The Appeals by three corporations and four individuals from findings of fraud and misrepresentation, and from sanctions imposed by the Securities Commission were dismissed where the Court held that the Commission was entitled to use interview evidence obtained during the investigative process

25. November 2008 0

Administrative law – Decisions of administrative tribunals – Securities Commission – Investigations – Stock brokers – Disciplinary proceedings – Penalties – Suspensions – Public interest – Judicial review – Hearings – Evidence – Interviews – Disclosure – Hearsay Evidence – admissibility

Alberta (Securities Commission) v. Brost, [2008] A.J. No. 1071, Alberta Court of Appeal, October 3, 2008, C.A. Fraser C.J.A., P.T. Costigan and J. Watson JJ.A.

This was an Appeal by Strategic Metals, its three directors, Capital Alternatives and Brost from two decisions of the Alberta Securities Commission (the “Commission”). The first decision held that the Appellants engaged in an illegal distribution of securities and the second decision imposed sanctions against them.

Brost was involved in developing Strategic, which was incorporated in 2005 to finance and acquire companies. Strategic was not a reporting issuer and issued no prospectus. Capital Alternatives, founded by Brost in 1999, marketed and sold Strategic shares in exchange for 5% of the money raised from investors. Capital Alternatives was not registered to trade in securities. Brost also served as CEO of Capital Alternatives. He was registered for a time as a salesperson of securities but was not registered as such during the relevant period. Strategic raised over $36,000,000, from selling its shares during the relevant period. Most of the money came from Alberta investors who were unsophisticated and relied on information in advertisements. Strategic invested the money raised in several ventures that provided no returns to its investors.

The Commission investigated, then made allegations that Strategic and the other Appellants made misrepresentations in the offering memoranda used to distribute Strategic securities, made false statements to Alberta investors and Commission investigators, engaged in unregistered trading, defrauded Strategic shareholders, and acted contrary to the public interest. The Commission ultimately ruled that the OM Exemption was not available for the distributions of Strategic securities and found that the offering memoranda contained defects so serious and pervasive that they fatally undermined the foundation of the OM Exemption. The Commission found that Capital Alternatives should have recognized the defects and the unavailability of the OM Exemption in concluding that it was responsible for the consequence that the trades and distributions in which it engaged were illegal. The Commission further found that all the Appellants had engaged in conduct that amounted to fraud on the investors.

The Commission imposed sanctions including a cease trading order for Strategic Securities, prohibitions and bans against Forrest, Regier, Weeks and Brost acting as directors or officers of issuers or trading in securities, a permanent ban against Capital Alternatives trading and securities, and administrative penalties against all the Appellants. The most significant sanctions were imposed against Brost because he had experience in the capital market and was the designer of the fraudulent scheme.

The Commission based its decisions on evidence obtained during the investigation, including interviews with Forrest, Weeks and Regier, and on the transcript of an interview of Brost conducted by a securities investigator in Washington. These individuals chose not to testify at the hearings. The decisions of the Securities Commission were appealed.

The Court held that the Appellants, having declined to challenge the evidence relied upon by the Commission during the hearing process, were precluded from arguing on Appeal that the evidence should not have been admitted as hearsay. The Court found that there was no issue with the use of the interview evidence being used inappropriately to incriminate the Appellants because it was used in the same regulatory proceedings in which it was obtained. These proceedings were administrative, not criminal in nature. The Court held that the Appellants had no privacy interest in the content of their interviews.

The Court held that the Commission’s conclusions regarding the fraud perpetrated by the Appellants were reasonable. The Court found that it was clear that the individual Appellants knew that there were defects in the disclosure made to investors and expected these defects to have a favourable effect on the investors’ willingness to give money to Strategic. Because Strategic acted solely through Forrest, Weeks and Regier, it was reasonable for the Commission to find that Strategic was also responsible for the fraud. The evidence supported the conclusion that, on the balance of probabilities, Brost and his companies were also responsible.

The Court held that the Commission’s approach in imposing sanctions to set an example was not an error. The fact that the sanctions were punitive did not mean that they did not also serve a valid regulatory purpose.

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