ALBERTA SECURITIES COMMISSION

DECISION

Citation: Re Felgate, 2021 ABASC 68 Date: 20210511

Nicholas John Felgate

Panel: Kari Horn Tom Cotter Gail Harding

Representation: Colin Schulhauser for Commission Staff

Brendan Miller for the Respondent

Submissions Completed: January 18, 2021

Decision: May 11, 2021

5960793.1

TABLE OF CONTENTS

I. INTRODUCTION ...... 1 II. BRIEF SUMMARY OF MERITS DECISION ...... 1 III. SANCTIONS ...... 2 A. The Law ...... 2 1. Rationale and Principles ...... 2 2. Factors ...... 2 B. Parties' Positions on Sanction ...... 3 1. Staff ...... 3 2. Felgate ...... 3 C. Analysis...... 3 1. Sanctioning Factors ...... 3 (a) Seriousness of Misconduct ...... 3 (i) Nature of Misconduct ...... 3 (ii) Degree of Intention ...... 4 (iii) Exposure to Harm ...... 4 (iv) Conclusion on Seriousness of Misconduct ...... 5 (b) Respondent's Characteristics and History ...... 5 (c) Benefit Sought or Obtained by Respondent ...... 6 (d) Mitigating or Aggravating Considerations ...... 6 2. Outcomes of Other Proceedings ...... 8 3. Appropriate Sanctions ...... 10 (a) Market-access Bans ...... 10 (b) Administrative Penalty...... 11 (c) Disgorgement ...... 12 (i) Payment to ASC ...... 12 (A) Parties' Positions ...... 12 (B) Analysis...... 13 (ii) Conditional Disgorgement Order ...... 14 (A) Parties' Positions ...... 14 (B) Analysis...... 14 (iii) Conclusion on Disgorgement ...... 15 IV. COST-RECOVERY ...... 15 A. The Law ...... 15 B. Parties' Positions on Cost-recovery ...... 15 1. Staff ...... 15 2. Felgate ...... 16 C. Analysis...... 16 V. CONCLUSION ...... 17

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I. INTRODUCTION [1] Nicholas John Felgate (Felgate) contravened s. 93.1 of the Securities Act (Alberta) (the Act) by trading securities in violation of an interim order (the Interim Order) of the Alberta Securities Commission (the ASC).

[2] The facts and findings of this misconduct were set out in an October 6, 2020 decision of this panel (the Merits Decision, cited as Re Felgate, 2020 ABASC 156). The Interim Order at issue consists of an ex parte interim cease trade order dated March 2, 2018 (cited as Re Felgate, 2018 ABASC 35 (the Ex Parte Order)), as extended by orders dated March 16, 2018 and July 11, 2018 (respectively, Re Felgate, 2018 ABASC 41 and Re Felgate, 2018 ABASC 113).

[3] Upon issuance of the Merits Decision, these proceedings moved into the second phase, to determine what (if any) sanction or cost-recovery orders ought to be made against Felgate. We received written submissions from ASC staff (Staff) and Felgate, both of whom made oral submissions on January 5, 2021.

[4] For the reasons set out below, we are ordering Felgate to pay an administrative penalty, be subject to certain market-access bans, and pay certain costs of the investigation and hearing.

II. BRIEF SUMMARY OF MERITS DECISION [5] We briefly summarize here certain aspects of the Merits Decision, with details of the facts, law and analysis set out therein.

[6] Staff alleged in an August 19, 2019 notice of hearing (the NOH) that Felgate traded in securities – identified in the evidence as "LENDER/LOAN PERSONAL NON SECURITIES RELATED AGREEMENT" AND "PROMISSORY NOTES" (the Agreements) – and thereby contravened the Act by violating the Interim Order. Pursuant to the Agreements, RVL and DVL gave Felgate $35,000 and $265,000, respectively.

[7] We adjudicated Felgate's application (the Nullity Application) contending that the Interim Order was invalid. We concluded that the Interim Order was valid and in effect during the period in which Felgate entered the Agreements with RVL and DVL. The Agreements contained language to the effect that the Agreements were not "securities" under the Act and that the Act did not apply to the Agreements. Despite that and despite what RVL (directly) and DVL (indirectly) understood from Felgate, we concluded that the Agreements were securities under s. 1(ggg)(v) of the Act. We also concluded that Felgate engaged in sales of those securities, as well as acts in furtherance of those sales, and thus engaged in trading under s. 1(jjj).

[8] As the Interim Order was in effect when Felgate traded in securities, we found that Felgate breached the Interim Order, thus contravening s. 93.1 of the Act.

[9] The Merits Decision also set out details of various other activities in which Felgate engaged, including other agreements sent to Staff by Felgate, and details of explanations and comments made to Staff by Felgate in emails, telephone messages and a telephone call.

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III. SANCTIONS A. The Law 1. Rationale and Principles [10] In Re Homerun International Inc., 2016 ABASC 95 at paras. 12-46, an ASC panel discussed the rationale, principles and factors relevant to sanction determinations. Staff referred to a different case in their submissions (Re Breitkreutz, 2019 ABASC 38). Felgate cited Spaetgens v. Alberta (Securities Commission), 2018 ABCA 410 at para. 31, in which the Alberta Court of Appeal confirmed the sanctioning factors set out by an ASC panel in Re Spaetgens, 2017 ABASC 38 at para. 19, which followed the formulation in Homerun. We find the framework and discussion in Homerun to be the most helpful when considering appropriate sanctions.

