2004 BCSECCOM 289

1. During the relevant period (October 31, 1996 to March 6, 2003), LOM distributed securities to 352 British Columbia investors for total proceeds of about US$1.4 million and Cdn$279,000.

2. LOM was not registered under the Act, nor did it file a prospectus; none of the exemptions from the registration and prospectus requirements applied to the distributions. LOM therefore contravened sections 34(1) and 61(1) of the Act.

3. Klippenstein was the president, a director, controlling shareholder and controlling mind of LOM during the relevant period.

4. As of January 1, 2004, Klippenstein is no longer the president or a director of LOM, and has agreed to have his, and his family’s, shares of LOM placed in a voting trust that will essentially vote the shares as the LOM board of directors directs, as contemplated by the Le Monde agreement. Klippenstein has also agreed to play no management role in LOM and has acknowledged that the board of directors of LOM will be independent of his influence.

5. The facts in paragraphs 1 through 4.

6. Klippenstein was not registered under the Act. Klippenstein participated in or directed the LOM distributions. Klippenstein therefore contravened sections 34(1) and 61(1) of the Act.

7. In contravention of section 50(1)(d) of the Act, Klippenstein misrepresented to investors of LOM, both orally and in newsletters that:

a. LOM securities would shortly be listed and posted for trading on a stock exchange and would then trade at higher prices, and
b. a product would be shortly manufactured by LOM and ready for distribution.

8. In November 1993, the Saskatchewan Securities Commission sanctioned Klippenstein for contravening the provisions of the Securities Act (Saskatchewan) that correspond to sections 34 and 61 of the Act, for the distribution of securities in three companies related to LOM.

· Between December 1996 and April 2004, Klippenstein, his family, and related corporations received $1,568,713 in salaries, directors’ fees and management fees ($1,357,716), rent for LOM office space ($166,022), and reimbursed automobile expenses ($44,975).

· During the same period, Klippenstein his family, and related corporations funded LOM in the amount of $1,230,244 through purchases of LOM shares and cash infusions ($748,840), unpaid salaries ($446,427) and unpaid rent ($34,977).

· the seriousness of person’s conduct,
· the harm suffered by investors as a result of the person’s conduct,
· the damage done to the integrity of the capital markets in British Columbia by the person’s conduct,
· the extent to which the person was enriched,
· factors that mitigate the person’s conduct,
· the person’s past conduct,
· the risk to investors and the capital markets posed by the person’s continued participation in the capital markets of British Columbia,
· the person’s fitness to be a registrant or to bear the responsibilities associated with being a director, officer or adviser to issuers,
· the need to demonstrate the consequences of inappropriate conduct to those who enjoy the benefits of access to the capital markets,
· the need to deter those who participate in the capital markets from engaging in inappropriate conduct, and
· orders made by the Commission in similar circumstances in the past.

55 In this appeal we are asked whether it is reasonable to decide that general deterrence has a role to play in the policing of capital markets. The conventional view is that participants in capital markets are rational actors. This is probably more true of market systems than it is of social behaviour. It is therefore reasonable to assume, particularly with reference to the expertise of the Commission in regulating capital markets, that general deterrence has a proper role to play in determining whether to make orders in the public interest and, if they choose to do so, the severity of those orders.

56 This approach is consonant with United States securities jurisprudence, which accepts that general deterrence may be a consideration in imposing penalties for fraudulent behaviour. The rationale is that the public interest demands appropriate sanctions to secure compliance with the rules, regulations and policies of the Securities and Exchange Commission ("SEC"): see, e.g., United States v. Matthews, 787 F.2d 38 (2d Cir. 1986), at p. 47. Civil penalties are increasingly important to the SEC for a number of reasons, including general deterrence: see R. G. Ryan, "Securities Enforcement: Civil Penalties in SEC Enforcement Cases: A Rising Tide" (2003), 17 Insights 17.
. . .

60 In my view, nothing inherent in the Commission's public interest jurisdiction, as it was considered by this Court in [Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) [2001] 2 S.C.R. 132] prevents the Commission from considering general deterrence in making an order. To the contrary, it is reasonable to view general deterrence as an appropriate, and perhaps necessary, consideration in making orders that are both protective and preventative.

61 The Oxford English Dictionary (2nd ed. 1989), Vol. XII, defines "preventive" as "[t]hat anticipates in order to ward against; precautionary; that keeps from coming or taking place; that acts as a hindrance or obstacle". A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others. In a word, a general deterrent is preventative. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under s. 162. The respective importance of general deterrence as a factor will vary according to the breach of the Act and the circumstances of the person charged with breaching the Act.

62 It may well be that the regulation of market behaviour only works effectively when securities commissions impose ex post sanctions that deter forward-looking market participants from engaging in similar wrongdoing. That is a matter that falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets.

Klippenstein
1. under section 161(1)(c) of the Act, that the exemptions described in sections 45 to 47, 74, 75, 98 and 99 of the Act do not apply to Klippenstein for a period of 10 years expiring on May 28, 2014, except that Klippenstein may rely on the exemption in section 45(2)(7) of the Act to trade securities for his own account through a registrant, if he gives the registrant a copy of this decision;

2. under section 161(1)(d)(i), that Klippenstein resign any position he holds as a director or officer of any issuer, except an issuer owned solely by himself or his family;

3. under section 161(1)(d)(ii), that Klippenstein be prohibited from becoming or acting as a director or officer of any issuer for a period of 10years expiring on May 28, 2014, except an issuer owned solely by himself or his family;

3. under section 161(1)(d)(iii), that Klippenstein be prohibited from engaging in investor relations activities for a period of 10years expiring on May 28, 2014;

4. under section 162, that Klippenstein pay an administrative penalty of $100,000;

5. under section 174, that Klippenstein pay costs of or related to the hearing in the amount of $20,000; and

LOM
6. under section 171, that the cease trade order against LOM made by this Commission on June 24, 2003 (COR #03/099) is revoked, on the conditions that:

a) LOM complete the rescissions contemplated in our March 19, 2004 variation order (COR#04/037), and

b) Klippenstein and his family members comply with conditions substantially the same as those contained in paragraph 6(g) of the Le Monde agreement (attached to Appendix 1 to this decision).