The order of the BC Securities Commission imposing the maximum administrative penalty against two securities brokers for breach of a prospectus requirement was restored. The standard of review applicable to the Commissioner’s order was reasonableness, and the focus should be on the reasonableness of the decision or the order, not on whether it was a tolerable deviation from a preferred outcome. If there was a rational basis for the Commissioner’s decision in light of the statutory framework and the circumstances, then the decision should not be disturbed.

22. June 2004 0

Cartaway Resources Corp. (Re) Executive Director of the British Columbia Securities Commission v. Hartvikson et al, [2004] S.C.J. No. 22, Supreme Court of Canada, April 22, 2004, McLachlin C.J. and Iacobucci, Major, Bastarache, Binnie, Arbour, LeBel, Deschamps and Fish JJ.

A group of securities brokers, including the Respondents Harvikson and Johnson (the “Respondents”), failed to disclose to investors a material change in a corporation’s business, entered into a private placement, which they split among friends and other brokers. Following investigation, the Appellant B.C. Securities Commission (the “Commission”) issued a notice of hearing against the brokers and firm involved in the private placement. Settlement agreements were entered into with all of the brokers and the firm with the exception of the Respondents. At the hearing, the Commission found that the Respondents breached the prospectus requirement of the B.C. Securities Act (the “Act”) and found that it was in the public interest to impose the maximum penalty of $100,000 under s.162 of the Act. On appeal, the Court of Appeal held that the penalty was unreasonable and substituted a penalty of $10,000 to each of the Respondents.

The Supreme Court of Canada allowed the appeal and restored the Commissioner’s order. The appropriate standard of review according to the pragmatic and functional analysis was reasonableness and not the more exacting standard of correctness. The reviewing court must therefore ask whether there was a rational basis for the decision of the Commission in light of the statutory framework and the circumstances of the case. Specifically, was it reasonable for the Commission to consider general deterrence in determining whether a sanction under s.162 would be in the public interest.

The Commission’s interpretation of section 162 of the Securities Act was reasonable. It was reasonable and appropriate for the Commission to consider general deterrence applied in respect of the Respondents’ conduct. While a specific breach of the Act is required to trigger the application of s.162, the penalty that the Commission imposes should take into account the entire context, as well as preservation of the public interest. General deterrence is both prospective and preventative in orientation, and it falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in capital markets.

The weight given to general deterrence will vary from case to case and is a matter within the discretion of the Commission. In this case, the commission weighed the aggravating and mitigating factors and determined an appropriate penalty. Appropriate weight was given to the settlements reached by the other members of the control group, and the Commission’s decision was based in part on the fact that the Respondents were the leading players and primary movers behind the control group’s deceitful conduct. Accordingly, the Court of Appeal erred by disregarding the Commission’s findings as well as the weight the Commission gave them. The weight that the Commission attributed to general deterrence and the settlement agreements was reasonable in the circumstances and should not be disturbed by the Court.

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