The topic of fraud recovery through Ontario Securities Commission (OSC) disgorgement orders has not been addressed much. My conclusion is that like criminal restitution orders, OSC disgorgement orders are but one part of an overall fraud recovery strategy that should be orchestrated by your civil fraud recovery counsel.
OSC’s mandate as it applies to sanctions and investor recovery
The OSC’s mandate as it applies to sanctions (and investor recovery) is published on its website. Some extracts follow: Sanctions are imposed either at the conclusion of a contested proceeding or as part of a settlement reached between the respondent and OSC staff and approved by the Commission.
The purpose of the Commission’s sanction powers is to deter future wrongdoing in the capital markets… Conduct orders are imposed to restrict an individual’s future activity in the capital markets or to ban them from the markets entirely, and thereby deter wrongdoing. The Commission also has the power to impose monetary sanctions for breaches of Ontario securities law and has exercised this authority since 2005. Monetary sanctions include administrative penalties and disgorgement orders…. Disgorgement orders require the respondent to pay the amount obtained as a result of the non-compliance with securities law.
The Commission’s practice is to impose the monetary sanctions that are appropriate in the circumstances, irrespective of a respondent’s ability to pay. That practice is intended to deter others from contravening the Securities Act. The recovery of monetary sanctions in many proceedings is limited because respondents may have no assets or limited assets, may no longer reside in Ontario, or cannot be found. Some respondents may have hidden assets in the names of others.
As is apparent from the OSC’s own website, the mandate of the OSC is not to recover money for investors – that issue is not even mentioned in their publication. Rather, the mandate of the OSC is deter wrongdoers and thereby protect Ontario’s capital markets. As discussed further below, most of the money that the OSC does collect goes to paying their own overhead, and not towards recovery for investors.
OSC general counsel statements
Back in 2004, when disgorgement powers for the OSC were first being considered, the mandate of the OSC as it applied to sanctions (and investor recovery) was communicated by the OSC’s then general counsel in an article by James Langton. In his article Getting their Money Back: Regulators Are Taking Steps to Compensate Canadians Cheated by Rogue Brokers, Mr. James Langton reported:
“While the OSC can now seek to force the culprit to repay that money, there’s no assurance investors will get a dime.
Susan Wolburgh-Jenah, the OSC’s general counsel, says disgorgement is primarily a power that’s designed to deprive the rogue of his or her illegal profits; it doesn’t necessarily imply that the money will be returned to investors.
Restitution is usually the job of the courts, not administrative tribunals, says Wolburgh-Jenah, who researched the issue on behalf of the securities review advisory committee, better known as the “five-year review committee.”
The goal of an administrative tribunal is protecting the vaguely defined “public interest,” which means to protect the public in general rather than specific investors. Courts, on the other hand, typically deal with “narrow fact” situations, which puts them in a better position to arrange restitution.
The distinction between the two often creates a schism between securities commissions and victims. A fleeced investor is alarmed, if not utterly baffled, that a regulator can’t do much to get his or her money back. The investor is faced with having to appeal to the rogue’s firm and its sense of fair play through its ombudsman and/or arbitration, often ultimately going to court.
Investors generally don’t have the right to appear at an OSC hearing without leave from the commission. …Typically, enforcement hearings can be called only in the name of protecting the capital markets, not to deal with individual complaints. So, if disgorgement is an appropriate remedy in that context, a welcome secondary benefit may be that it uncovers money for investors.
The picture depicted so far does not offer fraud victims much hope for recovery through the OSC sanctions enforcement. Case law from the OSC provides further explanation.
OSC case law explaining the disgorgement sanction
One case in which the OSC explains its disgorgement power is In the Matter of XI Biofuels Inc. et al. (May 26, 2010). In that case, the OSC Commissioner stated:
 The Commission’s disgorgement power is found in clause 10 of subsection 127(1) of the Act, which states: 127(1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders:
10. If a person or company has not complied with Ontario securities law, an order requiring the person or company to disgorge to the Commission any amounts obtained as a result of the non-compliance.
 In Limelight Sanctions and Costs, the Commission made the following comments about the disgorgement remedy:
… Disgorgement can be ordered with respect to “any amounts obtained” as a result of non-compliance with the Act. Thus, the legal question is not whether a respondent “profited” from the illegal activity but whether the respondent “obtained amounts” as a result of that activity.
