Solar Income Fund Inc. | Mar 28, 2022

Ontario

Securities

Commission de l’Ontario

Commission des

valeurs mobilières

22nd Floor

22e étage

20 Queen Street West 20, rue queen ouest

Toronto ON M5H 3S8 Toronto ON M5H 3S8

Citation: Solar Income Fund Inc. (Re), 2022 ONSEC 2

Date: 2022-03-28

File No. 2019-35

IN THE MATTER OF

SOLAR INCOME FUND INC., ALLAN GROSSMAN,

CHARLES MAZZACATO and KENNETH KADONOFF

REASONS AND DECISION

(Subsection 127(1) and Section 127.1 of the Securities Act, RSO 1990, c S.5)

Hearing:

March 1, 3, 4, 5, 24, 25, 29, 31, April 1, 6, 7, 8, 9, 21, 22; written

submissions filed on June 4 and 25, and July 5, 2021

Decision:

Panel:

March 28, 2022

Timothy Moseley

Craig Hayman

Vice-Chair and Chair of the Panel

Commissioner

Frances Kordyback

Commissioner

Appearances: Andrew Faith

For Staff of the Commission

Ryan Lapensée

James W.E. Doris

Sean R. Campbell

For Solar Income Fund Inc. and

Allan Grossman

Abhishek Vaidyanathan

Andrea L. Burke

Chantelle Cseh

For Charles Mazzacato

For Kenneth Kadonoff

Eli Lederman

Brian Kolenda

Madison Robins

TABLE OF CONTENTS

I.

OVERVIEW .............................................................................................. 1

FACTUAL BACKGROUND ............................................................................ 2

II.

A.

B.

C.

D.

General ......................................................................................... 2

Mr. Grossman................................................................................. 3

Mr. Mazzacato ................................................................................ 3

Mr. Kadonoff .................................................................................. 3

III.

IV.

ISSUES................................................................................................... 4

A.

B.

Earlier motion about proposed expert testimony.................................. 4

Issues raised by Staff’s allegations .................................................... 4

ANALYSIS................................................................................................ 5

A.

Subsection 44(2) ............................................................................ 5

Introduction.......................................................................... 5

Factual background................................................................ 6

Analysis ............................................................................... 6

Conclusion about Staff’s s. 44(2) allegations.............................10

Clause 126.1(1)(b).........................................................................10

Introduction.........................................................................10

Did the respondents engage in an act of deceit, falsehood, or some

other fraudulent means?........................................................12

Was there a deprivation caused by the dishonest act, i.e., the

B.

unauthorized diversion of funds?.............................................26

Subject to their defence of reasonable reliance on legal advice, did

each respondent have subjective knowledge of the fraudulent act?

..........................................................................................28

Is the defence of reasonable reliance on legal advice available to

the respondents on the facts of this case?................................37

Did each respondent have subjective knowledge that the fraudulent

act could have as a consequence the deprivation of another?......46

Conclusion regarding fraud.....................................................46

Are any of the individual respondents to be held liable under s. 129.2 of

the Act?........................................................................................47

Conduct contrary to the public interest..............................................48

C.

D.

V.

CONCLUSION..........................................................................................48

i

REASONS AND DECISION

I.

OVERVIEW

[1]

The respondent Solar Income Fund Inc. (SIF Inc.) was a small private company

set up to develop and manage solar photovoltaic power generation installations.

Staff’s allegations in this case arise from SIF Inc.’s activities between 2013 and

2016. Each of the individual respondents – Allan Grossman, Charles Mazzacato

and Kenneth Kadonoff – was a member of SIF Inc.’s senior management

committee for part or all of that period.

[2]

SIF Inc. and its principals established various funds, which paid SIF Inc. to

provide consulting, development and management services. This proceeding

focuses on two such funds. The first is SIF Solar Energy Income & Growth Fund,

called SIF #1. The second, Solar Income and Growth Fund #2, is referred to as

SIF #2.

[3]

[4]

Both funds raised money from the public. In each case, investors purchased fund

units through exempt market dealers based on disclosure contained in an

offering memorandum and its amendments.

The core of Staff’s case is that the respondents used funds raised by SIF #1 in

ways that were inconsistent with what was disclosed to potential and existing

investors. Staff alleges breaches of two provisions of the Securities Act¹(the

Act).

[5]

[6]

[7]

The first is s. 44(2) of the Act, which prohibits false or misleading

representations that a reasonable investor would consider relevant in deciding

whether to enter into or maintain a trading or advising relationship with the

person or company making the representation.

The factual matrix underlying Staff’s s. 44(2) allegation is wide-ranging. It

involves numerous loans by SIF #1 to related entities. Some loans were for

significant amounts. The impugned transactions total up to one third of the

approximately $60 million that SIF #1 raised from investors.

Staff contends that by purchasing units of SIF #1, investors entered into a

trading relationship with SIF Inc., and therefore any misrepresentations in the

offering memorandum are a breach of s. 44(2) by SIF Inc., and possibly, by

extension, one or more of the individual respondents. As we explain below, we

do not accept Staff’s submission that by purchasing a unit of SIF #1, an investor

enters into a trading relationship with SIF Inc. Subsection 44(2) does not apply

to the facts of this case, and we therefore dismiss that allegation.

[8]

The second provision on which Staff relies is s. 126.1(1)(b) of the Act, which

prohibits fraudulent conduct relating to securities. Unlike the wide range of

conduct underlying Staff’s s. 44(2) allegations, Staff’s fraud allegations are

limited to loans made by SIF #1 to SIF #2 for two specific purposes: (i) to pay

distributions to SIF #2 investors, and (ii) to pay fees to SIF #2’s exempt market

dealers.

[9]

The respondents submit that these loans were permissible under the terms of

the SIF #1 offering memorandum. For reasons we explain below, we do not

1

RSO 1990, c S.5

1

accept the respondents’ interpretation of the offering memorandum, and we find

that the loans were unauthorized diversions of investor funds.

[10] The respondents also submit that even if we find that the loans were

unauthorized by the offering memorandum, the respondents relied on advice

from the law firm of Aird & Berlis LLP, which had been SIF Inc.’s primary external

legal counsel since late 2010. We explore in detail below the communications

between the law firm and SIF Inc., and conclude that at no time did the lawyers

opine on whether the SIF #1 offering memorandum permitted these loans.

Accordingly, the defence of reasonable reliance on legal advice is unavailable to

the respondents in this case.

[11] We conclude that SIF Inc. engaged in fraudulent conduct relating to securities

and thereby breached s. 126.1(1)(b) of the Act. We find that each of the

individual respondents caused one or more of the fraudulent diversions of

investor funds, and we therefore conclude that all three individual respondents

also breached s. 126.1(1)(b) of the Act.

II.

FACTUAL BACKGROUND

A. General

[12] Before turning to our substantive discussion of the issues in this case, we set out

some additional factual background. We begin with SIF Inc. and then speak

about the individual respondents.

[13] Mr. Grossman and an individual named Paul Ghezzi founded SIF Inc., a private

company, in 2009. The offering memorandum at issue in this proceeding stated

that SIF Inc. was “focused on the development and management of solar

photovoltaic… energy power generation installations backed by long-term Power

Purchase Agreements.”²Messrs. Grossman and Ghezzi intended that SIF Inc.

would benefit from the Ontario government’s “feed-in tariff” program, which,

according to Mr. Grossman, could result in “very generous returns for solar

projects in Ontario.”³

[14] SIF Inc. had an informal management committee made up of the company’s

senior personnel. The composition of the committee changed over the period

from 2013 to 2016. We specify below each individual respondent’s time on the

committee.

[15] Mr. Grossman described the committee as a “very close-knit group” that “met

constantly” and would “discuss issues as they came up.”⁴He testified that

decisions were made within SIF Inc. by the whole management team acting

together and unanimously. If a member of the management team did not agree

with a transaction, SIF Inc. would not carry it out.

[16] Mr. Kadonoff gave a similar description, characterizing the relationship among

members of the management group as “consensus-driven”.⁵

2

Exhibit 32, Revised Exhibit A to the Affidavit of Kevin Dusseldorp affirmed February 20, 2021

(Dusseldorp Affidavit), Offering Memorandum dated March 6, 2013 at p 5

Hearing Transcript, Solar Income Fund (Re), March 29, 2021 at p14 line 27 to p15 line 3

Hearing Transcript, Solar Income Fund (Re), March 29, 2021 at 17 lines 11-14

Hearing Transcript, Solar Income Fund (Re), April 1, 2021 at 111 line 11

3

4

5

2

[17] Only members of the management committee could authorize the movement of

funds in and out of a SIF Inc.-related bank account. All members of the

management committee had online access to the bank accounts of SIF Inc. and

the entities that it managed.

B.

Mr. Grossman

[18] Through a trust, Mr. Grossman’s family held approximately 30% of the company.

[19] Mr. Grossman was a member of SIF Inc.’s management committee from at least

March 2013 (the establishment of SIF #1) to November 2017, when SIF Inc.

resigned as manager of SIF #1 and SIF #2. He was, at different times, SIF Inc.’s

Chief Operating Officer, Vice-President Finance, Chief Financial Officer and

Secretary. He also became a director of SIF Inc. in November 2013.

C.

Mr. Mazzacato

[20] In May 2014, Mr. Ghezzi, one of the founders of SIF Inc., left the company.

CPE Inc., a company run by Mr. Mazzacato and Jennifer Jackson (his

then-partner) had done work for SIF Inc., and Mr. Mazzacato and Ms. Jackson

were offered senior management positions by Mr. Grossman and Mr. Kadonoff.

Ms. Jackson became SIF Inc.’s President and Chief Operating Officer.

Mr. Mazzacato became Chief Technology Officer, VP Project Development, and a

member of the management committee.

[21] In June 2014, Mr. Mazzacato became a director of SIF Inc. The following month,

he and Ms. Jackson jointly acquired Mr. Ghezzi’s approximately 30% share of

SIF Inc., and SIF Inc. acquired 100% of CPE.

[22] During the summer of 2015, following Ms. Jackson’s departure from SIF Inc.,

and at which time Mr. Kadonoff was interim President, Mr. Grossman and

Mr. Kadonoff asked Mr. Mazzacato to become SIF Inc.’s President. Mr. Mazzacato

assumed that role, and remained on the management committee to November

2017.

D.

Mr. Kadonoff

[23] Mr. Kadonoff is a lawyer who began working with SIF Inc. in 2010, one year

after its inception, as a part-time consultant. In 2011, after reinstating his status

with the Law Society of Ontario, he signed a retainer agreement with SIF Inc. to

work full-time, primarily preparing and negotiating contracts for solar

acquisitions.

[24] Through a holding company, he became an indirect 30% shareholder of SIF Inc.

around 2010.

[25] According to Mr. Grossman, Mr. Kadonoff was a member of SIF Inc.’s

management committee:

a.

b.

c.

along with Mr. Ghezzi and Mr. Grossman from the establishment of SIF #1

in March 2013 until May 2014;

along with Ms. Jackson, Mr. Mazzacato and Mr. Grossman from May 2014

until May 2015; and

along with Mr. Mazzacato and Mr. Grossman from May 2015 until at least

the end of August 2015, at which time Mr. Kadonoff formally resigned as

an officer and director of SIF Inc.

3

[26] Mr. Kadonoff’s role after August 2015 is a matter of some dispute. He states that

following his resignation as an officer and director, he “was no longer involved in

management and did not have any decision-making authority.”⁶He further

states that he made clear to Mr. Grossman and Mr. Mazzacato that he would no

longer play a role in management. He continued to hold his shares in SIF Inc.,

because neither Mr. Grossman nor Mr. Mazzacato would purchase them from

him. He also continued to work as a consultant for SIF Inc. until February 2016,

to complete financing transactions for SIF #1 and SIF #2.

[27] However, according to Mr. Grossman, Mr. Kadonoff was a member of the

management committee until February 2016. Mr. Mazzacato has a similar

recollection, testifying that on an ongoing basis between September 2015 and

February 2016, Mr. Kadonoff participated in meetings with SIF Inc.’s

management committee, and provided “opinions and direction” on SIF Inc.’s

financial and legal affairs.⁷We will explore Mr. Kadonoff’s role in greater detail in

our analysis of Staff’s fraud allegations.

III. ISSUES

A.

Earlier motion about proposed expert testimony

[28] Before we identify the issues that are raised by this hearing, and before we

present our analysis of those issues, a preliminary comment is in order. Earlier in

this proceeding, a different panel of the Commission heard a motion about

Staff’s intention to call a witness at this hearing to give expert testimony.

[29] Based on the Statement of Allegations, which defines the scope of an

enforcement proceeding such as this, and with the benefit of an undertaking

from the respondents not to call evidence or make submissions that would have

made part of the expert’s proposed testimony relevant, the Commission decided⁸

that the proposed testimony was not admissible.

[30] We need not review here the reasons for that decision, but it is important to note

that as a result of the motion, there is no issue before us as to the commercial

reasonableness of any loan made by SIF #1 to SIF #2. Our analysis is confined

to the specific issues before us, which we will now address.

B.

Issues raised by Staff’s allegations

[31] As discussed above, Staff’s case rests on two alleged breaches of the Act.

[32] The first is of s. 44(2). In general, an alleged breach of s. 44(2) presents three

issues:

a.

b.

whether the respondent made a statement;

whether the statement was untrue or misleading in the circumstances in

which it was made; and

c.

whether a reasonable investor would consider the subject of the

statement to be relevant in deciding whether to enter into or maintain “a

6

7

8

Exhibit 38, Affidavit of Kenneth Kadonoff, affirmed March 30, 2021 at para 29 (Kadonoff Affidavit)

Exhibit 35, Affidavit of Charles Mazzacato, sworn March 29, 2021 at para 18

Solar Income Fund Inc. (Re), 2021 ONSEC 2, (2021) 44 O.S.C.B. 557 (Solar Income Fund Inc.

(Re) Motion Decision)

4

trading or advising relationship” with the respondent who made the

statement.

[33] The second alleged breach is of s. 126.1(1)(b). The two high-level issues

presented by that allegation are:

a.

whether the respondent directly or indirectly engaged in or participated in

acts, practices or courses of conduct relating to securities; and

b.

whether the respondent knew or ought reasonably to have known that the

acts, practices or courses of conduct perpetrated a fraud.

[34] These two issues can be broken down into their elements. We do that below, in

our introduction to the analysis of the fraud allegations. We turn now, though, to

our analysis of the alleged breach of s. 44(2).

IV.

ANALYSIS

A. Subsection 44(2)

Introduction

[35] Staff alleges that all respondents made, or caused SIF #1 to make, untrue or

misleading statements to investors about SIF #1’s use of funds. Staff alleges

that the respondents thereby contravened s. 44(2) of the Act. We conclude that

they did not.

[36] As noted above, a threshold issue raised by this allegation is whether that

subsection applies at all to the relationship between any of the respondents and

the investors. If the subsection applies, we must then consider whether any

respondent made any statement that contravenes the subsection.

[37] Subsection 44(2) provides:

No person or company shall make a statement about any

matter that a reasonable investor would consider relevant in

deciding whether to enter into or maintain a trading or

advising relationship with the person or company if the

statement is untrue or omits information necessary to

prevent the statement from being false or misleading in the

circumstances in which it is made.

[38] As we noted above, for Staff to prove a direct contravention of s. 44(2) against a

respondent, Staff must establish three things, one of which is that a reasonable

investor would consider the subject of the statement to be relevant in deciding

whether to enter into or maintain “a trading or advising relationship” with the

respondent who made the statement.

[39] Staff does not suggest that any of the respondents was in an “advising”

relationship with investors. As we will explain, Staff relies on the investors’

purchases of fund units, and other connections between those investors and the

fund, to submit that those connections establish a “trading” relationship.

[40] We conclude below that the relationship between SIF Inc. and existing or

potential investors was not a trading relationship. As a result, Staff failed to

establish the third of the three elements above, and s. 44(2) does not apply

here. If s. 44(2) were to apply in the circumstances of this case, then every

issuer might be said to be in a trading relationship with every holder of that

5

issuer’s securities. That cannot be the correct interpretation of s. 44(2), as we

explain more fully below.