[11] The ASC's mandate is to protect investors and to foster a fair and efficient capital market in Alberta. Sanctions imposed under ss. 198 and 199 of the Act are to be protective and preventive, not punitive or remedial; sanctions must also be reasonable and proportionate (see Homerun at paras. 12-13; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37 at paras. 39-45; and Walton v. Alberta (Securities Commission), 2014 ABCA 273 at paras. 154 and 156). Specific deterrence (deterring future misconduct by the particular respondent) and general deterrence (deterring others from engaging in similar misconduct) are both "legitimate considerations" when determining appropriate sanctions (Walton at para. 154; and see Re Cartaway Resources Corp., 2004 SCC 26 at paras. 52- 62).

[12] The panel in Homerun also stated (at paras. 14, 16):

The determination in a particular case of whether deterrence is required and, if so, the type and extent of sanctions appropriate for that purpose, will turn on the circumstances of the misconduct and of the particular respondent, and on an assessment of the risk posed to investors and the capital market by a particular respondent or by others who might be minded to emulate the respondent's misconduct.

. . .

Ensuring that sanctions are proportionate involves appropriate consideration of other decisions and settlement outcomes, while recognizing that decisions or outcomes seldom involve identical factual circumstances or wrongdoing.

2. Factors [13] The panel in Homerun set out the relevant factors for sanctioning, to be analyzed within the context of the rationale and principles already discussed. Those factors are (at para. 20):

 the seriousness of the respondent's misconduct;

 the respondent's pertinent characteristics and history;

 any benefit sought or obtained by the respondent; and

 any mitigating or aggravating considerations.

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[14] These four factors are discussed extensively in Homerun (at paras. 22-46), on which we rely. Details of the factors and their relevance in the present case are discussed below.

B. Parties' Positions on Sanction 1. Staff [15] Referring to the findings in the Merits Decision and characterizing Felgate's misconduct as flagrant, Staff sought an administrative penalty of $50,000, a disgorgement order of $300,000, and five-year market-access bans under ss. 198(1)(b), (c), (c.1), (d), (e), (e.1), (e.2) and (e.3) of the Act. Staff also asked that the expiry of any market-access bans be linked to Felgate paying any amounts ordered as disgorgement, as an administrative penalty or in costs.

2. Felgate [16] For the purpose of sanction, Felgate accepted the findings in the Merits Decision, although maintained that the Agreements were not securities (and stated that finding is being appealed), and that Felgate honestly believed they were not securities.

[17] Overall, Felgate contended that this breach was at the lower end of seriousness (with no allegations or connected findings of fraud, misrepresentation, omitted facts or deceit), he honestly believed the Agreements were not securities, he has not engaged in other breaches, and his assets are currently frozen or seized (which, he argued, means that monetary sanction orders would limit his ability to defend himself and leave less for any future monetary orders made through a court process).

[18] Felgate submitted that the appropriate sanction orders would be no disgorgement order, a $10,000 administrative penalty, and market-access bans of four to five years. Felgate did not dispute the nature of the specific market-access bans sought by Staff.

C. Analysis 1. Sanctioning Factors (a) Seriousness of Misconduct [19] There are three aspects to the seriousness of misconduct: "the nature of the misconduct; intention (whether the misconduct was planned and deliberate, not deliberate but attributable to recklessness, or simply inadvertent); and the harm to which the misconduct exposed identifiable investors or the capital market generally" (Homerun at para. 22). Typically, more serious misconduct means a greater future risk of misconduct and a corresponding greater deterrence required (Homerun at para. 26).

(i) Nature of Misconduct [20] Staff argued that Felgate's misconduct was very serious.

[21] Staff noted that cease trade orders, such as the Interim Order, are an important tool used by securities commissions to protect capital markets and that an intentional breach of such orders indicates a significant risk of future misconduct (Re Stewart Douglas Loughery and Military International Limited, 2019 BCSECCOM 78 at paras. 15, 22). Staff cited Re Arbour Energy Inc., 2012 ABASC 416, where a panel found that the breach of an ASC order "shows not only disregard

4 for the Alberta securities regulatory regime, but also disdain for the enforcement of Alberta securities laws" (at para. 81).

[22] Felgate contended that the misconduct found against him was less serious than if he had engaged in fraud, misrepresentation or omission. It became clear during oral submissions that Staff were not asking for sanctions to be imposed for fraud, misrepresentation or omission, but were asking the panel to consider as aggravating Felgate's misleading of RVL (and, indirectly, DVL) as to the Agreements not being subject to the Interim Order.

(ii) Degree of Intention [23] Staff characterized Felgate's contravention of the Act as knowing, deliberate, intentional and flagrant – he knew of the Interim Order, tried to evade it, and misled RVL by telling him that the Agreements were not subject to the Interim Order. Staff emphasized that Felgate used language in the Agreements to indicate they were not securities and not subject to the Act, and that he told RVL (who then told DVL) that the Agreements were not securities and not subject to the Interim Order – and argued that the latter conduct was deceitful. Staff contended that Felgate's path, in the face of an Interim Order he thought was wrong or unfair, was to appeal that Interim Order, not to engage in a collateral attack on it while feigning ignorance.

[24] Staff asserted that Felgate's animosity in dealing with Staff's investigators supported their contention that Felgate's misconduct was deliberate. Staff also argued that Felgate's contempt for the ASC and the Interim Order shows that he poses a serious risk in the future to investors and the Alberta capital market.

[25] Felgate argued that the misconduct was an error of law, honestly made, and reasonable, thus apparently arguing that the misconduct was not intentional and deliberate. The very behaviour Staff condemned as showing animosity and contempt, Felgate characterized as showing an honestly held conviction that the Agreements were not securities. Felgate also stated that such a belief can still be considered to be honestly held, even if unreasonable.

