In Lines v. British Columbia (Securities Commission), 2012 BCCA 316 (“Lines”), the British Columbia Court of Appeal held that the British Columbia Securities Commission (the “Commission”) could not impose a “public interest” order pursuant to s. 161(6)(d) of the Securities Act, R.S.B.C. 1996, c. 418 (the “Act”) more onerous than an order made by a regulatory authority in a foreign jurisdiction.
The Appellants, Scott and Brian Lines (the “Lines”), became the subjects of a complaint filed by the United States Security Exchange Commission (“SEC”) for alleged infractions of U.S. securities laws. The complaint was settled when the Lines entered into settlement agreements with the SEC (the “Agreements”).
Significantly, the Agreements provided that the Lines were neither admitting nor denying the alleged infractions but would nevertheless disgorge certain funds, pay certain penalties, and refrain from trading in penny stocks on over-the-counter markets for a number of years. This restriction left the Lines free to continue trading on the main American exchanges.
The terms of the Agreements were ultimately incorporated into final judgments filed by consent in a New York court (the “Judgments”). The Judgments were discreet. They did not expressly state the nature of the SEC’s complaints against the Lines, or the reason why disgorgement and civil penalties were agreed to, nor did they explain why the Lines were required to refrain from trading only in penny stocks for the stated periods.
Some time later, the Commission issued a “reciprocal order” against the Lines pursuant to s. 161(6)(d) of the Act (the “Reciprocal Order”). The Reciprocal Order prohibited the Lines from trading in any securities for a number of years. This was a far more onerous result than provided by the terms of the Agreements which only prohibited the Lines from trading in penny stocks on over-the-counter markets.
The Commission relied only on the Agreements and the Judgments in making its determination under s. 161 of the Act that the Reciprocal Order was in the public interest.
The Lines appealed to the British Columbia Court of Appeal on various grounds, including that in the absence of evidence or admissions of wrongdoing, the Commission did not have an evidentiary basis to found a substantially more onerous order.
Section 161(1) of the Act provides that if after a hearing the Commission or the Executive Director considers it to be in the public interest, either of them may make various orders, including orders prohibiting a person from trading, acting as a director or officer of an issuer, engaging in “investor relations activities”, or disseminating information to the public.
In particular, s. 161(1)(b) of the Act permits the Commission or Executive Director to order that:
(i) all persons,
(ii) the person or persons named in the order, or
(iii) one or more classes of persons
cease trading in, or be prohibited from purchasing, any securities or exchange contracts, a specified security or exchange contract or a specified class of securities or class of exchange contracts …
In addition, s. 161(6) of the Act permits the Commission or Executive Director to make orders based on finding of contravention made by a court or securities regulatory authority in another jurisdiction:
The commission or the executive director may, after providing an opportunity to be heard, make an order under subsection (1) in respect of a person if the person
(d) has agreed with a securities regulatory authority, a self regulatory body or an exchange, in Canada or elsewhere, to be subject to sanctions, conditions, restrictions or requirements. [Emphasis added.]
The issue on appeal was whether, under s. 161(6)(d) of the Act, a settlement agreement in which wrongdoing was not admitted could found a substantially more onerous order than that made by a regulatory authority in a foreign jurisdiction.
The Lines’ principal argument was that, in accordance with principles of procedural fairness, s. 161(6)(d) of the Act should, in the circumstances in the case at bar, be interpreted to only permit orders that replicated or closely mirrored the undertakings given by persons who were the subject of complaints by foreign regulatory authorities.
Madam Justice Newbury, writing for the Court, applied a standard of reasonableness in reviewing the Commission’s decision and found that the material before the Commission, which did not include any finding or admission of wrongdoing on the part of the Lines by any regulatory authority, did not reasonably support the order of the Commission. In the Court’s view, the Commission had unreasonably “made the leap in logic from the fact that the Lines had consented to certain sanctions without admitting wrongdoing, to the conclusion that the public interest required that they be prohibited from trading in all securities in British Columbia.”
Although the Court found the Commission’s decision to be unreasonable, it held that the Commission could, if it determined it was in the public interest, make an order that “mirrored” the Agreement.
Interestingly, the Court concluded by noting that it was not deciding “that the Commission may never impose a sanction under s. 161(6)(d) that is materially more onerous than the terms of the agreement on which it is based”. Nevertheless, the Court stated that “justice as well as transparency and intelligibility require that the Commission have evidence or an admission of a defendant’s wrongdoing ‒ and of course that the defendant be in a position to challenge such evidence at a hearing ‒ before such an order could reasonably be made under s. 161(6)(d).”