In Strictrade Marketing Inc. et al., 2017 ONSEC 12, the Ontario Securities Commission (the Commission) delivered robust sanctions to Respondents found to have marketed and sold licenses for trading software in breach of the Ontario Securities Act (the Act).
In 2015, Commission Staff brought enforcement proceedings against the Respondents, Edward Furtak (Furtak), Axton 2010 Finance Corp. (Axton) and Strict Trading Limited (STL), among others, in relation to a scheme they orchestrated to market and sell licenses for trading software (the Strictrade Offering). Furtak sold licences for the software to investors through financing by Axton – a company owned by Furtak. Investors then paid annual “hosting fees” to STL, which in turn paid investors for trading reports generated by the software.
A hearing on the merits took place between May and October 2016. The Commission released its decision on November 24, 2016, 38 OSCB 9731, finding that the Strictrade Offering was an investment contract subject to securities laws and that the Respondents had committed numerous breaches of the Act, including (i) illegal distribution of securities contrary to section 53(1) of the Act, (ii) STL, Furtak and Axton had engaged in, or held themselves out as engaging in, trading in securities without registration, and (iii) the individual Respondents had failed to comply with Ontario securities laws as directors and officers, contrary to section 129.2 of the Act.
Decision on Sanctions and Costs
The Commission received evidence and submissions from Staff and the Respondents on the issues of sanctions and costs in early 2017. In the majority decision, delivered by Chair Janet Leiper and Commissioner AnneMarie Ryan, the Respondents’ position on sanctions is summarized as asking the Commission “to permit them to continue to receive funds from the remaining investors [in the Strictrade Offering], to benefit from a scheme that had been found to be unlawful and to receive no sanctions for their breaches of the Act.” Instead, the majority exercised its public interest jurisdiction under section 127(1) of the Act to issue director and officer bans, registration bans, monetary penalties, disgorgement and costs payable to the Commission.
The majority decision considers, among other things, the seriousness of the allegations, the Respondents’ experience and activity in the marketplace, and whether the Respondents appreciated the seriousness of the misconduct. Chair Leiper and Commissioner Ryan found that Furtak was an experienced market participant, that the Respondents did not appreciate the impact of their misconduct, and that the Respondents had deliberately elected not to discuss the Strictrade Offerings with Staff when discussing similar vehicles in the past – a factor which the majority suggested evidenced the Respondents’ awareness that the product marketed wouldn’t ultimately pass regulatory scrutiny. For these reasons, the majority ordered comprehensive sanctions against Furtak, Axton and STL, including a 10 year cease trade order, a $75,000 administrative penalty and disgorgement of $180,298 for allocation and use by the Commission in accordance with the Act, and payment of $186,013 in costs in relation to the Commission’s investigation and hearings in relation to the Strictrade Offering.
In his minority opinion, Vice-Chair D. Grant Vingoe agreed with the sanctions imposed by the majority, with the exception of the scope of the trading bans. However, given that the intended tax treatment of the Strictrade Offering would necessarily terminate in the absence of any exception for continuing performance, Vice-Chair Vingoe indicated that he would have provided an exception and related exemptions from ss. 25(1) and 53(1) of the Act to allow the remaining investors in the Strictrade Offering to consent to continue their investments. In his reasons, Vice-Chair Vingoe urged caution in implementing sanctions under the Commission’s public interest jurisdiction which have the potential to negatively affect investors who were the subject of unlawful activity.
Edited by Linda Fuerst. The author would like to thank Blanchart Arun, articling student, for his assistance preparing this post.