In the Court of Appeal of Alberta

Citation: R. v Stevenson, 2017 ABCA 420

Date: 20171211

Docket: 1601-0246-A

Registry-: Calgary

Between:

Her Majesty the Queen

Respondent

- and -

Rand Tyler Stevenson

Appellant

The Court:

The Honourable Mr. Justice Frans Slatter

The Honourable Mr. Justice Brian OTerrall

The Honourable Mr. Justice Thomas W. Wakeling

Memorandum of Judgment

Appeal from the Conviction byThe Honourable Mr. Justice D.K. Miller

Dated on the 13th day of November. 2015Filed on the 23rd day of November. 2015(2015 ABQB 740: Docket: 130229958P1)

Memorandum of Judgment

The Court:

[1] The appellant was charged with a number of offences under the Securities Act. RSA 2000.c. S-4 arising out of the raising of money from the public through "Loan Agreements". Theappellant was acquitted at trial on the basis that the Loan Agreements did not constitute"securities", but was con% icted on appeal: R. v Stevenson. 2015 ABQB 740. reversing R. vStevenson. 2015 ABPC 96.

[2] Provincial Court Judge described the transactions as follows:

9 Between early May 2009 and late September 2011. OCl entered into LoanAgreements with 24 Alberta resident lenders listed in the active counts in theInformation (collectively Lenders). The same form of Loan Agreement (a copy ofwhich is attached as Appendix A) was used for each loan and lender. The Lendersadvanced a total of at least $1,003,000.00 to OCl pursuant to these LoanAgreements. Most of the Lenders entered into more than one Loan Agreement withOCl.

10 Each of the Loan Agreements states that it is for a term of six months, andprovides for a return of four (4) to two hundred (200) times the amount advanced toOCl payable "from the profits of the Corporation's income".

11 All of the Lenders were introduced to OCl and its reason for soliciting funds(commonly referred to by the Lenders as the "Project") by Derricott. For eachlender Derricott's presentation was done by using what the Lenders referred to asthe "Book" or the "Binder" (Exhibit 43) and which contained 70 pages of pictures,documents, bank statements and other material purporting to explain the Project.

14 Except for minor variations, the Lenders generally conveyed a consistentunderstanding of the reason OCl required funds as explained to them by Derricott;that is: Stevenson had met an individual from the Philippines (described as aFilipino farmer or fisherman named Romeo or "Romy" Santiago) who was the solebeneficiary of a large estate ranging in value from millions to billions of dollars (the"Estate") left to him by an aunt. Candelaria Y. Santiago. Ms. Santiago apparentlyaccumulated the wealth in some fashion associated with her position in thegovernment or employ of former Philippine dictator. Ferdinand Marcos. Stevensonwas purportedly helping the beneficiary. Romy. probate the Estate and gain accessto the assets of the Estate, in return for which Romy had contracted to pay a portion

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of the Estate to OCI. In exchange for their financing the associated costs of thisProject. Stevenson and OCI were to share their portion of the Estate proceeds withthe Lenders in the amounts set out in their Loan Agreements.

[3] The operative clauses of the Loan Agreements read as follows:

THE PARTIES HERETO AGREE. THAT:

1. The Lender is loaning money in the Corporation for a period expected to be nolonger than SIX MONTHS (6 months) from the date of the loan, with theCorporation having the option to pay the Lender the principle sum of the loanplus a premium amount of money in consideration of the use of the loan funds bythe Corporation.

2. The term of this Agreement is for SIX MONTHS {6 months).

3. The amount given to the Corporation as a loan is: Twenty Five ThousandCanadian Dollars.

4. The Corporation shall pay the Lender from the profits of the Corporation'sincome.

5. The Corporation shall pay the Lender a premium amount of money based on aformula of the principle [sic] amount of the load funds plus a factor of four timesthe original amount loaned, which is a total payout of: One Million FiveHundred Thousand Canadian Dollars.

