COURT OF APPEAL FOR ONTARIO

CITATION: Porter v. Bryan, 2017 ONCA 677

DATE: 20170901

DOCKET: C63670

Laskin, Feldman and Miller JJ.A.

BETWEEN

Chad Porter

Applicant (Respondent)

and

Brooke Bryan

Respondent (Appellant)

Paul Mongenais, for the Appellant

Thomas Mann, for the Respondent

Heard: August 23, 2017

On appeal from the order of Regional Senior Justice R.D.
    Gordon of the Superior Court of Justice, dated February 1, 2017, with reasons reported
    at 2017 ONSC 756.

REASONS
    FOR DECISION

[1]

This appeal concerns the proposed relocation of a five year old child
    from Cochrane, Ontario to Thunder Bay. The parties, the childs father and mother,
    separated in November 2015. By a consent order dated September 16, 2016, they
    agreed to joint custody and a shared parenting schedule. That order was made
    without prejudice to the appellant mother bringing a mobility motion to move
    their son to Thunder Bay. That motion, heard on January 9, 2017, was dismissed.
    The mother appeals.

[2]

For the reasons that follow, we agree that the appeal should be allowed.

BACKGROUND

[3]

The nature of the mothers employment as a prisoner transport officer in
    Cochrane meant her schedule was unpredictable; sometimes working out of town,
    sometimes working overtime, sometimes both, and never knowing until the last
    minute. This would have impaired her ability to care for her son  not knowing
    in advance whether she would be called in to work in the morning before he went
    to school, or whether she would be home in time to pick him up again  but her
    employer temporarily accommodated her with a schedule that avoided
    unpredictable deployment. Eventually, however, her employer withdrew this
    accommodation. After exhausting her vacation time and sick leave, the mother
    resigned her position. Prior to her resignation, her employer invited her to
    apply for another position in Cochrane with a more parenting-friendly schedule.
    She was successful, but the employer subsequently had to revoke the offer.

[4]

The father is employed as a forest-fire crew leader with the Ministry of
    Natural Resources during the fire season from April to September. During his
    deployment, he is only resident in Cochrane eight to ten days per month. In the
    off-season, he is employed in Cochrane as a snow plow operator, municipal
    firefighter, and moose hunting guide. His extended family resides in Cochrane.

[5]

Post-resignation, the mother has not been able to find employment in
    Cochrane. She has, however, had multiple job offers in Thunder Bay, where her
    extended family and new partner live.

[6]

The mother argued that the move was necessary for her to remain
    financially viable, and to provide for her son, as she could find no employment
    in Cochrane that allowed her to fulfill her duties as a parent. She argued that
    she was her sons primary caregiver and, accordingly, her decisions about where
    to live and work ought to be given considerable weight.

[7]

The father opposed relocation on several bases. The principal objection
    is that relocation would, in the words of the motion judge, leave [the son]
    without meaningful parental influence from his father. He also argued that
    whatever financial hardship the mother is experiencing is entirely
    self-imposed, and that the necessity of taking employment in Thunder Bay is
    mere pretext to be with her new partner.

[8]

The motion judge disagreed that the mothers reasons were mere pretext.
    But he agreed with the father that neither party was the primary caregiver for
    the child, and that the mothers decisions about how best to meet the needs of
    the child were to be given no special consideration.

[9]

The motion judge characterized the issue before him as a matter of
    comparing the benefits to the child of remaining in Cochrane and maintaining a
    close relationship with his father, on the one hand, with the loss of that
    close relationship and gain of additional economic benefits from moving to
    Thunder Bay on the other. But he was unconvinced that there were any economic
    benefits to moving to Thunder Bay. He believed that the mothers financial
    difficulties were self‑imposed by her voluntary resignation from her job,
    and that she would be able to find suitable work in Cochrane. The motion judge
    therefore concluded that, from the childs perspective, life in Thunder Bay
    would provide no relevant benefit that he would not enjoy in Cochrane, but
    would carry the additional cost of a disruption with his relationship with his
    father. He dismissed the motion.

ANALYSIS

[10]

In dismissing the motion, the motion judge correctly applied the proposition
    from this court in
Berry v. Berry
, 2011 ONCA 705, 285 O.A.C. 366 that
    the superordinate consideration in a mobility case is the best interests of
    the child, determined from a child-centred perspective (para. 10). Accordingly,
    in assessing the mothers reasons for moving, the motion judge correctly held
    that the only reasons relevant to the analysis were those that related to her
    ability to meet the needs of her son.

[11]

A motion judges decision not to allow a relocation is discretionary and
    it is not the place of this Court to engage in a rebalancing of the factors
    identified in
Berry
. However, as explained below, the motion judge made
    an error in principle by not characterizing the mother as the primary caregiver
    of the child, which led to the further error that her reasons for moving were
    not entitled to the serious consideration required by
Gordon v. Goertz
,
    [1996] 2 S.C.R. 27.

[12]

Furthermore, the motion judge made a palpable and overriding error in
    concluding that the mothers financial difficulties were self-imposed. They
    were not. Her resignation resulted from her employers withdrawal of an
    accommodation that had made her former employment compatible with her parenting
    responsibilities.

[13]

The motion judge further erred in finding that the mother could be
    expected to find suitable employment in Cochrane. There was no evidence on
    which to base that finding. Although the motion judge did not have the benefit
    of the mothers fresh evidence, that evidence attests both to her continued
    inability to find work in Cochrane, and her employment opportunities in Thunder
    Bay.

[14]

The Supreme Court of Canada held in
Goertz
, at para. 48, that where
    assessing a motion to relocate:

the views of the custodial parent, who lives with the child
    and is charged with making decisions in its interest on a day-to-day basis, are
    entitled to great respect and the most serious consideration. The decision of
    the custodial parent to live and work where he or she chooses is likewise
    entitled to respect, barring an improper motive reflecting adversely on the
    custodial parents parenting ability.

[15]

The motion judge held that in circumstances of joint and shared custody,
    there is no primary caregiver, and therefore neither parents interests can have
    greater weight than the others.

[16]

We do not agree that the legal status of joint and shared custody
    forecloses the possibility that one parent can be, for the purposes of a
    mobility motion, the primary caregiver. On the record before us, it is evident
    that although the parties have joint and shared custody, the mother is
    nevertheless the primary caregiver. This conclusion is not only supported by
    the mothers evidence, but from the fathers admission on his Form 35.1
    affidavit, his answers in cross-examination, and affidavits from two of the
    fathers aunts. Accordingly, the consideration articulated in
Goertz
comes into play, and the mothers reason for moving bears special consideration.

[17]

There is, in our view, a valid and compelling parenting-based reason for
    the move: it is necessary to enable the primary caregiver to remain financially
    viable while providing care for the child. The mother has done all she can be
    expected to do to secure employment in Cochrane. It has not worked out, and
    there is no good reason for her and her son to live in poverty when she has
    secured employment in Thunder Bay that will allow her both to parent her son
    and to provide economically for him.

[18]

We are encouraged in this result by the mothers offer to facilitate
    access by providing air travel to Cochrane for the child, taking advantage of
    an employment benefit of her new job in Thunder Bay. She is also willing, we
    are advised, to accept an unequal sharing of summer and non-school days during
    the school year to accommodate the fathers work schedule as a forest firefighter
    deployed across Canada.

[19]

There was some uncertainty as to whether the order appealed from was a
    final or an interim order. The procedure leading up to the order was somewhat
    irregular, but the motion judge found the order to be final. As a result, the appeal
    is properly before this Court.

[20]

As a consequence of our order, a new access regime will be required. The
    parties are encouraged to work out an acceptable access schedule as between
    them. However, if that is not possible, they may return on motion to the
    Superior Court of Justice in Thunder Bay.

DISPOSITION

[21]

The appeal is allowed, and the appellant mother is permitted to move the
    child to Thunder Bay. The mother is entitled to costs in the amount of $7,000,
    inclusive of disbursements and HST.

John Laskin J.A.

K. Feldman J.A.

B.W. Miller J.A.


COURT OF APPEAL FOR ONTARIO

CITATION: Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719

DATE: 20170918

DOCKET: C61449

Epstein, Hourigan and Paciocco, JJ.A.

