of this amount was paid from QAMII proceeds, roughly 44 per cent of the June 2011 dividends. Quadrexx Asset Management could not meet its dividend obligations for the June 2011 dividends, and so diverted new investment monies to pay those obligations. This was material, in the Commission's view, and being material is not subject to a "de minimis" exception. We see no error in principle in this analysis.

[109] The second of the submitted errors of mixed fact and law is the submission that the Commission erred in failing to consider, as relevant to the issue of mens rea, Mr. Nagy's and Mr. Sanfelice's belief that the payment of dividends was a permissible use of working capital, and therefore, even if mistaken, their failure to disclose the payment of dividends as one of many particular uses of the proceeds raised for working capital was not an intentional deceit or falsehood.

[110] Mr. Nagy and Mr. Sanfelice are incorrect in asserting that the Commission did not consider their submissions on this point. Their belief that what they were doing was permissible was considered at paras. 226 (c), 230, 242, 246, 313, 314, 320 and 321 of the of the Commission's merits decision. Whether or not this would be a permissible use of proceeds raised for working capital, however, totally misses the point that they did not disclose to investors that they intended to use working capital to pay dividends rather than for the business expansion purposes represented in the offering memorandums. In our opinion, there is no error of fact here and no error of law. This hearkens back to the prior point: using new investment funds to pay obligations owed to prior investors is an indicia of a Ponzi scheme. As found by the Commission, it is an inherently fraudulent use of funds if this use has not been disclosed to investors. The appellants' submission on this point distills down to a troubling point: that as securities professionals, they were ignorant of this point, and thus did not have the mens rea for fraud. The Commission did not make the point expressly, though it is implicit in the Commission's reasons, but we would make it expressly to answer to this argument: ignorance of the law is no excuse and does not negate mens rea.

[111] The third of the submitted errors of mixed fact and law is the submission that the Commission erred by adopting a blanket proposition of law that the payment of any new investor money to prior investors is an act of deceit, falsehood, or other fraudulent means, without regard to the disclosure made, or to an assessment of materiality in the context of that disclosure. This submitted error is essentially a reprise of the first and second submitted errors and once again in our opinion, there is no error of fact finding here and no demonstrated error in the application of the law.

[112] We find no adoption of any blanket proposition of law. The Commission found that the new investors were not told that their investment funds were going to be used to pay prior investors dividends that the corporation did not have sufficient funds to pay. The Commission found that new investors were told that the corporation intended to use the funds to grow the business. The scale of the diversion of investment funds, and the particular use made of those funds, was well beyond a de minimis threshold. This was not a "close call" as to whether the funds were misused. Clearly, they were. The question was whether mens rea could be established -- knowledge on the part of the appellants that funds raised from investors were and would be misused -- and the pattern of misuse of funds stretching back to the June dividend provides foundation for the Commission's conclusion that the appellants continued to cause the QAMII shares to be offered after they knew that proceeds would be misapplied -- as indeed they continued to be misapplied to pay the December dividends.

K. Did the Commission Deny the Appellants Procedural Fairness?

[113] Mr. Nagy and Mr. Sanfelice submit that they were denied procedural fairness because of the manner in which the Commission used hearsay evidence and handwritten notes to make adverse findings of credibility against them and favourable credibility findings for the Commission's witnesses. They submit that their evidence was subjected to a higher degree of scrutiny (skepticism) than the evidence of the Commissions' witness.

[114] There is no merit to these submissions.

[115] The Commission recognized that hearsay evidence is admissible in administrative hearings before the Commission pursuant to s. 15(1) of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22. The Commission cautioned itself that in determining the weight of hearsay evidence, care must be taken to avoid placing undue reliance on uncorroborated hearsay evidence that lacks sufficient indicia of reliability. The Commission noted the hearsay nature of the evidence about Mr. Pasquali's comments about the valuation and the Commission noted that his comments were corroborated by a contemporaneous e-mail message sent by Mr. Mohamed to Mr. Polisuk. Commission staffs' decision not to call Mr. Pasquali, who had no direct dealings with Messrs. Sanfelice and Nagy, was not a denial of procedural fairness. Rejecting the evidence of Mr. Nagy and Mr. Sanfelice on some issues is not a denial of procedural fairness. The Commission explained why it accepted the evidence put forward by staff over the testimony of Messrs. Nagy and Sanfelice and for the reasons expressed above the Commission's decisions did not reveal any palpable and overriding errors.

