The Scope of “Will Say” Statements: In the Matter of BDO Canada LLP

In BDO Canada LLP (Re), 2020 ONSEC 2, a panel (the Panel) of the Ontario Securities Commission (OSC) considered a motion brought by Staff alleging that BDO Canada LLP (BDO) failed to meet the standard imposed by the Ontario Securities Commission Rules of Procedure and Forms (Rules) in the preparation of its witness summaries. The motion is part of a larger proceeding against BDO related to alleged breaches of the Securities Act, RSO 1990, C S.5 in connection with audits conducted by BDO. As a part of pre-hearing disclosure, Staff and BDO exchanged summaries of the anticipated evidence of witnesses that each party intended to call to testify at the merits hearing.

Staff cited two main deficiencies in BDO’s witness summaries. Firstly, all nine of the witness summaries used the words “including, but not limited to” when describing the anticipated evidence of the witness. Further, for the eight witnesses who were interviewed by Staff during the investigation, the witness summary stated that the witness would testify in a manner that is “broadly consistent with” that witness’ earlier testimony. Secondly, Staff submitted that the witness summaries did not properly identify the documents to which the witness is expected to refer.

While the Panel acknowledged some deficiencies in the witnesses statements, the motion was ultimately dismissed, with the Panel determining that the deficiencies did not rise to the level necessary to conclude, ahead of the merits hearing, that they failed to comply with Rule 27(3). The Panel noted that witness summaries are not typically provided to a panel unless there is a specific need to review them in response to an allegation that a witness has exceeded the scope of what was disclosed in the summary.  It is otherwise difficult to assess the adequacy of a witness summary without the benefit of witness testimony at a merits hearing against which to compare.

Here, the Panel noted that of the eight individuals interviewed by the OSC, the witness summaries incorporated by reference the transcripts of those witnesses’ interviews. BDO’s counsel acknowledged during oral argument that the words “including, but not limited to” with respect to the witnesses’ expected testimony were “largely nominal” and of no real value.  The Panel indicated that, as a result, the substance of those witnesses’ testimony would be limited to whatever substance may be found in the transcripts.

As it relates to the identification of documents to which the witnesses were expected to refer, the witness summaries identified “the hearing brief of BDO, which is expected to include, among other documents, BDO’s Audit Working Papers and e-mail correspondence relating to the audits in question”.  The Panel determined that it was illogical and of no assistance for BDO to refer to a hearing brief which did not yet exist.  Accordingly, BDO’s witness summaries would be effectively read to refer to BDO’s Audit Working Papers and e-mail correspondence.  While Staff contended that BDO’s description was overly broad given the expansive scope of discovery, the Panel declined to order further and better witness summaries, reasoning that it would be difficult for the Panel to determine how the list of documents ought to be narrowed.  However, the Panel did observe that BDO may face cost consequences if the hearing panel determines that BDO’s choice not to narrow the list of documents referred to in the witness summaries unnecessarily lengthened the proceedings.

Only time will tell whether BDO’s witness summaries comply with Rule 27(3) or whether they are too perfunctory to properly disclose the substance of testimony that BDO’s anticipated witnesses seek to give.

The author would like to thank Nazish Mirza, articling student, for her contribution to this article.

Ding-Dong Dunsmuir is Dead: What Minister of Citizenship and Immigration v. Vavilov Means for the Ontario Securities Commission

The decision of the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v. Vavilov (2019 SCC 65) and its companion decision in Bell Canada v. Canada (Attorney General) (2019 SCC 66), both released on December 19, 2019, breathe new life into the statutory right of appeal contained in section 9 of the Ontario Securities Act, R.S.O. 1990, c. S. 5.  Section 9 allows a person or company directly affected by a final decision of the Ontario Securities Commission (OSC) to appeal to the Divisional Court.  Following the decisions in Vavilov and Bell Canada, such appeals will no longer be reviewable on a deferential reasonableness  standard.

