In the Court of Appeal of Alberta

Transcription

1 In the Court of Appeal of Alberta Citation: R. v Stevenson, 2017 ABCA 420 Date: Docket: A Registry-: Calgary Between: Her Majesty the Queen Respondent - and - Rand Tyler Stevenson Appellant The Court: The Honourable Mr. Justice Frans Slatter The Honourable Mr. Justice Brian OTerrall The Honourable Mr. Justice Thomas W. Wakeling Memorandum of Judgment Appeal from the Conviction by The Honourable Mr. Justice D.K. Miller Dated on the 13th day of November Filed on the 23rd day of November (2015 ABQB 740: Docket: P1)

2 Memorandum of Judgment The Court: [1] The appellant was charged with a number of offences under the Securities Act. RSA c. S-4 arising out of the raising of money from the public through "Loan Agreements". The appellant was acquitted at trial on the basis that the Loan Agreements did not constitute "securities", but was con% icted on appeal: R. v Stevenson ABQB 740. reversing R. v Stevenson ABPC 96. [2] Provincial Court Judge described the transactions as follows: 9 Between early May 2009 and late September OCl entered into Loan Agreements with 24 Alberta resident lenders listed in the active counts in the Information (collectively Lenders). The same form of Loan Agreement (a copy of which is attached as Appendix A) was used for each loan and lender. The Lenders advanced a total of at least $1,003, to OCl pursuant to these Loan Agreements. Most of the Lenders entered into more than one Loan Agreement with OCl. 10 Each of the Loan Agreements states that it is for a term of six months, and provides for a return of four (4) to two hundred (200) times the amount advanced to OCl payable "from the profits of the Corporation's income". 11 All of the Lenders were introduced to OCl and its reason for soliciting funds (commonly referred to by the Lenders as the "Project") by Derricott. For each lender Derricott's presentation was done by using what the Lenders referred to as the "Book" or the "Binder" (Exhibit 43) and which contained 70 pages of pictures, documents, bank statements and other material purporting to explain the Project. 14 Except for minor variations, the Lenders generally conveyed a consistent understanding of the reason OCl required funds as explained to them by Derricott; that is: Stevenson had met an individual from the Philippines (described as a Filipino farmer or fisherman named Romeo or "Romy" Santiago) who was the sole beneficiary of a large estate ranging in value from millions to billions of dollars (the "Estate") left to him by an aunt. Candelaria Y. Santiago. Ms. Santiago apparently accumulated the wealth in some fashion associated with her position in the government or employ of former Philippine dictator. Ferdinand Marcos. Stevenson was purportedly helping the beneficiary. Romy. probate the Estate and gain access to the assets of the Estate, in return for which Romy had contracted to pay a portion

3 Page: 2 of the Estate to OCI. In exchange for their financing the associated costs of this Project. Stevenson and OCI were to share their portion of the Estate proceeds with the Lenders in the amounts set out in their Loan Agreements. [3] The operative clauses of the Loan Agreements read as follows: THE PARTIES HERETO AGREE. THAT: 1. The Lender is loaning money in the Corporation for a period expected to be no longer than SIX MONTHS (6 months) from the date of the loan, with the Corporation having the option to pay the Lender the principle sum of the loan plus a premium amount of money in consideration of the use of the loan funds by the Corporation. 2. The term of this Agreement is for SIX MONTHS {6 months). 3. The amount given to the Corporation as a loan is: Twenty Five Thousand Canadian Dollars. 4. The Corporation shall pay the Lender from the profits of the Corporation's income. 5. The Corporation shall pay the Lender a premium amount of money based on a formula of the principle [sic] amount of the load funds plus a factor of four times the original amount loaned, which is a total payout of: One Million Five Hundred Thousand Canadian Dollars. 6. In the event of the expiry of the six month time period of this Agreement, any outstanding principle [sic] shall be placed upon the books of the Corporation as an outstanding liability. 7. This investment is in the fonn of a loan, and is not subject to any securities law, regulation, rules or forms of conduct. This investment and the loan of moneys does not constitute the transaction of any form of securities, stocks, bonds, or other financial instrument subject to regulation by Government under securities law. The trial judge accepted the appellant's argument that the Loan Agreements were "simply contracts between the parties and should be enforced in accordance with the intention of the parties and the normal rules of contract law". He found each Loan Agreement was a "separate, distinct, and pri\ ate transaction", not a "security". [4] In allowing the appeal, the summary conviction appeal court judge noted the lengthy and complex definition of "security" in the Securities Act, which contains the following specific inclusions among a list of 26 items: 1 In this Act....

