A real estate investment venture ordered into receivership amid the Ontario Securities Commission’s concerns about possible misconduct is appealing the decision, arguing the court set too low a bar for the regulator.
In May, the Ontario Superior Court of Justice appointed Grant Thornton Ltd. as the receiver for Cacoeli Capital Inc., Cacoeli Asset Management Inc. and a series of related limited partnerships, based on the OSC’s concerns that investors may have been harmed by having their capital diverted to real estate projects other than those specified at the time of investment.
In granting the regulator’s request, the court found the OSC had established it had “serious concerns” about potential breaches of securities laws.
The OSC has not made any enforcement allegations, and no wrongdoing has been proven.
Cacoeli is now appealing the court’s decision to appoint a receiver over its business, arguing the standard used by the court was too low.
In court filings, the firm argued this amounts to an “error of law” and that the extraordinary action of appointing a receiver calls for a higher standard of proof.
“On any evidentiary threshold more rigorous than a ‘serious issue to be tried,’ the commission cannot establish its allegations and the application should be dismissed,” the filing said.
While the same issue was raised in the initial hearing, the firm now argues the court erred by applying the lower standard.
“The application judge conducted no analysis in finding that the evidentiary standard was a ‘serious issue to be tried’ — concluding only that there is ‘no reason’ for a higher standard [than what’s required for asset freeze orders] — and did not address the fundamental difference between an order appointing a receiver… and an order for the continuation of a freeze,” the filing said.
The firm argued that ordering an asset freeze is less invasive than appointing a receiver. An asset freeze is “often a temporary step,” whereas, “The appointment of a receiver … is a final and powerful remedy that wrests control of a company’s assets and legal rights from management and delivers the power to a receiver.”
“Where relief is final in nature, a higher evidentiary standard is required,” the firm said.
Absent definitive guidance from the court on the correct threshold, the firm argued that a stricter standard — requiring the regulator to establish a “strong prima facie case” of breaches of securities law — should apply before the court imposes a receivership.
“The purpose of the Securities Act is not solely to provide for enforcement, but to support fair and efficient capital markets and facilitate capital formation. It is important that investors are sufficiently protected without excessive or heavy-handed intervention. A ‘serious issue to be tried’ standard for the commission’s alleged breaches of the Securities Act fails to strike this balance,” it said.
“Public confidence in capital markets depends not only on active enforcement, but also on procedural fairness and proportionality in regulatory interventions. A strong prima facie standard protects the balance between effective market oversight and the protection of individuals and firms from premature or unjustified regulatory overreach,” the firm argued.
As a result, it is requesting the court overturn the receivership or return the case to the lower court for a rehearing based on a higher standard of proof.
The OSC has not yet filed its response.