(iii) Exposure to Harm [26] Staff argued that Felgate caused harm to RVL and DVL by deceiving RVL about the Agreements not being securities and thus not subject to the Interim Order. Although Staff stated in their written submissions that Felgate deceived both RVL and DVL about Felgate's ability to cover losses, Staff acknowledged during oral submissions that they did not have evidence as to Felgate's ability to pay RVL and DVL (presumably both at the time of entering into the Agreements and at the time of submissions). Staff told us that Felgate's assets had been seized, that it seemed unlikely he would be able to pay back the $300,000 to RVL and DVL, and that there was no evidence Felgate had title to any of the vehicles and memorabilia seen by RVL and DVL or referred to in documents in evidence. Despite some uncertainty expressed in their written submissions, Staff agreed during oral submissions that RVL and DVL understood that Felgate could use the money in whatever way he wanted. Staff argued that the harm to RVL and DVL also harmed general investor confidence and the ability of those legitimately seeking investment capital to raise it.

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[27] Felgate did not directly address exposure to harm. It appeared that he considered any statement that the Agreements were not securities as relevant to intention. As Felgate agreed that his breach of s. 93.1 of the Act warranted four-to-five-year market-access bans and an administrative penalty (and restitution, had it been available), we are satisfied that he did not dispute that confidence in the Alberta capital market was harmed, and that RVL and DVL suffered at least potential harm.

(iv) Conclusion on Seriousness of Misconduct [28] In considering the Homerun parameters for seriousness of misconduct (nature of the misconduct; intention; and harm), we conclude that the nature of Felgate's misconduct was serious, that RVL and DVL were exposed to direct harm (and ultimately may suffer actual harm); and that there was indirect harm to the Alberta capital market (diminished confidence in that market). Contraventions of ASC orders are self-evidently of a serious nature. We do not know the actual risk faced by RVL and DVL because there was no evidence before us as to what Felgate did with their money, the amount of risk they were taking, or whether Felgate would be able to repay at least the principal amounts of the Agreements when due. However, it is clear that RVL and DVL were exposed to risk and face at least the possibility that they will not get their principal investment back or the promised interest (or fee, as Felgate called it). As stated in Homerun (at para. 25), potential harm is relevant to sanction.

[29] Felgate's intention was less clear. All capital market participants are required to know and follow the law (Homerun at para. 24). We said in the Merits Decision that Felgate's knowledge or motivation was irrelevant to whether he breached the Act by trading securities in contravention of the Interim Order, and that he "mistakenly took the approach that securities laws should not apply to him".

[30] However, the reasons underlying the Interim Order informed Felgate that an ASC panel found prima facie his loan agreement at issue there (with LB) was a security. Felgate's correspondence with Staff reproduced in the Merits Decision confirmed that he knew this was that panel's determination. Despite these circumstances, Felgate continued with the same behaviour, modified the language of the Agreements in an attempt to reinforce his erroneous opinion, and told RVL that the Agreements were not subject to the Interim Order. We conclude that Felgate deliberately traded in securities in contravention of the Interim Order. This behaviour highlights the importance of specific deterrence.

[31] Felgate's belligerent communications to Staff during the investigation did not influence our conclusion that his misconduct was deliberate, but that behaviour was an aggravating factor, as discussed below.

(b) Respondent's Characteristics and History [32] A respondent's characteristics and history (such as education, capital-market experience, disciplinary history and claimed impecuniosity) may influence the degree of deterrence required, based on the apparent future risk to investors and the capital market. Those aspects may also be relevant when assessing the appropriate proportionality for the package of sanctions being ordered. (See Homerun at paras. 27-28.)

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[33] Felgate has not previously been sanctioned by the ASC. Staff contended that Felgate's communications with the ASC after the Ex Parte Order should be considered part of his history and that they indicate a serious future risk. Staff also stated that RVL's testimony that Felgate solicited or entered other agreements at approximately the same time as the Agreements should be considered in determining the risk Felgate poses to the Alberta capital market in the future.

[34] Felgate argued that there was no history here. His dealings with LB, as described in the Merits Decision, led to prima facie findings against Felgate, and the issuance of the Interim Order. Felgate disagreed with the prima facie findings and breached the Interim Order by entering the Agreements, but there was no evidence of other breaches since the one found in the Merits Decision.

[35] We disagree with Staff that Felgate's communications with Staff would properly be considered as part of this factor. Later in this decision, we address the substance and tone of those communications as an aggravating factor.

[36] RVL's testimony about Felgate's other actions was limited to May 2019, which was before both the NOH (August 19, 2019) and the Merits Decision (October 6, 2020). The material Felgate sent to Staff was around the time of the Ex Parte Order in March 2018, also well before the NOH and the Merits Decision. We had no evidence of any securities activity by Felgate since May 2019.

[37] Accordingly, we discern nothing in Felgate's characteristics and history which affect our determination on sanction. This is a neutral factor.

(c) Benefit Sought or Obtained by Respondent [38] The extent to which a respondent obtained, or sought to obtain, a benefit through misconduct is also relevant to sanction, as a greater benefit is a greater incentive for that respondent or others to engage in future misconduct (Homerun at paras. 37-38).

[39] Staff considered the $300,000 to be a benefit to Felgate.

[40] Felgate did not consider the $300,000 to be a benefit to him, because he is responsible under the Agreements for paying it back to RVL and DVL in 2022, and there was no evidence that the Agreements are not viable.

