Mike Caswell posted the following article on April 20, 2018 on Stockwatch. He summarizes the findings of the Court of Appeal decision of Davis v. British Columbia (Securities Commission), 2018 BCCA 149. My colleague, Patricia Taylor and I argued this case in the Court of Appeal.
The B.C. Securities Commission must be gentler with its handling of some securities violators, the Court of Appeal for British Columbia has determined. In particular, the regulator should be extra careful when it hands out a permanent ban, the court has ruled. Such bans can interfere with a person’s ability to earn a living, and should only be considered after an examination of lesser options.
The directive from the Court of Appeal is contained in a decision released on Friday, April 20. It stems from the case of Larry Keith Davis, an investor relations man who received a permanent ban from the BCSC in 2016. BCSC enforcement staff said that Mr. Davis offered to sell shares in an OTC Bulletin Board company to his neighbour. He then used her money for personal expenses, and never delivered the shares.
The matter went to a hearing before a BCSC panel, at which Mr. Davis argued that he was a victim of circumstances. The company that he worked for (Formcap Corp.) had promised him the shares after it completed a rollback. He said that he sold the shares to his neighbour on the basis that she would get the stock as soon as he did. Unfortunately for everybody, he never received the shares, he said.
The BCSC panel rejected Mr. Davis’s arguments, noting that he was well aware that Formcap was having serious financial troubles when he sold his neighbour the shares. Moreover, after his neighbour sought the return of her money, he continued to deceive her, the regulator determined. He told her that there was no money available as it was tied up in market.
When it came to penalties, the BCSC found that Mr. Davis’s actions constituted more than a minor offence. When he sold the shares to his neighbour, Wendy McDonald, he “not only knew he did not have any Formcap shares to sell to [Ms. McDonald] but also knew the previously proposed Formcap share consolidation had been abandoned and the company was having serious financial difficulties. Yet, he proceeded to agree to sell [Ms. McDonald] another 30,000 Formcap shares which he did not own on the same terms and conditions.”
For those reasons, the BCSC decided to impose a permanent ban. It also ordered Mr. Davis to pay $15,000. In doing so, it noted that the amount of money at issue was relatively small ($7,000) but Mr. Davis’s continuing deceit amounted to the “most serious misconduct” that the BCSC regulated.
The penalty, however, was not properly considered, at least according to the Court of Appeal. In its Friday ruling, the court determined that the BCSC should have looked at a lesser penalty for Mr. Davis. While much of the ruling hinges on technical points of law, the Court of Appeal heard that Mr. Davis had worked in the industry for decades without attracting any regulatory sanctions.
Of more importance, at least to other potential regulatory targets, is the fact that the Court of Appeal identified an error in the BCSC’s approach to the ban. The regulator imposed it without considering if a lighter sanction would suffice. A permanent ban is an extreme measure that should only be considered under a specific set of circumstances, the ruling states. Such bans are for instances when the public has been abused, an individual is resistant to governance, there is an element of criminal activity or there is a reason to believe that the individual could not be trusted to deal honestly with the public, the Court of Appeal found.
For those reasons, the Court of Appeal has sent the case back to the BCSC to have another look at Mr. Davis’s penalty. While Mr. Davis won the sanctions part of the appeal, he lost another part of the appeal in which he had contested his liability. The decision was unanimous, all three judges having agreed.
This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.