6. In the event of the expiry of the six month time period of this Agreement, anyoutstanding principle [sic] shall be placed upon the books of the Corporation asan outstanding liability.

7. This investment is in the fonn of a loan, and is not subject to any securities law,regulation, rules or forms of conduct. This investment and the loan of moneysdoes not constitute the transaction of any form of securities, stocks, bonds, orother financial instrument subject to regulation by Government under securitieslaw.

The trial judge accepted the appellant's argument that the Loan Agreements were "simplycontracts between the parties and should be enforced in accordance with the intention of the partiesand the normal rules of contract law". He found each Loan Agreement was a "separate, distinct,and pri\ ate transaction", not a "security".

[4] In allowing the appeal, the summary conviction appeal court judge noted the lengthy andcomplex definition of "security" in the Securities Act, which contains the following specificinclusions among a list of 26 items:

1 In this Act.. . .

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(ggg) "security" includes ...

(ii) any document constituting evidence of title to or interest in thecapital, assets, property, profits, earnings or royalties of any person orcompany;. . .

(v) any bond, debenture, note or other evidence of indebtedness;...

(ix) any profit-sharing agreement or certificate;...

(xiv) any investment contract. .. .

The Crown is only required to show that the Loan Agreements fit within one of these componentsof the definition, but it argued that they actually fit within all four. The summary conviction appealcourt judge found at para. 17 that the Loan Agreements were clearly "evidence of indebtedness",and also met the other three branches of the definition. He noted that there was no blanket

exemption for "private transactions".

[5] The "facts" surrounding the Loan Agreements are not in dispute. Whether the LoanAgreements, as found on the facts, constitute "securities" is a question of law reviewable forcorrectness: R. v Shepherd, 2009 SCC 35 at para. 20. [2009] 2 SCR 527; R, v Abdulle, 2014ABCA 52 at para. 7. 96 Alta LR (5th) 44. 569 AR 142. Whether the Securities Act admits of anexception for "private transactions" is an extricable question of law. and the standard of review iscorrectness. Administrative law cases such as British Columbia (Securities Commission) v Gill.2003 BCCA 169, 11 BCLR (4th) 102 engage a different standard of review paradigm, because thelaw recognizes the expertise of the securities commissions in technical matters.

[6] The raising of funds from the public is one of the most highly regulated activities inCanada. The Securities Act regulates virtually every aspect of such transactions, and all thepersons and institutions that engage in them: Reference re Securities Act (Can,). 2011 ABCA 77at para. 3. 41 Alta LR (5th) 145. 510 AR 200. affm'd 2011 SCC 66 at paras. 100-101. [2011] 3SCR 837. The basic structure of the Act is that no "issuer" may "distribute" securities to thegeneral public unless those engaged in the distribution are "registered", and a "prospectus" hasbeen approved by the Securities Commission. The Act regulates both the initial or "primary"distribution of the securities, as well as secondary trading in securities. Some regulatory functionsare delegated to the stock exchanges and other organizations, which are themselves highlyregulated. There are numerous exemptions for particular transactions, particular participants in theindustry, particular issuers, and particular purchasers of securities. It was conceded that noexemptions were available here.

[7] The appellant argued in the Provincial Court that the Loan Agreements were not securities,because they were "simply contracts between the parties and should be enforced in accordancewith the intention of the parties and the normal rules of contract law". A "distribution" or sale ofsecurities is. however, always a contract if viewed in isolation. As was stated in Reference re

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Securities Act (ABCA) at para. 19: "The regulation of the raising of funds from members of thepublic has at its core the regulation of particular investment contracts." Declaring or obser\'ing thata particular transaction is a "private contract" provides no answer to the scope of the Securities Act.

