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Securities - Securities Act - Disgorgement. Marrone v. Ontario Securities Commission
In Marrone v. Ontario Securities Commission (Div Court, 2024) the Divisional Court dismissed an appeal from an OSC hearings panel "that he breached his duty as a registered mutual fund salesperson".
Here the court considers the compensation remedy of 'disgorgement':Issue on Cross-Appeal: Did the Tribunal err in declining to order disgorgement?
[50] As set out in s. 127(1) 10 of the Securities Act, the Tribunal may make an order requiring the person to disgorge to the Commission any amounts “obtained as a result of the non-compliance” with Ontario securities law. At the penalty hearing, in addition to the above $500,000 monetary penalty and other penalties, the OSC sought an order that Mr. Marrone disgorge an amount equal to any benefit that he may receive from MU’s estate. The specific amount was not known given the ongoing estate litigation. Mr. Marrone submits, both then and now, that if the will is upheld, the effect of disgorgement would be to override MU’s then proved testamentary intention and instead give her estate to the OSC.
[51] In the penalty decision, the Tribunal correctly set out the test under s. 127(1)10 and noted that, where met, disgorgement serves both specific and general deterrence. The Tribunal considered the requirement that Mr. Marrone obtain his interest as sole beneficiary “as a result of” his non-compliance with Ontario securities law. The Tribunal expressly found that requirement was “not met on the facts of this case.”
[52] On the cross-appeal, the OSC submits that the Tribunal erred. It submits that the only inference that could be drawn from the facts was that Mr. Marrone being named beneficiary was the result of his accepting a POA, becoming an alternate executor and failing to properly address the conflicts of interest that arose from those events.
[53] We do not agree that this was the only inference that could be drawn from the facts. We note that there was considerable evidence before the Merits Panel, which the panel was in the best position to weigh. The Merits Panel did not make an express finding that Mr. Marrone obtained his interest as sole beneficiary for those reasons. The Tribunal noted that the closest the Merits Panel came was to observe that disclosure of the conflicts “may have” put the inheritance at risk, which fell short of the necessary standard of proof.
[54] The OSC submits that in the absence of disgorgement, there will not be the needed general deterrence. That issue was expressly considered by the Tribunal, without any error in principle. Further both sides to this dispute acknowledge that this case is, in many respects, highly unusual. The decisions that are the subject of this appeal are also very fact specific.
[55] The OSC bore the burden of showing that the requirements for disgorgement were met. The Tribunal expressly found that those requirements were not met on the facts. The OSC has not shown a palpable and overriding error of fact or an error in principle in denying this order. . Aziz v. Ontario (Securities Commission, Chief Executive Officer)
In Aziz v. Ontario (Securities Commission, Chief Executive Officer) (Div Court, 2024) the Divisional Court dismissed an appeal from 'merits and sanctions' decisions of the Capital Markets Tribunal.
Here the court considered a disgorgement remedy [under Securities Act s.128(1)10]:[76] The appellants submit that the Tribunal erred in its interpretation and application of the disgorgement remedy under s. 128(1)10. They say that the Tribunal’s authority to make a disgorgement order against a particular party is limited to the amount that party “obtained”, directly or indirectly, “as a result of the noncompliance.” The appellants argue that the Tribunal erred in interpreting s. 128(1)10 as permitting disgorgement of any amount raised or received from anyone from the impugned activity. In doing so, they say that the Tribunal inappropriately circumvented the $1 million limit for an administrative monetary penalty set out in s. 128(1)9. They urge the court to adopt the reasoning of the British Columbia Court of Appeal in Poonian v. British Columbia Securities Commission, 2017 BCCA 207, 413 D.L.R. (4th) 594, as to the scope of the disgorgement remedy, rather than the “pre-Vavilov” reasoning in Phillips v. Ontario (Securities Commission), 2016 ONSC 7901, 135 O.R. (3d) 771 (Div. Ct.), and other Ontario judicial and Tribunal decisions.
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[81] In interpreting the phrase “obtained as a result of the non-compliance” in s. 128(1)10, the Tribunal determined that the statute supported the imposition of joint and several disgorgement on First Global, Mr. Itwaru and Mr. Alli, finding they acted as a single entity in committing the wrongdoing: Sanctions Decisions, at paras. 132-134. Similarly, the Tribunal imposed a joint and several disgorgement against GBR Ontario, Aziz and Bajaj, finding that they also acted as a single entity: Sanctions Decision, at paras. 135-136.
