Quadrexx Hedge Capital Management Ltd. v. Ontario Securities Commission: First Application Of The Vavilov Standard Of Review To An OSC Decision

• Published date: 30 October 2020
• Subject Matter: Corporate/Commercial Law, Wealth Management, Litigation, Mediation & Arbitration, Compliance, Corporate and Company Law, Wealth & Asset Management, Trials & Appeals & Compensation, Securities
• Law Firm: Norton Rose Fulbright Canada LLP
• Author: Ms Elana Friedman

In a previous post, we discussed the new standard of appellate review of tribunal decisions described in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 (Vavilov) and its implications for the Ontario Securities Commission (the OSC). In Quadrexx Hedge Capital Management Ltd. v. Ontario Securities Commission, 2020 ONSC 4392, the Divisional Court considered for the first time the application of Vavilov to a decision of an OSC Hearing Panel.

Background

After a contested hearing, a Hearing Panel of the OSC (the Panel) found that Miklos Nagy and Tony Sanfelice the directing minds of Quadrexx Hedge Capital Management Inc Quadrexx Asset Management Inc., and Quadrexx Secured Assets Inc (the Quadrexx entities) engaged in fraudulent conduct in connection with three distributions of securities contrary to section 126.1(1)(b) of the Ontario Securities Act (the Act), resulting in investor losses totaling over $3 million. In respect of the same distributions, the Quadrexx entities were similarly found to have engaged in fraudulent conduct. The Panel also found that Messrs. Nagy and Sanfelice (the Appellants), and Quadrexx Asset Management, committed other contraventions of the Act including:

• failing to report a working capital deficiency contrary to section 12.1 of NI 31-103;
• failing to deal fairly, honestly and in good faith with clients contrary to section 2.1(1) of OSC Rule 31-505; and
• with respect to the Appellants, breaching their obligations as Ultimate Designated Person and Chief Compliance Officer contrary to NI 31-103.

The Panel ordered, among other things, that the Appellants be permanently prohibited from trading or acquiring securities and acting as directors or officers of any issuer or registrant. They were also ordered to pay administrative penalties and to disgorge almost $2.5 million.

In their appeal to the Divisional Court, the Appellants submitted that the Panel had made twenty-three errors warranting appellate intervention, including numerous factual errors, errors of mixed fact and law, failures to afford procedural fairness, and that the Panel's reasons were inadequate.

The Applicable Standard of Review

Applying the Supreme Court's decision in Vavilov the Court confirmed that as the Legislature had provided a statutory right of appeal from decisions of OSC Hearing Panels, the Divisional Court was required to apply appellate standards of review, namely:

• Where the ground of appeal raises solely an issue of law alone the standard of review of a Panel...