The Executive Director of British Colombia Securities Commission has won an appeal to the Supreme Court of Canada to restore $100,000 administrative penalties against each of the two leaders of the Cartaway Resources Corp. scheme. The SCC decision was released today.

In the fall of 2002, the British Columbia Court of Appeal reduced the amount of the penalties to $10,000. While agreeing that the brokers involved had breached securities law, the BCCA said the public was not harmed and no shareholder complained.

But in its appeal to the country’s top court, the BCSC argued that general deterrence is an appropriate factor in assessing a penalty that is in the public interest. The SCC agreed.

“The correct standard of review in this case is reasonableness,” writes Justice Louis Lebel on behalf of a unanimous panel of nine judges. “In my opinion, general deterrence is an appropriate factor in formulating a penalty in the public interest. General deterrence is both prospective and preventative in orientation. As such, it falls squarely within the public interest jurisdiction of securities commissions to maintain investor confidence in the capital markets.”

Courts have less expertise relative to securities commissions in determining what is in the public interest in the regulation of financial markets, writes Lebel, explaining the SCC’s decision to restore the BCSC’s order. “The courts also have less expertise than securities commissions in interpreting their constituent statutes given the broad policy context within which securities commissions operate.”

The case began in the autumn of 1994, when a group of securities brokers, including Robert Hartvikson and Blayne Johnson, former brokers with First Marathon Securities Inc., banded together to make a quick profit. They orchestrated the purchase of Cartaway and funnelled some mining claims into Cartaway through a shelf company. Without disclosing to investors the material change in Cartaway’s business to a mining exploration firm, they entered into a private placement, which they split among friends and other employees of First Marathon.

The BCSC found that Hartvikson and Johnson had breached the prospectus requirement of the BC Securities Act by splitting the private placement, thereby relying on a prospectus exemption to which they were not entitled. The Commission imposed the maximum financial penalty of $100,000.

In its deliberations the BCSC, writes Justice Lebel, “took into account the settlement agreements reached in proceedings against other First Marathon brokers. But in doing so, it compared the role of those individuals against Hartvikson and Johnson’s leadership in perpetrating the illegal transaction and their deceitful conduct. Although deceit was not explicitly alleged in the notice of appeal, the respondents’ credibility and misleading conduct was the focus of the proceedings from the outset. The commission also took note of the $5.1 million in trading profits earned by Hartvikson and Johnson.”

On the other hand, notes Justice Lebel, the Commission took into account Hartvikson and Johnson’s previously untarnished records and their positive contribution to the capital markets. “Moreover, both respondents voluntarily surrendered their licences as registered trading representatives in 1996, and repented their actions. The Commission accepted that Hartvikson and Johnson would continue to make a positive contribution to British Columbia’s capital markets, if permitted to do so. It is also notable that both offered to pay $100,000 towards a university foundation or program about business ethics.

“After weighing these considerations, the Commission decided that a lengthy ban was unnecessary to protect the public interest,” writes Lebel. However, the BCSC also considered the need to send a clear message that would deter inappropriate conduct by other participants in British Columbia’s capital markets.