The decisions also signal that even where the reasonableness standard does apply, the court’s review must entail a “robust” evaluation of the tribunal’s decision.

The Dunsmuir Regime

Beginning with the decision of the Supreme Court of Canada in Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557 Canadian courts have given decisions of provincial securities commissions a high degree of deference even in relation to the interpretation of the regulators’ home statutes, notwithstanding the existence of statutory rights of appeal and the absence of a privative clause.  Courts “looked past” appeal clauses in securities legislation because securities regulators were perceived to have greater relative expertise as it related to matters of securities law.

The decision in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190 and its subsequent interpretation by the courts put the nail in the coffin for meaningful review of decisions of administrative tribunals like the OSC, by applying a deferential reasonableness standard of review to both judicial review and appeal of decisions of such tribunals, except in exceptional circumstances involving true questions of vires or jurisdiction, general questions of law of central importance to the legal system as a whole, or questions related to the jurisdictional boundaries between two administrative bodies.

The application of Dunsmuir deference and the reasonableness standard of review effectively rendered OSC decisions appeal proof.

Impact of Vavilov

The Vavilov decision is important for two primary reasons:

  • It sets out a revised framework for determining the standard of review of the merits of administrative decisions (other than review related to a breach of natural justice and/or the duty of procedural fairness) that clearly distinguishes between reviews and statutory rights of appeal; and
  • It clearly articulates how review on a standard of reasonableness should proceed.

Presumed Application of the Reasonableness Standard

Vavilov dictates that analysis of the applicable standard of review begins with a presumption that a deferential reasonableness standard is the applicable standard in all cases, including with respect to questions related to the interpretation of an administrative decision maker’s enabling statute. Reviewing courts should derogate from that standard only where required by a clear indication of legislative intent, either:

  • Where the legislature explicitly specifies the standard of review or there is a statutory right of appeal; or
  • Where the rule of law requires that the standard of correctness to be applied for certain types of legal questions, namely:
  • constitutional questions;
  • general questions of central importance to the legal system as a whole; or
  • questions regarding the jurisdictional boundaries between two or more administrative bodies

The Court left open the possibility that new categories could be recognized as requiring a derogation from the application of the reasonableness standard. However, jurisdictional questions are no longer to be treated as a distinct category attracting review using a correctness standard.

Statutory Appeals are to be Determined Using Appellate Standards of Review

Significantly, the existence of a statutory appeal mechanism (like section 9 of the Ontario Securities Act) rebuts the presumption that a reasonableness standard applies and signals the application of appellate standards of review, to be determined according to the nature of the issues on appeal.

Therefore, where a court is hearing an appeal from an administrative decision, it must apply the standard of correctness to questions of law, and the standard of palpable and overriding error for questions of fact and questions of mixed fact and law with no readily extricable legal questions.

Accordingly, in a statutory appeal from a decision of an OSC hearing panel, the reviewing court will determine questions of law, including questions of statutory interpretation and those concerning the scope of a decision maker’s authority, on a correctness standard.  This represents a welcome and marked change from Dunsmuir and opens the door to greater interference by the Divisional Court in the determination of questions of law by OSC panels.

What the Reasonableness Standard Entails: Not a Rubber Stamp

In Vavilov the Supreme Court offers a clearer articulation of what the reasonableness standard entails:

