When is a Foreign Issuer a “Responsible Issuer” for the Purpose of Part XXIII.1 of the Ontario Securities Act?

In Yip v. HSBC Holdings plc et al., 2017 ONSC 5332, Justice Perell was called upon to determine the jurisdictional reach of the Ontario courts to protect Canadian and foreign investors when the defendant is a foreign corporation whose shares do not trade on a Canadian stock exchange.

Yip, an Ontario resident who purchased shares of HSBC Holdings (Holdings) on the Hong Kong Stock Exchange, asserted both a statutory secondary market and a common law misrepresentation claim against Holdings and one of its former employees, alleging that he and other purchasers on foreign exchanges were misled by certain representations made by Holdings. Yip maintained that Holdings, a U.K. public issuer whose shares trade on exchanges including in the U.K., the U.S. and Hong Kong, but not in Canada, was a “responsible issuer”.

Based upon a substantial evidentiary record, Holdings moved to dismiss Yip’s action on the grounds that the Ontario court lacked jurisdiction simpliciter, or in the alternative, to stay it on the basis that Ontario was forum non conveniens.  Yip brought a cross-motion for a declaration that Holdings was a “responsible issuer” under s. 138.8 of the Ontario Securities Act (the Act). Justice Perell determined both motions in favour of Holdings, finding as follows.

Jurisdiction to Decide Jurisdiction

As a preliminary matter, Justice Perell agreed with Yip that “the court has jurisdiction to determine whether it has jurisdiction”. The power to make a declaration at the instance of any party with an interest in the subject-matter of the declaration exists whether or not there is a cause of action .

There is No Place of Trading Requirement in s. 138.3 of the Act

Justice Perell noted that unlike the U.S. statutory cause of action for misrepresentation in continuous disclosure, which applies only to the purchase or sale of a security on an American stock exchange or a securities transaction occurring within the U.S. (see Morrison v National Australia Bank, 130 S. Ct. 2869), and also unlike s. 130 of the Act which has a “place of trading” qualification, under s. 138.3 there is no requirement for a trade within the territorial jurisdiction  of the court.

His Honour identified three circumstances in which an Ontario court will have jurisdiction simpliciter over a foreign corporate defendant:

  1. where the foreign corporation’s securities trade in Ontario’s secondary market;
  2. where the foreign corporation’s securities trade both in Ontario’s secondary market and also in foreign secondary markets; and
  3. in some cases, where the foreign corporation’s securities do not trade in Ontario’s secondary market, but the corporation has a “real and substantial connection” to Ontario, as determined by the application of the test in Club Resorts Ltd. v. Van Breda, 2012 SCC 17.

This case fell within the third category. However, Holdings was found not to have a real and substantial connection to Ontario for the following reasons:

  • Holdings did not carry on business in Ontario. It had no physical presence in Ontario accompanied by any sustained degree of business activity within the province.  Although Holdings’ subsidiary, HSBC Canada, did carry on business in Ontario, those activities did not constitute Holdings carrying on business within the province and there was no basis for piercing the corporate veil.
  • Holdings did not commit a common law or statutory tort in Ontario. Its disclosures were prepared in the U.K. for the purpose of complying with the disclosure laws of the jurisdictions where its shares traded.  It had no reason to believe that it was subject to the securities laws of Ontario governing disclosure. In that regard, Justice Perell agreed that caution should be exercised against “creating what would amount to forms of universal jurisdiction in respect of tort claims arising out of categories of business or commercial activity”. If Holdings was obliged to comply with Ontario’s disclosure laws, it would also be obliged to comply with the laws of other countries that regulate their own domestic stock exchanges regardless of whether the shares traded on those exchanges.

Comity Plays a Key Role in the Forum Non Conveniens Analysis When the Matter Involves an International Matrix of Securities Law Regimes

Justice Perell also concluded that even if he was wrong in finding that there was no jurisdiction simpliciter, the U.K., rather than Ontario, was the natural forum for resolving the dispute. Ontario was forum non conveniens.

In reaching that conclusion, His Honour repeated the findings of the Ontario Court of Appeal in Kaynes v. BP, PLC, 2014 ONCA 580 that “the global regulation of the secondary market in securities is based on the principle that securities litigation should take place in the forum where the securities transaction took place”.  This is consistent with the approach taken by the United States Supreme Court in Morrison.

Accordingly, it was not unfair to “expect Mr. Yip and all of the putative Class Members who used foreign exchanges to look to the foreign courts to litigate their claims where the defendant is a foreign corporation whose shares do not trade on a Canadian exchange”.


The author would like to thank Joseph Palmieri, Student-At-Law, for his contribution to this article.