[8] The appellant relied in part on an obiter statement in /?. v Kirk. 2014 ABQB 517. 1 Alta LR(6th) 206. 596 AR 9:

60 Even though Securities Act s 93 refers to the perpetration of a "fraud." that"fraud" is not just any fraud. It is fraud that results from the person's engaging orparticipating in "any act, practice or course of conduct relating to a security orexchange contract." In other words, the legislation itself limits the type of actionthat would "perpetrate a fraud." That "action" falls within the general purposes ofthe Securities Act and is not Just "any action." For example, if individuals areinvolved in a transaction between themselves, such as a personal loan evidenced bya promissory note (which might fall within the definition of "security" under theSecurities Act), a misrepresentation or fraud in respect of that transaction would nottrigger an action under the Securities Act. as it would not fall within "Albertasecurities laws": it is a private transaction, (emphasis added)

Kirk is a decision on the constitutionality of the Securities Act. The argument was that theSecurities Act was unconstitutional because it dealt with "fraud" which is criminal law and so a

federal area of responsibility. The reliance on the very general statement in Kirk, to the effect thatsome "private transactions" might not be caught by the Act. is misplaced. The point being madewas that the Securities Act is narrow and focused, because it only deals with "fraud" in thesecurities context. Kirk does not deal directly with the transactions that are covered or excludedfrom the Act.

[9] The Securities Act is very broadly worded legislation, designed to cover virtually everymethod by which money could be raised from the public. It is contradictory to argue that money"raised from the general public" is nevertheless merely a series of "private transactions"; that isexactly what the Securities Act is designed to regulate. That characterization could be placed onany method of raising money from the public. Every sale of shares by a corporation to a member ofthe public is. at one level, a "private transaction". The entire process of raising money from thegeneral public is, however, regulated under the Act.

[10] The Provincial Court .ludge found that the lenders believed they were advancing personalloans, and also noted the provision in the Loan Agreements:

7. This investment is in the form of a loan, and is not subject to any securitieslaw. regulation, rules or forms of conduct. This investment and the loan of moneysdoes not constitute the transaction of any form of securities . stocks, bonds, or otherfinancial instrument subject to regulation by Government under securities law.

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It is, however, impossible for those raising funds from the public to contract themselves out of theSeciirifies Act, and this inclusion in the documentation is ineffective and irrelevant.

[11] As noted, the fact that the loans might be described as "personal" is not decisive. Equallyirrelevant is whether the lenders are happy with their investment, feel that they were fairly dealtwith, or believe that full disclosure was made to them. An issuer must comply with the Act even ifthe investors make a fortune. As P. T. Bamum noted: "There's one bom every minute": theSecurities Act is designed to protect them, along with ail investors. The Act regulates all raising ofmoney from the public, not just situations where the outcome of the investment is negative or thepurchasers of the securities are unhappy.

[12] Likewise, the definition of a "security" is a question of statutory interpretation, and theopinions of individual lenders and investors as to whether they were dealing in such an instrumentis irrelevant. The interpretation of statutes is a question of law. and evidence on this subject is notadmissible: R. v Century 21 Ramos Realty Inc, (1987). 58 OR (2d) 737 at p. 752 (CA): CanadaSafeway Ltd. v Manitoba. 2003 MBCA 78 at para. 7. [2004] 1 WWR 395.

[13] The appellant argues that a more realistic interpretation of the Act was needed, or else allsorts of routine transactions would be caught by it. The Act and its related subordinate regulations,however, have numerous provisions designed to deal with overbreadth. Some trades in"securities" are exempt from the registration and prospectus requirements of the Act. For example,under s. 2.4 and 2.5 of National Instrument 45-106: Prospectus and Registration Exemptions,certain trades of securities to "close friends and business associates" of directors or officers of the

issuer are exempt. Under s. 2.30 "isolated distributions" that are not a part of "successivetransactions of a like nature" are exempt. Even though these trades are "exempt trades", they arestill trades in "securities". There is. however, no general exemption for "private transactions*'.