BETWEEN

Paiman Rahimi

Plaintiff (Appellant and

Respondent)

and

SouthGobi Resources Ltd.
, Alexander A.
    Molyneux,
Terry Krepiakevich, Matthew OKane, Andre Deepwell, Pierre B.
    Lebel, Gordon Lancaster
and Deloitte LLP

Defendants (Respondents and

Appellants)

Michael G. Robb, Paul Bates and Alex Dimson, for the
    appellant

John A. Campion, Gavin Tighe,
    and Stephanie Clark, for the respondents SouthGobi Resources Ltd., Terry
    Krepiakevich, Matthew OKane, Andre Deepwell, Pierre B. Lebel, Gordon Lancaster

Heard: June 19, 2017

On appeal from the order of Justice Edward P. Belobaba of
    the Superior Court of Justice, dated November 5, 2015, with reasons reported at
    2015 ONSC 5948.

Hourigan J.A.:

A.

Introduction

[1]

Paiman Rahimi
is the representative plaintiff in a
    putative
secondary market securities class action against the
    respondents SouthGobi Resources Ltd. (SGR), Terry Krepiakevich, Matthew
    OKane, Andre Deepwell, Pierre Lebel, Gordon Lancaster and
Alexander
    Molyneux (collectively, save for Molyneux, the Individual Respondents) and Deloitte
    LLP
.
[1]

[2]

Rahimi sought leave under s. 138.8(1) of the
Securities
    Act
, R.S.O. 1990, c. S.5 (
SA
) to proceed with a
    misrepresentation claim. On the motion for leave, the motion judge permitted
    the claim to proceed as against SGR but not the Individual Respondents, holding
    that there was no reasonable possibility that the Individual Respondents would
    not be able to succeed on a defence of reasonable investigation under s.
    138.4(6)(a) of the
SA.

[3]

Rahimi appeals the motion judges denial of leave as against the
    Individual Respondents (the Rahimi Appeal). SGR brings a separate appeal (the
    Corporation Appeal) against the motion judges ruling granting leave for the
    claim to proceed against it.
[2]

[4]

For the reasons that follow, I would grant the Rahimi Appeal and dismiss
    the Corporation Appeal.

B.

Background

(1)

Nature of the Business

[5]

SGR is
a coal mining company trading on the
    Toronto and Hong Kong stock exchanges. Krepiakevich and OKane are two of its
    former CFOs. Deepwell, Lebel and Lancaster are directors and members of SGRs
    audit committee.

[6]

The entirety of SGRs revenue came from the coal-mining operations in
    Mongolia of its subsidiary SouthGobi Sands LLC (SGS). SGSs main coal mine
    was called Ovoot Tolgoi. SGS was a major coal supplier for the Chinese market
    and, by 2010, all the mines customers were Chinese.

[7]

SGS agreed to what are known as bill and hold contractual arrangements
    with certain of its customers. These customers ordered coal, which SGS
    stockpiled for custom pickup at a bonded yard that was under the control and
    supervision of the Mongolian government. The customers would pay the contract
    price as soon as the coal was delivered to the yard. Under that arrangement,
    they were able to avoid rising prices in coal and have greater flexibility in
    transporting it.

[8]

SGR used the International Financial Reporting Standards (IFRS) to
    report its revenue, rather than the American GAAP method. Under an IFRS
    recognition rule called IAS-18, revenue from the sale of coal on a bill and
    hold contract could be recognized as soon as the coal was delivered to the
    stockpile yard, rather than when the customer retrieved the coal from there,
    provided that a reasonable judgment could be made that the risks and rewards of
    ownership of the coal had been transferred to the customer upon delivery of the
    coal to the yard and that customer payment was probable. Therefore, beginning
    in 2010, SGS implemented the bill and hold arrangements and SGR recognized the
    revenue derived therefrom in the manner dictated by IAS-18.

(2)

Prelude to the November 2013 Restatement

[9]

In March and April 2012, SGRs parent company, Ivanhoe Mines, was
    acquired by Rio Tinto, which subsequently changed its name to Turquoise Hill
    Resources (TQR). PricewaterhouseCoopers (PwC), the long-time auditor for
    TQR, became the auditor for SGR, replacing Deloitte.

[10]

In 2012, a Chinese company attempted to purchase SGR, but the deal was blocked
    by the Mongolian government, which shut down SGSs coal-mining operation in
    Mongolia in May 2012. Ovoot Tolgoi produced no coal from then until September
    2013. Coal prices in China were falling, and by the middle of 2012 SGSs bill
    and hold customers had trouble making timely payments, resulting in a growing
    number of forfeitures of coal and repossessions by SGS. The likelihood-of-payment
    stipulation in IAS-18 was no longer being met for these customers.

[11]

SGR, with approval of PwC, stopped using bill and hold agreements in
    mid-2012. It adopted a revenue recognition policy that required delivery of
    coal to the customer as a prerequisite to recognition. The transfer of title
    provisions in SGSs bill and hold agreements were amended to take effect in
    January 2013, and the change in revenue recognition policy was to be
    implemented on a go-forward basis.

[12]

SGR concluded that there was no need in January 2013 to change its
    earlier financial statements as a result of these subsequent changes in
    operation. PwC, which reviewed the earlier financials from 2010 to mid-2012,
    agreed with this position.

(3)

The November 2013 Restatement

[13]

For reasons that are in contest in this litigation, in spite of the
    January 2013 decision not to alter its earlier financial statements, SGR did
    issue a formal restatement of its prior financial statements on November 8,
    2013 (the Restatement). In a press release, SGR stated that, as a result of a
    review by SGRs auditors for the 2010 and 2011 fiscal years,

The Company has determined that certain revenue transactions
    were previously recognized in the Companys consolidated financial statements
    prior to meeting relevant revenue recognition criteria. These transactions
    relate to coal that had been delivered to the customer's stockpile in a
    stockyard located with the SouthGobi Ovoot Tolgoi mining license area (the
    Stockyard)  The restatement of the Company's consolidated financial
    statements will reflect a change in the point of revenue recognition from: (A)
    the delivery of coal to the customer stockpiles with the Stockyard to (B) the
    loading of coal onto the customer's trucks at the time of collection

Until the recent review, it was determined that a restatement
    of financial statements for the periods prior to the second half of 2012 was
    not required. The restatement of the Company 2011 and 2012 financials in
    order to reflect this change in the point of revenue recognition will in turn
    require restatements to the comparative information in the Company's previously
    filed interim financial statements for 2013.

As a result of the potentially material effects on the
    Companys financial statements, the previous financial information provided by
    the Company in respect of the periods to be covered by the Restated Financials
    are no longer accurate and should not be relied upon.

[14]

Following the November 8 press release, SGRs share price dropped about
    18 per cent.

[15]

SGR released another press release on November 14, 2013 (the November
    14 Press Release) indicating that there was a material weakness in the
    Companys internal controls over the financial reporting. The material
    weakness was explained as a failure to ensure that all aspects of sales
    arrangements were considered in determining the appropriate financial accounting
    in respect of the bill and hold contracts used in Ovoot Tolgoi mining
    operations. There was, in other words, no assurance that the accounting for the
    bill and hold contracts was IFRS-compliant.

[16]

The restatement had a significant impact on SGRs financial reporting,
    decreasing what SGR represented as its gross revenue between late-2010 and
    early 2012:

Relevant Quarter

Original Gross Revenue

Less: Bill & Hold Sales Adjusted Per Restatement

Add: Bill & Hold Sales Adjusted From Earlier Periods

Adjusted Gross Revenue

Q4 2010

$46,314,989

$21,955,661

-

$24,359,328

Q1 2011

$22,843,665

-

$440,874

$23,284,539

Q2 2011

$56,522,889

$28,411,837

$2,534,010

$30,645,062

Q3 2011

$74,239,790

$31,404,960

$18,589,299

$61,424,130

Q4 2011

$63,616,358

$43,311,314

$20,725,082

$41,030,126

Q1 2012

$47,541,686

$37,467,649

$21,391,171

$31,465,208

Q2 2012

$9,884,263

$75,990

$46,217,031

$56,025,304

(4)

The Litigation

[17]

The putative class action was for all purchasers of SGR shares between
    March 30, 2011 and November 17, 2013. The parties agreed that certification
    should await the determination of the issue of leave under the
SA
.