FCAC and IIROC to join forces

On September 12, 2017, the Financial Consumer Agency of Canada (FCAC) and the Investment Industry Regulatory Organization of Canada (IIROC), two otherwise independent regulators, announced that they signed a memorandum of understanding (MOU) to coordinate regulatory oversight and strengthen consumer/investor protection. We have made inquiries and have learned that the MOU is not publicly available; we have therefore not been able to review its provisions.

Both regulators protect the interests of financial consumers, however, their mandates and jurisdictions are different. IIROC is a national self-regulatory organization that oversees provincially regulated investment dealers. The FCAC is the federal financial institutions consumer protection regulator and is mandated to supervise federally regulated financial institutions’ compliance with consumer protection measures.

According to the press releases regarding the MOU, it will enable the FCAC and IIROC to exchange pertinent information and improve regulatory oversight capacity. This collaboration will increase detection of wrongdoings and subsequent regulatory responses. Lucie Tedesco, Commissioner at FCAC expects that the MOU will keep “[FCAC] in pace with emerging trends and issues” and reinforce consumer protection.

This MOU may have been entered into in connection with an ongoing investigation of bank practices that was commenced in the Spring of this year following reports related to allegations that certain employees of banks were pressured to upsell to consumers and meet unrealistic sales targets.

Under its governing legislation, the FCAC is permitted to share information with other agencies that supervise financial institutions, if the FCAC is satisfied that the information will be treated as confidential by the agency.   IIROC’s by-laws provide for exchange of information agreements, but do not include a requirement that IIROC be satisfied that the information will be treated as confidential.

The Horror Show Continues: Application of the Limitation Period in s. 138.14 of the Ontario Securities Act in Kaynes v BP, PLC

In Kaynes v. BP, P.L.C. [2017] ONSC 5172, Justice Perell characterizes his decision about the operation of the limitation period set out in s. 138.14 of Part XXIII.1 of the Ontario Securities Act (the Act) as “the latest sequel or prequel in what has turned out to be the case law equivalent of a horror-movie franchise”.


The decision arises from a Rule 21 motion brought by BP for a ruling that the putative class members’ statutory misrepresentation claims were statute-barred under s. 138.14.  The motion was brought prior to argument of the motion for leave under s. 138.8.


On November 15, 2012, the plaintiff, Kaynes, commenced a proposed class action on behalf of  Canadian shareholders of BP.

Pursuant to s. 138.3 of the Act, Kaynes alleged that BP was liable for 14 secondary market misrepresentations made during the period from May 8, 2007 to April 15, 2010.  Of the 14 alleged misrepresentations, 3 were made in early 2010.  There was no suggestion that those three claims were statute-barred at the time of the issuance of the statement of claim.  However, the remaining 11 misrepresentations were all made more than three years prior to the issuance of the claim.

Fortuitously, the plaintiff served his motion for leave on November 16, 2012, one day after the issuance of the claim. Tolling agreements entered into while forum motions were being pursued suspended the operation of the limitation period between December 22, 2012 and September 22, 2015.  However, by September 2015, when those agreements terminated, it was arguable that the limitation period for the three alleged misrepresentations made in 2010 had expired.  A subsequent Tolling Agreement entered into in September 2016 provided that it did not revive any claim barred by any limitation period running between September 22, 2015 and September 29, 2016.

The Alleged Misrepresentations Made More than 3 Years Prior to the Issuance of the Statement of Claim Were Statute-Barred

BP successfully argued that the 11 alleged misrepresentations made prior to 2010 were out of time because they were made more than 3 years prior to the issuance of the statement of claim.

Interpretation of s. 138.14: An Event-Triggered Limitation Period

In response, Kaynes submitted that as a public correction of a misrepresentation is a constituent element of the cause of action, the limitation period did not begin to run until BP publicly corrected its statements on April 21, 2010. On that basis, as the claim was commenced within 3 years of the correction, the limitation period had not expired.

The Court disagreed, finding that Kaynes’ argument ignored the fact that s. 138.14 is an “event-triggered” limitation period, not a “claim-based” limitation period.  As such, the court could not impose a discoverability requirement.  To interpret s. 138.14 in the manner suggested by BP would obliterate the legislative policy for introducing that provision and would be contrary to how that provision has been discussed, interpreted and applied by the courts.

Purpose of s. 138.3(6)

Kaynes further asserted that the limitation period had not expired because all 14 misrepresentations should be treated as a single, continuous misrepresentation pursuant to s. 138.3(6) of the Act. On that basis, the limitation period would not begin to run until the final misrepresentation.