…All money illegally obtained from investors can be ordered to be disgorged, not just the “profit” made as a result of the activity.
…Where there is a breach of Ontario securities law that involves the widespread and illegal distribution of securities to members of the public, it is appropriate that a respondent disgorge all the funds that were obtained from investors as a result of that illegal activity.
…The Commission should consider the following issues and factors when contemplating a disgorgement order…
1. whether an amount was obtained by a respondent as a result of non-compliance with the Act;
2 . the seriousness of the misconduct and the breaches of the Act and whether investors were seriously harmed;
3 .whether the amount that a respondent obtained as a result of non-compliance with the Act is reasonably ascertainable;
4 .whether the individuals who suffered losses are likely to be able to obtain redress; and
5. the deterrent effect of a disgorgement order on the respondents and other market participants.
These factors are not exhaustive; . . . .
Staff has the onus to prove on a balance of probabilities the amount obtained by a respondent as a result of his or her non-compliance with the Act.
Subject to that onus …any risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose non-compliance with the Act gave rise to the uncertainty. In our view, no one should profit from his or her breach of the Act.
 … non-compliance with Ontario securities law falls into three “tiers”:
The first tier is amounts obtained by the Individual Respondents directly by withdrawal from the Corporate Respondents’ bank accounts.
The second tier is investor funds paid into the Corporate Respondents’ bank accounts.
The third tier is funds raised…that could not be traced to the Corporate Respondents’ bank accounts.
As is apparent from the foregoing, the purpose of disgorgement orders is to ensure that wrongdoers do not profit from their unlawful acts. The OSC does not have, as a primary objective, the recovery of funds for investors.
OSC statements at the 2015 FAIR Canada conference on investor recovery
At the October 26, 2015, FAIR Canada conference, the OSC’s vice-chair Monica Kowal gave the keynote address. Ms. Kowal’s address was reported on by various media outlets. In her article OSC Uses More Freeze orders to Recoup Fraud Money, Janet McFarland reported:
“The Ontario Securities Commission has made frequent use of new freeze-order powers to try to protect stolen money from being hidden or moved offshore by criminals, but still finds it is “very difficult” to recover money from many illegal schemes, vice-chair Monica Kowal said Monday.
…Ms. Kowal said the OSC has taken advantage of legal changes in 2014 that make it easier for the regulator to get court orders to prevent suspected fraudsters from liquidating or moving funds held in bank or brokerage accounts used in fraud cases. In the year since the rule change, the OSC has received 26 freeze orders from courts involving $9-million in assets, compared to just eight freezes involving $1.3-million of assets in the year prior to the change, she revealed.
Ms. Kowal said the freeze-order power has become the OSC’s most important tool to secure restitution for victims because it can be used in the early stages of an investigation and recovered money can be returned to victims under a court-ordered receivership process. But freeze orders cannot recover funds that have already been spent or hidden before regulators begin investigating, and Ms. Kowal said the OSC has limited powers to order restitution after a criminal is convicted.
“The simple truth is that people who perpetrate fraud don’t pay monetary fines,” she said. “It’s virtually impossible to recover stolen money after the fact. By the time the person has been caught and sanctioned, the money is long gone. It’s been spent or hidden, and the likelihood of finding it is extremely low.”
Likewise, Drew Hasselback for the Financial Post reported in his article The OSC Has Introduced Steps to Help Recover Funds for Wronged Investors, But Are They Enough.
“The reality is that regardless of recent steps, Canada has a long way to go before it emerges as a champion for investor recovery. The country remains plagued by a confusing patchwork of regulators and industry-funded bodies that complicate the task of compensating investors.”
In 2014, for example, Canada’s largest securities watchdog, the Ontario Securities Commission ordered $61.7 million in sanctions to be paid as a result of securities law breaches. But just $1.8 million of that, or 2.9 per cent, was collected. Due to regulatory constraints, very little of that cash got back into the pockets of harmed investors. Kowal acknowledged at a conference [that] the focus is on protecting investors at large, rather than recouping funds for specific victims. Indeed, most money recovered from administrative penalties and disgorgement orders issued by OSC tribunals are used to fund broad initiatives such as investor education.
