Cornish v. Ontario Securities Commission, (2013) 306 O.A.C. 107 (DC)

• Judge: Aston, Swinton and Ducharme, JJ.
• Court: Superior Court of Justice of Ontario (Canada)
• Case Date: March 19, 2013
• Jurisdiction: Ontario
• Citations: (2013), 306 O.A.C. 107 (DC);2013 ONSC 1310

Cornish v. Securities Comm. (2013), 306 O.A.C. 107 (DC)

MLB headnote and full text

Temp. Cite: [2013] O.A.C. TBEd. MY.024

Geoffrey Cornish (appellant) v. Ontario Securities Commission (respondent)

(33/12)

Dean Tai Appellant v. Ontario Securities Commission (respondent)

(35/12; 2013 ONSC 1310)

Indexed As: Cornish v. Ontario Securities Commission

Court of Ontario

Superior Court of Justice

Divisional Court

Aston, Swinton and Ducharme, JJ.

March 19, 2013.

Summary:

Coventree Inc. was an Ontario company incorporated in 1998. It became a reporting issuer following an initial public offering on November 15, 2006. At the relevant time, Coventree described itself as a niche investment bank specializing in structured finance. The Ontario Securities Commission found that Coventree had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act. In addition to two administrative orders regarding trading activity, Coventree was ordered to pay an administrative monetary penalty of $1 million and costs of $250,000. The Commission also found that the appellants, senior directors and officers of Coventree, authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Securities Act. The Commission also found that their conduct in contravening Ontario securities law was contrary to the public interest. The Commission publicly reprimanded each of the appellants and: (a) required them to resign as a director or officer of any reporting issuer, other than Coventree; (b) prohibited them from becoming or acting as a director or officer of a reporting issuer for one year; and (c) levied a $500,000 administrative monetary penalty against each of them. The appellants appealed the orders made against them (Act, s. 9(1)).

The Ontario Divisional Court dismissed the appeals, holding that the Commission made no error in law and reached a reasonable decision based on the evidence before it.

Administrative Law - Topic 2001

Natural justice - General principles - [See Securities Regulation - Topic 1386 ].

Administrative Law - Topic 3202

Judicial review - General - Scope or standard of review - [See Securities Regulation - Topic 1386 ].

Administrative Law - Topic 6204

Judicial review - Statutory appeal - Scope or standard of review - Of discretionary power - [See Securities Regulation - Topic 1386 ].

Administrative Law - Topic 6207

Judicial review - Statutory appeal - Scope or standard of review - Question of law or jurisdiction - [See Securities Regulation - Topic 1386 ].

Administrative Law - Topic 6207.1

Judicial review - Statutory appeal - Scope or standard of review - Question of fact or mixed law and fact - [See Securities Regulation - Topic 1386 ].

Administrative Law - Topic 9102

Boards and tribunals - Judicial review - Standard of review - [See Securities Regulation - Topic 1386 ].

Securities Regulation - Topic 1370

Regulatory commissions (incl. self regulatory organizations) - Practice - Hearings - Evidence - The Ontario Securities Commission found that a company had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Ontario Divisional Court stated that "... no issue can be taken with the Commission's statement in this case that '[d]etermining questions such as whether a fact is a material fact, whether a material change has occurred, the effect of events or developments on the market price or value of securities and the adequacy of disclosure made, are matters squarely within our expertise as a specialized tribunal.' ... The Commission has repeatedly held that, as an expert tribunal, it does not require evidence from experts or investors in order to determine questions of disclosure and materiality. Thus, 'such opinion or evidence may be relevant or useful but is not necessary.'" - The court went further, providing three reasons why evidence of historical price and volume fluctuations for a reporting issuer's shares might not always be of assistance in this regard - See paragraphs 58 and 59 - Further, no shareholder or expert evidence was required here where the conclusion that material changes had occurred was not only an available common sense inference, it was the only reasonable inference available to the Commission on the evidence before it - See paragraphs 98 to 100.