  • Review on a reasonableness standard is intended to be “robust”. It is not a “rubber stamping” process or a means of sheltering administrative decision makers from accountability.
  • The requirements of the duty of procedural fairness and whether it requires a decision maker to give reasons for its decision will impact how a court conducts a reasonableness review.
  • The focus of a reasonableness review will be on the decision actually made by the decision maker, not on the conclusion the court itself would have reached. It includes both the decision-making process and its outcome: “a reasonable decision is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker”.
  • Reasonableness is a single standard that accounts for context. What is reasonable in a given situation will depend upon the constraints imposed by the legal and factual context of the decision under review.
  • Formal reasons for a decision should be read in light of the record and with sensitivity to the administrative setting in which they were given:
  • Written reasons should not be assessed against a standard of perfection;
  • Courts should pay “respectful attention” to the application by decision makers of specialized knowledge and “demonstrated expertise”; and
  • The reviewing court should consider the history and context of the proceedings in which the decision was rendered, including the evidence before the decision maker, submissions of the parties, publicly available policies informing the work of the decision maker, and past decisions of the administrative body.
  • However, where reasons contain a “fundamental gap” or reveal “an unreasonable chain of analysis”, even if the outcome could be reasonable under different circumstances, it is not appropriate for the court to fashion its own reasons to buttress the administrative decision, and the decision will generally fail to meet the requisite standard of justification, transparency and intelligibility.
  • A reasonable decision is one that is (1) based on an internally coherent reasoning and (2) justified in light of the legal and factual constraints that bear on the decision. Relevant factors in evaluating whether a decision is reasonable will include the governing statutory scheme, other relevant law, principles of statutory interpretation, the evidence before the decision maker and facts of which it may take notice; the parties’ submissions; past practices and decisions of the administrative body; and the potential impact of the decision on the party to which it applies.
  • Reasonableness review “does not give administrative decisions makers free reign in interpreting their enabling statutes”.  The governing statute will always act as a constraint on administrative decision makers. Although a decision maker’s interpretation of its statutory grant of authority is generally entitled to deference, “the decision maker must nonetheless  properly justify that interpretation”.
  • Whether an interpretation is justified will depend on the context including the language in the legislation describing the limits of the decision maker’s authority. Where the legislature has used broad, open-ended or highly qualitative language like “in the public interest”, it contemplates that the decision maker is to have greater flexibility in interpreting that language.
  • Depending on the statutory language chosen by the legislature, questions relating to the scope of a decision maker’s authority may support only one interpretation of the scope of an administrative decision maker’s authority or more than one such interpretation.
  • Minor missteps should not result in the decision being overturned. Any shortcomings in the decision must be “sufficiently central or significant” to render the decision unreasonable.

This explanation of what review on a reasonableness standard should involve is unlikely to be of much significance to parties to proceedings before the OSC given the existence of a statutory right to appeal decisions rendered by it that are final.  In general, judicial review of preliminary or interlocutory decisions is discouraged by the courts. Further, the Court specifically noted that the framework for review of decisions on the merits set out in Vavilov does not apply to reviews relating to breach of principles of natural justice or the duty of procedural fairness.


As a result of Vavilov, we anticipate that appeals of OSC decisions to the Divisional Court, which will now be governed by standards of appellate review rather than Dunsmuir reasonableness, will likely increase in frequency.  In theory, the odds of success on appeals grounded in alleged errors of law should also improve.

Disclosure of evidence by the Crown in electronic format needs to be organized and accessible

In a judgment released on December 10, 2019, the Court of Quebec, Criminal and Penal Division, in R. v. Morris, 2019 QCCQ 7635, confirmed that when the Crown chooses to disclose its evidence in a criminal or regulatory proceeding in an electronic format, it has a duty to organize the evidence and format it in a way that makes it accessible to the defendant.

In this case, in connection with alleged breaches of the Tax Administration Act, the Crown disclosed most of its evidence – roughly 50,000 items – in electronic format, on CDs, DVDs and USB keys, through six successive waves.

The Defendant complained that this electronic disclosure was not organized and came without any search engine or software allowing for searches by keywords or by field or even allowing the identification of duplicates as between waves of disclosure. The Defendant argued that his right to full answer and defense protected by Section 7 of the Canadian Charter of Rights and Freedoms was infringed as a result and sought an order compelling the Crown to redo its disclosure so that it would be accessible.

The Court held that any sizeable disclosure by the Crown of evidence in an electronic format must be organized and must include a search tool allowing the Defendant to:

  • search the entire disclosure at once (even if there is more than one wave of disclosure),
  • to do searches by keywords or by field such as date, author, recipient, subject; and
  • maintain the links between documents and their respective attachments or, in other words, allow for the identification of families of documents.

