Financial criminals can declare bankruptcy and avoid punitive fines issued by securities regulators, the Supreme Court of Canada has ruled.
In a reversal of two lower-court decisions, Wednesday’s judgment ends a decade-long legal saga and places substantial limits on the enforcement powers of market watchdogs across Canada. The case is critical for securities regulators who struggle to collect many of the fines they impose on people who commit fraud and other violations.
The court’s decision is based on a technical question of whether punitive regulatory fines can be directly linked to fraud. Securities-law experts say the ruling will now require Parliament to help regulators by amending the Bankruptcy and Insolvency Act.
Ed Waitzer, former chair of the Ontario Securities Commission, said the ruling will tie regulators’ hands. “This decision denies them one of the enforcement tools specifically provided to them in securities law,” he said in an interview. “What they will rightly say is our arsenal of enforcement weapons has been reduced.”
The decision could “permit bankrupts to benefit from their dishonesty through a release of liability, even when the debt directly results from the specific misconduct targeted by Parliament,” Supreme Court Justices Andromache Karakatsanis and Sheilah Martin warned in a dissenting opinion.
Thal and Sharon Poonian were previously ordered by the B.C. Securities Commission to pay more than $19-million after the regulator learned they had manipulated the price of a TSX Venture Exchange-listed oil and gas stock called OSE Corp. in 2008. The commission found in a 2015 decision that the manipulation left “hundreds of investors financially devastated.”
The B.C. regulator ordered the Poonians to return the $5.6-million they had obtained through the scheme and to pay an additional $13.5-million in administrative penalties. The couple declared bankruptcy in 2018, and argued that should allow them to avoid making any payments to the commission, but two subsequent court rulings rejected those arguments.
Brenda Leong, the B.C. Securities Commission’s chair and chief executive officer, told reporters at a Wednesday press conference the ruling was “a bit of a setback.”
“The decision affirmed that the Bankruptcy and Insolvency Act as drafted does not go far enough to exempt administrative penalties from bankruptcy,” Ms. Leong said.
“This commission has long advocated for changes to the bankruptcy legislation in order to expressly exempt securities sanctions from bankruptcy. The federal government needs to act now to make that change in order to protect investors in this country.”
Wednesday’s ruling delivered only a partial victory to the Poonians. While the Supreme Court found the $13.5-million in administrative penalties are considered debts that can be discharged as part of the bankruptcy process, the decision also said the order for the Poonians to repay $5.6-million in ill-gotten gains from their OSE Corp. fraud – also known as a disgorgement order – will not be forgiven.
“The disgorgement orders were made under the Securities Act and represent the value of the bankrupts’ fraud – the funds that they gained as a result of their market manipulation,” Justice Suzanne Côté wrote on behalf of the majority. “There is therefore a direct link between the fraudulent conduct of the bankrupts and the Commission’s disgorgement orders.”
The administrative penalties, however, “did not result directly from the bankrupts’ fraudulent misrepresentation, but arose indirectly as a result of the Commission’s decision to sanction them,” Justice Côté wrote.
In their dissent, Justices Karakatsanis and Martin argued both the administrative penalties and the disgorgement order were directly linked to the Poonians’ fraudulent conduct and both should therefore survive any bankruptcy proceeding.
“Rehabilitation of the bankrupt is not best served if the bankrupt can obtain a discharge for liabilities directly resulting from fraudulent conduct,” they wrote.
Using pseudonyms and multiple accounts, the Poonians artificially inflated the share price of OSE Corp. between late 2007 and early 2009 from roughly 10 cents to nearly $2 a share. Then, working with Ontario credit counselling firm Phoenix Credit Risk Management, the Poonians found their victims.
Phoenix “encouraged its clients, generally unsophisticated investors seeking to escape personal debt through investment in more high-yield vehicles, to purchase OSE shares at the artificially inflated prices,” Supreme Court of British Columbia Justice David Crerar said in a 2021 ruling.
Losses attributed to Phoenix clients alone surpassed $7.1-million, according to B.C. Securities Commission calculations, while Phoenix received commissions as high as 28 per cent each time one of the firm’s clients was convinced to buy OSE shares.
Mr. Poonian deliberately tried to disguise his involvement by using an alias, “Tim Jenson,” in his communications with Phoenix, Justice Crerar wrote.
In 2011, Phoenix directors Jawad Rathore and Vince Petrozza agreed to pay $3-million in fines to the Ontario Securities Commission for their role in the scheme.
The Poonians sought to be discharged from bankruptcy in 2020, which would have relieved them of virtually all their debt, including their B.C. Securities Commission fines. That request was denied, partly because the B.C. court found “the size of the Poonian’s personal tax debt of $4.3-million, alone, is extreme and difficult to excuse.”
According to a Canada Revenue Agency audit report from 2014, the couple “had grossly underreported their actual gains from stock trading.”
“There is also considerable doubt in this case whether the Poonians have been rehabilitated,” the 2020 decision said. “They say they have learned a ‘very hard lesson’; however, they attribute their bankruptcy, in Mr. Poonian’s words, to an ‘outlandish fine’, ‘bureaucracy’ and a tax reassessment that ‘makes no sense.’ Their own evidence demonstrates that the Poonians refuse to take responsibility for their actions or the consequences of those actions for others.”
Mr. Poonian has been unemployed since 2016, according to the 2020 decision. It added there is no evidence that, apart from a failed attempt at starting a trucking company, Mr. Poonian “has even tried to earn an income.”
In his 2021 ruling, Justice Crerar noted the process had already been particularly lengthy.
“This legal saga has been protracted and multi-pronged,” he wrote. “The Poonians have vigorously fought the allegations since 2012.”
The Poonians appealed the 2021 ruling, but a three-judge panel of the B.C. Court of Appeal dismissed their application in an August, 2022, ruling that upheld the lower court’s decision. The Poonians have not made any voluntary payments to either the B.C. Securities Commission or the CRA to address their tax debts.
Their bankruptcy trustee was only able to realize $3,189.15 from the Poonians’ assets, according to the 2020 decision.
Mr. Waitzer said there are now only two ways for securities regulators to regain the ability to impose administrative penalties that can survive a bankruptcy proceeding: get Parliament to amend the Bankruptcy and Insolvency Act or wait until a similar case comes back before the Supreme Court.
Either recourse would likely take years and in the meantime, Mr. Waitzer said, Wednesday’s ruling moves Canadian securities law enforcement backward.
“Securities regulators in Canada in particular have been criticized for being ineffective at enforcement or toothless and legislatures have responded in recent years by giving them broader powers,” he said. “Now, the Supreme Court is taking one of those powers away from them.”
Philip Anisman, a securities lawyer and former OSC commissioner, said Wednesday’s decision “cries out” for an update to the Bankruptcy and Insolvency Act that provides an exemption for fines levied by securities regulators in cases of fraud.
“What the simple solution here is, and the most expeditious, is for Parliament to make an amendment to the Bankruptcy Act; it would be easy to do,” Mr. Anisman said. “The Supreme Court is not going to reverse itself on this in the near future.”
Editor’s note: A previous version of this article incorrectly stated that a bankruptcy trustee realized $3.2-million from the Poonians’ assets. The actual sum was just over $3,000. This version has been updated.