COURT FILE AND PARTIES

COURT FILE NO.: CV-11-434840

DATE: 2013-02-28

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA, Plaintiff,

AND:

JULIUS CAESAR PHILLIP VITUG, Defendant

BEFORE: STEWART, J.

COUNSEL:
Christopher D. Bredt and Kristen Riess, for the Plaintiff

Alistair Crawley and Kate McGann, for the Defendant

HEARD: October 19, 2012

ENDORSEMENT

Nature of the Motion

[1] The Investment Industry Regulatory Organization of Canada ("IIROC") has brought this motion seeking summary judgment on its claim against the Defendant Julius Caesar Phillip Vitug ("Vitug"). IIROC seeks payment of costs of a disciplinary hearing involving charges against Vitug. The Hearing Panel fixed costs in the amount of $80,000.00 to be paid by Vitug to IIROC.

[2] Both parties are in agreement that this motion raises an issue that turns upon an analysis of the regulatory framework within IIROC operates and a proper construction of the terms that govern all of its members. There are no material facts in dispute. In particular, it is conceded on Vitug's behalf that no genuine issue requiring a trial exists. Rather, it has been agreed by both parties that the materials before the court provide a sufficient record from which a full appreciation of the issues may be gleaned and a final determination made on this motion.

Regulatory Framework

[3] IIROC is a voluntary self-governing organization which regulates members engaged in the investment industry. At all relevant times, Vitug was a member of IIROC and subject to its regulatory authority by virtue of that membership.

[4] IIROC’s purpose is to regulate the operations, standards of practice and business conduct of its members and their representatives in the securities industry with a view to promoting the protection of investors and the public interest.

[5] IIROC is the successor to the Investment Dealers Association of Canada (“IDA”), which also was a voluntary association. IDA performed many of the regulatory functions now performed by IIROC. Following IDA’s combination with Market Regulation Services Inc. (“RS”) into IIROC on June 1, 2008, IIROC now has all of the rights and authority formerly enjoyed by IDA.

Background Facts

[6] Vitug first became a registrant with IDA in 2001. He became a registrant with IIROC on June 1, 2008.

[7] When Vitug applied for registration with IDA, he filed a Uniform Application for Registration/Approval. In his IDA Application for Registration, Vitug sought registration/approval with each of the 13 Canadian securities regulators as well as IDA, the Canadian Venture Exchange, the Montreal Exchange, and the Toronto Stock Exchange.

[8] By signing and submitting the application, Vitug and his employer certified and agreed that they were “conversant with the by-laws, rulings, rules and regulations of the self-regulatory organizations listed in Question 4” (which included IDA). Vitug and his employer further agreed as follows:

We agree to be bound by and to observe and to comply with [the by-laws, rulings, rules and regulations of the self-regulatory organizations listed in Question 4] as they are from time to time amended or supplemented, and we agree to keep ourselves fully informed about them as so amended and supplemented. We submit to the jurisdiction of the self-regulatory organizations and, wherever applicable, the Governors, Directors and committees thereof, and we agree that any approval granted pursuant to this application may be revoked, terminated or suspended at any time in accordance with the then applicable by-laws, rulings, rules and regulations. …

We agree to the transfer of this application form, without amendment, to another of the self-regulatory organizations listed in Question 4 of this application form in the event that at some time in the future the undersigned applicant applies to such other self-regulatory organization.

[9] Thereafter, Vitug continued his registration with IDA by means of various documents filed either personally or through his employers with the National Registration Database (“NRD”) implemented in 2003 by Canadian securities regulators.

[10] In advance of the combination of IDA and RS into IIROC on June 1, 2008, IDA provided notice to its regulated persons (including Vitug) that obligations owed to IDA would be transferred to IIROC. On April 1, 2008, IDA issued a Member Regulation Notice with respect to this transfer as follows:

As part of the National Registration Database (NRD) application process, all Approved Persons submit to the jurisdiction of any self-regulatory organization that their Member sponsor joins. Therefore Approved Persons will automatically be subject to IIROC’s jurisdiction as of the date of the merger, when their Member sponsors become Members of IIROC.

[11] In May 2008, all IDA registrants (including Vitug) were sent a letter regarding the jurisdiction of IIROC. The letter specified the basis for IIROC’s jurisdiction and concluded as follows:

Accordingly, you will be subject to the jurisdiction of IIROC. The jurisdiction of IIROC will cover any acts of misconduct committed while you were approved by the Association. In addition, the IDA will remain in existence to initiate or compete investigatory and enforcement proceedings relating to the conduct of past Members or Approved Persons prior to the effective date of merger.

While not necessary to establish that jurisdiction, this notice is being sent to ensure that you are aware of it.

[12] Following the combination of IDA and RS into IIROC, Vitug became a registrant of IIROC and thereby subject to IIROC jurisdiction. Thereafter, Vitug maintained his registration with IIROC by submitting various filings to the NRD. He continued to participate in the securities industry until mid- 2010.

