In Phillips v. Ontario Securities Commission, Justice Sachs of the Divisional Court upheld the Ontario Securities Commission's decision that the appellants, who were both registrants, defrauded investors by selling and overseeing sales of almost $19 million in securities while withholding certain financial information from investors.
The Commission also found that they made representations contrary to the Securities Act and failed to deal with their clients honestly, fairly and in good faith. They were ordered to disgorge all the proceeds realized from their misconduct, totaling over $16.5 million. The appellants challenged the fraud finding, the misrepresentation finding and the disgorgement order.
The appellants had obtained a report from Grant Thornton which contained significant information that could adversely affect the pecuniary interests of investors and which made a number of recommendations. Nevertheless, the appellants continued to raise capital for investment without disclosing the fact of the review by Grant Thornton or the report. The Court confirmed that it was reasonable for the Commission to make a finding of fraud on the basis that a reasonable person would regard the non-disclosure as dishonest, and taking into account that the appellants went ahead with the sale of the securities.
With respect to misrepresentation, the Court clarified that to establish a breach of s.44(2) of the Securities Act, it is not necessary that the investor to whom the statement was made relied on the statement in making his or her investment. All that is necessary is to establish that a reasonable investor would consider the statements relevant to his or her decision about whether to make the investment.
Finally, following a review of the case law and s. 127(1) of the Securities Act, the Court found that there is no limitation based on the individual's use of the funds obtained. Thus, the Commission had the authority to order disgorgement even though the amounts were not obtained by the appellants personally and were obtained by entities that were not named as respondents in the proceeding.
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