Spork et al. v. Ontario Securities Commission, (2014) 319 O.A.C. 297 (DC)

• Judge: Himel, Sachs and Hennessy, JJ.
• Court: Superior Court of Justice of Ontario (Canada)
• Case Date: December 06, 2013
• Jurisdiction: Ontario
• Citations: (2014), 319 O.A.C. 297 (DC);2014 ONSC 2467

Spork v. Securities Comm. (2014), 319 O.A.C. 297 (DC)

MLB headnote and full text

Temp. Cite: [2014] O.A.C. TBEd. MY.018

Otto Spork, Konstantinos Ekonomidis and Natalie Spork (appellants) v. Ontario Securities Commission (respondent)

(DC-340/12; 2014 ONSC 2467)

Indexed As: Spork et al. v. Ontario Securities Commission

Court of Ontario

Superior Court of Justice

Divisional Court

Himel, Sachs and Hennessy, JJ.

May 5, 2014.

Summary:

Three appellants appealed from the following three orders of the Ontario Securities Commission pursuant to ss. 127 and 127.1 of the Securities Act: a merits decision (May 17, 2011); a jurisdiction motion (April 27, 2012); and a sanctions decision (June 1, 2012). The appellants sought to set aside the June 1, 2012 order, or, in the alternative, to have it varied. The appeal raised the following issues: (1) did the Commission fail to comply with the quorum requirements under the Act for the sanctions hearing, and thereby have no jurisdiction to make the June 1, 2012 orders; (2) did the Commission err in the application of the appropriate test for fraud and thereby render an unreasonable decision; and (3) did the Commission unreasonably conclude that the appellant Ekonomidis was acting as an investment manager and required to comply with the duties of an investment fund manager; and (4) did the Commission impose unreasonable sanctions as against each of the three appellants?

The Ontario Divisional Court dismissed the appeal.

Administrative Law - Topic 549

The hearing and decision - Decisions of the tribunal - Reasons for decisions - Sufficiency of - Three appellants appealed from three orders of the Ontario Securities Commission pursuant to ss. 127 and 127.1 of the Securities Act, including its decision on the merits - In that decision, the panel concluded, inter alia, that the appellant Otto Spork had committed acts of fraud - The appellants submitted that the Commission erred in applying the mens rea element of fraud, when they held that Otto Spork knew or ought reasonably to have known that certain share values were totally unreasonable and were inflated - They argued that the Commission failed to consider and discuss in the reasons the relevant evidence known to Otto Spork that was inconsistent with the finding of fraud - Further, a finding that advance payments were fraudulent was unreasonable in that there was no evidence that at the time Otto Spork took the advances, he was aware that they were prohibited - The Ontario Divisional Court rejected both submissions - The panel's reasons provided an adequate explanation of the basis on which the decision was reached and satisfied the Dunsmuir (2008 SCC) criteria of justification, transparency and intelligibility - The reasons articulated the evidence that was relevant and significant to the decision - The court discussed the appropriate test for fraud involving securities under s. 126.1(b) of the Act - The court held that the evidence supported that Otto Spork knew of his wrongful acts and knew that those acts could have as a consequence the deprivation or risk of deprivation to the investors - See paragraphs 49 to 68.

Administrative Law - Topic 3202

Judicial review - General - Scope or standard of review - The appellants appealed from the following three orders of the Ontario Securities Commission pursuant to ss. 127 and 127.1 of the Securities Act: a merits decision (May 17, 2011); a jurisdiction motion (April 27, 2012); and a sanctions decision (June 1, 2012) - The appellants sought to set aside the June 1, 2012, sanctions order, or, in the alternative, to have it varied - At issue, inter alia, was whether the Commission failed to comply with the quorum requirements under the Act for the sanctions hearing, and thereby lacked jurisdiction to make the June 1, 2012 orders - The parties agreed that the standard of review on an appeal for questions arising from the merits and sanctions decisions was reasonableness - However, the appellants submitted that the issue of the quorum for the sanctions decision went to jurisdiction and concerned a question of central importance to the legal system as a whole; therefore, it was subject to the correctness standard - The Ontario Divisional Court rejected the submission, holding that the standard of review for all the issues on appeal was reasonableness - See paragraphs 25 to 34.

Administrative Law - Topic 9102

Boards and tribunals - Judicial review - Standard of review - [See Administrative Law - Topic 3202 ].

