In Sharp v. Autorité des marchés financiers, 2023 SCC 29, the Supreme Court of Canada recognized the transnational nature of modern securities regulation in holding there was a “real and substantial connection” between alleged perpetrators of a “pump-and-dump” scheme and Québec. This connection allowed the province’s Financial Markets Administrative Tribunal (FMAT) to assume jurisdiction over the defendants.

Background Facts and Judicial Review in Québec

The four appellants/defendants were BC residents who are alleged by Québec’s Autorité des marchés financiers (AMF) to have engaged in a transnational pump-and-dump securities manipulation scheme in breach of Québec’s Securities Act. They were alleged to have acted in concert to acquire the shares of a shell company, give it a legitimate face, promote its business, and sell their shares for a profit.

The focus of the appeal was the FMAT’s decision that it had jurisdiction over these out-of-province defendants, citing the SCC’s decision in Unifund Assurance Co. v. Insurance Corp. of British Columbia, 2003 SCC 40. Unifund held that a provincial regulatory scheme constitutionally applies to an out-of-province defendant when there is a “sufficient connection” or a “real and substantial connection” between the province and the defendant.

Quebec’s Superior Court agreed with FMAT’s decision to assume jurisdiction, dismissing the defendants’ application for judicial review, and the Court of Appeal dismissed the defendants’ appeal.

Majority of Supreme Court dismisses appeal, applying Unifund test to Québec’s securities regulatory scheme

In reasons penned by Chief Justice Wagner and Justice Jamal, a  majority[1] of the Supreme Court of Canada held that theUnifund test does indeed apply, and in the circumstances, there was a sufficient or real and substantial connection to Québec, meaning that the FMAT properly assumed jurisdiction over these defendants.  

The majority held that the private international law rules of the Civil Code of Quebec did not apply here; instead, the FMAT has jurisdiction thanks to the “special jurisdictional rules” of the Québec securities scheme contained in two statutes: the Securities Act and the AMF’s empowering statute, the
Act respecting the Autorité des marchés financiers.  Even though neither statute expressly provides for the FMAT to assert jurisdiction over out-of-province parties, the Québec securities scheme must be interpreted to determine its territorial reach.

Interpreted in light of the Unifund test, the Québec securities scheme provides the FMAT with jurisdiction over out‑of‑province parties with a “sufficient connection” or “real and substantial connection” between Québec and the facts alleged against the defendants. A “sufficient connection” analysis must recognize the transnational nature of modern securities regulation and the public interest in addressing international market manipulation. Securities regulation raises unique considerations, such as the Internet having increased the ability of traders to extend across borders, that highlight the need for transnational enforcement.

Applying the Unifund principles to the allegations in this case, the majority saw a clear connection between Québec and the out‑of‑province defendants, warranting the province’s regulatory oversight:

  • The defendants allegedly used Québec as the face of their pump‑and‑dump scheme by promoting the shell company’s mining activities in the province
  • They participated in marketing or financing efforts and partly targeted Québec residents
  • The shell company was a reporting issuer in Québec, and its director was a Québec resident

In the majority’s view, applying the Québec regulatory regime is consistent with the governing principles of order and fairness. It is fair to the defendants, whose entrance into the province’s market was not accidental or irrelevant, but rather was chosen as an integral part of their securities manipulation operation. Moreover, applying the Québec regulatory scheme did not offend the principle of order or the related concept of interprovincial comity. Because contemporary securities manipulation and fraud are often transnational and extend across provincial and national borders, courts and tribunals must take a flexible and purposive approach when applying the principles of order and fairness in the securities context. Regulators from multiple jurisdictions may exercise jurisdiction over the same scheme.

Takeaways

This decision reveals a Court that is alive to the transnational dimensions of the contemporary securities market and how bad actors are not hemmed in by provincial or national borders. As such, there is a need for securities regulatory bodies to address the cross-border nature of market manipulation in order to protect the public interest. The assumption of jurisdiction will be warranted where the out-of-province actor has a “real and substantial” or sufficient connection to the province in which the regulatory body operates.

[1] Justice Côté dissented. She would have allowed the appeal. She held that the Unifund test didn’t apply, instead preferring the private international law rules of the Civil Code of Quebec. According to her consideration of these rules, the FMAT did not have adjudicative jurisdiction over the defendants.