Ipsofactoj.com: International Cases  Part 5 Case 9 [SCC]
SUPREME COURT OF CANADA
Executive Director of
the British Columbia
- vs -
22 APRIL 2004
(delivered the judgment of the court)
In the autumn of 1994, a group of securities brokers, including Robert Hartvikson and Blayne Johnson, banded together to make a quick profit. They orchestrated the purchase of Cartaway Resources Corporation ("Cartaway") and funnelled some mining claims into Cartaway through a shelf company. Without disclosing to investors the material change in Cartaway's business to a mining exploration firm, they entered into a private placement, which they split among friends and other employees of First Marathon Securities Limited ("First Marathon").
The Securities Commission (the "Commission") found that Hartvikson and Johnson had breached s. 61 of the British Columbia Securities Act, R.S.B.C. 1996, c. 418 (the "Act") - the prospectus requirement - by splitting the private placement, and thereby relying on a prospectus exemption to which they were not entitled. The Commission further found that it was in the public interest to impose the maximum financial penalty of $100,000 under s. 162 of the Act. On this appeal, we are not concerned with Hartvikson and Johnson's other dealings.
The Executive Director of the Commission appeals a decision of the British Columbia Court of Appeal that reduced the amount of an administrative penalty imposed by the Commission under s. 162 of the Act. The principal issues on appeal were:
what is the correct standard of review of the Commission's interpretation of s. 162 of the Act and its order;
whether general deterrence is an appropriate factor in assessing a penalty that is in the public interest; and
whether the Commission must consider settlement agreements entered into by the Executive Director in assessing sanctions under the Act.
The correct standard of review in this case is reasonableness. In my opinion, general deterrence is an appropriate factor in formulating a penalty in the public interest. General deterrence is both prospective and preventative in orientation. As such, it falls squarely within the public interest jurisdiction of securities commissions to maintain investor confidence in the capital markets.
On the facts of this case, the imposition of the maximum penalty is rationally connected to the conduct of Hartvikson and Johnson globally. Section 162 of the Act is triggered by a breach of the Act, but in formulating an order that protects the public interest, the Commission may take into account the context surrounding the breach. While settlement agreements between the Executive Director and the other brokers are a relevant factor, they are not dispositive or binding on the Commission, particularly where the conduct of the respondents and the other brokers is missing the required parity. In this case, Hartvikson and Johnson's deceitful conduct and leadership roles justified the imposition of a higher penalty than that imposed on their confederates. I therefore conclude that the $100,000 fine was reasonable in all the circumstances.
Consequently, I would allow the appeal with costs, and reinstate the Commission's order.
In the summer of 1994, Christopher Stuart and Larry Birchall were seeking to purchase a shell company trading on the Vancouver stock exchange. Both were employees of First Marathon - a member of the Vancouver, Alberta and Toronto stock exchanges, and a registered investment dealer under the Act. A shell company would be used to vend in other businesses, allowing them access to the capital markets without having to go through the slower process of an initial public offering.
In October 1994, Hartvikson and Johnson, with six other brokers from First Marathon, acquired a controlling block of shares in Cartaway, which was then a small company in the business of licensing garbage containers in Kelowna, British Columbia. The control group included Hartvikson, Johnson, Robert Disbrow, David Lyall, Eric Savics, and Stuart. This control group acquired Cartaway.
In the spring of 1995, Voisey's Bay in Labrador was the location of a staking rush resulting from the discovery of considerable nickel, cobalt and copper deposits. In April 1995, the respondents were presented with an opportunity to purchase some mining claims in the Voisey's Bay area. The vendor wanted $300,000 and 1.2 million free-trading shares in exchange for the claims. On April 5, an oral agreement to purchase the claims was reached. The respondents used a shelf company, 489895 B.C. Ltd., for the purpose of warehousing the various mining claims they were pursuing.
In the meantime, after the oral agreement was made, and without disclosing to the market the effective acquisition of the claims and the change in business of the company, Cartaway raised money to finance the acquisition through a brokered private placement on May 5, 1995. First Marathon acted as agent for the offering. Over 82 per cent of the units were placed with the control group or with their friends. The seven million unit placement was priced at $0.125 per unit. When Cartaway announced the closing of the placement it indicated that $875,000 had been raised, and would go towards undetermined future acquisitions.