[41] In our view, it would be illogical and unworkable to conclude that a wrongdoer's contractual obligation to repay money means that the wrongdoer did not "obtain" that money in the first place. We conclude that Felgate benefitted from his misconduct by having unconstrained use of the $300,000 he obtained from RVL and DVL for the term of the Agreements.

(d) Mitigating or Aggravating Considerations [42] Mitigating and aggravating considerations are those which are relevant to sanction, even though not falling under one of the other three factors. These would generally be considerations such as the payment of restitution or the respondent's acknowledgement of (or failure to

7 acknowledge) the seriousness of the misconduct. Such matters may affect the appropriate assessment of the level of risk and deterrence in the circumstances. (See Homerun at paras. 39- 42.)

[43] Staff stated that there were no mitigating factors and identified several instances of Felgate's conduct as aggravating: (1) showing disdain for the ASC and securities laws; (2) including language in the Agreements to evade the application of the Act; (3) deceiving RVL regarding the applicability of the Interim Order to the Agreements; (4) deceiving RVL and DVL by representing that Felgate had enough money to cover any losses and that their returns were guaranteed; and (5) directly and personally benefitting in the amount of the $300,000 he received from RVL and DVL by breaching the Interim Order.

[44] Felgate argued that his belief that the Agreements were not securities was a mitigating factor. He referred to R. v. Imperial Oil Ltd., [1988] M.J. No. 488 (Prov. Ct.) for the principle that an error of law may be mitigating if honestly made and if reasonable. Felgate also stated that he did not breach the Interim Order, other than through the two Agreements, so his good conduct since the NOH should be considered a mitigating factor. Felgate noted that the Agreements were not found to be based on a fraud or misrepresentation, and that he intends to pay RVL and DVL the money pursuant to the Agreements (the latter was a representation by counsel of his understanding of Felgate's intentions, not sworn testimony from Felgate).

[45] Other than Felgate's acceptance, as mentioned, that the findings against him were serious, we do not find any mitigating factors here. Regarding restitution, we have only his counsel's statement that Felgate expressed an intention to pay back RVL and DVL, and his counsel's submission that the panel has the authority to link the expiration of any market-access bans to the payment of restitution. However, we also were informed that Felgate's assets have been frozen or seized, apparently in relation to criminal and civil proceedings against him. In the circumstances, we could not reach a conclusion as to the sincerity of Felgate's apparent intention to repay RVL and DVL.

[46] We do not find Imperial Oil helpful here. Even if we were to rely on that case, Felgate did not make an error of law. He disagreed with the Interim Order and decided he did not need to follow it – persisting in virtually identical conduct by entering the Agreements with RVL and DVL. There was no indication that, in so acting, Felgate was relying on inaccurate advice from a lawyer or had any other grounds to claim a reasonable belief that the Interim Order would allow him to enter the Agreements.

[47] There was no evidence that Felgate continued to engage in the same conduct after the NOH was issued, but we consider that to be a neutral factor, not mitigating.

[48] Turning to aggravating factors, we first note that it is not an aggravating factor for Felgate to have defended himself against the allegations in the NOH and to have appealed the Merits Decision (see Homerun at para. 41).

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[49] We consider most of Staff's list of aggravating factors (in para. 43 herein) to be properly applied in a different part of the analytical framework. We addressed Staff's second, third and fourth factors when discussing the seriousness of Felgate's misconduct. We addressed Staff's fifth factor when discussing the benefit received by Felgate.

[50] Staff's remaining aggravating factor was Felgate's disdain for the ASC and Alberta securities laws. The Merits Decision set out at length the communications Felgate had with Staff around the time of the Ex Parte Order. Those communications were aggressive and contemptuous, even accusing the ASC investigator of defamation and harassment. We conclude that these communications were aggravating. As stated in Homerun (at para. 46):

An aggravating consideration might take the form of a respondent displaying a belligerent contempt for either the victims of the misconduct or the law. Such behavior might reasonably indicate a pronounced risk of future misconduct (and send a disconcerting message of defiance to observers), demanding heightened specific and general deterrence.

[51] Overall, we conclude this significant aggravating consideration far outweighs the mitigating consideration. This calls for greater deterrence, particularly specific deterrence.

2. Outcomes of Other Proceedings [52] Sanctions must be proportionate to the offence and the offender (Walton at para. 156). The panel in Homerun (at para. 16) noted that a consideration of other decisions and settlement outcomes is part of ensuring that proportionality.

[53] Staff referred us to eight decisions from Alberta and British Columbia for comparison. Felgate agreed that Staff had provided a helpful selection of cases. We now turn to a brief discussion of those decisions.

[54] Re Kearl, 2008 ABASC 491, Re Caspian Energy Inc., 2013 ABASC 367, and Re Brent Glen Jardine and Indo Global Exchange(s) Pte., Ltd., 2016 BCSECCOM 82 each had either joint submissions on sanction or a settlement agreement. Re William Raymond Malone, 2016 BCSECCOM 334 was uncontested. Re Dobler, 2004 ABASC 1178, Re John Arthur Roche McLoughlin et al., 2011 BCSECCOM 202, and Spaetgens involved contested sanctions. In Loughery, the respondents did not provide submissions on sanction.

[55] In Kearl, certain respondents were subject to an interim order. They were later found to have engaged in illegal trades and distributions totaling approximately $3 million, which also put them in breach of the interim order. The panel noted that the interim order "was issued with a view to protecting Alberta investors and the Alberta capital market from activity that was prima facie troubling" (at para. 25). Stating that the joint proposal on sanction was at the lower end of the range for the circumstances (at para. 59), the panel ordered five-year market-access bans and a $50,000 administrative penalty against each of two respondents (a third respondent, who did not contravene the interim order, received two-year market-access bans and a $15,000 administrative penalty for his less-serious involvement in the illegal trades and distributions).