Justice Perell also rejected that argument, stating that that interpretation of s. 138.3(6) would effectively obliterate the operation of s. 138.14 and “the clear policy of the Legislature that no action shall be commenced under s. 138.3 after three years from the first release of the misrepresentation”.  Moreover, the legislative purpose in enacting s. 138.3(6) was to protect defendants from multiple liability for disclosure violations that were so interconnected to be considered a single disclosure violation, rather than to safeguard plaintiffs’ claims from the running of the limitation period.  Accordingly, it was not plain and obvious that s. 138.3(6) “brought back from the dead” the 11 statute-barred misrepresentation claims made more than 3 years prior to the issuance of the statement of claim.

The Representations Made in 2010 Were Saved by the Availability of the Nunc Pro Tunc Doctrine

BP unsuccessfully argued that the Tolling Agreement foreclosed the plaintiff from relying upon the doctrine of nunc pro tunc to save the 3 alleged misrepresentation claims arising from representations made in 2010 that were arguably statute-barred by virtue of the lapse of the Tolling Agreement in 2015 and the expiry of the limitation period.

Justice Perell disagreed with the suggestion that the Tolling Agreement operated to foreclose the plaintiff from relying upon the nunc pro tunc doctrine articulated in Green v. C.I.B.C., 2015 SCC 60, the purpose of which is “to backdate the leave order to a time when viable claims were not statute-barred”.  In Green, the Supreme Court of Canada determined that in certain circumstances, it was open to a court to grant leave to a plaintiff nunc pro tunc to assert Part XXIII.1 statutory misrepresentation claims that would otherwise be statute- barred, provided that the notice of motion for leave had been delivered before the limitation period had tolled.

As the plaintiff had not expressly agreed in the Tolling Agreement that he could not rely upon the nunc pro tunc doctrine, and had commenced the motion for leave before the expiry of the limitation period, he was not foreclosed from relying upon that doctrine if he succeeded in getting leave to bring the statutory claim.  As such, those misrepresentation claims were not necessarily statute-barred.


The 11 alleged misrepresentation claims arising from statements made prior to 2010 were “already impotent” by the time that Kaynes commenced his proposed class action, and “could not be made fertile” by operation of s. 138.3(6).

However the 3 alleged misrepresentation claims arising from statements made in 2010 were “immunized” by the fact that Kaynes had served his notice of motion for leave in a timely fashion, thereby preserving his ability to seek to rely upon the nunc pro tunc doctrine.


In any circumstance where the doctrine of nunc pro tunc may be available, defendants would be well advised to include specific language in tolling agreements excluding its application.


The author would like to thank Joseph Palmieri, Student-At-Law, for his contribution to this article.



Third party litigation funding of class actions in Ontario: “A work in progress”

In the most recent Ontario decision on third-party litigation financing, Justice Perell provides further guidance concerning the circumstances in which such funding arrangements will receive court approval.

In Houle v. St. Jude Medical Inc., 2017 ONSC 5129, Bentham IMF Capital Inc. (Bentham), an Australian-based litigation financing firm, entered into a financing agreement with Mr. and Mrs. Houle, plaintiffs in a proposed class action alleging negligent manufacture and distribution of implantable cardiac defibrillators and failure to warn of rapid, premature battery depletion.

Pursuant to the agreement, Bentham committed to pay, on a non-recourse basis:

  1. the disbursements incurred by class counsel up to a prescribed amount, after which amount class counsel would fund the disbursements;
  2. any costs assessed against the Houles;
  3. any security for costs; and
  4. 50% of the reasonable docketed time of class counsel up to a prescribed maximum amount.

The architecture of Bentham’s contingency fee was straightforward: the later the stage at which the action is resolved, the larger the contingency fees that Bentham would receive. Bentham’s payout ranged from 20% to 25% of the proceeds depending upon when the matter was resolved. A retainer agreement with class counsel mirrored those terms of the litigation funding agreement, also providing for a higher fee recovery for class counsel the later the case is resolved.  Combined, Bentham and class counsel’s contingency fees ranged between 30% to 38% of the litigation proceeds.

Justice Perell reviewed existing case law concerning the circumstances in which third party funding agreements have been approved in the class action context.  According to Justice Perell, in general, such agreements must not be champertous or illegal, and must be a fair and reasonable arrangement that facilitates access to justice while protecting the interests of the defendants.  In the class action context, such arrangements may be justified as a matter of expediency.