[18]

On the motion for leave, SGR and the Individual Respondents took a very
    unusual position. They relied on the defence of reasonable investigative
    efforts afforded to them by s. 138.4(6)(a) of the
SA
. In support of
    that defence, they submitted that the financial statements during the class
    period did not need to be restated and that SGR had no material weaknesses in its
    internal financial reporting controls. They tendered affidavit evidence that
    the restatement was undertaken not because of any securities law requirement,
    but due to pressure from TQR, PwC and the United States Securities Exchange
    Commission (SEC). They said that in the summer of 2013, the SEC reviewed
    TQRs consolidated financial statements and challenged SGRs earlier revenue
    recognition decisions relating to the bill and hold agreements because they
    were not GAAP-compliant. Rio Tinto, TQR and PwC defended those decisions based
    on their compliance with IFRS. The SEC nevertheless stated that it would not
    approve TRQs third quarter financials unless SGRs bill and hold revenues were
    restated. Significantly, TRQ required this approval to complete a rights
    offering financing venture being planned for November 2013. Under pressure from
    the SEC, TRQ therefore asked SGR to provide the requested restatement in early
    November 2013.

[19]

The motion judge described the situation as follows, at para. 15 of his
    reasons:

The uncontroverted evidence of the defendant directors is that
    SGR reluctantly agreed to restate the 2010 to 2012 financials for three
    reasons: one, to accommodate TQRs dispute with the SEC and allow TQR to
    conclude its rights offering financing; two, to itself avoid default on a
    convertible debenture held by the Chinese Investment Corporation by making a
    required interest payment that depended on financial support from TQR, who would
    only fund the companys operations if SGRs earlier financials were restated;
    and three, because PwC was now taking the position, despite agreeing in 2012
    that no restatements were necessary, that it would not approve SGRs 3Q2013
    financials unless the earlier financials were restated.

[20]

In other words, the Individual Respondents position was that there was
    no misrepresentation during the class period; rather, any potential
    misrepresentation was in the Restatement and/or the November 14 Press Release.

[21]

With respect to the reference in the press release announcing the
    Restatement that SGRs earlier financial statements were no longer accurate
    and should not be relied upon, Lebel, Lancaster and Deepwell swore nearly
    identical affidavits saying that they did not mean to convey that the earlier financial
    statements contained any misrepresentation of revenue. Rather, they asserted
    that the reference to the inaccuracy and unreliability of the earlier financial
    statements flowed,
ipso facto
, from the restatement decision itself.

(5)

The Motion Judges Reasons

[22]

At the first stage of his analysis, the motion judge concluded that the
    misrepresentation claim should proceed because it had a reasonable possibility
    of success. In so concluding, he highlighted the explicit language in the
    Restatement to the effect that SGRs earlier revenue reports were deficient and
    should not be relied on (see para. 38), as well as SGRs statements about deficiencies
    in its earlier revenue reports in the November 14 Press Release.

[23]

The motion judge then turned to the issue of the reasonable
    investigation defence. He did not grant leave as against the Individual
    Respondents because he held that there was no reasonable possibility that they
    would not be able to establish a reasonable investigation defence at trial
    under the
SA
.

[24]

With respect to Krepiakevich and OKane, the motion judge found that
    their uncontroverted evidence was that they carefully analyzed IFRS standards
    against all of the bill and hold contracts created during their respective
    tenures and concluded that the IFRS criteria were properly applied to them. The
    motion judge referred to the factors for the court to consider in determining
    whether there was a possibility that they could succeed on a reasonable
    investigation defence set out in s. 138.4(7) of the
SA
. He held that,
    because the two CFOs had impressive accounting credentials and experience with
    the IFRS standards, their knowledge and experience favoured their defence, as
    did their reasonable reliance on the opinions of the companys auditors,
    Deloitte and PwC.

[25]

With respect to Deepwell, Lebel and Lancaster, the motion judge noted
    that they were on the Board of Directors of SGR in November 2013 during the Restatement
    and the November 14 Press Release. He stated that SGRs admission that its
    prior financials were deficient was inconsistent with a reasonable
    investigation defence. However, he observed that the November 14 Press Release
    was never put to the Board of Directors before being released and was drafted
    exclusively by SGR management. Therefore, he stated at para. 56, there is no
    linkage between the three defendant directors and the reference in the November
    14 news release about a weakness in internal financial reporting controls.

[26]

The motion judge stated that these parties provided credible and
    unchallenged evidence establishing their reasonable investigation defences.
    Deepwell reviewed the opinions of the audit committee and presented them to the
    board. His actions in doing so showed an appropriate degree of attention to the
    reporting of revenue and, in particular, to the reporting of the bill and hold
    contract revenue over the time periods in question. Lebel testified that the Board
    of Directors never had any reasonable grounds to believe that its earlier
    financial statements were untrue. His evidence of what corporate governance and
    accounting procedures were used by SGR was not undermined by cross-examination.
    Lancaster testified that all revenue recognition decisions in respect of the
    bill and hold contracts were only made after review and approval by the
    auditors.

[27]

The motion judge concluded at para. 62:

The defendants evidence taken as a whole shows that the
    individual defendants were fully alive to the bill and hold issues. There were
    visits to Mongolia by the CFO, the audit committee and board, and the external
    auditors. There was thoughtful preparation, review and approval of audit plans
    and draft financial statements and the correction and adjustment of these
    statements as and when needed. I am satisfied on the evidence before me that
    nothing more could have been done by the two CFOs or the three defendant
    directors to ensure the legitimacy and accuracy of the financial representations
    at issue.

[28]

With respect to SGR, the motion judge held that there was a reasonable
    possibility that it would not establish a reasonable investigation defence at
    trial. According to the motion judge, the fact that SGR had issued the
    Restatement was arguably inconsistent with a reasonable investigation defence.
    The Restatement amounted to an acknowledgment of a prior error in a financial
    statement as defined under the IFRS, being an error arising from a failure to
    use or the misuse of reliable information that was available at the time that
    the relevant financial statements were issued, and that could reasonably have
    been expected to be obtained and taken into account in the preparation of those
    financial statements. A prior error thus defined is inconsistent with the
    possibility of a reasonable investigation.

[29]

The motion judge also relied on the fact SGR management announced a
    material weakness in the companys internal financial reporting controls in the
    November 14 Press Release. This admission was found to be inconsistent with the
    companys having performed a reasonable investigation in relation to the
    subject of the alleged misrepresentations.

[30]

Finally, the motion judge noted that there was no evidence from any
    member of SGR management who was in place at the time of the Restatement or the
    November 14 Press Release about the weaknesses in SGRs internal
    revenue-reporting controls to explain why management said what it said.

[31]

Rahimi appeals the motion judges decision on the ground that leave to
    pursue the misrepresentation claim should have been granted in respect of the
    Individual Respondents.  SGR appeals on the ground that leave should have been
    denied as against SGR.

[32]

On its motion for leave to appeal in the Divisional Court, SGR took the
    position that the doctrine of corporate identification merges the mental state
    of the responsible individual within a corporation with that of the corporation
    itself. In short, it submitted that there cannot be a finding that SGR is
    culpable while the individual respondents are exonerated. The Divisional Court
    granted leave to appeal to SGR, finding that there was reason to doubt the
    correctness of the motion judges decision based on the corporate
    identification doctrine.

C.

Issues

[33]

The appeals raise two issues for determination: (i) did the motion judge
    err in denying leave on the claim against the Individual Respondents?; and (ii)
    did the motion judge err in granting leave on the claim against SGR? Below, I
    answer the first issue in the affirmative and the second issue in the negative.

[34]

In summary, with respect to the Individual Respondents, the primary
    error made by the motion judge was treating the leave motion as if it were a
    trial in which he had to finally resolve significant credibility issues on the
    record before him. The motion judge failed to give meaningful consideration to
    gaps in the evidentiary record and the significant credibility issues apparent
    from that record. In particular, he failed to consider compelling evidence that
    contradicted the defence narrative offered by SGR and the Individual
    Respondents on the leave motion. The decision of the motion judge to deny leave
    to as against the Individual Respondents was also inconsistent with fundamental
    policy imperatives that animate securities regulation. With respect to the
    claim against SGR, the motion judge made no error in determining that there was
    no certainty at this stage that SGR's reasonable investigation defence would
    succeed at trial.

D.

Analysis

(1)

Legal Principles

[35]

Before considering the issues in these appeals, it is helpful to review
    the legal principles applicable to leave motions under the
SA
.

[36]

Part XXIII.1 of the
SA
creates a regime governing civil liability
    for misrepresentation on the secondary securities market. Section 138.3 creates
    a cause of action for misrepresentation, but s. 138.8 requires the plaintiff to
    first obtain leave of the court to commence the action. Subsections (1)-(3) of
    s. 138.8 provide:

(1) No action may be commenced under section 138.3
    without leave of the court granted upon motion with notice to each
    defendant.  The court shall grant leave only where it is satisfied that,

(a) the action is being brought in good faith; and

(b) there is a reasonable possibility that the
    action will be resolved at trial in favour of the plaintiff.