4 Page: 3 (ggg) "security" includes... (ii) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company;... (v) any bond, debenture, note or other evidence of indebtedness;... (ix) any profit-sharing agreement or certificate;... (xiv) any investment contract.... The Crown is only required to show that the Loan Agreements fit within one of these components of the definition, but it argued that they actually fit within all four. The summary conviction appeal court judge found at para. 17 that the Loan Agreements were clearly "evidence of indebtedness", and also met the other three branches of the definition. He noted that there was no blanket exemption for "private transactions". [5] The "facts" surrounding the Loan Agreements are not in dispute. Whether the Loan Agreements, as found on the facts, constitute "securities" is a question of law reviewable for correctness: R. v Shepherd, 2009 SCC 35 at para. 20. [2009] 2 SCR 527; R, v Abdulle, 2014 ABCA 52 at para Alta LR (5th) AR 142. Whether the Securities Act admits of an exception for "private transactions" is an extricable question of law. and the standard of review is correctness. Administrative law cases such as British Columbia (Securities Commission) v Gill BCCA 169, 11 BCLR (4th) 102 engage a different standard of review paradigm, because the law recognizes the expertise of the securities commissions in technical matters. [6] The raising of funds from the public is one of the most highly regulated activities in Canada. The Securities Act regulates virtually every aspect of such transactions, and all the persons and institutions that engage in them: Reference re Securities Act (Can,) ABCA 77 at para Alta LR (5th) AR 200. affm'd 2011 SCC 66 at paras [2011] 3 SCR 837. The basic structure of the Act is that no "issuer" may "distribute" securities to the general public unless those engaged in the distribution are "registered", and a "prospectus" has been approved by the Securities Commission. The Act regulates both the initial or "primary" distribution of the securities, as well as secondary trading in securities. Some regulatory functions are delegated to the stock exchanges and other organizations, which are themselves highly regulated. There are numerous exemptions for particular transactions, particular participants in the industry, particular issuers, and particular purchasers of securities. It was conceded that no exemptions were available here. [7] The appellant argued in the Provincial Court that the Loan Agreements were not securities, because they were "simply contracts between the parties and should be enforced in accordance with the intention of the parties and the normal rules of contract law". A "distribution" or sale of securities is. however, always a contract if viewed in isolation. As was stated in Reference re

5 Page: 4 Securities Act (ABCA) at para. 19: "The regulation of the raising of funds from members of the public has at its core the regulation of particular investment contracts." Declaring or obser\'ing that a particular transaction is a "private contract" provides no answer to the scope of the Securities Act. [8] The appellant relied in part on an obiter statement in /?. v Kirk ABQB Alta LR (6th) AR 9: 60 Even though Securities Act s 93 refers to the perpetration of a "fraud." that "fraud" is not just any fraud. It is fraud that results from the person's engaging or participating in "any act, practice or course of conduct relating to a security or exchange contract." In other words, the legislation itself limits the type of action that would "perpetrate a fraud." That "action" falls within the general purposes of the Securities Act and is not Just "any action." For example, if individuals are involved in a transaction between themselves, such as a personal loan evidenced by a promissory note (which might fall within the definition of "security" under the Securities Act), a misrepresentation or fraud in respect of that transaction would not trigger an action under the Securities Act. as it would not fall within "Alberta securities laws": it is a private transaction, (emphasis added) Kirk is a decision on the constitutionality of the Securities Act. The argument was that the Securities Act was unconstitutional because it dealt with "fraud" which is criminal law and so a federal area of responsibility. The reliance on the very general statement in Kirk, to the effect that some "private transactions" might not be caught by the Act. is misplaced. The point being made was that the Securities Act is narrow and focused, because it only deals with "fraud" in the securities context. Kirk does not deal directly with the transactions that are covered or excluded from the Act. [9] The Securities Act is very broadly worded legislation, designed to cover virtually every method by which money could be raised from the public. It is contradictory to argue that money "raised from the general public" is nevertheless merely a series of "private transactions"; that is exactly what the Securities Act is designed to regulate. That characterization could be placed on any method of raising money from the public. Every sale of shares by a corporation to a member of the public is. at one level, a "private transaction". The entire process of raising money from the general public is, however, regulated under the Act. [10] The Provincial Court.ludge found that the lenders believed they were advancing personal loans, and also noted the provision in the Loan Agreements: 7. This investment is in the form of a loan, and is not subject to any securities law. regulation, rules or forms of conduct. This investment and the loan of moneys does not constitute the transaction of any form of securities. stocks, bonds, or other financial instrument subject to regulation by Government under securities law.

