On December 6, 2022, in Re Sand, Achs, Gulston, 2022 BCSECCOM 473 [PDF], the British Columbia Securities Commission (BCSC) banned John Sand, Karol Achs and Jolyon Charles Christopher Gulston from participating in capital markets for life and ordered them to pay more than $1.5 million in administrative and enforcement penalties to the BCSC under sections 161(1) and 162 of British Columbia’s Securities Act, R.S.B.C. 1996, c. 418.
Sand, Achs and Gulston were found to have defrauded two investors into believing that $600,000 in investment funds would be used to build a facility to produce zinc-based batteries. Instead, the investment funds were used for personal expenses and other unrelated purposes. Gulston also made representations about the existence of purchase orders and production facility plans that were found to be knowingly false. In sanctioning Sand, Achs and Gulston, the BCSC highlighted the seriousness of fraud in this case and in general, as well as its immeasurable harm to the reputation, integrity and public confidence of capital markets.
Securities commissions, rather than criminal courts, seem to continue to be the forum of choice for “prosecuting” capital markets law breakers, even though securities regulators are generally limited to using their prescribed “public interest” mandate to prevent future wrongdoing and to protect investors and confidence in the capital markets and not “punish” wrongdoing.
Background
In the fall of 2014, Gulston approached two investors regarding a possible new venture to produce zinc-based batteries. Gulston told the investors that Achs was the battery scientist, Sand was responsible for sales and Gulston was an investor seeking to attract other investors. The two investors were also led to believe that the battery venture had significant purchase orders and that an investment of $600,000 would be sufficient to start production.
One year after the two investors provided the $600,000 investment, they became increasingly concerned with the minimal to no progress on the battery facility and other investors’ inability to obtain written technical specifications for the battery. When the investors demanded their money be returned, $200,000 of the $600,000 was returned by cash cheques; the other cheques were dishonoured. Sand, Achs and Gulston had used the invested funds for other purposes, including personal expenses, loan repayments and other services.
On August 8, 2022, the BCSC found that Sand, Achs and Gulston knowingly participated in fraud in breach of section 57(b) of the Securities Act. In addition, the BCSC found that Gulston further breached section 50(1)(d) of the Securities Act by knowingly making untrue statements of material facts while engaged in investor activities to promote the sale of securities. Approximately four months later, the BCSC announced sanctions against Sand, Achs and Gulston in administrative penalties and enforcement orders under the Securities Act.
The decision
Sanctions under the B.C. Securities Act
Sections 161(1) and 162 of the Securities Act grant the BCSC relatively broad sanction powers. While the BCSC highlighted that section 161(1) orders are protective and preventative in nature and prospective in orientation, aspiring to protect investors, to promote the fairness and efficiency of capital markets and to preserve public confidence in capital markets, it has the power to impose an administrative penalty up to $1,000,000 for each contravention. Using this power is meant to attract specific and general deterrence.
Administrative penalties
The BCSC considered several factors to arrive at their sanction orders under sections 161(1) and 162 of the Securities Act, including the seriousness of the conduct; the harm to investors; the enrichment of the respondents; aggravating or mitigating factors; past misconduct; risk to capital markets; fitness to be a registrant, director or officer of an issuer; specific and general deterrence; and prior orders in similar cases. Sand, Achs and Gulston were found to have committed serious fraud with intentional dishonesty in creating false documents and failing to make and retain documentary records to track the funds and ordered to pay $380,000 in administrative penalties under section 162 of the Securities Act.
Penalties under section 161(1)(g) of the Securities Act
In determining the appropriate orders under section 161(1)(g) of the Securities Act, the BCSC applied the two-step approach from Re SPYru Inc., 2015 BCSECCOM 452 [PDF].
First, the BCSC considered whether Sand, Achs and Gulston directly or indirectly obtained amounts arising from their contraventions of the Securities Act. It found that they obtained amounts from their contraventions of the Securities Act and that Sand and Achs jointly controlled the $600,000 received by their fraudulent conduct.
Second, the BCSC considered if it was in the public interest to make an order under the provision, considering issues of specific and general deterrence. The BCSC highlighted that fraud is the most serious misconduct under the Securities Act, requiring mental intent for deceit in the misconduct. Fraud causes immeasurable harm to the reputation, integrity and public confidence of the capital markets. Misstating material facts undermines the public’s confidence in the provision of accurate and complete information for informed investment decision-making. The lack of proper record keeping by Sand, Achs and Gulston in relation to the material facts was also an aggravating factor, as record keeping is an expectation for all those who wish to participate in capital markets. On the other hand, the BCSC concurrently found that it was not in the public interest to order payments exceeding $400,000 in total because $200,000 of the $600,000 benefit was repaid to the investors.
Balancing the section 161(1)(g) factors, Sand, Achs and Gulston were subject to permanent prohibitions, including prohibitions on trading in or purchasing any securities or derivatives (with certain limited exceptions), acting as a director or officer of any issuer or registrant and engaging in any securities-related promotional activities.
The BCSC had sufficient evidence to determine how Sand, Achs and Gulston each personally benefitted from the investors’ funds and ordered them to receive section 161(1)(g) disgorgement orders with penalties between $100,000 and $180,000. In a press release announcing the decision, the BCSC stated that any money it collected for the disgorgement orders could be distributed to victims; however, the penalties in all six precedent cases used to calculate Sand, Ach and Gulston’s penalties remain unpaid.
Takeaways
The BCSC’s decision show a continued practice of the Commission bringing enforcement actions and seeking sanctions against alleged capital market actors, even in alleged fraud causes (see also the BCSC’s recent decisions of Re Oei, 2022 BCSECCOM 225 [PDF], and QcX Gold Corp., 2022 BCSECCOM 422 [PDF]).
Under reciprocal recognition orders across provinces, this decision may automatically take effect against Sand, Achs and Gulston in Alberta (as we discussed here), Nova Scotia [PDF], Québec, New Brunswick, Manitoba, Northwest Territories [PDF], Prince Edward Island [PDF], Yukon [PDF], Saskatchewan [PDF] and Newfoundland and Labrador.
Notably, this case mirrors some of the relatively stiff sanctions sought for securities fraud in Ontario, as well, although it is not comparable to the penalties imposed by courts in the United States, particularly those pursued in the criminal sphere. However, despite reliance on capital markets regulators instead of the courts, seemingly preferred due to the lower standard of proof required — balance of probabilities versus beyond reasonable doubt for criminal and quasi-criminal matters — there have been indications and articulated ambitions to look into criminal and quasi-criminal sanctions for situations involving serious or complex fraud, bribery and corruption. In 2019, the Government of Ontario, for example, launched the Serious Fraud Office, inspired by similar offices in the U.S. and U.K., to focus on serious or complex fraud, bribery and corruption. Time will tell whether material progress in this area is realized.