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Securities - Securities Act - Penalties. 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 comments on securities 'general deterrence':[40] The Tribunal was empowered to order various sanctions against Mr. Marrone, including an administrative monetary penalty of not more than $1,000,000 for each breach: Securities Act, s. 127(1) 10. This form of sanction exists to deter an individual respondent from conducting themselves this way in the future, and to indicate to other market participants that the conduct involved will be sanctioned, in other words, general deterrence: Pro-Financial Asset Management (Re), 2018 ONSEC 18 at para. 78. . 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 a 'sanctions' decision of the Capital Markets Tribunal.
The decision "imposed monetary and non-monetary sanctions that included disgorgement, administrative penalties, and market participation restrictions, and also ordered costs against the appellants":B. Legal framework – sanctions and costs
[71] After a hearing, the Tribunal may make one or more of 16 categories of “public interest” orders imposing monetary and non-monetary sanctions on capital markets participants “if in its opinion it is in the public interest” to do so: Securities Act, s. 128(1). The Tribunal is also authorized to make a costs order: Securities Act, s. 127.1.
[72] Two of the public interest orders that the Tribunal is authorized to make under s. 128(1) would require the payment of monetary amounts to the OSC:Orders in the public interest
127(1) The Tribunal may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders:
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9. If a person or company has not complied with Ontario securities law, an order requiring the person or company to pay an administrative penalty of not more than $1 million for each failure to comply.
10. If a person or company has not complied with Ontario securities law, an order requiring the person or company to disgorge to the Commission any amounts obtained as a result of the non-compliance. [73] The Tribunal has “very wide discretion” to intervene in the public interest under s. 127(1): see Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132 (“Asbestos”), at para. 39. The discretionary nature of the Tribunal’s authority is evident from the opening wording of s. 127(1), authorizing the Tribunal to make orders “if in its opinion it is in the public interest” to do so (emphasis added). The Tribunal’s public interest jurisdiction “is neither remedial nor punitive; it is protective and preventative, intended to be exercised to prevent likely future harm to Ontario’s capital markets”: Asbestos, at para. 42.
[74] The Tribunal weighs many factors in determining appropriate sanctions, in a process that is generally fact intensive. The weight given to any individual sanctioning factor will vary from case to case and falls within the Tribunal’s discretion. No one factor should be considered in isolation “because to do so would skew the textured and nuanced evaluation conducted by the [tribunal] in crafting an order in the public interest”: Cartaway, at para. 64.
[75] Appeal courts have afforded the Tribunal’s decisions on sanctions considerable deference, given their discretionary and fact-intensive nature and recognizing the tribunal’s subject matter expertise: Cartaway, at para. 45; see also Wood Buffalo, at para. 8; Natural Resource Gas, at para. 8; Dufferin Wind Power, at para. 13. An appeal court will interfere with a tribunal’s decision on sanctions only if the tribunal made an error in principle or the sanction is clearly unfit: College of Physicians and Surgeons of Ontario v. Peirovy, 2018 ONCA 420, 143 O.R. (3d) 596, at para. 38. As well, an appeal court will interfere with a tribunal’s costs award only if the tribunal made an error in principle or was plainly wrong: Kennedy v. College of Veterinarians, 2018 ONSC 3603 (Div. Ct.), at para. 24, citing Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27. . Kitmitto v. Ontario (Securities Commission)
In Kitmitto v. Ontario (Securities Commission) (Div Court, 2024) the Divisional Court considers (and dismissed) related appeals from two Capital Markets Tribunal (CMT) decisions, one respecting 'merits' and one respecting 'sanctions' [under Securities Act (SA), s.10(1)], here addressing SA 76 "which prohibits insider trading and tipping" ['Part XVIII - Continuous Disclosure ' ('Trading where undisclosed change' and 'Tipping')].
Here the court considers an appeal against tribunal-assessed securities 'penalties' [para 169] - though also referred to as 'sanctions' by the tribunal [para 164] - while holding that they are not 'punishments' [para 179] [SS: a distinction that I am not comfortable with]:[3] In the “Sanctions Decision” dated January 20, 2023 (reported at 2023 ONCMT 4), the Tribunal imposed various sanctions, including market participation bans, administrative monetary penalties, disgorgement of profits, and costs.
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[5] In the alternative, Mr. Kitmitto and Mr. Goss submit that the Tribunal erred in the Sanctions Decision, including by imposing punitive sanctions that were not proportionate to their conduct and that did not properly take into account mitigating factors applicable to them individually.
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[177] The Supreme Court of Canada has recognized that the Tribunal has “very wide discretion” to intervene in the public interest, including when imposing sanctions designed to prevent likely future harm to Ontario’s capital markets: Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132, at paras. 39-45; see also Cartaway Resources Corp (Re), 2004 SCC 26, [2004] 1 S.C.R. 672, at paras. 45, 63. The circumstances in which an appellate court may interfere with the exercise of that discretion are very limited. The weight given to any individual sanctioning factor will vary from case to case and falls within the Tribunal’s discretion. 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”: Cartaway, at para. 64.