The principles that must be satisfied in order for a court to approve a third-party funding agreement were enumerated as follows:

  1. The third-party funding agreement must have procedural, technical, and evidentiary requirements that enable the court to scrutinize the agreement. This includes evidence of the plaintiff’s receipt of independent legal advice about the agreement, disclosure to the court of the retainer agreement with class counsel and the third party funding agreement, and the willingness and ability of the third-party funder to post security for costs;
  2. The third-party funding must be necessary;
  3. The third-party funder must make a meaningful contribution to access to justice or behaviour modification;
  4. The litigation funder must not be overcompensated given the particular circumstances of the case for assuming the litigation risks, in whole or in part. Justice Perell characterized this as the “penultimate-predominant factor”, because over-compensation moves the funder into the role of a champertor.
  5. The funding agreement must not interfere with the lawyer-client relationship, including retention by the plaintiffs of autonomy, control and carriage of the litigation; and
  6. The funding agreement cannot be not illegal on some basis independent of champerty and maintenance.

Upon review, the Bentham funding agreement failed the fourth and fifth conditions. It ran the risk of overcompensating Bentham and interfered with the lawyer-client relationship.

In determining that Bentham ran the risk of being overcompensated, Justice Perell took issue with the fact that Bentham’s recovery was uncapped, leaving open the possibility that Bentham could be rewarded more than the Class Proceedings Fund levy and that its ultimate recovery may be unfair and disproportionate because it could not be adjusted by the scrutiny of the court.

In addition, various provisions of the funding agreement were found to unduly interfere with the lawyer-client relationship and the Houles’ autonomy as the genuine plaintiffs, leaving the impression “that the Houles and Class Counsel have promised to prosecute the proposed class action as much, if not more, on behalf of Bentham than on behalf of the class members”.  His Honour noted, however, that certain of the clauses that were objectionable in this case would not necessarily be offensive in other class actions, such as where the representative plaintiff had been recruited and had little “skin in the game”, because his damages were trivial and the behaviour modification goal might be better achieved by accepting the involvement of a non-party with an entrepreneurial motivation to pursue the wrong-doer. This was not such a case.

While the agreement was not approved by the court, Justice Perell indicated that he would be prepared to approve it if the objectionable features that he identified were addressed.

The author would like to thank Saam Pousht-Mashhad, student-at-law, for his contribution to this article.



Reasonable diligence and good faith, no excuse for CFOs under IIROC regulatory regime

In Sutton (Re), the Investment Industry Regulatory Organization of Canada’s (IIROC) found that individuals with regulatory functions in securities industry may not enjoy immunity for errors where they acted in good faith and with reasonable diligence.

Sutton was a specialist in the field of securities industry regulation. From March 2003 until July 2012, he acted as the CFO for First Leaside Securities Inc., which was a part of the First Leaside Group of Companies. As part of his role, Sutton was required to monitor First Leaside Securities Inc.’s policies and procedures to ensure that it complied with the financial rules about the pricing of its unlisted securities.

For financing, the First Leaside Group issued fund units at $1.00. The issue before IIROC was whether Sutton, as CFO of First Leaside Securities, breached IIROC Dealer Member Rule 38.6(c) by failing to ensure that these fund units were properly priced on client account statements.

Sutton’s position was that there was an active market for the fund units and that the securities’ $1.00 price was the result of that active market. He opined that he did not need to take any further steps to determine a price. The Hearing Panel was unpersuaded :

61 […] Infrequent transactions at a fixed price, offered by the issuer of the Fund Units, for the ultimate purpose of maintaining the price and utilizing funds which were obtained from other investors for such purchases has none of the hallmarks of an active market.

In responding to the argument that individuals with regulatory functions in the securities industry should enjoy a degree of immunity from errors, the Hearing Panel acknowledged SEC statements and sentiments that compliance officers should not have to fear enforcement actions if they perform their responsibilities diligently, in good faith, and in compliance with the law.

Nevertheless, the Hearing Panel found that Sutton breached the IIROC Dealer Member Rule 38.6(c) because the fund units were not properly priced. The Hearing Panel opined that if immunity were afforded, it would be contrary to the purpose of having a CFO supervise pricing. As such, the absence of intentional wrongdoing or mens rea, or the fact that Sutton may have acted with reasonable diligence were not considered a defence by the Hearing Panel.

The Hearing Panel ruled that, if required, a Sanction Hearing will take place at a date and place to be determined.


The author would like to thank Saam Pousht-Mashhad, Articling Student, for his contribution to this article.

You Get it Right and it’s Still a Misrepresentation: the Paradox in Pretium

A gold mining company chooses not to disclose preliminary mineral sampling results that it viewed as unreliable. Further testing eventually proves the preliminary sample to be inaccurate. In Wong v Pretium Resources, 2017 ONSC 3361 the Ontario Superior Court of Justice granted leave for a plaintiff to proceed with a securities class action under s. 138.3 of the Ontario Securities Act (the OSA) alleging secondary market misrepresentation for failing to disclose the preliminary results. What gives?

Is there gold in the hills?