In closing, the Court mentions that on the eve of 2020, the Crown must provide the necessary tools associated to the volume of evidence disclosed in an electronic format. Failure to do so can, as in this case, breach a Defendant’s right to full answer and defence and could compromise the holding of a trial within reasonable delays.

IIROC’s New Reporting Requirements for Cybersecurity Incidents

New Reporting Requirements

On November 14, 2019, the Investment Industry Regulatory Organization of Canada (IIROC) amended its Dealer Member Rules (the Rules) to address reporting of cybersecurity incidents. The amendment, which takes effect immediately, requires all investment dealers regulated by IIROC to report all cybersecurity incidents.

The Rules define a “cybersecurity incident” as “any act to gain unauthorized access to, disrupt or misuse a Dealer Member’s information system, or information stored on such information system, that has resulted in, or has a reasonable likelihood of resulting in:

(i) substantial harm to any person

(ii) a material impact on any part of the normal operations of the Dealer Member,

(iii) invoking the Dealer Member’s business continuity plan or disaster recovery plan, or

(iv) the Dealer Member being required under any applicable laws to provide notice to any government body, securities regulatory authority or other self-regulatory organization.”

IIROC acknowledged that it chose a definition broad and flexible enough to capture a wide variety of incidents and to be inclusive of business models.

The newly amended Rules stipulate that cybersecurity incidents must be reported to IIROC in two phases, as follows:

  1. The first phase mandates that following an incident, a report must be submitted within three days. The report must describe the incident, including the date of the incident, when it was discovered, a preliminary risk assessment, an outline of what steps have been taken and a contact for IIROC to follow up with.
  2. The second phase requires an incident investigation report to be submitted within 30 days. This report must provide a more detailed account assessing the cause and scope of the incident. It should include the steps taken to mitigate any risk of harm as well as remediate any harm done. Dealer Members should also include a description of how they will better prepare for a future incident.

The proposed amendments were first released in April 2018 for public consultation before approval by the Canadian Securities Administrators. As part of the public consultation, Dealer Members raised concerns that the reported information would be not kept confidential. IIROC has addressed this concern by ensuring Dealers that all reported incidents will only be shared “on an anonymous and high level basis” to spread awareness of known threats and keep other Dealers vigilant.


According to IIROC, the amendments are intended to respond to increasingly frequent and sophisticated cybersecurity attacks. IIROC expects that mandatory reporting will result in the following key benefits:

  • enable IIROC to better support and advise dealers during a cybersecurity incident;
  • spread awareness of known issues and potential risks in a timely manner to share best practices, mitigate harm, and better prepare other Dealers; and
  • allow IIROC to gain more information for analysis, which in turn would improve preparedness, integrity and confidence in the industry.

The amendments are not surprising given the increased attention placed on cybersecurity over the past few years by IIROC, the Canadian Securities Administrators, the Mutual Fund Dealers Association, and other regulators and industry participants.  For example, in a survey of investment firms conducted by IIROC in 2018, it was discovered that:

  • an annual cybersecurity training had been implemented by 82% of investment firms surveyed, compared with 56% in 2016;
  • cybersecurity response plans had been implemented by 72% of investment firms surveyed, compared with 53% in 2016; and
  • as a precursor to entering into a contract with another party, 94% of investment firms surveyed are now evaluating cybersecurity risks, compared with 70% in 2016

As cybersecurity becomes an increasingly hot button topic, the implementation of mandatory reporting rules is IIROC’s next step in enforcing strong cybersecurity practices in the investment industry.

For those interested in learning more, IIROC has also released a notice answering Frequently Asked Questions on the amendments.  IIROC’s previously published Cybersecurity Best Practices Guide and Cyber Incident Management Planning Guide provide additional guidance on the topic.