[41] Because we conclude that the third element above is not present, we need not

consider the first two elements in the context of the s. 44(2) allegations.

However, our assessment of some of the statements made, and the extent to

which funds were used in a manner consistent with those statements, is central

to our analysis of the fraud allegations, which follows below.

Factual background

[42] We therefore turn to a closer examination of our reasons for concluding that the

relationship here between SIF Inc. and existing or potential investors was not a

trading relationship. Staff cites the following facts in support of its position:

a.

b.

investors purchased SIF #1 units directly from SIF Inc.;

investors entered into a subscription agreement that was explicitly

directed to SIF #1, and to SIF Inc. as the “Manager”, and that was signed

by SIF Inc. “as agent for” SIF #1;

c.

SIF Inc. would determine the investor’s eligibility to purchase the units;

d.

SIF Inc. wrote to each purchaser to confirm details and to invite

questions;

e.

Raintree, the lead exempt market dealer retained to sell units, identified

itself as an independent dealer and advised investors that the investors

would “also be creating a relationship with [the] issuer for the ongoing

care and control of [the] investment.”;

f.

the SIF #1 management agreement said that SIF Inc.’s role would include

reporting to and liaising with investors about SIF #1;

g.

h.

SIF Inc. sent regular newsletters to unitholders;

units were redeemable at the unitholder’s option, with the redemption

price being tied to the units’ market value, which was determined by

SIF Inc.; and

i.

SIF Inc. could cancel units at its discretion.

[43] The respondents do not dispute these facts, but assert that the facts do not

create a trading relationship within the meaning of s. 44(2). We will now

consider that submission.

Analysis

[44] Subsection 44(2) governs some relationships involving investors. The question

here is whether it governs the relationship between SIF Inc. and investors in

SIF #1.

[45] The term “trading relationship” is not defined in the Act. We begin our task of

giving that phrase meaning by examining the context in which it appears, i.e.,

“to enter into or maintain a trading… relationship.”

[46] The plain meaning of the word “relationship”, in its ordinary sense, evokes an

ongoing connection involving enduring or repetitive behaviour. The word

“maintain” in s. 44(2) highlights this enduring character. The alternative of

6

“enter into” clearly aims the provision not only at existing participants in the

subject relationship, but also at potential participants.

[47] There can be no question that for as long as an investor holds a security of an

issuer, the investor and issuer are in a relationship. The question is whether it is

a relationship that falls within the provision. To answer that question, we must

look to the fact that the nature of the enduring or repetitive behaviour is defined

by the qualifier “trading”.

[48] Can it fairly be said in this case that the relationship between SIF #1 unitholders

and SIF Inc. meets that qualifier? Looking solely at the words of s. 44(2), we

think not.

[49] To further test that proposition, we look to the rest of s. 44, to give additional

context. Is there anything about any other part of s. 44 that suggests one

conclusion or the other?

[50] Section 44 has only one other subsection apart from s. 44(2). Subsection 44(1)

provides that a person or company may make a representation about their

registration status under the Act only if that representation is true and it

specifies the particular category of registration. The subsection aims to ensure

that investors can know whether or not they are dealing with a registrant, and if

so, the category of registrant.

[51] Subsection 44(1) of the Act does not apply to the facts of this case. However, we

still find it useful in assessing the purpose of s. 44(2). While we do not place

significant weight on its presence, we note that it governs registrants or others

who make representations about being a registrant. This reinforces our

conclusion that the “trading or advising relationship” envisaged by s. 44(2) is of

a nature typically provided by registrants, i.e., to act on behalf of investors to

assist with their trading, and to advise investors on investment decisions they

may make.

[52] SIF Inc. is not a registered dealer and none of the individual respondents is a

registrant. Should the provision apply in these circumstances? Of previous

decisions that deal with s. 44(2), none is determinative, but two offer some

assistance.

[53] The first is Carter,⁹a 2010 decision of a Director of the Commission. The

respondent Carter Securities Inc. was a registered exempt market dealer who

marketed and sold securities of an unrelated issuer. The dealer gave investors

marketing materials that were found to have contravened s. 44(2). The Director

therefore suspended the dealer’s registration. Staff’s allegations in the

proceeding were confined to the dealer and did not extend to the issuer or to any

of its principals.¹⁰Accordingly, the relationship between the respondent dealer in

Carter and the investors was more immediate than, and is not analogous to, the

relationship here between SIF Inc. and SIF #1 investors.

[54] In the Commission’s 2013 decision in Winick,¹¹the respondent Winick directed a

transfer agent to send misleading correspondence to potential investors in two

issuers of which Winick was the directing mind. The Commission dismissed

9

Carter Securities Inc. (Re), (2010) 33 OSCB 8691 (Carter)

Carter at paras 1, 53, 74, 87

Winick (Re), 2013 ONSEC 31, (2013) 36 OSCB 8202 (Winick)

10

11

7

Staff’s allegation that by giving that direction, Winick breached s. 44(2). The

Commission found that while the misstatements might have related to a trading

relationship with the transfer agent, they did not relate to a trading relationship

with Winick himself.¹²

[55] While the facts in Winick are distinct from those in this case, Winick does

reinforce the importance not just of identifying who was responsible for a

communication that contained untrue or misleading statements, but also of

carefully identifying who the parties are in the relationship that is governed by

s. 44(2), i.e., a trading or advising relationship. In this case, we must look

closely at the nature of the interaction between SIF Inc. and the SIF #1

investors.

[56] The respondents in this case point to other contested cases before the

Commission or a Director of the Commission that featured alleged breaches of

s. 44(2). As the respondents correctly submit, in none of those cases did Staff

successfully establish a breach of s. 44(2) by a non-registrant,¹³other than one

case in which the non-registrant was also found to have been carrying on the

business of trading or advising without being properly registered.¹⁴

[57] In the one case in which a non-registrant was found to have contravened

s. 44(2), the respondent Goddard had previously been a registrant but was no

longer registered during the material time. He was the sole director, officer and

directing mind of the respondent corporation. The respondents (Goddard and his

corporation) issued documents to investors, pursuant to which the respondents

promised those investors a return on their investment. The Commission found

that:

a.

b.

c.

d.

the documents were themselves securities;

the respondents engaged in the business of trading in securities;

the documents were false and misleading; and

the documents were relevant to any investor who was deciding whether to

enter into a trading relationship with the respondents.

[58] In that case, the trading relationship was clearly between the investors and the

respondents. There was no intermediary. The fact that the respondents were not

registered could not shield them from liability under s. 44(2), especially (but not

exclusively) since the respondents were engaged in the business of trading and

ought to have been registered if they were to carry on that business.

[59] Staff has cited no other decision in which a breach of s. 44(2) was found against

a non-registrant. While Staff correctly submits that we ought not to read words

into s. 44(2) that are not there, we must interpret, give meaning to and apply

the words that are there. The subsection contains the words “a trading or

advising relationship”, and to us these words mean something considerably more

12

Winick at paras 157-8

13

See Waterview Capital Corp (Re), (2011) 34 OSCB 5059; Energy Syndications Inc. (Re), 2013

ONSEC 24, (2013) 36 OSCB 6500; David Charles Phillips (Re), 2015 ONSEC 24, (2015) 38 OSCB

617 (Phillips)

14

Black Panther (Re), 2017 ONSEC 1, (2017) 40 OSCB 1115

8

than the incidental and administrative relationship between unitholder and

manager of the issuer in this case.

[60] We therefore agree with the respondents’ submission that to apply s. 44(2) in

this case would be a departure from previous decisions.

[61] We also agree that such a departure is not warranted on policy grounds. The

connection between SIF Inc. and those who purchased units of SIF #1 was a

relationship between the investor and an entity to which the issuer delegated all

responsibility for management and general administration (i.e., SIF Inc. as

manager of SIF #1). We had no evidence before us that any investor had any

trading-related connection with SIF Inc. that was anything more than, once,

buying units of SIF #1.

[62] We do not accept that the facts cited by Staff, referred to in paragraph [42]

above, create a trading relationship with any of the respondents. In particular:

a.

SIF Inc.’s administrative steps at the time of purchase were typical of

those of an issuer of exempt securities, and its after-purchase steps were

typical of investor relations activities conducted by many issuers;

b.

even if the exempt market dealer was correct when it told investors that

they would “also be creating a relationship with [the] issuer for the

ongoing care and control of [the] investment”, that relationship was of an

administrative nature, and there would not necessarily be any trading

once the initial purchase was complete; and

c.

any rights of redemption or cancellation did not create a “trading”

relationship.

[63] Mr. Mazzacato’s own testimony supports this conclusion. As he testified, SIF Inc.

had an investor relations person “who did administration work”.¹⁵Any interaction

with investors was through SIF Inc.’s exempt market dealers. Mr. Mazzacato

reported that he was told that interactions with investors were not permitted.

[64] Our conclusion on this issue is unaffected by the fact that Staff alleges that the

trading relationship involving the investor is with SIF Inc. instead of SIF #1. For

these purposes, SIF Inc. essentially stands in the shoes of SIF #1. SIF Inc. as

manager did nothing more or differently than SIF #1 would have as issuer, had

there been no manager.

[65] In addition, it is noteworthy that Staff does not allege that any of the impugned

statements were made orally by any of the respondents. Instead, those

statements were contained in the offering memorandum and its amendments.

Those documents were given to investors by the exempt market dealer, not by

the respondents. As a general proposition, that kind of distinction in a given case

would not necessarily absolve a respondent of responsibility for any

misstatements if the respondent were found to be an author of the document.

However, the fact that there was no direct communication between a respondent

and an investor helps to understand the nature of the relationship between

them.

[66] We do not agree with the dire consequences behind Staff’s warning that if the

respondents are not held to have contravened s. 44(2) in this case, “an issuer

15

Hearing Transcript, Solar Income Fund (Re), April 8, 2021 at 98 lines 22-23

9

could never be held liable under s. 44(2) for making misrepresentations to

investors so long as the issuer retained an EMD to sell on its behalf.”¹⁶It is true

that if there is no trading or advising relationship between the issuer and its

prospective or existing securityholder, then the issuer cannot be held liable

under s. 44(2). But that is because the trading or advising relationship is an

essential element of s. 44(2). The issuer about which Staff is concerned can still

be held liable under other provisions of Ontario securities law more relevant to

issuers.

[67] If we were to find the existence of a trading relationship in this case, every

issuer could face a similar finding. There is nothing about this case to

meaningfully distinguish the relationship from the common event of an investor

completing a single trade in a security of an issuer.

[68] In summary, we find that it would take something more than a trade, and

associated administrative and information-conveying steps, to create a trading

relationship. The facts of this case do not support such a conclusion.

Conclusion about Staff’s s. 44(2) allegations

[69] We therefore dismiss the allegation that SIF Inc. breached s. 44(2).

[70] As for the individual respondents, Staff does not allege that any of them

breached s. 44(2) directly; only that as officers and directors of SIF Inc. they

should be found to share liability for any breaches by SIF Inc., pursuant to

s. 129.2 of the Act. Having found no breach by SIF Inc., we dismiss the related

allegations against the individual respondents.

[71] Having found that no reasonable investor would consider the subject of the

impugned statements to be relevant in deciding whether to enter into or

maintain a trading relationship with the respondent who made the statement, we

decline to find, within the context of the s. 44(2) allegations, whether the

statements were untrue or misleading (the second of the three elements to be

proven, as referred to in paragraph [38] above). In our analysis below of Staff’s

fraud allegations, we will return to consider whether the respondents adhered to

certain statements in the offering memorandum.

[72] We will now address Staff’s allegations that all four respondents engaged in

fraudulent acts.

B.

Clause 126.1(1)(b)

Introduction

[73] In the Statement of Allegations, Staff alleges that the “offering memorandum led

investors to believe that all of their invested funds would be used to buy,

develop and operate physical assets that would produce a return on investment

through the sale of solar energy.” Staff alleges that the respondents did not live

up to this promise, because they used SIF #1 funds “in a way that was contrary

to the purpose and the short-term and long-term objectives of SIF #1 as

provided in” the offering memorandum.¹⁷

16

Written Reply Submissions of Staff of the Ontario Securities Commission dated July 5, 2021, para

40

17

Amended Statement of Allegations dated February 18, 2021, at paras 2 and 63

10

[74] At the hearing, including in Staff’s closing submissions, Staff limited and

particularized that broad complaint of misuse of funds, alleging that the

respondents caused SIF #1 to transfer funds to SIF #2 for the payment of:

a.

b.

distributions to SIF #2 investors; and

fees owed to SIF #2’s exempt market dealers.

[75] Staff alleges that because the SIF #1 offering memorandum did not contemplate

that SIF #1 would lend funds to another entity (even a related entity) for these

purposes, the loans to SIF #2 were unauthorized. Further, Staff alleges, these

loans caused a deprivation to SIF #1 investors, in that their funds were put at

risk in a manner to which they had not agreed. As a result, says Staff, all four

respondents contravened s. 126.1(1)(b) of the Act.

[76] The burden of proof for this allegation is the same as for all allegations before

us. It is the balance of probabilities. In other words, is it more likely than not

that a particular fact is true, or that the allegation is proven? While any

conclusion we reach by applying the balance of probabilities standard must be

based only on clear, cogent and compelling evidence, that requirement does not

elevate the standard of proof.¹⁸This is so, despite the use of the words “high

standard of proof” in some decisions cited by the respondents from other

jurisdictions.

[77] Staff makes no allegation that an individual respondent committed a fraud

independent of any of SIF Inc.’s actions. Instead, Staff submits that the

individual respondents share responsibility for those actions. Accordingly, in our

analysis we focus first on SIF Inc.’s actions.

[78] We then consider what are, on the facts of this case, the two ways that an

individual respondent can be found liable for a fraud committed by SIF Inc. As

we explain further below, we may make such a finding against an individual

respondent if:

a.

Staff proves all the elements of s. 126.1(1)(b) against that respondent

directly, one of which is that the respondent knew or ought to have known

that SIF Inc. was perpetrating a fraud; or

b.

pursuant to s. 129.2, Staff proves that SIF Inc. contravened

s. 126.1(1)(b), that the individual respondent was a director or officer of

SIF Inc. at the time of SIF Inc.’s non-compliance, and that the respondent

authorized, permitted or acquiesced in that non-compliance.

[79] In their closing written submissions, the respondents submit that Staff has

“impermissibly attempted to expand the scope of the case” beyond the

Statement of Allegations, including by submitting that the impugned transactions

“were not commercially reasonable or prudent”.¹⁹For the reasons set out above

regarding the motion about expert testimony, we agree with the respondents

that that issue, framed that way, is not relevant in this proceeding. We confine

our analysis to the elements required for proof of the s. 126.1(1)(b) allegations,

which require Staff to establish that:

18

FH v McDougall, [2008] 3 SCR 41 at para 46

Joint Written Submissions of Solar Income Fund Inc., Allan Grossman, Charles Mazzacato, and

19

Kenneth Kadonoff, dated June 25, 2021, at paras 6-7

11

a.

b.

the respondent directly or indirectly engaged in or participated in acts,

practices or courses of conduct relating to securities; and

the respondent knew or ought reasonably to have known that the acts,

practices or courses of conduct perpetrated a fraud.

[80] There is no dispute that the first of these two elements is true in this case. The

transfer of funds to pay investor distributions and dealer fees, whether

permissible or not, relates to securities.

[81] The second element raises the central question. Was the transfer of funds for

those purposes fraudulent, and if so, did each respondent know, or ought that

respondent to have known, that the transfer was fraudulent? For Staff to

establish that the transfer was fraudulent, Staff must prove two things:

a.

the actus reus, a mostly objective element (except for the subjective

requirement that the act have been a voluntary act of the person alleged

to have committed it,²⁰a consideration not relevant here), which must

consist of:

a prohibited act, which may be an act of deceit, falsehood, or some

other fraudulent means; and

deprivation caused by that act; and

b.

the mens rea, or subjective or mental element, which must consist of:

subjective knowledge of the act referred to above; and

subjective knowledge that the act could have as a consequence the

deprivation of another.²¹

[82] A corporation cannot be described as having “knowledge” in the same way that

an individual does. A s. 126.1(1)(b) allegation is established against the

corporation where Staff proves that the corporation’s directing minds knew or

ought reasonably to have known that the corporation perpetrated a fraud.²²

[83] We will now review these elements individually, in each case in the context of

Staff’s two allegations about the transfer of funds to pay distributions to SIF #2

investors and fees owed to SIF #2’s exempt market dealers.

