The OSC’s Jurisdiction on an Appeal from a Decision of a Director: Re Dhillon (2018) ONSEC 14

In Re Dhillon, the Director of Compliance and Registrant Regulation (“Director”) of the Ontario Securities Commission (“OSC” or “Commission”) refused Dhillon’s application for registration under s. 27 of the Ontario Securities Act (the “Act”) on the ground that Dhillon lacked both the proficiency and integrity for registration, and that his registration would otherwise be objectionable (the “Director’s Decision”).  Thereafter, Dhillon applied to the OSC for a hearing and review of the Director’s Decision under s. 8  of the Act. Between the time of the Director’s Decision and the time of the hearing and review by the OSC, Dhillon’s sponsor withdrew its sponsorship of his registration.

The OSC’s decision to deny Dhillon’s application considers the impact of the sponsor’s withdrawal of its sponsorship, and sheds light on the test that an applicant must satisfy on an appeal and review of a decision of the Director to deny registration as well as the scope of the Commission’s jurisdiction under s. 8.

Preliminary Issue: Commission’s Jurisdiction under s. 8 of the Act Where the Applicant’s Sponsor Has Withdrawn

Section 25 of the Act requires that an individual seeking to engage in the business of trading in securities be registered as a dealing representative of a registered dealer. As the registered dealer that had originally sponsored Dhillon’s application for registration had withdrawn its sponsorship following the Director’s Decision, the OSC was required to determine, as a preliminary matter, its jurisdiction to grant the relief requested.

The OSC concluded that Dhillon remained a person “directly affected” by the Director’s Decision within the meaning of s. 8, and as such had standing to seek a hearing and review of the denial of his application for registration. Further, the Commission’s authority to make “such decision as it considers proper” under s. 8 of the Act must surely include the authority to set aside the Director’s Decision without approving the registration. Accordingly, while the Commission did not have jurisdiction to approve Dhillon’s application for registration given his unsponsored status, the Commission retained jurisdiction under s. 8(3) to set aside the Director’s Decision to refuse it.  The hearing proceeded on that basis.

Presumably the practical effect of this approach is that if Dhillon had succeeded in persuading the OSC to set aside the Director’s Decision, and had he been able to find a dealer to sponsor him, the Director would have been required to grant a further request by him for registration as a dealing representative of that registered dealer, absent additional grounds for denying him status as a registrant.

Burden of Proof on Staff Under s. 27 of the Act

The Commission confirmed that a hearing and review to the OSC of a decision of the Director is a hearing de novo, involving a fresh consideration of the issue.  No deference is owed to the Director’s Decision, and Staff bear the burden of proof or persuasion of establishing that the applicant lacks the proficiency or integrity to be registered, or that his registration would otherwise be objectionable.

Staff argued that the burden of proof on Staff was lower than the balance of probabilities standard, based upon the wording of s. 27(1) of the Act that provides that the Director may refuse registration where it appears to the Director that the applicant is not suitable or the registration would otherwise be objectionable. The OSC noted that in F.H. v. McDougall, 2008 SCC 53, the Supreme Court of Canada recognized that it is open to the legislature to change the civil standard of proof on a balance of probabilities through statutory enactment using clear and unambiguous language.  However, the language of s. 27 fell short of the type of clear and unambiguous language required to displace the conventional standard of proof. Further, given the impact of a denial or loss of registration on an individual, requiring Staff to establish the preconditions to a denial of registration on a balance of probabilities was not onerous. Ultimately, however, the OSC declined to decide the issue as it did not have a detailed analysis of the phrase, which also appears in other sections of the Act including s. 61 concerning the issuance of a receipt for a prospectus and s. 70 concerning the issuance of an order to cease trade a prospectus distribution. Further, even using the conventional standard of proof on a balance of probabilities, Dhillon was unsuitable for registration.

Decision on the Merits of the Hearing and Review

The Commission confirmed its obligation to act in the public interest when reviewing the Director’s Decision, and to bear in mind certain fundamental principles such as the requirement for the maintenance of high standards of fitness and business conduct to ensure honest and responsible conduct by market participants enshrined in s. 2.1(2)(iii) of the Act.

In determining whether Dhillon was suitable for registration, the Director and the Commission were required to consider whether he satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity.  The solvency requirement was not an issue in this case.

In this case, the OSC was satisfied on a balance of probabilities that Dhillon was not suitable for registration, based upon a lack of proficiency and prior conduct demonstrating a lack of integrity. On that basis it confirmed the Director’s Decision.

The issue with respect to Dhillon’s proficiency was whether, notwithstanding that Dhillon’s application for registration was dated more than three years after he was last registered in 2012, he could still meet the proficiency requirements in National Instrument 31-103 – Registration Requirements. NI 31-103 requires that a mutual fund dealing representative have passed at least one of the Canadian Investment Funds Course Examination, the Canadian Securities Course Examination or the Investment Funds in Canada Course Examination. Although Dhillon had passed one of those courses in 1990, he was deemed by NI 31-103 not to have passed such an examination as he had not passed it within a three year period prior to his application for registration. Dhillon’s argument to the Director that he satisfied an exemption for individuals who had gained twelve months of relevant securities industry experience during the three year period prior to his application failed. His submission that, notwithstanding that he had not been employed in the industry during that three year period, he had taken several industry related seminars and training courses which should qualify as securities industry experience was rejected by the Director. The OSC agreed with the Director that Dhillon’s attendance at seminars did not amount to 12 months of relevant securities industry experience.

