Court Affirms OSC Panel's Fraud Decision
15 January 2018
By Uri Snir
The Ontario Divisional Court recently upheld
two related decisions from the Ontario Securities Commission (“OSC”).
In 2013, an OSC panel found that the Appellants, North American Financial Group Inc. (“NAFG”), North American Capital Inc. (“NAC”), and Alexander and Luigino Arconti, had committed securities fraud, among other contraventions of the Securities Act (the “Merits Decision”).
In a separate 2014 hearing, the panel imposed a lifetime ban against the Appellants, and ordered over $3 million in disgorgement, and an additional $2 million in penalties and costs (the “Sanctions Decision”).
Background: The Arcontis brothers owned a used car dealership. They incorporated NAFG to provide lease financing to customers. Originally, the brothers used their own money to fund these leases. Eventually, they began raising money by selling non-prospectus qualified securities to investors. They later incorporated another company, NAC, to offer investors different types of securities. When the brothers began to experience financial difficulties and were unable to pay back all of their investors, they began using “new” investor money to pay back “old” investors.
The OSC’s Rulings:
In its Merits Decision (which can be found here
), the OSC panel found the Appellants had:
- Failed to take reasonable steps to ensure that the purchase of NAFG securities was suitable for their clients;
- Failed to disclose to investors the financial state of NAFG; and
- Engaged in fraudulent behaviour by disseminating materials that were knowingly false. The Appellants also failed to tell investors that their funds were being used to pay interest, dividends or principal to other NAFG or NAC investors.
The OSC panel also found that Luigino Arconti traded in securities without registration.
In its Sanctions Decision (which can be found here
), the OSC found that a lifetime ban and the disgorgement of funds was a proportionate and reasonable penalty. It stated that “[a] message must be sent to the [Appellants] and like-minded individuals that fraudulent schemes similar to the one involved in this case will result in severe sanctions.”
The Divisional Court Decision: The Appellants raised the following issues on appeal:
- The Commissioner who presided over the merits and penalty hearings was biased or had a reasonable apprehension of bias, as he had previously ordered several cease trade orders against the Appellants;
- Their lawyer had a conflict of interest given his past representation of the OSC and/or was incompetent, and therefore did not adequately represent them;
- The Commission’s finding with respect to fraud was unreasonable, as the Appellants’ acts could not reasonably be found to be “acts of deceit, falsehood or some other fraudulent means”; and
- The Commission’s sanctions decision was unreasonable given certain mitigating factors it allegedly failed to consider.
The Divisional Court addressed each of these issues and determined that the Commission’s rulings were all reasonable. The Court found that:
- The OSC Commissioner who presided over the merits and penalty hearing did not act outside of his statutory authority when he issued three cease trade orders and then presided over the merits hearing.
- The Appellants failed to establish that their lawyer was incompetent and/or in a conflict of interest, and even if they had, they were unable to show that the existence of such incompetence or conflict actually resulted in a “miscarriage of justice.”
- The OSC’s finding of fraud was reasonable. The non-disclosure of important facts to investors, the publishing of false information in brochures, and the use of new investor money to pay back old investors all constituted acts of “deceit, falsehood, or some other fraudulent means.”
- The OSC’s sanctions were reasonable. The OSC considered the various mitigating factors raised by the Appellants, and their sanctions fell within the range of acceptable outcomes. The aim of the OSC is to preserve confidence in the capital markets by ensuring that fraudulent behaviour does not occur. The lifetime ban and the disgorgement of money was meant as a deterrent. It did not matter that the fraudsters did not pocket the money for themselves.
The Takeaway: The case highlights the potential dangers when individuals with limited expertise issue securities. The Arconti brothers were high school graduates who started a car dealership and needed to raise money. It appears they were in over their heads, and likely got some bad advice along the way.
Entities or individuals who wish to issue non-prospectus qualified securities must ensure they get proper advice and go through the appropriate channels. The consequences for failing to do so can be severe.
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