Supreme Court of Canada considers sanctions imposed by Securities Regulators -- Re: Cartaway Resources Corp, [2004] 1 S.C.R. 672 Douglas Worndl

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1 Supreme Court of Canada considers sanctions imposed by Securities Regulators -- Re: Cartaway Resources Corp, [2004] 1 S.C.R. 672 Douglas Worndl February 2005 In April of 2004, the Supreme Court of Canada released its decision in Re: Cartaway Resources Corp. This is a significant decision to those practicing before provincial securities commissions in that the Supreme Court: 1) re-affirmed the strong curial deference accorded decisions of provincial securities commissions; 2) adopted general deterrence as a one factor among many to be considered in determining sanctions that are in the public interest; and 3) confirmed that settlement agreements of co-respondents are a relevant but non-binding consideration in the determination of sanctions. Background: It was found by the British Columbia Securities Commission (the Commission ) that, in 1994, a group of securities brokers orchestrated the purchase of Cartaway Resources Corporation ( Cartaway ) and channelled some mining claims into Cartaway through a shelf company. Without disclosing to investors the material change in Cartaway s business, the brokers entered into a private placement which they split among friends and other employees of First Marathon Securities Limited ( First Marathon ). Commission proceedings were commenced against the brokers and First Marathon. Settlement agreements were reached between the Executive Director of the Commission and all but two of the brokers, H. and J.. The non-settling respondents, H. and J., were the subject of a Commission hearing wherein each was ordered to pay an administrative penalty of $100,000. In addition, the Commission imposed a limited suspension on them inasmuch as they were effectively cease-traded one-year (except that each could trade through a registered dealer and only on his own account). They were also prohibited from CALGARY MONTRÉAL OTTAWA TORONTO VANCOUVER WATERLOO REGION

2 acting as directors or officers of any reporting issuer for a period of one year and until each had successfully completed a remedial course concerning the duties and responsibilities of directors and officers, whichever was later. H. and J. appealed the Commission s findings and order to the British Columbia Court of Appeal ( BCCA ) The British Columbia Court of Appeal Braidwood JA, for a majority of the BCCA confirmed that the standard of review of the Commission s findings was reasonableness simpliciter, which is consistent with Supreme Court of Canada authority. However, with regard to the penalty imposed on H. and J., the BCCA held that the imposition of the maximum available penalty of $100,000 was too severe and unreasonable in all the circumstances. The BCCA substituted a penalty of $10,000 each for H. and J., finding their culpability to be relatively minor with respect to the breach of the British Columbia Securities Act, and found that the public had not been harmed by their conduct. The BCCA also took into the account the settlements by the other co-respondents which were viewed to be significantly less onerous than the sanctions imposed by the Commission on the non-settling respondents. In addition the BCCA interpreted the Supreme Court of Canada decision in Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132 ( Asbestos ) as precluding the Commission from considering general deterrence as a factor to be considered in determining sanctions under Section 162 of the British Columbia Securities Act. Braidwood JA, for the majority, held that the Asbestos decision stood for the proposition that the Ontario Securities Commission s public interest jurisdiction is prospective and preventative, rather than remedial and punitive, and this restricted the Commission s public interest jurisdiction to restraining future conduct of the specific respondents, H. and J. that would likely prejudice the public interest. The Supreme Court of Canada (1) Standard of Review The Supreme Court of Canada restated and relied upon past decisions of that Court regarding the reasonableness simpliciter standard of review of findings of specialized administrative tribunals. Referring to Dr. Q. v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226 ( Dr. Q. ), Pezim v. British Columbia (Superintendent of 2

3 Brokers), [1994] 2 S.C.R. 557, ( Pezim ); Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247 ( Ryan ); and Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1. S.C.R. 748 ( Southam ), the Court in Cartaway confirmed its interpretation of the reasonableness simpliciter standard of review: The balance of factors in the pragmatic and functional analysis point towards the standard of review of reasonableness and away from the more exacting standard of correctness. The reviewing court must therefore ask whether there is a rational basis for the decision of the Commission in light of the statutory framework and the circumstances of the case. Do the reasons as a whole support the decision? In applying the standard of reasonableness, the reviewing court should not determine whether it agrees with the determination of the tribunal. Such a conclusion is irrelevant. The focus should be on the reasonableness of the decision or the order, not on whether it was a tolerable deviation from the preferred outcome. (at paras. 49 and 50). This construction on the reasonableness standard is consistent with Supreme Court of Canada jurisprudence on the issue over the last 10 years, and confirms a high degree of curial deference to the expertise of the provincial securities commissions, and indeed other expert administrative tribunals, in the exercise of their statutory jurisdiction. 2) General Deterrence In answering the question as to whether there was a rational basis for the decision of the Commission in light of the statutory framework in the circumstances of the case and, whether the reasons as a whole support the decision, the Supreme Court of Canada concluded that it was reasonable for the Commission to consider general deterrence in determining whether a sanction under Section 162 of the British Columbia Securities Act was in the public interest. In the Asbestos case, the Supreme Court of Canada held that the discretion to act in the public interest is not unlimited, and that in exercising its discretion, the Ontario Securities Commission should consider the protection of investors and the efficiency of, and the public confidence in, capital markets generally (Asbestos, at para. 45). In Asbestos, the court held that Section 127 of the Ontario Securities Act (the public interest section) could not be used to redress misconduct alleged to have caused harm to private parties or individuals. The court held that the 3