Trust and transparency: New guidance from CSA regarding enhanced disclosure of conflicts of interest in cannabis M&A

Trust and transparency have been challenging in the cannabis industry: whether related to product trust and transparency or to public disclosure of conflicts of interest and the need for trust and transparency has not gone unnoticed by securities regulators. In reviewing disclosure relating to M&A and other significant corporate transactions by cannabis issuers, the Canadian Securities Administrators (CSA) suggested that there was inadequate transparency and disclosure of financial and other interests.

For the full article, please click on the following link:


White Collar Criminals Beware – BC strengthening Securities Commission investigation and enforcement powers

On October 21, 2019, the BC provincial government announced sweeping and significant changes to the BC Securities Act which are intended to give the BC Securities Commission (BCSC) the strongest powers in the country to impose tougher consequences for wrongdoers.

Bill 33-2019, the Securities Amendment Act, 2019, sets out over 100 proposed amendments, many of which are new to securities regulators in Canada.  These include:

  • expanding the BCSC’s investigative powers;
  • broader powers to collect financial sanctions when there are assets to collect, including enhancements to the current ability to freeze property and new measures, such as seizing registered retirement savings plans and the power to authorize investigations into property ownership or property transactions that may have occurred to avoid property being claimed under an enforcement order;
  • mandatory minimum jail sentences for certain types of securities fraud, including for people convicted of significant offences multiple times or where the fraud exceeds a specified value;
  • increased penalties for certain types of misconduct;
  • new prohibitions on false or misleading statements; and
  • tighter rules around promotional activities.

The amendments also add whistleblower protection for employees, establish a regulatory regime for over-the-counter derivatives, and provide the ability to regulate benchmarks which is consistent with the framework already in place in other jurisdictions including Alberta and Ontario.

This update is the latest step in the BC government’s campaign against white collar crime.  Measures earlier this year included a review of money laundering in real estate, legislation to end hidden ownership in corporations and real estate, and the establishment of a working group with the federal government on tax fraud and money laundering.

The Securities Amendment Act, 2019 received first reading on October 21, and will come into force by regulation.

Dismissal of damages claim based on AMF press release announcing filing of market manipulation charges

In June 2013, the AMF laid two penal charges against Mr. Forget, the president and CEO of Clemex Technologies, a public company, alleging that he would have manipulated its stock close to five years earlier in 2008. A few weeks later, the AMF published a press release announcing the filing of the charges and specifying that “its investigation had revealed that the president and CEO conducted securities transactions in a bid to boost the market price of the securities” of Clemex.

The AMF press release did not specify that the trades at issue would have been executed close to five years earlier, that the value of the trades was less than $3,000 and that the investigation had been completed in the Fall of 2010.

Mr. Forget was ultimately acquitted of the charges.

Mr. Forget sued the AMF for intentionally, unlawfully and maliciously causing harm to his reputation of $225,000 by the issuance of the AMF press release. Mr. Forget argued that the law did not authorize the AMF to issue such a press release, that there was no valid reason to have issued it and that the AMF’s various immunities from prosecution should not afford it any protection against his claim.

On August 20, 2019, the Quebec Superior Court dismissed the damages claim in Forget c. Autorité des marchés financiers, 2019 QCCS 3513, holding that:

  • the law does not limit the steps that can be taken by the AMF in discharging its mission of protecting investors and the capital markets;
  • the issuance of a press release announcing the laying of penal charges is a proper tool in its toolbox;
  • as the issuance of a press release is an act performed in the exercise of the AMF’s functions, it is only if there was a showing of bad faith or gross negligence on the part of the AMF that would prevent the operation and protection of its legal immunities;
  • in this case, it was legitimate for the AMF to inform the public that the securities regulator had reasonable grounds to believe that an officer of a public company had manipulated the stock of his company, an infraction which it considers to be serious regardless of the amount involved;
  • the contents of the press release was factually accurate and its language and tone were neutral.

As Mr. Forget failed to show that the AMF had acted in bad faith, had been grossly negligent or had deliberately sought to defame him, the AMF was protected from prosecution by its immunities and the claim was dismissed.