Securities Regulation - Topic 1303

Hearings - Quorum - Three appellants appealed from the following three orders of the Ontario Securities Commission pursuant to ss. 127 and 127.1 of the Securities Act: a merits decision (May 17, 2011); a jurisdiction motion (April 27, 2012); and a sanctions decision (June 1, 2012) - Commissioners Carnwath and Perry sat on the hearing of the merits in 2010, but by the time the parties convened for the hearing on sanctions Commissioner Perry's appointment had expired - The appellants brought the jurisdiction motion prior to the sanctions hearing seeking an order that the Commission lacked jurisdiction to proceed with the sanctions hearing with only a single member of the Commission; that s. 3(11) of the Statutory Powers Procedure Act (SPPA) applied, which prescribed that two members of the Commission constituted a quorum - Commissioner Carnwath heard and dismissed that motion with reasons - The Ontario Divisional Court referred to s. 2 of the SPPA which required that the Act be liberally construed to secure the just, most expeditious and cost-effective determination of every proceeding on its merits - The court stated that "... a plain reading of s. 4.4(1) of the SPPA grants authority to the Commission to resolve the problem of losing statutory quorum as the result of the incapacity of a member, unless there is something in another act or regulation that specifically deals with the circumstances of loss of quorum. That narrow exception does not apply here. Section 4.4(1) specifically permits the Commission to override s. 3(11) of the Act in order to proceed expeditiously in the circumstances where quorum has been lost. ... [T]he principle of audi alteram partem was fully met. Commissioner Carnwath, who was present at the merits hearing and at the sanctions hearing, made the decision with respect to sanctions. The parties were fully heard by the panel that ultimately made the order." - See paragraphs 35 to 48.

Securities Regulation - Topic 1386

Regulatory commissions (incl. self-regulatory organizations) - Statutory appeal or judicial review - Scope of appeal or standard of review - [See Administrative Law - Topic 3202 ].

Securities Regulation - Topic 5012

Registration - Investment fund managers, securities advisors and sales persons - General - Section 116 of the Securities Act addressed the standard of care of investment fund managers - The appellants submitted that the Securities Commission unreasonably concluded that Ekonomidis was an "investment fund manager" within the meaning of s. 116 as the panel found that his only responsibilities were sales, not operation of the business or affairs of the funds in issue and, in any event, his communication with W.G., a retail broker, did not provide a reasonable basis to conclude that he had breached his duties as an investment fund manager - The Commission submitted that the panel's conclusion that Ekonomidis was an "investment fund manager" was reasonable based on the evidence that he was involved in higher level decision-making involving the funds and that he had fulfilled more than a sales function at Sextant Capital Management Inc. (the funds investment advisor), as he had assisted in the operations during another person's absence - In particular, the panel found that Ekonomidis had "concealed the high concentration of IGP in the portfolio from W.G.", and W.G. was invited to purchase units of the fund after this lack of disclosure - The Commission heard evidence from W.G. that he was horrified to learn that 95% of the fund was invested in one water company (IGP) - The Ontario Divisional Court held that the panel's findings were reasonable given the evidence and should not be disturbed - See paragraphs 69 to 72.

Securities Regulation - Topic 5302

Trading in securities - Offences - Legislation - Interpretation - [See Securities Regulation - Topic 1303 ].

Securities Regulation - Topic 5313

Trading in securities - Offences - Fraud - [See Administrative Law - Topic 549 ].

Securities Regulation - Topic 5316

Trading in securities - Offences - Contravention of securities laws (incl. breach of securities commission order) - [See Securities Regulation - Topic 5012 ].

Securities Regulation - Topic 5321.1

Trading in securities - Offences - Penalties and punishments - Considerations - The Ontario Divisional Court stated that "The [Ontario Securities] Commission is empowered to order sanctions if, in its opinion, it is in the public interest to do so. The Commission has a very broad discretion in determining what is in the public interest." - See paragraph 83.

Securities Regulation - Topic 5322

Trading in securities - Offences - Penalties and punishments - Administrative penalties - [See Securities Regulation - Topic 5325.1 ].

