An Ontario court has upheld an Ontario Securities Commission (OSC) ruling that found certain fund managers breached their fiduciary duty when they engaged in self-dealing transactions.
The Superior Court of Justice (Divisional Court) dismissed an appeal from Wayne Pushka and Crown Hill Capital Corp., which sought to overturn an enforcement decision against them and the sanctions an OSC hearing panel had imposed. Overall, the court ruled that the OSC’s findings were reasonable; as a result, the appeal of the OSC’s findings in the case and the sanctions it imposed were dismissed.
According to the court’s decision, Pushka and Crown Hill sought to appeal the OSC’s 2013 decision, which found that they “committed multiple breaches of their fiduciary obligations … to the investment funds they managed and the unitholders of those funds.”
Pushka and Crown Hill also appealed the sanctions the OSC handed down in 2014, which included registration and trading bans, along with ordering more than $18 million in disgorgement, administrative penalties of $1.875 million and costs of $300,000.
OSC orders substantial penalties for breach of fiduciary duty
The court ruling notes that the appeal is “largely based on one fundamental characterization of the case by the appellants.” It says that Pushka and Crown Hill argued that the board, the funds’ independent review committee (IRC) and advice from two law firms supported the transactions in question.
“The appellants argue that the impugned transactions were matters of business judgment and are protected from review by the ‘business judgment rule,’ which precludes a tribunal from second-guessing the decisions made by a board of directors in the course of managing the affairs of a corporation,” the court ruling says.
However, both the OSC, and now the court, rejected this line of reasoning. “The OSC found that the appellants’ self-dealing was not saved, and could not be saved, by decisions of the board of directors, recommendations of the IRC or legal advice. Simply put, the appellants could not breach their duties of good faith and loyalty by acting in conflict of interest, even if independent financial professionals told them otherwise,” the court said in its decision.
The court said that it found no fault with the OSC’s reasoning in reaching these conclusions. Furthermore, the court rejected the appellants’ argument that the OSC staff should have disproven their defence. “This is wrong. It was not necessary for OSC staff to disprove the appellants’ defences as part of the prosecution case,” it said.
“I see no unfairness in the way the OSC addressed the role of the board, the IRC or legal counsel. The case for breach of fiduciary duty was overwhelming,” stated Justice D.L. Corbett in the decision. “The sanctions ordered are well within the range of reasonable possible sanctions, and, in particular, the disgorgement order is consistent with the principles that apply to fiduciaries who have engaged in self-dealing. I would dismiss the appeal.”
The OSC notes that the court’s ruling in this case “is one of the only decisions of the Divisional Court to consider the fiduciary duty owed by investment fund managers to the investment funds they manage.”
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