Stung By Deceit: Re Natural Bee Works Apiaries Inc.

On July 3, 2019 the Ontario Securities Commission (“OSC”) released its decision in Re Natural Bee Works Apiaries Inc., 2019 ONSEC 23 (“Natural Bee”).   Natural Bee provides useful guidance concerning proof of falsity and participation in a fraudulent scheme under section 126.1(1) of the Ontario Securities Act (the “Act”).


In Natural Bee, OSC Staff alleged that Natural Bee Works Apiaries Inc. (“NBW”), Rinaldo Landucci (“Landucci”), its sole director, and Tawlia Chickalo (“Chickalo”), an employee of NBW who was at one point identified as its President, committed breaches of the Act including engaging in a course of conduct relating to securities that they knew or ought reasonably to have known perpetrated a fraud, and making misleading statements in marketing materials.  In addition, Chickalo was alleged to have traded securities of NBW without registration and without a prospectus or a prospectus exemption.

OSC Findings

At the conclusion of a six day hearing, the Hearing Panel (the “Panel”) determined that Staff had succeeded in proving all of its allegations.

Chikalo was found to have sold shares of NBW, a company “apparently” engaged in the sale of bee-related products, to friends and persons to whom she had sold beeswax candles.  Chickalo prepared marketing materials designed to induce persons to invest in shares of NBW which repeated false information that had been provided to her by Landucci.  Chickalo undertook no inquiries whatsoever into the veracity of those  statements, which were characterized by the Hearing Panel as involving “extravagant deceit”.  Further, funds from the sale of the shares totaling $291,250 were transferred to bank accounts controlled by the respondents.  Most of that money was used for personal expenditures or withdrawn in cash.

The decision is noteworthy for three reasons.

First, the Panel concluded that even though Staff did not adduce evidence to refute the truth of statements made in the NBW marketing material, for example that NBW would be launching on NASDAQ with a “lowest launch value” of $4 a share, it was open to draw an inference that the statements were false.  Applying its expertise as a specialized securities tribunal, the Panel concluded that the claims were “baseless”.  Further, no evidence was submitted by the respondents to support the truth of the statements.

Second, the Panel found that Chickalo had breached the fraud provision of the Act on the basis of willful blindness and/or recklessness.  In this case, Landucci made false statements to Chickalo in order to lure her into repeating such statements to investors in the course of her capital-raising role.  Although Chickalo lacked actual knowledge of Landucci’s fraudulent scheme, she was willfully blind about whether Landucci’s statements were true.  Chickalo simply accepted them at face value and composed detailed solicitation materials that reflected these false claims that were designed to make investing in NBW seem like a “sure bet”.  The Panel concluded that Chickalo reasonably ought to have known that these statements were false and thereby found that she had participated in the fraudulent scheme.

Finally, relying upon prior OSC decisions, the Panel applied the “Kienapple” principle which stands for the proposition that the same misconduct should not form a basis for separate overlapping contraventions.  The Panel determined that the principle applied equally in the OSC’s securities regulatory context and declined to find violations of other provisions of the Act given its finding of fraud.


The OSC released its decision on sanctions and costs on September 25, 2019.  Pursuant to 127(1) of the Act, the OSC ordered that the respondents:

(a) cease trading or acquiring any securities or derivatives (with a few exceptions);

(b) pay an administrative penalty of $650,000 to the OSC ($150,000 to be paid by Chickalo);

(c) disgorge $267,203 to the OSC ($32,281 to be disgorged by Chickalo); and

(d) pay $267,806.59 in costs to the OSC ($80,341.98 to be paid by Chickalo).

The OSC Panel did not view Chickalo’s lack of actual knowledge or self-proclaimed “inexperience in capital-raising activities” as a substantial mitigating factor.  Chickalo had played a “supporting but significant” role in Landucci’s fraudulent scheme.  The apportionment of the monetary sanctions was reflective of that sentiment.


