Introduction
Facts
Analysis
Comment
On April 25 2012 the Court of Appeal for Ontario dismissed an application by John Xanthoudakis and Dale Smith for leave to appeal an October 31 2011 decision of the Ontario Superior Court of Justice (divisional court),(1) which unanimously upheld two earlier decisions of the Ontario Securities Commission (OSC). The OSC had rejected a motion by the appellants for a stay of OSC proceedings against them on the basis of a reasonable apprehension of bias,(2) and later found that the appellants had breached Ontario's securities laws in connection with their involvement in the failed Norshield investment scheme.(3) The OSC later sanctioned the appellants with permanent cease trade orders, permanent officer and director bans, fines of C$4 million and costs of C$295,000.(4)
The appellants' motion for a stay of the OSC proceedings arose from comments made on November 23 2008 by the chair of the OSC during a televised interview. At the time the comments were made, an OSC hearing was underway to consider whether the appellants, among others, were in breach of the Ontario Securities Act(5) in relation to their involvement in the Norshield failure, which resulted, among other things, in the loss of C$159 million raised from some 1,900 Canadian retail investors of Olympus United Funds Corporation, one of the Norshield companies.
The chair's impugned comments were as follows:
"The OSC wants to allow people to do business. So we clear prospectus[es] so people can pursue earning a living by managing other people's money in the capital markets, and 99% of the time they're good people that aren't fraudulent people. Norshield was run by people who were not honest. That's what happened in Norshield."
By the time the chair's comments were made, the hearing of evidence was complete and the matter had been adjourned to enable counsel to prepare argument. Before the hearing of argument, the appellants commenced an application for judicial review before the divisional court. The application sought an order for prohibition against the OSC on the basis that it had lost jurisdiction. A motion was brought for a stay of the OSC hearing pending determination of the judicial review application. The OSC brought a cross-motion to quash the application as premature. Both motions were heard and dismissed by the court on December 5 2008.(6)
The appellants then moved for a stay before the OSC panel conducting the hearing. They argued that the OSC lacked jurisdiction to conduct the hearing because of a reasonable apprehension of bias arising from the chair's televised comments. On February 3 2009 the OSC dismissed the motion for a stay.(7) That decision was the subject of the first appeal before the divisional court.
The appellants then brought a fresh motion before the divisional court for a stay of the OSC proceedings, pending the outcome of the appeal. The court dismissed the motion for a stay.(8)
The OSC hearing was subsequently completed and a decision rendered on the merits on March 8 2010, in which the OSC found that the appellants had breached Ontario's securities laws.(9) That decision was the subject of the second appeal before the divisional court.
First appeal: reasonable apprehension of bias
The issue before the divisional court on the first appeal was whether the chair's comments led to a circumstance where the OSC's decision was 'infected' by bias in the legal sense, and whether any subsequent hearing would be similarly contaminated,(10) such that the proceedings against the appellants should be permanently stayed.
The dvisional court affirmed that the test to establish bias does not require a finding of actual bias. Rather, the question before the divisional court was whether the chair's comments would cause a reasonable person informed of the facts to conclude that the OSC had pre-judged the conduct of the appellants such that they did not receive a fair hearing.
The divisional court noted that there had been no suggestion of bias in the actions or statements of any of the three commissioners who conducted the hearing. Nor was there any evidence indicating that the chair had any communications with the OSC panel in respect of the investigation, hearing or any other aspect of the proceeding in which the appellants' activities were examined.
While the divisional court indicated that the chair's comments were inappropriate, the court found that they reflected the organisation and structure of the OSC as established by the Securities Act. The OSC investigates possible breaches of the Securities Act, its regulations and rules, and also conducts hearings in respect of allegations that result from its investigations. The divisional court held that these overlapping investigative and adjudicative functions do not give rise to a reasonable apprehension of bias per se, as long as the chair acts within the authority of the Securities Act.
The divisional court determined that it is within the chair's statutory authority to speak publicly on matters that may affect confidence in capital markets. Being interviewed for television or other media falls within the purview of this authority. Therefore, the divisional court held that in making the comments to the television interviewer, the chair was acting within his statutory authority.
In respect of the actual comments made by the chair, the divisional court found that they were general in nature and did not refer to any specific allegation made by OSC staff. Moreover, Section 3.5(4) of the Securities Act makes clear that any member of the OSC who is involved in an investigation cannot take part in any subsequent hearing, which affirms the separation of the investigatory function and the decision-making authority of the OSC. The divisional court held that this separation is further confirmed by the OSC's Charter of Governance Roles and Responsibilities, the mandate and make-up of the Adjudicative Committee, and the Guidelines for Members and Employees Engaging in Adjudication. The divisional court determined that a reasonable person informed of the facts would recognise the separation of the chair from the adjudicative function of the OSC, and would not conclude that as a result of the chair's comments, the OSC had pre-judged the conduct of the appellants such that they did not receive a fair hearing.
