Canada: BC Court Of Appeal Clarifies Use Of Disgorgement Remedy Under The Securities Act

In Poonian v. British Columbia Securities Commission1 the BC Court of Appeal recently found that the BC Securities Commission (BCSC) may, in limited circumstances, make orders pursuant to s. 161(1)(g) of the BC Securities Act (the Act) holding persons jointly and severally liable for a disgorgement order where there is evidence showing control and direction between them.

Pursuant to s. 161(1)(g) of the Act, after finding a breach of securities law, the BCSC may make a disgorgement order requiring that a person or company "pay to the commission any amount obtained, or payment or loss avoided, directly or indirectly, as a result of the failure to comply or the contravention."

The Court considered two decisions of the BCSC which both turned on the same central issue: whether contraveners who were involved in the same fraud could be held jointly and severally liable under a disgorgement order, or whether the BCSC's powers were limited to ordering disgorgement of only the benefit received by each individual contravener.

Background

Two couples, the Poonians and Sihotas, along with other minor participants, were found to have inflated the price of shares in a company they controlled, engaging in market manipulation contrary to section 57(a) of the Act, earning combined aggregate net trading gains of approximately $7.3 million. 2 The BCSC made an order against the contraveners to disgorge $7.3 million, holding each of them jointly and severally liable for the amount to be disgorged.3 The BCSC also ordered administrative penalties against each of the contravenors which totalled $21.5 million.

In a second decision, the BCSC found that Lathigee and Pasquill had jointly directed a group of companies called the "Freedom Investment Club" which raised $21.7 million from investors after running into financial difficulties, misusing those funds and misrepresenting to investors the financial condition of the companies. 4 They were found to have committed fraud contrary to section 57(b) of the Act. The BCSC made an order against the contraveners and the corporate entities they controlled to disgorge $21.7 million, holding Lathigee and Pasquill jointly and severally liable for this amount and the companies jointly and severally liable for parts of this amount. 5 The BCSC also ordered a $15 million administrative penalty against each of Lathigee and Pasquill.

Liability was not an issue on either appeal. Rather, the appellants argued that the BCSC lacked the power to make disgorgement orders against them jointly and severally pursuant to s. 161(1)(g). The appellants also argued that the BCSC had failed to establish that the persons against whom the orders were made had actually received the amounts ordered to be disgorged, and that the BCSC should have made certain deductions in calculating the amounts to be disgorged.

Scope of Disgorgement Orders

The Court confirmed that the BCSC's powers under s. 161(1)(g) should be interpreted consistently with its purpose, which is remedial and concerned with protection of the public. The provision must be read broadly and with sensitivity to economic realities.

The Court made identified 5 key principles about disgorgement orders under s. 161(1)(g):

  1. The purpose is to deter persons from contravening the Act by removing the incentive to contravene, i.e., by ensuring the person does not retain the "benefit" of their wrongdoing.
  2. The purpose is not to punish the contravener or to compensate the public or victims of the contravention. There are other mechanisms in the Act for achieving these goals, and general protection of the public cannot be used to expand the purpose of this particular provision.
  3. There is no "profit" notion to a disgorgement order. The "amount obtained" which should be disgorged does not require the BCSC to allow deduction of the contravener's expenses or costs in perpetrating the wrongful scheme. Amounts returned to the victims may be deducted, and the BCSC had discretion to make other deductions where appropriate, such as where contraveners have unequal degrees of liability.
  4. The "amount obtained" to be disgorged must be the amount obtained by that person, directly or indirectly, as a result of his or her noncompliance; usually this precludes the making of a joint and several order.
  5. However, a joint and several order may be made against parties who are under the direction and control of the contravener, such that the contravener received the amounts indirectly via the other parties. (In this case, all of the parties held jointly and severally liable were respondents to the securities commission proceedings that were found to have breached securities law.)

The Court rejected the BCSC's argument that joint and several orders were appropriate wherever parties acted jointly in contravening the Act. This does not establish that each party obtained amounts which could be disgorged. Rather, a joint and several order may only be made where one party exercised direction and control over another.

The BCSC may order disgorgement of amounts that a contravener obtained indirectly through, inter alia, corporate alter egos, nominees, or agents. The test is whether the parties held jointly and severally liable were effectively acting as one person with the contravener.

The Court also confirmed that the BCSC need only prove a "reasonable approximation" of the amount obtained through the contravention. The burden then shifts to the contravener to disprove the reasonableness of that amount. The more complex or opaque the scheme, the more flexibility the BCSC has in making a reasonable approximation.

Application in these cases

The Poonians and Sihotas' appeals were allowed in part. The Court found that although the BCSC had made findings as to the degrees of involvement of each of the contraveners, it did not make any findings that each of these individuals obtained amounts personally, or whether any individual indirectly obtained an amount. The Court sent the matter back to the BCSC to determine whether amounts in accounts not belonging to the Poonians or Sihotas were under their control such that they indirectly received the amounts and could be held liable for them.

The Lathigee and Pasquill appeal was dismissed. The BCSC had shown that contraveners had received amounts indirectly from the corporate entities they controlled, and the Court confirmed that they could be held jointly and severally liable for the full amount. The BCSC found that Lathigee and Pasquill had jointly directed and controlled the corporate entities that obtained the money, and thus each had "obtained" the "amount", albeit indirectly through those entities.

Lathigee and Pasquill argued that the corporate entities were not originally created as vehicles for fraud, and that some of the funds received had been used for their intended purpose and thus should not be disgorged. The Court rejected both these arguments. Regardless of how the funds were used, they were raised by fraudulent misrepresentations or omissions and that was what constituted the contravention giving rise to disgorgement

The author wishes to thank Katrina Labun, summer articled student, for her help in preparing this update.


Footnotes

1 2017 BCCA 207

2 Re Poonian, 2014 BCSECCOM 318 (liability)

3 Re Poonian, 2015 BCSECCOM 96 (sanctions)

4 Re Lathigee, 2014 BCSECCOM 264 (liability)

5 Re Lathigee, 2015 BCSECCOM 78 (sanctions)


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