The Ontario Superior Court of Justice in Furtak v Ontario (Securities Commission), 2018 ONSC 6616, has upheld the Ontario Securities Commission’s (OSC) merits and sanctions decisions with respect to the Strictrade Offering, which we previously reported on here.
In 2015, OSC Staff brought enforcement proceedings against Edward Furtak, Axton 2010 Finance Corp., (Axton), Strict Trading Limited (STL), Strictrade Marketing Inc. (SMI), Trafalgar Associates Limited (TAL), Ronald Olsthoorn, and Lorne Allen (collectively the Strictrade Parties) arising out a scheme that involved the marketing and offering of a set of computerized trading software license contracts (the Strictrade Offering). Under the Strictrade Offering, third party participants signed a promissory note in favour of Axton, a company operated by Furtak, for the purchase of a license to use the Strictrade computerized trading software. The participants simultaneously contracted with STL, another company operated by Furtak, to host the Strictrade software and trade in financial instruments. Participants purchased licenses in $10,000 units and were required to pay upfront annual fees and interest to Axton and STL. In exchange, participants received annual trading report payments. The annual fees and interest paid by purchasers exceeded the trading report payments they received. The Strictrade Offering was marketed to investors as a tax-planning vehicle meant to provide participants with an opportunity to take advantage of business tax deductions.
In a merits decision released on November 24, 2016 (2016 ONSEC 35), the OSC found that the set of contracts being marketed in the Strictrade Offering were “investment contracts” and were therefore “securities” within the meaning of the Securities Act, RSO 1990, c S. 5 (the Act). As a result, the OSC found that:
- Furtak, Axton, STL, SMI, and Allen engaged in, or held themselves out as engaging in, the business of trading in securities without registration, contrary to subsection 25(1) of the Securities Act, RSO 1990, c S. 5 (the Act);
- all of the Strictrade Parties distributed securities without filing and obtaining a receipt for a preliminary prospectus, in violation of subsection 53(1) of the Act;
- Furtak, Olsthoorn and Allen, as officers and directors of the corporate respondents authorized, permitted or acquiesced in the corporate respondents’ non-compliance with Ontario securities law, in violation of section 129.2 of the Act; and
- Oslthoorn failed to fulfill his Know Your Client obligations, failed to fulfill his obligations as Chief Compliance Officer and Ultimate Designated Person of TAL, and failed to take reasonable steps to determine whether the Strictrade Offering was suitable for investors, contrary to sections 3.4, 13.2 and 13.3 of National Instrument 31-103.
In a separate sanctions and costs decision released May 4, 2017 (2017 ONSEC 12), the OSC reprimanded the Strictrade Parties and imposed a number of hefty sanctions including cease trade orders, administrative monetary penalties, disgorgement of proceeds, and costs in the amount of $186,013. In a minority opinion, Vice-Chair D. Grant Vingoe disagreed with the scope of the cease trade orders imposed by the majority, indicating that he would have allowed an exception to permit the remaining investors in the Strictrade Offering to continue their investments if they so wished.
Appeal to the Divisional Court
The Strictrade Parties appealed the OSC’s merits and sanctions decisions to the Ontario Superior Court of Justice, Divisional Court. The Strictrade Parties argued that the OSC (i) erred in finding that the set of contracts met the legal test for an “investment contract”, (ii) erred in making factual findings and drawing inferences unsupported by evidence, and (iii) imposed unreasonable sanctions.
Standard of Review
The Divisional Court determined that the reasonableness standard of review applied to all three grounds of appeal. The Court rejected the Strictrade Parties’ argument that the presumption in favour of a reasonableness standard that applies where a tribunal is interpreting its home statute was rebutted in this instance because the issue on appeal was not related to the OSC’s threshold jurisdiction to sanction conduct and was not a matter of central importance to the legal system outside of the OSC’s specialized expertise. The Court also rejected the Strictrade Parties’ submission that the standard of “palpable and overriding error” should apply to the Commission’s findings of fact, holding that that standard is not applicable in a judicial review of an adjudicative tribunal’s decision. Rather, factual errors may only be a ground for overturning a tribunal’s decision if they go to a “core finding” that is fundamental to the reasonableness of the ultimate decision.
In determining that the set of contracts marketed under the Strictrade Offering were “investment contracts”, the OSC adopted the test from Pacific Coast Coin Exchange v Ontario Securities Commission,  2 SCR 112 and outlined the following four elements of an “investment contract”:
1. an investment of money,
2. with an intention or an expectation of profit,
3. in a common enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties,
4. whether the efforts made by those other than the investor are the undeniably significant ones – essential managerial efforts which affect the failure or success of the enterprise.
The Divisional Court found that, while the OSC broke down the test for an “investment contract” into four components in a manner not reflected in the Supreme Court of Canada’s decision in Pacific Coast Coin, the OSC recognized that the elements of the test are not “airtight compartments” and many of the same considerations may apply to more than one aspect of the test. The OSC’s reformulation captured the “essence” of the test. The Divisional Court further held that the OSC’s application of the test to the Strictrade Offering and the finding that the set of contracts constituted “investment contracts” and were therefore “securities” under the Act was reasonable.
The Strictrade Parties argued that the OSC made a number of factual errors and drew improper inferences not supported by the evidence. In dismissing this ground of appeal, the Divisional Court noted that the Strictrade Parties had failed to demonstrate that any of the factual errors alleged would have impacted the OSC’s conclusion that the set of contracts were “investment contracts”. In essence, the Strictrade Parties were asking the Divisional Court to improperly re-weigh the evidence that was before the OSC. In any event, the Divisional Court found that the OSC referred to evidence that amply supported its conclusion and its findings were therefore reasonable.
The Strictrade parties argued that the sanctions imposed by the OSC were unreasonable, disproportionate to the nature of the misconduct, and failed to serve any identifiable public interest goals. The Divisional Court disagreed, holding that the OSC properly considered all of the relevant factors, including the different circumstances, roles, and histories of the various Strictrade Parties and imposed sanctions that fell within its broad discretion.
The Divisional Court also considered Vice-Chair Vingoe’s minority opinion that would have allowed an exemption to the cease trade orders to permit the remaining participants to continue their investment in the Strictrade Offering. The Divisional Court determined that both the majority and Vice-Chair Vingoe, in the minority, provided a reasonable basis for their respective positions on the cease trade orders and that each was defensible. Faced with two reasonable interpretations, the Divisional Court concluded that it was obliged to defer to the findings of majority, and upheld the sanctions decision.