Pretium Resources (Pretium) is a mineral exploration company listed on the TSX and NYSE that operated a gold mine in northern B.C. The mine’s feasibility was predicated on a mineral resource estimate. Pretium agreed to extract a large bulk sample to validate the estimate to be carried out by a well-known mining consulting firm. First, however, Pretium decided to conduct a much smaller, and less reliable, “tower” sample as the bulk sample would be delayed.

The tower sample failed to substantiate the resource estimate and the consultant urged Pretium to disclose the results to the market. Pretium disagreed that the results of the tower sample were material. The consulting firm would later resign over the disagreement. Pretium disclosed the consultant’s resignation along with the reasons for the resignation to the market, and its shares dropped by over 50%.

As it turns out, Pretium was correct all along. The bulk sample confirmed the validity of the mineral resource estimate. Nevertheless, the company was hit with a class action for an alleged misrepresentation by not disclosing the tower sample results and the consultant’s findings and concerns.

Subjectivity and materiality

In order to obtain leave, the plaintiff needed to prove that its case was not so weak and not so successfully rebutted that there was no reasonable possibility of success. Pretium argued that there was no misrepresentation and relied on the reasonable investigation defence under s. 138.4(6) of the OSA.

The Court emphasized that the materiality standard that calls for the disclosure of information is focused on information that a reasonable investor objectively would consider important in making an investment decision, not information that the issuer subjectively believed or did not believe to be true. The Court reasoned that the findings of an expert mining consulting firm going to the heart of Pretium’s business model was information that was important to investors in deciding whether to invest and at what price. The Court noted that Pretium had every right to qualify such information with its own opinions regarding the accuracy of the testing and the true mineral content of the mine in their disclosure, but failing to disclose the information in the first place was potentially a misrepresentation.

The Court’s decision may be surprising and suggest that the leave test is a low bar, but there are some important facts which may help explain the result. In particular: Pretium publicly announced the involvement and reputation of the consulting firm, previous disclosure referenced the tower sample as an integral part of the testing procedure, and the consultant genuinely believed in the integrity and reliability of the tower testing method. Once Pretium built up the credibility of the testing process and the consultant’s involvement to gain leverage in the market, it was tricky to argue that the outcome of the testing and the consultant’s advice were immaterial.

Curiously, just a month before the Ontario decision, a parallel securities class action in the U.S. was dismissed. It remains to be seen whether the Ontario Superior Court of Justice’s decision in Pretium will be subject to an appeal.

The author would like to thank Alexandre Kokach, Articling Student, for his assistance in preparing this post.

Second Circuit overturns precedent regarding scope of tipper/tippee insider trading liability

In the recent divided opinion in United States v. Martoma,1 the Second Circuit overturned its 2014 opinion in United States v. Newman2 regarding the test for tipper and tippee liability in insider trading cases. The majority opinion reasoned that last year’s Supreme Court decision in Salman v. United States3 is inconsistent with Newman’s requirement that, in the absence of quid pro quo, there be a meaningfully close relationship between the tipper and tippee to support an inference of a gifting of the material, nonpublic information in order for insider trading liability to attach. The majority opinion upheld the insider trading conviction of Mathew Martoma, the former portfolio manager at SAC Capital Advisors LP, despite the nonexistence of a proven close relationship between Martoma and the source of the confidential information.

The test for analyzing tipper and tippee liability can be complicated. In 1983, the Supreme Court in Dirks v. SEC4 established the test for tipper liability as “whether the insider personally will benefit, directly or indirectly from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach [by the tippee].”5 Dirks then listed factors where one can infer a personal benefit, including “when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.”6

Martoma managed an investment portfolio focused on pharmaceutical and healthcare companies. Doctors who were involved in a clinical trial for two pharmaceutical companies developing an experimental drug improperly provided Martoma with confidential information about the results of the trial. Based on that information, Martoma advised his boss to trade on the securities for those two pharmaceutical companies. Those trades generated US$80 million in gains and more than US$190 million in losses avoided.

After Martoma’s conviction for insider trading, the Second Circuit reversed the insider trading convictions of two traders in Newman because the government failed to prove that the tipper who initially disclosed the material, non-public information received any personal benefit in exchange for doing so. In elaborating on the Dirks test, the Second Circuit held that a tipper does not derive a personal benefit when he gifts material nonpublic information “in the absence of proof of a meaningfully close personal relationship [between the tipper and the tippee] that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”7

Based on the Newman decision, Martoma appealed his conviction arguing that the jury had not been properly instructed and the evidence was insufficient. While Martoma’s appeal was pending, the Supreme Court issued the decision in Salman, which held that “Dirks specifies that when a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”8 The Supreme Court rejected the Newman decision “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, . . . this requirement is inconsistent with Dirks.”9