6 Page: 5 It is, however, impossible for those raising funds from the public to contract themselves out of the Seciirifies Act, and this inclusion in the documentation is ineffective and irrelevant. [11] As noted, the fact that the loans might be described as "personal" is not decisive. Equally irrelevant is whether the lenders are happy with their investment, feel that they were fairly dealt with, or believe that full disclosure was made to them. An issuer must comply with the Act even if the investors make a fortune. As P. T. Bamum noted: "There's one bom every minute": the Securities Act is designed to protect them, along with ail investors. The Act regulates all raising of money from the public, not just situations where the outcome of the investment is negative or the purchasers of the securities are unhappy. [12] Likewise, the definition of a "security" is a question of statutory interpretation, and the opinions of individual lenders and investors as to whether they were dealing in such an instrument is irrelevant. The interpretation of statutes is a question of law. and evidence on this subject is not admissible: R. v Century 21 Ramos Realty Inc, (1987). 58 OR (2d) 737 at p. 752 (CA): Canada Safeway Ltd. v Manitoba MBCA 78 at para. 7. [2004] 1 WWR 395. [13] The appellant argues that a more realistic interpretation of the Act was needed, or else all sorts of routine transactions would be caught by it. The Act and its related subordinate regulations, however, have numerous provisions designed to deal with overbreadth. Some trades in "securities" are exempt from the registration and prospectus requirements of the Act. For example, under s. 2.4 and 2.5 of National Instrument : Prospectus and Registration Exemptions, certain trades of securities to "close friends and business associates" of directors or officers of the issuer are exempt. Under s "isolated distributions" that are not a part of "successive transactions of a like nature" are exempt. Even though these trades are "exempt trades", they are still trades in "securities". There is. however, no general exemption for "private transactions*'. [14] The appellant relied on Ontario (Securities Commission) v Tiffin, 2016 ONCJ OR (3d) 341. which in turn relied on American case law such as Reves v Ernst & Young. 494 US 56 (1990). Counsel for the respondent advised the Court that Tiffin is under appeal. Tiffm relied on a finding in Reves that not all "notes" are securities. [15] Reves involved the interpretation of the term "any note" in the definition of "security" in the Securities Exchange Act of The American courts have restricted the term to notes that have an "investment" character to them, on the theory that Congress did not intend the statute to reach other "commercial" notes. All notes are presumed to be securities unless the opposite is shown. The presumption can be rebutted by considering several factors: a) if the motivation is an investment with a view to a profit, it is likely a security. If it is to finance an asset purchase or to meet short term funding needs, it may not be: b) if there is a "plan of distribution" and "common trading for speculation or investment" it is likely a security: c) if there is a public expectation that the notes are securities, they will be dealt with as such: and d) if some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, the application of the Securities Acts may be unnecessary.

7 Page: 6 [16] Reves itself does not create any general exemption for "private transactions", and it deals only with the specific term "notes", not all types of securities in general. Further, the notes in Reves were found to be securities. Given the comprehensive and complex regulation of securities in Alberta, there is no apparent need for any judicially created exemptions to the securities regime. There are numerous conditions and exemptions built into the Alberta securities regulation system that are designed to deal with the issues raised in Reves. [17] In any event, the Loan Agreements involved in this appeal would meet the test in Reves for securities. The Loan Agreements expressly describes the loan as an investment: "This investment is in the form of a loan...." They recite that the lender wishes to lend his or her "capital funds to the corporation with the intent of receiving a return in consideration of the risk taken by the Lender." The corporation is "to receive the investment from the lender to carry on the operations and activities of the Corporation with the intent to earn profits from the use of the investment capital funds from the Lender". The obligation to repay is only triggered if. as and when the company makes profits: the Corporation has an "option to pay the lender the principle [sic] sum of the loan plus a premium." If the loan is not repaid, it simply gets placed on the books as an outstanding liability, creating a long term investment. [18] Further, even if the Loan Agreements are not "notes", they would still fall within the other components of the definition of "securities": "evidence of indebtedness", "profit-sharing agreement" and "investment contract". [ 19] Tifjin was prepared to recognize a general exemption from the statute for transactions that were purely private in nature, and had no element of raising funds from the public, even though there is no such exemption in the Ontario statute. It appears the trades in Tiffin may have qualified as exempt trades with "close friends and business associates", which undermines the rationale in justifying such a judge-made exemption. That approach has been found to be necessary in the United States, apparently because of the very wide wording of their statute. The Alberta regime has its own built-in exemptions for the issuing of securities to close friends and business associates, and no common-law exception is appropriate. [20] Tiffin turns on the fact that all of the funds were raised from close friends of Tiffin himself. It appears to suggest that a particular instrument would be a "security" if used to raise funds from the general public, but not a "security" if used to raise funds from friends. The Alberta statute does not recognize a distinction in the characterisation of an instrument as a "security" depending on the identity of the purchaser or investor. The test is functional: Is the issuer raising funds from the public for investment purposes? On the facts of this case funds were raised from members of the public on the expectation that they would participate in the gains to be made from the venture.

8 Page: 7 [21] The Loan Agreements are clearly within the definition of "securities". The interpretation of the summary conviction appeal court judge was correct, and the appeal is dismissed. Appeal heard on December Memorandum filed at Calgary, Alberta thisu^ day of December, 2017 o FILED DEC Mppe3^ Slatter J.A. OTerrall J.A. Authorized to kan for:-.---"^akeling J.A

9 Page: 8 Appearances: D. Young Y. Somji for the Respondent D.W. Kobylnyk for the Appellant