The purchasers of the units under the private placement relied on an exemption from the normal prospectus requirements provided by s. 74(2)(4) of the Act, which allows a person to purchase as principal more than $97,000 worth of shares. The respondents, along with some of the other members of the control group, split the exemption by purchasing shares for other employees who did not individually meet the $97,000 requirement. The respondents relied on a legal opinion that this splitting was acceptable.
In June 1995, Cartaway completed the purchase of the Voisey's Bay claims through the acquisition of all the outstanding shares of the shelf company, 489895 B.C. Ltd., and became the owner of the claims. On June 29, 1995, Cartaway announced the change in its business to a natural resource exploration firm, and that it was making an "arm's length" acquisition of the Voisey's Bay claims. Cartaway then proceeded with another private placement for $1 per share purchase warrant, which closed on July 11, 1995. The offering memorandum for this private placement failed to disclose the respondents' acquisition of the mining claims, the extent of the control group's holdings or any conflicts of interest.
The investigation into Cartaway was triggered by events that took place almost a year later. On May 8, 1996, Cartaway announced that it had found significant mineralization on the Voisey's Bay claims based on a visual inspection of drilling samples. The share price jumped dramatically to $23, but later fell below $1 when an analysis of the samples failed to confirm these findings. Hartvikson and Johnson reaped in total $5.1 million in profits by trading Cartaway shares.
The proceedings against Hartvikson, Johnson, Disbrow, Savics, Lyall, Stuart and First Marathon were commenced on July 17, 1998 when a notice of hearing was issued against them with respect to their conduct in relation to Cartaway.
A. The Role Played by Hartvikson and Johnson
The Commission found that Hartvikson and Johnson were "control persons" of Cartaway under s. 1(1) of the Act. They and the six other First Marathon brokers constituted a combination of persons who acted in concert, by virtue of an agreement, and who held a sufficient number of shares to affect materially control of Cartaway.
The First Marathon brokers acquired a 45.6 per cent stake in Cartaway from the existing control group for $294,000 under a share purchase agreement on October 3, 1994. This agreement provided that all current directors and officers of Cartaway would resign and would vote to appoint new directors and officers designated by the new control group. Following the acquisition of a control block of Cartaway shares, the control group's common purpose was to change Cartaway's business by vending a new business venture into the company, replace its management, and finance the operation through First Marathon. Hartvikson and Johnson breached s. 61 of the Act - the prospectus requirement - when they purchased Cartaway shares in the $0.125 private placement by splitting these shares with other First Marathon employees who did not individually qualify for the $97,000 prospectus exemption.
When Hartvikson and Johnson were presented with an opportunity to acquire mineral claims on April 4, 1995, the control group's common purpose became to acquire these and other Voisey's Bay claims, and to vend these claims into Cartaway and to conduct a large area plan. The control group would acquire a substantial number of shares prior to the public disclosure of Cartaway's acquisition of the claim, and before the $1 private placement was announced.
By buying control of Cartaway and then continuing to act as brokers and principals in the sale of Cartaway's shares, they put themselves in a conflict of interest with their duties to their clients and Cartaway. Hartvikson and Johnson did nothing to resolve these conflicts. They acted in their own interests contrary to the interest of their clients and Cartaway. Further, by purchasing the shares in a private placement prior to the disclosure of the acquisition of mineral claims, and then selling the shares to their clients at a higher price after the announcement of the acquisition of the claims, they acted contrary to the interests of their clients. They ensured that the investors in the private placement, and not their clients, would earn a higher return on the investment in Cartaway. They took unfair advantage of their positions as registrants, and engaged in conduct that seriously undermined the public confidence in the fairness of the capital markets. Consequently, they acted contrary to the public interest.
The Commission found that Hartvikson and Johnson were the driving force behind the reorganization of Cartaway. Consequently, as control persons, they were undisclosed promoters under s. 1(1) of the Act and acted as undisclosed de facto directors of Cartaway. The Commission held that they should have disclosed their status as directors in the June 23, 1995 offering memorandum and the November 3, 1995 prospectus.
