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.”2 Messrs. 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.”4 He 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. Grossmans 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.”6 He 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 directionon SIF Inc.’s  
financial and legal affairs.7 We 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,9 a 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.10 Accordingly, 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,11 the 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,13 other 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”.15 Any 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.”16 It 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.18 This 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”.19 For 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,20 a 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.23 Even 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 funds24 because 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.”25 The 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;27 and  
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”.31 These 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.33 Again, 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 #1.34 Fourteen 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”38 in 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”.40 It 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”.43 It 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”.45 This 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,47 and  
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.48 Accordingly, 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.50 Staff 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.53 If 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 previously55 adopted 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.58 Like 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”.60 They 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.61 In 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.68 An 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.71 The 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.75 She 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.78 This  
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.80 However, 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”;82 and  
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