Dhillon also failed to establish that he satisfied the integrity requirements. Dhillon’s prior registration history revealed that he had been the subject of client complaints and compliance deficiencies while working at other dealers, and was found by the MFDA to have breached MFDA rules and to have deliberately misconducted himself. The Commission determined that he had  repeatedly used pre-signed forms, recommended unsuitable leverage strategies to clients and engaged in off-book trading activities. He had mistreated compliance staff at multiple firms, and his explanations for his conduct displayed a lack of integrity. The manner in which he responded to regulators when his non-compliance was raised with him also demonstrated his lack of integrity. In sum, the evidence was “truly overwhelming that Mr. Dhillon is effectively ungovernable and completely lacking in personal integrity”.


Whether the use of the words “appears to the Director” in sections 27, 61 and 70 of the Act should be interpreted as importing a standard of proof lower than on a balance of probabilities is unclear and remains to be definitively determined.

Civil Forfeiture in the Securities Context

Administrative fines are are regularly imposed by the Ontario Securities Commission (the OSC) in enforcement proceedings as sanctions for violations of Ontario securities law. Less well-known, but equally important, is the ability of the OSC to require wrongdoers to forfeit to the Crown the ill-gotten proceeds of unlawful activities. This post outlines the process by which proceeds derived from securities law violations may be forfeited to the Crown and ultimately returned to victims of securities law breaches.

The OSC cannot on its own compel a civil forfeiture to the Crown. That power belongs to the Attorney General of Ontario (the AG), which is statutorily authorized under the Civil Remedies Act, 2001 (the Act) to commence proceedings before the Ontario Superior Court for an order requiring a wrongdoer to forfeit property in Ontario to the Crown in right of Ontario where the court finds that the property is the “proceeds of unlawful activity”. “Unlawful activity” is broadly defined as “an act or omission that is an offence under an Act of Canada, Ontario or another province or territory of Canada” and clearly includes violations of securities law in Ontario.

The Act explicitly states that all findings of fact in proceedings under the Act are to be made on a balance of probabilities. Accordingly, the AG must only prove that it is more likely than not that certain targeted property is “proceeds of unlawful activity.” Importantly, the Act contains provisions protecting property held by “legitimate owners”.

Following a court forfeiture order, the forfeited money or property is held by the Crown in a “special purpose account”, and the Crown is required to release a notice which conforms to prescriptions found in regulations made in O. Reg. 498/06, Payments Out Of Special Purpose Account. Among other things, the notice must:

  • identify the proceeding under the Act as a result of which the money was deposited into the special purpose account;
  • state that any direct private victim who suffered pecuniary or non-pecuniary losses as a result of the unlawful activity in relation to which the proceeding was commenced is entitled to make a claim for compensation;
  • describe the steps to be taken to make a claim;
  • name the final day for filing, which shall not be earlier than three months after the first publication of the notice; and
  • state that a claim that does not comply with the Regulation will be denied.

In Ontario, claims are made to the Civil Remedies for Illicit Activities Office (CRIA), in the Ministry of the Attorney General. An example of a statutory notice can be reviewed here.

While the ability to initiate court proceedings for a forfeiture order belongs solely to the AG by statute, this does not prevent the OSC from pursuing forfeiture remedies under the Act. The OSC has entered into a Memorandum of Understanding with the AG for the exchange of information and administration of the Civil Remedies Act (the MOU). The MOU allows the OSC to pursue civil forfeiture remedies where is it advantageous to do so. Using this mechanism, the OSC can supply vital information to the AG with a view to assisting it in discharging its burden of proof under the Act. On October 26, 2015, Monica Kowal, then the Vice-Chair of the Ontario Securities Commission, described the relationship in a keynote address at an Investor Recovery Conference:

In 2011, the OSC added a fourth mechanism through an information sharing memorandum of understanding (MOU) with the Civil Remedies for Illicit Activities Office (CRIA).

Under Ontario’s civil forfeiture law, CRIA can, with a court order, take possession of property that is determined to be a proceed of unlawful activity, search for people who have suffered losses as a result of that activity and use the property to compensate them.

Our partnership with CRIA allows us to leverage their capacity to advertise for harmed investors, process and adjudicate claims for lost money, and make large scale distributions – all under the auspices of the Office of the Attorney General of Ontario. (emphasis added)

If the AG can successfully prove to the court that, on a balance of probabilities, the defendant individuals or corporations hold property derived as proceeds of securities law violations, such proceeds may become subject to a forfeiture order by the Ontario Superior Court, and recoverable by victims pursuant to the claims procedure outlined above.

The author would like to thank Fahad Diwan, articling student, for his contribution to this article.


Bustle without the Hustle not an “Act in Furtherance of a Trade” under the Ontario Securities Act

A recent decision by the Ontario Court of Justice provides lessons about the scope of the Ontario Securities Commission (OSC)’s powers to regulate acts “in furtherance of a trade”.  The OSC’s case was against two individuals who helped create a website for a new company.  The website included an investors relations page which stated that the company would be listing its common shares and provided an email address for all investor or shareholder correspondence.

Staff of the OSC (Staff) charged Mark Lowman and Dave Jarett with trading in securities without the required registration, issuing securities without having filed a prospectus, and representing that securities would be listed on an exchange with the intention of affecting a trade, contrary to s. 25(1), s. 53(1), s. 38(3), and s. 122(1)(c) of the Ontario Securities Act (OSA).

In his Reasons for Judgment, Justice West dismissed all charges.


The story begins with Duncan Cleworth and his aspirations to expand his waste-to-energy business.  He was a part-owner of a company involved in such a project in Madagascar and was looking to expand into Asia.  Cleworth told the manager of a local restaurant, Mansoor Igbal, of his plans.  Iqbal then introduced Cleworth to the Defendant, Mark Lowman, who owned a company called Saxon Securities.

Lowman agreed to help get Cleworth with his enterprise.  The two entered into a joint venture agreement to incorporate and develop a company and to obtain a public listing of its shares.  The second Defendant, Dave Jarett, was an employee of Saxon Securities.