Hartvikson and Johnson were the primary movers in achieving the control group's unlawful purpose. They targeted Cartaway. They decided to pursue the Voisey's Bay claims. They made the deal with the vendor of the claims. They funded the expenses related to the claims. They arranged the share swap with the vendor of the claims. From April 5, 1995 onward, Hartvikson and Johnson, with Stuart's approval, made all of Cartaway's business decisions. They gave notice to the Exchange to set the price for the $0.125 private placement. They found new management for Cartaway. With Lyall, they placed most of the $1 private placement. Hartvikson and Johnson decided when Cartaway disclosed material information. They gave instructions on draft agreements, news releases and Cartaway's name change.
B. The Settlement Agreements
First Marathon, Disbrow, Savics, Lyall and Stuart entered into settlement agreements with the Executive Director prior to the conclusion of the hearing.
First Marathon settled with the Executive Director on January 29, 1999. It admitted to contravening s. 44(1) of the Securities Rules, B.C. Reg. 194/97 (the "Rules"). It also admitted that it failed to ensure the proper supervision of its employees, and that it inadequately addressed the conflict of interests among its Vancouver brokers. Consequently, First Marathon agreed to pay $50,000 in costs to the Commission, and to donate $450,000 to the Mineral Deposit Research Fund at the University of British Columbia. First Marathon had settled earlier with the Toronto Stock Exchange ("TSE") for $3.5 million in fines.
Disbrow also settled with the Executive Director on January 29, 1999. He admitted to breaching s. 66 of the Rules by inadequately supervising Hartvikson, Johnson, Lyall and Savics. Disbrow had earlier agreed with the TSE to a permanent suspension in certain supervisory capacities as an exchange member, a three-month suspension from employment in any capacity by a TSE member, and the payment of a $110,000 fine.
Both Lyall and Savics agreed to settle with the Executive Director on April 9, 1999. They admitted to facilitating a breach of s. 61 of the Act by splitting the $0.125 private placement with persons who did not qualify under the claimed exemption. They admitted that they ought to have known that Hartvikson and Johnson's involvement as Cartaway promoters was a conflict of interest that they failed to bring to the attention of the appropriate First Marathon personnel. They each undertook to pay $25,000 to the Commission and to comply with the Act and Rules, and with First Marathon's Employee Investment Policy.
Finally, Stuart agreed with the Executive Director on May 8, 1999, that any order of the Alberta Securities Commission in this matter would be imposed on a concurrent basis by the British Columbia Securities Commission. Stuart came to a final settlement with the Executive Director on September 10,1999. He agreed not to act as a director for any issuer for five years, and not to act in any designated compliance or supervisory position with a member of the Alberta Exchange. Further, he agreed to pay the Commission $5,000 in costs. In settling with the Alberta Commission, Stuart paid a fine of $100,000 and $25,000 in costs. He also agreed to pay the TSE $130,000 plus $20,000 in costs, in addition to a lifetime ban on acting in any designated compliance capacity, and a four-month suspension from employment in any capacity with a TSE member.
C. The Sanctions Imposed by the Commission
In imposing sanctions on Hartvikson and Johnson under ss. 161 and 162 of the Act, the Commission weighed several important factors, including general deterrence, protecting the securities market, the settlement agreements and the circumstances of the case.
On one hand, the Commission considered the need to send a clear message that would deter inappropriate conduct by other participants in British Columbia's capital markets. It took into account the settlement agreements reached in proceedings against other First Marathon brokers. But in doing so, it compared the role of those individuals against Hartvikson and Johnson's leadership in perpetrating the illegal transaction and their deceitful conduct. Although deceit was not explicitly alleged in the notice of appeal, the respondents' credibility and misleading conduct was the focus of the proceedings from the outset. The Commission also took note of the $5.1 million in trading profits earned by Hartvikson and Johnson.
On the other hand, the Commission took into account Hartvikson and Johnson's previously untarnished records and their positive contribution to the capital markets. Moreover, both respondents voluntarily surrendered their licences as registered trading representatives in 1996, and repented their actions. The Commission accepted that Hartvikson and Johnson would continue to make a positive contribution to British Columbia's capital markets, if permitted to do so. It is also notable that both offered to pay $100,000 towards a university foundation or program about business ethics.