  • In appropriate circumstances, the OSC will rely upon its specialized expertise to draw inferences from the evidence even in the absence of proof of a particular fact.
  • Reckless or willfully blind conduct may be sufficient to establish a breach of the fraud provision of the Act.
  • The Kienapple principle may apply in the securities regulatory context such that the same misconduct does not form the basis for separate overlapping contraventions.


The authors would like to thank Jessica Silverman, articling student, for her contribution to this article.

Alberta Securities Commission secures restitution for Lutheran Church congregants

Two ordained ministers are among the five named individual Respondents who have settled with the Alberta Securities Commission (the Commission) in Re Lutheran Church-Canada, the Alberta-British Columbia District, 2019 ABASC 140.  The individual Respondents were all involved in investment funds run by the Lutheran Church-Canada, Alberta-British Columbia District (the District), which became insolvent in 2015.  The individual Respondents admitted that they authorized statements in promotional literature from 2008 to 2014 about the investment funds that they knew or ought to have known were misleading contrary to section 92(4.1) of the Alberta Securities Act (the Act).

The Funds

The District operated two funds, the Church Extension Fund and the District Investment Fund (collectively, the Funds), which were used to help build schools and churches.  The Church Extension Fund was used by the District to invest in “faith-based developments”.  The District Investment Fund offered its investors registered investments, which provided tax efficiencies though RRSP, RRIF and TFSA accounts.

In the 1990s, the District began loaning substantial amounts of money to support the development of a large seniors’ housing complex.  In 2005, the District incorporated EnCharis Community Housing and Services (ECHS) to hold and manage this development.  By 2009, approximately $49 million of the approximately $78.8 million raised in the Church Extension Fund was loaned in ECHS.  However, the ECHS was experiencing substantial financial difficulties.  In 2015, the financial difficulties faced by ECHS resulted in insolvency for itself and for the Funds.

Misleading Investors

The District continued to promote the Funds by emphasizing, among others, the “partnership between investors and congregations to share the Good News of Jesus Christ”.  The Respondents failed to inform investors that a substantial portion of the Funds was invested in mortgages with the ECHS and that the ECHS had defaulted on its principal payments in 2007, 2008 and 2009.  The District also received an auditor’s opinion in 2012, which stated that certain assets were overvalued and that an impairment write-down was necessary in respect of the District’s financial statements.  However, the District did not inform investors of the opinion until 2014.  Despite knowing the financial difficulties that the Funds faced, the District only stopped soliciting new investments in March 2014, mere months before the Funds collapsed into insolvency.

The Settlement

The District and the District Investment Fund admitted to making statements which they knew or ought to have known did not state all of the facts required to be stated to make the statements not misleading in violation of section 92(4.1) of the Act.  The individual Respondents each, as a consequence of his position on the Board, with the District, and with the District Investment Fund, authorized, permitted, or acquiesced in the above-noted breach of the Act.

On September 11, 2019, the individual Respondents agreed to pay a total of $500,000 to investors (the Settlement Funds) and $100,000 to the Commission for costs.  The Settlement Funds will be distributed to investors through the same distribution scheme which was imposed on the District in a parallel Companies’ Creditors Arrangement Act proceeding.  The Settlement Funds will help make up for the anticipated shortfall from the District’s CCAA proceeding of around $27 million.

Further, the individual Respondents and the District undertook to permanently refrain from trading in or purchasing securities; acting as a registrant, investment fund manager or promoter; advising in securities or exchange contracts; and acting in a management or consultative capacity in connection with activities in the securities market.

Some of the investors were unsophisticated congregants investing for retirement.  Settlements such as this are necessary to remind those involved in securities that there is a high standard for timely and accurate disclosure, regardless of context.

The authors would like to thank Tom Sutherland, articling student, for his contribution to this article. 

Alberta Court of Appeal considers an investment scheme

The Alberta Court of Appeal has provided helpful analysis relating to personal liability of actors in investment schemes: personal liability of principals and claims under the Securities Act.