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[56] The settlement agreement in Caspian required a $10,000 payment from that company for inadvertently issuing securities three days after being subject to a cease trade order for failure to file required financial documentation. We do not find Caspian relevant to this case.

[57] In Jardine, the panel accepted the parties' joint recommendation on sanction, which included various market-access bans for seven years and a $40,000 administrative penalty. Jardine had acted as a de facto director or officer of a company while subject to a British Columbia Securities Commission order banning him from being a director or officer for two years. The panel characterized Jardine's misconduct as intentional and designed to circumvent the original order, but with no evidence of profit to Jardine or losses to investors.

[58] The two respondents in Dobler were found to have contravened a cease trade order (raising $200,000) and to have made misrepresentations (contrary to s. 92(3)(c) of the Act), as well as other conduct contrary to the public interest. The panel concluded that all the misconduct was serious and caused harm, ordering four-year market-access bans and a $10,000 administrative penalty against one respondent, and five-year bans and $15,000 against the other respondent. Dobler was decided before the maximum allowable administrative penalty was increased by the Legislature from $100,000 for each contravention of Alberta securities laws to $1 million for each contravention and should be considered in that light. It is reasonable to conclude that a panel faced with the same facts and circumstances today would impose administrative penalties greater than $10,000 and $15,000.

[59] McLoughlin agreed to the 10- to 15-year range of market-access bans sought against him, but contested the proposed $20,000 administrative penalty as unmanageable in his financial circumstances (about which he provided no evidence). He had previously contravened the Securities Act (British Columbia), leading to orders against him, including a cease trade order which he violated as part of the contraventions being sanctioned (raising $312,000). The panel ordered 15-year bans and a $50,000 administrative penalty, given his history, including the seriousness of his refusal to comply with the earlier order.

[60] An ASC panel in Spaetgens imposed 15-year market-access bans and a $40,000 administrative penalty, which were decreased on appeal to 10 years (based on the Court of Appeal's assessment of precedent) and $10,000 (in part because of Spaetgens' financial circumstances). Spaetgens had breached an undertaking not to act as a director or officer and not to trade in securities. He characterized his actions as falling short of a director or officer role, but the ASC panel found that he had repeatedly crossed that line, although more recklessly than deliberately (he did not appeal the panel's director and officer findings, and the Court of Appeal upheld the panel's findings on trading).

[61] The uncontested Malone hearing resulted in seven-year market-access bans and a $60,000 administrative penalty for conducting investor relations activities and acting as a de facto director or officer (or both), contrary to a previous order. The panel found Malone's misconduct to be serious and intentional, and concluded that the administrative penalty should be higher than in Jardine because Jardine's admissions significantly shortened the enforcement proceedings which resulted in a credit toward sanctions.

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[62] In Loughery, a panel found that Loughery had intentionally breached a cease trade order, raising $170,000 and making him "a significant risk to our capital markets" (at para. 22). Further, it found that that serious misconduct was exacerbated by Loughery's history as a previously sanctioned registrant, which should have made him aware of the gravity of breaching a cease trade order. Investors had suffered financial losses, with a corresponding benefit to the corporate respondent of which Loughery was a de facto director or officer. The panel ordered six-year market-access bans and a $50,000 administrative penalty against Loughery.

[63] We find Malone and Loughery to be the most helpful parallels to the present case.

3. Appropriate Sanctions (a) Market-access Bans [64] Staff asked for various market-access bans for five years against Felgate, with no carve- out provisions (carve-out provisions are exceptions to market-access bans to allow limited activity, such as investing in a retirement savings plan). Staff also submitted that the expiry of any bans ordered should be contingent on Felgate paying any monetary amounts ordered as sanctions (administrative penalty, disgorgement or both) and cost-recovery.

[65] Felgate submitted that a four- to five-year range was appropriate for market-access bans, acknowledging that specific deterrence was needed here. He did not dispute the types of ban sought by Staff, the absence of carve-out provisions, or the expiry of any bans ordered being linked to the payment of monetary orders.

[66] We consider that market-access bans of five years are appropriate here, in conjunction with the administrative penalty discussed below. We also agree with the types of ban sought by Staff – orders that Felgate: cease trading and purchasing securities and derivatives; be unable to rely on exemptions contained in Alberta securities laws; be unable to act as a director or officer of various entities; and be banned from acting in certain other capacities and engaging in certain other capital market activities. Staff's submissions were somewhat inconsistent regarding a proposed ban on advising in securities. However, Staff's intention was sufficiently clear that Felgate had notice that Staff were seeking a ban on advising. In the circumstances, we conclude that a ban on Felgate advising in securities and derivatives is also warranted here.

[67] No carve-out provisions were requested by Felgate, and no information before us indicated those would be appropriate. We therefore decline to include carve-out provisions in the market- access bans ordered.

[68] During oral submissions, the panel asked the parties for additional written submissions on whether the panel has the jurisdiction to make the expiry of market-access bans conditional on Felgate repaying the principal amount of $300,000 to RVL and DVL, given that the panel has no jurisdiction to make a restitution order requiring such a payment directly to RVL and DVL (the Additional Submissions).

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[69] In their Additional Submissions, Staff contended that s. 198(2) of the Act gives panels a broad jurisdiction to issue orders with conditions, as long as they exercise their discretion in the public interest. Section 198(2) states that an order under s. 198(1) "is subject to any terms and conditions that the [ASC panel] may impose". Staff did not find any case authority from a provincial securities regulator either granting the type of order mentioned by this panel or stating that there is no jurisdiction to grant such an order. Felgate agreed that the panel has the jurisdiction to make such an order.