[178] The arguments of Mr. Kitmitto and Mr. Goss relating to penalty and costs do not meet the high bar for appellate intervention. In large measure, they repeat the submissions they made before the Tribunal at the sanctions hearing, which the Tribunal considered and rejected after due consideration.
[179] I do not agree that the penalties the Tribunal imposed are properly characterized as punitive. The Tribunal, at para. 6, correctly enunciated its preventive (rather than punitive) role when imposing sanctions, noting that its role “is not to punish past conduct, but to restrain “future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient”, citing Mithras Management Ltd (Re) (1990), 13 OSCB 1600, at p. 1611. The Tribunal, at para. 7, also recognized that the sanctions must be appropriate and proportionate to the circumstances of each respondent, emphasizing again that punishment is not a permissible goal of sanctions: see Azeff (Sanctions), at paras. 7, 10. After careful consideration of the circumstances of the culpable defending parties, both collectively and individually, the Tribunal imposed the sanctions outlined previously and explained the reasons for doing so. I see nothing in the Tribunal’s analysis to suggested that they erred in principle in doing so.
[180] Previous case law has recognized that participation in the capital markets is a privilege, not a right: see Erikson v. Ontario (Securities Commission) (2003), 169 O.A.C. 80 (S.C.), at para. 55, citing Manning v. Ontario (Securities Commission) (1996), 94 O.A.C. 15 (Div. Ct.), at paras. 10-11. Significant market bans, including director and officer bans, are well established market protective measures that have been imposed, and upheld on appeal, in other insider tipping and trading cases: see Azeff (Sanctions)[4], at paras. 9, 21, 28, 40, 42; Agueci (Sanctions), at para. 87, aff’d 2016 ONSC 6559, 133 O.R. (3d) 81 (Div. Ct.). The Tribunal, at para. 25, amply addressed and justified director and officer bans in this case, having considered Mr. Goss’ submissions to the contrary. I see no basis for appellate intervention.
[181] I also see no basis for concluding that the administrative penalties were punitive. As the Court of Appeal and this court have repeatedly recognized, insider tipping and trading are serious breaches of securities laws that erode public confidence in the capital markets: see Finkelstein, at paras. 22-25; Fiorillo v Ontario (Securities Commission), 2016 ONSC 6559, 133 O.R. (3d) 81 (Div. Ct), at para. 289. In Rowan v. Ontario (Securities Commission), 2012 ONCA 208, 110 O.R. (3d) 492, at para. 49, the Court of Appeal stated that administrative penalties of up to $1 million per infraction (the maximum amount that the Tribunal may impose under s. 127(1)9 of the Securities Act) were entirely in keeping with the OSC’s mandate to regulate the capital markets where (as here) large sums of money are involved and where substantial penalties are necessary to remove economic incentives for non-compliance with market rules. The court recognized that an administrative penalty must not be viewed as “a ‘cost of doing business’ or a ‘licencing fee’ for unscrupulous market participants”: Rowan, at para. 49.
[182] I also see no error in the Tribunal’s methodology in calculating the administrative penalties. As the Tribunal explained at para. 27-28, the $200,000 per breach baseline was determined with due consideration of the seriousness of the misconduct, precedents set by past cases (in particular Azeff (Sanctions), at para. 33, and Agueci (Sanctions), at paras. 38, 40, 45, which respectively ordered $150,000 and $250,000 per illegal tip or trade), and the significant passage of time since those earlier (2015) decisions. The Tribunal, at para. 29-30, then assessed whether any variation from the per-breach benchmark was appropriate for each individual, with due consideration to mitigating and aggravating factors.
[183] As well, I am not persuaded by Mr. Kitmitto’s submission that the sanctions imposed on him were out of line with those imposed in previous cases, notably Agueci (Sanctions) and Cheng (Sanctions). In those cases, there were distinguishing factors that justified a different result, in the exercise of the Tribunal’s discretion: see Agueci (Sanctions), at para. 29; Cheng (Sanctions), at paras. 7, 10. For example, Mr. Cheng acknowledged and admitted his wrongful conduct, cooperated with OSC staff’s investigation and agreed to testify as a witness. In determining penalty, it would be an error in principle to consider as an aggravating factor Mr. Kitmitto’s failure to admit his wrongdoing and cooperate with OSC staff, since to do so would be inconsistent with his right of make full answer and defence: see Sanctions Decision, at para. 15. However, the fact remains that it was open to the panel in Cheng (Sanctions) to consider Mr. Cheng’s admission and cooperation as a mitigating factor in determining penalty, a consideration that was not open to the Tribunal when determining the appropriate sanction for Mr. Kitmitto.