The four men then set out to design a website for the company and all four appeared to have contributed to its content.  The website advised the company was seeking a listing and provided an email address for all investor or shareholder correspondence.  The company was eventually incorporated in the British Virgin Islands approximately six weeks after the website first went live.

Shortly after the company was incorporated, cold-calls were made to investors in Europe and South Africa by sales representatives situated outside of Canada seeking to sell the company’s soon to be listed shares.  Five of the investors were directed to the company’s website by the sales representatives.  Five eventually purchased shares after they were listed on the GXG Exchange.  None of the sales representatives were identified at trial and there was no direct evidence establishing a connection between the Defendants and the sales representatives.

The Defendants were never registered with the OSC to trade in securities.  No prospectus was ever filed with the OSC by the company or by anyone in respect of the securities of the company during the relevant time period.

Staff’s Position

Staff of the OSC argued that:

1) The Defendants were involved in the actual trades of shares made by the sales representatives;

2) the company’s website was designed and created for the purpose of “exciting the reader” and this alone amounted to an act in furtherance of trading thereby inducing investors to purchase shares contrary to s. 25(1) and 53(1);  and

3) the website stated the company’s common shares would be listed for trading on an exchange and specified a specific time frame for the listing in a manner that indicated an intent to effect trades in the company’s common shares contrary to s. 38(3).

The decision

Justice West dismissed all of the charges against both Defendants.  He found that the evidence was simply insufficient to draw the necessary inferences to give rise to conduct contrary to the OSA.

Staff argued that the Defendants had committed an offence under s. 53(1) of the OSA, which provides that:

No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director.

The OSA, s. 1(1) defines “trade” or “trading” to include:

(a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, except as provided in clause (d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith,

. . .

(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing;

Justice West first reviewed two prior OSC decisions where involvement in the creation of a website was found to be an act in furtherance of a trade:

  • In First Federal Capital (Canada) Corp (Re), the OSC held an act in furtherance of trading does not require an actual or completed trade, “anticipated” trades that arise where there is a direct proximate connection between the offering and any trade that was anticipated as a result of those solicitations may be caught by the OSA. However, in that case the website at issue actually offered a “trading program” and the principal of the company engaged in direct solicitation and negotiations with investors which continued over an extended period of time.
  • In Xi Biofuels Inc (Re), the OSC found a website was created to “excite the reader” and solicit potential investors by numerous misleading statements. However, the OSC in that case also pointed to multiple other acts in furtherance of trades apart from the creation of a website that were found to be created for the purpose of “exciting the reader”, including signing treasury directions, signing share certificates, picking up share certificates, opening bank accounts, and depositing investor funds into them.

Staff conceded that the company’s website did not directly offer to sell shares to the public and there was no direct evidence of any direct or indirect contact or connection between the Defendants and the foreign investors, but argued an inference could be drawn that the Defendants were aware of and involved in the ongoing marketing of the shares of the company.

Justice West disagreed.  He found that there were alternative explanations which cut against the inferences proposed by Staff.  For example, the Defendants’ testified that the purpose of creating a website was to have governments review the website as potential clients.  Of some relevance is that none of the investors ever contacted the email address listed on the website’s investors page.

There was also no evidence that any of the promotional materials sent by sales representatives to investors were found in the possession of the Defendants.  A reasonable inference could be drawn that the sales representatives “saw an opportunity and created a scenario” which allowed the sales representatives to make cold-calls and representations which were designed to induce investors to purchase the company’s shares without any knowledge or involvement of the Defendants.

Justice West’s reasons are best encapsulated at paragraph 125 of his decision, which reads:

“All that existed, on the evidence presented, was that Jarrett was developing a website for a company that ultimately it was hoped would be listed on an exchange, a website where the content was in a state of revision and where the company’s name was changed at least four (4) times in the space of two months. No shares existed at the time the purported sales representatives solicited the foreign investors. I find there was not a sufficient proximate connection to an anticipated trade to constitute an act in furtherance of a trade.”

Due to the lack of direct or compelling circumstantial evidence of involvement by the Defendants in acts of trading in securities or any other acts in furtherance of trading in securities Staff were unable to make out the charges under s. 53(1), s. 25(1), and s. 38(3).


The definition of a “trade” under the OSA is extremely broad.  Justice West’s decision in R v Lowman is a rare example where a court has refused to recognize that conduct fell within the scope of that definition.  The critical aspects of his decision are as follows:

  • Merely “exciting the reader” with a website is not enough for an act in furtherance of a trade. The OSC must meet the standard established in cases like Xi Biofuels Inc. and First Federal Capital (Canada) Corp (Re), where websites directly solicited investors to purchase shares and provided instructions on where and how those shares could be purchased and the individuals charged were directly soliciting and pointing investors to their company’s website.
  • Justice West’s reasons also suggest that there must be a causal connection between the act supposedly in furtherance of a trade, and the trade itself. It is not enough that the Defendants created a website informing investors of a potential opportunity to purchase securities which coincided with certain investors purchasing securities.  The evidence showed that the investors decision to purchase securities was primarily or exclusively due to third party sales representatives rather than the Defendants’ website.
  • Finally, Justice West’s reasons demonstrate the importance of direct evidence in establishing the strict liability offences under the OSA. Circumstantial evidence that Saxon Securities received a wire transfer around the time that one investor provided funds to a sales representative to purchase securities was not sufficient to draw an inference of wrongdoing.  The Defendants were able to provide equally plausible alternative explanations.