After weighing these considerations, the Commission decided that a lengthy ban was unnecessary to protect the public interest. The Commission held that a limited suspension and the imposition of a financial penalty would be sufficient to protect the public interest. Under s. 161(1)(1)(c) of the Act, it ordered that exemptions under ss. 44 to 47, 74, 75, 98, and 99 did not apply to the respondents for one year, except that each could trade only through a registered dealer and only on his own account under s. 45(2)(7) of the Act. Under s. 161(1)(d)(ii) of the Act, it ordered that the respondents were prohibited from acting as directors or officers of any reporting issuer for a period of one year and until they each successfully completed a remedial course concerning the duties and responsibilities of directors and officers, whichever was later.
Finally, under s. 162 of the Act, the Commission ordered Hartvikson and Johnson each to pay an administrative penalty of $100,000. In determining an appropriate order, the Commission did not take into account its findings that Hartvikson and Johnson were de facto directors and officers of Cartaway because this was not alleged in the notice of hearing.
III. PROCEDURAL HISTORY
Court of Appeal for British Columbia ((2002), 118 D.L.R. (4th) 470, 2002 BCCA 61)
Hartvikson and Johnson appealed the Commission's findings and order directly to the Court of Appeal for British Columbia under s. 167(1) of the Act. Hartvikson and Johnson raised several grounds of appeal.
First, the Commission erred in finding that on April 5, 1995, they acted on behalf of Cartaway to make a legally binding deal to acquire the Voisey's Bay claims.
Second, the Commission erred in finding that they were de facto directors.
Third, the Commission erred in imposing the maximum administrative penalty available under s. 162 of the Act.
Finally, the Commission created a reasonable apprehension of bias when its spokesperson made certain public statements. This ground was not pressed on appeal and was not, in the Court of Appeal's view, a sufficient ground to overturn the decision of the Commission.
(1) Braidwood J.A. for the Majority
Braidwood J.A. held that the standard of review of the Commission's findings and order was reasonableness simpliciter. Based on a review of the evidence as a whole, Braidwood J.A. held that the Commission reasonably concluded that Hartvikson and Johnson, with Stuart's approval, acted on behalf of Cartaway to acquire the Voisey's Bay claims on April 5, 1995. Similarly, the court upheld the Commission's findings with respect to Cartaway's control group, and the role played by Hartvikson and Johnson.
Braidwood J.A. held that, although the Commission's findings that Hartvikson and Johnson were de facto directors were probably necessary in the Commission's reconstruction of the facts, the Commission should not have then criticized them for the breach of their duties in the absence of giving adequate notice to the respondents and hearing evidence on this issue. In the court's view, the Commission did not appear to rely on this finding in imposing a penalty.
With regard to the penalty, the majority held that the imposition of the maximum penalty was too severe and unreasonable in all the circumstances. It substituted a penalty of $10,000 each for Hartvikson and Johnson. Braidwood J.A. viewed Hartvikson and Johnson's culpability as relatively minor with respect to the breach of s. 61 of the Act by illegally splitting the $0.125 private placement. Braidwood J.A. found that the public had not been harmed by this splitting. The learned appellate judge also took into account the settlements by the other brokers, which he viewed as significantly less onerous.
Based on his reading of this Court's decision in Committee for Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission),  2 S.C.R. 132, 2001 SCC 37, Braidwood J.A. held that the Commission did not have the authority to consider general deterrence under s. 162, and that only the specific conduct in relation to the breach of the Act could be considered. Braidwood J.A. believed this Court's opinion in Asbestos that the Ontario Securities Commission's public interest jurisdiction is prospective and preventative, rather than remedial or punitive, restricted the Commission's public interest jurisdiction to restraining future conduct of Hartvikson and Johnson that would likely prejudice the public interest.
(2) Ryan J.A. (Dissenting in Part)
Ryan J.A. dissented on the penalty issue. She read Asbestos, supra, differently. In Ryan J.A.'s opinion, Asbestos dealt with the jurisdiction of the Ontario Securities Commission to prosecute or take action against a party whose actions were prejudicial to the public interest. In Ryan J.A.'s view, this Court did not address the principles a commission must consider in imposing administrative penalties.
Further, Ryan J.A. reasoned that general deterrence is neither punitive nor remedial. General deterrence is designed to discourage similar behaviour in others. Ryan J.A. concluded that the Commission - as part of its protective and preventative jurisdiction - may consider general deterrence in fashioning an appropriate penalty. Nevertheless, Ryan J.A. agreed with the majority of the court that the penalty was flawed in other ways, and would have reduced the penalties to $50,000 each.