The Supreme Court did not address Newman’s holding that the “gift” analysis requires the existence of a “meaningfully close personal relationship” between the tipper and tippee. Nevertheless, the Second Circuit reversed its existing precedent, explaining that “following the logic of the Supreme Court’s reasoning in Salman, interpreting Dirks, we think that Newman’s ‘meaningfully close personal relationship’ requirement can no longer be sustained.” In a footnote, however, the majority stated that it did not hold that the relationship between the tipper and tippee cannot be relevant to the jury in assessing whether information was disclosed. Of course, this begs the question of what type of relationship is needed to support a valid inference that the tipper intended to provide a gift to the tippee by supplying material, nonpublic information. The Second Circuit had attempted to bring clarity to this issue in Newman but has now taken a step backward, thereby leaving it to prosecutors to fill the void. In such circumstances, over-prosecution becomes a real and meaningful risk.

In a lengthy dissent, Judge Pooler explained how the majority ignored precedent and “significantly diminishes the limiting power of the personal benefit rule and radically alters insider-trading law for the worse.”10 Those who find themselves caught in the crosshairs of an insider trading investigation will undoubtedly raise many of Judge Pooler’s points until further clarity can be obtained in the appellate courts.

1 US v. Martoma, No. 14- 3599 (2d. Cir. Aug. 23, 2017).
2 773 F.3d 438 (2d Cir. 2014).
3 137 S. Ct. 420 (2016).
4 Dirks v. SEC, 463 US 646 (1983). A person who provides material, nonpublic information to another who trades is a “tipper” and the recipient of that material, nonpublic information who then trades is a “tippee”.
5 Id. at 662.
6 Id. at 664 (emphasis added).
7 United States v. Newman, 733 F.3d at 452.
8 137 S. Ct. at 428.
9 Id.
10 US v. Martoma, No. 14- 3599 (2d. Cir. Aug. 23, 2017).

Canadian Securities Administrators to regulate Cryptocurrency Offerings and Crypto-Investment Funds

2017 has been an extraordinary year for cryptocurrencies.[1] The recent increase in the number of cryptocurrency offerings reflects a dramatic shift in investor-attitudes towards the crypto-economy. However, the increased popularity of initial coin offerings (ICO), initial token offerings (ITO) and cryptocurrency investment funds has triggered a wave of regulatory responses, from the USA to Singapore and to, most recently, Canada.[2]

On August 24, 2017, the Canadian Securities Administrators (CSA) announced that securities law requirements may now apply to cryptocurrency offerings (ICOs and ITOs) involving persons or companies conducting business from within Canada or with Canadian investors.[3]  According to CSA Staff Notice 46-307 – Cryptocurrency Offerings,[4] securities law will apply to cryptocurrency offerings when the cryptocurrencies can be properly categorized as securities.

To determine whether a cryptocurrency is properly classified as a security, the CSA will focus on the substance of a given transaction, considered in its totality, as opposed to its mere form.[5] Typically, cryptocurrencies that are offered through an exchange and traded, or that are subject to fluctuations in value and speculation by investors will have the character of securities. However, the concept of securities has an expanded meaning in the Canadian context.  For example, cryptocurrencies may also constitute securities if they are exchanged in the context of transactions or arrangements involving an investment contract.[6]  An investment contract exists when there is an investment of money in a common enterprise with the expectation to profit significantly from the efforts of others.[7]  In such a case, securities law will likely apply.

In the CSA’s view, every cryptocurrency offering is unique and must be assessed on a case-by case-basis. As an example, the CSA suggests that securities law would not necessarily apply where an individual simply purchases coins or tokens to “play video games on a platform” but would apply if, instead, the value of the coins or tokens “is tied to the future profits or success of a business”.[8]

Aside from dealing with ICOs and ITOs, cryptocurrency investment funds, which allow investors to pool their capital and allocate their individual investments between various cryptocurrencies, will also be subject to various securities laws requirements, especially when dealing with retail investors and cryptocurrency exchanges.[9]

Without a doubt, this is an exciting time for fintech businesses. However, going forward, businesses that plan on offering cryptocurrencies and cryptocurrency investment funds should be attuned to their potential securities market obligations at home and abroad.  In Canada, businesses must consider whether they are subject to securities law, including any prospectus and dealer registration requirements. In addition, businesses should be aware of the possibility that a planned arrangement or transaction might constitute an “investment contract”, and therefore fall within the expanded meaning of a “security”.[10]  The CSA is encouraging businesses contemplating cryptocurrency offerings to contact their local securities regulatory authority to discuss how to comply with securities laws.[11]

The author would like to thank Blanchart Arun, student-at-law, for his contribution to this article.