Aurora/CanniMed: Canadian securities regulators provide guidance on takeover bids in Canada – Expect to see more hard lock-ups and fewer tactical poison pills

Key takeaways:

  • expect to see an increased use of hard lock-ups (that is, lock-ups in which a shareholder agrees to tender shares even if a superior bid comes along), which will provide bidders with reduced risk during the new 105-day bid period
  • well-structured hard lock-ups do not necessarily result in target shareholders being joint actors with the bidder
  • tactical shareholder rights plans or poison pills will likely have limited uses going forward
  • ultimately, regulators expect the new takeover bid regime to emphasize target shareholder choice
  • regulators will insist on strict compliance with the new takeover bid regime

Quick Background


  • Aurora Cannabis Inc. launches unsolicited bid for CanniMed Therapeutics Inc. and signs hard lock-up agreements with four target shareholders representing approximately 38% of CanniMed’s shares
  • three days later, CanniMed announces it has entered into a plan of arrangement with Newstrike Resources Ltd.
  • CanniMed announces that its board has adopted a tactical poison pill in response to Aurora’s bid

Key lessons

The Ontario and Saskatchewan securities regulators (the Commissions) have released their reasons in connection with the unsolicited bid of Aurora for CanniMed (the Reasons).

Lesson 1: Lock-ups are good for bidders and do not necessarily make shareholders joint actors


Due to the 105-day deposit period provided for in the 2016 take-over bid regime, bidders are exposed to greater risk. The response of bidders has been to attempt to secure hard lock-ups from target shareholders as early as possible. We expect this trend to continue following the Aurora/CanniMed decision. Hard, well-structured lock-up agreements will be a critical tool for bidders.

In the Reasons, the Commissions noted that while lock-up agreements or the context in which they are used can raise public interest issues, lock-ups are a “lawful and established feature” of the M&A process and are of increased importance since the adoption of the new regime. By upholding relatively restrictive lock-ups, the Reasons indicate that generally the Commissions will accept target shareholders’ ability to execute lock-ups in furtherance of their own interests.

The Reasons held that entering into hard lock-up agreements did not automatically result in Aurora and the locked-up shareholders acting jointly or in concert. The Commissions noted that Canadian securities legislation provides that an agreement or understanding to tender securities to a bid does not, in and of itself, lead to a determination of acting jointly or in concert. The legislation does not distinguish between hard and soft lock-ups.

Notably, the provision in the agreements requiring the locked-up shareholders to vote against the Newstrike transaction and for the Aurora transaction if it were reformulated into a corporate transaction (such as an arrangement) did not make Aurora and the locked-up shareholders joint actors – the Commissions found that such voting provisions were consistent with the otherwise permissible commitments to tender to a bid. In the Commissions’ view, the lock-ups were consistent with the shareholders seeking enhanced liquidity and a higher price.

Lesson 2: Despite creative defensive tactics, regulators expect shareholders to have the ultimate say

The Reasons emphasize that despite creative defensive tactics targets may employ, the uses of tactical poison pills will likely be limited under the new regime. The Reasons suggest that it will be a rare case where poison pills will be allowed to interfere with established features of the new bid regime—including by preventing creeping 5% acquisitions or hard lock-ups.

In this case, CanniMed’s pill had a number of unusual features, including changing the mandatory extension period to 10 business days rather than the 10 calendar days provided for under the bid regime, and deeming all securities subject to lock-up agreements to be beneficially owned by Aurora.

The Commissions cease traded CanniMed’s pill, as in their view, its principal function was not to give CanniMed’s board extra time for higher bids to emerge, but rather to prohibit further lock-ups being entered into and to support the Newstrike transaction in the face of Aurora’s bid, which was conditional on the Newstrike transaction being abandoned. As such, the pill interfered with legitimate and established elements of the bid regime such as lock-up agreements, which are of increased importance under the new take-over bid regime.

Lesson 3: Regulators will insist on strict compliance with the new regime

The Reasons indicate that given the “careful rebalancing” of the takeover bid regime in 2016, the Commissions will be reluctant to waive prescribed bid requirements, favouring a predictable regime instead.

Aurora argued that the policy rationale for the “alternative transaction” exception to the 105-day bid period applied in this case. As a result, the minimum deposit period for Aurora’s bid should be reduced from 105 to 35 days to coordinate the timing of the Newstrike acquisition and the Aurora bid and allow shareholders to consider both at once.

The Commissions disagreed, and stated that the Newstrike transaction was not an alternative transaction to Aurora’s bid, noting that Aurora itself had made its offer conditional on the Newstrike transaction not being completed. The Commissions noted that Aurora was free to solicit proxies against the Newstrike transaction if it so chose and could also seek to persuade shareholders to wait it out until its bid expired. The Commissions stated that abbreviating the 105-day period was not necessary in the circumstances to facilitate a choice by CanniMed shareholders between both transactions. In addition, in their view, the Newstrike acquisition did not preclude competing bids during the bid deposit period.

The Commissions also found that Aurora could avail itself of the 5% exemption to the prohibition against it purchasing target shares outside of the bid, noting that Aurora did not own any shares and that allowing a purchase of up to 5% would not put Aurora in a blocking position to preclude any superior offers.



The Aurora/CanniMed reasons provide the clearest guidance to date on the state of hard lock-ups and defensive tactics under the new regime. Overall, the message is clear: the expectation is that target shareholders should have the ultimate say. We will continue monitoring future developments.

Deferred Prosecution Agreements: Coming to Canada Shortly

The Canadian government, as part of Bill C-74-1 the Budget Implementation Act introduced on March 27, 2018, finally introduced a bill that would make deferred prosecution agreements (DPAs) part of the Criminal Code. This new prosecutorial tool would represent a significant shift in Canada’s approach towards corporate wrongdoing – one that aligns Canada more closely with global trends. The introduction swiftly follows the consultation process which wrapped up in December. DPAs will be available for certain, not-yet-disclosed, offences.

As in other jurisdictions which have recently recommended DPAs, such as in Singapore and Australia, Canada’s remediation agreement framework is expected to encourage corporations to voluntarily disclose wrongdoing, implement remediation measures, and hold corporate entities accountable. In Canada, like the UK and unlike the US, the proposed remediation agreement framework would be subject to judicial approval.