[13] In executing and filing his OSC Application for Registration (and subsequently applying for registration with IDA) as well as by filing his IDA Application for Registration, Vitug agreed that he was conversant with the by-laws, rulings and regulations of IDA and agreed to be bound by and to observe and comply with them as they were from time to time amended or supplemented. By continuing to participate in the securities industry following the combination of IDA and RS into IIROC, and by proceeding to file additional registration documents with the NRD, Vitug agreed to the transfer of any obligations to IIROC that were formerly owed to IDA.

[14] In paragraph 33 of his Statement of Defence, Vitug admits that he agreed to abide by the by-laws and rules of IIROC as a condition of his registration as an investment advisor. By continuing to remain a member, he agreed to any change or additions to those regulatory provisions and to submit to IIROC’s regulatory and disciplinary authority (see: Senez v. Montreal Real Estate Board, 1980 222 (SCC), [1980] 2 S.C.R. 555).

[15] In exchange, Vitug received significant benefits, including the ability to participate in the Canadian securities market as an investment advisor and seller of securities.

Disciplinary Proceedings

[16] Rule 19 of IIROC’s rules provides for the investigation of the conduct of all regulated persons for compliance with IIROC’s by-laws, rules and applicable securities regulations. Rule 20 provides for disciplinary hearings, penalties and enforcement.

[17] IIROC Dealer Member Rule 20.49(1) provides as follows:

20.49 Assessment of Costs

(1) In addition to imposing any of the penalties set out in Rule 20.33, 20.34 or Rule 20.45, the Hearing Panel may assess and order any Corporation Staff investigation and prosecution costs determined to be appropriate and reasonable in the circumstances.

[18] By decision dated March 31, 2009, the Hearing Panel found Vitug guilty of the following charge against Vitug:

In or about April 2003 to August 2005 the Respondent engaged in business conduct or practice which is unbecoming or detrimental to the public interest in that he had an undisclosed financial interest and undisclosed financial dealings in accounts, including accounts held at another member firm, of two of his clients, in violation of IDA By-law 29.1.

[19] The Hearing Panel specifically found that Vitug had undisclosed interests in trading accounts opened in the names of his aunt and father-in-law, and that he used the account opened in the name of his aunt for his own personal benefit which was in violation of the applicable business conduct by-law. Vitug was therefore found guilty of the charge against him.

[20] In a separate decision dated July 7, 2009, the Hearing Panel ordered a permanent ban prohibiting Vitug from being registered in any capacity under IIROC’s rules, and imposed a fine of $350,000 payable by him to IIROC.

[21] In addition, the Hearing Panel ordered that Vitug pay $80,000 to IIROC for costs.

Appeals

[22] Vitug appealed the Hearing Panel's decision to the Ontario Securities Commission. At the hearing of the appeal before the OSC, Vitug raised no objection to the jurisdiction of IIROC to enforce compliance with IDA’s by-laws or IIROC’s rules, nor did he challenge the availability or quantum of the costs order despite this opportunity to do so. By decision dated April 23, 2010, Vitug's appeal was dismissed.

[23] Vitug further appealed to the Divisional Court of the Superior Court of Justice. At the hearing before the Divisional Court, Vitug raised no objection to the jurisdiction of IIROC to enforce compliance with IDA’s by-laws or IIROC’s rules nor did he seek to set aside or reduce the costs order on any grounds despite this opportunity to do so. On August 12, 2010, his appeal was dismissed by the Divisional Court.

[24] Although he has received demands from IIROC for payment of the hearing costs, Vitug has failed to pay the $80,000.00 for costs as ordered by the Hearing Panel. As a result, IIROC has commenced this action against Vitug and claims the amount of $80,000.00 for breach of contract for failure to pay the costs order which remains outstanding.

Law and Discussion

[25] By virtue of its rules and by-laws, IIROC has contractual jurisdiction over its members and their registered employees. In Morgis v. Thomson Keraghan & Co. (2003), 174 O.A.C. the Ontario Court of Appeal stated:

Membership in the IDA is voluntary. It is based on the contractual commitment of members to abide by the constitution, regulations, rules and by-laws of the association. The IDA is not created by and does not derive its authority from statute. Rather, it operates under the authority of its own constitution and is recognized under some securities legislation.

[26] That same principle has been applied by courts in Ontario and British Columbia which have held that such by-laws, rules and regulations are contractually binding on regulated persons. In Dass v. Investment Dealers Assn. of Canada, 2008 BCCA 413, 2008 CarswellBC 2244 (WL) the British Columbia Court of Appeal affirmed the B.C. Securities Commission decision to apply IDA by-law 20.7(1) to extend IDA’s jurisdiction over members for a period of five years after they ceased to be members, stating as follows:

… a decision that the IDA could not discipline former members despite their agreement to submit to IDA jurisdiction for five years after termination of their membership would undermine the regulatory scheme. A non-compliant member would be able to avoid any oversight of his conduct simply by resigning and any general deterrence to be gained by findings of misconduct and consequential penalties would be lost. Such a result would diminish investor protection and damage public confidence in the regulatory system. It would accordingly be unacceptable to hold that the appellant could so easily shed himself of a contractual commitment entered into in part for the protection of the investing public.