Did the respondents engage in an act of deceit, falsehood, or

some other fraudulent means?

(a)

“Other fraudulent means” includes unauthorized

diversion of funds, of the type Staff alleges here

[84] We begin by considering whether SIF Inc. engaged in an act of deceit, falsehood

or other fraudulent means. Staff relies on the third of those elements, “other

fraudulent means”.

[85] The Supreme Court of Canada, in the leading case of Théroux, states that

whether an act falls within “other fraudulent means” must be determined

objectively, with reference to what a reasonable person would consider to be a

20

R v Théroux, [1993] 2 SCR 5 at para 17 (Théroux)

Théroux at para 24, cited in Re Quadrexx Hedge Capital Management Ltd, 2017 ONSEC 3, (2017)

21

40 OSCB 1308 (Quadrexx) at para 19

22

Re Al-Tar Energy Corp, 2010 ONSEC 11, (2010) 33 OSCB 5535 at para 221

12

dishonest act.²³Even where deceit or falsehood cannot be established, a

situation may still be dishonest and therefore be “other fraudulent means”.

[86] That description applies to unauthorized diversions of funds²⁴because they

generally constitute, in the words of the Supreme Court of Canada, “the wrongful

use of something in which another person has an interest, in such a manner that

this other’s interest is… put at risk.”²⁵The unauthorized nature of the diversion is

the wrongful use that is at the heart of the dishonesty contemplated by “other

fraudulent means”. The separate question of whether a wrongful use puts one’s

interest at risk (as contemplated in the above quotation) is part of the analysis of

deprivation. We address that question below.

[87] Staff cites several previous decisions where diversion of investor funds has been

found to have been fraudulent:

a.

diversion, without notice to investors, of funds raised ostensibly for a

factoring scheme (“a very specific investment proposal”), to a separate

unrelated company (“funds… not used in the specific manner authorized

by the clients”);²⁶

b.

c.

without first amending the relevant offering memorandum and notifying

investors of the change, diversion of new investor funds to pay dividends

to existing investors;²⁷and

without proper authority, a corporation’s diversion of funds to the

personal benefit of two of the corporation’s principals.²⁸

[88] Each of those, to a greater or lesser extent, bears some similarity to the present

case. All of them reinforce the principle that a use of funds that is inconsistent

with what was promised to investors and that is without notice to them is

dishonest.

[89] The respondents submit that the impugned transfers of funds from SIF #1 to

SIF #2 cannot be found to be fraudulent, for two reasons:

a.

the funds used for the transfers were not the funds of SIF #1 investors;

and

b.

the risks borne by SIF #1 investors in connection with the loans from

SIF #1 to SIF #2 were exactly the risks that they had bargained for.

[90] We address the second of those two objections, about the risks borne by SIF #1

investors, in our discussion of deprivation below.

[91] As for the suggestion that the funds used for the transfers were not those of

SIF #1 investors, we cannot accept that submission. Staff’s investigator witness

provided extensive evidence of cash flows to and from investors and various

entities, and transfers between accounts. In addition to cross-examining that

witness, the respondents provided an extensive appendix to their closing

23

Théroux at para 14

Théroux at para 15

R v Zlatic, [1993] 2 SCR 29 at para 19 (Zlatic)

R v Currie, [1984] OJ No 147 at para 15

24

25

26

27

Quadrexx at para 246

28

Money Gate Mortgage Investment Corporation (Re), 2019 ONSEC 40, (2019) 43 OSCB 35 at para

307

13

submissions, that they say exposes gaps and limits associated with the Staff

witness’s evidence. One of the respondents’ main submissions on this point is

that the impugned payments originated from third parties who loaned funds to

SIF #1 and SIF #2.

[92] The respondents’ submission is misguided, because it implies a necessary tracing

of a particular dollar from an investor to its ultimate use. Such a tracing would

be possible where funds are segregated, e.g., in trust. However, no such

segregation happened here, nor was one required. SIF #1’s funds were to be

fungible, whether their source was investors or a lender (or, eventually,

revenue). This is reflected in the use of funds table in the offering memorandum,

which aggregates the $30 million (maximum) to be received from investors and

the approximately $72,462,000 in long-term debt, and then indicates how that

total is allocated. There is no streaming of investor funds for some purposes and

debt financing for others.

[93] An investor who decided to invest in SIF #1 was entitled to assume that all of

SIF #1’s affairs (not just a portion represented by the funds of that investor or

all investors) would be conducted in a manner consistent with that set out in the

offering memorandum.

[94] Our conclusion on the tracing point does not preclude the Commission’s

examination, for other purposes, of the overall cash flow and general financial

condition of one or more entities. For example, the fact that at a given point in

time, an entity had insufficient funds to make a necessary payment, and funds

were transferred to that entity that were immediately used to make that

payment, may be relevant evidence in support of a conclusion about either or

both of:

a.

b.

a respondent’s state of mind at the time; and/or

the purpose of a transfer of funds.

[95] We decline to apply the tracing approach urged by the respondents in the

context of this issue. We agree with Staff’s submission that the unauthorized

diversion of funds from SIF #1 for the impugned purposes was wrongful.

(b)

As alleged, SIF #2 paid fees to exempt market

dealers, and distributions to its investors

[96] Staff’s investigator witness prepared an analysis of the flow of funds among

various accounts. That analysis included a particular focus on transfers from

SIF #1 to SIF #2 in the ten-month period from July 1, 2015, to May 5, 2016.

During that time, according to the analysis:

a.

approximately $5.31 million was transferred from the SIF #1 operating

trust account to the SIF #2 operating trust account, being substantially all

the external funds received in the SIF #2 account;

b.

c.

approximately $1.66 million went from the SIF #2 operating trust account

to the SIF #2 fund account;

at least $223,224.04 was paid from the SIF #2 fund account to investors

as distributions; and

14

d.

$92,031 was paid from the SIF #2 fund account to exempt market dealers

($11,640) and a numbered Alberta corporation that was retained to

provide marketing services to the dealers ($80,391).

[97] There is no real dispute that SIF #2 made some payments to exempt market

dealers and to investors, and that the loans from SIF #1 to SIF #2 enabled

SIF #2 to make these payments. This fact is evident from, among other things:

a.

b.

contemporaneous email correspondence;

cheques signed by Mr. Grossman and Mr. Mazzacato indicating that the

funds were being paid for those purposes; and

c.

Mr. Grossman’s acknowledgment in his affidavit that he was aware at the

time that some portion of the funds loaned by SIF #1 were used to pay

SIF #2 distributions and exempt market dealer fees.

[98] Staff cites several payments out of SIF #1 as examples of the impugned

transfers:

a.

two payments relating to exempt market dealers and for marketing

services:

a November 25, 2015, cheque for $15,000, signed by

Mr. Grossman, from the SIF #1 operating trust to the SIF #2

operating trust, with the memo line showing: “Re Computershare

annual fee+pinnacle”; and

a February 4, 2016, wire transfer for $25,000, from the SIF #1

operating trust to the SIF #2 operating trust, with the memo line

on the bank statement showing: “Re Geoff Lafleu”, an apparent

reference to Geoff Lafleur, the principal of the numbered Alberta

corporation referred to in paragraph [96] above; and

b.

payments to fund investor distributions:

a July 7, 2015, wire transfer for $35,000 from the SIF #1 operating

trust to the SIF #2 operating trust, with the memo line on the bank

statement showing: “MFT2JuneDist”, “MFT2” being SIF #2; and

a December 7, 2015, cheque for $80,000, signed by

Mr. Mazzacato, from the SIF #1 operating trust to the SIF #2

operating trust, with the memo line showing: “MFT 2 Expenses &

Distribution”, and a cheque of the same day and in the same

amount, from the SIF #2 operating trust to SIF #2, also signed by

Mr. Mazzacato, and with the same memo line notation.

[99] The respondents correctly submit that the Alberta corporation providing

marketing services to the exempt market dealers was not itself an exempt

market dealer. The Statement of Allegations repeatedly describes the category of

impugned payments as “exempt market dealer fees” or “fees owed to exempt

market dealers”. Staff’s written submissions confirm that the fraud allegation is

so limited. There are no words in the Statement of Allegations that would cover

fees paid to a third party non-dealer for marketing. Accordingly, we exclude the

$80,391 paid to the Alberta corporation, leaving $11,640 paid to the two exempt

market dealers.

15

[100] The respondents also dispute the precise amount of the impugned payment from

the SIF #2 fund account to investors. Staff’s investigator witness arrived at the

figure of $223,224.04 for distributions by a self-described conservative approach

of taking the total of $261,159.38 paid for distributions during the period and

deducting an adjustment of $37,935.34.

[101] Staff’s investigator witness applied the adjustment on a chronological basis to

reflect the fact that some funds were commingled in the SIF #2 fund account,

and some or all of the $37,935.34 may have been used for various impugned

purposes, including not only the payment of distributions and exempt market

dealer fees, but also allegedly improper payments to SIF Inc. and CPE. While

that last category of payments is not the subject of Staff’s fraud allegation, the

category is essential to understanding the adjustment.

[102] We accept this conservative approach as an appropriate methodology.

Accordingly, for our purposes the amount transferred from SIF #1 to SIF #2 that

funded distributions is not less than $223,224.04, and may be slightly higher.

Using Staff’s chronological approach, the opening balance adjustment referred to

above was consumed by July 22, 2015, at the latest. This date is not material for

the overall calculation we discuss here, but it becomes relevant when we address

Mr. Kadonoff’s responsibility below.

[103] Taking the $223,224.04 amount together with the dealer fees of $11,640, the

total challenged amount is $234,864.04.

[104] Contrary to the respondents’ submission, Staff’s analysis does not demonstrate

that the impugned uses of SIF #1 funds began no earlier than September 2015.

Staff’s analysis cannot be completely conclusive on the point, because of the

commingling of funds. We accept Staff’s conclusion that the use of SIF #1 funds

to pay distributions and dealer and marketing fees began no later than June

2015. We are bolstered in this conclusion by Mr. Grossman’s testimony that the

“entire management team” in June and July of 2015 was aware that funds were

being transferred at that time from SIF #1 to SIF #2 to pay distributions to

SIF #2 investors.²⁹

[105] The respondents describe the impugned amount as a small subset of the funds

that SIF #1 advanced to SIF #2. Even accepting that characterization for the

sake of argument, it is irrelevant to our analysis. If the transfer were isolated,

inadvertent, and of an insignificant amount, then under certain circumstances it

might justifiably be disregarded for not meeting the “dishonesty” criterion. In

this case, that description does not apply. The absolute size of the amount in

issue, and the ratio of the impugned amount to the total amount transferred, are

meaningless in the context of this merits hearing.³⁰

[106] We will now consider whether the transfer of $234,864.04 to pay distributions

and dealer fees was authorized.

29

Hearing Transcript, Solar Income Fund (Re), April 1, 2021 at 69-70

Quadrexx at para 241

30

16

(c)

Was the use of SIF #1’s funds for those purposes

authorized?

i.

Introduction

[107] In addressing the question of whether the use of SIF #1’s funds for the

impugned purposes was authorized, the respondents rely not only on the SIF #1

offering memorandum, but also on the declaration of trust that established the

SIF #1 operating trust. For reasons we expand on in our discussion below about

legal advice given to the respondents, we focus our analysis on the language

contained in the offering memorandum, since that is the investor-facing

document. Further, while the two documents contain some language in common,

there are significant differences as well. Nothing in the declaration of trust that is

not already present in the offering memorandum affects, positively or negatively,

the respondents’ position in this case.

[108] We will first conduct a thorough analysis of relevant provisions in the offering

memorandum, following which we will review related oral testimony.

ii.

Text of the offering memorandum

[109] The offering memorandum was originally issued on March 6, 2013, in support of

an intended $30 million capital raise. It contemplated that SIF #1 would create a

subsidiary trust that would be the sole limited partner of one or more limited

partnerships to be formed to conduct SIF #1’s business. A July 3, 2013,

amendment to the offering memorandum reflected the creation of the SIF #1

operating trust, which was the subsidiary trust referred to in the original offering

memorandum.

[110] The offering memorandum was amended again on January 15, 2014, after

approximately $25.5 million had been raised, to double the total size of the

offering to $60 million. Two more amendments were made, on April 23 and June

10, 2014, respectively. Neither amendment is consequential for our purposes.

[111] The original offering memorandum describes the nature of SIF #1’s business and

short- and long-term objectives. According to the offering memorandum, SIF #1

“was established to invest in Subsidiaries which will in turn invest in the

acquisition, development, financing and operation of solar energy power

installations… and other ancillary or incidental business activities”.³¹These words

echo those set out in the Feb 4/13 declaration of trust by which SIF #1 was

created.

[112] The word “Subsidiaries” in the above text is defined as “any company,

partnership, limited partnership, trust or other entity either controlled, directly or

indirectly, by the Fund or in which the Fund holds more than 50% of the

outstanding equity securities.”³²

31

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 5

32

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 1

17

[113] The listed short-term objectives in the offering memorandum are specified to be

“for the next 12 months” and are only two:

a.

to raise capital through the offering that is the subject of the offering

memorandum; and

b.

to acquire and/or develop and operate solar energy installations on land

or on rooftops, to generate power to be sold under long-term power

purchase agreements.

[114] The description of SIF #1’s long-term objective tracks the language set out in

paragraph [111] above.

[115] SIF #1’s purpose is to “invest in” subsidiaries, of which the SIF #1 operating

trust is one. As noted above, the SIF #1 operating trust, in turn, is to invest in

“the acquisition, development, financing and operation” of solar installations. The

respondents contend that an “investment” by the SIF #1 operating trust can be

in the form of an equity investment or a loan.

[116] As for permissible activities of the entity to which the loan is made (in this case,

SIF #2), the respondents rely heavily on the word “financing” in the phrase

quoted above. They submit that nothing in the offering memorandum specifies

that any investment that is “financing” must occur in tandem with the

acquisition, development or operation of a solar power energy installation.

[117] Staff rejects the respondents’ proposed interpretation of the offering

memorandum, i.e., that it permitted the respondents to use investor funds to

make unsecured loans to unowned third-party entities. Staff contends that even

under the respondents’ interpretation, the offering memorandum would not

permit the impugned uses of SIF #1’s funds.

[118] Staff submits that:

a.

reasonably, “financing” could only have meant borrowing by SIF #1, and

not SIF #1 lending to other entities; and

b.

even if the respondents’ proposed interpretation is correct, it would not

have permitted SIF Inc. to use SIF #1’s money to pay dealer fees or

distributions to SIF #2 investors.

[119] In general, the word “financing” is capable of two meanings, representing two

opposite directions of flow of funds. An entity that engages in financing may be

raising or borrowing funds for its own purposes, as in financing one of its

projects. Alternatively, an entity that engages in financing may be lending to

another entity, i.e., providing financing.

[120] This ambiguity is at the heart of the dispute between Staff and the respondents.

[121] Given that ambiguity, what meaning should we give the word in the description

of permissible uses of funds? Does it mean, as Staff submits, that the

subsidiaries in which SIF #1 will invest will not only acquire, develop and operate

solar installations, but those subsidiaries will also borrow funds as necessary for

those purposes? Or does it mean, as the respondents submit, that the

subsidiaries in which SIF #1 will invest may acquire, develop and operate solar

installations, and may also provide financing for such installations? Or can it

mean both in that phrase?

18

[122] In order to answer those questions, we must examine the entire offering

memorandum so that we can understand the context in which the word arises.

Analyzing the question in this way best aligns with the fundamental purpose of

an offering memorandum, and the interest at stake, i.e., disclosure to investors,

and how a reasonable investor would understand the offering memorandum’s

contents. We conduct the analysis by reviewing the relevant provisions or

characteristics of the offering memorandum and assessing the effect of each.