(2) Upon an application under this section, the
    plaintiff and each defendant shall serve and file one or more affidavits
    setting forth the material facts upon which each intends to rely.

(3) The maker of such an affidavit may be examined on
    it in accordance with the rules of court.

[37]

The Supreme Court of Canada addressed the proper interpretation and
    application of s. 138.3(1) in
Canadian Imperial Bank of Commerce v. Green
,
    2015 SCC 60, [2015] 3 S.C.R. 60. It adopted the same interpretation it
    previously gave to the virtually identical s. 225.4 of Quebecs
Securities
    Act
, C.Q.L.R., c. V-1.1, in
Theratechnologies Inc. v. 121851 Canada Inc.
,
    2015 SCC 18, [2015] 2 S.C.R. 106.

[38]

These cases establish that for there to be a reasonable possibility that
    a misrepresentation action will be resolved at trial in favour of the plaintiff
    under s. 138.8(1)(b), there must be a reasonable or realistic chance that it
    will succeed, and the plaintiff must offer both a plausible analysis of the
    applicable legislative provisions, and some credible evidence in support of the
    claim:
Green
, at para. 121. The plaintiff must adduce sufficient
    evidence to persuade the court that there is a reasonable possibility that the
    action will be resolved in the [plaintiffs] favour:
Theratechnologies
,
    at para. 39.

[39]

The civil liability regime in Part XXII.1 of the
SA
was enacted
    in 2002 following a series of high profile misrepresentations and questionable
    disclosure practices among publicly traded companies in Canada during the
    1990s. Regulatory sanctions available at the time were perceived as inadequate
    deterrents for these wrongs. Common law remedies for negligent
    misrepresentation  which required investors to prove detrimental reliance on
    an alleged misrepresentation  were perceived as too onerous for a legal
    proceeding to be feasible. Accordingly, the Part XXII.1 regime was designed to
    provide more effective deterrence for wrongful conduct on the part of
    corporations by making it easier for investors to obtain compensation for
    misrepresentations, who are not required to prove detrimental reliance under
    the regime: see
Theratechnologies
, at paras. 28-29, 33; and
Green
,
    at paras. 63-65.

[40]

The leave requirement in s. 138.8 was added in response to a concern
    that a lack of safeguards in the Part XXII.1 regime would unfairly expose
    securities issuers and long-term shareholders to the volatility of share prices
    engendered by unmeritorious, frivolous, and costly secondary market
    misrepresentation claims:
Goldsmith v. National Bank of Canada
, 2016
    ONCA 22, 128 O.R. (3d) 481, at para. 27. U.S.-style strike suits, or
    meritless actions launched in order to coerce targeted defendants into unjust
    settlements, undermine the integrity of Ontarios capital markets:
Green
,
    at paras. 67-68. The leave requirement is therefore intended to function as a
    screening mechanism so that only actions that have a reasonable possibility
    of success are permitted to proceed and unmeritorious litigation, and the time
    and expense it imposes on defendants, is avoided or brought to an end early in
    the litigation process:
Theratechnologies
, at paras. 30 and 38.

[41]

In light of these policy objectives, the statutory cause of action in
    the Part XXII.1 regime balances provisions that facilitate a plaintiffs
    remedy, such as deemed reliance on the misrepresentation, against protections
    for defendants, including the leave requirement and the reasonable
    investigation defence:
Theratechnologies
, at para. 179; and
Drywall
    Acoustic Lathing and Insulation, Local 675 Pension Fund (Trustees of) v.
    SNC-Lavalin Group Inc
., 2015 ONCA 718, 340 O.A.C. 271, at para. 49.

[42]

The reasonable investigation defence is contained in ss. 138.3(6) and
    (7):

(6) A person or company is not liable in an action
    under section 138.3 in relation to,

(a) a misrepresentation if that person or company
    proves that,

(i) before the release
    of the document or the making of the public oral statement containing the
    misrepresentation, the person or company conducted or caused to be conducted a
    reasonable investigation, and

(ii) at the time of
    the release of the document or the making of the public oral statement, the
    person or company had no reasonable grounds to believe that the document or
    public oral statement contained the misrepresentation; or

(7) In determining whether an investigation was
    reasonable under subsection (6)  the court shall consider all relevant
    circumstances, including,

(a) the nature of the responsible issuer;

(b) the knowledge, experience and function of the person
    or company;

(c) the office held, if the person was an officer;

(d) the presence or absence of another
    relationship with the responsible issuer, if the person was a director;

(e) the existence, if any, and the nature of any
    system designed to ensure that the responsible issuer meets its continuous
    disclosure obligations;

(f) the reasonableness of reliance by the person
    or company on the responsible issuers disclosure compliance system and on the
    responsible issuers officers, employees and others whose duties would in the
    ordinary course have given them knowledge of the relevant facts;

(g) the period within which disclosure was
    required to be made under the applicable law;

(h) in respect of a report, statement or opinion
    of an expert, any professional standards applicable to the expert;

(i) the extent to which the person or company
    knew, or should reasonably have known, the content and medium of dissemination
    of the document or public oral statement;

(j) in the case of a misrepresentation, the role
    and responsibility of the person or company in the preparation and release of
    the document or the making of the public oral statement containing the
    misrepresentation or the ascertaining of the facts contained in that document
    or public oral statement; and

(k) in the case of a failure to make timely
    disclosure, the role and responsibility of the person or company involved in a
    decision not to disclose the material change.

[43]

In
Gould v. Western Coal Corp.
, 2012 ONSC 5184, 7 B.L.R. (5th)
    19, at para. 267, Strathy J. (as he then was) stated that the reasonable
    investigation defence has two requirements: (1) the defendant must have
    conducted a reasonable investigation or caused such an investigation to be conducted;
    and (2) the defendant had no reasonable grounds to believe that the defective
    public document contained a misrepresentation.

[44]

The operation of the reasonable investigation defence under s.
    138.3(6)(a), in the context of a motion for leave to commence a
    misrepresentation action, was not before the Supreme Court in either
Theratechnologies
or
Green
. In its own decision in
Green
(2014 ONCA 90, 118
    O.R. (3d) 641, at para. 94), this court endorsed the test Strathy J adopted for
    determining whether to grant leave to a plaintiff under s. 138.8 where the
    defendant asserts a defence of reasonable investigation. The test asks whether there
    is a reasonable possibility that the defendant will not be able to establish
    one or more of the branches of the reasonable investigation defence at trial.

[45]

There is, therefore, an underlying balancing inherent in the legal
    standard for obtaining leave to pursue the secondary market misrepresentation cause
    of action created by Part XXII.1 of the
SA
. On the one hand, the standard
    is designed to provide aggrieved investors with an effective remedy. On the
    other hand, issuers must be protected from unmeritorious claims and frivolous
    strike suits. A motion judge hearing a leave application must balance these
    competing policy imperatives. She must vigilantly implement the screening
    mechanism of the leave requirement under s. 138.8 while at the same ensuring that
    the secondary market remedy is not rendered illusory through the elimination of
    potentially meritorious claims.

[46]

Although this is a relatively new cause of action, the case law provides
    guidance on how the motion judge is to discharge these competing duties. The court
    must undertake a reasoned consideration of the evidence to ensure that the
    action has some merit:
Theratechnologies
, at para. 38. This must
    include some weighing of the evidence that both parties are required to proffer
    under ss. 138.8(2) and (3) and scrutiny of the entire body of evidence, not
    just the evidence of the plaintiff viewed in isolation. To achieve the
    objective of the leave requirement,

the motion judge must do more than simply ascertain whether the
    plaintiff has presented evidence of a triable issue. Instead, the motion judge
    must review all the evidence adduced by both parties to ascertain whether there
    is a reasonable or realistic chance that the action will succeed.

Mask v. Silvercorp Metals Inc.
, 2016 ONCA
    641, 132 O.R. (3d) 161, at para. 43.