[27] Similarly, the fact that Vitug is no longer registered does not eliminate his obligation to pay the hearing costs as ordered by the Hearing Panel (see: Re Market Regulation Services Inc., 2012 ONSC 3012).

[28] The analysis employed by Court of Appeal for Ontario in Investment Dealers Association of Canada v. Taub (2009 ONCA 628) likewise supports a conclusion that an IIROC costs order is enforceable as a matter of contract. In Taub, the Court expressed the view that an IIROC fine is enforceable against a member unless it falls into the realm of the unconscionable. Even if an unconscionability test were required to be applied to a costs order, which I do not consider to be the case as the nature of a costs order is compensatory and not punitive, I am of the view that the amount imposed by way of costs for this hearing and investigation is both fair and reasonable in light of the issues involved, their complexity and the length of the hearing.

[29] As is suggested by the decision in Taub, Vitug’s agreement to the terms of his registration includes a promise to pay any lawful costs awards made against him in disciplinary proceedings. This term is a contractually binding obligation that may be sued upon in a civil action. The absence of specific statutory authority in that regard does not serve to alter that conclusion.

[30] Vitug complains that he could not recover any part of his costs of earlier unsuccessful disciplinary proceedings against him as IIROC rules do not provide for same. In my view, that aspect of the Rules is irrelevant insofar as the costs order made by the Hearing Panel in 2009 is concerned.

[31] Further, Vitug argues that any agreement to IIROC’s terms of registration should not be binding on him because he says he had no opportunity to negotiate or modify those terms. This argument has already been considered by a court and rejected (See: Steinhoff v. Investment Regulatory Organization of Canada, 2012 BCSC 1054, 2012 CarswellBC 2100 (WL). I reject the argument for the same reasons.

[32] A regulated person’s agreement to IIROC’s by-laws, rules and regulations provides the person with substantial benefits – the ability to participate in the securities markets. However, given the significant harm that can be done to investors and public confidence in the intergrity of the markets by the misconduct of market participants, it is a necessary component of the contractual agreement between the parties that IIROC be able to deploy significant resources to police its public interest obligations. It is only fair that regulated persons who have been found to be guilty of misconduct be required to pay a portion of the costs they have imposed on IIROC and its membership as a result of their breach of IIROC’s by-laws, rules and regulations, if the Hearing Panel in the proper exercise of its discretion considers that to be appropriate.

[33] If an individual does not wish to be so bound by the rules and regulations which are clearly designed to protect the public, that individual may decline to seek registration.

[34] I note as well that the process leading up to the making of costs awards provides regulated persons with adequate procedural protections. Vitug was provided with detailed notice of the allegations made against him, and was entitled to a hearing before an IIROC Hearing Panel. During the hearing, Vitug was able to lead evidence and cross-examine all prosecution evidence. Arguments and submissions were entertained on liability, penalty and costs. Following the Hearing Panel’s decision, Vitug had an automatic right of appeal to the OSC, with a further appeal to the Divisional Court. Although the reasons of those appellate tribunals reflect a due deference to the Hearing Panel’s decision, they do not raise any serious concern of reasonableness or mistake that would have justified appellate interference with the result.

[35] Many of the other arguments advanced by Vitug strike me as an effort to attack the underlying validity of the disciplinary process and proceedings and the soundness or justness of the result. These arguments have been heard and dismissed on appeal. They have no bearing on Vitug’s obligation to pay the costs order which remains outstanding after all avenues of legal redress available to him have been exhausted.

Conclusion

[36] In my opinion, it is evident that Vitug submitted to the rules of this regulatory scheme of which he was a member. He went through a fair and legitimate disciplinary proceeding and was found guilty of having breached IIROC’s rules for its proper conduct of its members. The very reasonable order for costs pursuant to the IIROC rules made by the Hearing Panel, which represents only a fraction of IIROC’s actual costs of this investigation and prosecution which I am satisfied it has incurred, must therefore be paid by him. The bringing of an action by IIROC to recover those costs, framed as an action for breach of contract, is both appropriate and available in view of the contractual terms which govern Vitug’s membership.

[37] For these reasons, IIROC is entitled to judgment against Vitug in the amount of $80,000.00.

Costs

[38] If the parties cannot agree on the subject of costs or interest, written submissions may be delivered by the Plaintiff within 30 days of the date of release of this decision, and by the Defendant within 20 days thereafter.

STEWART, J.

Date: February 28, 2013