[70] Despite the parties' Additional Submissions, we conclude that linking the expiry of the market-access bans to Felgate's repayment of RVL's and DVL's principal amounts would effectively be ordering restitution, thus attempting to do indirectly that which we do not have the jurisdiction to do directly.

[71] We conclude that the expiry of the market-access bans should be contingent on Felgate paying the administrative penalty (but not on the payment of disgorgement, as we are not making a disgorgement order, and not on future payments of amounts owed to RVL and DVL under the Agreements). A cost-recovery order is not a sanction (discussed below), and therefore we decline to link the expiry of the market-access bans to the cost-recovery order.

(b) Administrative Penalty [72] Staff suggested that an administrative penalty of $50,000 would be appropriate. This is near the high end of the $10,000 to $60,000 range from previous decisions, discussed above. Staff considered $50,000 warranted here for specific and general deterrence.

[73] Felgate agreed with the range put forward by Staff, but submitted that $10,000 would be appropriate for an administrative penalty here, in line with that in Dobler.

[74] As noted, Dobler was decided before the Legislature increased the maximum administrative penalty for each contravention of Alberta securities laws. As such, it was of limited assistance in determining the appropriate range for an administrative penalty in this case. Also as noted, we found Malone and Loughery most helpful here.

[75] Although Staff proved Felgate's contravention of the Interim Order with only the two Agreements, we agree with Staff that this was serious misconduct. All orders of the ASC – including interim orders made on a prima facie basis – must be respected by those against whom the orders are made. When such respect is not shown, specific investors are potentially harmed and the Alberta capital market as a whole is harmed. Further, there may be a higher risk of such misconduct recurring in the future, either by that person or by others. Felgate's communications with Staff certainly showed, as acknowledged by Felgate, a strong conviction that he was right. However, as Staff stated, if Felgate thought he was correct that the Interim Order had no legal basis, he should have taken proper legal steps, instead of ignoring the Interim Order. Felgate's unacceptable approach was aggravated by his offensive and belligerent conduct toward the Staff investigator.

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[76] We conclude that an administrative penalty of $50,000 is appropriate, in conjunction with the market-access bans discussed above.

(c) Disgorgement (i) Payment to ASC (A) Parties' Positions [77] Staff asked for a disgorgement order of $300,000, paid to the ASC, to remove the benefit Felgate received for breaching the Act. Staff referred to Re Fauth, 2019 ABASC 102 at para. 77, which stated that disgorgement is ordered not as compensation (because it is payable to the ASC, not to wronged investors), but to provide specific and general deterrence by removing a profit incentive connected to the misconduct found.

[78] Staff noted the Merits Decision finding that Felgate's misconduct led to him receiving $300,000 total from RVL and DVL (although Felgate received some of that indirectly through his spouse). Staff considered the $300,000 to be a benefit to Felgate that should be disgorged – it "was unlawfully obtained and it is properly within the purview of a disgorgement order".

[79] In response to Felgate's argument that a disgorgement order could risk depriving RVL and DVL of the ability to recover their principal amount, Staff stated that a disgorged amount would be revenue of the ASC (under s. 19(1) of the Act), so that "the Director of Enforcement can exercise her authority to return disgorgement money to RVL and DVL, and in this case has directed Staff to advise the Panel that Staff will endeavour to return any monies ordered disgorged by the Panel to DVL and RVL". During oral submissions, Staff clarified that this would be attempted through the appointment of a receiver.

[80] Felgate submitted that there has never been an ASC order for disgorgement for the breach of an interim cease trade order (or undertaking), and that this is because there is no inherent profit element when s. 93.1 (or s. 93.2) of the Act is contravened. Staff argued that profit is not necessary to ground a disgorgement order and noted that a breach of s. 93.1 could be profitless, such as acting as a director or officer if an ASC order prohibits that.

[81] Felgate contrasted a disgorgement order – paid to the ASC with no guarantee that it would find its way to RVL and DVL – with restitution. Felgate stated that he would not have opposed a restitution order, but that ASC panels do not have the jurisdiction to make such orders. He argued that if disgorgement were ordered, RVL and DVL would have the right to a judicial review of such a decision, as it could negatively affect in several ways their ability to get money back from Felgate directly or through a civil court case.

[82] First, Felgate pointed to Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 as stating that disgorgement and restitution are different and are alternatives in some circumstances (at paras. 24, 27). Felgate argued that a disgorgement order by the panel here would therefore preclude RVL and DVL from seeking restitution in another forum, as that would be double recovery from Felgate, contrary to Atlantic Lottery, and beyond the panel's jurisdiction.

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[83] Second, he argued that ordering disgorgement here, with a restitution order later made in another forum, would essentially convert the ASC's disgorgement order into a punishment (because Felgate would potentially have to pay $600,000 rather than the $300,000 he obtained from RVL and DVL). In a related argument, Felgate contended that if two orders were made for $300,000, he would not have the ability to pay both. He was not claiming impecuniosity, but argued that he would not have sufficient resources to pay double the amount of the Agreements, especially since he also owes money to others.

[84] Third, Felgate stated that no repayment of the $300,000 is due to RVL and DVL until the Agreements terminate (in 2022), and there is no indication that Felgate would refuse to pay that amount. Felgate emphasized that no fraud, misrepresentation or deceit was alleged and no connected findings were made, and there is nothing before the panel to indicate that the Agreements are not viable. Therefore, a disgorgement order would be premature. (We note there was some evidence that RVL's agreement was to be for 12 months, not 36 months. However, for our analysis, we assume the 36-month period, as the parties did in their submissions.)