[1] https://www.smithandcrown.com/icos/; https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html; https://www.cnbc.com/2017/07/18/startups-raise-record-1-point-27-billion-selling-bitcoin-other-cryptocoins.html; https://cointelegraph.com/news/cryptocurrency-market-cap-reaches-record-161-bln-investments-flow.

[2] http://www.huffingtonpost.com/entry/sec-issues-report-on-initial-coin-offerings-icos_us_59a5bbe4e4b05fa16286bdcc; http://fortune.com/2017/08/28/canada-ico/.

[3] https://www.securities-administrators.ca/aboutcsa.aspx?id=1606; http://www.cbc.ca/news/business/cryptocurrency-regulators-1.4262279.

[4] http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20170824_cryptocurrency-offerings.htm.

[5] Ibid.

[6] Ibid.

[7] Ibid; see also Pacific Coast Coin Exchange v Ontario (Securities Commission), [1978] 2 SCR 112.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

BC Court of Appeal clarifies use of disgorgement remedy under the Securities Act

In Poonian v. British Columbia Securities Commission[1] the BC Court of Appeal recently found that the BC Securities Commission (BCSC) may, in limited circumstances, make orders pursuant to s. 161(1)(g) of the BC Securities Act (the Act)  holding persons jointly and severally liable for a disgorgement order where there is evidence showing control and direction between them.

Pursuant to s. 161(1)(g) of the Act, after finding a  breach of securities law, the BCSC may make a disgorgement order requiring that a person or company  “pay to the commission any amount obtained, or payment or loss avoided, directly or indirectly, as a result of the failure to comply or the contravention.”

The Court considered two decisions of the BCSC which both turned on the same central issue: whether contraveners who were involved in the same fraud could be held jointly and severally liable under a disgorgement order, or whether the BCSC’s powers were limited to ordering disgorgement of only the benefit received by each individual contravener.


Two couples, the Poonians and Sihotas, along with other minor participants, were found to have inflated the price of shares in a company they controlled, engaging in market manipulation contrary to section 57(a) of the Act, earning combined aggregate net trading gains of approximately $7.3 million. [2]  The BCSC made an order against the contraveners to disgorge $7.3 million, holding each of them jointly and severally liable for the amount to be disgorged.[3]   The BCSC also ordered administrative penalties against each of the contravenors which totalled $21.5 million.

In a second decision, the BCSC found that Lathigee and Pasquill had jointly directed a group of companies called the “Freedom Investment Club” which raised $21.7 million from investors after running into financial difficulties, misusing those funds and misrepresenting to investors the financial condition of the companies.[4]  They were found to have committed fraud contrary to section 57(b) of the Act.  The BCSC made an order against the contraveners and the corporate entities they controlled to disgorge $21.7 million, holding Lathigee and Pasquill jointly and severally liable for this amount and the companies jointly and severally liable for parts of this amount.[5]  The BCSC also ordered a $15 million administrative penalty against each of Lathigee and Pasquill.

Liability was not an issue on either appeal. Rather, the appellants argued that the BCSC lacked the power to make disgorgement orders against them jointly and severally pursuant to s. 161(1)(g).  The appellants also argued that the BCSC had failed to establish that the persons against whom the orders were made had actually received the amounts ordered to be disgorged, and that the BCSC should have made certain deductions in calculating the amounts to be disgorged.

Scope of Disgorgement Orders

The Court confirmed that the BCSC’s powers under s. 161(1)(g) should be interpreted consistently with its purpose, which is remedial and concerned with protection of the public.   The provision must be read broadly and with sensitivity to economic realities.

The Court made identified 5 key principles about disgorgement orders under s. 161(1)(g):

    1. The purpose is to deter persons from contravening the Act by removing the incentive to contravene, i.e., by ensuring the person does not retain the “benefit” of their wrongdoing.
    2. The purpose is not to punish the contravener or to compensate the public or victims of the contravention. There are other mechanisms in the Act for achieving these goals, and general protection of the public cannot be used to expand the purpose of this particular provision.
    3. There is no “profit” notion to a disgorgement order. The “amount obtained” which should be disgorged does not require the BCSC to allow deduction of the contravener’s expenses or costs in perpetrating the wrongful scheme. Amounts returned to the victims may be deducted, and the BCSC had discretion to make other deductions where appropriate, such as where contraveners have unequal degrees of liability.
    4. The “amount obtained” to be disgorged must be the amount obtained by that person, directly or indirectly, as a result of his or her noncompliance; usually this precludes the making of a joint and several order.
    5. However, a joint and several order may be made against parties who are under the direction and control of the contravener, such that the contravener received the amounts indirectly via the other parties. (In this case, all of the parties held jointly and severally liable were respondents to the securities commission proceedings that were found to have breached securities law.)