[116] In our opinion, it was not a denial of procedural fairness for the Commission to consider the information or the absence of information that Mr. Nagy and Mr. Sanfelice provided to the Commission staff during the 2011 Compliance Review. As it happened, the Compliance Review occurred during the distribution of QAMII preference shares and at the same time that Messrs. Nagy and Sanfelice were making decisions about declaring dividends and Messrs. Nagy's and Sanfelice's responses were relevant to the general issue of their credibility.

L. Were the Reasons of the Commission Inadequate?

[117] The Commission's reasons on liability are set out in an 86-page decision of 393 single-spaced paragraphs. Its reasons on sanctions are set out in a 21-page decision of 121 single-spaced paragraphs.

[118] The question of the adequacy of reasons for decision is whether the reasons, viewed in light of the record and counsel's submissions on the live issues presented by the case, explain why the decision was reached, by establishing a logical connection between the evidence and the law on the one hand, and the decision on the other.[^21]

[119] Inadequate reasons may be a ground of appeal because an adjudicator must provide adequate reasons to account to the parties and to the public for the decision.[^22] Appellate intervention based on inadequacy of reasons is justifiable when the inadequacy prejudices the appellant's exercise of his or her right to appeal or impedes or prevents an appellate court from understanding the basis of the decision.[^23] Reasons should provide the basis for a meaningful consideration of the merits of an appeal and for meaningful appellate review of the correctness of the decision, but reasons will be sufficient if they are responsive to the case's live issues and the parties' key arguments and their sufficiency should be measured not in the abstract, but as they respond to the substance of what was in issue.[^24]

[120] The critical question is whether, in the context of the record, the issues, and the submissions of the parties, the judgment is sufficiently intelligible to show that the tribunal understood the substance of the matter and addressed the necessary and critical issues.[^25] Merely failing to refer to a piece of evidence does not mean that the tribunal failed to consider the matter and a party must point to something in the record to justify the conclusion that that the tribunal failed to consider evidence.[^26] The failure to directly address the sole argument made by a party is an error of law.[^27] Where credibility plays an important role in the trial, the failure to provide an explanation for rejecting the evidence of a key witness may precluded effective appellate review and compel the court to order a new trial.[^28]

[121] There is no obligation on a tribunal to record every argument or aspect of the deliberation process.[^29] However, for meaningful appellant review, the decision of the court must, at a minimum, provide some insight into how the legal conclusion was reached and what facts were relied upon in reaching that conclusion.[^30]

[122] It is somewhat ironic and undermines their submission that the Commission's decisions were inadequate that Mr. Nagy and Mr. Sanfelice posit 23 errors that can meaningfully be reviewed before this court. It cannot be said that the Commission prevented this court from understanding the basis of its decision.

[123] Apart from the irony, there is no merit to the argument that the Commission's reasons for decision were inadequate. Mr. Nagy and Mr. Sanfelice know precisely how and why they found to have contravened the Securities Act.

[124] Finally, this is not a case where a tribunal has painstakingly memorialized the evidence before it and then provided a conclusion without analysis. Length of reasons, by itself, does not establish that reasons are sufficient. Here, the tribunal engaged in analysis at every step of its decision, within a coherent and logical framework. With decisions of the length of the impugned decisions below, it is always possible to find infelicitous expressions and areas where a decision might have been expressed better. But that does not render reasons materially defective or insufficient. Where, as here, the tribunal's line of reasoning is clear -- from the issues before it, through the findings of fact and credibility, the statement and application of the law, to conclusions -- the reasons are sufficient.

M. Did the Commission Err in its Sanctions Decision?

[125] The standard of review for the sanctions decision is that sanctions should be set aside if demonstrably unfit, based on some error of principle, or otherwise unreasonable.

[126] Under s. 127(1) of the Securities Act, the Commission is empowered to order sanctions if, in its opinion, it is in the public interest to do so. The Commission has a broad discretion in determining what is in the public interest.[^31]

[127] Mr. Nagy and Mr. Sanfelice argue that the Commission's Sanctions should be set aside for five reasons or five alleged errors, namely,

1. The DALP fraud disgorgement order was unreasonable because the Commission substituted its opinion for the value of Canadian Hedge Watch shares and unreasonably ignored the only expert opinion to the contrary.

