In a recent decision, Quadrexx Hedge Capital Management Ltd v Ontario Securities Commission (the "Quadrexx Appeal"), the Ontario Divisional Court applied a re-articulated "standard of review" framework for appeals from decisions of the Ontario Securities Commission (the "Commission"). This framework appears, at least at first blush, to reduce the amount of deference the appeal court will grant to certain decisions of the Commission, thereby lowering the hurdle that appellants from decisions of the Commission must meet.
The framework adopted by the Court in the Quadrexx Appeal was the one set out by the Supreme Court of Canada (the "SCC") in January 2020 in the landmark case of Canada (Minister of Citizenship and Immigration) v Vavilov ("Vavilov"). In Vavilov, the SCC updated the applicable standards of review for decisions from administrative tribunals, which the Divisional Court has now confirmed impacts how appeals from decisions of the Commission are approached.
The Quadrexx Appeal was the first case in which the Ontario Divisional Court considered and articulated the revised framework to a decision of the Commission. The Court held that decisions from the Commission will no longer be subject to review on a "reasonableness" standard, as they formerly were under the framework outlined in Dunsmuir v New Brunswick ("Dunsmuir"). Rather, courts will apply to decisions of the Commission the same standard that is applied to lower court decisions: questions of law will attract a "correctness" standard and questions of fact or mixed fact and law will attract a "palpable or overriding error" standard.
Facts of Quadrexx
In the Commission's decision Quadrexx Hedge Capital Management Ltd, Re, the Commission found that the Respondents, Mr. Nagy and Mr. Sanfelice, had, as the directing minds of the relevant Quadrexx entities, engaged in fraudulent conduct in connection with three distributions of securities.
The three instances of alleged fraud involved:
- Causing Diversified Assets LP ("DALP") to acquire Canada Hedge Watch Inc. shares at an inflated price (the "alleged DALP Fraud");
- Misusing the proceeds of Quadrexx Asset Management Inc. preference shares (the "alleged QAM II Fraud"); and
- Misappropriating the proceeds of the sale of Quadrexx Secured Assets Inc. (the "alleged QSA Fraud").
Alleged DALP Fraud
In 2008, Mr. Nagy and Mr. Sanfelice decided to divest their interests in Canadian Hedge Fund. In order to do so, they established DALP as a limited partnership with Quadrexx Hedge Capital Management Inc. They prepared an offering memorandum, which stated that the initial equity investment made by DALP would be the acquisition of shares in Canadian Hedge Watch. A second offering memorandum valued the Canadian Hedge Watch shares at $2.54 million. The OSC found that this valuation was not substantiated and that the accurate value of the shares was $1.53 million. The OSC held that the inflated share price in the offering memorandum constituted a fraud on investors.
Alleged QAM II Fraud
From March 2011 to June 2012, Quadrexx Asset Management Inc. ("QAM") issued and sold Class II Preference Shares. A 2011 Class II Preference share offering memorandum stated that money raised would be used for working capital to fund the growth plan. The memorandum was never updated to specify a different use. The memorandum was also clear that QAM was under no obligation to pay dividends to Class I and II investors. Notwithstanding its business losses, QAM paid a dividend to the Class I and II investors. The OSC found that Mr. Nagy and Mr. Sanfelice knew that QAM II Proceeds were being used to pay dividends and that the representations in the Class II offering memorandum were misleading and constituted a fraud on investors.
Alleged QSA Fraud
In 2011, Mr. Nagy and Mr. Sanfelice established Quadrexx Secured Assets Inc.("QSA") and made QAM responsible for managing QSA's assets. The offering memorandum of QSA indicated that 4% in offering costs would be taken as fees for QAM. Mr. Nagy and Mr. Sanfelice decided that QAM would take a flat fee from the offering costs, rather than recovering the costs from the 4% fee. Although a solicitor drafted an amendment reflecting this change in a footnote, it was never provided to investors. The OSC found that Mr. Nagy and Mr. Sanfelice intentionally used the proceeds in a manner other than for the purposes represented to prospective investors.