The Court rejected the BCSC’s argument that joint and several orders were appropriate wherever parties acted jointly in contravening the Act.  This does not establish that each party obtained amounts which could be disgorged.  Rather, a joint and several order may only be made where one party exercised direction and control over another.

The BCSC may order disgorgement of amounts that a contravener obtained indirectly through, inter alia, corporate alter egos, nominees, or agents.  The test is whether the parties held jointly and severally liable were effectively acting as one person with the contravener.

The Court also confirmed that the BCSC need only prove a “reasonable approximation” of the amount obtained through the contravention. The burden then shifts to the contravener to disprove the reasonableness of that amount.  The more complex or opaque the scheme, the more flexibility the BCSC has in making a reasonable approximation.

Application in these cases

The Poonians and Sihotas’ appeals were allowed in part. The Court found that although the BCSC had made findings as to the degrees of involvement of each of the contraveners, it did not make any findings that each of these individuals obtained amounts personally, or whether any individual indirectly obtained an amount.  The Court sent the matter back to the BCSC to determine whether amounts in accounts not belonging to the Poonians or Sihotas were under their control such that they indirectly received the amounts and could be held liable for them.

The Lathigee and Pasquill appeal was dismissed. The BCSC had shown that contraveners had received amounts indirectly from the corporate entities they controlled, and the Court confirmed that they could be held jointly and severally liable for the full amount.  The BCSC found that Lathigee and Pasquill had jointly directed and controlled the corporate entities that obtained the money, and thus each had “obtained” the “amount”, albeit indirectly through those entities.

Lathigee and Pasquill argued that the corporate entities were not originally created as vehicles for fraud, and that some of the funds received had been used for their intended purpose and thus should not be disgorged. The Court rejected both these arguments.  Regardless of how the funds were used, they were raised by fraudulent misrepresentations or omissions and that was what constituted the contravention giving rise to disgorgement

The author wishes to thank Katrina Labun, summer articled student, for her help in preparing this update.  

[1] 2017 BCCA 207

[2] Re Poonian, 2014 BCSECCOM 318 (liability)

[3] Re Poonian, 2015 BCSECCOM 96 (sanctions)

[4] Re Lathigee, 2014 BCSECCOM 264 (liability)

[5] Re Lathigee, 2015 BCSECCOM 78 (sanctions)

Dual-listed companies beware

Securities class action filings have hit record highs in the United States. In 2016, the United States observed the highest number of securities class action filings since “the early 2000s dot-com crash.”[1] By July of this year, 246 new securities class actions claims were filed in U.S. federal courts.[2] This phenomenon comes as little surprise; these numbers reflect the recent upward trend in securities class action claims observed over the past number of years in the United States.

Canada, on the other hand, is not yet experiencing the same trend. In 2016, nine new securities class action claims were filed. With the exception of 2015, this figure is lower than the number of claims filed in any year annually since 2010.[3] These lower numbers of claims may be explained by differences in the litigation climate or incentive structures for plaintiff’s counsel.  What is clear is that companies listed on the Toronto Stock Exchange (TSX) tend to face less litigation risk. From 2011 to 2016, 44 securities class actions were filed against companies listed on the TSX.  This translates to a litigation risk of about 0.5% per year.[4] In comparison, companies listed on the major securities exchanges in the United States faced a litigation risk of approximately 3.1% per year over the same period.[5]

Canadian dual-listed companies, however, face increased risk. Six out of the nine class actions filed in Canada in 2016 involved companies that were also sued in parallel in the United States.[6] In fact, since 2006, approximately half of all securities class actions launched in the United States against Canadian companies have a corresponding claim in Canada.[7]

This data appears to suggest that Canadian companies listed both on Canadian and American securities exchanges are at a higher risk of securities class action lawsuits than companies listed solely on the TSX.

The author would like to thank Fahad Diwan, Student-At-Law,  for his contribution to this article.

[1] Bradley A. Heys & Robert Patton, “Trends in Canadian Securities Class Actions: 2016 update” (2016) NERA Economic Consulting Report at 1.
[2] Stefan Boettrich & Svetlana Starykh, “Securities Class Actions: 2016 Full-Year Review and Mid-2017 Flash Update” (24 July 2017), Harvard Law School Forum on Corporate Governance and Financial Regulation, online: <https://corpgov.law.harvard.edu/2017/07/24/securities-class-actions-2016-full-year-review-and-mid-2017-flash-update/>.
[3] Supra note 1 at 2.
[4] Ibid.
[5] Ibid.
[6] Ibid at 6.
[7] Ibid at 7.