2. The QAM II fraud disgorgement order of $2,309,880 was premised on a finding, in the absence of evidence, that more than $500,000 of the proceeds were used to pay part dividends ignoring the evidence that only 6.3 per cent of the gross proceeds raised ($259,012) were used to pay dividends.

3. The QAM II fraud sanctions were premised on an erroneous finding that the appellants failed to disclose to investors that the financial condition of Quadrexx Asset Management was precarious, without regard for disclosure including the audited financial statements of Quadrexx Asset Management showing an annual loss of $2.5 million and a cumulative deficit of $9.2 million.

4. The QAM II fraud sanctions were premised on the finding that a misrepresentation was made to investors without evidence of reliance, holding that staff does not need to prove reliance and, without considering that Mr. Nagy and Mr. Sanfelice were obliged only to provide further disclosure by way of an amendment if the misrepresentation constituted a material change.

5. The Sanctions Decision failed to consider the consequences to investors of staff's decision to reject of the Mineralfields Transaction, which was premised on false information and made without considering several of the Commission's findings. Further, staff's behaviour interrupted the chain of causation which is required to order disgorgement.

(1) The DALP fraud disgorgement order

[128] The Commission found that the disgorgement order should be limited to the difference between what the appellants received for their CHW shares and the true value of those shares at the time. The Commission then stated:

staff has the burden of proving that a respondent obtained some amount as a result of a contravention. However, if a respondent's illegal conduct creates difficulty in determining the amount, the risks of any such uncertainty fall on that respondent. In this case, any uncertainty arising out of Nagy and Sanfelice's fraudulent termination of Deloitte's engagement before Deloitte could complete its valuation report cannot inure to the respondents' benefit.

(Sanctions decision, para. 33; footnote omitted)

[129] The appellants argued before the Commission that the methodology used by Mr. Figov should be applied to the forecasts provided to Deloitte. They produced their own calculations that, they said, showed that the disgorgement order, calculated in this way, ought to be $668,909. The Commission rejected this argument on the basis that it was unsupported by expert evidence that Mr. Figov's methodology would apply properly to the materials provided to Deloitte.

[130] The Commission found that by January 19, 2009, Deloitte's valuation work was "sufficiently developed" to provide the basis for a disgorgement order. The Commission used Deloitte's "midpoint of $1,535,000" for the true value of the CHW shares. From this conclusion it calculated disgorgement orders of $482,660.67 for Mr. Nagy and $323,382.28 for Mr. Sanfelice.

[131] We do not accept that the Commission "substituted its opinion of value" for the CHW shares. It relied upon the only opinion of value accepted in the Merits decision and available on the record at the Sanctions hearing. It acknowledged that this opinion of value was not finalized by Deloitte but found that it was "sufficiently developed" to be relied upon. We do not accept that the Commission "unreasonably ignored" the only expert opinion to the contrary. There was no expert opinion to the contrary, and the Commission explained why it was not prepared to rely upon the appellants' own calculations based on a methodology that was not shown to be applicable to the materials before Deloitte.

[132] We would not give effect to this ground of appeal. The Commission came to a reasoned finding based on the evidence before it on the DALP fraud disgorgement issue.

(2) The QAMII fraud disgorgement order

[133] The three arguments raised by the appellants respecting the QAMII fraud disgorgement order misstates the sanctions decision and is a collateral attack on the merits decision. This can be seen by a review of the entire, brief reasons for ordering disgorgement respecting the QAMII fraud:

The respondents' submission concerning disclosure and reliance misconceives the nature of a fraud. In view of the Commission's finding of fraud in the Merits Decision, staff does not need to prove that investors relied on the respondents' failure to disclose their use of QAM II funds. Further, the materiality of the use that was made of the funds is implicit in the finding that QAM's offering memorandum contained a misrepresentation. Accepting the respondents' submissions would therefore lead us to conclusions that are impermissibly inconsistent with the finding of fraud in the Merits Decision. Accordingly, we reject those submissions.