[47]

The balancing exercise was described by Abella J. in
Theratechnologies

at para. 39:

A case with a reasonable possibility of success requires the
    claimant to offer both a plausible analysis of the applicable legislative
    provisions, and some credible evidence in support of the claim. This approach,
    in my view, best realizes the legislative intent of the screening mechanism: to
    ensure that cases with little chance of success  and the time and expense they
    impose  are avoided. I agree with the Court of Appeal, however, that the
    authorization stage under

s.
    225.4

should not be treated as a
    mini-trial. A full analysis of the evidence is unnecessary.  If the goal
    of the screening mechanism is to prevent costly strike suits and litigation
    with little chance of success, it follows that the evidentiary requirements
    should not be so onerous as to essentially replicate the demands of a trial. To
    impose such a requirement would undermine the objective of the screening
    mechanism, which is to protect reporting issuers from unsubstantiated strike
    suits and costly unmeritorious litigation. What

is

required
    is sufficient evidence to persuade the court that there is a reasonable
    possibility that the action will be resolved in the claimants favour.

[48]

To be clear, the motion judges duty to scrutinize the entire record is
    not restricted to a review of the evidence filed on the motion. The motion
    judge is also obligated to consider what evidence is
not
before her. She
    must be cognizant of the fact that, at the leave stage, full production has not
    been made and the defendant may have relevant documentation that has not been produced
    or relevant evidence that has not been tendered. Consideration of these
    evidential limitations of the leave stage is important because they can work to
    the prejudice of plaintiffs who have potentially meritorious claims.

[49]

Equally important is the requirement that the motion judge thoroughly
    examine the state of the evidence to determine whether there are contentious
    issues of credibility that impact on the decision whether to grant leave. Where
    such credibility issues are extant, the motion judge must ask herself whether
    they can be resolved on the existing record.

[50]

In the present case, the motion judge found that Rahimi had established
    a
prima facie
case in his misrepresentation claim. The real issue was
    whether there was a reasonable possibility that SGR and the Individual
    Respondents will not be able to establish one or more of the branches of the
    reasonable investigation defence at trial. In the face of the limited record
    and significant credibility issues, the proper course for the motion judge was
    not to do the best he could on the available record, treating the motion as if
    it were a mini-trial. Rather, the lack of a clear record makes evident that the
    leave must be granted because there is no certainty that the reasonable
    investigation defence will succeed.

(2)

Reasonable Investigation Defence of the Individual Respondents

[51]

With respect, I am of the view that the motion judge erred in law in
    treating the motion as a mini-trial in which his function was to determine
    contentious issues of credibility. He compounded that error by conducting a
    review of the credibility issues that failed to properly consider the gaps in
    the evidence and the evidence that conflicts with the contents of the
    affidavits filed on the leave motion. In particular, he failed to take into
    account the following issues.

[52]

First, nowhere in the documents produced by SGR and the Individual
    Respondents is there any contemporaneous document that is consistent with the Individual
    Respondents current narrative that they objected to the Restatement and  were
    of the view that the November 14 Press Release was inaccurate.

[53]

To the contrary, the minutes of a conference call meeting of the SGR Board
    of Directors held the day before the Restatement show that the management of SGR
    approved the Restatement with the full support of the Board of Directors. There
    is no indication of any objection to the Restatement and no reference to a
    belief among the Individual Respondents and\or SGR that a restatement was
    unnecessary. There is also no reference in any of the documents produced by SGR
    from that time that the Individual Respondents objected to the statements made
    regarding internal revenue recognition controls in the November 14 Press
    Release.

[54]

Similarly, two PwC reports to SGRs audit committee on the Restatement
    process, dated November 13, 2013 and December 6, 2013, do not contain any
    indication that the Individual Respondents or SGR were reluctantly agreeing to
    the Restatement. Nor do the reports evidence any dissention on the part of the
    Individual Respondents regarding the contents of the November 14 Press Release.

[55]

The only time the Individual Respondents narrative is articulated is in
    the affidavits filed in response to the leave motion. The lack of
    contemporaneous evidence consistent with the central component of the defence
    asserted by SGR and the Individual Respondents raises a serious credibility
    issue. The motion judge never averted to this issue in his analysis.

[56]

Second, the failure to correct or clarify raises another important
    credibility issue. The Individual Respondents take the position that the
    November 14 Press Release is false because there were never any material
    weaknesses in SGRs internal revenue reporting controls. Yet, the concession of
    these weakness by SGR in the Press Release is significant. The information was
    disclosed because SGR deemed it material. If it were false information, as the
    Individual Respondents now assert, SGR and those Individual Respondents still
    employed by it had an obligation to take steps to have SGR correct that false
    information. That was not done by SGR, and there is no evidence that any of the
    Individual Respondents sought such a correction.

[57]

With respect to the Restatement itself, the Individual Respondents
    reinterpretation of what appear to be clear words in the accompanying press
    release seems at first blush to be inconsistent with a duty of plain and frank disclosure:
    see
Cornish v. Ontario (Securities Commission)
, 2013 ONSC 1310, 306
    O.A.C. 107 (Div. Ct.), at paras. 38-40, cited in
Theratechnologies
, at
    paras. 25-26. Recall that the press release announcing the Restatement stated
    that the relevant financial statements could not be relied upon and were to be
    restated. Those words would suggest that there was a problem with the previous
    statements. Nowhere in the press release was there any suggestion that the
    financial statements were reliable and that the Restatement was being made for
    other reasons.

[58]

But even accepting the interpretation that the Individual Respondents
    now give to the words used in the press release, there would still be an obligation
    to clarify them. The Individual Respondents are now suggesting that the words
    used by SGR to explain the Restatement are to be interpreted
in a manner that would appear to be inconsistent with
    their plain meaning. In those circumstances, SGR had an obligation to clarify
    what it really meant. Again, that was not done and there is no evidence that
    the Individual Respondents took steps to make that happen.

[59]

There would appear to be an available inference on these facts that no correction
    to the public record was made because the position now taken by the Individual
    Respondents is not truthful. That inference could certainly be rebutted at
    trial, but on the face of the record on the leave motion it could not be definitively
    resolved. Again, the motion judge failed to avert to this significant
    credibility issue in his analysis.

[60]

Third, the Individual Respondents all attach significant importance to
    the fact that at the relevant points throughout the class period they relied on
    the advice of SGRs external auditors, being first Deloitte and later PWC.
    However, there is no affidavit evidence filed by Deloitte or PWC. It is,
    therefore, not possible on this record for Rahimi to meaningfully challenge the
    reliance argument made or to probe the specific instructions and corresponding
    advice between SGR and its auditors.

[61]

Fourth, in their affidavits filed on the leave motion, the Individual Respondents
    assert that one of the primary reasons for the Restatement was that the SEC
    required that revenue be reported in accordance with GAAP. In other words, it
    is not that there was an error in revenue recognition under IFRS; the change
    was made because GAAP was thrust upon them and they had no choice but to accept
    it.

[62]

This position is not consistent with what is disclosed in the Board of
    Directors minutes from the meetings that took place at the time of the
    Restatement. There is no reference to a move to GAAP, much less a forced move.

[63]

Similarly, in PwCs November 13, 2013 and December 6, 2013 reports to SGRs
    audit committee, there is no reference to GAAP. Instead, as stated in the
    December 6, 2013 report, PwC reported that [m]anagement has reviewed its
    historical revenue recognition approach and concluded that it is not
    appropriate under IFRS. Later in the same report, PwC stated that they had assessed
    whether the adjustments have been accounted for and disclosed in accordance
    with IFRS standards on correction of errors.

[64]

An expert accounting report prepared by Stuart Harden and filed by
    Rahimi on the leave motion also casts doubt on the Individual Respondents
    explanation of the Restatement based on a forced changeover to GAAP. The report
    states:

No mention, in either the required disclosures
    regarding the nature of the restatement or the Independent Auditors Reports of
    either PwC or Deloitte, is made of a change in accounting principle, either
    mandated by IFRS, or voluntarily adopted by the company. In fact, the required
    disclosures and Independent Auditors Reports refer to corrections and
    errors.

I understand from the affidavits and exhibits
    I have read that the United States Securities and Exchange Commission raised
    issues with the Companys parent and grandparent, each of which prepared their
    consolidated financial statements in accordance with USGAAP, about the revenue
    recognition policies applied at SouthGobi.

If the Companys restatement was required for
    the sole purpose of reporting revenue retrospectively on the basis of USGAAP
    consistent with the parent and grandparent, the restatement would have been
    identified as a voluntary change in accounting principle and the disclosures
    and auditors opinions would have noted that the Companys restated
    consolidated financial statements were fairly stated in accordance with the
    IFRS
except for
the recording of revenue in
    accordance with USGAAP. This was not the case.