Securities Regulation - Topic 1386

Regulatory Commission (incl. self-regulatory organizations) - Statutory appeal to courts or judicial review - Scope of appeal or standard of review - The Ontario Securities Commission found that Coventree Inc. had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Commission also found that the appellants (senior directors and officers) authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act - Further, their conduct in contravening Ontario securities law was contrary to the public interest - The appellants appealed (s. 9(1)) - They challenged the Commission's interpretation and application of its enabling statute, the Securities Act - In particular, they challenged the Commission's interpretation and application of the definition of "material change" under the Act and its discretionary application of its public interest jurisdiction under s. 127 of the Act - The appellants also argued that the Commission made irrelevant and prejudicial findings against them contrary to the rules of natural justice and procedural fairness - The Ontario Divisional Court held that the first two matters fell within the Commission's specialized expertise; thus, the appropriate standard of review was reasonableness - The court did not apply a standard of review to the allegation of a denial of procedural fairness - The question was whether there was a denial of procedural fairness - See paragraphs 27 to 36.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - [See Securities Regulation - Topic 1370 ].

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Section 75 of the Securities Act required forthwith disclosure of material changes to a reporting issuer's business, operations or capital - The Ontario Divisional Court reviewed (1) the importance of public disclosure in the regulation of securities markets; (2) the public disclosure requirements under the Securities Act; and (3) the proper approach to determining when a material change had occurred - See paragraphs 37 to 59.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Section 75 of the Securities Act required forthwith disclosure of material changes to a reporting issuer's business, operations or capital - Coventree, an Ontario company incorporated in 1998, became a reporting issuer following an initial public offering on November 15, 2006 - At the relevant time, Coventree described itself as a niche investment bank specializing in structured finance - The Commission also found that the appellants, senior directors and officers of Coventree, authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act and that their conduct in contravening Ontario securities law was contrary to the public interest (s. 127) - They appealed (s. 9(1)), submitting, inter alia, that the Commission erred in applying the "reasonable investor test" to determine materiality instead of the statutorily mandated "market impact test" (s. 1.1) - The Ontario Divisional Court rejected the submission, holding that the Commission clearly recognized and applied the statutory market impact test for materiality - See paragraphs 60 to 81.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Section 75 of the Securities Act required forthwith disclosure of material changes to a reporting issuer's business, operations or capital - On an appeal under s. 9(1) of the Act, the appellants submitted, inter alia, that the Ontario Securities Commission erred in applying the "reasonable investor test" to determine materiality instead of the statutorily mandated "market impact test" (s. 1.1) - The Ontario Divisional Court rejected the submission - The court stated that "In conclusion, there is nothing objectionable to the foregoing references to the reasonable investor or shareholder. They simply reflect the reality that the market impact test subsumes the perspective of the reasonable investor. ... That is, the determination of whether the disclosure of information would reasonably be expected to have a significant effect on the market price or value of a security turns on whether or not it can be reasonably expected to affect the investment decisions of reasonable investors or shareholders. Recognizing this connection does not, in any way, dilute the market impact test. Thus, it was reasonable and appropriate for the Commission to consider whether a change would constitute 'important information' to reasonable investors in determining whether the change would reasonably be expected to have a significant effect on the market price or value of the issuer's securities." - See paragraph 79.