Proceedings

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Glen & Christie Erikson v., O.S.C.

22/99

 

Coram.

Archie Campbell, Cosgrove & Thomas JJ.

 

 

For Appellant

Allan Sternberg

 

For Respondent

Yvonne B. Chisholm

 

 

Heard:

September 11, 2002

 

Decided

February 7, 2003

 

ENDORSEMENT

The Facts

[1] It is unnecessary to repeat the facts set out in the factums in such detail.

The Grounds of Appeal

[2] Mr. Sternberg in his able argument says the tribunal erred in principle within the meaning of Committee for the Treatment of Asbestos Minority Shareholders v. O.S.C. (1999) 43 O.R. (3rd) 257 per Laskin J.A. at p. 269.

[3] He says that the tribunal misapprehended the evidence, wrongly analyzed the question of culpability, and wrongly concluded that there was clear cogent and persuasive evidence that the appellants had any awareness or knowledge of the alleged manipulative scheme. He says that the tribunal took a market manipulation case and turned it into a reporting violation case. In response to a question from the court he said there was "an absence or any evidence that Glen Erikson had knowledge of his client's wrongdoing." He challenges the finding of fact that there was any deceptive manipulative scheme at all. He says that: "if one analyzes the whole of the evidence it would be unreasonable to make any inference of culpability against the appellants. "

[4] Despite Mr. Sternberg's valiant attempt to couch his appeal in terms of error in principle, the appellants' case depends on a complete factual re-argument of the case they lost before the tribunal, largely on the basis that the tribunal drew the wrong factual inferences as to the knowledge of the appellants, who did not testify.

The Decision

[5] The tribunal heard 22 witnesses over 18 hearing days, considered 156 exhibits, some comprising many volumes, and then heard argument for seven days. After delivering extensive reasons on the first phase of the hearing it then proceeded for six days on the issues of limitation period and sanction.

[6] The tribunal found as a fact that there was a carefully prepared scheme designed to profit the participants whether or not the speculative ventures proved to be successful, a scheme designed to take advantage of every possible exemption under the act to reduce expense and provide practically no information on the public record as to the likelihood of success. Towards the beginning of its reasons the tribunal said:

As will appear from what follows, we are satisfied that there were violations of important requirements of the Act which deserves censure. Even if we are wrong in this, however, we also hold that by knowingly participating in a scheme which was clearly designed to place securities in the hand of investors at prices which did not reflect their real value, the respondents have participated in a process which was abusive of the market which also should lead to censure.

At the end of the reasons the tribunal said:

In coming to the conclusions we have set out, we have been mindful of the many statements to which we were referred that we should act on nothing short of clear and convincing proof based upon cogent evidence accepted by the tribunal where potential disciplinary matters or where matters of personal reputation are Involved.

.....

As a result of our review of the voluminous documentary evidence and our consideration of the evidence, we have concluded that Christine Erikson was either a pure nominee or a member of a control group and that Erikson knowingly acquiesced in and facilitated the distribution of the common shares of Belteco and Torvalon where violations of the prospectus and reporting requirements of the Act occurred. The result has been a serious abuse of the capital market contrary to the public Interest. We believe their conduct deserves censure.

Finally, if we are wrong in our findings that important violations of the Act and the Regulations have occurred, we find that on all the evidence before us what occurred in this case was manipulative, deceptive and unconscionably abusive of the capital markets and we would exercise our discretion under Section 127 of the Act in the absence of any breach of the Act to find that the public interest was involved, that what occurred was contrary to the public interest and thus sufficient to receive submissions as to what, if any, Order should be made within those permitted under Section 127. In this regard we rely on Re CTC Dealer Holdings et al. and Ontario Securities Commission et al. (1957) 59 OR (2d) 79 (DivCt) affirming (1997) 10 OSCB 857.

[7] It is important to note that the findings are couched in the alternative. Neither violations nor knowledge of violations are essential to the overall conclusion. The appeal is not from the reasons, which refer in the alternative to knowledge. The appeal is from the result, in which knowledge is not a necessary ingredient.