[123] Description of the business – The offering memorandum defines the business of

SIF #1 as being the investment by SIF #1 in subsidiaries that will in turn “invest

in” the financing of solar installations, among other things.

[124] It is illogical to say that an entity would be “investing in financing” by borrowing

money. The concept of investing in financing makes sense only if “financing” in

this phrase means lending money. Had the intended allusion been to borrowing

money in connection with the acquisition, development or operation of a solar

installation, we would expect to see words such as “which will in turn invest in

the acquisition, development and operation of solar installations, including by

obtaining the necessary financing to do so”. The wording of the phrase as it

appears in the offering memorandum supports the respondents’ proposed

interpretation of “financing”.

[125] Use of funds under the original offering memorandum – The maximum amount

of the initial offering was $30 million. SIF #1 also intended to obtain long-term

debt financing under a term loan of $72,462,000. After the deduction of selling

commissions and fees, and offering and marketing costs (all of which totaled

approximately $4 million), approximately 90% of the remaining $98,670,775

was to be used for hard costs to develop or acquire solar installations. The other

10% was to be used for: (i) cash to be held in trust in respect of the long-term

debt; (ii) a development fee, or management fee, of $1.62 million payable to

SIF Inc.; (iii) an electricity grid connection fee; (iv) bank, legal and other

professional fees; and (v) a reserve to fund distributions to SIF #1 unitholders.

[126] Of the above list, the only use of funds that was directly attributable to a solar

installation was the hard costs “to develop or acquire” solar installations. No

portion of the funds raised under the offering memorandum explicitly mentioned

providing financing. The word “acquire” cannot imply the provision of financing.

The respondents’ best argument is that the “development” of a solar installation

could include the provision of financing. In our view, that would be a strained

interpretation that would be unlikely to alert a reasonable investor to that

possible use of the invested funds. The description of use of funds supports

Staff’s proposed interpretation of “financing”.

[127] Timeline for deployment of funds under the original offering memorandum – The

offering memorandum states that all of the raised funds will be deployed within

12 months for “acquisition and/or development and operation” of solar

installations.³³Again, no mention is made of using funds to provide financing.

Further, the timeline for the deployment of any funds would be inconsistent with

any lending by SIF #1 for a term exceeding 12 months. These provisions support

Staff’s proposed interpretation of “financing”.

33

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 11

19

[128] Services covered by the development or management fee – SIF #1 was to pay

SIF Inc. a $1.62 million development fee pursuant to a management agreement.

The offering memorandum sets out a long list of the “consulting, development

and administrative services” to be provided by SIF Inc. to SIF #1.³⁴Fourteen of

the services on the list are in connection with solar installations that were not

then currently operating. Of those fourteen, thirteen are clearly preparatory

steps toward allowing the solar installation to begin operating or to sustain

operation in its early days (e.g., securing regulatory approvals, arranging a

construction contract to build the installation).

[129] Only one of the fourteen items, when read on its own, does not definitively fall

into that category: “negotiating and managing long-term debt financing”. That

phrase suffers from the same ambiguity that we seek to resolve. However, the

item is followed immediately by: “preparing all technical and legal requirements

required to receive approvals for long-term debt financing”. Read together, these

two items clearly contemplate SIF #1 receiving financing as opposed to

providing it.

[130] None of the other items in the broader list of all services to be provided by

SIF Inc. to SIF #1, including the eight relating to installations that will be

acquired and that are currently operating, could conceivably oblige SIF Inc. to

provide consultative, development or administrative services in respect of SIF #1

lending money. Such an obligation would not necessarily have to exist in the

management agreement, so we attribute less weight to its absence than we do

to the earlier-mentioned provisions. Nevertheless, its absence does support

Staff’s proposed interpretation of “financing”.

[131] Other uses of the word “financing” in the offering memorandum – The word

“financing” is used elsewhere in the offering memorandum, apart from the

ambiguous phrase “the acquisition, development, financing and operation of

Installations”. For example, the offering memorandum contains a warning that

“alternative financing” may be necessary to accomplish all SIF #1’s objectives if

the offering does not raise sufficient funds.³⁵

[132] Mr. Grossman was asked on cross-examination to identify any occurrences of the

word in the offering memorandum that could mean lending as opposed to

borrowing. He was given several days to locate any occurrences but could not.

This fact supports Staff’s proposed interpretation of the word.

[133] No reference in the offering memorandum to interest income – In all the

discussion of the inflow and outflow of funds, there is no reference to a projected

contribution to be made by interest income on funds loaned. If funds were to be

deployed by providing financing, one would expect to see the benefit of doing so,

likely in the form of interest income. The absence of any such reference supports

Staff’s proposed interpretation of “financing”.

[134] No risk factors related to lending money – The offering memorandum lists 25

“Risk Factors”, each of which is a category of risks associated with SIF #1’s

business in general or the offering in particular. Some risk factors relate to solar

34

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at pp 16-18

35

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 11

20

installations, e.g., seasonality and solar panel degradation. Others relate to

unitholder rights, reliance on the manufacturer and installer, and on

management, and other types of risk.

[135] Certain of the risks relate to financial concerns, including limited availability of

working capital (because most of the proceeds would be used “to develop and

operate” the installations), risks associated with tax consequences and currency

exchange rates, and, significantly, risks associated with borrowing (e.g., the

availability of construction or term loans on acceptable terms).

[136] Enumerated risks relating to the lending of money are conspicuous by their

absence. Many such risks exist for any lender, especially where, as here, the

parties are related, funds are lent without collateral, and terms are indefinite. We

would expect any issuer whose business is, in part, the lending of funds, to

disclose these risks, among others. The fact that the SIF #1 offering

memorandum does not strongly compels the conclusion that Staff’s proposed

interpretation of “financing” is correct.

[137] General disclaimers – The respondents also point to language in the offering

memorandum that advises investors that:

a.

“operations” may “differ materially from the forward looking statements in

this Offering Memorandum”; and

b.

the “risks and uncertainties” to which investors are exposed “include risks

associated with the solar energy power generation business, financing,

environmental and tax related risks.”³⁶

[138] These words are contained in the largely boilerplate language about forward

looking statements generally, and the unpredictability of external factors.

Permitting any issuer to depart from the use of funds described in an offering

memorandum simply in reliance on language like this would be to open the door

wide to unfettered changes without notice to investors. That approach is

fundamentally at odds with the requirement of investor protection and the

purpose of an offering memorandum. We reject it.

[139] Financial statements – A note to SIF #1’s financial statements as at February 4,

2013 (a month prior to issuance of the offering memorandum), which are

appended to the offering memorandum, describes the nature of SIF #1’s

operations. The note says that SIF #1 was formed “for the purpose of acquiring,

developing and managing solar energy power generation installations.” The note

goes on to say that the “purpose of [SIF #1] is to invest in subsidiaries which

will in turn invest in the acquisition, development, financing and operation of

solar energy power installations.”³⁷

[140] These two parts of the note are almost entirely duplicative, except that: (i) the

first part says it is SIF #1 will do the acquiring, developing and managing, while

the second part says SIF #1’s subsidiaries will do those things; and (ii) the

second part mentions “financing” while the first part does not. Given that the

financial statements are prepared by SIF #1’s independent auditors, not SIF #1

36

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 3

37

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Offering Memorandum dated March 6,

2013 at p 44 of PDF

21

or its counsel, it appears that these largely duplicative descriptions are drawn

from other documents already referred to above. We attribute no weight to this

note in the financial statements.

[141] The Whitewater loan – The respondents highlight a reference in the “Recent

Developments” section of the second amendment to a particular unsecured loan

to be made by SIF #1. The respondents submit that the reference makes clear

that lending money had been and was part of SIF #1’s business. Careful scrutiny

of this submission is warranted, and requires a review of transactions that led up

to the loan:

a.

in 2012, SIF Capital Inc., a corporation controlled by SIF Inc., began an

offering of 10.75% debentures;

b.

in October 2013, by which time SIF Capital Inc. had raised almost

$8 million under the offering, SIF Capital Inc. sent a notice of redemption

to the debenture holders, advising of its intention to redeem the entire

principal amount of the debentures, plus accrued but unpaid interest, on

January 15, 2014;

c.

d.

e.

f.

when Mr. Grossman signed the redemption notice, he knew that SIF

Capital did not have the cash to do the redemption on its own;

Mr. Kadonoff also knew that SIF Capital had financial difficulty, in that it

required funds in order to continue to pay its distributions;

in November 2013, Whitewater entered into an agreement with a

contractor, by which the Whitewater project would be expanded;

by December 19, 2013, SIF #1 had agreed to:

effective January 15, 2014, refinance SIF Capital’s 10.75%

debentures in exchange for a 9% debenture, in order for SIF

Capital to “meet its distributions in the future”³⁸in the absence of

available third party lenders and, as Mr. Grossman agreed, to “ease

the burden on SIF Capital”³⁹; and

lend $900,000 to Whitewater, an operating solar facility and joint

venture owned 80% by SIF Capital to expand production capacity

of that project, an expansion made necessary (according to

Mr. Kadonoff) in order to produce additional revenue to allow the

joint venture to meet the new 9% debenture obligations;

g.

h.

on January 13, 2014, SIF #1 issued the second amendment to the

offering memorandum, which amendment referred to SIF #1’s intention

to make the $900,000 loan;

despite the language in the second amendment about the intention to

make the loan, by January 13, 2014, SIF #1 had already transferred to

Whitewater $600,000 of what would by December 23, 2014, total

$965,000

38

39

Exhibit 2, Memorandum to File dated December 19, 2013 at p 4-5

Hearing Transcript, Solar Income Fund (Re), March 31, 2021 at 51 lines 22-23

22

i.

on January 15, 2014, SIF #1 loaned $8 million to SIF Capital to redeem

the debentures, with the rate set at 9%.

[142] We review this series of events not because the propriety of any of the

transactions is at issue, but in order to put into context the respondents’

submission that by the time of the second amendment, it was apparent to

investors that SIF #1 was engaged in financing in the form of lending funds. It is

clear that SIF #1 funds were used to come to SIF Capital’s rescue, and that

commitments to do so had been made even before the second amendment was

issued.

[143] In our view, the fact that the respondents chose at the time to adopt an

interpretation of “financing” that allowed them to effect this rescue is neutral on

the question of how the word should be interpreted in the operative provisions of

the offering memorandum.

[144] Further, by the time SIF #1 acquired a 20% interest in Whitewater, SIF #1 had

advanced $750,000 to Whitewater. Therefore, at the time of those advances,

Whitewater was not a subsidiary of SIF #1, contrary to the limiting provision in

the offering memorandum’s description of SIF #1’s business.

[145] Summary – We summarize the relevant provisions of the offering memorandum

as follows:

a.

the only provision that supports the respondents’ proposed interpretation

of “financing” is the reference to SIF #1 investing in subsidiaries that

would in turn “invest in… financing”; and

b.

the promised use of funds, the timeline for deployment of funds raised

and borrowed, the silence of the management agreement about any

lending by SIF #1, and particularly the absence of any risk factors related

to lending or any mention in the offering memorandum of interest income

(two notable absences on which we place great weight), all support Staff’s

proposed interpretation.

iii.

Testimony

[146] Having concluded our analysis of relevant provisions of the offering

memorandum, we turn to consider testimony at the hearing that relates to this

issue.

[147] Margaret Nelligan, one of the two Aird & Berlis partners principally responsible

for providing legal services to SIF Inc., testified that when the phrase

“acquisition, development, financing and operation of solar power installations”

was drafted as part of the offering memorandum, SIF Inc. management and

Aird & Berlis did not discuss “this”.⁴⁰It is unclear from Ms. Nelligan’s answer

whether the “this” to which she referred was the phrase itself or a possible desire

by SIF Inc. management to be able to lend money directly to “third party

corporations”.

[148] When asked whether SIF Inc. management told Aird & Berlis at the time that

management would like to be able to lend money to limited partnerships “that

they didn’t own”, Ms. Nelligan confirmed that management did not do so.

40

Hearing Transcript, Solar Income Fund (Re), April 22, 2021 at 69-70

23

[149] Staff describes these answers as a concession by Ms. Nelligan that when SIF #1

was formed, “no one specifically contemplated that it would lend funds as part of

its business.”⁴¹

[150] Similarly, Staff cites an answer that Mr. Grossman gave while being

cross-examined about instructions that he gave Aird & Berlis around the time the

offering memorandum was being prepared. Staff asked Mr. Grossman whether

he gave Aird & Berlis any reason to believe that he wanted to be able to “lend

money to other unowned entities with no collateral”. Mr. Grossman’s response

was: “I don’t think we said that specifically. But I said we wanted to have the

ability to invest and finance the solar projects.”⁴²

[151] Staff says that this answer, like Ms. Nelligan’s, was a concession by

Mr. Grossman that when SIF #1 was formed, “no one specifically contemplated

that it would lend funds as part of its business.”

[152] We do not read either Ms. Nelligan’s or Mr. Grossman’s answers as supporting

that broad statement.

[153] Ms. Nelligan’s answers were about loans to “third party corporations” and limited

partnerships that “they didn’t own”.⁴³It is unclear that these questions as

phrased would include SIF #2 (which is not a corporation that “they” owned,

depending on who “they” is). The answers certainly do not go so far as to

support a statement that no one contemplated that SIF #1 would do any

lending.

[154] The question to Mr. Grossman that drew his answer was limited to lending

money to unowned entities, and with no collateral. Mr. Grossman confirmed that

those specific instructions were not given. He maintained that the SIF Inc.

management group’s desire was to be able “to invest and finance the solar

projects.” Again, this answer does not support Staff’s characterization.

[155] To summarize our review of the relevant oral testimony, we heard nothing in the

above that persuades us one way or the other about any of the respondents’

understanding at the time the offering memorandum was being drafted as to

whether the word “financing” permitted loans from SIF #1 to SIF #2 for the

purpose of paying dealer fees or SIF #2 distributions.

[156] While we heard no oral testimony that influences our view on this specific issue,

Mr. Grossman did, in his affidavit, shed some light on what SIF Inc.

contemplated at the time the offering memorandum was prepared. He states

that “[b]eginning in the summer of 2014” (more than a year after the issuance

of the offering memorandum), SIF Inc. sought Aird & Berlis’s advice about

whether SIF #1 could lend funds to other entities managed by SIF Inc. “to

finance solar projects”. Mr. Grossman explains that this happened because

SIF #1 had a surplus of cash and was seeking higher returns than it had been

obtaining.⁴⁴

[157] What was in SIF Inc.’s corporate “mind” at the time the offering memorandum

was prepared (or one year later) is not determinative of how a reasonable

41

Written Submissions of Staff of the Ontario Securities Commission dated June 4, 2021, para 371

Hearing Transcript, Solar Income Fund (Re), March 29, 2021 at 88 lines 21-23

Hearing Transcript, Solar Income Fund (Re), April 22, 2021 at 70 lines 2-12

Exhibit 35, Affidavit of Allan Grossman, affirmed March 26, 2021 at para 77

42

43

44

24

investor would read that document. However, Mr. Grossman’s explanation

corroborates Ms. Nelligan’s testimony and reinforces the inference that even

SIF Inc.’s principals did not originally consider that the SIF #1 offering

memorandum contemplated SIF #1 lending money to other SIF Inc.-managed

entities.

iv.

Concession by Mr. Grossman

[158] In his cross-examination, Mr. Grossman agreed that loans “from SIF #1 to

SIF #2 to make distributions to SIF #2 investors is not financing a solar

installation”.⁴⁵This was truly a concession, not necessarily that such loans were

unauthorized, but that the word “financing” in the offering memorandum could

not be relied on to support them.

[159] We believe that this admission against interest accurately reflects

Mr. Grossman’s true state of mind. We accord it significant weight, despite:

a.

the respondents’ joint submission that SIF #2’s payments of distributions

to its investors and fees to its exempt market dealers were permitted by

the SIF #2 offering memorandum (as opposed to the SIF #1 offering

memorandum) and were legitimate business purposes of SIF #2, a

question that is not before us and that is distinct from the question of

whether the transfers from SIF #1 to SIF #2 for these purposes were

authorized;

b.

c.