As discussed above, the Act authorizes disgorgement of amounts obtained by the respondents as a result of their fraud. The respondents admitted in their oral submissions that Nagy and Sanfelice received an indirect benefit from the distribution in view of their positions and interests in QAM. Moreover, as the directing minds of QAM, their conduct was QAM's and vice versa. Accordingly, the funds that QAM received through the QAM II Offering were obtained by Nagy and Sanfelice. Staff need not show that the funds received by QAM were personally obtained by Nagy and Sanfelice. In these circumstances, the Commission has commonly held the directing minds of an issuer that receives funds through a contravention of the Act to be jointly and severally liable for the disgorgement of those funds.

Disgorgement of the full amount obtained, however, is not mandatory. Paragraph 127(1)10 authorizes the Commission to require disgorgement of "any" amounts obtained as a result of a contravention. It is open to the Commission to order disgorgement of less than the full amount obtained, if circumstances warrant a reduction. It is appropriate in this case to apply a reduction to reflect the amount of the dividends paid to investors in QAM II Shares. The evidence does not support any other reduction.

The amount obtained as a result of Nagy's, Sanfelice's and QAM's contravention of clause 126.1(1)(b) was $2,411,880, and QAM II investors received $102,000 back as dividends. Accordingly, Nagy and Sanfelice must jointly and severally disgorge $2,309,880.

(Sanctions decision, paras. 45-48 [footnotes omitted])

The Commission imposed a disgorgement order based on the facts as found in the merits decision. The appellants acknowledged that investors would not have purchased QAMII shares if QAM had failed to pay dividends, but they argued that the same could not be said if QAM used new investment funds to pay dividends. Aside from the de minimis argument rejected in the merits decision, we do not understand why the appellants consider that the market would react differently to the two scenarios: in the first, an issuer is failing to meet its dividend obligations; in the latter, it is using a classic pyramid structure to meet obligations it cannot fulfill on the basis of its business performance: using funds from new investors to satisfy obligations owed to prior investors. The Commission was satisfied that causation was established by the materiality of the fraud, as reflected in the liability finding on the issue of misrepresentation. "Causation" here encompassed the entire offering -- that is, no money would have been raised but for the fraud and consequent misrepresentation to investors.

[134] We agree with the Commission that these findings flow from the merits decision, and the appellants' arguments to the contrary at the Sanctions hearing were "impermissibly inconsistent" with the findings in the merits decision.

(3) Staff's rejection of the Mineralfields transaction

[135] There is no merit to the argument that staff's rejection of the Mineralfields transaction was in any way improper or "interrupted the chain of causation". First, the DALP fraud was complete, and the improper payment of dividends from QAMII proceeds had already happened at the time that staff intervened in the Mineralfields transaction. Second, the findings of fraud against the appellants in the merits decision substantially supported staff's concerns about the Mineralfields transaction, in retrospect.

[136] The appellants' argument on this point really concerns the potential impact of their fraudulent conduct in the QAMII fraud. In effect, they argue that if only staff had not acted to prevent the Mineralfields transaction, QAM would have survived and prospered. The spirit of this argument permeates the appellants' approach to this case: as put by staff, the appellants' conduct "throughout the transactions and events that are [in issue] demonstrate repeatedly their commitment to the survival of [QAM] without regard to the consequences of their actions." If only they had been permitted to go ahead with Mineralfields, everything would have turned out alright, they argue in effect. Simply put, again, the ends do not justify the means, and when regulators step in, the aspirational ends, frustrated by the regulator doing its job, do not justify the means. As Commissioner Portner put it in the merits decision (at para. 23):

It is no defence that a respondent may have hoped that deprivation would not take place or held a sincere belief that no deprivation would ultimately materialize. Many frauds are perpetrated by people who sincerely believe that their acts will not ultimately result in actual losses to others.