The tribunal when considering sanction summed it up even more succinctly:

It is not necessary to repeat those conclusions here except to say that we have found that by their conduct the three respondents who appeared in these proceedings participated to some degree in a scheme which was manipulative, deceptive, and unconscionably abusive of the capital markets and thus their conduct was clearly contrary to the public interest.

Standard Of Review

[8] It is unnecessary to pinpoint the exact position of the standard of review within the intermediate reasonableness spectrum addressed in Committee for the Equal Treatment of Asbestos Minority Shareholders v. O.S.C. (2001), 2 S.C.R. 132 per lacobucci J. at para 49, 152 - 3. This case is entirely fact- driven and the issues faced by the tribunal are at the heart of its specialized expertise in understanding the knowledge of marketplace players engaged in complex marketplace transactions. This decision attracts a high degree of appellate deference.

Criminal Law Notions

[9] The tribunal found three separate bases for the exercise of its public interest jurisdiction, any one of which was sufficient:

Knowing participation in a manipulative scheme

Violations of the act which resulted in an abuse of capital markets

Conduct, whether a violation or not, which resulted in an abuse of capital markets

[10] None of these ultimate conclusions require criminal knowledge or intent. The tribunal, to exercise its public interest jurisdiction after a hearing under s.128, was not obliged to find criminal intent or knowledge. As the Commission pointed out in Re Standard Trustco Limited (1992), 15 OSCB 4322 at 4359-60:

State of Mind of the Respondents

While the Commission should consider the state of mind of the Respondents in deciding whether to exercise its public interest jurisdiction, it is not determinative. It is not necessary for us to find that the Respondents acted wilfully or deceitfully in order to exercise our public interest jurisdiction. In the case of Gordon Capital Corporation and Ontario Securities Commission (1990), 13 OSCB 2035, affirmed (1991) 14 OSCB 2713 (Ont. Div. Ct.) at p. 14, Craig J stated:

"The fact that Gordon may have acted without malevolent motive and Inadvertently is not determinative of the right of the OSC to exercise its regulatory and discretionary powers to impose a sanction upon Gordon".

Although that case involved a hearing into whether it was in the public interest to suspend, cancel, restrict or impose conditions on the registration of a registrant and not a section 128 hearing, we believe the same principle applies in the case at hand.

[11] As for the appellants' criminal law arguments on proof of intention and mens rea, this is not a criminal case like R. v. Carter (1996) 9 CCLS 21 or R. v. Mammolita (1983) 9 C.C.C. (3rd) 85 The applicants were not charged with any offence or prosecuted under any penal statute, nor did the tribunal make any "findings of guilt." The tribunal was not obliged to apply criminal law principles such as "accessorial liability" in exercising its jurisdiction to protect capital markets and regulate the activity of the participants in that marketplace.

[12] Notwithstanding Mr. Sternberg's able re-argument of the points he made before the tribunal there was overwhelming evidence that

there was a deceptive scheme of the kind alleged and

the exemptions were used abusively to facilitate the scheme

The appellants, whether or not guilty of violations, participated in acts vital to the implementation of the scheme which abused the market

[13] It is important to remember the tribunal's finding that even if it erred in finding violations, there was in any event an abuse of the market that triggered the application of s. 127.

[14] So far as knowledge is concerned there comes a point where the unexplained participation of individuals in a vital capacity in a scheme which abuses the market supports an inference that some sanction is required to prevent them from doing so again, whatever their precise degree of knowledge.

[15] This was a classic scheme where the promoters, in order to avoid scrutiny of risk by prospective investors, adopted procedures including the use of exemptions in order to withhold information showing that the ventures are nothing more than commercial moose pasture.

[16] Although it was essentially agreed by the tribunal that Glen Erikson participated only in the build up phase, his participation in misleading press releases demonstrates his participation in activities (whether one characterizes them as build-up or marketing) directed at the public market.

[17] It is unnecessary to prove his participation in the marketing or blow-out phases. The build-up phase was just as essential to the abuse of the market as the marketing and blow-out phases. Erikson's crucial engineering of the first phase of the scheme was an essential part of the ultimate abuse of the market.