Accordingly, I conclude that the recognition
    of revenue at the time that coal was loaded onto customers trucks during the
    restatement period (fourth quarter of 2010 through the second quarter of 2012)
    was determined by the company, and the companys auditors, to be the
    appropriate policy in accordance with IFRS and, therefore, the restatement was
    identified as a correction of an error and not a change in accounting
    principle.

The Company could have, if permitted under its
    regulatory requirements, adopted USGAAP in its entirety by retrospective
    restatement. Similarly, if permitted under their regulatory requirements, the
    parent and grandparent could have reported the Companys revenue in accordance
    with USGAAP with explanation that the Companys separate reporting was in
    accordance with IFRS and disclosed the magnitude of the differences. Both of
    these options would be consistent with the notion that revenue recognition
    principles under USGAAP and IFRS, when applied to the Companys transactions,
    result in different answers. However, the reporting methodology adopted by the
    Company (i.e. restatement due to errors) is not consistent with that notion but
    rather the notion that revenue recognition principles for USGAAP and IFRS, when
    applied to the Companys transactions, produce similar results.

[65]

This is expert evidence that directly calls into to question the
    veracity of the position taken by the Individual Respondents that a forced move
    to GAAP was a prime factor behind the Restatement. There is also no mention of
    such a forced move in the expert accounting report prepared by Michael Garvey
    and filed by the respondents on the leave motion. This, too, casts doubt on the
    evidence relied upon by the motion judge.

[66]

There is a further problem with the motion judges treatment of
    the expert testimony I have just described. He found that it was unnecessary to
    consider the expert evidence filed by the parties because their evidence was a
    matter of common sense. With respect, understanding the process leading up to
    the Restatement is not a matter of common sense. It requires consideration the
    specific language used in the Restatement, as well as the accounting principles
    regarding when such restatements are necessary and how they are to be carried
    out. The motion judge erred in not taking this evidence into account.

[67]

Counsel for SGR and the Individual Respondents take the position that
    whatever is said in the Restatement and the November 14 Press Release is only
    relevant to whether the financial statements contained a misrepresentation. He
    argued that the Restatement and the November 14 Press Release are irrelevant to
    the defence of reasonable investigation.

[68]

I disagree. When a corporation says in its continuous disclosure that
    its financial statements cannot be relied upon and that there is a material
    weakness in its internal financial reporting controls, this is powerful
    evidence that strongly contradicts a defence of reasonable investigation. The
    evidence is relevant not only to the directors and officers who were involved
    in the Restatement, but also to the directors and officers who were involved
    earlier in the class period. This is because the Restatement and the November
    14 Press Release are evidence that the financial statements were unreliable
    throughout the class period, thereby calling into question the reasonableness
    of the investigation by all of the Individual Respondents.

[69]

To the extent the motion judge considered the discrepancy between the disclosure
    in November 2013 and the Individual Respondents current narrative at all, he
    distinguished between SGR and the Individual Respondents on the basis that the
    November 14 Press Release was prepared by management and the Individual
    Respondents had no involvement in its preparation. This distinction is
    problematic for three reasons.

[70]

First, prior to the issuance of the November 14 Press Release, SGR had
    repeatedly represented to the market that its internal financial reporting
    controls were adequate. If, as the Individual Respondents would now have us
    believe, the information in the November 14 Press Release was false, they had
    an obligation to correct that false information. As discussed above, the fact that
    the Individual Respondents failed to correct what they now say was false
    material information raises a serious unresolved credibility issue.

[71]

Second, the documentary evidence is clear that Lebel, Deepwell and
    Lancaster were intimately involved in the Restatement process. It is evident
    from the Board of Directors minutes from the meeting the day before the
    Restatement that both management and the Board of Directors were devoting a great
    deal of time to managing this issue and were working closely with the auditors
    and external legal counsel as part of that process. The suggestion that
    management issued the November 14 Press Release without audit committee approval
    would appear to be inconsistent with the crisis management process reflected in
    the Board of Directors minutes. While it may be that the members of the audit
    committee had no involvement in the issuance of the November 14 Press Release,
    at this stage it is impossible to be certain; as the motion judge found, there was
    no evidence from any member of SGR management who was in place at the time of
    the November 14 Press Release to explain why management said what it said.

[72]

Third, focussing on who issued the November 14 Press Release misses the
    point. It is the content of the release that is important. The release
    contained a significant admission of a major problem with the companys
    previous internal revenue-reporting controls. If true, this evidence would
    appear to be inconsistent with a reasonable investigation defence on behalf of
both
SGR and the Individual Respondents.

[73]

In any event, the Individual Respondents do not assert that they are in
    a different position than SGR. To the contrary, their mutual counsel submits
    that they are indistinguishable and that there is no legal difference between
    the actions of the Individual Respondents and SGR.

[74]

I also agree with Rahimis submission that the factors relied upon by
    the motion judge as militating in favour of granting leave to proceed against SGR
     a failure to use or the misuse of reliable available information, the
    admission of compromised
internal
    financial reporting controls and the lack of explanation from management about
    the restatement
are equally applicable on the issue of leave to
    proceed as against the Individual Respondents.

[75]

In summary, this was not a case where there was truly uncontroverted
    evidence adduced by a defendant in support of a reasonable investigation
    defence. This was a case where there was conflicting evidence emanating from SGR
    on that key issue for determination. The motion judge erred in accepting the
    denials asserted by the Individual Respondents without considering the lack of
    production, the absence of evidence from PWC and Deloitte and the unqualified
    statements made in the Restatement and the November 14 Press Release. In coming
    to these unwarranted evidentiary conclusions regarding the credibility of the
    Individual Respondents as if the leave stage constitutes a mini-trial, the
    motion judge failed to properly implement the screening mechanism of the leave
    requirement in s. 138.8 of the
SA
by foreclosing a misrepresentation
    claim that has a reasonable possibility of success. The residual credibility
    problems with the Individual Respondents central defence, which could only be
    determined at trial, meant that this was not a case in which the policy
    objective of the leave requirement of protecting defendants from unmeritorious
    claims would be advanced by denying leave to Rahimis claim on the basis of
    that defence.

(3)

Reasonable Investigation Defence of the Individual Respondents

[76]

The next issue for determination is whether the motion judge erred in
    granting leave to Rahimi to pursue his claim as against SGR.

[77]

For the reasons given above, I am of the view that the
    motion judge did not err in granting leave as against SGR. This is a case
    filled with credibility issues and gaps in the evidentiary record. It is not
    possible on this record to be satisfied that there is no reasonable possibility
    that SGR would not be able to succeed on a defence of reasonable investigation
    under s. 138.4(6)(a) of the
SA.

(4)

Public Policy

[78]

There is a further and, in my view, more troubling flaw in the motion
    judges reasons, which arises from the very unusual facts of this case. The
    decision to deny leave as against the Individual Respondents is inconsistent
    with the public policy animating the secondary market cause of action and with
    the fundamental policies underlying securities regulation, including protection
    of the investing public and maintaining the integrity of the capital markets.
    At the heart of the submissions made by SGR and the Individual Respondents is
    the rather remarkable proposition that they should be permitted to evade a
    potentially meritorious action at the leave stage because they previously made
    material misrepresentations during a restatement process about their company
    but they are now telling the truth about the same issue.

[79]

Although one might imagine a situation where a securities issuer who
    released a restatement is permitted to later resile from that restatement, the
    evidence on a leave motion would have to be very strong because the conflicting
    positions raise serious credibility issues. As a necessary first step, the
    issuer would have had to have taken action to correct the restatement that they
    are resiling from. SGR has not done so. Instead, we have a situation where its disclosure
    documents tell one story and their court filings tell an opposite story. They
    cannot have it both ways.

[80]

Continuous disclosure is at the heart of securities regulation and must
    be scrupulously accurate and fair. There is no room for prevarication or
    double-talk. The importance of continuous disclosure was recognized by Abella
    J. in
Theratechnologies
at paras. 25-26:

Both periodic and timely disclosure obligations are designed to
    increase fairness in the secondary market:

[Continuous disclosure]  is designed to create a level
    playing field where all investors have access to the same information and all
    pricing and investment decisions are made from the same starting point. Of
    course, investors may still value securities differently, depending on how they
    interpret that information. Different investors have different goals, typically
    balanced between risk and return. Riskier investments generally yield higher
    returns, and vice versa. Securities regulation
does
not tell investors what to do, nor steer them toward or away from particular
    investments. It should, however, ensure that they have enough information to
    assess properly the risks involved and make fully informed decisions. [Footnote
    omitted; Johnston, Rockwell and Ford, at p. 249.]