Securities Regulation - Topic 5325.1

Trading in securities - Offences - Penalties and punishments - Fraud - An Ontario Securities Commission panel held that Otto Spork, Sextant Capital Management Inc. ("SCMI"), and Sextant Capital GP Inc. committed non-criminal fraud from July 2007 to December 2008 by: (1) selling investments fund units with falsely inflated values; (2) taking millions of dollars in fees based on falsely inflated values; and (3) directly misappropriating money from investment funds - The panel also found that Otto, Ekonomidis and Natalie Spork had breached their duties as investment fund managers contrary to s. 116 of the Securities Act; failed to deal fairly, honestly, and in good faith contrary to s. 2.1 of the OSC Rule 31-505 - Conditions of Registration; and acted contrary to the public interest - Ekonomidis as Vice-President of SCMI was second in command to Otto and engaged in selling fund units - He was found to have acted contrary to the public interest by misrepresenting the fund's state of affairs to investors - As of May 28, 2008, Natalie Spork, Otto's daughter became SCMI's President and Director and became registered with the Commission as the Ultimate Responsible Person with SCMI - The panel found that she took no steps to learn about or discharge her obligations in these roles and ultimately failed in her duties to act in good faith toward investors - The following sanctions were imposed against Otto: termination of his registration under the Act; a permanent prohibition against trading in and acquiring of any securities; a reprimand; resignation from all positions as a director or officer of an issuer, registrant, or investment fund manager; a permanent prohibition against becoming or acting as a director or officer of any issuer, registrant, or investment fund manager; a permanent prohibition against becoming or acting as a registrant, as an investment fund manager, or as a promoter; a $1,000,000 administrative penalty for third parties; disgorgement of $6,350,000; and $350,000 costs - The following sanctions were imposed against Ekonomidis: termination of his registration under the Act; a 10 year prohibition against trading in and acquiring of any securities; a reprimand; resignation from all positions as a director or officer of an issuer; a 10 year prohibition against becoming or acting as a director or officer of any issuer or registrant, or investment fund manager or promoter; a $250,000 administrative penalty for third parties; disgorgement of $250,000; and $65,000 costs - The following sanctions were imposed against Natalie: termination of her registration under the Act; a three year prohibition against trading in and acquiring of any securities; a reprimand; resignation from all positions as a director or officer of an issuer; a five year prohibition against becoming or acting as a director or officer of any issuer or registrant; a three year prohibition against becoming a registrant; a $50,000 administrative penalty for third parties; disgorgement of $140,000 and; $20,000 costs - On appeal, Otto, Ekonomidis and Natalie submitted that the sanctions were harsh and excessive - The Ontario Divisional Court found no basis to interfere - See paragraphs 73 to 90.

Securities Regulation - Topic 5336

Trading in securities - Offences - Penalties and punishments - Fines (incl. imprisonment in default of payment) - [See Securities Regulation - Topic 5325.1 ].

Cases Noticed:

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. 28].

New Brunswick (Board of Management) v. Dunsmuir, [2008] 1 S.C.R. 190; 372 N.R. 1; 329 N.B.R.(2d) 1; 844 A.P.R. 1; 2008 SCC 9, refd to. [para. 28].

Volochay v. College of Massage Therapists (Ont.) (2012), 295 O.A.C. 164; 2012 ONCA 541, refd to. [para. 29].

Taylor v. Ontario Securities Commission (2013), 317 O.A.C. 164; 2013 ONSC 6495, refd to [para. 30].

Taub v. Investment Dealers Association of Canada et al. (2009), 255 O.A.C. 126; 98 O.R.(3d) 169; 2009 ONCA 628, refd to. [para. 30].

McLean v. British Columbia Securities Commission (2013), 452 N.R. 340; 347 B.C.A.C. 1; 593 W.A.C. 1; 2013 SCC 67, refd to. [para. 30].

MRS Sciences Inc., Re (2011), 34 O.S.C.B. 12288, refd to. [para. 45].

R. v. Théroux (R.), [1993] 2 S.C.R. 5; 151 N.R. 104; 54 Q.A.C. 184, appld. [para. 52].

Barrington et al. v. Institute of Chartered Accountants (Ont.) (2011), 279 O.A.C. 148; 2011 ONCA 409, refd to. [para. 53].

Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board) et al., [2011] 3 S.C.R. 708; 424 N.R. 220; 317 Nfld. & P.E.I.R. 340; 986 A.P.R. 340; 2011 SCC 62, refd to. [para. 54].

Ryan v. Law Society of New Brunswick (2003), 302 N.R. 1; 257 N.B.R.(2d) 207; 674 A.P.R. 207; 2003 SCC 20, refd to. [para. 55].

Donnini v. Securities Commission (2005), 194 O.A.C. 29; 76 O.R.(3d) 43 (C.A.), refd to. [para. 56].

Nest Acquisitions and Mergers, Re (2013), 36 O.S.C.B. 4628, refd to. [para. 59].

Anderson et al. v. British Columbia Securities Commission (2004), 192 B.C.A.C. 119; 315 W.A.C. 119; 23 B.C.L.R.(4th) 182; 2004 BCCA 7, leave to appeal refused (2004), 331 N.R. 399; 210 B.C.A.C. 320; 348 W.A.C. 320 (S.C.C.), refd to. [para. 59].

Limelight Entertainment Inc., Re (2008), 31 O.S.C.B. 12030, refd to. [para. 85].

Simply Wealth Financial Group Inc., Re (2013), 36 O.S.C.B. 5099, refd to. [para. 87].

Axcess Automation LLC, Re (2013), 36 O.S.C.B. 2919, refd to. [para. 87].

Statutes Noticed:

Statutory Powers Procedure Act, R.S.O. 1990, c. S-22, sect. 2 [para. 46]; sect. 3(11) [para. 38]; sect. 4.4(1) [para. 39]; sect. 126.1(b) [para. 58].

Counsel:

Jay L. Naster, for the appellants;

Tamara B. Center, Pamela Foy and Scott Hutchison, for the respondent.

This appeal was heard at Toronto, Ontario, on December 6, 2013, by Himel, Sachs and Hennessy, JJ., of the Ontario Divisional Court. Hennessy, J., delivered the following decision for the court on May 5, 2014.