Mr. Grossman’s submission that funds transferred by SIF #1 for the

impugned purposes “were not diverted to a purpose unrelated to a

business in the solar industry or otherwise used to enrich any of the

Respondents personally”, a factual assertion that even if true does not

reflect the test for whether the diversion was authorized, given the

language of the offering memorandum; and

the respondents’ unfounded attempt to minimize the admission’s

importance by distinguishing the factual background of this case from that

of other cases.⁴⁶

v.

Conclusion on the question of whether the impugned

uses of SIF #1’s funds were authorized

[160] We conclude our analysis by noting the obvious; that the ambiguity in the pivotal

language of the offering memorandum is unfortunate. However, the only reason

we have found to justify interpreting “financing” in favour of the respondents

(the words “invest in… financing”) is overwhelmed by the many reasons not to.

Viewed from the perspective of a reasonable investor reading the offering

memorandum, the respondents’ position cannot be sustained.

[161] The offering memorandum paints a clear overall picture of an entity that is not

only raising funds, but borrowing significant funds as well; in fact, a multiple of

the funds to be raised through the offering. It was doing so in order to acquire,

develop and operate solar installations.

[162] A suggestion that SIF #1 would also be engaged in lending money comes only

after microscopic scrutiny of one phrase in the entire offering memorandum. The

45

Hearing Transcript, Solar Income Fund (Re), April 1, 2021 at 72 lines 19-22

Zlatic; Hibbert (Re), 2012 ONSEC 11, (2012) 35 OSCB 8583

46

25

explanation that the phrase permits lending, without any of the ancillary

language one would reasonably expect to see in the offering memorandum, is

decidedly inferior to the more reasonable explanation, that lending is not

contemplated. Instead, an inartful and aberrant phrase is used, intended to

mean, but not saying clearly, that SIF #1 may need to obtain financing to

support the acquisition, development and operation of solar installations.

[163] In our view, that conclusion is compelling. It was unreasonable for

the respondents to rely on that language for the purposes of paying dealer fees

and distributions of another fund. Even if “financing” in the offering

memorandum included lending, which we have concluded it did not, neither of

those two purposes could reasonably be said to be closely related to acquisition,

development and operation of a solar installation. The offering memorandum did

not authorize a loan, or diversion of funds, for either purpose.

[164] Before leaving this topic, we repeat our earlier comment that we reach all our

conclusions in this case without reference to the commercial reasonableness of

any of the transactions, including the prospect of repayment of any loan.

[165] Repeating that caution is necessary because Staff, in its reply submissions,

asserts that the prospect of repayment is directly relevant to whether a loan

could properly be considered “financing”. While Staff’s submission is not framed

in terms of “commercial reasonableness”, the two are inextricable. Staff

essentially submits that the farther the terms of a loan are from what would be

considered commercially reasonable, the less likely the loan would be considered

by a reasonable investor to be financing. Such an allegation would have to have

been particularized in the Statement of Allegations. It would be improper for us

to consider this submission, given:

a.

b.

c.

the absence of any allegation in the Statement of Allegations tying the

prospect of repayment to “financing”;

the Commission’s previous decision in this proceeding about Staff’s

proposed expert; and

the respondents’ undertaking not to lead or elicit evidence, or make any

submission, about the soundness of any allocation of funds.

Was there a deprivation caused by the dishonest act, i.e.,

the unauthorized diversion of funds?

[166] We have found the diversion of funds to pay dealer fees and distributions to have

been unauthorized and therefore dishonest. We turn now to consider whether

that diversion caused a deprivation.

[167] We begin by reviewing the specific allegation in the Statement of Allegations. At

paragraph 10, Staff alleges that “by causing SIF #2 to pay exempt market

dealer fees and distributions to SIF #2 investors using SIF #1 funds, Grossman,

Mazzacato and SIF Inc. engaged in conduct that they knew or ought to have

known perpetrated a fraud, and deprived SIF #1 investors of their capital and/or

put their capital at risk.”

[168] We have two comments about this allegation. First, while it excludes

Mr. Kadonoff, the exclusion is inconsequential, since the allegation is essentially

repeated in paragraph 65(c) of the Statement of Allegations. In that allegation,

Mr. Kadonoff is included.

26

[169] Second, the respondents submit that for the fraud allegation, there is an

important distinction between SIF #1’s own capital and the SIF #1 investors’

capital. While there clearly is a difference between the two, we do not accept

that anything flows from that difference in this case. Staff’s allegation is that

the respondents, by their conduct, deprived SIF #1 investors of their capital

and/or put their capital at risk.

[170] The respondents submit that there was no evidence that the loans to SIF #2

increased the risk to SIF #1 investors to a level greater than if the funds had

been similarly deployed within SIF #1.

[171] The respondents are correct in their statement that we heard no such evidence.

However, there was no need to. As the respondents acknowledge in their

submissions, a risk of prejudice to economic interests causes a deprivation,⁴⁷and

that risk of prejudice can be established where investors are induced, by

dishonest means, to purchase or hold an investment, even if doing so causes no

actual economic loss.⁴⁸Accordingly, we are not required to engage in an

assessment of the relative risks of the authorized use of funds and the

unauthorized use of funds.

[172] There is a causal link between a diversion of invested funds like the one that

occurred in this case, and a risk of prejudice to those funds. In these

circumstances, the investors unwittingly took on risks they did not bargain for.

[173] We do not accept the respondents’ contention that the risks borne by the SIF #1

investors following the impugned transfers were precisely those they had already

bargained for. The respondents base that submission on their characterization of

those risks as “those related to the ability to earn a return on solar projects”.

That description is generic and superficial, it fails to take account of the many

different risks that contribute to a return, and it fails to take account of the

significance of risks that may be different in degree, not only in kind.

[174] Whether those different risks would ultimately turn out to be neutral, or to the

investors’ benefit or their detriment, is not determinative. It should have been

for the investors, not the respondents, to evaluate the relative merits of the

promised uses of the funds and uses other than those promised.⁴⁹

[175] We therefore conclude that the unauthorized diversion of funds resulted in a

deprivation of the SIF #1 investors’ funds, by causing a risk of prejudice to those

funds and to the investors’ interests.

[176] Because of the causal link between the diversion and a risk of prejudice, and

because Staff relies here on “other fraudulent means” (e.g., unauthorized

diversion of funds) as opposed to falsehood or deceit, Staff need not prove that

investors actually relied on the act that proved to be dishonest.⁵⁰Staff has

proven the dishonest act undertaken voluntarily by the respondents, and a

deprivation caused by that dishonest act. Staff has therefore established the

actus reus elements of its fraud allegations.

47

Théroux at para 13

Quadrexx at para 21

Re Borealis International Inc., 2011 ONSEC 2, (2011) 34 OSCB 777 at para 108

R v Riesberry, 2015 SCC 65 at para 26

48

49

50

27

Subject to their defence of reasonable reliance on legal

advice, did each respondent have subjective knowledge of

the fraudulent act?

(a)

Introduction

[177] We turn to consider the mental element of the fraud allegations, which is

established where: one is subjectively aware that (i) they are undertaking a

prohibited act; and (ii) the prohibited act could cause deprivation.⁵¹

[178] Staff need not show that a respondent regarded the act as dishonest. In the case

of a dishonest means (e.g., unauthorized diversion of funds), subjective

awareness of the prohibited act is proven where the person knowingly undertook

the act. It is not necessary to prove that they knew that the act was prohibited.⁵²

[179] We begin our analysis of the mental element with the first of the two elements

mentioned above, i.e., whether the respondent was subjectively aware that they

were undertaking a prohibited act. We will review the circumstances relevant to

each respondent and then, before concluding on this first component, consider

whether the legal advice provided by Aird & Berlis to the respondents affects our

conclusions.

[180] As we consider each respondent individually, we bear in mind that subjective

awareness may be established by showing recklessness.⁵³If one is aware that

there is danger that their conduct could bring about the prohibited result, but

persists despite the risk, that person is reckless and that subjective element is

proved.⁵⁴

[181] We also highlight the words “reasonably ought to know” in s. 126.1(1). This

constructive knowledge principle makes clear that Staff may prove the element

of knowledge of the fraudulent act by establishing that the respondent

reasonably ought to have known that the impugned act, practice or course of

conduct perpetrates a fraud. The Commission has previously⁵⁵adopted the

reasoning of the British Columbia Court of Appeal, which held in the context of

the corresponding provision in the British Columbia statute that the words

“reasonably ought to know” bring within the provision those who engage in a

course of conduct and ought reasonably to know that a fraud is being

perpetrated by others.⁵⁶

[182] Staff and the respondents approach the import of those words differently. The

respondents note that the Natural Bee Works decision of the Commission, on

which Staff relies, applies the “reasonably ought to have known” standard to

those who participate in the same “scheme” as an individual found to have

perpetrated a fraud. The respondents imply, without saying as much, that the

word “scheme” carries a more pejorative meaning and requires a greater degree

of co-operation in the fraud than would be the case without that word. Whether

51

Théroux at para 21

Théroux at para 22

Théroux at para 25

Sansregret v The Queen, [1985] 1 SCR 570

52

53

54

55

Re Bradon Technologies Ltd, 2015 ONSEC 26, (2015) 38 OSCB 6763 at para 232 (Bradon); Re

Natural Bee Works Apiaries, 2019 ONSEC 23, (2019) 42 O.S.C.B. 5905 at para 104 (Natural Bee

Works)

56

Anderson v. British Columbia Securities Commission, 2004 BCCA 7

28

or not that is a fair interpretation of the word “scheme”, that submission does

not assist the respondents. While Natural Bee Works happened to involve a

“scheme” (as described by the Commission in its decision), we reject the

respondents’ submission that in that case the Commission noted that the

constructive knowledge element applies only where there is a ‘scheme’. We read

nothing in the decision as limiting the application of the constructive knowledge

standard to where a “scheme” exists.

[183] Neither the words of s. 126.1(1)(b) nor the words of the British Columbia Court

of Appeal referred to above support the respondents’ suggestion. Nor do those

words undermine the principle, correctly submitted by the respondents, that

Staff must prove a mental element for each participant in the fraud. The point is

that under s. 126.1(1)(b), Staff need not prove that the particular respondent

actually knew that the course of conduct was fraudulent; rather, Staff may prove

the mental element by showing that the respondent reasonably ought to have

known that the course of conduct in which the respondent is participating

amounts to a fraud being perpetrated by one of the other participants.

[184] Finally, by way of introduction, we repeat the limits of Staff’s fraud allegations.

In its written submissions, Staff addresses in detail each respondent’s knowledge

of and involvement in the loans of funds from SIF #1 to SIF #2. Many of these

submissions relate to the s. 44(2) allegations. In analyzing the fraud allegations,

we confine ourselves to those payments relating to the payment of dealer fees

and investor distributions, without reference to loans made for other purposes.

(b)

Mr. Grossman

[185] With those principles in mind, we begin with Mr. Grossman.

[186] Mr. Grossman was SIF Inc.’s Chief Operating Officer from December 18, 2009, to

May 15, 2014, its Chief Financial Officer from November 25, 2013, to June 10,

2014, and its Vice President Finance from May 15, 2014, onwards. He became a

director of SIF Inc. on November 25, 2013. He was the only person who was a

director and/or officer of SIF Inc. for the entire period of March 2013 to

December 2016.

[187] Mr. Grossman agreed that an investor reading the offering memorandum would

conclude that he was a directing mind of SIF Inc., and that there was nothing in

the offering memorandum to suggest otherwise. We find that he was a directing

mind of SIF Inc. throughout the period of March 2013 to December 2016.

[188] Mr. Grossman testified that the management committee authorized all of the

transfers from SIF #1 to SIF #2, whether individually or as one or more groups

of transactions. As a general matter, transfers were made from SIF #1 to SIF #2

whenever the need for money arose in SIF #2.

[189] Mr. Grossman admitted that he authorized the use of SIF #1 funds to pay

SIF #2’s dealer fees and distributions, and he did so to maintain the confidence

of the SIF #2 investors and exempt market dealers. However, he explained that

based on his own interpretation of the offering memorandum and advice he had

earlier received from Aird & Berlis, he believed this was an authorized use of

funds.

[190] We discuss the Aird & Berlis legal advice below. Mr. Grossman’s mistaken

interpretation of the offering memorandum is of no assistance to him. He is

29

bound by what the offering memorandum said and what it actually meant, not

his interpretation at the time, an interpretation he now concedes was incorrect.

[191] Mr. Grossman authorized the transfers of funds for the unauthorized purposes,

and knew that by doing so, SIF #1’s funds (and by extension the funds of SIF #1

investors) were being subjected to risks not previously applicable to those funds.

Staff has therefore proven, subject to the legal advice defence, that

Mr. Grossman was subjectively aware of the fraudulent act.

[192] Because Mr. Grossman was a directing mind of SIF Inc., the company is deemed

to have had subjective knowledge of the fraudulent act, subject to the legal

advice defence.

(c)

Mr. Mazzacato

[193] Staff submits that it is uncontroverted that Mr. Mazzacato was an owner and

director of SIF Inc., a member of the management team, and a directing mind

for all the impugned fraudulent transactions. Indeed, Mr. Mazzacato does not

dispute this assertion in his submissions. He acknowledges that he became a

member of SIF Inc.’s management team upon joining the company in May 2014,

even though at the time he joined, he knew little to nothing about SIF #1 or how

it worked (although he was aware that SIF Inc. was SIF #1’s manager), but as

time went on, he came to understand what SIF #1 and the offering

memorandum were.

[194] Mr. Mazzacato also emphasizes that he had no prior experience with respect to

the exempt market. He testified that he relied on Mr. Grossman and

Mr. Kadonoff to advise him of the contents of the offering memorandum.

Mr. Mazzacato took no independent steps to understand what the document

contained.

[195] He testified that in the late summer of 2015, when Mr. Grossman and

Mr. Kadonoff asked him to become SIF Inc.’s President, he was reluctant to take

on the role because of his lack of education or expertise in financing, accounting

or legal matters, and his lack of knowledge about the financial and legal aspects

of SIF Inc.’s business. He states that Mr. Grossman and Mr. Kadonoff assured

him that he could rely on them for those matters and continue to focus on

project origination and the technical aspects of the business.

[196] From Mr. Mazzacato’s perspective, he had no responsibilities beyond those.

During the hearing, Mr. Mazzacato took pains to confine the subject areas over

which he exercised oversight while he was President. However, he agreed that

he had “ultimate responsibility” for ensuring that SIF #1 didn’t do anything that

was contrary to its offering memorandum.⁵⁷

[197] Mr. Mazzacato signed many cheques transferring funds from SIF #1 to SIF #2.

Two are relevant – one in December 2015 (referred to in paragraph [98] above)

and one in February 2016, both on the operating trust account of SIF #1. The

two cheques were payable to the SIF #2 operating trust and clearly showed that

the payments were to cover SIF #2 distributions. However, he testified that he

chose not to scrutinize the reasons for the funds transfers being effected by

cheques he signed, because he relied on others.

57

Hearing Transcript, Solar Income Fund (Re), April 8, 2021 at p91 line 25 to p92 line 2

30

[198] Similarly, he never reviewed detailed bank statements for any of the SIF Inc.

entities, nor did he monitor the amounts that were flowing into the various bank

accounts. On August 21, 2015, when he signed the amended and restated

management agreement between SIF Inc. and SIF #1, he did not carefully

review the three-page schedule that specified the services that SIF Inc. was to

provide to SIF #1. Once more, he relied on Mr. Grossman and Mr. Kadonoff to

advise him of anything he needed to know of a legal or financial nature.

[199] Mr. Mazzacato submits that he should benefit from the same consideration given

to two of the respondents in the Commission’s decision in YBM Magnex

International Inc.⁵⁸Like Mr. Mazzacato, those two respondents (Messrs. Antes

and Greenwald, who were retired scientists) were not experienced in securities

law or public financing. They were involved with the company because of their

scientific expertise, experience and connections. Under the circumstances

present in that case, the Commission found that it was reasonable for the two

respondents to rely on counsel.⁵⁹

[200] While Mr. Mazzacato’s circumstances have some commonality with those of the

two YBM Magnex respondents, the differences easily outweigh those similarities.