[18] Although the Eriksons complain of insufficient evidence and findings about their precise degree of knowledge, they declined to testify. They provided no explanation for any of the evidence against them. Their failure to testify as to their knowledge and intention weakens their attack on the tribunal's findings about their knowledge and intention. Their elaborate argument about the precise nature and quality of their suspicion, willful blindness, or knowledge and the "complexity of the mental element necessary for accessorial liability" rings hollow in light of their failure to testify.

Sufficiency of Reasons

[19] The tribunal set out the evidence, their primary findings of fact as to the appellants' participation, and their ultimate conclusions without fully elaborating everything they could have said about their intermediate reasoning. The reasons for judgment could have been more explicit in relation to the continuum between innocence, naive inexperience, ignorance, suspicion, negligent failure to inquire, reckless failure to inquire, sophisticated blindness, wilful blindness, things the appellants ought to have known, imputed knowledge, and actual knowledge. The tribunal could have been more explicit in finding precisely how the trees fit into the forest or, to put it legally, "in the logical process by which conclusions are sought to be drawn" from the evidence. [lacobucci J. in Southam at pp. 776 - 7.] It must always be remembered, when parsing reasons for judgment, that the appeal is from the result and not from the reasons.

[20] In finding knowledge on the part of the appellants the tribunal made no express reference to its marketplace expertise. Nor was it obliged to do so. The entire judgment reflects the tribunal's understanding of the marketplace and of the kind of mental awareness one would normally expect of someone in the appellants' position.

[21] There is no obligation on the tribunal to say everything it might have said and failure to do so does not evidence error. The reasons, taken as a whole, demonstrate a meticulous review of the evidence and clear findings of primary fact which were more than adequate as a foundation for the ultimate conclusions. To take but one of dozens of examples, the tribunal said this about Glen Erikson's participation in the issuance of Betelco shares from treasury in return for the rights to the moon balancer and continuous squirt gun:

On this first acquisition of business assets for treasury shares, it is clear that a prospectus was required. This is part of the fundamental protection under the Act Mr. Erikson as a solicitor knowledgeable in securities law and as the president and a director of Belteco at the time ought to have ensured compliance. The press release which was filed was woefully lacking in the information required in the circumstances.

[22] The primary findings of fact, taken cumulatively, are more than enough to support the ultimate conclusion that the appellants participated in the abuse of capital markets in a manner that required the imposition of a preventive sanction.

Sufficiency of Evidence

[23] The case against the appellants was strong. The assets underlying the shares were "commercial moose pasture". It was not necessary to follow the money or to have any evidence of where it went. Neither was it necessary to conduct a formal valuation of the commercial moose pasture.

[24] It was for the tribunal, not this court, to weigh the evidence of all the witnesses whom they saw and heard, including Whymark and Madeiros. There were some matters the tribunal did not refer to although they could have, and some minor errors in relation to the details of this elaborate and complicated scheme. But nothing in the evidence or the reasons suggests any factual error that might affect the result, any failure to consider a vital matter, or any other error in principle.

[25] The appellant seeks to re open and reargues the case it lost before the O.S.C. This is not a trial de novo and it is not for the court to rehear the case.

Seven Alleged Errors

[26] The appellants raise seven alleged "factual" errors:

1. Cleaning up the shell: Whymark's suggestion or Erikson's?

2. Was the promoter exemption available to Petry?

3. Was the employee exemption available to Madeiros?

4. Did Madeiros act in a purely accommodation capacity?

5. Submissions for G. Erikson, Private Placement December 23 1991

6. Elaine Salter's holdings on April 30 1992

7. Did Erikson avoid a prospectus or a takeover bid circular?

[27] Some of these alleged errors have nothing to do with any factual mistake but rather with technical statutory pigeonholes, for instance whether there was a failure to file a prospectus or a failure to file a takeover bid circular.

Re-Argument before Tribunal

[28] The seven alleged errors were argued not only on appeal but also, in the following manner, in front of the tribunal after it had rendered its decision.

[29] In its extensive reasons for judgment on September 30, 1998 the tribunal left it open to the appellants to make further submissions on the facts:

...when counsel re-attend to address us on the consequences of our decision we are prepared to hear any reasonable representations arising from our analysis or presentation of the facts.