As a result, the policy of ensuring this level playing field
    reified in statutory continuous disclosure obligations has been called the
    most fundamental principle of securities regulation:

Cartaway
    Resources Corp.
(Re)
, [2000] B.C.S.C.D. No. 92 (QL), at para.
    216;

Cornish
    v. Ontario Securities Commission

(2013), 2013 ONSC 1310 (CanLII),

306 O.A.C. 107 (S.C.J.)
, at para. 40
.

Disclosure also supports capital market efficiency by helping
    investors target the most deserving securities and enhancing the accountability
    of corporate management:

Cornish
,

at
    para. 40. As investors realize that they have the necessary information, they
    become more confident in the securities market, and their consequent increased
    participation leads to more efficient markets: Johnston, Rockwell and
    Ford, at p. 249.

[81]

Continuous disclosure obligations are not a shell game where investors
    are left to guess where the truth lies. Investors have a right to know a
    corporations true state of affairs. In my view, the motion judge failed to
    consider this policy imperative and rendered a decision with respect to the
    Individual Respondents that is inconsistent with basic notions of securities
    regulation. The discrepancy between the position asserted in this litigation
    and the position taken in the Restatement and the November 14 Press Release is
    so jarring that the motion judge should not have refused to grant leave to
    proceed against any of the respondents.

E.

disposition

[82]

I would allow the Rahimi Appeal, set aside that part of the motion
    judges order denying leave to proceed against the Individual Respondents, make
    an order granting leave to proceed against the Individual Respondents and grant
    Rahimi leave to file a statement of claim in the form attached as Schedule A
    to his notice of appeal. I would dismiss the Corporation Appeal.

[83]

The parties may make written submissions on the issue of the costs of
    the appeals and the leave to appeal motion in the Divisional Court.

Released: G.E. September 18, 2017

C.W. Hourigan J.A.

I agree. Gloria Epstein
    J.A.

I agree. David M. Paciocco
    J.A

[1]

Molyneux is a former CEO of SGR who lives in Taiwan. The
    action at issue in these appeals as against him has been adjourned until he has
    been properly served under the rules of private international law. Deloitte LPP
    served as an auditor for SGR for a period of time captured in these appeals.
    The action against it has been settled.

[2]
Because that ruling was interlocutory, it was only properly appealable to the
    Divisional Court with leave. Stewart J. granted leave in a decision dated May
    24, 2016: see 2016 ONSC 1634 (Div. Ct.). On September 12, 2016, this court
    ordered the Corporation Appeal to be heard together with the Rahimi Appeal, on
    consent of the parties, pursuant to ss. 6(2) and (3) of the
Courts of
    Justice Act
, R.S.O. 1990, c. C.43.


COURT OF APPEAL FOR ONTARIO

CITATION: R. v. Caporiccio, 2017 ONCA 742

DATE: 20170925

DOCKET: C61925

Laskin, Trotter and Fairburn JJ.A.

BETWEEN

Her Majesty the Queen

Respondent

and

David Caporiccio

Appellant

Peter Lindsay and Maleeka Mohamed, for the appellant

Rachel Young, for the respondent

Heard: September 11, 2017

On appeal from the convictions entered by Justice Nancy
    L. Backhouse of the Superior Court of Justice on December 18, 2015, and from
    the sentence imposed on May 11, 2016.

REASONS FOR DECISION

A.

Overview

[1]

The appellant was convicted in a judge alone trial of
    two counts of fraud over $5,000, each relating to small business loans obtained
under Industry Canadas Small Business Loan Program. Under this program,
    loans could only be obtained for specified expenditures relating to the
    purchase and improvement of real or leased property or equipment. Restricting
    the loans to tangible items that could be recovered in the event of default
    allowed banks and the government to limit their exposure.

[2]

It was not in dispute that the appellant was a professional loan broker
    and that he brokered loans for Megaplex Enterprises Inc. and Plava Consulting
    Inc. Nor was it in dispute that the stated purposes for which these loans were
    obtained was false. In fact, it was conceded that the loans were fraudulently
    obtained. The sole issue at trial was one of
mens rea
:

did the
    appellant knowingly participate in the frauds?

[3]

The trial judge found beyond a reasonable doubt that the appellant was
    guilty of fraud in relation to the Megaplex and Plava loans. She had a reasonable
    doubt as to whether the appellant was knowingly involved in a third fraudulent
    loan taken out by a company called Pro Sport, and entered an acquittal on that count.

[4]

The appellant appeals both his conviction and sentence. We have
    distilled his arguments into three alleged errors that he says require a new
    trial: (1) the trial judge misapprehended the evidence; (2) the trial judge
    erred in her credibility and reliability analysis; and (3) the trial judge
    reversed the burden of proof. The appellant also maintains that the trial judge
    erred in law when she imposed sentence. He seeks leave to appeal against the sentence
    imposed.

B.

Conviction Appeal

(1)

Misapprehension of the
    Evidence

[5]

The appellant argues that the trial judge
    misapprehended the evidence in two ways: (a) by finding that he was the
    recipient of $25,000 obtained from the Plava loan; and (b) by misconstruing the
    evidence of a witness.

[6]

In her reasons for judgment, the trial judge
    correctly summarizes the evidence regarding the movement of the Plava loan
    money. She specifically notes that while the proceeds from the loan went to companies
    associated with Mr. Sabato, a friend of the appellant who was his co-accused
    before pleading guilty, no funds were paid out during this period directly to
    Mr. Caporiccio or his companies.

[7]

Despite containing a proper summary of the evidence,
    the reasons for judgment later state that $25,000 of the Plava loan can be
    traced to the appellants company during the relevant period of time. This is
    incorrect. While the forensic accounting evidence suggests that within a month
    of loan proceeds going into a Sabato account, $25,000 was disbursed to the
    appellants company, this money was traceable to the Pro Sport loan  the count
    upon which the appellant was acquitted.

[8]

The appellant argues that this was a critical
    misstatement of fact that infected the trial judges entire set of reasons. He points
    to other locations in the reasons where he claims that the trial judge incorrectly
    found that he and Mr. Sabato took the proceeds of the loans. He emphasizes a
    passage where the trial judge called them major benefactors of these loans.

[9]

In order to succeed on this ground of appeal,
    the appellant must demonstrate that the trial judges misapprehension of
    evidence is more than peripheral to the reasoning process, in the sense that it
    is not simply part of the narrative: see
R. v. Lohrer
,

2004 SCC
    80, [2004] 3 S.C.R. 732, at para. 2. Only where the misapprehension plays an
    essential part in the reasoning process resulting in a conviction, can it be
    said that the verdict is not true, in the sense that it is not based
    exclusively on the evidence:
R. v. Morrissey

(1995), 22 O.R. (3d) 514, at p. 541.

[10]

While the trial judges misstatement of the
    evidence is material, it is not essential to the reasoning process resulting in
    conviction. The actual frauds were conceded in the sense that it was agreed
    that the loans were not obtained for the purposes laid out in the loan
    requirements. The loan registration forms themselves suggest that the loans
    were for the purchase or improvement of real property or immovable or leasehold
    improvements, and for financing leasehold improvements. Yet there was evidence
    that the Megaplex loan was actually for the purpose of paying for licensing rights
    to a soccer curriculum, and the Plava loan was largely for the purpose of expanding
    a concert promotion business.

[11]

The question for the trial judge was whether the
    appellant knew that the purpose of the loans did not meet the requirements as
    set out by the bank.

[12]

Read as a whole, the reasons for judgment make
    clear that this case was not about whether the appellant actually benefited
    from the fraudulent funds. The fraud was complete when the bank and government
    were put at economic risk. The trial judge found that, Mr. Caporiccio knew
    that these loans did not comply from the outset and yet he proceeded with them.
    There is no honest basis for such conduct.

[13]

Based on the conclusion that the appellant knew the
    loans he brokered did not comply with their stated purpose (a misrepresentation
    that was acted upon), it did not matter whether he ended up with money in hand.
    The bank and government were put at economic risk based upon the
    misrepresentation that the appellant  as the broker of the loan  was
    knowingly involved in. As such, the trial judges misstatement that the $25,000
    came from the Plava loan is not essential to the reasoning process that
    resulted in the appellants conviction on the Plava count.

[14]

In addition, while not essential to her finding
    of fraud, the trial judges characterization of the appellant as a major
    benefactor of the loans was a finding of fact that was available to her. This
    observation was not dependent on the misapprehension regarding the $25,000 or
    the forensic accounting evidence.