The process at a glance

  • The prosecutor must determine whether there are appropriate conditions for a remediation agreement, including whether there is a reasonable prospect of conviction, the offence did not cause death or serious bodily harm, whether the agreement is in the public interest, and that the Attorney General has consented to the negotiations;
  • The prosecutor then gives a written notice to the organization inviting it to negotiate;
  • The parties then negotiate a remediation agreement, which must include certain elements including a statement of facts that contains an admission of responsibility, disgorgement of any benefit from the wrongdoing, a penalty, and the date by which the agreement terms must be met;
  • Optional elements of the agreement include obligations to establish or enhance compliance measures, reimbursement for the costs of the prosecutor, and the imposition of an independent monitor;
  • Then the prosecutor brings an application for court approval of the remediation agreement, and the court must decide taking factors into account including reparations made, any victim impact statement, whether the agreement is in the public interest, and that the terms of the agreement are fair, reason, and proportionate;
  • The court implements a stay of proceedings shielding the company of further prosecution for the offence;
  • Once approved, the prosecutor must direct the clerk of the court to stay the proceedings with respect to the charges that have been laid against the organization, and any relevant limitation period is tolled during the course of the remediation agreement;
  • Any variation or termination of the remediation agreement is subject to court approval, and a court hearing will be set to consider various defined factors;
  • Courts are then generally expected to order the remediation agreement to be published, but if publication is not appropriate the court must publish the reasons for non-publication; and
  • The agreement can be terminated for breach, or once the agreement is successfully completed, and a court must approve such an application brought by the prosecutor.

A corporate entity entering into a remediation agreement will have to fully cooperate with the prosecution and be as transparent as possible. This means, among other things, that the organization will have to make an admission of responsibility, fully cooperate in any investigation or prosecution into the actions, forfeit any property or benefit derived from the offence, and report on the implementation of the agreement. The draft legislation also contemplates various types of financial obligations, including disgorgement of any property, benefit or advantage, penalties, reparations and restitution to victims, and a 30% victim surcharge except for some Corruption of Foreign Public Officials Act offences.

Of particular note are considerations regarding the interest of the victim(s) of the organization’s crimes. Although this will depend on the nature of the crime, reparations to victims and communities are a stated purpose of the remediation agreements. Moreover, prosecutors will have to inform victims of any negotiations, and courts must consider reparations made to victims when approving a remediation agreement.

Next Steps

The introduction of this bill is an exciting step forward in Canada’s alignment with other jurisdictions, most notably the US which has had DPAs since 1992. The bill will work its way through Parliament and may be amended along the way.

One interesting point to watch in the bill is that the Attorney General, being the Minister of Justice, must give a prosecutor approval to negotiate a remediation agreement. This introduces a political element into what would otherwise be an independent decision of the Public Prosecution Service of Canada to enter into negotiations.

More to come!

Federal court holds that CFTC can regulate virtual currencies as commodities

On March 6, 2018, in a fraud proceeding involving a virtual currency product, a New York federal court held that virtual currencies can be regulated by the Commodity Futures Trading Commission (CFTC) as commodities. Commodity Futures Trading Commission v. McDonnell (E.D.N.Y. Mar. 6, 2018).[1] This ruling marks the first federal judicial endorsement of the CFTC’s position that it had such jurisdiction over virtual currencies, which the CFTC took in its 2015 order in the Coinflip proceeding.[2] As such, this ruling represents a major step in defining the regulatory landscape in the United States for virtual currencies (also known as cryptocurrencies), of which over 1500 exist, the most well-known being Bitcoin. However, the ruling does not preclude concurrent regulation of virtual currencies by other governmental bodies, a number of which have been devoting attention to this area.

The alleged fraud challenged by the CFTC

The McDonnell case began in January 2018 when the CFTC commenced proceedings against Patrick McDonnell and his company CabbageTech Corp., which did business under the name “Coin Drop Markets.” The CFTC alleged that they offered fraudulent trading and investment services related to virtual currency. According to the CFTC, customers from the United States and abroad paid the defendants for membership in virtual currency trading groups, with the defendants purporting to provide exit prices and profits of up to 300 per cent per week through day trading. However, according to the CFTC, after receiving membership payments and virtual currency investments from their customers, the defendants deleted their social media accounts and websites, ceased communicating with the customers, provided minimal, if any, virtual currency trading advice, and never achieved the promised return on investment. When customers asked for a return of their membership fees or virtual currency investments, the defendants refused and misappropriated the funds.

Under these facts, the court upheld the CFTC’s request for the issuance of a preliminary injunction against the defendants barring them from engaging in any fraudulent practices and trading currencies for themselves or others. The court additionally ordered the defendants to preserve and produce documents and to account for all transfers or payments of funds. But more notably, the court provided a detailed analysis of why regulating virtual currencies that were involved in alleged frauds of this kind fell within the CFTC’s authority to regulate commodities under the Commodity Exchange Act (CEA).[3]

Definition of a “commodity”

The court acknowledged at the start of its ruling that virtual currencies “have some characteristics of government paper currency, commodities, and securities.” It explained that the “CFTC, and other agencies, claim concurrent regulatory power over virtual currency in certain settings,” yet at the same time “concede their jurisdiction is incomplete,” noting that “Congress has yet to authorize a system to regulate virtual currency.” Thus, the court observed, the “CFTC is one of the federal administrative bodies currently exercising partial supervision of virtual currencies,” along with the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), private exchanges and the states.

The CFTC’s power over virtual currencies, said the court, derives from its “[e]xclusive jurisdiction over ‘accounts, agreements and transactions involving swaps or contracts of sale of a commodity for future delivery’” under the CEA, 7 U.S.C. § 2. The court noted commentators who had offered various rationales for why virtual currencies should be viewed as “commodities”: “based on common usage,” “because virtual currencies provide a ‘store of value,’”; and “because they serve as a type of monetary exchange.”

