Area of Law: Fraud and Fraud Recovery
Answer # 1527
Ontario Securities Commission (OSC) - Disgorgement OrdersRegion: Ontario Answer # 1527
What are disgorgement orders?
In the context of securities fraud, disgorgement is the act of giving up profits obtained by illegal acts. According to the Courts, all money illegally obtained from investors can be ordered to be disgorged, not just the profit made as a result of the activity.
Mandate of Securities Regulators
The mandate of most provincial securities regulators is to deter crimes and misconduct and thereby protect capital markets. The securities regulators are not mandated to recover money for investors who have been defrauded.
With this in mind, most provincial mandates consist of the following basic goals:
- imposing sanctions at the conclusion of a proceeding, or as part of a settlement reached between the respondent and the Commission;
- the purpose of the Commission’s sanction powers is to discourage future wrongdoing in the capital markets;
- conduct orders are imposed to discourage wrongdoing by restricting an individual’s future activity in the capital markets or by banning them from the markets entirely;
- the Commission has the power to impose monetary sanctions for breaches of provincial securities law, including administrative penalties and disgorgement orders;
- disgorgement orders require the respondent to pay the amount acquired as a result of breaking the securities law;
- in an effort to deter others from contravening the Securities Act, Commissions will impose monetary sanctions that are appropriate in the circumstances, regardless of a respondent’s ability to pay; and
- in many proceedings, the recovery of monetary sanctions is limited because respondents:
- may have no or limited assets,
- no longer reside in the province,
- cannot be found, or
- may have hidden assets in the names of others.
Money recovered from disgorgement orders
Regulators have a low recovery rate of only about 3% of sanctions issued. When they do collect money, most of it is used to cover their own overhead, and very little goes towards recovery for investors. Because of this, private litigation is often the best option available for investors to obtain a recovery.
No action against secondary defendants
Fraud victims should also be aware that most times criminal and regulatory actions are focused mainly on the primary fraudsters. Whereas, in civil fraud recovery actions, victims often can bring a case against professionals (such as accountants and lawyers) and other third parties who took part in, or who benefitted from the fraud. These individuals are also known as secondary defendants, or defendants who are ‘knowing assistants’ or ‘knowing recipients.’ In most cases, actions against secondary defendants should be brought when the loss is discovered. For more information refer to topic #1519 Recover your money from fraudster’s professionals.
It is important that fraud victims are aware of limitation periods for starting an action against a fraudster. Many victims are either unaware of limitation periods, or mistakenly believe that the limitation period is calculated from the date that the regulatory procedure is completed or after a criminal trial has concluded.
This is not the case. If you are contemplating bringing a civil action to recover your losses, you should ensure that you start the action before it’s too late. For more information refer to our limitation periods topics, beginning with topic #1530 Limitation period for fraud recovery.
If you discover you are a victim of fraud, it is a good idea to contact a fraud recovery expert for advice.
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