IV. RELEVANT STATUTES
Securities Act, R.S.B.C. 1996, c. 418
If the commission, after a hearing,
the commission may order the person to pay the commission an administrative penalty of not more than $100 000.
The following issues are raised on this appeal:
Whether the Executive Director has standing to bring this appeal.
Whether the Commission may consider general deterrence when ordering sanctions under s. 162 of the Act.
Whether the Commission must consider settlement agreements entered into by the Executive Director in assessing sanctions under the Act.
Whether the Court of Appeal should have referred the question of appropriate sanctions back to the Commission under s. 167(3) of the Act.
The Executive Director was granted leave to appeal by the Court on April 10, 2003. At the time of the leave application, Hartvikson and Johnson did not challenge the standing of the Executive Director to bring this appeal. They did so only in their submissions on the merits.
During enforcement proceedings before the Commission, the Executive Director acts as an administrative prosecutor, while the Commission is the impartial arbiter. In the court below, the Executive Director did not appear as a party. Rather, the Commission itself was the named respondent because the Commission is designated as a party to an appeal to the Court of Appeal under s. 167(5) of the Act. However, between the time of the hearing before the court below and the appeal to this Court, the Court of Appeal released its decision in British Columbia (Securities Commission) v Pacific International Securities Inc. (2002), 2 B.C.L.R. (4th) 114, which held that the Executive Director is the proper party on an interlocutory appeal on the merits of a procedural decision by the Commission. Without commenting on the correctness of Pacific International, I observe that the Executive Director merely sought to comply with this decision.
In our Court, given the nature of its functions in the enforcement of the law, the Executive Director is properly substituted as a party under Rule 18(5) of the Rules of the Supreme Court of Canada, SOR/2002-156. If there is any procedural irregularity in this case, it may be cured under Rule 8(1). Moreover, the respondents did not suffer any prejudice from the substitution.
B. Standard of Review
The first step in the analysis of the Commission's interpretation of s. 162 is to determine the appropriate standard of review according to the pragmatic and functional analysis. While a pigeonhole approach should be eschewed by reviewing courts, past judicial decisions may be helpful in determining the appropriate standard of review: Dr. Q v College of Physicians and Surgeons of British Columbia,  1 S.C.R. 226, 2003 SCC 19, at paras. 24-25. This Court applied the pragmatic and functional analysis to the Commission's interpretation of a similar provision, s. 144 (now s. 161), in Pezim v British Columbia (Superintendant of Brokers),  2 S.C.R. 557.
The pragmatic and functional analysis involves the weighing of four factors: (1) the presence or absence of a privative clause or statutory right of appeal; (2) the expertise of the administrative tribunal relative to the reviewing court regarding the question at issue; (3) the purpose of the legislation and the provision in particular; and (4) the nature of the question - law, fact, or mixed law and fact: Dr. Q, supra, at para. 26. No one factor is dispositive.
Section 167(1) of the Act provides that an appeal of a decision of the Commission under s. 162 lies to the Court of Appeal, with leave of a justice of that court. Decisions of the Commission are thus not protected by a privative clause. This militates against deference. Nevertheless, this Court has held that deference is due to matters falling squarely within the expertise of the Commission even where there is a right of appeal: Pezim, supra, at p. 591. This Court recognized in Pezim, supra, at pp. 593-94, that the Commission has special expertise regarding securities matters. The core of this expertise lies in interpreting and applying the provisions of the Act, and in determining what orders are in the public interest with respect to capital markets. In this case, the question of whether general deterrence is an appropriate consideration in formulating a penalty in the public interest falls squarely within the expertise of the Commission.
Although courts are regularly called on to interpret and apply general questions of law and engage in statutory interpretation, courts have less expertise relative to securities commissions in determining what is in the public interest in the regulation of financial markets. The courts also have less expertise than securities commissions in interpreting their constituent statutes given the broad policy context within which securities commissions operate: National Corn Growers Assn. v Canada (Import Tribunal),  2 S.C.R. 1324, at p. 1336.
A reviewing court must consider the general purpose of the statute and the particular provision under consideration with an eye to discerning the intent of the legislature: Dr. Q, supra, at para. 30. The adjudicative function of the Commission in enforcement proceedings under s. 162 would generally call for less deference. In the present case the Commission is called upon to adjudicate a bipolar dispute rather than exercise a pure policy decision. Nevertheless, the Commission also plays a principal role in policy development, in the management of a complex securities regulation scheme and in reconciling the interests of a number of different groups and in protecting the public: Brosseau v Alberta Securities Commission,  1 S.C.R. 301, at pp. 313-14. This calls for some deference by the reviewing court: Pezim, supra, at p. 591.