In reaching its conclusion, the court surveyed the development of online marketplaces for trading and investing in virtual currencies and noted how values had risen and fallen, often dramatically over short periods. The court also observed that “[l]egitimization and regulation of virtual currencies has followed from the CFTC’s allowance of futures trading on certified exchanges.”

Looking at the CEA’s definition of a “commodity,”[4] the court noted that it covered not just various agricultural articles but also “all other goods and articles and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.” The statute’s reference to “services, rights and interests” encompassed even “intangible commodities” such as “futures and derivatives.” Thus, “[w]here a futures market exists for a good, service, right, or interest, it may be regulated by CFTC, as a commodity, without regard to whether the dispute involves futures contracts.” Given the CEA’s anti-fraud provisions and the regulations promulgated thereunder,[5] the CFTC’s enforcement powers extend “to fraud related to spot markets underlying the (already regulated) derivative markets.”

Accordingly, the court held that “[v]irtual currencies can be regulated by CFTC as a commodity,” because they “are ‘goods’ exchanged in a market for a uniform quality and value.” They thus “fall well-within the common definition of ‘commodity’ as well as the CEA’s definition of ‘commodities.’”


While acknowledging that the CFTC has “exclusive jurisdiction over transactions conducted on futures markets,” the court did not go so far as to hold that the CFTC’s authority with regard to the entire range of issues as to virtual currencies was exclusive. “Federal agencies may have concurrent or overlapping jurisdiction over a particular issue or area.” The court noted that the “SEC, IRS, DOJ, Treasury Department, and state agencies have increased their regulatory action in the field of virtual currencies without displacing CFTC’s concurrent authority.”

Of particular note, the court stated that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities,” pointing to recent highly-publicized comments by SEC Chairman Jay Clayton that “some products that are labeled cryptocurrencies have characteristics that make them securities,” in which case “[t]he offer, sale and trading of such products must be carried out in compliance with securities law.”[6]

In the situation presented in McDonnell, the court held that “CFTC has jurisdictional authority to bring suit against defendants utilizing a scheme to defraud investors through a ‘contract [for] sale of [a] commodity in interstate commerce’” (citing 7 U.S.C. § 9(1)). The court held this authority was not limited to the CFTC’s traditional focus on futures contracts but could also encompass “spot trade commodity fraud” pursuant given “statutory and regulatory guidelines.” Because in the case at hand, the “CFTC has made a prima facie showing that the defendants committed fraud by misappropriation of investors’ funds and misrepresentation of trading advice and future profits promised to customers” with respect to this virtual currency commodity, the court issued the CFTC the requested relief.


McDonnell is of course just one ruling, issued by a trial-level court and not yet tested on appeal. Nevertheless, it is an important stepping-stone in defining the regulatory landscape that will govern activity in the virtual currency space. Among the key takeaways from McDonnell are the following points:

  • The CFTC can assert regulatory jurisdiction over virtual currencies as “commodities.”
  • This does not necessarily mean that the CFTC in practice will apply to or enforce upon virtual currencies all the same rules that it now applies to other “commodities,” such as classic physical agricultural commodities.
  • However, McDonnell shows that the CFTC will apply existing anti-fraud rules in regard to virtual currencies, at least in the face of fairly brazen fraudulent schemes that border upon outright theft. How the CFTC will act in cases presenting less extreme facts remains to be seen.
  • With McDonnell now having judicially endorsed the exercise of CFTC jurisdiction over virtual currencies, it remains to be seen whether the CFTC will seek to promulgate new rules specific to virtual currencies and the particular issues they pose.
  • Other federal agencies are not precluded from exercising their own regulatory jurisdiction over virtual currencies notwithstanding the CFTC’s authority, such as the SEC if it is determined that a particular virtual currency qualifies as a “security.”
  • No guidance is yet provided about how to resolve possible future conflicts between regulations or enforcement activity of the CFTC and other federal or state authorities, and it remains to be seen how courts will deal with such conflicts should they arise.


[1]     No. 1:18-cv-00361-JBW-RLM, Dkt. No. 29 (E.D.N.Y. Mar. 6, 2018).

[2]     In the Matter of: Coinflip, Inc., CFTC Dkt. No. 15-29 (Sept. 17, 2015).

[3]     7 U.S.C. § 1 et seq.

[4]     7 U.S.C. § 1a(9).

[5]     7 U.S.C. § 9(1); 17 C.F.R. § 180.1.

[6]     Jay Clayton & J. Christopher Giancarlo, Regulators are Looking at Cryptocurrency,Wall Street Journal, Jan. 24, 2018.

New Corporate Governance Website Disclosure Requirements for TSX-Listed Issuers In Effect April 1, 2018

Amendments to the TSX Company Manual (the Manual), which places new website disclosure requirements (Requirements) on TSX-listed issuers, are coming into effect on April 1, 2018 in accordance with the newly adopted section 473 of the Manual.

Among other things, the Requirements mandate website publication of any majority voting and advance notice policies that have been adopted, as well as a company’s articles and by-laws.  By-laws (whether majority voting, advance notice, or otherwise) in particular, can be central to proxy fights and other shareholder litigation against an issuer or its Board, and may not be publically available or, as noted by the TSX, can be difficult to locate on SEDAR as a result of varying practices, such as filing certain materials under different categories.  The publication of these documents will make it easier for shareholders of a TSX-listed company to access information relevant to their complaints prior to the commencement of legal action.

The TSX initially proposed new website disclosure requirements in 2016, with publication of the final amendments on October 19, 2017.  The TSX’s impetus for this change is to provide more accessible information to capital market participants who are seeking access to a company’s key securityholder documents, in particular, those relating to corporate governance. The new Requirements now mandate that TSX-listed issuers have their current constating documents, together with certain policies and charters (if adopted) available on their websites for investor review. By doing so, the TSX aims to have companies centralize the location of certain publicly-available documents. In particular, the following constating documents will now be required to be available on an issuer’s website:

  • articles of incorporation, amalgamation, continuation or any other establishing or constating documents of the issuer; and
  • by-laws.

