Within a year of the Supreme Court of Canada’s pronouncement, in the March 2008 New Brunswick (Board of Management) v. Dunsmuir decision, that the "reasonableness simpliciter" and "patent unreasonableness" standards for appellate review of administrative decisions should be consolidated into a single "reasonableness" test, the Alberta Court of Appeal has provided strong indication that this consolidation means more deference to the Alberta Securities Commission’s decisions when discharging its mandate to protect the investing public. In a series of decisions culminating with Alberta (Securities Commission) v. Lavallee, issued in February 2009, the Court of Appeal has confirmed that it will defer to the Commission not only on questions of fact and on questionsof law pertaining to securities law (its delegated area of expertise), but also on questions of evidence where procedural fairness is not in dispute. Corporations, directors, officers and promoters finding themselves before the Commission should heed these concluding words of the Court of Appeal in Lavallee: "A decision is only unreasonable if it is wholly unsupported by the evidence" [emphasis added].
At issue in the Lavallee matter were provisions of the Securities Act (the Act) that require advisors and sellers of securities to be registered, and issuers of securities to file a prospectus, with the Commission. Certain exceptions to these requirements exist under Multilateral Instrument
45-103 Capital Raising Exemptions, if securities are sold only to "accredited investors," a defined term that includes persons whose net income exceeds a certain threshold (accreditation category (l)) or who own realizable assets exceeding $1 million (accreditation category (k)).
Lavallee was a director, founder and significant shareholder of KCP Innovative Services Inc. (KCP). Common shares of KCP were sold to more than one hundred persons for aggregate proceeds to KCP of $1.5 million. Lavallee had never registered with the Commission pursuant to Section 75 of the Act, and KCP had not filed a prospectus pursuant to Section 110 of the Act. The Commission staff alleged that Lavallee had participated in distributing KCP shares by soliciting trades despite not being registered. While this would have been permitted if allthose persons who purchased KCP shares were accredited investors, Commission staff said that some were not and that others did not qualify under the accreditation category (l), whichthey had been instructed to declare on their subscription forms.
The Commission found that although the common shares had been distributed to investors in purported reliance on an accredited investor exemption under Multilateral Instrument 45-103, some of the investors did not qualify for the accredited investor exemption, and that as such Lavallee had engaged in illegal trades and distributions contrary to Sections 75 and 110 of the Act. The Commission reached this conclusion despite the evidence being unclear as to whether Lavallee himself had instructed investors to misrepresent themselves as accredited investors, and despite the evidence of certain investors being somewhat inconsistent and uncertain.The Commission, instead, noted the failure of Lavallee to testify (and address any such inconsistencies and ambiguities), and based its findings on what it described as the aggregateof the evidence.
Lavallee appealed on two grounds. First, he submitted that the inconsistencies in the evidence rendered it insufficient to support his conviction. Second, he submitted that there could not have been an illegal distribution to an investor who was actually an accredited investor, albeit one falling into exemption category (k) rather than category (l), which had been indicated on the completed subscription form.
The Court of Appeal dismissed the appeal. It commenced its review by observing, as it had in two of its 2008 decisions — Anderson, Re and Alberta (Securities Commission) v. Brost — that the Supreme Court of Canada’s decision in Dunsmuir supported the proposition that a "fresh standard of review analysis" was not necessary and that a plain reasonableness standard applied to both grounds of appeal.
Turning to the specific evidence, the Court of Appeal noted the Commission had not foundthat an illegal distribution had been made toany particular investor, but rather had found an illegal distribution based on all of the evidence. However, it did not discredit the Commission’s approach, and this effectively overcame Lavallee’s focused attacks on the sufficiency of the evidence in relation to particular investors. The result was that the decision turned on the evidence of all witnesses taken as a whole, even though in certain aspects the degree of Lavallee’s personal involvement was unclear. Among the findings relied upon were that Lavallee had recruited a marketing officer who gave improper instructions to investors, that he arranged and attended road shows where improper instructions were given to investors, that he failed to take steps to ensure subscriptions went only to accredited investors, and that he was "more than a mere bystander or volunteer in the solicitation of investors."
McCarthy Tétrault Notes:
While the weakness of the direct evidence impugning illegal distributions having been made to specific investors may, at first blush, appear to be striking, it must be borne in mind that the number of persons involved in promoting the distributions was extremely small, and that the evidence of the affected investors was similar in general terms. Had there been a greater number of promoters and more contentious evidence about what had taken place, it might not have been open to the Court of Appeal to uphold liability on such a generalized standard.
It is fair to observe that it is not new law to apply a standard of reasonableness to the appellate review of findings of fact made by an administrative tribunal. However, the Court of Appeal’s affirmation of the Commission’s conviction in Lavallee despite various evidentiary uncertainties, together with its concluding language about unreasonableness existing only where a decision is "wholly unsupported" by the evidence, on the heels of its decision months earlier in Brost, suggests that the consolidated reasonableness test may translate into more, rather than less, judicial deference to administrative decisions — particularly in a public interest context, such as decisions of Securities Commissions