The interpretation of s. 162 is a question of statutory construction of the Commission's enabling statute. As I stated above, the application of s. 162 requires the determination of when an order is in the public interest, and this calls for the Commission to apply its expertise. Although the Commission's interpretation of s. 162 is not binding on future Commission decisions, once the Commission finds that it can take general deterrence into account, it is unlikely to break from this practice in the future. It therefore has some precedential value. On the whole, the nature of the question militates in favour of deference.
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: Law Society of New Brunswick v Ryan,  1 S.C.R. 247, 2003 SCC 20, at para. 56? Specifically, is it reasonable for the Commission to consider general deterrence in determining whether a sanction under s. 162 would be in the public interest?
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: Canada (Director of Investigation and Research) v Southam Inc.,  1 S.C.R. 748, at para. 80. The focus should be on the reasonableness of the decision or the order, not on whether it was a tolerable deviation from a preferred outcome.
In my view, the Commission's interpretation of s. 162 was reasonable.
C. General Deterrence
Deterrent penalties work on two levels. They may target society generally, including potential wrongdoers, in an effort to demonstrate the negative consequences of wrongdoing. They may also target the individual wrongdoer in an attempt to show the unprofitability of repeated wrongdoing. The first is general deterrence; the second is specific or individual deterrence: see C. C. Ruby, Sentencing (5th ed. 1999). In both cases deterrence is prospective in orientation and aims at preventing future conduct.
General deterrence as an aim of sentencing in criminal law is well established: see R. v M. (C.A.),  1 S.C.R. 500, at para. 56; R. v Morrisey,  2 S.C.R. 90, 2000 SCC 39, at paras. 44 and 46. One of its earliest proponents was Jeremy Bentham. In his view, where the same result cannot be achieved through other modes of punishment and the net benefit to society outweighs the harm imposed on the offender, a deterrent penalty should be imposed and tailored in order to discourage others from committing the same offence. He assumes that citizens are rational actors, who will adjust their conduct according to the disincentives of deterrent penalties: A. Ashworth, Sentencing and Criminal Justice (3rd ed. 2000), at p. 64. Similarly, law and economic theorists such as R. A. Posner view deterrent penalties as a kind of pricing system: "An Economic Theory of the Criminal Law" (1985), 85 Colum. L. Rev. 1193.
However, general deterrence is not without its critics. In the criminal context, commentators and courts have expressed doubts as to the effectiveness of imprisonment as a general deterrent: R. v Wismayer (1997), 115 C.C.C. (3d) 18 (Ont. C.A.), at p. 36; Sentencing Reform: A Canadian Approach: Report of the Canadian Sentencing Commission (1987) (Archambault Report), at pp. 136-37.
In this appeal we are asked whether it is reasonable to decide that general deterrence has a role to play in the policing of capital markets. The conventional view is that participants in capital markets are rational actors. This is probably more true of market systems than it is of social behaviour. It is therefore reasonable to assume, particularly with reference to the expertise of the Commission in regulating capital markets, that general deterrence has a proper role to play in determining whether to make orders in the public interest and, if they choose to do so, the severity of those orders.
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 ("SEC"): see, e.g., United States v Matthews, 787 F.2d 38 (2d Cir. 1986), at p. 47. Civil penalties are increasingly important to the SEC for a number of reasons, including general deterrence: see R. G. Ryan, "Securities Enforcement: Civil Penalties in SEC Enforcement Cases: A Rising Tide" (2003), 17 Insights 17.
The Commission imposed the financial penalty on Hartvikson and Johnson under s. 162 of the Act, which provides that if the Commission finds after a hearing that a person has acted contrary to the Act, regulations or a decision of the Commission, and it is in the public interest to make such an order, it may impose a fine of no more than $100,000:
If the commission, after a hearing,
the commission may order the person to pay the commission an administrative penalty of not more than $100 000.
The Commission considered it to be in the public interest to levy the maximum fine for Hartvikson and Johnson's breach of s. 61.