The TSX will also require the following corporate governance-related documents to be uploaded:

  • majority voting policy;
  • advance notice policy;
  • a position description for the chairman of the board;
  • a position description for the lead director;
  • the board mandate; and
  • board committee charters.

The TSX has clarified that the Requirements do not require an issuer to create new policies, but simply to disclose existing versions of policies covered by the Requirements (with the exception being that TSX issuers must comply with the majority voting requirement in section 461.3 of the Manual). As an alternative, issuers can choose to upload a larger document, such as a circular, which may incorporate the documents indicated above. The website which hosts these documents must either be linked to the issuer’s homepage or a page designated for investor relations. If an issuer shares a website with another issuer, each listed issuer is to have a separate, dedicated webpage.

The TSX has carved out exemptions from the Requirements. As defined in the Manual, Non-Corporate Issuers, Eligible Interlisted Issuers and Eligible International Interlisted Issuers will not be required to adhere to the new rules. For all other issuers, this information is to be available online by no later than April 1, 2018.

The author would like to thank Joseph Palmieri, articling student, for his contribution to this article.

Reforming Class Actions in Ontario – Your Input Please!

On March 9, 2018, the Law Commission of Ontario (LCO) released its Consultation Paper entitled “Class Actions: Objectives, Experiences and Reforms”. The Consultation Paper is the next phase of the LCO’s Class Actions Project which is set to conduct a general review of the class action landscape in Ontario, with a view to providing a final report with recommendations for law reform where appropriate.

It has now been 25 years since the passage of the Ontario Class Proceedings Act, and this is said to be the first systematic review of the class action regime in Ontario since the 1990 report of the Ontario government’s Advisory Committee on Class Action Reform.  As can be seen from the questions below, there is the potential that recommendations made during the process could have significant impact on class actions in Ontario, and thus companies operating in Ontario who might be faced with class action litigation.

The LCO has invited views on a series of consultation questions as follows:

  1. How can delay in class actions be reduced?
  2. Given that class actions must provide access to compensation to class members, how should distribution processes be improved?
  3. What changes, if any, should be made to the costs rule in the CPA?
  4. Is the current process for settlement and fee approval appropriate?
  5. Is the current approach to certification under s. 5 of the CPA appropriate?
  6. Are class actions meeting the objective of behaviour modification? What factors (or kinds of cases) increase (or reduce) the likelihood of behaviour modification?
  7. Please describe class members’ and representative plaintiffs’ experience of class actions.
  8. In light of existing constitutional restrictions, what is the most effective way for courts to case manage multi-jurisdictional class actions in Canada?
  9. How should Ontario courts address the issue of carriage in class actions?
  10. What is the appropriate process for appealing class action certification decisions?
  11. What best practices would lead a case more efficiently through discoveries, to trial and ultimately to judgment? Are there unique challenges in trials of common issues that the CPA and/or judges could address? What can judges do to facilitate quicker resolutions and shorter delays?
  12. In addition to the issues listed in this paper, are there provisions in the CPA that need updating to more accurately reflect current jurisprudence and practice? If so, what are your specific recommendations?
  13. Should the Class Proceedings Act or Rules of Civil Procedure be amended to promote mandatory, consistent reporting on class action proceedings and data?

The deadline for comment is May 11, 2018.

The LCO’s project is ambitious, and identifies many of the issues that both our clients and our colleagues have identified as being areas of concern. We expect that the LCO will receive significant comment on these issues in the consultation period from plaintiffs, defendants, third party litigation funders and  counsel.  Whether the consultation leads to real reform remains to be seen, but this is certainly a step in the right direction. We will be reviewing the LCO’s paper in detail and our class actions team would be pleased to discuss the process.  We will also keep you advised of developments as they occur.

IIROC Seeks Public Comment on Proposed New Disciplinary Options

On February 22, 2018, the Investment Industry Regulatory Organization of Canada (IIROC) announced that it was launching a public consultation on two new disciplinary approaches for dealing with minor violations of IIROC rules and the resolution of disciplinary cases.

IIROC’s Enforcement Department is specifically responsible for enforcing IIROC’s Dealer Member Rules relating to the sales, business and financial conduct of its Dealer Members and their registered employees, as well as the Universal Market Integrity Rules (UMIR) relating to the trading activity on all Canadian debt and equity marketplaces. Under the current regime, a respondent faced with IIROC disciplinary proceedings has two options: either settle the case before a disciplinary panel or have a full disciplinary hearing, which can result in significant fines, suspensions and permanent bans.

According to IIROC, the proposed new approaches would provide IIROC with added tools and flexibility to more fairly address varying degrees of rule breaches in order to focus resources on matters that are more serious and/or harmful to investors. With these changes, IIROC hopes that disciplinary cases will be resolved more quickly and in a manner that is more proportionate to the offenses in question. Currently, a typical disciplinary case that proceeds from investigation through to the disciplinary process can take a year or more to complete. IIROC expects that the new programs will allow for quicker, more efficient resolution of certain disciplinary cases.

In particular, IIROC is considering two new disciplinary programs:

  1. A new Minor Contravention Program (MCP) under which an Approved Person or Dealer Member would agree to the imposition of a sanction for rule contraventions that are deemed minor. The MCP would provide a more efficient means to resolve cases that cannot be adequately addressed by way of a Cautionary Letter but do not warrant formal disciplinary action; and
  2. The use of Early Resolution Offers to conclude settlement agreements at an earlier point in the enforcement process to promote the efficient resolution of cases, increase the application of the IIROC Staff Policy Statement on Credit for Cooperation, and encourage firms to take remedial measures and address investor harm through voluntary acts of compensation.