[85] Felgate submitted that granting a disgorgement order with Staff's promise to use their best efforts to pay that money to RVL and DVL means the panel would be indirectly ordering restitution, which it cannot do directly under the Act.

[86] Staff countered most of Felgate's arguments by cautioning the panel against assuming that RVL and DVL would wish to sue Felgate, could afford to sue him, and could collect any amounts awarded following a successful suit. Further, Staff disagreed with Felgate's assertion that a disgorgement order here would bar RVL and DVL from seeking recovery in another forum.

(B) Analysis [87] As set out in Fauth (at para. 78), determining if a disgorgement order is warranted is a two- step process:

… First, the adjudicator should "'determine whether a respondent, directly or indirectly, obtained amounts arising from his or her contraventions of the Act'" in order to establish whether a disgorgement order can be made at all … . Second, the adjudicator should "'determine if it is in the public interest to make such an order'", including by considering the goals of specific and general deterrence … . [Citations omitted.]

[88] We are satisfied that Felgate, through his contravention of s. 93.1 of the Act, directly or indirectly obtained $35,000 from RVL and $265,000 from DVL. Therefore, the first part of the test set out in Fauth is satisfied.

[89] We now turn to the question of whether it would be in the public interest to make a disgorgement order against Felgate in these circumstances.

[90] Staff submitted that a disgorgement order would be appropriate to remove a profit incentive, as part of a package of sanctions for specific and general deterrence.

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[91] The majority of Felgate's arguments were not persuasive. For example, Atlantic Lottery was not helpful here because it discussed a plaintiff's right to claim disgorgement or restitution, which is a different context. We also conclude that RVL's and DVL's ability, or lack thereof, to pursue remedies in another forum is not relevant to our determination of whether a disgorgement order is in the public interest.

[92] We disagree with Felgate's suggestion that a disgorgement order would be indirect restitution in the circumstances of Staff's stated intention to redirect any disgorged funds to RVL and DVL. As noted, the purpose of a disgorgement order is deterrence by removing the incentive to profit from non-compliance with the Act. The purpose is not compensation. Accordingly, Staff's intention is not germane to our determination of whether disgorgement is in the public interest.

[93] We did find persuasive Felgate's argument that it would not be appropriate to order disgorgement for his breach of the Interim Order.

[94] In assessing whether disgorgement is in the public interest, we consider the deterrent effect of such an order in the context of several factors peculiar to the circumstances of this case. Specifically, we have evidence that Felgate does not need to pay RVL and DVL under the Agreements until May 2022. Further, we do not have evidence that RVL and DVL are dissatisfied with Felgate's use of their money or that the money was used in a manner inconsistent with their expectations. Moreover, the request for disgorgement is premised solely on Felgate's breach of the Interim Order; the allegation of fraud underlying the Interim Order has not yet been adjudicated. In the circumstances, we conclude that ordering disgorgement is not in the public interest for Felgate’s breach of the Interim Order.

(ii) Conditional Disgorgement Order (A) Parties' Positions [95] In their Additional Submissions, citing the panel's authority under s. 198(2) of the Act to impose terms or conditions, Staff suggested the panel could make a disgorgement order now for $300,000, but suspend its effect until May 2022 (the expiration of the Agreements). If Felgate were to repay RVL and DVL by then, either Staff or Felgate could apply under s. 214 to vary the order by removing the suspended disgorgement order. Staff contended that this would be in the public interest as a way to ensure Felgate did not retain the benefit of the $300,000 illegally raised from RVL and DVL.

[96] Felgate opposed Staff's suggestion for reasons including: no jurisdiction to make a suspended conditional disgorgement order; RVL's and DVL's ability to seek repayment could be negatively affected if there were such an order outstanding; the time suggested by Staff does not account for the limitations period during which RVL and DVL could pursue any claim against Felgate; and specific wording would be required to comply with Alberta Court of Queen's Bench rules.

(B) Analysis [97] Staff's proposal would have the panel making a disgorgement order with suspended effect. That is still a disgorgement order. We have already determined that a disgorgement order is not

15 appropriate in these circumstances. Further, if we made such an order and Felgate repaid RVL and DVL – or was ordered by a court to make such payments – there would be, at least for a time, an outstanding ASC order requiring Felgate to pay to the ASC money he had already paid back to RVL and DVL. We do not view Staff's proposal as being in the public interest. We need not address Felgate's other concerns.

(iii) Conclusion on Disgorgement [98] For the reasons stated, we decline to make a disgorgement order, conditional or otherwise, against Felgate. In appropriate circumstances, Staff should consider whether s. 197(1)(h) of the Act provides a more suitable means of seeking repayment to investors.

IV. COST-RECOVERY A. The Law [99] ASC panels have often stated that an order for the recovery of costs of the investigation or hearing under s. 202 of the Act is distinct from sanctions (Homerun at para. 48, citing Re Marcotte, 2011 ABASC 287 at para. 20):

A costs order is . . . a means of recovering, from a respondent found to have engaged in capital- market misconduct, certain investigation and hearing costs that would otherwise be borne indirectly by law-abiding market participants whose fees fund the [ASC's] operations. It is generally appropriate that a respondent pay at least some portion of the relevant costs. Determination of the appropriate portion may involve assessing parties' contributions to the efficient conduct and ultimate resolution of the proceeding.

B. Parties' Positions on Cost-recovery 1. Staff [100] Staff sought to recover from Felgate certain costs of the investigation and hearing in the amount of $50,995.75, although stating that the panel may wish to deduct some of the amount claimed for having two litigation counsel: $23,450 was claimed for the time of one counsel and $20,750 for the other.