"Public interest" is not defined in the Act. This Court considered the scope of a securities commission's public interest jurisdiction in Asbestos, supra. At issue in Asbestos was the Ontario Securities Commission's jurisdiction to intervene in Ontario's capital markets, for purposes of protection and prevention, if it is in the public interest to do so pursuant to s. 127(1) of the Securities Act, R.S.O. 1990, c. S.5. This Court held that the discretion to act in the public interest is not unlimited. In exercising its discretion the Commission should consider "the protection of investors and the efficiency of, and public confidence in, capital markets generally" (Asbestos, supra, at para. 45). Because s. 127 is regulatory, its sanctions are not remedial or punitive, but rather are preventative in nature and prospective in application. As a result, this Court held that s. 127 could not be used to redress misconduct alleged to have caused harm to private parties or individuals: Asbestos, supra, at paras. 41-45. It should be observed that our Court was not considering the function of general deterrence in the exercise of the jurisdiction of a securities commission to impose fines and administrative penalties nor denying that general deterrence might play a role in this respect.
Braidwood J.A. understood Asbestos, supra, to foreclose the imposition of public interest penalties for the purpose of general deterrence. With respect, 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. Ryan J.A. recognized this in her dissent: "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" (para. 125).
The Oxford English Dictionary (2nd ed. 1989), Vol. XII, defines "preventive" as "[t]hat anticipates in order to ward against; precautionary; that keeps from coming or taking place; that acts as a hindrance or obstacle". 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 s. 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.
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 in similar wrongdoing. That is a matter that falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets.
D. The Commission's Order Was Reasonable
Further, it was reasonable in all the circumstances for the Commission to conclude that general deterrence applies in respect of Hartvikson and Johnson's conduct. While a specific breach of the Act is required to trigger the application of s. 162, unlike s. 161, the penalty that the Commission ultimately imposes should take into account the entire context, as well as the preservation of the public interest. The public interest must be satisfied under both ss. 161 and 162, and is not restricted to situations where the Commission imposes a ban on market participation under s. 161. Where conduct could be addressed under the two sections, the Commission may use both provisions to craft the order that is most in the public interest.
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. Iacobucci J. in Pezim, supra, at p. 607, suggested that an example of such unreasonableness would be the exercise of the Commission's discretion in a manner that was capricious or vexatious.
In my opinion, increasing the amount of the fine is not "a vexatious and capricious exercise of the Commission's discretion" but sends a clear message to other actors in the British Columbia securities market that a breach of s. 61 will be dealt with severely, and it is rational to assume that this conduct will accordingly be deterred. The Commission stressed the seriousness of the respondents' conduct and the damage done to the integrity of the capital markets, and found that when making an order that is in the public interest, "[w]e are obliged to take whatever remedial steps we determine are appropriate to maintain the public's confidence in the fairness of our markets" (para. 14).
The Commission's order was also a reasonable one globally. The Commission weighed the aggravating and mitigating factors and determined the appropriate penalty. Hartvikson and Johnson were the primary movers behind the control group's deceitful conduct. They were the leading players in breaching s. 61 of the Act. It does not appear on the face of the Commission's reasons for making the order under s. 162 that it gave unreasonable weight to general deterrence.
The respondents argued that the Commission erred in not giving appropriate weight to the settlements reached by the other members of the control group. I disagree.
In my view, settlement agreements arrived at by co-respondents 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 s. 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 light of the discount accorded settlements, do they necessarily reflect the appropriate penalty in all cases.
Moreover, there appear to have been reasonable grounds for the Commission to impose a heavier penalty pursuant to s. 162 upon Hartvikson and Johnson than upon their co-respondents. The Commission's sanction of Hartvikson and Johnson appears to be reasonable in comparison to the settlement agreements in light of the finding by the Commission that Hartvikson and Johnson were the driving force responsible for the events described in the notice of hearing. Parity with the settlement agreements is not necessary because the Commission concluded that the respondents were more culpable than the other brokers.
Accordingly, the Court of Appeal erred by disregarding the Commission's findings as well as the weight the Commission gave them. The weight that the Commission attributed to general deterrence and the settlement agreements is reasonable in all the circumstances and should not be disturbed by this Court.
