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Administrative - Mens Rea. Kadonoff v. OSC
In Kadonoff v. OSC (Div Court, 2023) the Divisional Court considered a s.9 Securities Act appeal of "a finding of the Ontario Securities Commission (“OSC”) that he engaged in fraudulent conduct pursuant to s. 126.1 of the Securities Act, and the penalty imposed by the [SS: now named] Capital Markets Tribunal (CMT) in that proceeding".
Although this was an administrative (CMT) ruling, the appellant sought to advance a common law 'due diligence defence' [which is more commonly advanced strict liability (eg. POA) prosecutions], and in the course of that attempt the court considered a related 'defence of reasonable reliance on legal advice':Did the Panel err in law by finding that Mr. Kadonoff had not established a due diligence defence under s. 126.1 of the Securities Act?
[35] Mr. Kadonoff argues that the Panel erred in stating that due diligence is not an available a defence to an allegation of breach of s. 126.1 of the Securities Act. The Panel made this comment in the context of its consideration of the defence of reasonable reliance on legal advice. At paragraph 239 of the reasons the Panel wrote:[239] We will now review the defence of reasonable reliance on legal advice and consider whether it is available to the respondents on the facts of this case.
[240] The defence is available in a Commission proceeding in respect of an allegation that requires Staff to establish an intentional or wilful act. An allegation of fraud contrary to the Act falls into that category. The defence is therefore available, subject to a respondent satisfying the criteria for its use.
[241] Subsection 126.1(1) of the Act does not provide for a due diligence defence, and under these circumstances none is available. Instead, a respondent who asserts the defence must establish that:a. the lawyer had sufficient knowledge of the facts on which to base the advice;
b. the lawyer was qualified to give the advice;
c. the advice was credible given the circumstances under which it was given; and
d. the respondent made sufficient enquiries and relied on the advice. [242] The last of these four components has a due diligence aspect to it, and even though the defence in this context is not a true due diligence defence, diligence on the part of the respondent asserting the defence may play a role both in the assessment of the mental element at the merits stage and as a potential mitigating factor at the sanctions stage (if any) of a proceeding. (Citations omitted). [36] The defence of due diligence is a defence available at common law or by statute for strict liability offences. It involves an individual proving on a balance of probabilities that they took all reasonable care or took all reasonable steps to avoid committing the offence: R. v. Sault Ste Marie (City), [1978] 2 S.C.R. 1299, 1978 CanLII 11 (SCC), at p. 14.
[37] This defence is also incorporated in some statutes, including in s. 122 of the Securities Act in the case of a prosecution for the offence of making misleading statements:Defence – Without limiting the availability of other defences, no person or company is guilty of an offence under clause (1)(a) or (b) if the person or company did not know and in the exercise of reasonable diligence could not have known that the statement was misleading or untrue or that it omitted to state a fact that was required to be stated or that was necessary to make the statement not misleading in the light of circumstances in which it was made. [38] In contrast to s. 122 which uses the language of “reasonable diligence,” s. 126.1 of the Securities Act provides:Fraud and market manipulation
126.1(1) A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,
a. results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or
b. perpetrates a fraud on any person or company. [39] Due diligence can take several forms. As counsel for the OSC concedes, a mistake of fact is an aspect of due diligence which can be a legitimate defence in a prosecution under s. 126.1 of the Securities Act. Mr. Kadonoff raised that defence, testifying that he did not know that SIF#1’s funds were being used to fund the distributions by SIF#2 in June, July and August of 2015.
[40] Had the Panel accepted this evidence, then this would have been a defence, at common law, akin to due diligence. Mr. Kadonoff’s mistake would have countered the allegation that he knew or reasonably ought to have known that the acts done perpetrated a fraud. But the Panel did not accept his evidence on this point, finding that although Mr. Kadonoff raised concerns about the transfers, he signed the cheque to SIF#2 distributions in his capacity as an officer of SIF Inc. The Panel went on to say that “a reasonable inquiry would have revealed exactly what Mr. Kadonoff feared was indeed happening, we cannot accept his wishful assertion that he relied on others to justify his signing the cheque.” Thus, although the Panel did not describe his defence as one of due diligence, it nevertheless considered Mr. Kadonoff’s defence of mistake of fact, and his lack of knowledge and rejected his evidence on that point. I find that in considering the defence of mistake of fact, and in observing that there was no statutory defence of due diligence in s. 126.1, the Panel did not fall into legal error.
[41] In reading the detailed reasons for each of the defences raised by Mr. Kadonoff and considering the discussion of due diligence in the context of the section, I conclude that it is likely that the Panel meant that s. 126.1 does not include an explicit statutory defence of due diligence. The Panel understood the defences raised by Mr. Kadonoff at common law and addressed them. This raises a question of mixed fact and law. I see no error in law or any palpable and overriding error in the Panel’s application of the law to Mr. Kadonoff’s defence of mistake of fact or purported exercise of due diligence. Thus, I would not give effect to this ground of appeal.
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