Ordinarily, a regulatory settlement involving securities fraud should include a disgorgement order, but in the case of a woman who settled with the Ontario Securities Commission (OSC) last year, the existence of ongoing civil litigation to recover money for investors justified a settlement that didn’t include disgorgement, regulators say.
In December, Ontario’s Capital Markets Tribunal approved a proposed settlement between the OSC and Claire Amanda Drage, who the regulator accused of fraud and other violations in connection with the sale of high-interest, unsecured promissory notes to investors to finance various real estate projects, which resulted in approximately 450 investors losing $90 million.
Under the settlement, Drage was permanently banned from the capital market, however no financial sanctions were imposed.
Now, the tribunal has issued its reasons explaining the decision to approve a settlement in a massive fraud case that didn’t include any financial sanctions — a resolution that raised eyebrows with the tribunal.
“We did … question the fact that there were no financial sanctions, and particularly no disgorgement order,” it said in its reasons — noting that a recent decision from the Supreme Court of Canada established that regulatory disgorgement orders aren’t wiped out by bankruptcy in fraud cases.
“With the clarification of the law provided in [the Supreme Court ruling], we would generally expect to see some amount of disgorgement in settlements involving admissions of fraud, even when the respondent is bankrupt or insolvent,” it said.
The Tribunal also noted that it would expect disgorgement to be ordered even in cases where it’s unlikely that investors will recover any money.
“In our view, an unconditional disgorgement order reinforces both general and specific deterrence and serves a forward-looking investor and market protective purpose,” it said.
While going through with the charade of imposing an unenforceable penalty may undermine confidence in the regulatory enforcement process, “… a disgorgement order that survives bankruptcy is not merely symbolic,” the panel said. “An unconditional disgorgement order may become collectible if a respondent acquires resources after being discharged from bankruptcy.”
However, in this case, the tribunal noted that the existence of ongoing civil litigation that could result in investors getting some money back justified a settlement that didn’t include disgorgement.
“A disgorgement order that survives bankruptcy could compete with investor recovery in those proceedings, which is not a desirable outcome,” it found. “As such we are satisfied that we can approve the settlement even though it did not include a disgorgement order.”
Ultimately, the panel concluded that the proposed settlement that featured a market ban, but no financial sanction, was reasonable and in the public interest.
“… We are satisfied that the negotiated settlement falls within a range of reasonable outcomes,” it said. “The Tribunal respects the negotiation process and accords significant deference to the resolution reached by the parties. The proposed sanctions against Drage should deter both her and others from fraud, registration and prospectus violations.”