Appeal to the Divisional Court
Mr. Nagy and Mr. Sanfelice (the "Appellants") appealed the OSC's decision to the Divisional Court on the basis that the OSC committed palpable and overriding errors and that it denied them procedural fairness.
After the appeal was argued, the Court reserved judgment, during which time the SCC released its decision in Vavilov. Ultimately, the Divisional Court dismissed the appeal, upholding the Commission's decision, but provided general comments on the application of Vavilov to decisions of the OSC.
Former standard of review under Dunsmuir
Prior to Vavilov, the leading case on the standard of review in administrative law was Dunsmiur. Under the Dunsmuir framework, when a tribunal was interpreting its enabling statute or an area within its expertise, the presumptive standard of review was "reasonableness." It has been widely held that courts owed deference to the conclusions of law reached by administrative tribunals, especially those with highly specialized subject matter expertise, such as the Commission. The effect was that Commission decisions were subject to the reasonableness standard. As explained in an Osler blog post from earlier this year, this approach meant that a reviewing court could uphold a Commission decision as "reasonable," even if it were technically "incorrect".1
Standard of review under Vavilov
In Vavilov, the SCC sought to clarify and simplify crucial aspects of administrative law. Now, when courts are faced with a judicial review of administrative action, the presumed standard is reasonableness. However, this standard is displaced in a number of instances, including if the governing legislation provides for an express statutory right of appeal, as, for example, is provided for in s. 9(1) of the Ontario Securities Act.
The SCC held that an express statutory right of appeal is evidence that the legislature intended for the applicable standard of review to be the same as those that apply to appeals from judges. This standard of review is outlined in another SCC case, Housen v Nikolaisen ("Housen"). Under the Housen framework, questions of law attract a "correctness" standard of review. Where a legal principle cannot be easily extricated, as in questions of fact or mixed fact and law, the court will grant substantial deference to any factual findings of the tribunal and review on the standard of "palpable or overriding error." Unlike the standards of administrative review, which have undergone periodic shifts, the standards outlined in Housen have been relatively stable and have built up considerable jurisprudence.
Appeal of the Commission's decision in Quadrexx
The Appellants argued that the Commission made errors on issues of fact, mixed fact and law, and in the application of procedural fairness. The Court rejected all of these arguments and held that none of the submitted errors of fact were palpable or overriding errors; the Commission made no errors of law with regards to the submitted errors; and the Commission did not deny procedural fairness. The Court indicated that the Commission did not ignore or misunderstand the Appellants version of events, the Commission simply did not find it to be convincing and gave reasons justifying this decision.
What does this mean going forward?
The approach taken by the Divisional Court in the Quadrexx Appeal suggests that going forward certain Commission decisions could be subject to greater scrutiny on appeal. Commission rulings on questions of law, which courts might have previously affirmed as "reasonable," may not meet the higher "correctness" standard, to which they will now be held.
Nonetheless, the Quadrexx Appeal also suggests that reviewing courts will continue to give weight to the Commission's expertise. The Divisional Court acknowledged that securities regulation is a highly specialized area that requires specific expertise. Despite applying the new standard, the Court did not interfere with any element of the OSC's decision. That said, none of the issues that the Appellants submitted to the Court were characterized as pure "questions of law", and the Court found little merit in the Appellants' arguments. It therefore remains to be seen in a future case how the Court will approach an appeal from a Commission decision on a question of law.
Further, it will be interesting to see the approach taken by the courts to appeals from decisions of the Commission if recently proposed recommendations are adopted. As reported in an earlier Osler blog post, the Ontario government's Capital Markets Modernization Taskforce has recommended bifurcating the structure of the Commission by creating an adjudicative Tribunal separate from the Commission's market regulation decision functions.
1 See Sears Holdings Corp. v. Ontario Securities Commission at paragraph 13 where the Divisional Court held that the "standard of review of reasonableness encompasses the "right to be wrong"."
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