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Coventree Inc. was an Ontario company incorporated in 1998 - It became a reporting issuer following an initial public offering on November 15, 2006 - At the relevant time, Coventree described itself as a niche investment bank specializing in structured finance - The Ontario Securities Commission found that Coventree had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Commission also found that the appellants, senior directors and officers of Coventree, authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act and that their conduct in contravening Ontario securities law was contrary to the public interest (s. 127) - On an appeal under s. 9(1) of the Act, the appellants submitted, inter alia, that the Commission erred in finding that there was a material change in the absence of any evidence capable of supporting that finding - The appellants suggested that, in using a common sense approach when determining whether a change was material, the Commission based its findings on speculation rather than evidence - The Ontario Divisional Court rejected the submission - "[T]he Commission based its decision on an evidentiary framework that included: detailed evidence of Coventree's business and operations; detailed evidence of market conditions for Coventree's ABCP [asset-backed commercial paper] product; Coventree's description of itself in its publicly filed disclosure documents; Coventree's historical share price; and the prevailing ABCP market conditions." - See paragraphs 80 to 91.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Coventree Inc. was an Ontario company incorporated in 1998 - It became a reporting issuer following an initial public offering on November 15, 2006 - At the relevant time, Coventree described itself as a niche investment bank specializing in structured finance - The Ontario Securities Commission found that Coventree had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Commission also found that the appellants, senior directors and officers of Coventree, authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act and that their conduct in contravening Ontario securities law was contrary to the public interest (s. 127) - The credit rating of ABCP was done by the Dominion Bond Rating Service (DBRS) - At the hearing, the appellants had argued that a January 2007 DBRS Release was not material because there was no change in the market price of Coventree's shares when Coventree included some disclosure about it in its 2006 Annual Report and Q1 Management's Discussion & Analysis (MD&A), publicly filed on February 14, 2007, and in its Q2 MD&A, publicly filed on May 14, 2007 - In its Q2 MD& A, Coventree disclosed that the DBRS January Release would "have the effect of reducing the profitability of the Company by substantially curtailing its ability to grow, if not halt in the short term, its credit arbitrage business." - The Ontario Divisional Court held that the Commission did not reverse the burden of proof and require the appellants to disprove the other explanations as to why the DBRS January Release had no effect on the market price of Coventree's shares - Rather, it applied its expertise to the evidence before it and explained why the lack of a change in share price was not determinative of the material change issue - See paragraphs 92 to 97.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Coventree Inc. described itself as a niche investment bank specializing in structured finance - The Ontario Securities Commission found that Coventree had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Commission also found that the appellants (senior directors and officers) authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act - The appellants appealed (s. 9(1)), submitting, inter alia, that the Ontario Securities Commission erred in failing to distinguish between a "material fact" and "material change" in finding that disclosure was required - The Ontario Divisional Court rejected the submission - The Commission clearly recognized the distinction between the two and the legal consequences of their occurrence - See paragraphs 101 to 122.