IIROC is encouraging stakeholders to review and comment on these proposals. To supplement and engage a broader representation of stakeholders, IIROC will consult directly with Canadian investors to get their views on the proposed alternative forms of disciplinary action. Under its current Strategic Plan, IIROC has committed to actively consulting with retail investors on key policy issues. In line with that commitment, IIROC has established an online pool of 10,000 Canadian investors, from which it consults on key proposals to better understand their needs, experiences and perceptions. IIROC has stated that it intends to draw on a subset of this pool to solicit input on this proposal from retail investors across Canada.

Following the close of the 90-day comment period, IIROC intends to draft a consolidated response to the written comments received and, where appropriate, revise the proposals to address the comments received. IIROC also intends to publish the results of the investor survey. Finally, IIROC staff may also consider inviting those who submit comments to a meeting to discuss issues related to the adoption and implementation of the proposals. Any comments should be made in writing and delivered by May 23, 2018.


No Early Disclosure: Quebec Court of Appeal Confirms Protection for Public Issuer

Plaintiff-shareholders in Quebec are not entitled to early document disclosure when seeking leave to bring claims against public issuers for secondary market liability. The Quebec Court of Appeal’s decision in Amaya[1] confirms that the “screening mechanism” under the Quebec Securities Act[2] to root out frivolous claims by plaintiff-shareholders is analogous to the statutory remedies available in other provinces and is meant to protect public issuers.

This decision should be read as victory for public issuers faced with such secondary market liability claims in Quebec. Except for seeking disclosure of relevant insurance policies, plaintiff-shareholders in Quebec are not entitled to early document disclosure to assist in their leave applications to the court.

Legislative Context

Like other provinces, Quebec has enacted a legislative remedy for plaintiff-shareholders who allege they have suffered losses in the secondary market for publicly-traded securities due to wrongful conduct by public issuers.[3] Under Quebec’s Act, plaintiff-shareholders are partially relieved from establishing that the public issuer caused their loss — an element they would be otherwise required to establish under the general civil liability regime of the Civil Code of Quebec.[4]

This advantage for plaintiff-shareholders, however, is balanced with the requirement that they first secure leave of the court to bring a claim against the public issuer for secondary market liability. This requirement, under s. 225.4 of Quebec’s Act,  serves as a  “screening mechanism” to protect public issuers and their shareholders from frivolous or bad faith actions, sometimes called “strike suits”, brought by investors who seek to take advantage of the favourable statutory recourse by bringing meritless actions.[5]

The plaintiff-shareholders in Amaya sought production of certain Amaya documents, including any insurance policies, to establish that their claims were not meritless. The motions judge held that Quebec’s Act was silent on the right to early document disclosure and, in that legislative gap, he applied the Code of Civil Procedure[6] to enable an albeit limited document request by the plaintiff-shareholders.

The Appeal Decision

The Court of Appeal held that the motions judge’s interpretation of s. 225.4 was incorrect. Kasirer JA, writing for the unanimous panel, held that document disclosure should not be allowed at this early stage of the proceedings because it is incompatible with the legislative policy pursued in the screening mechanism under section 225.4 of the Act.[7]  While the underlying policy for the statutory remedy is to make available a remedy for aggrieved shareholders, the underlying policy of the screening mechanism requiring leave is to protect public issuers against frivolous lawsuits brought by investors who have no meaningful evidence to show their loss. The screening mechanism, Kasirer JA held, contributes to protect the public confidence in the capital markets and avoids costs and wasted time on meritless litigation.[8]

As such, the screening mechanism cannot be the opportunity for the plaintiff-shareholder to conduct a fishing expedition of the public issuer. At this early stage, the evidentiary bar is lower and the plaintiff shareholder must only show some credible evidence that the suit is not destined to fail. They are not, at this early stage, entitled to document disclosure to assist them.[9] The Court of Appeal cited similar decisions in Ontario courts under its corresponding legislation, aligning the interpretation of Quebec’s Act with those in other provinces.[10]

The Court of Appeal, however, did uphold the motions judge’s decision to compel the early disclosure of the insurance policies held by the public issuer.


The nominal differences in wording between the Quebec Act’s statutory remedy and those in other provinces do not warrant a departure from the policy common to securities legislation among the provinces: while the statutory remedy has been made available for plaintiff-shareholders to bring claims for secondary market liability, the screening mechanism is in place to prevent its abuse.

To provide plaintiff-shareholders with early document disclosure, apart from any insurance policies, undermines this balance struck in the legislation.

The Amaya decision reinforces the protection for public issuers — and their innocent shareholders — and balances the statutory remedy against its abuse.


[1] Amaya inc. c. Derome, 2018 QCCA 120. [Amaya]

[2] CQLR c V-1.1. [the Act]

[3] An Act to amend the Securities Act and other legislative provisions, S.Q. 2007, c. 15.

[4] CQLR c CCQ-1991.

[5] Theratechnologies Inc. v. 121851 Canada Inc., 2015 SCC 18 (CanLII), [2015] 2 S.C.R. 106, para. [39].

[6] CQLR c C-25.01.

[7] Amaya, para. 103.

[8] Amaya, para. 84.

[9] Amaya, para. 105

[10] See, e.g., Ainslie v. CV Technologies Inc., 2008 CanLII 63217 (Ont. S.C.J., per Lax, J.), section 138.8(1) of the Ontario Securities Act, the screening mechanism analogous to s. 225.4 of the Quebec Act.  In the class action context, see, e.g., Mask v. Silvercorp Metals Inc., 2014 ONSC 4161 (Ont. S.C.J., per Belobaba, J.), leave to appeal refused, 2014 ONSC 4647 (Div. Ct., per Perrell, J.).