The B.C. Court of Appeal has overturned a decision by the B.C. Securities Commission, which earlier found that a pair of businessmen had committed fraud.

The pair, Carl Anderson and Douglas Montaldi, contested the finding of the BCSC, which said that they perpetrated a fraud and were otherwise in breach of the Securities Act. They also appealed the commission’s findings of misrepresentation, fraud, and acting contrary to the public interest. The pair did not appeal the finding that they traded in securities without registration and distributed securities without filing a prospectus.

Anderson and Montaldi admitted that they were trading in securities without registration and distributing securities without filing a prospectus. But they contend that the commission erred in the legal definition of fraud that it applied to the facts of the case. The court agreed, noting, “The commission’s decision was based on what the appellants ought to have known of the transactions, rather than on what they actually knew.”

The B.C. appeal court found in the pair’s favour, and set aside the findings of fraud and misrepresentation. It also referred the issue of failure to act in the public interest back to the commission for reconsideration.

From January 1996 to April 2002 the pair were engaged in the business of making loans to individuals and small businesses in and around Burns Lake, B.C. Their lending and collection practices of the business were very casual. To raise capital for its lending activities, they sold promissory notes to investors. Ultimately, the business foundered and regulators investigated.

The BCSC had imposed penalties on each of the appellants that included 12-year prohibitions from acting as a director or officer of an issuer (with one exception) and administrative penalties of $200,000 each. The appellants argued that the penalties imposed were unduly punitive, and the court agreed. It ruled that the sanctions imposed by the BCSC should be set aside and the commission should reconsider appropriate sanctions following its reconsideration of the public interest issue.