Ontario Court of Appeal upholds OSC decisions and sanctions in the matter of Watt Carmichael Inc. et al.

TORONTO – In a unanimous decision issued yesterday, the Ontario Court of Appeal upheld the Commission’s decisions relating to Watt Carmichael Inc., Roger Rowan, Harry Carmichael and Michael McKenney. The Court of Appeal dismissed all of the grounds of appeal, including a constitutional challenge to the Commission’s ability to order administrative monetary penalties.

The appellants appealed from the merits and sanctions decisions of the Commission in this matter dated June 20, 2008 and December 21, 2009. These decisions found each of the appellants to have committed serious violations of Ontario securities law and to have engaged in conduct contrary to the public interest. As summarized by the Court of Appeal:

• [t]he proceedings arose from allegations that Roger Rowan, President and Chief Operating Officer of Watt Carmichael Inc. (WCI), breached Ontario securities law by trading in, and failing to report his trades in, a large volume of shares of Biovail Corporation. WCI is a broker and registered investment dealer.
• Rowan was also a director of Biovail. Eugene Melnyk, Biovail’s Chairman and Chief Executive Officer, set up various offshore trusts which held Biovail securities and maintained discretionary trading accounts at WCI. Rowan, as registered representative on the trust accounts, was permitted to trade in securities without client authorization. Before the Commission, the parties agreed that Rowan traded millions of Biovail shares, generating approximately $2,350,000 in commissions for WCI between 2002 and 2004. The Commission dismissed allegations of insider trading but found that Rowan breached Ontario securities law by failing to file insider reports.
• Harry Carmichael was the Chairman, Chief Executive Officer and Ultimate Designated Person of WCI and Michael McKenney was the Chief Financial Officer and Chief Compliance Officer. The Commission found that WCI, Carmichael and McKenney failed adequately to supervise Rowan’s trading in Biovail shares.

The Commission ordered significant sanctions against each appellant, including administrative penalties of more than $1.2 million against Roger Rowan, Watt Carmichael Inc. and Harry Carmichael. The Commission’s decisions were upheld in their entirety by the Ontario Superior Court of Justice (Divisional Court) in a decision rendered December 16, 2010.

Before the Ontario Court of Appeal, the appellants advanced a number of grounds of appeal, including a constitutional challenge to the administrative penalty provision set out in section 127(1)(9) of the Securities Act (Ontario). That provision allows the Commission to order payments of up to $1 million per breach of the Securities Act. The appellants argued that the magnitude of the potential penalties under this section would violate section 11 of the Canadian Charter of Rights and Freedoms if awarded by the Commission.

Writing for the Court of Appeal, Justice Sharpe dismissed this argument and wrote: “[p]enalties of up to $1 million per infraction are, in my view, entirely in keeping with the Commission’s mandate to regulate the capital markets where enormous sums of money are involved and where substantial penalties are necessary to remove economic incentives for non-compliance with market rules.”

The Court of Appeal's decision is available at www.ontariocourts.ca.

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