The appellants believe that QAM would have prospered if staff had not prevented the Mineralfields transaction. That is no defence to the fraud allegations, and it does not break the chain of causation establishing losses caused by the frauds. In our view the appellants' argument on this point is without merit.[^32]

N. Summary

[137] In the merits decision, the Commission found that the appellants committed three frauds contrary to the Securities Act. They personally benefitted by over $800,000 in respect to the DALP fraud. QAM benefitted by about $2.3 million in the QAMII fraud, and the appellants are liable for that fraud because of their roles in it. In the third fraud, about $187,000 of QSA funds were misappropriated by QAM, for which the appellants are liable because of their roles in that misappropriation. The pattern of conduct reflected in these three frauds shows systematic dishonesty. The Commission's factual findings in the merits decision are fully supported by the record, and there is no error of law in the Commission's analysis. The sanctions decision is consistent with applicable principles on the basis of the facts as found in the merits decision. We see no reversible error.

O. Conclusion

[138] For the above reasons, the appeal is dismissed. This decision is effective from the date an unsigned copy is transmitted by e-mail from the Divisional Court to counsel for the parties. A signed version of the decision shall be provided to the parties in due course.

[139] The respondent is entitled to its costs of this appeal from the appellants. If the parties cannot agree on the appropriate costs order, then within 21 days the respondent shall provide written costs submissions, including a bill of costs, a costs outline, and argument of no more than five double-spaced pages. Each appellant may (but is not required to) submit a bill of costs and costs outline and argument of no more than five double-spaced pages each. There shall be no reply or oral costs submissions unless we subsequently direct otherwise.

Appeal dismissed.

[^1]: R.S.O. 1990, c. S.5.

[^2]: Quadrexx Hedge Capital Management Ltd. (Re), 2017 LNONOSC 47, 2017 ONSEC 3, 40 O.S.C.B. 1308 (Ont. Securities Comm.) (the "merits decision").

[^3]: Quadrexx Hedge Capital Management Ltd. (Re), 2018 LNONOSC 32, 2018 ONSEC 3, 41 O.S.C.B. 1023 (Ont. Securities Comm.) (the "sanctions decision").

[^4]: [2019] S.C.J. No. 65, 2019 SCC 65, 441 D.L.R. (4th) 1, 59 Admin. L.R. (6th) 1, 69 Imm. L.R. (4th) 1.

[^5]: Mr. Nagy and Mr. Sanfelice submit that the OSC refused to consider the evidence because it misunderstood a defence objection.

[^6]: Barrington v. Institute of Chartered Accountants of Ontario, [2011] O.J. No. 2378, 2011 ONCA 409 (C.A.), at para. 113; Law Society of Upper Canada v. Neinstein (2010), 99 O.R. (3d) 1, [2010] O.J. No. 1046, 2010 ONCA 193 (C.A.), at paras. 61, 94.

[^7]: Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58.

[^8]: Northern Securities Inc. v. Ontario (Securities Commission), [2015] O.J. No. 2924, 2015 ONSC 3641 (Div. Ct.); McLean v. British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67; Cornish v. Ontario Securities Commission, [2013] O.J. No. 1233, 2013 ONSC 1310 (Div. Ct.); Rowan v. Ontario Securities Commission (2012), 110 O.R. (3d) 492, [2012] O.J. No. 1375, 2012 ONCA 208 (C.A.); Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132, [2001] S.C.J. No. 38; Pezim v. British Columbia (Superintendent of Brokers), supra, note 7

[^9]: Supra, note 3.

[^10]: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at para. 5.

[^11]: Schwartz v. Canada, 1996 217 (SCC), [1996] 1 S.C.R. 254, [1996] S.C.J. No. 15.

[^12]: L. (H.) v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401, [2005] S.C.J. No. 24, at para. 55.

[^13]: Ibid., at paras. 55, 56.

[^14]: Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201 (C.A.), at paras. 296, 306, 335, and 349.

[^15]: Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53; MacDonald v. Chicago Title Insurance Co. of Canada, 127 O.R. (3d) 663, [2015] O.J. No. 6350, 2015 ONCA 842 (C.A.), at paras. 1-41, leave to appeal refused [2016] S.C.C.A. No. 39; Housen v. Nikolaisen, supra, note 10.

[^16]: Canada (Citizenship and Immigration) v. Khosa, 2009 SCC 12, [2009] 1 S.C.R. 339, [2009] S.C.J. No. 12, para. 43, per Binnie J.; Mission Institution v. Khela, 2014 SCC 24, [2014] S.C.R. 503, [2014] S.C.J. No. 24, para. 79.

