On May 5, 2014, Ontario’s Divisional Court dismissed the appeal of Otto Spork, Konstantinos Ekonomidis, and Natalie Spork from the decision of the Ontario Securities Commission (“OSC”) that they had breached Ontario’s securities law and engaged in conduct contrary to the public interest. Otto Spork, Konstantinos Ekonomidis, and Natalie Spork were ordered to disgorge $6.75 million, $325,000 and $165,000, respectively, out of a total $23 million that had been obtained from investors. Virtually all of the $23 million was lost.
Otto Spork was the directing mind of various funds that invested heavily in Iceland Glacier Products ehf (“IGP”), a company that planned to sell water from glaciers in Iceland. The exploits of Otto Spark and his dream of bulk water exports are chronicled by McKenzie Funk in the 2013 article, Glaciers for Sale .
Section 127 of the Ontario Securities Act provides that a person or company that has breached Ontario securities law can be ordered to disgorge any amounts obtained as a result of the non-compliance. The legal question is not whether a respondent “profited” from the illegal activity, but whether the respondent “obtained amounts” as a result of that activity. Within this regime, there remains discretion to order only the disgorgement of profits received from illegal activity.
The power to order disgorgement of “amounts obtained” was introduced by the Ontario legislature in 2002 through Bill 198 (Keeping a Promise for a Strong Economy Act) and came into force in April, 2003. Given that the part of the rationale of the legislative change is deterrence, it remains an open question what types of cases will warrant disgorgement of all ill-gotten monies obtained from investors, not just the illicit profits or benefits received by the wrongdoers.
One of the earlier cases to consider the new section was Limelight Entertainment Inc. (Re) which sets out a non-exhaustive list of factors that the OSC panel may consider when making a disgorgement order:
a) whether an amount was obtained by a respondent as a result of non-compliance with the Act;
b) the seriousness of the misconduct and the breaches of the Act and whether investors were seriously harmed;
c) whether the amount that a respondent obtained as a result of non-compliance with the Act is reasonably ascertainable;
d) whether the individuals who suffered losses are likely to be able to obtain redress; and
e) the deterrent effect of a disgorgement order on the respondents and other market participants.
Outside of the securities law context, courts have relied upon the disgorgement remedy to prevent wrongdoers from being unjustly enriched by their misconduct. For instance, in the 2012 decision of Enbridge Gas Distribution Inc. v. Marinaccio, the Ontario Court of Appeal considered whether disgorgement of all funds received from an illicit scheme was an appropriate remedy for Enbridge, which had been defrauded of over $6.5 million. The appellants contended that they should not have been required to return the funds received from Enbridge because they did not know, at the time of the scheme, that their dishonest actions rose to the level of fraud. The Court of Appeal disagreed, holding that the appellants’ full participation in arranging and perpetuating a dishonest and fraudulent scheme meant that they had no grounds to retain any of Enbridge’s money. The Court of Appeal ultimately affirmed the motion judge’s summary judgment decision, which required the fraudsters to collectively repay all of the $6.5 million.
Although complete disgorgement was not ordered in the Spork case, the affirmation of the OSC’s order for disgorgement is significant and continues the alignment of administrative and common-law/equitable remedies in Ontario.
*The authors wish to thank Jennifer Bernardo, Student-at-Law, for her assistance.