[184] More generally, I do not agree that the Tribunal erred by failing to consider mitigating factors and individual circumstances for sanctions purposes. The Tribunal explicitly considered the facts and circumstances of each offending party, including those highlighted by Mr. Kitmitto and Mr Goss. The Tribunal rejected certain facts and arguments as mitigating in all the circumstances of the case, including after giving due consideration to the factors militating in favour of significant sanctions: see Sanctions Decision, at paras. 8, 17, 30, 33-40 (re Mr. Kitmitto) and 60-71 (re Mr. Goss). It was within the Tribunal’s discretion to do so. Mr. Kitmitto and Mr. Goss have identified no reversible errors of principle associated with the Tribunal’s exercise of its discretion, nor are the penalties imposed clearly unfit. . Kitmitto v. Ontario (Securities Commission)
In Kitmitto v. Ontario (Securities Commission) (Div Court, 2024) the Divisional Court considers (and dismissed) related appeals from two Capital Markets Tribunal (CMT) decisions, one respecting 'merits' and one respecting 'sanctions' [under Securities Act (SA), s.10(1)], here addressing SA 76 "which prohibits insider trading and tipping" ['Part XVIII - Continuous Disclosure ' ('Trading where undisclosed change' and 'Tipping')].
Here the court cites an appellate SOR for administrative penalty decisions, here in a securities context but by citing some related RHPA law:[168] The standard of review that applies on appeal of a tribunal’s penalty decision or costs award is one of considerable deference.
[169] An appeal court will interfere with a tribunal’s penalty decision only if the tribunal made an error in principle or the penalty is clearly unfit: College of Physicians and Surgeons of Ontario v. Peirovy, 2018 ONCA 420, 143 O.R. (3d) 596, at para. 38. A penalty will be clearly unfit where the decision does not fall within “a range of possible, acceptable outcomes which are defensible in respect of the facts and law”: Peirovy, at para. 38, citing Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47. . 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 in that proceeding".
In these quotes the court considers the propriety of Securities Act penalties:Did the Panel err by imposing a disproportionate, overly punitive penalty?
[47] The Panel imposed sanctions on all three respondents, including Mr. Kadonoff, and in doing so considered seriousness, duration, indirect benefit, and precedents in other sanction decisions of the Capital Markets Tribunal. The Panel rejected taking a broader contextual perspective based on the amounts raised by the funds, and instead connected the financial sanctions to the amounts attributed to each respondent. It also considered and carefully examined the mitigating factors raised by the parties, including Mr. Kadonoff’s ability to pay.
[48] Sanctions are at the discretion of the Panel. Absent a palpable and overriding error as to the facts on which the sanctions are based, or an error in principles of sanction, the court should not interfere. Here, the Panel carefully went through the appropriate principles and reviewed in detail the arguments and factors pertinent to sanction. The Panel was guided by questions of public interest, and the purposes of the Securities Act, including “the protection of investors from unfair, improper or fraudulent practices and the fostering of fair and efficient capital markets.”
[49] In Mr. Kadonoff’s case, the Panel imposed an administrative penalty of $125,000, disgorgement in the amount of $51,361, costs of $37,500 (jointly and severally with Mr. Grossman for SIF Inc.’s portion of the costs), along with cease trading orders, and a prohibition on serving as an officer and director, save for certain “carve-outs” available once the financial penalties have been paid.
[50] The Panel noted that the disgorgement ordered for Mr. Kadonoff is less than that for the other respondents, given “his limited (in time and amount) role in SIF Inc.’s fraud.” Thus, having accepted that a further reduction in that limited amount is available on the record and in line with the acceptance by the Panel of the “conservative” methodology proposed by the OSC, and on appeal (if true), I would reduce the amount of the disgorgement ordered and make a replacement order in the amount of $45,298. Given the relatively minor amount of the adjustment, I would not disturb either the administrative penalty or costs.
[51] Counsel for Mr. Kadonoff also raised the question of whether requiring payment of the financial penalties before permitting the carve-out provisions to take effect is overly punitive given the submission to the Panel that Mr. Kadonoff has limited resources. The Panel considered this submission and noted that in contrast to the respondent, Mr. Mazzacato, who provided a detailed affidavit about his financial situation, Mr. Kadonoff filed only information about his current employment status without disclosing information about his assets or income earned from those assets. The Panel fairly concluded that the evidence proffered was insufficient to establish that Mr. Kadonoff was unable to pay the financial penalties ordered as part of his sanction.
[52] Based on these findings, it cannot be said that the Panel imposed a harsh or punitive sanction by requiring Mr. Kadonoff to pay the penalties and costs prior to having the benefit of the carve-outs from the prohibition orders.
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