[82] In its analysis, the Tribunal considered the 2016 Divisional Court decision in Phillips. In the tribunal decision under appeal in Phillips, the tribunal held that the disgorgement remedy was broad enough to support disgorgement of amounts beyond what a wrongdoer had actually obtained for themselves. In upholding the tribunal’s decision, the court observed, at para. 71, that “[o]n its face, the wording of the section is broad” and supports the conclusion that disgorgement can be ordered of “any amounts obtained”, and that there “is no limitation based on the individual’s use of the funds obtained.” The court concluded, at para. 80. that the tribunal’s decision fell within a range of reasonable outcomes and that “the reasons given were justifiable, transparent and intelligible”. While Phillips was decided before the Supreme Court’s 2019 decision in Vavilov (therefore on a reasonableness standard of review), the court’s reasons strongly suggest that it viewed the tribunal’s decision as correct. At para. 78, the court stated that the tribunal’s decision “was consistent with the plain wording of the legislation, the purpose of the legislation and prior case law”.
[83] Similarly, in North American Financial Group Inc. v. Ontario (Securities Commission), 2018 ONSC 136, the Divisional Court stated, at para. 217, that the “issue of whether disgorgement orders should be limited to the amount that the fraudsters obtained personally, either directly or indirectly, has been litigated and lost”.
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[89] In support of their submission that the Tribunal erred in its interpretation and application of the disgorgement remedy, the appellants rely on the British Columbia Court of Appeal’s decision in Poonian, which (like the Ontario Divisional Court decision in Phillips) was decided before the Supreme Court’s decision in Vavilov.
[90] In Poonian, the court considered the scope of the disgorgement remedy under s. 161(1)(g) of the Securities Act, R.S.B.C. 1996, c. 418. That provision is substantially similar to s. 127(1)10 of the Ontario statute, with the addition of the words “directly or indirectly” to modify the “amount obtained” as a result of the non-compliance. The parties to this appeal agree that those additional words in the B.C. statute make no difference to the analysis in this case.
[91] In Poonian, at paras. 100, the court concluded that for the purposes of a disgorgement order, the “amount obtained” must be an amount obtained (directly or indirectly) by “the person who is to pay pursuant to the order, because the person contravened the Act” (emphasis in the original). In its analysis, the court, at para. 98 recognized the “interpretive challenge” that arises from the language of the disgorgement provision, “which omits explicit reference to who is doing the obtaining”. However, the court rejected the regulator’s submission that the provision should be read as authorizing disgorgement “by anyone who contributed to the failure to comply or whose wrongful act contributed to the amount being obtained … despite not having directly or indirectly obtained any amount.” The court found, at para. 110, that the narrower reading of the “amount obtained” reflected the “ordinary grammatical reading” of the language. The court also found, at para. 111, that this reading was “consistent with the purpose of the provision: to deter persons from non-compliance by removing the prospect of receiving and retaining moneys from non-compliance. It is also consistent with what is not the primary purpose of the provision: it is not to punish or compensate.”
[92] The court also noted, at para. 143(4), that the narrow interpretation of the disgorgement remedy “generally prohibits the making of a joint and several order because such an order would require someone to pay an amount that person did not obtain as a result of that person's contravention.” However, the court went on to state, at para. 143(5) that a joint and several order may be appropriate where the parties subject to the order “are under the direction and control of the contravener”, with the result that “the contravener obtained those amounts indirectly”. In its analysis, the court noted, at para. 131, that the disgorgement remedy was intended “to capture amounts the wrongdoer obtained through indirect means (e.g., through agents, nominees, alter egos), as opposed to direct means”. At para. 134, the court also stated:Using a corporate alter ego is but one example of a mechanism a wrongdoer may employ to indirectly obtain funds from wrongdoing. It is impossible to imagine and enumerate the wide variety of tactics wrongdoers may use to do so. The critical element is that the wrongdoer and the person with whom he or she is held jointly and severally liable were, in effect, acting as one person. [Emphasis added.] [93] The appellants submit that the approach to interpretation of the disgorgement remedy in Poonian is the correct approach and should be adopted in this case. Among other things, they argue that consistent with Poonian, joint and several liability for disgorgement is only available in the narrow circumstances where third parties subject to the disgorgement order are under the direction and control of the wrongdoer, for example, where the wrongdoer is the controlling shareholder of third-party companies subject to the order. The appellants argue that this approach differs significantly from the law in Ontario and would lead to a different result.
[94] I do not agree. As argued by OSC staff, the interpretation of the B.C. statute in Poonian supports (rather than undermines) the Tribunal’s disgorgement analysis. As noted above, the court in Poonian recognized, at paras. 134, that the disgorgement remedy was intended to be available to cover “the wide variety of tactics wrongdoers may use” to indirectly obtain funds from wrongdoing – the “critical element” is that “the wrongdoer and the person with whom he or she is held jointly and severally liable were, in effect, acting as one person.”
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