[^17]: London (City) v. Ayerswood Development Corp., 2002 3225 (ON CA), [2002] O.J. No. 4859, 167 O.A.C. 120, para. 10 (C.A.); Brooks v. Ontario (Racing Commission), [2017] O.J. No. 5664, 2017 ONCA 833, 33 Admin. L.R. (6th) 316 (C.A.), para. 5. See, also, Re:Sound v. Fitness Industry Council of Canada, [2014] F.C.J. No. 215, [2015] 2 F.C.R. 170, 2014 FCA 48 (Fed. C.A.).

[^18]: Baker v. Canada (Minister of Citizenship and Immigration), 1999 699 (SCC), [1999] 2 S.C.R. 817, [1999] S.C.J. No. 39.

[^19]: L. (H.) v Canada (Attorney General), supra, note 12, at para. 74.

[^20]: (2018), 2018 ONCA 61, 139 O.R. (3d) 161, [2018] O.J. No. 489 (C.A.). See also: Ottawa (City) Police Services v. Ottawa (City) Police Services, [2016] O.J. No. 4331, 2016 ONCA 627 (C.A.).

[^21]: R. v. M. (R.E.), 2008 SCC 51, [2008] 3 S.C.R. 3, [2008] S.C.J. No. 52, at para. 41.

[^22]: R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869, [2002] S.C.J. No. 30, at para. 15; National Gallery of Canada v. Lafleur de la Capitale Inc. (2017), 137 O.R. (3d) 481, [2017] O.J. No. 4589, 2017 ONCA 688 (C.A.).

[^23]: Brake v. PJ-M2R Restaurant Inc. (2017), 135 O.R. (3d) 561, [2017] O.J. No. 2659, 2017 ONCA 402 (C.A.), at para. 52; Canadian Broadcasting Corp. Pension Plan (Trustee of) v. BF Realty Holdings Ltd., 2002 44954 (ON CA), [2002] O.J. No. 2125, 160 O.A.C. 72 (C.A.), at para. 24.

[^24]: R. v. Walker, 2008 SCC 34, [2008] 2 S.C.R. 245, [2008] S.C.J. No. 34, at para. 20.

[^25]: National Gallery of Canada v. Lafleur de la Capitale Inc., supra, note 22, at para. 12; R. v. M. (R.E.), supra, note 21.

[^26]: Roulston v. McKenny (2017), 135 O.R. (3d) 632, [2017] O.J. No. 26, 2017 ONCA 9 (C.A.), at para. 22; Waxman v. Waxman, supra, note 14, at para. 343 (C.A.).

[^27]: West Van Inc. v. Daisley (2014), 119 O.R. (3d) 481, [2014] O.J. No. 1424, 2014 ONCA 232 (C.A.), at para. 15.

[^28]: Birkshire Group Inc. v. Wilkes (2018), 142 O.R. (3d) 476, [2018] O.J. No. 3695, 2018 ONCA 631 (C.A.); Dovbush v. Mouzitchka (2016), 131 O.R. (3d) 474, [2016] O.J. No. 2627, 2016 ONCA 381.

[^29]: Todorov v. Ontario Securities Commission (2018), 142 O.R. (3d) 578, [2018] O.J. No. 3940, 2018 ONSC 4503 (Div. Ct.); R. v. Walle, [2012] 2 S.C.R. 438, [2012] S.C.J. No. 41, 2012 SCC 41, at para. 46.

[^30]: R. v. Sheppard, supra, note 22, at para. 24; Barbieri v. Mastronardi, [2014] O.J. No. 2419, 2014 ONCA 416 (C.A.).

[^31]: Ontario Securities Commission v. MRS Sciences Inc. (2015), 128 O.R. (3d) 414, [2015] O.J. No. 7025, 2015 ONSC 6317 (Div. Ct.); Cartaway Resources Corp (Re), 2004 SCC 26, [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22; Donnini v. Ontario Securities Commission, [2003] O.J. No. 3541, 37 B.L.R. (3d) 48 (Div. Ct.); Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), supra, note 8.

[^32]: Commissioner Portner was critical of staff's handling of the Mineralfields transaction: see merits decision, para. 224. However, this criticism was in light of the acknowledgment by the appellants that "the CRR Branch was not obligated to approve the Mineralfields transaction".