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Re Rowan: Penalties without Charter Protection

June 30, 2012

By: Emily Fan and Michael Barrack

In the March 29, 2012 decision Re Rowan,1 the Ontario Court of Appeal decided, among other issues, that individuals involved in proceedings at the Ontario Securities Commission (the “Commission”) who are subject to monetary penalties imposed under the Ontario Securities Act (the “Act”),2 are not afforded the protections of the Charter of Rights and Freedoms.3 Over the past decade, rather than imposing criminal or penal sanctions, governments have attempted to impose very substantial monetary penalties through regulatory bodies.  Many in the legal community view this as an attempt to impose severe sanctions without providing the protections of the Charter.  In Re Rowan, rather than allowing accused persons the benefit of Charter protections, the Court imposed limits on the motive for these large penalties.  Following this decision, it is uncertain whether simply requiring a tribunal to categorize its sanctioning motives affords the type of protection that the Charter was intended to provide to those accused of committing an offence.

As background to this review, the Commission initiated proceedings against three individuals in 2006.  The proceedings arose from allegations that Roger Rowan, the President and Chief Operating Officer of Watt Carmichael Inc. (“WCI”), had breached the Act by trading in and failing to report his trades in shares of Biovail Corporation (“Biovail”), a company of which he was also a director.  WCI was a broker and registered investment dealer.  Biovail’s Chairman and Chief Executive Officer had created offshore trusts holding Biovail securities and maintained discretionary accounts at WCI.  Rowan was the registered representative on these accounts and was allowed to trade in securities without client authorization.  Ultimately, the Commission dismissed allegations of insider trading against Rowan but found that he had breached Ontario securities law by failing to file certain insider reports required under section 107 of theAct.4

Proceedings were also brought against Harry Carmichael, the Chairman, Chief Executive Officer and Ultimate Designated Person of WCI, and Michael McKenney, the Chief Financial Officer and Chief Compliance Officer of WCI on the basis of the same facts.5  The Commission held that WCI, Carmichael, and McKenney had all failed to adequately supervise Rowan while he was trading in Biovail shares.6

Rowan, Carmichael, and McKenney appealed the Commission’s findings to the Divisional Court, which dismissed the appeal.  The Ontario Court of Appeal upheld the decision of the Divisional Court.

The central ground of the appellants’ appeal was based on section 127(1)(9) of the Act, which allowed the Commission to impose administrative monetary penalties (“AMPs”) for breaches of the Act.  The appellants argued that this section permitted the Commission to impose maximum penalties of $1 million per transaction.  Therefore, if the maximum amount were imposed on each transaction in a single course of infractions, the amount of the AMP could be so large as to constitute a penal sanction, triggering the protections of section 11(d) of the Charter, which provides the right “to be presumed innocent until proven guilty according to law in a fair and public hearing by an independent and impartial tribunal”The central issue in the case was whether the Charter applied to this proceeding and whether the accused should be afforded the benefits of its protections.  It was argued that the size of the potential fine, rather than the actual fine imposed in this case, brought the proceedings within the scope of the Charter.

The Supreme Court of Canada’s decision in R v Wigglesworth is the leading case interpreting the application of section 11 of the Charter.  In it, the Supreme Court of Canada rejected the proposition that all persons subject to proceedings leading to the imposition of a penalty should be regarded as charged with an offence for the purposes of section 11, and instead restricted the section to only the most serious of offences: criminal or penal matters.7

Wigglesworth established two categories of proceedings that would fall under section 11 of the Charter.  The first category included matters that are by their very nature a criminal proceeding.  The second category included matters where a conviction in respect of an offence may lead to a true penal consequence.  The appellants argued on the basis of the latter category.8

Turning back to Re Rowan, applying Wigglesworth, the Court of Appeal refused to accept that an unlimited power to impose fines was sufficient to create a proceeding to which Charter protections applied.  Instead, the Court of Appeal held that the power to impose an unlimited fine was not subject to the Charter but was instead subject to interpretation such that the tribunal’s discretion was limited to the imposition of penalties consistent with the purpose of maintaining discipline and order within a particular sphere of society only.9 There is a great deal of imprecision in this formula and it is difficult for anyone to order their affairs with any certainty on the basis of it.

The Court of Appeal also referenced a line of jurisprudence that holds that the power of administrative tribunals to impose fines is to be assessed on the basis of the actual, rather than the potential penalty.10 The Court then cited two cases in which substantial monetary penalties had been upheld – Lavallee v Alberta (Securities Commission),11 and Canada (Attorney General) v United States Steel Corp.12  The latter case was the first case to be litigated under the Investment Canada Act.13 The ICA permitted a penalty of up to $10,000 per day for failing to follow a ministerial directive.  U. S. Steel had argued that the procedure leading up to the imposition of the penalty did not afford the accused the protections required by section 11 of the Charter.  The Court in U. S. Steel, however, held that legislation authorizing fines even where the limits of the fine were ambiguous would not trigger section 11 protections as long as the power was exercised to achieve proper administrative purposes.14

The Court of Appeal found that the Commission’s authority to order penalties was also consistent with its role in regulating capital markets and preventing economic motivations for breaching securities laws.15 Previous Supreme Court jurisprudence had held that penalties amounting to $1 million had a deterrent purpose, but were not necessarily penal in nature.16 Further, the penalty ordered by the Commission in Re Rowan was consistent with the penalties permitted by statutes in other jurisdictions.17

The Court of Appeal ultimately agreed with the Commission and held that a $1 million penalty did not meet the true penal consequences test18 because the motivation for the AMP was governed by regulatory considerations and not by criminal liability or sentencing objectives, there was no criminal record associated with the fine, and the fine was to be paid to third parties.  Lastly, considering the substantial number of infractions involving billions of dollars and commissions earned, it found that the $1,220,000 fine ordered against the appellants was constitutionally proportional.19


 

1 Re Rowan, 2012 ONCA 208, 2012 CarswellOnt 3909 [Re Rowan].

2 Securities Act, RSO 1990, c S5 [Act].

3 Charter of Rights and Freedoms, Part I of the Constitution Act, 1982 being Schedule B to the Canada Act 1982 (UK), 1982, c11 [Charter]

4 Rowan, supra at para 2.

5 Rowan, ibid at para 3.

6 Rowan, ibid at para 3.

7 Rowan, ibid at para 35 citing R v Wigglesworth, [1987] 2 SCR 541 at pp 559-560 [Wigglesworth].

8 Rowan, ibid at paras 36-37.

9 Rowan, ibid at para 41.

10 Rowan, ibid at para 46.

11 Lavallee v Alberta (Securities Commission), 2010 ABCA 48, 317 DLR (4th) 373.

12 Canada (Attorney General) v United States Steel Corp., 2011 FCA 176, 33 DLR (4th) 1 [U. S. Steel].

13 Investment Canada Act, RSC 1985, c 28 (1st Supp) [ICA].

14 Rowan, supra at para 48 citing U. S. Steel, supra at para 80.

15 Rowan, ibid at para 49.

16 Rowan, ibid at para 51.

17 Rowan, ibid at para 50.

18 Rowan, ibid at paras 52-53.

19 Rowan, ibid at para 55.

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