On July 3, 2019 the Ontario Securities Commission ("OSC") released its decision in Re Natural Bee Works Apiaries Inc., 2019 ONSEC 23 ("Natural Bee"). Natural Bee provides useful guidance concerning proof of falsity and participation in a fraudulent scheme under section 126.1(1) of the Ontario Securities Act (the "Act").

Background

In Natural Bee, OSC Staff alleged that Natural Bee Works Apiaries Inc. ("NBW"), Rinaldo Landucci ("Landucci"), its sole director, and Tawlia Chickalo ("Chickalo"), an employee of NBW who was at one point identified as its President, committed breaches of the Act including engaging in a course of conduct relating to securities that they knew or ought reasonably to have known perpetrated a fraud, and making misleading statements in marketing materials. In addition, Chickalo was alleged to have traded securities of NBW without registration and without a prospectus or a prospectus exemption.

OSC Findings

At the conclusion of a six day hearing, the Hearing Panel (the "Panel") determined that Staff had succeeded in proving all of its allegations.

Chikalo was found to have sold shares of NBW, a company "apparently" engaged in the sale of bee-related products, to friends and persons to whom she had sold beeswax candles. Chickalo prepared marketing materials designed to induce persons to invest in shares of NBW which repeated false information that had been provided to her by Landucci. Chickalo undertook no inquiries whatsoever into the veracity of those statements, which were characterized by the Hearing Panel as involving "extravagant deceit". Further, funds from the sale of the shares totaling $291,250 were transferred to bank accounts controlled by the respondents. Most of that money was used for personal expenditures or withdrawn in cash.

The decision is noteworthy for three reasons.

First, the Panel concluded that even though Staff did not adduce evidence to refute the truth of statements made in the NBW marketing material, for example that NBW would be launching on NASDAQ with a "lowest launch value" of $4 a share, it was open to draw an inference that the statements were false. Applying its expertise as a specialized securities tribunal, the Panel concluded that the claims were "baseless". Further, no evidence was submitted by the respondents to support the truth of the statements.

Second, the Panel found that Chickalo had breached the fraud provision of the Act on the basis of willful blindness and/or recklessness. In this case, Landucci made false statements to Chickalo in order to lure her into repeating such statements to investors in the course of her capital-raising role. Although Chickalo lacked actual knowledge of Landucci's fraudulent scheme, she was willfully blind about whether Landucci's statements were true. Chickalo simply accepted them at face value and composed detailed solicitation materials that reflected these false claims that were designed to make investing in NBW seem like a "sure bet". The Panel concluded that Chickalo reasonably ought to have known that these statements were false and thereby found that she had participated in the fraudulent scheme.

Finally, relying upon prior OSC decisions, the Panel applied the "Kienapple" principle which stands for the proposition that the same misconduct should not form a basis for separate overlapping contraventions. The Panel determined that the principle applied equally in the OSC's securities regulatory context and declined to find violations of other provisions of the Act given its finding of fraud.

Sanctions

The OSC released its decision on sanctions and costs on September 25, 2019. Pursuant to 127(1) of the Act, the OSC ordered that the respondents:

(a) cease trading or acquiring any securities or derivatives (with a few exceptions);

(b) pay an administrative penalty of $650,000 to the OSC ($150,000 to be paid by Chickalo);

(c) disgorge $267,203 to the OSC ($32,281 to be disgorged by Chickalo); and

(d) pay $267,806.59 in costs to the OSC ($80,341.98 to be paid by Chickalo).

The OSC Panel did not view Chickalo's lack of actual knowledge or self-proclaimed "inexperience in capital-raising activities" as a substantial mitigating factor. Chickalo had played a "supporting but significant" role in Landucci's fraudulent scheme. The apportionment of the monetary sanctions was reflective of that sentiment.

Takeaways

  • In appropriate circumstances, the OSC will rely upon its specialized expertise to draw inferences from the evidence even in the absence of proof of a particular fact.
  • Reckless or willfully blind conduct may be sufficient to establish a breach of the fraud provision of the Act.
  • The Kienapple principle may apply in the securities regulatory context such that the same misconduct does not form the basis for separate overlapping contraventions.

The authors would like to thank Jessica Silverman, articling student, for her contribution to this article.

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