E. The Court of Appeal May Substitute a Sanction
The Executive Director argued that the Court of Appeal ought to have referred the question of the appropriate sanction back to the Commission once it had found its decision to be unreasonable. I conclude, however, that it would have been unnecessary under s. 167(3) for the Court of Appeal to refer the question of appropriate sanctions back to the Commission.
Section 167(3) of the Act provides that "[i]f an appeal is taken under this section, the Court of Appeal may direct the commission to make a decision or to perform an act that the commission is authorised and empowered to do". Section 167(3) is permissive and does not mandate that the Court of Appeal direct the Commission to reassess the appropriate penalty. To the contrary, on an ordinary construction, the wording of s. 167(3) would permit the Court of Appeal to direct the Commission to order a particular penalty.
This Court has interpreted a similar provision as empowering the Court of Appeal to direct the Commission to make an order; it did not require the question of penalty to be remitted to the Commission: Hretchka v Attorney General of British Columbia,  S.C.R. 119, at pp. 126 and 129-30. The provision at issue in Hretchka was s. 31(5) of the Securities Act, 1967, S.B.C. 1967, c. 45, as amended by S.B.C. 1968, c. 50, which is very similar to s. 167(3) of the current Act. Martland J. held that the provision did not prohibit the Court from varying the order of the Commission. Consequently, it is within the Court of Appeal's jurisdiction to order the Commission to substitute a penalty.
The Court of Appeal may itself substitute the appropriate penalty pursuant to s. 9(8)(b) of the Court of Appeal Act, R.S.B.C. 1996, c. 77, which provides that "if the appeal is not from the Supreme Court, the Court of Appeal has the power, authority and jurisdiction vested in the court or tribunal from which the appeal was brought".
In the result, I would allow the appeal with costs, and reinstate the Commission's order.
Committee for Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission),  2 S.C.R. 132, 2001 SCC 37; British Columbia (Securities Commission) v Pacific International Securities Inc. (2002), 2 B.C.L.R. (4th) 114; Dr. Q v College of Physicians and Surgeons of British Columbia,  1 S.C.R. 226, 2003 SCC 19; Pezim v British Columbia (Superintend of Brokers),  2 S.C.R. 557; National Corn Growers Assn. v Canada (Import Tribunal),  2 S.C.R. 1324; Brosseau v Alberta Securities Commission,  1 S.C.R. 301; Law Society of New Brunswick v Ryan,  1 S.C.R. 247, 2003 SCC 20; Canada (Director of Investigation and Research) v Southam Inc.,  1 S.C.R. 748; R. v M. (C.A.),  1 S.C.R. 500; R. v Morrisey,  2 S.C.R. 90, 2000 SCC 39; R. v Wismayer (1997), 115 C.C.C. (3d) 18; United States v Matthews, 787 F.2d 38 (1986); Hretchka v Attorney General of British Columbia,  S.C.R. 119.
Court of Appeal Act, R.S.B.C. 1996, c. 77, s. 9(8)(b).
Rules of the Supreme Court of Canada, SOR/2002-156, Rules 8(1), 18(5).
Securities Act, R.S.B.C. 1996, c. 418, ss. 1(1), 61 [rep. & sub. 1999, c. 20, s. 15], 74(2)(4), 161 [am. 1999, c. 20, s. 29], 162, 167.
Securities Rules, B.C. Reg. 194/97, s. 44(1), 66.
Authors and other references
Ashworth, Andrew. Sentencing and Criminal Justice, 3rd ed. Markham : Butterworths, 2000.
Canada. Canadian Sentencing Commission. Sentencing Reform: A Canadian Approach: Report of The Canadian Sentencing Commission. Ottawa: The Commission, 1987.
Oxford English Dictionary, 2nd ed., vol. XII. Oxford: Clarendon Press, 1989, "preventive".
Posner, Richard A. "An Economic Theory of the Criminal Law" (1985), 85 Colum. L. Rev. 1193.
Ruby, Clayton C. Sentencing, 5th ed. Toronto: Butterworths, 1999.
Ryan, Russell G. "Securities Enforcement: Civil Remedies in SEC Enforcement Cases: A Rising Tide" (2003), 17 Insights 17.
James A. Angus, Patricia A. Taylor and Joseph A. Bernardo, for the appellant (instructed by British Columbia Securities Commission, Vancouver).
Mark L. Skwarok and Stephen M. Zolnay, for the respondents (instructed by Lang Michener, Vancouver).
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