Messrs. Antes and Greenwald were directors only, and not officers of the

company, and the context of their reliance was the actions of a special

committee of the board, a committee of which neither respondent was a

member. In stark contrast, Mr. Mazzacato was an officer of SIF Inc. throughout

his time with the company, a member of the senior management group that

made decisions by consensus, president of the company for part of his tenure,

and by his own admission ultimately responsible for SIF #1’s compliance with

the offering memorandum during that time.

[201] Further, the Commission in YBM Magnex found that the two respondent directors

“took their duties as directors seriously”.⁶⁰They made efforts to engage with the

areas, unfamiliar to them, that formed part of their responsibilities as directors.

The Commission acknowledged the position that the two individuals found

themselves in, including their lack of experience in the capital markets.

[202] Despite this, the Commission concluded that Mr. Antes (who was more involved

in the company’s affairs than Mr. Greenwald was, and who was an active

member of the Audit Committee) ought to have challenged legal advice given

about potential disclosure of a material change.⁶¹In other words, the position of

director (or officer) brings with it certain responsibilities that cannot be escaped

by asserting a limited expertise and experience.

[203] Mr. Mazzacato did not demonstrate any interest in going beyond his area of

expertise, even when he was president of the company. He was content to stick

to what he knew and to rely on others for everything else, despite the fact that

he was ultimately responsible.

[204] Mr. Mazzacato states that in early 2016, he was generally aware that SIF #1 was

lending money to SIF #2, including for development of one particular project.

However, Mr. Mazzacato says that because he did not have day-to-day

58

(2003) 26 OSCB 5285 (YBM Magnex)

YBM Magnex at paras 326, 332

YBM Magnex at para 327

YBM Magnex at paras 329, 551

59

60

61

31

responsibility for, or oversight of, financial matters at SIF Inc., SIF #1 or SIF #2,

he was not aware of all circumstances relating to the loans.

[205] Mr. Mazzacato, in his affidavit, describes his understanding that SIF #1 was

entitled to lend to SIF #2, and that SIF #2 was entitled to use those funds in

accordance with the SIF #2 OM, which permitted the payment of dealer fees and

investor distributions. Mr. Mazzacato explains that his understanding arose in the

context of the decision to lend funds to SIF #2 in order to develop the project

referred to in the preceding paragraph. Mr. Mazzacato says that he relied on

assurances from Mr. Grossman and Mr. Kadonoff that SIF #1 could make these

loans, and that they had obtained advice from Aird & Berlis regarding “all

important matters”.

[206] In his written submissions, Mr. Mazzacato challenges Staff’s submission that he

provided no support for his understanding as to the effect of the SIF #1 and

SIF #2 offering memoranda. Mr. Mazzacato contends that Staff’s submission is

improper, because Staff did not cross-examine him on the point. We reject

Mr. Mazzacato’s submission, because Staff merely observes the absence of

anything to corroborate his own testimony. In any event, though, nothing turns

on it. Such a belief on Mr. Mazzacato’s part would not constitute a defence to the

allegation.

[207] With respect to exempt market dealers, Mr. Mazzacato states that he knew that

SIF #2 had engaged various dealers, but he was not aware at the time that any

fees were paid from any of the funds that SIF #1 loaned to SIF #2, although as

stated above he believed such payments were permitted.

[208] Staff submits that this understanding is inconsistent with the SIF #1 offering

memorandum and the purported advice received from Aird & Berlis.

[209] Staff asks us to reject Mr. Mazzacato’s testimony about his lack of understanding

and oversight, and participation in the decisions being made about the transfer

of funds, because:

a.

Mr. Mazzacato was an evasive witness who sought to minimize his

involvement in the affairs of SIF Inc.;

b.

Mr. Grossman testified that everyone on the management team

authorized all transfers of cash from SIF #1 to SIF #2, and Mr. Grossman

was not cross-examined on this point;

c.

in a December 2017 written response to Staff’s request for documents

supporting authorization of transfers in 2013 to 2016, SIF Inc. described

the management team as a “closed knit [sic] group” that had ad hoc

meetings (without formal minutes) “all the time to make decisions”, and

stated that “the Board of Directors at the time was the group who

authorized the transactions.”⁶²

[210] We do not accept Staff’s characterization of Mr. Mazzacato as “evasive”.

Mr. Mazzacato answered questions directly. He did, however, consistently seek

to minimize his involvement in SIF Inc.’s affairs.

62

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Letter from Solar Income Fund enclosing

response to November 10, 2017 Summons at p 3

32

[211] We weigh his testimony against the documentary evidence (including emails and

cheques) and the testimony of the other principals. We conclude that it is more

likely than not that Mr. Mazzacato sought then, as he does now, to limit his

day-to-day activities to the areas in which he felt comfortable, i.e., project

origination and technical matters. Having said that, we also conclude that it is

more likely than not that: (i) Mr. Mazzacato was present for, and participated in,

discussions and decisions to a greater extent than he describes; and (ii) he had a

greater understanding of the overall financial picture than his testimony would

suggest.

[212] We have no doubt that at least in some measure, he deferred to Mr. Grossman

and Mr. Kadonoff. But we do not accept that his deference excluded him from

the decision-making process. It is apparent that he did not then, and does not

now, fully appreciate the obligations that come with being a director and officer

of a company that, through the related entities that it managed, raised funds

from the public.

[213] Mr. Mazzacato was a directing mind of SIF Inc. from the time he joined the

company in 2014. He is correct in saying that he had ultimate responsibility.

[214] It was not sufficient for him to abdicate that responsibility. One need not be

expert in legal or financial matters to question whether it is appropriate to use

the money raised from the public in one fund to pay distributions to investors in

another fund, at a time when, to everyone’s knowledge, the latter fund had

insufficient cash to pay those distributions. We accept that someone with

Mr. Mazzacato’s background would not have a deep understanding of the

competing principles at play, but the situation ought to have been a red flag for

Mr. Mazzacato. As President with ultimate responsibility, the red flag should have

prompted him to exercise some independent oversight regarding the legal advice

that he says he understood had been obtained. Mr. Mazzacato took no such

steps.

[215] Given his position, even if Mr. Mazzacato did not know that the transfer of funds

for the impugned purposes was unauthorized, he was reckless about that, and

he reasonably ought to have known. Staff has therefore successfully established

that mental element, subject to the legal advice defence.

(d)

Mr. Kadonoff

[216] During the summer of 2015, at the beginning of the ten-month period that is the

subject of Staff’s financial analysis in support of the fraud allegation (see

paragraph [96] above), Mr. Kadonoff was the interim President of SIF Inc. He

had previously been Vice President and General Counsel and had become a

registered director and officer on June 10, 2014. This step did not significantly

change his role at SIF Inc., although he states that while he “had a voice

before”, these new responsibilities gave him “a different voice”, and he was

“definitely involved in decision-making… from that point on.”⁶³

[217] Mr. Kadonoff testifies that Mr. Grossman was generally responsible for the

financial aspects of SIF Inc. and the entities under SIF Inc.’s management. We

accept that characterization. Mr. Kadonoff does concede, though, that when he

63

Exhibit 38, Kadonoff Affidavit at para 24; Hearing Transcript, Solar Income Fund (Re), April 1, 2021

at 110 lines 22-25

33

became interim President in May 2015, his level of involvement in management

increased. We have no difficulty concluding that Mr. Kadonoff was a directing

mind of SIF Inc. from at least May 2015.

[218] While he testified that he did not focus on the source of funds used to pay the

distributions, he states his belief that none of the funds used for distributions

came from SIF #1 investor funds.

[219] Mr. Kadonoff described his involvement in SIF Inc.’s financial affairs as

“extremely limited”. He testified that he did not pay attention to the financial

statements unless there was a problem or concern with them. He testified that

he was “quite excluded” from the financial aspects at SIF Inc., but we interpret

the word “excluded” to mean that he chose not to participate, as opposed to

having his efforts to participate rebuffed. As Mr. Kadonoff himself explained:

I didn’t have an interest in it… both Paul [Ghezzi] and Allan

[Grossman] were chartered accountants. There was, frankly,

nothing I could add that – no value I could add to any of the

conversations they were having on analysis, financial

analysis, financial statements, any of that stuff. I trusted, I

trusted them both in terms of taking care of the financial

aspects of the business.⁶⁴

[220] Whatever the extent of Mr. Kadonoff’s obligation to familiarize himself with

financial matters may be, it is clear that he chose not to do so. Further, the fact

that Mr. Grossman was primarily responsible for financial matters does not

preclude involvement by others or, more importantly, an obligation on others to

have some degree of familiarity, especially when a management decision is

made to effect a transaction.

[221] Staff submits that despite Mr. Kadonoff’s denials, he must have known that the

SIF #2 distribution payments in June, July and August 2015 were funded by

loans from SIF #1:

a.

on June 2/15 he signed a SIF #1 cheque for $530,000 payable to SIF #2;

and

b.

he knew that SIF #2:

had stopped raising funds from investors in the spring of 2015 and

did not resume that summer;

had not yet obtained any loans that could be used for distribution

payments; and

was not generating any revenue because the project referred to

above, SIF #2’s only project, was under development and not yet

operating.

[222] Staff does not allege that the $530,000 cheque signed by Mr. Kadonoff was

specifically targeted for the payment of SIF #2 distributions. Indeed,

Mr. Kadonoff submits that this amount did not pass through the SIF #2 account

from which distributions were being paid. In reply, Staff did not contest this

submission. Instead, Staff cites this payment in support of the proposition that

64

Hearing Transcript, Solar Income Fund (Re), April 1, 2021 at 104 lines 21-28

34

Mr. Kadonoff was generally aware of SIF #2’s financial situation (for the reasons

listed above), and that money was being lent by SIF #1 to SIF #2 during that

period.

[223] Mr. Kadonoff also testified that Mr. Grossman told him that the necessary funds

originated in a loan that had been made from CPE Inc. to SIF #2. Staff asks us

to reject this explanation, given Mr. Kadonoff’s concession that he did not know

at the time precisely when the loan was made or how much CPE Inc. was

advancing. In fact, the CPE Inc. loan was for $51,500, which was a small fraction

of the total amount transferred from SIF #1 to SIF #2 that summer, and less

than one quarter of the total distributions paid to SIF #2 investors during that

period.

[224] Mr. Kadonoff resigned on August 31, 2015, but continued some limited

involvement in SIF Inc., partly because he retained signing authority on the bank

account, and that authority had not yet been transferred to someone else.

[225] On September 1, 2015, Mr. Kadonoff wrote an email to a number of people,

including Mr. Mazzacato and Mr. Grossman. In that email, Mr. Kadonoff relayed

concerns from SIF Inc.’s then-CFO that SIF #2 did “not have the cash to pay

distributions.” Mr. Kadonoff said that he was “not comfortable borrowing funds

from [SIF #1] for this purpose.” He recommended that SIF #2 unitholders be

advised that distributions could not be paid until additional funds were raised.⁶⁵

[226] Soon after sending that email, and despite his concerns, Mr. Kadonoff signed a

cheque for August distributions. Mr. Kadonoff says that he must have had

discussions with one or more of Mr. Grossman, the CFO, the controller or others

in accounting, in which he received comfort that there were sufficient funds. He

also relied on a discussion he had with one of the Aird & Berlis lawyers (who had

been copied on his September 1 email) about his concerns. Mr. Kadonoff says

that in that discussion, he heard no advice that it would be improper to use

loaned funds to pay distributions.

[227] Mr. Kadonoff submits that with respect to the impugned transactions in July and

August of 2015, while he was an officer and director, and before he began

objecting to the transfers, Staff has not proven that he approved the

transactions or knew that they were occurring or inappropriate.

[228] In response, Staff emphasizes that by his own admission, Mr. Kadonoff failed to

focus on or to investigate the source of funds used to make distributions. Staff

relies on these concessions in support of its submission that Mr. Kadonoff was

reckless or wilfully blind. Staff also cites a portion of Mr. Kadonoff’s testimony in

which he described his involvement in the financial areas of the firm as being

“extremely limited”, and “if they didn’t bring up a question, I wasn’t asking.”⁶⁶

However, that answer specifically relates to the time period before June 2014,

more than one year prior to the period during which Staff alleges that

Mr. Kadonoff was complicit in using SIF #1 funds to pay SIF #2 distributions. We

reject Staff’s invitation to link the two.

[229] Staff also points out that Mr. Kadonoff did not ask questions about the fact that

SIF #2 was making payments for marketing services in July and August of 2015.

65

Exhibit 38, Kadonoff Affidavit, Tab 69

Hearing Transcript, Solar Income Fund (Re), April 1, 2021 at 105 lines 16-18

66

35

As we concluded above, the payments for marketing services are not properly

the subject of Staff’s fraud allegations. However, Mr. Kadonoff’s inaction with

respect to them reinforces his own contention that he paid little attention to

financial matters at the firm.

[230] There is a troublesome similarity between Mr. Kadonoff’s characterization of his

obligations as President and that of Mr. Mazzacato. SIF Inc. was a small

company with just a few members of senior management. We find it implausible

that Mr. Grossman was left to manage, on his own, the financial affairs of

SIF Inc. and entities it managed, and that two Presidents in a row chose to

ignore even high-level indicators of the financial health of the business.

[231] We find that it is more likely than not that Mr. Kadonoff understood the overall

financial picture, and that he knew funds were being transferred from SIF #1 to

SIF #2 to pay whatever obligations SIF #2 had. As Staff correctly observes,

during the summer of 2015, SIF #2 was no longer raising funds, had not

obtained any loans that could be used to fund distributions, and was not earning

any revenue.

[232] SIF #2’s suspension of the capital raise was caused by Ms. Jackson identifying

concerns about SIF Inc.’s accounting and record-keeping. Mr. Kadonoff

supported Ms. Jackson’s request that SIF Inc. retain a forensic accounting firm to

conduct a preliminary investigation. The investigation resulted in no findings of

negligence or misconduct, but SIF #2’s situation caused significant turmoil,

including the temporary exclusion of Mr. Grossman and some accounting staff

from SIF Inc.’s office. There can be no doubt that SIF #2’s need for funds was

prominent for all of the individual respondents.

[233] After his resignation, Mr. Kadonoff briefly retained signing authority, until that

was fully transferred to Mr. Mazzacato. Mr. Kadonoff continued to work as a

consultant for SIF Inc. until February 16, 2016, so that he could complete

financing transactions for SIF #1 and SIF #2. His relationship with SIF Inc.

during this period was governed by the original retainer agreement entered into

in mid-2011, although Mr. Kadonoff drafted a revised consulting agreement

reflecting his narrow responsibilities, an agreement that Mr. Mazzacato refused

to sign.

[234] In early October 2015, Mr. Kadonoff met with Mr. Grossman and Mr. Mazzacato

to discuss, among other things, Mr. Kadonoff’s view that unitholder distributions

to SIF #2 investors should stop until SIF #2 could resume fundraising.

Mr. Grossman and Mr. Mazzacato rejected this advice and advised that

distributions would continue.

[235] Mr. Kadonoff wrote to Mr. Mazzacato and Mr. Grossman to express his

opposition, stating that in his view “the distribution should not be made”.⁶⁷

[236] Mr. Kadonoff submits that he was clearly not part of any consensus

decision-making after August 31, 2015. His involvement with SIF Inc. continued

only until he could close a SIF #1 loan from a third-party lender in November

2015 and could help secure additional financing from that lender for SIF #2 in

January 2016. Mr. Kadonoff’s services were terminated in mid-February 2016.

67

Exhibit 38, Kadonoff Affidavit, para 127, footnote 72

36

[237] Mr. Kadonoff was right to raise concerns in September 2015 about SIF #1

lending funds to SIF #2 to pay distributions, although it is unclear precisely what

motivated him to raise those concerns, and it is troubling that he signed the

cheque for August distributions. Mr. Kadonoff is vague about comfort that he

might have obtained to support his decision. Because a reasonable inquiry would

have revealed that exactly what Mr. Kadonoff had feared was indeed happening,

we cannot accept his wishful assertion that he relied on others to justify his

signing the cheque.