[30] Mr. Sternberg took up the tribunal's invitation. On November 17 when the tribunal came back he argued these points as shown in volume 25 pages 1-41 of the transcript, followed by Mr. Ritchie's response. During this reargument it became obvious that the tribunal had intended a limited argument on four new transaction summary tables attached to the reasons, but not a plenary reargument on all the findings in the reasons. The tribunal made a few observations during the course of these submissions such as "I think you may be right" or "You are probably right" in respect or minor details but made it clear that on the controlling findings and conclusions they were not open to re-argument. Mr. Sternberg's argument before the tribunal was largely to preserve rights or appeal on the points with which he took issue.

The Seven Alleged Errors Analyzed

[31] The first alleged error (reasons page 12, fourth full paragraph) has to do with the assignment to Krater of Whymark's Beltco shares. The chair agreed that the tribunal maybe should have said ''as a result of Mr. Erikson's suggesting that it had value" (v. 25 November 18 pp. 13 - 140) and agreed that "you can qualify the degree of suggestion." Whatever should have been said on that point it is a small point that predates 1991, a point of no moment.

[32] The second alleged error (reasons page 18. second last full paragraph) has to do with the moonbalancer and the continuous feed squirt gun and the finding that the promoter exemption was not applicable to Petrie. In light of the lack of any role by Petrie in the reorganization of Betelco's business and in light of the inability to find Petrie's alleged company in Kent, Ohio, the finding is not unreasonable.

[33] The third alleged error has to do with the finding (reasons p. 23, last full paragraph) that Madeiros was not an employee of Betelco or Pearl "in the spirit in which that term is used in Section 72 (1) (n)". Madeiros testified on July 22 and July 23. The tribunal had a full opportunity to assess the real nature of her role. She was unaware what it meant to act as a director of a company, did not know the difference between a public and a private company, was unaware until the investigation that she was listed as the secretary of Betelco or that she had resigned. She never attended a board of directors meeting although she signed a lot of documents, sometimes in blank. Whatever technical argument might be made about her legal status, the finding is not unreasonable that she was not an employee in which the spirit of that term is intended in the Act.

[34] The fourth alleged error has to do with the finding (reasons p. 10 last paragraph);

We accept the evidence of Madeiros that in her capacity as a director and officer of Belteco and as an officer of Torvalon, she was acting as a pure accommodation party at the request of Gary Salter or through him at the request of Erikson. In our view, this is also true with respect to the trading in shares which were issued to her or to the actions of corporations of which she was the sole director and officer.

[35] Mr. Sternberg pointed out to the tribunal that there was no evidence that "on the trading aspect that she was in any way acting through Erikson" and the chair said "I think that is right." (transcript November 18 page 11 ). So far as trading is concerned it is clear that the tribunal did not associate Glen Erikson with the blow-out phase and any slip reflected in the quoted paragraph could have had no effect on the result.

[36] This fourth alleged error involves a subtext to the other complaints of the appellants. This cumulative complaint alleges that the tribunal followed the investigators' error by seeing something wrong at the end of the day and then working far back ex post facto to tar, as sinister, every detail of Erikson's behaviour. This subtext applies also to the fifth and sixth alleged errors.

[37] There was no error in the tribunal's approach. Behaviour associated with a market abuse invites a trier of fact quite properly, when the behaviour is unexplained, to analyze it In the context of the abuse with which it was associated. There is nothing in the alleged errors that could, individually or cumulatively, have affected the result of the hearing.

[38] The fifth alleged error has to do with the tribunal's treatment of Glen Erikson's role in the private placement of December 23 1991 (page 29)

As to Erikson's participation, it is clear from the record that he was fully aware of the circumstances and probably participated in the preparation of both the report and the press release.

No submission was made on behalf of Erikson on this transaction, but none of these shares reached the market as it had collapsed before the shares became tradeable.

[39] In fact submissions had been made on behalf of Erikson, submissions to the effect that this was one of the few transactions in which there was complete compliance with all filing requirements.

[40] On this issue the staff had conceded that although the transaction required a prospectus, an exemption was probably available. The staff submitted that the use of the exemption in the circumstances was abusive because the press release was incomplete in relation to the destination of the funds to be applied to debt reduction.