[101] As noted, we have already rejected Staff's submission that the expiration of market-access bans be dependant, in part, on the payment of any costs order.

[102] Staff submitted that it is appropriate for Felgate to pay at least a significant portion of the $50,995.75 because Staff proved the sole allegation and Felgate lost the Nullity Application. Staff pointed to inefficiencies connected to the delay caused both by Felgate's counsel change after all evidence had been adduced and by the Nullity Application brought by his new counsel. Staff suggested that Felgate should have to pay all of Staff's claimed costs for the Nullity Application (with no deduction), given the delay it occasioned and its dismissal.

[103] Staff noted that they did not claim any cost-recovery related to the Interim Order, Staff's initial disclosure requirement or the sanctions portion of this proceeding.

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2. Felgate [104] Felgate submitted that cost-recovery should be reduced because much of the second counsel work was duplicative on this non-complex matter. Felgate also contended that Staff's costs were higher than warranted because Staff billed in 15-minute increments, rather than using the legal industry standard of 6-minute increments. In effect, that argument was that Staff would round up any task of less than a 15-minute period and bill it as a 15-minute time expenditure.

[105] Felgate asked that any costs imposed against him be decreased by $2,025 because Felgate was effectively compelled to reply to Staff's suggestion of a conditional disgorgement order. He stated that he took the amount of $2,025 from the Court of Queen's Bench costs tariff; there was no suggestion that it represented the costs of the work counsel for Felgate did on this discrete point.

C. Analysis [106] As set out in Homerun at para. 50, a panel determines recoverable costs by looking at several factors, including the time spent by Staff, duplicated effort that may warrant a reduction, and the disbursements claimed. Inefficiency is also relevant in determining what should be recovered (Homerun at para. 52).

[107] In assessing whether Staff's claimed costs should be reduced, the factors raised by the parties were Felgate's delay, Staff's billing practices, Staff's second counsel, and Felgate's need to respond to Staff's suggestion that the panel make a conditional disgorgement order.

[108] We disagree with Staff that Felgate's change of counsel and the Nullity Application caused inefficiency through delay (and through Felgate's loss of the Nullity Application). In our view, there was no unreasonable delay here. The NOH was dated August 19, 2019, with the merits hearing commencing relatively soon after that. There was only one month from the date of Felgate's letter setting out the Nullity Application (April 9, 2020) to the last written submissions on that matter (May 8, 2020). This was a neutral factor for costs.

[109] Regarding Staff's billing practices, in response to the concern raised by Felgate and subsequent questions from the panel, Staff stated that their practice is to round work time down (not up) and not to bill at all for work of less than 15 minutes, such as a short telephone call. This would decrease the total costs claimed. Accordingly, it appeared that Staff's bill of costs underestimated the amount of legal counsel time, perhaps quite significantly. We were satisfied that no deduction from Staff's claimed costs was required in respect of Staff's billing practices.

[110] Staff had two counsel for the majority of this proceeding, including for the Nullity Application (although not for this sanctions and cost-recovery phase). While the Nullity Application was a novel argument, the overall proceeding was not complex. We consider that some deduction is warranted from Staff's costs. However, we also remained aware of the likely underestimation caused by Staff's rounding down of billing time. Overall, we conclude that the amount claimed for Staff counsel should be reduced from $44,200 to $35,000.

[111] We reject Felgate's claim for a $2,025 deduction in costs for Felgate's reply to the conditional disgorgement order proposal that Staff included in its Additional Submissions. We do

17 not follow the Court of Queen's Bench costs tariff. There was no evidence here as to how much time Felgate's counsel spent to reply to the Additional Submissions. Regardless, we will not penalize Staff for raising an argument and making submissions.

[112] Considering it appropriate to round the cost-recovery amount ordered, we conclude that Felgate should pay costs of $41,800.

V. CONCLUSION [113] For the reasons given, we make the following orders against Felgate:

 under s. 198(1)(d) of the Act, he must resign all positions he holds as a director or officer (or both) of any issuer, registrant, investment fund manager, recognized exchange, recognized self-regulatory organization, recognized clearing agency, recognized trade repository, designated rating organization or designated benchmark administrator;

 for a period of five years from the date of this decision or until the administrative penalty set out below is paid in full, whichever is the later:

 under s. 198(1)(b), he must cease trading in or purchasing any security or derivative;

 under s. 198(1)(c), all of the exemptions contained in Alberta securities laws do not apply to him;

 under s. 198(1)(c.1), he is prohibited from engaging in investor relations activities;

 under s. 198(1)(e), he is prohibited from becoming or acting as a director or officer (or both) of:

 any issuer or other person or company that is authorized to issue securities; or

 a registrant, investment fund manager, recognized exchange, recognized self-regulatory organization, recognized clearing agency, recognized trade repository, designated rating organization or designated benchmark administrator;

 under s. 198(1)(e.1), he is prohibited from advising in securities or derivatives;

 under s. 198(1)(e.2), he is prohibited from becoming or acting as a registrant, investment fund manager or promoter; and

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 under s. 198(1)(e.3), he is prohibited from acting in a management or consultative capacity in connection with activities in the securities market;

 under s. 199, he must pay to the ASC an administrative penalty of $50,000; and

 under s. 202, he must pay costs to the ASC in the amount of $41,800.

[114] Under its terms, the Interim Order remains in effect.

[115] These proceedings are now concluded.

May 11, 2021

For the Commission:

"original signed by" Kari Horn

"original signed by" Tom Cotter

"original signed by" Gail Harding