[238] We find that Mr. Kadonoff was a directing mind of SIF Inc. until September 14,

2015, the date on which he authorized the cheque to pay the August

distributions. We therefore conclude that Mr. Kadonoff was at least reckless, if

not aware of, the fraudulent act. Staff has established that mental element,

subject to the legal advice defence, to which we now turn.

Is the defence of reasonable reliance on legal advice

available to the respondents on the facts of this case?

(a)

Introduction

[239] We will now review the defence of reasonable reliance on legal advice and

consider whether it is available to the respondents on the facts of this case.

[240] The defence is available in a Commission proceeding in respect of an allegation

that requires Staff to establish an intentional or wilful act.⁶⁸An allegation of fraud

contrary to the Act falls into that category. The defence is therefore available,

subject to a respondent satisfying the criteria for its use.

[241] Subsection 126.1(1) of the Act does not provide for a due diligence defence, and

under these circumstances none is available. Instead, a respondent who asserts

the defence must establish that:

a.

the lawyer had sufficient knowledge of the facts on which to base the

advice;

b.

c.

the lawyer was qualified to give the advice;

the advice was credible given the circumstances under which it was given;

and

d.

the respondent made sufficient enquiries and relied on the advice.⁶⁹

[242] The last of these four components has a due diligence aspect to it, and even

though the defence in this context is not a true due diligence defence, diligence

on the part of the respondent asserting the defence may play a role both in the

assessment of the mental element at the merits stage and as a potential

mitigating factor at the sanctions stage (if any) of a proceeding.⁷⁰

[243] In order to show actual reliance on the advice, as is required by the fourth

criterion, the respondent must show that the advice was sufficiently clear,

specific and connected to the impugned act, by addressing the question raised

68

Re Crown Hill Capital Corp, 2013 ONSEC 32, (2013) 36 OSCB 8721 at para 150, aff’d Pushka v

Ontario (Securities Commission), 2016 ONSC 3041 (Crown Hill)

69

Phillips at para 212; Re Mega-C Power Corp, 2010 ONSEC 19, (2010) 33 OSCB 8290 at para 261

(Mega-C)

70

Re Aitkens, 2018 ABASC 27 at para 72

37

by that impugned act.⁷¹The advice need not necessarily be in contemplation of a

single instance or transaction, but on the other hand it cannot be so broad or

vague as to preclude reasonable reliance.

[244] With that legal background, we now consider whether the facts of this case

support the availability of the defence for the respondents. We will then review

the involvement of each individual respondent in the subject communications.

(b)

Overall characterization of the advice given

[245] Aird & Berlis’s client was SIF Inc., not the individual respondents. As a result, we

focus on advice that Aird & Berlis provided to SIF Inc., no matter to which

individual or individuals it was communicated.

[246] Staff and the respondents adopt starkly different characterizations of the legal

advice that the respondents obtained from Aird & Berlis. Staff submits that

the respondents and their counsel all conceded that the respondents never

received specific legal advice on the permissibility of the various impugned

transactions in this case. The respondents submit that Ms. Nelligan’s evidence

was that the respondents “sought and received advice on the very issue at the

heart of the case – whether it was permissible for SIF1 to lend money to related

or third party entities.”⁷²

[247] The apparent contradiction between Staff’s assertion that the respondents

conceded the point and the respondents’ assertion that the evidence shows they

received advice on the central issue can be explained by noting the difference in

the way the parties describe the issue about which advice was sought. This

difference is critical as we analyze the availability of the defence.

[248] Staff and the respondents agree that the advice related to the permissibility of

SIF #1 lending money to SIF #2. However, in their characterization of the issue,

the respondents stop there. In so doing, they fail to embrace the pivotal element

of Staff’s fraud allegations – whether the loans were made for permissible

purposes.

[249] We agree with Staff’s framing of the issue. The Statement of Allegations does

not allege that no loans from SIF #1 to SIF #2 would be permissible. The

allegation is that loans made for the purpose of paying dealer fees or

distributions to SIF #2 investors would be impermissible. Staff submits that if

advice was not received about this narrower issue, the defence of reliance on

legal advice is unavailable, because the respondents cannot demonstrate that

they fully complied with the fourth criterion above, i.e., that they reasonably

relied on advice that squarely addressed the issue presented.

[250] A close examination of the advice given is therefore required.

(c)

Evidence about the advice sought and received

[251] In testifying about the advice she gave, Ms. Nelligan of Aird & Berlis

distinguished between SIF #1’s offering memorandum and the declaration of

trust. She emphasized that in giving advice about what SIF #1 was permitted to

71

Crown Hill at para 606; Re CTC Crown Technologies (1998), 8 ASCS 1940 at p8

Joint Written Submissions of Solar Income Fund Inc., Allan Grossman, Charles Mazzacato, and

72

Kenneth Kadonoff, dated June 25, 2021 at para 17

38

do, she would refer to the declaration of trust (and not the offering

memorandum), since the declaration of trust is the constating document.

[252] Ms. Nelligan testified that the offering memorandum summarizes the declaration

of trust, but that it also contains elements not present in the declaration of trust,

specifically a description of the short- and long-term goals of the SIF #1 trusts.

She further testified that in assessing the propriety of proposed payments by

SIF #1 for proposed investments, she would do so with reference to two

components: (i) mutual fund trust rules; and (ii) the declaration of trust, and

related considerations under general trust law.

[253] It is noteworthy that neither component refers to the offering memorandum or

to Ontario securities law.

[254] In the summer of 2014, Mr. Kadonoff corresponded with Anne Miatello, the other

partner at Aird & Berlis who was principally responsible for providing legal

services to SIF Inc. (and who was then known as Anne Markle; we will refer to

her throughout as Ms. Miatello). On June 25, Mr. Kadonoff wrote to her, saying

that based on his reading of a provision of the SIF #1 offering memorandum,

SIF #1 could “lend money for financing third party solar deals (including other

SIF LPs) as an ancillary activity without acquiring the asset.” He then asked

whether she agreed with his conclusion that “acting as a short term lender (i.e.

less than 1 year) is permitted.”⁷³

[255] On July 3, Ms. Miatello replied. The entire relevant portion of her email said:

“I’ve looked at both declarations of trust. The operating trust can lend funds for

financing solar deals to the LPs or unrelated entities. The MFT should not lend

the money.”⁷⁴

[256] Ms. Nelligan testified that Ms. Miatello brought the question to her when

Mr. Kadonoff asked it, that they discussed how to respond, and that Ms. Nelligan

reviewed the reply before Ms. Miatello sent it.

[257] Ms. Nelligan explained that the reply’s distinction between the operating trust

and the mutual fund trust was to ensure compliance with the federal Income Tax

Act.⁷⁵She explicitly confirmed that Aird & Berlis did not consider the offering

memorandum in giving the advice.

[258] Again, it is noteworthy that Ms. Miatello’s reply does not refer to the offering

memorandum, despite the fact that Mr. Kadonoff’s question of Ms. Miatello

referred to the offering memorandum and not the declarations of trust. We

return below to this important misalignment of question and answer.

[259] The individual respondents rely heavily on the Aird & Berlis reply:

a.

In his affidavit, Mr. Kadonoff describes Ms. Miatello’s reply as having

advised that SIF #1’s operating trust could lend funds to other entities for

solar deals (the acquisition, development, operation or financing of solar

projects). In his oral testimony, Mr. Kadonoff’s description was less

limiting – he said that Ms. Miatello was opining that SIF #1 could make

73

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Emails between Allan Grossman, Ken

Kadonoff, Jennifer Jackson, Charles Mazzacato and Anne Markle Re: MFT as a lender at p 1

74

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Emails between Allan Grossman, Ken

Kadonoff, Jennifer Jackson, Charles Mazzacato and Anne Markle Re: MFT as a lender at p 2

75

RSC, 1985, c 1 (5th Supp)

39

loans “really unconditionally” and without restriction as to the identity of

the borrower, as long as the money came out of the operating trust.⁷⁶

Mr. Kadonoff further reports his second-hand understanding that in the

fall of 2014, Aird & Berlis specifically confirmed the permissibility of

short-term loans from SIF #1 to SIF #2 that were associated with the

financing of solar projects.

b.

c.

In his affidavit, Mr. Mazzacato sets out his similar understanding. He also

states that in September 2014, Mr. Kadonoff sought and obtained advice

from Aird & Berlis about a proposed loan by SIF #1 to a related limited

partnership for purposes of financing a solar project. Aird & Berlis gave

advice and provided draft language setting out the terms.

On direct examination by his counsel, Mr. Grossman described the reply

from Aird & Berlis as having given “carte blanche on lending funds”. When

cross-examined, Mr. Grossman apologized for that choice of words, but

agreed with the suggestion that he believed that the Aird & Berlis reply

confirmed an unlimited opportunity to lend money from SIF #1 to other

entities, as long as that was done through the operating trust.

[260] The respondents’ description of the Aird & Berlis advice as being unrestricted

permission, subject only to the funds coming out of the operating trust as

opposed to the mutual fund trust, is at odds with the text of Ms. Miatello’s email,

for two reasons.

[261] First, that text clearly states that loans must be “for financing solar deals”, and

that the advice is based on her review of the declarations of trust. We note Ms.

Nelligan’s testimony that Aird & Berlis was never asked for, and never provided,

advice about whether that phrase could encompass any specific kinds of

transactions. In particular, Aird & Berlis did not provide advice about whether

loans to permit payment of distributions, or loans to permit payment of dealer

fees, would constitute financing of a solar deal. Given that the ordinary meaning

of the words “financing solar deals” would not include the payment of

distributions at least, if not exempt market dealer fees as well, it was incumbent

on those claiming to have received legal advice to have ensured that they truly

were receiving an answer to a question they now say they asked.

[262] Second, since Mr. Kadonoff’s email to Ms. Nelligan asking for the advice was

limited to loans of less than one year, her advice must be taken to apply to such

loans. We can neither conclude that the advice would apply equally to longer-

term loans, nor can we exclude that possibility. What is clear is that in the

context of the exchange of emails, no advice was given about loans of more than

one year. Accordingly, Staff submits that the respondents cannot rely on the

legal advice contained in this email as a defence in respect of the SIF #2 loans,

which were advanced over more than 20 months.

[263] The respondents also seek comfort from Aird & Berlis’s letter of April 24, 2015,

about a credit agreement of the same day involving a loan from a third-party

lender to Solar Income Fund LP (#5), an LP unrelated to the issues before us. In

the relevant part of that opinion, Aird & Berlis opines that the various

agreements making up the transaction did not and would not breach or

76

Hearing Transcript, Solar Income Fund (Re), April 6, 2021 at 17 -18

40

constitute a default under “to our knowledge, any of the terms, provisions or

conditions of any agreement, indenture, instrument or other document to which

SIF or SIF Trust is party or by which SIF or SIF Trust or any of their respective

property or assets is or may be bound or subject.”⁷⁷

[264] We reject the respondents’ submission that this letter is of any assistance. It is a

transaction-related opinion addressed to third parties, with no reference to the

offering memorandum or to Ontario securities law. The cited passage has neither

the specificity nor the relevance to entitle a respondent to rely on it as part of a

legal advice defence.

[265] We pause our review of the evidence to emphasize that reviewing declarations of

trust to determine what is permissible according to trust law is significantly

different from reviewing an offering memorandum to determine whether an

intended use of investor funds conforms to investors’ reasonable expectations.

The two questions arise in different contexts, and each requires its own lens.

[266] The reasonable expectations of investors who receive an offering memorandum

inform the answer to the pivotal question of whether a use of SIF #1 funds was

authorized or not. For a respondent to rely on legal advice in respect of the

allegations in this proceeding, that advice must be viewed not only in the context

of securities law (as opposed to trust law), but also in the context of the

relationship between legal counsel and their client.

[267] Ms. Nelligan testified that as far as she could recall, only once in the course of

the relationship with SIF Inc. was Aird & Berlis asked to give advice about the

permissibility of a specific use of funds loaned from SIF #1 to SIF #2. The

request for advice was about a short-term loan to pay deposits in connection

with the purchase of a particular project.

[268] Mr. Grossman suggests that there was at least one other occasion on which the

question was asked of Aird & Berlis. He cites the September 1, 2015, email from

Mr. Kadonoff to Mr. Mazzacato and him, as well as the Aird & Berlis lawyers, in

which Mr. Kadonoff asks Aird & Berlis to opine on various issues relating to

SIF #2 (discussed at paragraph [225] above). That email contains Mr. Kadonoff’s

concern about SIF #2 borrowing funds from SIF #1 to pay distributions to

SIF #2 investors.

[269] The respondents rely in part on a handwritten note in the Aird & Berlis file, most

of which is redacted in our record. The visible portions record the date

(September 1, 2015), the subject “MFT #2 raise”, and a list of issues, only one

of which is unredacted. The text relating to that issue is limited to the question

“suspending distributions?”, to which the notes in apparent response are “OK 

at Manager’s discretion” and “what about DRIP?”. There is one marginal note

“o/s issue” with an arrow pointing to one or both of those last two lines.⁷⁸This

note confirms the respondents’ contention that one of the topics of the call was

distributions. Nothing in the note suggests that the question of whether loans

could be made from SIF #1 to SIF #2 to pay distributions was mentioned in the

call.

77

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Letter from Aird & Berlis to Sprott Bridging

Income Fund LP c/o Bridging Finance Inc. and Dale & Lessmann LLP at p 7

78

Exhibit 38, Kadonoff Affidavit, Tab 70

41

[270] Further, Ms. Nelligan testified that she understood Mr. Kadonoff’s concern to be

whether he might have been personally liable in the same way that a director of

a corporation would.

[271] In conversations leading up to November 25, 2014, and in an email of that date

to Mr. Grossman confirming those conversations, Aird & Berlis listed a number of

concerns that should be addressed. These included considerations about the

method by which the deposits would be paid, the time horizon and risks of the

loan, costs and benefits to each of SIF #1 and SIF #2, and SIF Inc.’s policy for

allocating opportunities between funds.

[272] The subject matter and form of this email stand in stark contrast to the advice

on which the respondents say they should be able to rely. First, the payments

that are the subject of the email relate directly and immediately to the

acquisition of a solar project (unlike distributions and dealer fees). Second, the

email carefully documents concerns that Aird & Berlis raised in earlier

conversations.

[273] We accept Ms. Nelligan’s testimony that this was the only occasion on which

Aird & Berlis gave advice about a specific use of funds loaned from SIF #1 to

SIF #2. The only evidence that might suggest a contrary conclusion is that

relating to the July 3, 2014, email from Ms. Miatello (which we have already

discussed) and Mr. Kadonoff’s testimony about a telephone call he had with

Ms. Nelligan on October 8, 2015.

[274] In his affidavit, Mr. Kadonoff states that he sought Ms. Nelligan’s advice on,

among other things, the propriety of continuing distributions to SIF #2

unitholders in light of SIF #2’s lack of cash, and of using a loan from SIF #1 to

SIF #2 to fund the distributions.

[275] Mr. Kadonoff’s description of his call with Ms. Nelligan is carefully worded. He

does not actually state that Ms. Nelligan expressly gave any advice; rather,

Mr. Kadonoff inferred the propriety of a loan because Ms. Nelligan raised no

concerns. Mr. Kadonoff states that:

a.

b.

c.

he “believes” that he “fully disclosed [his] understanding that advances

for that purpose would be required if distributions continued” and that he

raised concerns about the permissibility of such a loan;

he “believes” that he and Ms. Nelligan discussed the fact that he was

seeking legal advice from Aird & Berlis “about the use of loaned funds for

distributions in light of the cash flow issues”; and

he raised the issue “on several occasions and… was never advised by [any

of the Aird & Berlis lawyers] that distributions to SIF #2 investors should

not or could not be made”.⁷⁹

[276] Mr. Kadonoff also points to Ms. Nelligan’s handwritten note of the conversation.

That note is one half-page, most of which was redacted (for solicitor-client

privilege) in the version tendered to us. The unredacted portion consists, in its

entirety, of the date of the call, the fact that it was a call from Mr. Kadonoff, a

hand-drawn diagram of overlapping ovals with two instances of the word

“trustee”, and one line saying “- distributions may be made”.

