Securities fraudsters already have a shockingly easy ride in Canada, and a ruling from the Supreme Court of Canada makes their lives even easier. In a 5-2 decision, the Supreme Court ruled in July that securities violators can escape the regulatory penalties imposed on them by declaring and being discharged from bankruptcy.
The majority on the court drew an odd distinction between disgorgement orders and monetary penalties, ruling that the former flow directly from the misconduct and the latter are financial obligations created by a regulator’s decision to impose a sanction rather than by the misconduct itself.
The court’s majority concluded that because regulatory penalties can reflect the regulators’ desire to provide a general deterrent in addition to addressing specific misconduct, these sanctions can be evaded through bankruptcy.
The dissenting justices ruled that the penalties imposed by regulators result from the misconduct itself, not the regulators’ efforts to address that misconduct.
The majority opinion requires a twisted leap in logic to draw a distinction between monetary sanctions and disgorgement, given the proximate cause of any regulatory sanction is fraud, investor abuse and other misdeeds.
Fortunately, the court laid out a solution to the consequences of its decision. The majority said that if legislators had wanted regulatory fines, penalties and restitution orders to survive bankruptcy, they should have spelled that out in the legislation.
In light of the precedent set by the country’s top court, the law must be changed.
Regulators, law enforcement and the courts already have a difficult time grappling with financial crime. The Supreme Court’s latest decision further weakens regulators’ authority and alters the calculus of fraud in favour of the criminal. Legislators must address this absurdity immediately.
This article appears in the September issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
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