An Ontario Securities Commission (OSC) panel has ordered over $20 million in disgorgement and penalties against a fund manager for breaching fiduciary duties and violating the public interest.
The panel ordered $18.2 million in disgorgement, $1.875 million in penalties, and $300,000 in costs, along with 10-year bans, against fund manager, Crown Hill Capital Corp. (CHCC), and the firm’s directing mind and sole shareholder, Wayne Lawrence Pushka. The sanctions handed down by the commission relate to breaches of their fiduciary duties to the Crown Hill Fund and its predecessor, and that they acted contrary to the public interest.
In the initial hearing, the panel found the violations stemmed from various transactions, including a fund merger that altered unitholder rights, failing to address conflicts of interest, making a loan and undertaking an acquisition and reorganization that amounted to breaches of fiduciary duty. It also found that a circular to approve a proposed reorganization was “materially misleading”. (See investmentexecutive.com, OSC panel finds Crown Hill Capital, CEO breached fiduciary duty, August 26, 2013.)
On Monday, the commission handed down sanctions in the case. OSC staff sought almost $24 million in disgorgement and a permanent ban against the respondents. The decision indicates that the respondents argued against any disgorgement, saying that the amounts in question were earned through valid, legal transactions that were approved by unitholders. They also cited several mitigating factors, and stressed that there was no fraud or loss of investor funds, among other things.
The panel ruled that disgorgement is warranted in this case, itemizing fees that it found were generated by non-compliance with securities law. It also ordered 10-year prohibitions on Pushka being a director or officer of any reporting issuer, registrant or investment fund manager, or CHCC and Pushka from being a registrant, investment fund manager or a promoter.
“A disgorgement order alone is not sufficient deterrence,” it said, noting, “In this case, CHCC and Pushka were gambling with other people’s money and benefited substantially from doing so. That is the most important factor in considering the imposition of administrative penalties in this matter. In our view, simply ordering disgorgement of amounts obtained by CHCC is not sufficient deterrence. There must be administrative penalties of a substantial amount in order to remove the economic incentive for misconduct and to deter others.”
However, it declined to order the permanent ban requested by OSC staff. “We have not imposed permanent bans primarily because this matter did not involve fraud or illegal distributions,” it said, noting that a loan in question was repaid, a note was ultimately discharged, and because the firm relied on legal advice to an extent.
“Today’s decision demonstrates the OSC’s commitment to ensuring fund managers, entrusted with investor’s money, are abiding by their fiduciary duty,” said Tom Atkinson, director of enforcement at the OSC. “It also sends a clear message to the marketplace that if you break the rules, you’re going to pay – the commission doesn’t shy away from ordering large monetary penalties when the amounts obtained are a result of non-compliance with Ontario securities law and abusing the trust of investors.”