The British Columbia Court of Appeal (Court) recently released its decision in Davis v. British Columbia (Securities Commission) (Davis), overturning the decision of the B.C. Securities Commission (Commission) to impose a lifetime market ban on an individual for committing fraud pursuant to the B.C. Securities Act.
The decision is a strong rebuke of the Commission’s overly formulaic approach to sanctions, and marks the second time in the last year that the Court has found the Commission’s sanctioning regime to be unlawful.
Larry Davis was a British Columbia resident who had worked in investor relations for approximately 25 years. In 2016, Mr. Davis was found liable by a hearing panel of the Commission of fraud contrary to section 57(b) of the Securities Act for a false promise to sell his neighbour certain shares of a Nevada company that he had previously promoted in exchange for C$7,000. While Mr. Davis received the C$7,000, he did not, in fact, have any shares to sell, and instead used the money to cover various personal expenses.
At the sanctions hearing, the Commission ordered Mr. Davis to pay a C$15,000 administrative penalty and permanently prohibited him from participating in the securities market. In reaching its conclusion, the panel held that, while the amount of the fraud was relatively small, Mr. Davis’s conduct and “initial and ongoing deceit” was “properly characterized as falling within the most serious misconduct prohibited by the [Securities Act].” In determining that a lifetime market ban was appropriate, the Commission relied on past decisions involving fraud and applied the penalty formulaically, without consideration of Mr. Davis’s personal circumstances or any possible alternative sanctions. While Mr. Davis did not have any prior regulatory history, the Commission dismissed this as a mitigating factor and rejected his submission that proportionality was the overarching principle in determining appropriate sanctions.
Mr. Davis appealed both the liability and sanctions portions of the Commission’s decision. With respect to liability, he argued that his actions did not amount to fraud because he subjectively believed that he would obtain the shares that he had promised to sell sometime in the future. With respect to sanctions, Mr. Davis argued that the panel’s decision was unreasonable because it was predicated only on the fact that permanent bans had been generally imposed in other fraud cases, without any regard to the circumstances of the offence or the offender.
The Court dismissed Mr. Davis’s arguments on liability. However, it allowed the appeal with respect to sanctions, set aside the Commission’s decision to impose a lifetime ban on Mr. Davis and remitted the issue of appropriate sanctions back to the Commission for reconsideration.
In coming to its decision, the Court emphasized the fact that the Commission had failed to consider established criteria for determining sanctions and instead relied solely on past decisions in which fraud had resulted in a lifetime ban for the offender. In addition to noting that the Commission did not mention the evidence before it of Mr. Davis’s personal circumstances, the Court highlighted the importance of proportionality and need for the Commission to reserve its harshest penalties (such as lifetime bans) for only those cases in which lesser measures would be inadequate to protect the public interest. In this case, the Court held that Mr. Davis’s lifetime ban amounted to a “capital punishment” for his transgressions and was unreasonable in light of the Commission’s failure to consider Mr. Davis’s personal circumstances or any alternative sanctions.
Davis highlights the Court’s concern with respect to the Commission’s approach to sanctions and reminds the Commission that its discretion to impose sanctions must be exercised in accordance with settled principles of law and fundamental justice. Market participants should take comfort in this decision as it signals to securities regulators that they are required to consider all relevant factors when fulfilling their public interest mandate.