Securities Regulation - Topic 5311

Trading in securities - Offences - Material changes or facts - Nondisclosure - Section 75 of the Securities Act required forthwith disclosure of material changes to a reporting issuer's business, operations or capital - The Ontario Divisional Court stated that "the disclosure obligation in s. 75 of the Act is triggered by the occurrence of a change to the 'business, operations or capital' of an issuer. If no such change has actually occurred, there is no duty to immediately disclose under s. 75. Changes that are external to the issuer such as political, economic or social developments that affect it may be material facts, even where they create a risk that a material change may occur at some unspecified future time. However, such material facts are required to be reported only in a company's periodic disclosure documents such as its MD&A [Management's Discussion & Analysis]. Such external changes need not be reported immediately under s. 75 unless they have actually resulted in a change in the 'business, operations or capital' of an issuer." - See paragraph 105.

Securities Regulation - Topic 5314

Trading in securities - Offences - Acting contrary to the public interest - The Ontario Securities Commission found that Coventree Inc. had violated the Securities Act by failing to comply with its continuous disclosure obligations respecting material changes under ss. 75(1) and 75(2) of the Act - The Commission also found that the appellants (senior directors and officers) authorized, permitted or acquiesced in Coventree's noncompliance with Ontario securities law, and thereby failed to comply with Ontario securities law under s. 129.2 of the Act - Further, their conduct in contravening Ontario securities law was contrary to the public interest (s. 127) - The appellants appealed (s. 9(1)) - They submitted, inter alia, that the Commission erred in making orders in the public interest under s. 127 of the Act - The parties agreed that the Commission could conclude that not every breach of securities law required a sanction in the public interest - However, they differed as to what factors should be considered in making this determination - The appellants submitted that, given the Commission's findings and the appellants' antecedents, there was no need to make such an order in this case - The Ontario Divisional Court upheld the Commission's decision regarding public interest as reasonable - "The disclosure cases cited by the Commission make it clear that it is not necessary for the Commission to conclude that a respondent acted willfully or deceitfully in order to exercise its public interest jurisdiction. ... A breach of the disclosure requirements under Ontario securities law will generally involve conduct contrary to the public interest. ... The prior good character of the appellants and the fact they acted in good faith, while relevant to sanctions, does not preclude a finding that their conduct was contrary to the public interest." - See paragraphs 128 to 139.

Cases Noticed:

Pezim v. British Columbia Securities Commission et al., [1994] 2 S.C.R. 557; 168 N.R. 321; 46 B.C.A.C. 1; 75 W.A.C. 1, refd to. [para. 30, footnote 5].

Pezim v. Superintendent of Brokers (B.C.) - see Pezim v. British Columbia Securities Commission et al.

Asbestos Corp., Société nationale de l'Amianté and Quebec (Province), Re, [2001] 2 S.C.R. 132; 269 N.R. 311; 146 O.A.C. 201; 2001 SCC 37, affing. (1999), 117 O.A.C. 224; 43 O.R.(3d) 257 (C.A.), refd to. [paras. 31, 137, footnotes 6, 73].

Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario Securities Commission - see Asbestos Corp., Société nationale de l'Amiante and Quebec (Province), Re.

Alberta Teachers' Association v. Information and Privacy Commissioner (Alta.) et al., [2011] 3 S.C.R. 654; 424 N.R. 70; 519 A.R. 1; 539 W.A.C. 1; 2011 SCC 61, refd to. [para. 32, footnote 7].

Rowan et al. v. Ontario Securities Commission (2012), 290 O.A.C. 159; 110 O.R.(3d) 492; 2012 ONCA 208, refd to. [para. 33, footnote 8].

Rogers Communications Inc. et al. v. Society of Composers, Authors and Music Publishers of Canada et al., [2012] 2 S.C.R. 283; 432 N.R. 1; 2012 SCC 35, dist. [para. 35, footnote 9].

London (City) v. Ayerswood Development Corp. et al. (2002), 167 O.A.C. 120 (C.A.), refd to. [para. 36, footnote 10].

Ontario Securities Commission and Brigadoon Scotch Distributors (Canada) Ltd., Re, [1970] 3 O.R. 714 (H.C.), refd to. [para. 38, footnote 11].

Pacific Coast Coin Exchange of Canada et al. v. Ontario Securities Commission, [1978] 2 S.C.R. 112; 18 N.R. 52, refd to. [para. 38, footnote 11].

Philip Services Corp., Re (2006), 29 O.S.C.B. 3941 (Sec. Comm.), refd to. [para. 38, footnote 12].

British Columbia Securities Commission v. Branch and Levitt, [1995] 2 S.C.R. 3; 180 N.R. 241; 60 B.C.A.C. 1; 99 W.A.C. 1, refd to. [para. 39, footnote 13].

Cartaway Resources Corp., Re, [2000] B.C.S.C.D. No. 92 (Sec. Comm.), refd to. [para. 40, footnote 14].

YBM Magnex International Inc., Re (2003), 26 O.S.C.B. 5285 (Sec. Comm.), refd to. [para. 41, footnote 15].

TSC Industries Inc. v. Northway Inc. (1976), 426 U.S. 438, refd to. [para. 41, footnote 16].

Kerr et al. v. Danier Leather Inc. et al., [2007] 3 S.C.R. 331; 368 N.R. 204; 231 O.A.C. 348; 2007 SCC 44, refd to. [para. 42, footnote 17].