79

Exhibit 38, Kadonoff Affidavit at paras 128-129

42

[277] In his affidavit, Mr. Kadonoff states that this last element “is consistent with

what” he believes the two discussed.⁸⁰However, to the extent Mr. Kadonoff

seeks to rely on this note as part of a legal advice defence, that reliance is

misplaced, for many reasons:

a.

as is quite often the case with notes of this kind, the note is, to use

Mr. Kadonoff’s own description of it, “cryptic” to anyone but the author;

b.

on its face, the phrase “distributions may be made” is entirely ambiguous

as to whether it reflects Mr. Kadonoff telling Ms. Nelligan that distributions

might be made in the future (a possible interpretation that Mr. Kadonoff

does not contradict), or Ms. Nelligan giving advice that distributions are

permissible;

c.

we are not persuaded by Mr. Kadonoff’s attempt under direct examination

to enhance the value of the phrase, when he testified that it “is really

consistent with what I believe I heard”;⁸¹

d.

even if the phrase does reflect Ms. Nelligan’s advice, it says only that

distributions may be made – it makes no reference to a loan from SIF #1

to SIF #2 for the purpose; indeed, on cross-examination, Mr. Kadonoff

conceded that he did not recall Ms. Nelligan giving advice about that

issue, although he “didn’t hear any objection to it being done”;⁸²and

e.

Ms. Nelligan acknowledged that information about distributions may have

been imparted to her, but she testified that to her knowledge, no one

raised with Aird & Berlis a concern about using SIF #1 loan funds to pay

SIF #2 distributions, and Aird & Berlis never gave advice on that issue.

[278] We reach the same conclusion about the Aird & Berlis note of a call on October

21, 2015, that included Mr. Kadonoff, Mr. Mazzacato and Mr. Grossman. The

unredacted part of the note reflects that SIF #1 had been and was continuing to

fund SIF #2 to “keep #2 going”, and that both were still paying distributions.

The full context of the note is unclear, but Ms. Nelligan repeats her earlier

assertion that Aird & Berlis was not asked if it had any concerns, and

Aird & Berlis did not raise any concerns.

[279] We conclude our review of the advice sought and received by finding that to the

extent Ms. Nelligan’s testimony differs from Mr. Kadonoff’s or that of either of

the other individual respondents, we prefer hers. She was candid about her

ability to recall events, her testimony was internally consistent about the scope

of questions asked and advice given, her testimony was consistent with the

documentary record, and her explanations were reasonable. Her distinction

between the questions on which Aird & Berlis gave advice and questions that

were not asked was consistent with the documentary record and with the

practice that would be expected from any professional giving advice.

[280] Any attempts by the respondents to undermine or embellish her testimony are,

in our view, the product of after-the-fact mischaracterizations of documents in

80

Exhibit 38, Kadonoff Affidavit at para 129

Hearing Transcript, Solar Income Fund (Re), April 6, 2021 at 52 lines 27-28

Hearing Transcript, Solar Income Fund (Re), April 6, 2021 at 52 lines 5-7

81

82

43

the record, and wishful (at best) recollections of conversations that occurred

more than five years before the respondents testified about them in this hearing.

(d)

Involvement of the individual respondents in receiving

the legal advice

[281] SIF Inc. used the law firm of Aird & Berlis for much of its legal work.

Mr. Grossman recounted interviewing two law firms to do SIF Inc.’s legal work

and choosing Aird & Berlis.

[282] The individual respondents were, to varying extents, involved in some way in

communication with Aird & Berlis. While Mr. Grossman and Mr. Kadonoff had

more frequent communication with Aird & Berlis than Mr. Mazzacato did, all three

were included on most or all of the material written communications.

[283] The most pivotal communication, according to the respondents, serves as an

example. When Mr. Kadonoff received the July 3, 2014, response from

Aird & Berlis noting that Ms. Miatello had “looked at both declarations of trust”

and had concluded that the “operating trust can lend funds for financing solar

deals to the LPs or unrelated entities”, Mr. Kadonoff forwarded the email minutes

later to Mr. Grossman and Mr. Mazzacato.⁸³

[284] Mr. Mazzacato testified that he did not believe he saw the email at the time, that

he was focused at the time on origination and technical matters, and that he

relied on others to tell him that SIF Inc. had received the necessary legal advice.

He submits that because Staff did not question him about his understanding of

the legal advice or the reasonableness of his belief about that advice, Staff is

precluded from arguing to the contrary.

[285] We disagree. As Staff correctly submits, the burden is on Mr. Mazzacato to

establish reasonable reliance on legal advice. Mr. Mazzacato failed to do so. Staff

is entitled to rely, as it has, on all of the relevant evidence regarding the steps

Mr. Mazzacato took and did not take with respect to the legal advice. Further, it

was abundantly clear at least from the beginning of the hearing, if not earlier in

the proceeding, that Staff sought to challenge the reasonableness of

the respondents’ reliance on legal advice. The principle protected by Browne v

Dunn, i.e., affording a respondent a fair opportunity to address the case against

them, suffered no damage whatsoever.

[286] We conclude from the fact that the individual respondents are shown on the

material communications, together with the ongoing discussions among the

small management committee, that there is no reason to differentiate among the

individual respondents with respect to the benefit any of them might derive from

Aird & Berlis’s advice.

(e)

Conclusion about legal advice

[287] None of the respondents’ assertions about advice received approaches the level

necessary to establish the defence of reasonable reliance on legal advice. Even if

Mr. Kadonoff’s recollection of the discussion set out beginning at paragraph

[285] above is correct (a determination we need not make and decline to make),

silence from one’s lawyer is insufficient to establish reasonable reliance on a

83

Exhibit 32, Revised Exhibit A to the Dusseldorp Affidavit, Emails between Allan Grossman, Ken

Kadonoff, Jennifer Jackson, Charles Mazzacato and Anne Markle Re: MFT as a lender

44

question as central and as specific as this, i.e., does the offering memorandum

permit loans from SIF #1 to SIF #2 for these two purposes?

[288] In concluding that silence is insufficient, we need not resort to the American

jurisprudence that Staff submitted as part of its reply submissions. The test set

out in Phillips and in Mega-C (see paragraph [239] above) necessarily presumes

that the client received advice. This is not the defence of reliance on passive

acquiescence.

[289] The respondents refer to a number of communications between SIF Inc. and

Aird & Berlis where some sort of concerns were raised, and some answer was

given. In none of these communications was there sufficient precision in either

the questions (which were generally not focused on one particular concern) or

more importantly the answers, for us to conclude that the respondents received

the legal advice they now submit they did receive.

[290] As the respondents have correctly submitted that we must do, we have

considered the nature of the communications between SIF Inc. and Aird & Berlis

in the context of the overall solicitor-client relationship. We have used the many

communications in evidence before us as a standard against which to measure

the advice that the respondents say SIF Inc. received on the question of whether

loans to pay distributions and dealer fees were permitted. We agree with the

respondents’ submission that Aird & Berlis’s silence on the point is “significant”.

However, we reach the opposite conclusion from this than the respondents

suggest when they say that the silence “was something that the Respondents

could reasonably rely upon”.

[291] The evidence demonstrates that all respondents were included on

communications on which they now rely. It was open to each one of them,

whether legally trained or not, at least to read carefully the advice on the

important question, and to form an independent view and to ask questions if

necessary. None of them did.

[292] Before we leave our discussion of the defence of reliance on legal advice, we

wish to address Staff’s request that we draw an adverse inference against

the respondents, due to their decision not to call Ms. Miatello, author of the two

emails sent in July and November, 2014. We decline to draw such an inference in

this case. The emails speak for themselves, and having Ms. Miatello explain what

she intended by their content would not assist us in determining their value to

the respondents.

[293] We do not accept Staff’s reply submission that the respondents’ decision not to

call Ms. Miatello precludes Staff from testing the respondents’ understanding of

her advice and whether it was reasonable in the circumstances. We have found

no advice from Ms. Miatello that could operate as a defence to the two fraud

allegations in this case, so there is no need to consider the respondents’

understanding of any other advice she gave.

[294] In conclusion, there is no clear evidence whatsoever that Aird & Berlis actually

gave any advice regarding the question at issue, i.e., whether the offering

memorandum permitted SIF #1 to use its funds to lend to SIF #2 for the

purpose of paying dealer fees and SIF #2 investor distributions. Therefore, none

of the four respondents has available the defence of reliance upon legal advice.

45

Did each respondent have subjective knowledge that the

fraudulent act could have as a consequence the deprivation

of another?

[295] The final element Staff must prove as part of its fraud allegations is that each

respondent subjectively knew that the impugned act could have as a

consequence the deprivation of another.

[296] As we have discussed above, the deprivation at issue in this case arises because

the investors’ funds were subjected to risks that the investors had not bargained

for and that were not disclosed to them.

[297] We have found that all individual respondents were aware or reasonably ought to

have been aware that the purpose of the impugned transactions was to pay

SIF #2 investor distributions and dealer fees. It follows inexorably from the

unauthorized diversion of funds that those funds are exposed to different risks,

and therefore that deprivation is a consequence. Staff having proved the first

part of the mental element need not prove anything further, given the

circumstances of this case where the deprivation is an automatic result of the

fraudulent act. It is sufficient to infer, as we do, subjective awareness from the

act itself.⁸⁴

Conclusion regarding fraud

[298] For the reasons we have set out above, SIF Inc. effected an unauthorized and

wrongful transfer of funds from SIF #1 to SIF #2 for improper purposes, and

thereby deprived SIF #1 investors. The actus reus has been established.

[299] SIF Inc. is deemed to have had subjective knowledge of the fraudulent act, since

all three of its directing minds knew or ought reasonably to have known of the

fraudulent act.

[300] We find that by causing SIF #1 to make loans to SIF #2 that were improper to

the extent of the investor distributions and dealer fees (i.e., $234,864.04; see

paragraph [103] above for the calculation of that amount), SIF Inc. contravened

s. 126.1(1)(b) of the Act.

[301] As for the individual respondents, each attempted to limit his own responsibility,

including by professing near-total reliance on others. We found that to be

remarkable, particularly for Mr. Mazzacato and Mr. Kadonoff, each of whom was

President of SIF Inc. for part of the period during which the impugned transfers

were made.

[302] The individual respondents’ submissions are inconsistent with the obligations

that come with being one of three or four members of senior management of an

entity that raises funds from the public. This is particularly so, given the

overwhelming preponderance of evidence, which we accept, that the

management team met regularly and made decisions by consensus. We

recognize that each member of a corporation’s management will inevitably adopt

a unique focus, often based in large part on previous experience and expertise.

This reality does not, however, relieve a corporation’s officers from their legal

obligations. These three officers, under these circumstances, suggest an

⁸⁴Théroux at para 20

46

approach to corporate governance that is inappropriate for a public issuer and

that undermines investor protection and the integrity of the capital markets.

[303] Mr. Grossman conceded that he knew the purpose of the transfers. If

Mr. Mazzacato and Mr. Kadonoff did not know, they were reckless about that.

[304] As for any legal advice that was obtained, we conclude that it is more likely than

not that the respondents were not focused at that time on whether the offering

memorandum permitted the loans. Their concerns about the propriety of the

loans arose from other considerations, including tax law, trust law, and personal

liability. Had the respondents asked the right question of their lawyers, as they

ought to have done, they would likely have received a direct answer. They could

then have acted with the benefit of that advice.

[305] Instead, the respondents did not afford Aird & Berlis an opportunity to answer

the direct question that was not asked. The diversion of funds they caused was

an unauthorized one, and they knew or ought to have known that the funds were

being diverted for those purposes.

[306] We therefore find that since Staff has established the necessary elements as

against all three individual respondents, each of them contravened

s. 126.1(1)(b) of the Act. We must now calculate the amount of the fraud for

which each individual respondent is responsible.

[307] Because Mr. Grossman and Mr. Mazzacato were directing minds of SIF Inc.

throughout the ten-month period of July 1, 2015, to May 5, 2016 that Staff used

for its calculations, they are responsible for the full amount of $234,864.04,

being the total of $223,224.04 for distributions and $11,640.00 for dealer fees.

We repeat our note above that we accept Staff’s conservative analysis of the use

of funds available in the SIF #2 fund account, and specifically Staff’s application

of a $37,935.34 reduction to reflect the use of an opening balance in that

account. That reduction is reflected in the total of $234,864.04.

[308] Mr. Kadonoff’s responsibility spans only a portion of the ten-month period that is

the subject of Staff’s analysis. For Mr. Kadonoff, the relevant sub-period runs

from July 1, 2015 (the beginning of Staff’s ten-month period) to September 14,

2015 (the date on which he authorized payment of SIF #2 distributions using

funds loaned from SIF #1). In that shorter period, three months’ worth of

distributions were paid -- $25,680.67 in the first half of July, and the same

amount in each of the first half of August and the first half of September.

[309] As we mentioned above in paragraph [102], Staff’s adjustment was applied on a

chronological basis as impugned payments were made, and was fully consumed

by those payments by July 22, 2015. We give Mr. Kadonoff the benefit of that

conservative approach and exclude the June 2015 distributions paid in the first

half of July. That leaves a total of $51,721.34 that Mr. Kadonoff shares

responsibility for, being the two $25,860.67 payments in August and September.

In the relevant period, no dealer fees were paid until September 22, 2015, by

which time Mr. Kadonoff had resigned and was no longer signing cheques.

C.

Are any of the individual respondents to be held liable under

s. 129.2 of the Act?

[310] Section 129.2 of the Act attaches liability to an individual for non-compliance by

a corporation, in certain circumstances. For s. 129.2 to apply, the individual

47

must have been a director or officer of the company that failed to comply with

Ontario securities law. The individual director or officer must also have

“authorized, permitted or acquiesced in” the company’s non-compliance.

[311] Having found that each of the individual respondents directly contravened

s. 126.1(1)(b) of the Act to the full extent of SIF Inc.’s non-compliance during

the period relevant to each respondent, it is unnecessary for us to consider

separately any potential liability under s. 129.2. We decline to do so.

D.

Conduct contrary to the public interest

[312] The Statement of Allegations includes an allegation that the respondents

engaged in conduct “contrary to the public interest”. The Statement of

Allegations contains no particulars of that allegation.

[313] As the Commission found on the earlier motion in this proceeding, referred to

above, a submission that the Commission ought to make an order under s. 127

of the Act absent a contravention of Ontario securities law must be supported by

sufficient particulars and submissions.⁸⁵Staff offered no particulars or

submissions on this point, other than a bald suggestion that the respondents’

conduct was contrary to the public interest.

[314] Accordingly, Staff’s allegation is dismissed.

V.

CONCLUSION

[315] We dismiss Staff’s allegations that the respondents contravened s. 44(2) of the

Act, because we conclude that statements made by the respondents to investors

(including in the offering memorandum) were not ones that a reasonable

investor would consider relevant in deciding whether to enter into or maintain a

trading relationship with SIF Inc.

[316] With respect to the allegations that the respondents contravened s. 126.1(1)(b)

by causing SIF #1 to divert funds for purposes unauthorized by the offering

memorandum, we find each of them to have contravened s. 126.1(1)(b), to the

following extents:

a.

b.

$234,864.04 for SIF Inc., Mr. Grossman and Mr. Mazzacato; and

$51,721.34 for Mr. Kadonoff.

[317] The parties shall contact the Registrar by 4:30pm on April 14, 2022, to arrange

an attendance in respect of a hearing regarding sanctions and costs. The

attendance is to take place on a date that is mutually convenient, that is fixed by

the Secretary and that is no later than April 29, 2022.

[318] If the parties are unable to present a mutually convenient date to the Registrar,

then each party may submit to the Registrar, for consideration by a panel of the

85

Solar Income Fund Inc. (Re) Motion Decision at paras 70-76

48

Commission, one-page written submissions regarding a date for the attendance.

Any such submissions shall be submitted by 4:30pm on April 14, 2022.

Dated at Toronto this 28th day of March, 2022.

“Timothy Moseley”

Timothy Moseley

“Frances Kordyback”

“Craig Hayman”

Frances Kordyback

Craig Hayman

49