$9 million not a particularly noteworthy achievement
Of note is that the OSC’s 26 freeze orders totalling $9M over the past year is not a particularly noteworthy achievement given the budget of the OSC, the amount of investment fraud in the market place and the number of OSC staff they have to assign to their case load. Many civil fraud recovery firms obtain freeze orders well in excess of these numbers on an annual basis with a fraction of the OSC budget or staff.
It is also noteworthy that there is no mention in these articles of tracing efforts before seeking freeze orders, or seeking freeze orders outside of Ontario. If tracing efforts are properly undertaken, the quantum of the assets frozen should increase.
Finally, the low recovery rate of only 2.9% of sanctions issued, little of which was returned to investors, also demonstrates that recovery for fraud victims is at best a secondary priority of the OSC. As mentioned above, the priority of the OSC is maintaining the integrity of the capital markets through education and deterrence through sanctions. Deterrence through sanctions is something quite different than recovery.
While the OSC takes the position that “it’s virtually impossible to recover stolen money after the fact,” what is more likely accurate is that the OSC itself has not had reasonable returns on their fraud recovery efforts, and does not like seeing fraud victims waste “good money after bad” – such as by spending on private lawyers where their view is that there is no reasonable prospect of recovery. But not all private litigation fraud recovery is throwing good money after bad, and in most cases private litigation is the only realistic avenue to obtain a recovery.
For an example of recovery on a $2M investment fraud including the litigation and investigation costs where the stolen funds were traced through three jurisdictions, see the Zia Shlaimoum fraud recovery story. We note that this recovery was done without any complaint made to criminal or regulatory bodies such as the OSC, notwithstanding that there was an unregistered Ontario ‘advisor’ involved in this scam.
The bottom line: at least issue a claim
While recovery efforts through a security regulator such as the OSC is laudable investment/securities fraud victims hoping to obtain recovery in the justice system should retain their own civil fraud recovery counsel to at least issue a claim and then monitor the criminal and regulatory case. Fraud victims require guidance on coordinating their private recovery actions with their role as complainants in regulatory or criminal actions. Civil fraud recovery counsel should also provide an opinion on whether civil pre-action remedies such as tracing and freezing of the victim’s lost money is viable in the circumstances.
Often being part of a group of complainants is not in all investors’ best interests. While class action fraud cases are appropriate in some circumstances, the vast majority of fraud recovery actions are by single or small groups of investors. The FAIR Canada conference had a panel that discussed the “Relationship Between Public Regulatory Enforcement and Private Securities Class Actions”. Maybe at their next conference coordination between public regulatory enforcement and private fraud recovery lawyers will be addressed. In the Shlaimoun action, for example, our client made a full $4.5M recovery of their investment and costs, while other victims from other jurisdictions with losses of about $10M did not recover anything.
Fraud victims should be aware that if a criminal complaint is made, and if a restitution order is issued, this order can be registered as a civil judgment and also used for obtaining judgment for a higher quantum of damages in the civil system. If a restitution order is not made by a criminal court, at least the victim will have an avenue (the civil system) through which to pursue recovery. Again, a group action may not be advantageous to all individual investors – some individual investors who have the means to do so may wish to seek a civil judgment for their own specific loss.
It is not yet clear whether regulatory disgorgement orders can also be registered as civil judgments like in the criminal system. But there does not appear to be a reason why this could not be done. If nothing else, the decision (reasons for judgment) of a securities regulator such as the OSC can be used to obtain summary or default judgment against those responsible for a loss.
Secondary defendants and limitation periods
Another important consideration for fraud victims is that often criminal and regulatory actions only focus on the primary fraudsters. In civil fraud recovery actions, victims often can bring suit against and seek recovery from professionals and others who facilitated or were enriched by the fraud – sometimes referred to as secondary defendants – or defendants who are ‘knowing assistants’ or ‘knowing recipients.’ Actions against secondary defendants should often be brought when the loss is discovered.
Finally, as reported in previous blogs, fraud victims must be aware of limitation periods. Often victims, such as in the Alberta Sorenson and Brost case, lose their right to civil recovery because they mistakenly believed they could sue after the criminal system has run its course if a recovery through the ‘public’ system was not successful. The hard reality is that often criminal and regulatory cases take longer than the civil limitation period allows – resulting in victims losing their right to sue when they realize there will not be a recovery for them through the criminal or the securities regulator processes.