Charles Ryan promoted a plan to develop land through various corporate vehicles. Markus Abt invested $800,000 after speaking with an investment advisor with Sun Life. Mr. Abt believed he would receive 70% return on the investment and monthly payments of $2,600.

When the developer corporation became insolvent, the Abts sued numerous people involved in the investment. Prior to trial, the Abts settled with Sun Life for $360,000.

The trial judge found Mr. Ryan and several other defendants liable for the Abts’ losses. The trial judge held that Mr. Ryan was liable for negligent misrepresentation. Mr. Ryan appealed.

Personal liability for corporate acts

While the trial judge found Mr. Ryan should be personally liable in tort for negligent misrepresentation, the Court of Appeal did not find it necessary to come to a “definitive conclusion” on this issue. However, the Court of Appeal noted that the “circumstances here may well be sufficient” to meet the test for Mr. Ryan’s personal liability.

The circumstances under which a corporate officer will be personally liable for the corporation’s misrepresentations is noted in Blacklaws v. Morrow, 2000 ABCA 175: are the individual director’s actions “themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own”.

The court found that the circumstances may be sufficient to indicate that Mr. Ryan was acting in his personal interest, separate from the corporation, based upon the following factors:

  • Significant amounts of the funds raised were used to pay the “straw mortgages” to the Ryan corporations.
  • Ryan had organized the corporate structure so that he acquired for a nominal consideration all the “B” units, which were entitled to 35% of the venture’s profits.
  • Ryan was actively involved in helping the Abts’ investment advisor close the transaction with the Abts. He agreed to provide collateral security for the investment by pledging land that he owned.

The Securities Act claim

Since the trial judge found Mr. Ryan liable at common law, he declined to “unpack” the Abts’ Securities Act claim, but concluded the Abts had not proven a Securities Act violation. However, the Court of Appeal found Mr. Ryan liable under the Securities Act.

The Abts alleged that Mr. Ryan breached section 204(1) of the Securities Act, which provided that security purchasers have a right of action for misrepresentation in a prescribed offering document. The offering memorandum used by Mr. Ryan was missing certain required disclosures, such as an independent appraisal disclosing the market value of the real property. While there was no overt misrepresentation on the form, the court held that Mr. Ryan’s failure to disclose material facts constituted a misrepresentation, and held Mr. Ryan personally liable.

In defence, Mr. Ryan relied on the statutory cap on damages in section 204(4) of the Securities Act. Mr. Ryan argued that the Abts could recover the principal amount of the investment but not the 4% compound interest awarded by the trial judge. The Court of Appeal found that section 204(4) may not bar a claim for interest between the date the cause of action arose until judgment. Further, the court held that it did not need to come to a decision on this issue. The Abts had settled with Sun Life prior to trial, and the Court of Appeal found that the Abts “were entitled to allocate the settlement amount paid by Sun Life on any reasonable basis.” The Abts could treat the Sun Life settlement as payment of the interest the trial judge awarded.

Mr. Ryan further relied upon the 180‑day limitation period set out in section 211, arguing that the Abts knew of the claim earlier than March 15, 2012. The court held that the Abts’ earliest warning about their investment occurred in late 2011, when their accountant grew concerned. The accountant expressed further concerns in February 2012. Mr. Abt attempted to take up Mr. Ryan’s previous offer to buy back his units, but Mr. Ryan stopped communicating and Mr. Abt resolved to consult a lawyer by March 28, 2012. The court held that while the accountant had serious reservations about the investment by March 15, 2012, there was no evidence that he or Mr. Abt knew about the misrepresentation by that point.


The Court of Appeal has confirmed the appropriate legal framework for considering claims personally against the principals of investments schemes. Regarding personal liability for misrepresentation, the court examined the true circumstances of the transaction. On the matter of the claim under the Securities Act, the Court of Appeal held that an omission to state material facts can ground liability under the legislation. Further, the court adopted a pragmatic approach to the defences of limitations of liability and limitation periods, in a manner that appreciates the unique challenges of an investment scheme victim.