The Lines brothers entered into a settlement with the SEC under which they agreed to disgorge $1.3 million in profits from alleged misconduct, paid civil penalties and undertook not to trade in penny stocks on certain platforms. The terms of the settlement were incorporated into final judgments filed with the Southern District in New York. As is the case in SEC proceedings (but not currently in Canada), the respondents did not admit or deny any of the underlying allegations of fact, and the settlement clearly stated that while it could have ‘collateral consequences’ elsewhere, it did not extend to trading in foreign securities on foreign exchanges. The BC Securities Commission (BCSC) subsequently used its power to make reciprocal orders and barred the Lineses from trading in any securities in British Columbia for a certain period of time. They challenged this on the grounds that the BCSC did not have a sufficient evidentiary basis for an order that was ‘substantially more onerous’ than those they agreed to in the States.
The BC Court of Appeal agreed that the BCSC had gone too far: Lines v British Columbia (Securities Commission), 2012 BCCA 316. The Lines settlements did not indicate why they were to disgorge funds or why the US ban extended to penny stocks, nor did it state whether the penalties were for alleged conduct that was intentional or merely negligent. The BCSC, in making a supposedly reciprocal order of ‘extremely wide sweep’, had ignored the fact that there had never been a determination that the Lineses had broken any laws; it was a ‘leap in logic’ to say that consent to sanctions without admitting wrongdoing made it necessary to bar the brothers from any kind of trading in British Columbia. In Madam Justice Newbury’s words, ‘The evidence relied on did not, and could not, justify the more onerous order’ that the BCSC had imposed.
[Link available here].