Rex Diamond Mining Corp., Re (2008), 31 O.S.C.B. 8337 (Sec. Comm.), refd to. [para. 42, footnote 18].

AIT Advanced Information Technologies Corp., Re (2008), 31 O.S.C.B. 712 (Sec. Comm.), refd to. [para. 49, footnote 28].

Rex Diamond Mining Corp. et al. v. Ontario Securities Commission, [2010] O.A.C. Uned. 434; 2010 ONSC 3926 (Div. Ct.), refd to. [para. 55, footnote 34].

Biovail Corp., Re (2010), 33 O.S.C.B. 8914 (Sec. Comm.), refd to. [para. 58, footnote 37].

Magna International Inc., Re (2010), 33 O.S.C.B. 6013 (Sec. Comm.), refd to. [para. 58, footnote 37].

Rowan et al. v. Ontario Securities Commission et al. (2010), 272 O.A.C. 119; 103 O.R.(3d) 484; 2010 ONSC 7029 (Div. Ct.), refd to. [para. 72, footnote 49].

Sharbern Holding Inc. v. Vancouver Airport Centre Ltd. et al., [2011] 2 S.C.R. 175; 416 N.R. 1; 306 B.C.A.C. 1; 516 W.A.C. 1; 2011 SCC 23, refd to. [para. 80, footnote 55].

Cartaway Resources Corp. et al., Re (2002), 173 B.C.A.C. 235; 283 W.A.C. 235; 218 D.L.R.(4th) 461; 2002 BCCA 461, revd. in part [2004] 1 S.C.R. 672; 319 N.R. 1; 195 B.C.A.C. 161; 319 W.A.C. 161; 2004 SCC 26, refd to. [para. 82, footnote 57].

Johnson v. British Columbia Securities Commission - see Cartaway Resources Corp. et al., Re.

Anderson, Re (2004), 27 O.S.C.B. 7955 (Sec. Comm.), refd to. [para. 123, footnote 66].

Cineplex Corp., Drabinsky and Gottlieb, Re (1983), 6 O.S.C.B. 3845 (Sec. Comm.), refd to. [para. 131, footnote 69].

Standard Trustco, Re (1992), 15 O.S.C.B. 4322 (Sec. Comm.), refd to. [para. 131, footnote 69].

Mithras Management Inc., Re (1990), 13 O.S.C.B. 1660 (Sec. Comm.), refd to. [para. 134, footnote 70].

Gordon Capital Corp. v. Ontario Securities Commission (1991), 50 O.A.C. 258; 1 Admin. L.R.(2d) 199 (Div. Ct.), refd to. [para. 136, footnote 71].

Marchment & Mackay Ltd. et al. v. Ontario Securities Commission (1997), 101 O.A.C. 154; 34 O.R.(3d) 284 (Div. Ct.), refd to. [para. 136, footnote 71].

YBM Magnex International Inc., Re (2000), 23 O.S.C.B. 623 (Sec. Comm.), refd to. [para. 136, footnote 72].

Statutes Noticed:

Securities Act, R.S.O. 1990, c. S-5, sect. 1.1 [para. 45]; sect. 75 [para. 37].

Authors and Works Noticed:

Alboini, Victor P., Securities Law and Practice (2nd Ed. 1984), p. 18-14 [para. 73, footnote 50].

Counsel:

B. Zarnett, J.T. Curry, S. Roy and P. Kolla, for the appellant, Geoffrey Cornish;

J. Waechter, M. Vaillancourt and C. Johnson, for the respondent;

P. Le Vay and P. Sagull, for the appellant, Dean Tai.

These appeals were heard at Toronto, Ontario, on October 23 and 24, 2012, by Aston, Swinton and Ducharme, JJ., of the Ontario Divisional Court. Ducharme, J., delivered the following decision for the court on March 19, 2013.