According to the divisional court, this reasoning was consistent with the decision in EA Manning Limited v Ontario Securities Commission,(11) in which the Court of Appeal for Ontario held that even if statements by a regulator relate to the matters which the regulator is considering, that in itself is not a basis for concluding that the regulator had pre-judged the matter. Moreover, even if the chair showed bias against a party, the divisional court found that that in itself would not disqualify the other commissioners from conducting the hearings.
The divisional court thus held that the chair's general comments removed him from the specific allegations considered in the hearing. The comments were not made in the context of the OSC's adjudicative function, from which the chair is separate. In any event, there was nothing to extend the allegation of bias to each and every other member of the OSC such that no proper hearing could be conducted. Thus, the divisional court found that there was no reasonable apprehension of bias.
The divisional court therefore dismissed the first appeal.
Second appeal: judicial review
The second appeal challenged the OSC's findings of misconduct against the appellants. In this appeal, the divisional court considered the issues of whether:
- the appellants had been denied natural justice and procedural fairness due to allegations of inadequate and late disclosure because of a lack of oral testimony of fact witnesses at the hearing;
- the OSC erred in its reliance on the reports and testimony of the receiver of Olympus;
- the OSC erred in finding that the appellants were the directing minds of Norshield;
- the OSC erred in finding that the appellants breached OSC Rule 31-505 in failing to deal honestly with investors; and
- the OSC erred in finding that the appellants intentionally misled OSC staff.
The divisional court determined that the OSC's decision was careful, comprehensive and complete. There was no basis on which any finding could be made that the appellants were denied a fair hearing by the OSC panel.
The divisional court held that the appellants could not complain that the investigation was incomplete. There was no requirement that the breadth of the OSC's investigation should satisfy the appellants. The appellants were responsible for their own defence and they chose to call no evidence.
The divisional court found no error in the OSC's reliance on the receiver's evidence, as the panel did not simply accept the receiver's conclusions, but examined the evidence to come to its own conclusions.
The divisional court did not consider it unreasonable for the OSC to find that the retail investors of Olympus were the appellants' clients, and that the appellants had breached Rule 31-505 in failing to deal fairly, honestly and in good faith with investors.
In concluding that the appellants were the directing minds of Olympus and the other Norshield companies, the OSC made findings of fact. The divisional court found no palpable and overriding error so as to justify overturning the OSC's findings of fact in this regard.
The divisional court found no error in the OSC's finding that the appellants had misled the OSC as they failed to disclose to OSC staff the existence of funds invested in non-hedged assets, which was misleading by omission under Section 122(1)(a) of the Securities Act.
The divisional court accordingly dismissed the second appeal.
The Court of Appeal for Ontario gave no reasons in denying the appellants' application for leave to appeal the decision of the divisional court. This is not an uncommon practice. The denial of leave, as a consequence, confirms the divisional court's finding that a reasonable apprehension of bias does not arise merely because the OSC's structure consists of overlapping adjudicative and investigative functions, as there are mechanisms in place to maintain the separation of the two branches. A party will, as a result, have difficulty taking advantage of comments made by a regulator to the media in order to justify a stay of proceedings on the ground of a reasonable apprehension of bias. As long as the comments do not exceed the speaker's authority as set out in the statute, and there is nothing which would extend the alleged bias to the other members of the organisation, a reasonable apprehension of bias will be difficult to establish in this context.
For further information on this topic please contact Norm Emblem or Rebecca Studin at Fraser Milner Casgrain LLP by telephone (+1 416 863 4511), fax (+1 416 863 4592) or email ([email protected] or [email protected]).
Endnotes
(1) Xanthoudakis v Ontario Securities Commission, 2011 ONSC 4685 (CanLII).
(2) Re Norshield Asset Management (Canada) Ltd (February 3 2009), OSC Decision, online: OSC www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20090203_norshield.pdf.
(3) Re Norshield Asset Management (Canada) Ltd (March 8 2010), OSC Decision, online: OSC www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20100308_rev-norshield.pdf.
(4) Re Norshield Asset Management (Canada) Ltd (August 6 2010), OSC Decision, online: OSC www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20100806_norshield-sanctions.pdf.
(5) RSO 1990, c S.5.
(6) Smith v Ontario (Securities Commission), 2008 Carswell Ont 7435 (Div Ct).
(7) Re Norshield Asset Management (Canada) Ltd (February 3 2009), OSC Decision, online: OSC www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20090203_norshield.pdf.
(8) Xanthoudakis v Ontario Securities Commission, 2009 CanLII 30146 (ON SCDC).
(9) Re Norshield Asset Management (Canada) Ltd (March 8 2010), OSC Decision, online: OSC www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20100308_rev-norshield.pdf.
(10) Xanthoudakis v Ontario Securities Commission, 2011 ONSC 4685 (CanLII) at para 4.
(11) 1995 CanLII 1706 (ON CA) at p7.