Investigations; Stock brokers - Professional misconduct / conduct unbecoming - Disciplinary proceedings - Freezing of bank accounts - Public interest; Judicial review - Compliance with legislation - Jurisdiction - Standard of review

Zhu v. British Columbia (Securities Commission)

The Court of Appeal dismissed an appeal by Zhu from a British Columbia Securities Commission decision refusing to set aside an order freezing certain bank accounts of a company where Zhu was the sole director. The company was alleged to have breached provisions of the Securities Act, R.S.B.C. 1996, c.418, by operating a cash rebate program which was in substance an investment contract and security, without a prospectus. As well, the rebate program was alleged by the Executive Director to be, in effect, a Ponzi scheme. The Court, in dismissing the appeal, held that the Commission had a very broad discretion in determining whether Zhu had established that revocation of the freeze order would not be prejudicial to the public interest. The Commission's approach was clearly within its mandate and did not lend itself to guidance by way of tests, mandatory criteria or other guidelines that would tie the Commision's hands. The Commission's decision not to revoke the freeze order was reasonable.

[2013] B.C.J. No. 1051

2013 BCCA 248

British Columbia Court of Appeal

J.E. Prowse, D.M. Smith, K.E. Neilson JJ.A.

May 23, 2013

The appellant Zhu was the sole director of Bossteam Inc., a company which offered internet advertising services through its website and a cash rebate program offering advertisers cash rebates by viewing advertisements a number of times daily. The Executive Director of the Commission alleged the cash rebate program was in substance an investment contract and security within the meaning of the Securities Act, R.S.B.C. 1996, c.418, and the appellant illegally sold the investment in BC without a prospectus. Bossteam also offered 8 million shares for sale on its website, stating the shares would be tradeable to a company platform, without issuing a propectus. The Executive Director also alleged that the cash rebate program and membership program operated, in effect, a Ponzi scheme, and the appellant illegally and fraudulently raised $14 million from 4,900 investors. The Commission ordered an investigation into the allegations and issued a freeze order in respect of certain bank accounts belonging to Bossteam. Section 151 of the Securities Act provides the Commision with discretion to freeze any funds or other property if it has ordered, or proposes to order, an investigation into that person.

At the same time, the Commission also issued temporary orders and a notice of hearing. These orders prohibited the appellant from trading in certain investments and from engaging in certain investor relations activities relating to Bossteam. The Executive Director later applied for an extension of the temporary order and the appellant also applied for revocation of the freeze order. The Commission made a ruling dismissing both the Executive Director's application for extension of the temporary order, and appellant's application to revoke the freeze order. The appellant sought and was granted leave to appeal the Commission's decision refusing to vacate the freeze order.

On appeal, the Court noted it was common ground that the Commission's interpretation and application of its home statute was entitled to deference for which the standard of review is one of "reasonableness". The appellant argued that the Commission's refusal to revoke the freeze order was based solely on the fact there was an investigation under the Act, and that the minimum criteria for making a freeze oder under s.151, and refusing to revoke a freeze order under s. 171, must logically be the same: a prima facie case of breach of the Act; a causal link between the breach and the monetary remedy; and proportionality between the amount subject to the freeze order and the potential amount of any monetary remedy. The appellant also submitted that if these criteria were applied, then the Commission's refusal to revoke the freeze order could not stand. In short, the exercise of the Commission's discretion in refusing to revoke the freeze order was arbitrary and, as such, unreasonable.

In response, the Executive Director argued it was unnecessary and unwise for the Court to embark on setting a test, or a list of criteria, which the Commission must apply in either s.151 or s.171 of the Act. A failure of the Commission to make a freeze order unless and until a prima facie case of breach was established, or until a correlation between the alleged breach and the extent of the monetary remedy had been determined, could almost instantly result in the disappearance of any funds which might otherwise be available to compensate members of the public harmed by the misconduct of the parties being investigated.

The Court noted in this case there was an admitted breach of s.61 of the Act, and evidence of other breaches, albeit not to the standard of a prima facie case. There was also evidence linking the admitted and alleged breaches to the frozen accounts and it was apparent that proof of the breaches could give rise to a substantial monetary remedy. The Court agreed that the approach adopted by the Commission and reflected in its decision was clearly within its mandate and does not lend itself to guidance by the Court by way of tests, mandatory criteria, or other guidelines that would tie the hands of the Commission. In all of the circumstances, having regard to the breadth of the Commission's mandate to act in the public interest in the area of its expertise and the broad discretion available under s.171, the Commission's refusal to revoke the freeze order was reasonable. Thus, the appeal was dismissed.