An appeal of a decision to grant the Ontario Securities Commission’s (OSC) request for a receiver over the business of real estate investment firm, Cacoeli Asset Management Inc., has been rejected — the court upheld a lower court’s finding that the OSC only needs to establish a “serious concern” about possible regulatory violations in order to secure a receivership order.
The Court of Appeal for Ontario dismissed an appeal from Cacoeli, which sought to a challenge a decision of the Superior Court of Justice in June that tapped Grant Thornton Ltd. to oversee its business, after the OSC sought a receiver amid concerns about possible securities law violations.
The OSC began investigating the Cacoeli businesses — which are in the business of acquiring, managing, renovating and selling residential properties — following a complaint from the venture’s former CFO, alleging that investor funds were used for different projects than the ones that investors bought into.
That investigation is ongoing, and there haven’t been any enforcement allegations brought against the firm. In the meantime though, the OSC sought a court-appointed receiver for the business, citing concerns about possible misconduct.
“The OSC’s allegations relate to transactions that have taken place since 2021 or 2022. Cacoeli used investor equity from certain projects to fund other projects, and it used proceeds from the sale of existing projects to repay loans taken out to fund deposits on a proposed property purchase,” the court noted.
While Cacoeli’s principals admitted that investors’ equity was diverted between projects, they argued that these uses were permitted, and that investors received stakes in the other projects.
“The application judge rejected this argument and found that diversion of funds was not permitted,” the appeal court noted. The judge also rejected their argument that the OSC must show that it has “strong prima facie” evidence of breaches of securities law to justify a receivership order.
Instead, she found that the regulator only has to demonstrate that it has a “serious concern” about possible breaches.
On appeal, Cacoeli argued that appointing a receiver is a final and powerful remedy, which requires a higher bar for justifying the action — and, it argued that the lower evidentiary standard for freeze orders implies that there should be a higher standard for receivership orders.
“Given the nature of a receivership order and the absence of specific language, they submit that the legislature intended for a higher evidentiary standard to apply to the appointment of a receiver,” the court noted.
However, the appeal court rejected that argument, finding that the “serious concern” standard is consistent with the purpose of securities law, and that the ability to seek a receiver is consistent with the OSC’s mandate. It also said that, “There is no basis to suggest that the legislature intended to impose a strong prima facie standard for receivership orders.”
“A receivership is an important tool available to the OSC while an investigation continues,” it added. “To impose an onerous evidentiary standard for a receivership would impede the public protection mandate of the OSC, as it could potentially make it impossible for the OSC to obtain a receivership at the early stages of an investigation when the facts are not fully known.”
Ultimately, the court dismissed the appeal, and ordered that Cacoeli pay the OSC its costs of the appeal, fixed at $15,000.