[41] There was no error here that could have affected the result. The tribunal appeared to acknowledge the availability of an exemption and there was no finding against Erikson in respect of the issue on which submissions were made on his behalf.

[42] The sixth alleged error (page 29) has to do with a finding that the cumulative total of shares of Betelco issued to Elaine Salter and her company 918211 amounted to 832,342 shares or 17% of the issued and outstanding shares at the end of April 1992. The alleged error is the failure to consider that sales from January to April would have reduced the percentage.

[43] On this point the Chair during re-argument (page 19) said:

THE CHAIR: ...I think you may be right. What the 17 percent is calculated on is the 832.342, that obviously those numbers can be added up in the table and probably does not take into account sales

MR. STERNBERG: Yes

THE CHAIR: Probably does not. I think you are quite right.

[44] There followed a dialogue between Mr. Sternberg and the Chair as to whether she clearly had over 10% which triggers the creeping control provisions of s. 101.

[45] Again, the error resulted in no crystallized finding against Erikson. It was certainly not the key to the decision against him and could not in the overall body of findings have affected the ultimate result.

[46] Mr. Sternberg characterizes the seventh alleged error as the most offensive error that impacted on the way Glen Erikson was viewed. The argument on this point is highly technical and was reviewed extensively during re-argument (transcript pp. 22 - 33). It involves the Torvolon acquisition of control and the following concluding passage (reasons page 35):

We have no doubt that the real number of sellers was artificially reduced so that the prospectus requirements of the Act could be avoided. This fact was clearly known to Erikson and consequently no prospectus exemption was applicable because he knew that the nominal sellers were acting as nominees or agents for others having a beneficial interest in the securities being sold. There was a clear breach of the Act. A prospectus was required. Furthermore, the Section 101 filing was inaccurate and incomplete as it did not disclose the true identity of the purchasers.

[47] Although a lot can be said about this issue it makes no difference in the result. Even if a prospectus was not required but a take over bid circular was required, the result is the same. Neither a prospectus nor a take over bid circular was filed. In the result the public was deprived of critical information and it does not matter which pigeonhole the delict best fits.

[48] Most of the alleged errors are not made out. None of those that are made out are substantial and none of them could have affected the result.

Limitation Period

[49] Because it found as a fact that the reports in question did not contain the range of knowledge required to trigger the limitation period, the tribunal found it unnecessary to decide whether the knowledge of TSE and CDN should be attributed to OSC.

[50] There is no basis to interfere with that finding of fact, uniquely within the expertise of the tribunal.

[51] The report itself recommended that further investigations be done. It is difficult to pinpoint the exact stage during an investigation when there is enough knowledge of facts to launch proceedings. Between suspicion and knowledge there is no bright line. The regulator is guilty of tunnel vision if it proceeds against individuals on the basis of mere suspicion before conducting an adequate investigation, including necessary interviews, of the kind required to turn suspicion into knowledge.

[52] The Boyce letter of December 17 said there was a possibility of manipulative trading and unwarranted markups. Although a great deal of trading and transaction detail was presented, there were at that time no interviews of people like Madeiros, Rooney, Kirkwood, Petrie, Virginia Bailey, Daniel Bailey, Wayne Whymark, Link, Torrens or Erikson's mother in law, Mrs. Picke.

[53] More is needed than "This looks like a market manipulation; something is going on here and we have to investigate." It would be irresponsible, without conducting personal interviews, to conclude that there was enough evidence to launch proceedings. The tribunal correctly held that the necessary knowledge could only be attributed to staff well after December 19, 1991.

Sanction

[54] The sanction is not as serious as suggested by the appellants. It is not a life-time ban on trading. In the first place it is always open to the appellants to apply to the Commission at any time under s. 144(1) to revoke or vary the sanction. Second, the appellants are entitled, after the expiry of two years, to trade firstly in s. 35 (2)(1) securities, bonds and debentures and also in TSE- listed securities in respect of companies where they are not an insider and do not own more than 2 1/2 %.

[55] The sanction must also be considered in light of the fact that it did not deprive the appellants of any right. Participation in the capital markets is a privilege, not a right. As this court said in Manning v. O.S.C, [1996] O.J. No. 3414 (O'Driscoll, Borkovich and Corbett JJ.) per O'Driscoll J.:

[6] We agree with paragraphs 47 and 48 of the Respondent's Factum.

