Alberta appeal court rules sanction by province's securities regulator doesn't survive bankruptcy

The Alberta Securities Commission (ASC) and the Alberta RCMP Federal Policing Integrated Market Enforcement Team (IMET) have charged a Calgary man, Theodor Hennig, with two offences under the Securities Act.

The charges come after the Court of Appeal of Alberta granted Hennig’s appeal challenging administrative fines of $400,000 and $175 000 the ASC imposed on him in 2008. The court ruled in December that Hennig’s debt to the ASC doesn’t survive a bankruptcy he filed in 2011 and was discharged from in 2015.

Lawyer Joseph Groia, who acted on behalf of Hennig, says the laying of new charges might reflect new tactics being taken by regulators after the appeal court decision.

“The real danger is that regulators try to get the Bankruptcy and Insolvency Act changed, and if that doesn’t work, they then lay more criminal or quasi-criminal charges,” he says. However, that could ultimately be a potential positive for those facing quasi-criminal charges related to securities laws, Groia notes, “as it’s fairer and more transparent, and far more people get acquitted by the courts then they do by regulators in hearing rooms.”

Joseph Groia

In 2008, Hennig was ordered by the ASC to pay the administrative penalties for his role in a company issuing misleading financial statements, failing to disclose secret commissions, failing to file insider trading reports, and market manipulation.

The ASC panel also found that Hennig had breached the Securities Act and imposed sanctions. These include a permanent ban from acting as a director or officer of any issuer and a 20-year ban on trading in or purchasing securities, including those acquired using exemptions.

The quasi-criminal charges laid in mid-January relate to those sanctions. Hennig is charged with one count of trading and/or purchasing securities while prohibited from doing so by order of the ASC; and one count of acting as a director and/or officer of an issuer while prohibited from doing so by order of the ASC, contrary to s. 93.1 of the Securities Act.

It is alleged that Hennig purchased securities using an accredited investor exemption in May 2018 in violation of the sanctions. It is also alleged that Hennig acted as the CEO and director of an issuer, Octopus Technologies Inc., from October 3, 2019, to June 22, 2020, in violation of his sanctions. The charges were laid following the Joint Serious Offences Team (JSOT) investigation.

The JSOT is an enforcement partnership between the ASC, the IMET and Alberta Crown Prosecution Service. It investigates and prosecutes quasi-criminal cases under the Securities Act and certain securities-related criminal offences under the Criminal Code. Repeat offenders, serious frauds and breaches of ASC or court orders and bans are typically targeted.

Hennig’s first appearance in court is scheduled for March 15, 2022.

The December Court of Appeal decision stems from the ASC in 2018 asking a Court of Queen’s Bench chambers judge to have the outstanding administrative fee owed to the commission — now more than $600,000 — enforced. The ASC argued the debt survived Hennig’s discharge from bankruptcy.

The judge, Barbara Romaine, granted the ASC’s application, finding that the debt to the ASC survived the bankruptcy because it arose because of fraud or represented a penalty similar to sanctions imposed by a court.

Hennig appealed that decision, and the appeal court found in his favour, ruling that the lower court judge erred.

Says Groia: “Justice Romaine is a highly respected senior justice of the Alberta court; where the ACA found that she erred was in her reading of what the ASC could, and did, do in their decision against Mr Hennig.”

The appeal court noted the ASC didn’t find that Hennig committed fraud, nor did the regulator even allege fraud in its allegations against him.

“Almost two decades after the impugned conduct, the ASC is claiming Mr. Hennig made fraudulent statements, when it never chose to do so before,” the appeal court said in its decision.

It added that “the chambers judge erred by not considering the full context of the proceedings before concluding that the findings of fact made by the ASC panel amounted to Mr. Hennig making fraudulent statements.”

The appeal court also found that a penalty imposed by the ASC isn’t equivalent to a court-ordered sanction that would survive bankruptcy.

The ruling said that “fines,” “penalties,” and orders like them refer to money penalties imposed as punishment for offences against the public or the state in criminal or quasi-criminal proceedings.

 The ASC did not impose the administrative penalty and the costs order to punish Mr. Hennig but to prevent future misconduct, nor did it impose them in criminal or quasi-criminal proceedings.

Says Groia: “In simple terms the ACA has held that unless the penalty is given in a court by a judge then it isn’t the sort of penalty that survives bankruptcy. Nor should it be in my view.”

The ruling also stated: “The ASC and the chambers judge characterized Mr. Hennig’s conduct as morally reprehensible, and I do not disagree. The ASC could have referred the matter to the Crown to lay charges against Mr. Hennig for the offence of contravening securities laws under the Securities Act — a quasi-criminal proceeding — but it chose not to. Instead, it chose the regulatory path.”

Groia says this case “is really about how we police and protect the capital markets. As long as regulators continue to overuse their public interest powers, they will have to also accept that courts will continue to apply the principles espoused in [earlier cases] . . . that say those powers are not meant to be punitive.”

Pallett Valo lawyer Daniel Waldman, who wrote a column on the original chambers decision in 2020, says that the appeal court decision “makes a lot of sense” in that securities regulators, as quasi-criminal bodies have numerous tools at their disposal for dealing with someone who is sanctioned, many of which would survive a bankruptcy.

“What the original decision seemed to say is that if a securities regulator has sanctioned you for any reason, and you go bankrupt, you're not going to escape any fine, penalty or administrative fee,” he says. “The Court of Appeal seems to be saying here that this interpretation adds another layer or two to s. 178 [of the Business and Insolvency Act], and that it is far too broad an interpretation.”

He points to the appeal court ruling’s concluding paragraph, which says “what the ASC is seeking is a general exemption from release upon discharge for the administrative penalties imposed by a securities regulator. This would create a new category of exemption under s. 178(1) which falls within the purview of Parliament, not this court.”

It adds “The ASC’s debt is neither ‘a fine, penalty, restitution order or other order similar in nature … imposed by a court in respect of an offence’ (s 178(1)(a)) nor a ‘debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation’ (s 178(1)(e)). Accordingly, it was released when Mr Hennig was discharged from bankruptcy.”