4 sanctions imposed in the public interest pursuant to s. 127 of the Ontario Act are not remedial or punitive but are preventative in nature and prospective in application. In Cartaway, Braidwood JA for the majority at the BCCA interpreted Asbestos to foreclose the imposition of public interest penalties for the purpose of general deterrence. The Supreme Court of Canada in Cartaway, held that Braidwood J.A. s interpretation was mistaken: In my view, nothing inherent in the Commission s public interest jurisdiction, as it was considered by this Court in Asbestos, supra, prevents the Commission from considering general deterrence in making an order. To the contrary, it is reasonable to view general deterrence as an appropriate, and perhaps necessary, consideration in making orders that are both protective and preventative. (at para.60). The Supreme Court cited with approval the following passage from the dissenting reasons of Ryan JA of the BCCA in Cartaway: The notion of general deterrence is neither punitive nor remedial. A penalty that is meant to generally deter is a penalty designed to discourage or hinder like behaviour in others. (at para 60) In conclusion, the Supreme Court of Canada held: A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others. In a word, a general deterrent is preventative. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under Section 162. The respective importance of general deterrence as a factor will vary according to the breach of the Act and the circumstances of the person charged with breaching the Act. (para. 61) It may well be that the regulation of market behaviour only works effectively when securities commissions impose ex post sanctions that deter forward-looking market participants from engaging similar wrongdoing. This is a matter that falls squarely with the expertise of 4

5 securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets. (para. 62). In assessing whether the Commission s order was reasonable, the Court confirmed that the weight given to general deterrence will vary from case to case and is a matter within the discretion of the Commission: Protecting the public interest will require a different remedial emphasis according to the circumstances. Courts should review the order globally to determine whether it is reasonable. No one factor should be considered in isolation because to do so would skew the textured and nuanced evaluation conducted by the Commission in crafting an order in the public interest. Nevertheless, unreasonable weight given to a particular factor, including general deterrence, will render the order itself unreasonable. (at para. 64) 3) The Relevance of Settlement Agreements H. and J., argued that the Commission did not give appropriate weight to settlements reached by the co-respondents. The argument went that if the corespondents settlements (which were more lenient) were approved by the Commission as being in the public interest, then the public interest sanctions imposed against the non-settling respondents after a hearing should approximate the settlements. The Supreme Court of Canada determined that consideration of settlement agreements is among the relevant factors in assessing the appropriate penalty: In my view, settlement agreements arrived at by corespondents and the Executive Director are not binding on the Commission in determining the appropriate penalty for other co-respondents, although such settlements are among the relevant factors in assessing the appropriate penalty under Section 162. There is no support in the Act to find that settlements between a party against whom enforcement proceedings are brought and the Executive Director are binding as precedent upon the Commission. Indeed, such an approach would unduly fetter the Commission s mandate to make orders in the public interest. Nor, in 5

6 light of the discount accorded settlements, do they necessarily reflect the appropriate penalty in all cases. (at para. 68). The Supreme Court went on to observe that there appears to have been reasonable grounds for the Commission to impose a heavier penalty upon the nonsettling respondents H. and J. than upon the settling co-respondents. The Court concluded that the Commission s sanctions of the non-settling respondents appear to have been reasonable in comparison to the settlement agreements in light of the finding by the Commission that H. and J. were the driving force responsible for the events giving rise to the proceedings: Parity with the settlement agreements is not necessary because the Commission concluded that the respondents were more culpable than the other brokers. (at para. 69) Concluding Comment on the Cartaway Decision In addition to reconfirming the reasonableness simpliciter standard of review set out in previous Supreme Court decisions of Dr. Q, Ryan, and others, the Cartaway decision is significant in establishing that general deterrence is an appropriate consideration for provincial securities commissions imposing sanctions in the public interest. Dovetailing with the reaffirmation of the reasonableness standard of review, the Supreme Court indicated that there be a high degree of deference accorded the Commission in its assessment of the weight to be ascribed to general deterrence in the fashioning of the sanctions against the respondents in question. Provided that the Commission s reasons for making an order demonstrate that the purpose of the order was preventative in nature and prospective in application, such an order would appear to be within the ambit of the Commission s public interest jurisdiction. An order that seeks to deter others from engaging in conduct which is detrimental to the capital markets would fill these preventative and prospective criteria. The acceptance of the general deterrence principle is not only consistent with sentencing in Canadian criminal law, but it is also similar to the approach taken in United States securities litigation: 6

7 This approach is consonant with United States securities jurisprudence, which accepts that general deterrence may be a consideration in imposing penalties for fraudulent behaviour. The rationale is that the public interest demands appropriate sanctions to secure compliance with the rules, regulations and policies of the Securities and Exchange Commission. (at para. 56) As was the case in determining the relative importance of general deterrence in the matrix of factors to be considered in meting out a sanction, the Supreme Court of Canada appeared to be prepared to grant the Commission considerable deference in assessing the appropriate weight to be given to settlements reached by co-respondents. Regarding the relevance of settlement agreements reached between securities commissions and co-respondents, the Supreme Court of Canada recognized that such settlement agreements are relevant but not binding on securities commissions in determining sanctions. However by noting the discount accorded settlements, it is submitted that the Court was recognizing that settlements are arrived at for a variety of reasons, and are necessarily a compromise on the part of both sides. For example a respondent may be of the view that enforcement counsel or a prosecutor may not be able to establish liability; however, the financial and non-financial cost of fighting may be prohibitive relative to that which might be agreed by way of settlement. Alternatively, enforcement counsel, for equally pragmatic reasons, may prefer to settle with peripheral players against whom the evidence might not be as strong, and be prepared to discount significantly sanctions which might be achieved if a full-blown hearing is undertaken against a co-respondent. Depending on the circumstances of an individual case, co-respondents settlements may or may not be useful in assessing what is an appropriate sanction in the public interest against the non-settling party. Nevertheless, the principles articulated in Cartaway appear to provide sufficient basis for respondents to argue that due regard must be given to the proportionality between sanctions imposed by a Commission in approving settlement agreements and sanctions imposed following contested hearings. 7