[14] The appellant relied on Ontario (Securities Commission) v Tiffin, 2016 ONCJ 543. 133OR (3d) 341. which in turn relied on American case law such as Reves v Ernst & Young. 494 US56 (1990). Counsel for the respondent advised the Court that Tiffin is under appeal. Tiffm reliedon a finding in Reves that not all "notes" are securities.

[15] Reves involved the interpretation of the term "any note" in the definition of "security" inthe Securities Exchange Act of 1934. The American courts have restricted the term to notes thathave an "investment" character to them, on the theory that Congress did not intend the statute toreach other "commercial" notes. All notes are presumed to be securities unless the opposite isshown. The presumption can be rebutted by considering several factors: a) if the motivation is aninvestment with a view to a profit, it is likely a security. If it is to finance an asset purchase or tomeet short term funding needs, it may not be: b) if there is a "plan of distribution" and "commontrading for speculation or investment" it is likely a security: c) if there is a public expectation thatthe notes are securities, they will be dealt with as such: and d) if some factor such as the existenceof another regulatory scheme significantly reduces the risk of the instrument, the application of theSecurities Acts may be unnecessary.

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[16] Reves itself does not create any general exemption for "private transactions", and it dealsonly with the specific term "notes", not all types of securities in general. Further, the notes inReves were found to be securities. Given the comprehensive and complex regulation of securitiesin Alberta, there is no apparent need for any judicially created exemptions to the securities regime.There are numerous conditions and exemptions built into the Alberta securities regulation systemthat are designed to deal with the issues raised in Reves.

[17] In any event, the Loan Agreements involved in this appeal would meet the test in Reves forsecurities. The Loan Agreements expressly describes the loan as an investment: "This investmentis in the form of a loan. . .." They recite that the lender wishes to lend his or her "capital funds tothe corporation with the intent of receiving a return in consideration of the risk taken by theLender." The corporation is "to receive the investment from the lender to carry on the operationsand activities of the Corporation with the intent to earn profits from the use of the investmentcapital funds from the Lender". The obligation to repay is only triggered if. as and when thecompany makes profits: the Corporation has an "option to pay the lender the principle [sic] sum ofthe loan plus a premium." If the loan is not repaid, it simply gets placed on the books as anoutstanding liability, creating a long term investment.

[18] Further, even if the Loan Agreements are not "notes", they would still fall within the othercomponents of the definition of "securities": "evidence of indebtedness", "profit-sharingagreement" and "investment contract".

[ 19] Tifjin was prepared to recognize a general exemption from the statute for transactions thatwere purely private in nature, and had no element of raising funds from the public, even thoughthere is no such exemption in the Ontario statute. It appears the trades in Tiffin may have qualifiedas exempt trades with "close friends and business associates", which undermines the rationale in

justifying such a judge-made exemption. That approach has been found to be necessary inthe United States, apparently because of the very wide wording of their statute. The Alberta regimehas its own built-in exemptions for the issuing of securities to close friends and businessassociates, and no common-law exception is appropriate.

[20] Tiffin turns on the fact that all of the funds were raised from close friends of Tiffin himself.It appears to suggest that a particular instrument would be a "security" if used to raise funds fromthe general public, but not a "security" if used to raise funds from friends. The Alberta statute doesnot recognize a distinction in the characterisation of an instrument as a "security" depending on theidentity of the purchaser or investor. The test is functional: Is the issuer raising funds from thepublic for investment purposes? On the facts of this case funds were raised from members of thepublic on the expectation that they would participate in the gains to be made from the venture.

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[21] The Loan Agreements are clearly within the definition of "securities". The interpretation ofthe summary conviction appeal court judge was correct, and the appeal is dismissed.

Appeal heard on December 5. 2017

Memorandum filed at Calgary, AlbertathisU^ day of December, 2017

FILED2017DEC

o

2Mppe3^

Slatter J.A.

OTerrall J.A.

Authorized to kan for:-.---"^akeling J.A

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Appearances:

D. YoungY. Somji

for the Respondent

D.W. Kobylnykfor the Appellant