47. There is no right of any individual to participate in the capital markets in Ontario. Section 35 of the Act provides certain exemptions which allow individuals to make certain trades without being registered, however the OSC has explicit jurisdiction to remove the exemptions if an individual engages in conduct contrary to the letter or spirit of the Act, whether such conduct causes damage to investors or is detrimental to the integrity of the capital markets. The OSC found that such conduct existed on the facts of the present case.

48. The OSC exercised its public interest discretion in a manner within the core of its regulatory jurisdiction. Its decision was based on voluminous evidence, made in good faith, for the purposes of the Act and on the basis of relevant factors. It is a matter that falls within the OSC's exclusive jurisdiction and one with which the Court should not Interfere.

[7] The removal of the exemptions of the appellants, in our view, falls within the OSC's exclusive jurisdiction. On this record, we are not persuaded that there is any basis upon which to interfere. In the result, the appeals are dismissed.

[56] This extract from Manning shows that participation in capital markets is a privilege and not a right. It also shows that sanctions addressed to that privilege are within the deference accorded to decisions at the heart of the Commission's specialized expertise.

[57] The tribunal is in a much better position than this court to determine the gravity of the conduct and the risk to the public. As this court said in Robinson v. O.S.C., [2000] O.J. No.648 (Southey, MacFarland and Swinton JJ.).

The Commission is in a much better position than this court to determine the gravity of the breaches of the Securities Act that have been found, and to assess the risk to the public from the future conduct of the persons involved. Such determinations are squarely within the core jurisdiction of the Commission. The Commission is entitled to deference. We are not persuaded that any of the decisions as to penalty was unreasonable, and there will be no order disturbing the penalties that have been imposed by the Commission.

[58] The tribunal when considering sanction addressed itself expressly to the appropriate factors including:

the seriousness of the allegations proved;

the respondents' experience in the marketplace;

the level of the respondents' activity in the marketplace;

whether or not there has been recognition of the seriousness of the improprieties, and

whether or not the sanctions imposed serve to deter not only those involved in the case being considered but also any like-minded people from engaging in similar abuses of capital markets.

[59] The tribunal addressed, in particular, the principal consideration of the need not to punish past conduct but to restrain future conduct likely to be prejudicial to the public interest in the integrity of capital markets. The tribunal in this respect quoted In the Matter of Mithras Management Ltd. (1990), 13 O.S.C.B. at pp. 1610 - 1611:

Under sections 26, 123 and 124 of the Act, the role of this Commission is to protect the public interest by removing from the capital markets -- wholly or partially, permanently or temporarily, as the circumstances may warrant -- those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts, particularly under section 118 of the Act. We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person's future conduct might reasonably be expected to be; we are not prescient, after all. And in so doing, we may well conclude that a person's past conduct has been so abusive of the capital markets as to warrant our apprehension and intervention, even if no particular breach of the Act has been made out.

[60] Nothing in the negotiated settlements of the other participants suggests any error in the appellants' sanctions. As for the identity of sanction between the two appellants it was open to the tribunal, in considering future conduct, to consider their continuing mutual participation in public companies since the Betelco and Torvolon matters. Glen Erikson was a director, officer or holder of more then 10% of the shares of eight public companies and Christine Erikson to like degree in six of those public companies.

[61] Penalty is a matter uniquely within the expertise of this regulatory tribunal which is intimately familiar on a daily basis with the practices and expectations of the marketplace. The appellants, as the commission found, participated in a scheme which was manipulative, deceptive, and unconscionably abusive of capital markets. Their conduct, which was clearly contrary to the public interest, resulted in net proceeds of $969,000 for Betelco and over $2 million for Torvalon.

[62] Neither the reasons not the sanctions demonstrate any error in principle or any reason to interfere with the imposition of these sanctions at the heart of the Commission's specialized understanding of what is necessary to protect the integrity of capital markets.

Conclusion

[63] For these reasons the appeal is dismissed with costs fixed in the agreed amount of $10,000.

A. CAMPBELL, J.

COSGROVE, J.

THOMAS, J.

February 7, 2003.