[15]

While there was no evidence that directly linked
    the appellant to the Megaplex and Plava loan money, there was other evidence
    upon which the trial judge could properly characterize the appellant as a
    major benefactor of the fraudulent scheme. There was evidence that the loan money
    flowed directly to Mr. Sabatos accounts. There was evidence that Mr. Sabato,
    who pled guilty prior to trial, was good friends with the appellant. There was
    evidence that the appellant moved his office into Mr. Sabatos home. There was
    evidence that a bank account belonging to Mr. Sabato disbursed money to one of
    the appellants companies during the relevant time for the Megaplex loan. And there
    was evidence that the appellant received commissions for his brokerage work
    from the owners of Plava and Megaplex.

[16]

In these circumstances, there was ample evidence
    upon which the trial judge could infer that the appellant was a major
    benefactor of the loans. Read in context, it cannot be said that she came to
    this conclusion only because she misapprehended the origin of the $25,000.

[17]

The appellant also argues that the trial judge
    misapprehended the evidence of a witness named Majit Khan. The owner of Plava
    testified that she discussed leasing a property from Mr. Khan. The appellant claims
    that the trial judge incorrectly summarized Mr. Khans evidence by stating that
    he testified that the owner of Plava had come to see him about leasing a
    property in the future for her business.

[18]

We have considered Mr. Khans evidence. While his
    evidence is not a model of clarity, considering it as a whole, it was open to
    the trial judge to summarize it in the manner she did. In particular, Mr. Khan testified
    in-chief that while the Plava owner did not ask to rent the property, she asked
    to see it and if she can use  in future. The trial judge did not
    misapprehend this evidence. If she did, it was peripheral to her reasoning
    process.

(2)

Credibility and Reliability Issues

[19]

The appellant raises concerns about the trial
    judges approach to the credibility and reliability of two key Crown witnesses:
    the owner of Megaplex and the owner of Plava. He argues that the trial judge
    erred in two ways in finding the loan applicants credible and reliable: (a) by
    bolstering their credibility through a finding that they had no motive to lie;
    and (b) by failing to deal with evidence that is said to have undermined their
    credibility.

[20]

The appellant argues that the trial judge erred
    by stating that the owners of Plava and Megaplex had no reason to be anything
    but honest in their evidence. He submits that the trial judge essentially
    reversed the burden of proof by requiring him to lead positive evidence of a
    motive to fabricate. The appellant maintains that the trial judge then used the
    absence of a motive to fabricate to support the credibility of the witnesses.

[21]

This issue must be considered in context. The only
    reason that the trial judge considered whether there was a motive to fabricate
    is that the appellant raised the issue in his closing submissions. He argued
    that the subject witnesses alleged he committed a fraud because when they
    defaulted on the loans they tried to lay the blame at his feet.

[22]

The reasons for judgment reflect nothing more
    than a response to the appellants submission on this point. The trial judge
    did not reverse the burden of proof when she rejected the suggestion of motive.
    It was open to her to reject that the witnesses had a motive to mislead. She
    gave a reason for coming to this conclusion. She did not then use her rejection
    of a motive to fabricate as evidence supporting the credibility of the
    witnesses.

[23]

The appellant also suggests that the trial judge
    erred by failing to specifically address evidence that undermined the credibility
    and reliability of the lead Crown witnesses. For instance, the appellant argues
    that the trial judge failed to consider important facts testified to by the
    owner of Megaplex. By way of example, he argues that the trial judge failed to
    deal with the witness acknowledgment that it was possible that he had been
    advised that there were limitations regarding what the loan could be used for.
    On this point, we note that the trial judge specifically adverted to the fact
    that the witness agreed in cross-examination that it was possible that when he
    began the application process, he understood there were certain limits on how the
    funds could be used.

[24]

As another example, the appellant claims that
    the trial judge failed to consider or give effect to the evidence that the
    owner of Megaplex picked up a large cheque made payable to one of Mr. Sabatos
    companies, yet could not recall this fact. Again, the trial judge essentially
    covered this off in her summary of the witness evidence when she recounted
    that he could not recall who the cheque was made payable to.

[25]

While the trial judge did not deal with every
    piece of evidence in the context of her credibility findings, she was not duty
    bound to do so. Credibility findings can be difficult to articulate with
    precision, particularly bearing in mind the complex intermingling of
    impressions that emerge after a full trial:
R. v. Gagnon
, 2006 SCC 17,

[2006] 1 S.C.R. 621, at para. 20; and
R. v. Dinardo
,

2008 SCC
    24, [2008] 1 S.C.R. 788, at para. 26. Making credibility findings does not
    involve science and attracts a high degree of deference: see
Gagnon
, at para. 20; and
R. v. Vuradin
,

2013 SCC 38, [2013] 2 S.C.R. 639, at
    para. 11.

[26]

No intervention is required here. The trial
    judge articulated why she accepted the evidence of the two main Crown witnesses.

[27]

Moreover, even if her reasons left out some
    evidentiary points that the appellant maintains should have been confronted
    head-on, it is important to recall that the focus of this case did not turn on
    the credibility of the owners of Megaplex and Plava.

[28]

While the appellant suggests that the Crown
    witnesses were complicit in the frauds and that the trial judge should have come
    to this conclusion, this would not have afforded him a defence. Whether the
    borrowers were complicit in the frauds or not, the question for the trial judge
    was whether the appellant knew that the purpose of the loans was being
    misrepresented when he brokered them. He was an experienced broker. He knew
    what small business loans could be obtained for and, conversely, what they
    could not be obtained for. It is on this basis that the trial judge concluded that
    he was knowingly involved in the frauds. This knowledge was squarely fixed in
    the documents contemporaneously produced at the time the loan applications were
    made.

(3)

The Burden of Proof

[29]

The appellant suggests that the trial judge
    reversed the burden of proof. He objects to various passages in the reasons
    where he claims it is clear that the trial judge required him to provide
    positive evidence of his innocence. We do not agree.

[30]

While on a few occasions the trial judge references
    the fact that there was no evidence to the contrary, taken in context this
    expression does not reveal a reversal of the burden of proof. At no time does
    the trial judge suggest that she accepts evidence
because
there was no evidence to the contrary. Instead, in using the
    impugned expression, she is simply signaling that there was no evidence
    contradicting certain pieces of evidence that she accepted as true. There was
    nothing wrong with making this observation.

[31]

The appellant also claims that the trial judge
    erred by noting the absence of evidence supporting the appellants position
    that the monies Mr. Sabato paid to the appellants companies were extraneous to
    the fraudulent loans. The trial judge was not bound to find that the money disbursed
    to the appellant by Mr. Sabato was clean money. Her observation that there
    was no evidence supporting the defence suggestion that the monies were
    extraneous to the fraud is true; there was no such evidence. There was nothing
    wrong with her saying this. She did not reverse the burden by making this
    observation.

[32]

Finally, the trial judge acquitted the appellant
    on the Pro Sport count. This acquittal provides further assurance that she was
    well aware of who held the burden and did not place an improper obligation on
    the appellant.

C.

Sentence Appeal

[33]

The appellant received a 90-day intermittent
    sentence on the Megaplex count, followed by a consecutive 12-month conditional
    sentence on the Plava count. Given the intermittent nature of the 90 days, she
    also imposed a term of probation. The parties agreed upon a restitution order
    in the amount of $31,500.

[34]

The appellant seeks leave to appeal his sentence
    on the basis that the trial judge erred with respect to the principle of
    parity. The appellant claims that since the offences were so similar, parity
    demanded that a 12-month conditional sentence be imposed on both counts.

[35]

We do not agree with this submission. The
    principle of parity, governed by s. 718.2(b) of the
Criminal Code,
speaks to sentences imposed on similar offenders for similar
    offences in similar circumstances. This case does not require consideration
    of similar offenders for similar crimes, but rather the same offender for
    similar crimes. In arriving at an appropriate overall disposition for this
    offender, the trial judge was not precluded from imposing different types of sentences
    for the crimes committed.

[36]

Sentencing is a highly individualized
    exercise and one that is owed deference:
R. v. Lacasse
,

2015 SCC 64,
    [2015] 3 S.C.R. 1089, at paras. 58-59. We see no error in principle or in the
    actual sentence imposed. We defer to the trial judge.

D.

Conclusion

[37]

The conviction appeal is dismissed. Although we
    grant leave to appeal the sentence, the sentence appeal is dismissed.

John Laskin J.A.

G.T. Trotter
    J.A.

Fairburn J.A.