Motions for Further Disclosure in OSC Proceedings: Privilege, Relevance and Proportionality

In a recent decision of the OSC in Re Caldwell Investment Management Ltd. (October 12, 2018), a hearing panel (the “Panel”) denied a motion by Caldwell Investment Management Inc. (“Caldwell”) for further pre-hearing disclosure from OSC Staff. The motion was made in the context of an upcoming enforcement proceeding alleging, among other things, that Caldwell had breached its best execution obligation under s. 4.2 of NI 23-101 by placing most of its trades for execution through a related dealer, without having adequate policies and procedures in place to ensure that Caldwell’s best execution obligation was being met.

Caldwell brought a motion under R. 27 of the OSC’s Rules of Procedure seeking an order requiring Staff to disclose additional documents and information in Staff’s possession alleged to be necessary to enable Caldwell to defend itself. This included materials related to Staff’s discussions with its expert, and materials related to best execution practices and procedures of other OSC registrants obtained through the Commission’s regulatory programs, including information from firms that use affiliated dealers to execute orders on behalf of clients.

The Panel denied both requests.

With respect to the request for materials related to Staff’s discussions with its expert, consistent with Moore v. Getahun 2015 ONCA 55, the Panel determined that notes reflecting an expert’s preliminary views and “partial draft expert reports” of an expert who had not yet produced a final report are protected by litigation privilege and do not have to be disclosed. Since an expert report, if delivered by Staff, would be provided to Caldwell in due course, there was “no compelling reason to subordinate the privilege to a need to disclose to allow for full answer and defence”.

The Panel also denied the request for production of information and materials in Staff’s possession related to other OSC registrants.

In its Statement of Allegations, Staff allege that Caldwell was in a conflict of interest in directing trades to its related dealer for execution, and that in many cases, the equity commission rates and bond spreads charged by the related dealer were significantly less favourable than what unaffiliated dealers were charging Caldwell. Examples of the average commission rate charged to a particular Caldwell mutual fund by the related dealer in comparison to the average rate charged to the same Caldwell fund by the unaffiliated dealers were specified in the Statement of Allegations. Staff also allege that Caldwell made misleading statements in its Annual Information Form that it paid brokerage fees “at the most favourable rates available to the Funds”.

According to the Panel, at issue was Caldwell’s best execution practices measured against the applicable regulatory standard, not against other registrants whose business models, services, markets and types of clients will all vary. Accordingly, the “raw materials” demanded by Caldwell were judged not to be helpful to its defence and accordingly not required to be produced by Staff pursuant to its obligations under the Stinchcombe standard.

The Panel also concluded that disclosure of such information obtained by Staff from other registrants, who were not party to the motion, would undermine those registrants’ expectations of confidentiality in the examination process.

Finally, the Panel noted that in addition to lack of relevance, the requested production “would be a very onerous task that would adversely affect the efficiency of a proceeding of this kind”.  Unfortunately, this concept of proportionality has not been applied by OSC Staff during investigations, when vast amounts of electronic documents and data may be demanded of market participants pursuant to a summons issued under s. 13 of the Securities Act, regardless of the cost to produce.


Even “Small Frauds” May Warrant the Imposition of Significant Sanctions by Securities Regulators

In Re Davis, 2018 BCSECCOM 284, the British Columbia Securities Commission upheld permanent market prohibitions against Mr. Davis who committed fraud on one investor in the aggregate amount of (only) $7,000.


Mr. Davis, who was never registered under the Securities Act (B.C.), purported to sell shares that he did not own to an investor over a period of two years. Throughout that time, Davis continued to deceive the investor by providing false assurances regarding the status of the shares. Although the investor was successful in obtaining repayment of her $7,000 through court proceedings, the Commission, in its 2016 decision, imposed permanent market prohibitions and a $15,000 administrative penalty.


Mr. Davis appealed the Commission’s imposition of the permanent market prohibitions on the basis that they were unreasonable. In particular, Mr. Davis argued that the panel had failed to consider his unblemished record in the industry and the principle of proportionality.  The Court of Appeal agreed.  It concluded that the Commission had failed to conduct an individualized assessment of Mr. Davis’ personal circumstances, and remitted the matter back to the Commission for reconsideration.


As directed, the Commission considered Mr. Davis’ personal circumstances, in particular the evidence regarding his livelihood and his unblemished career in the capital markets industry. The evidence revealed, however, that since late 2011 or early 2012, he had moved on to other types of work and was no longer dependent upon his involvement in the capital markets to earn a living. Further, the fact that Mr. Davis had no prior regulatory history was inconsequential to the Commission’s decision to impose section 161 prohibition orders, which are intended to be “protective and preventative”.

While the amount of the fraud was relatively small, Mr. Davis’ misconduct involved ongoing deceitful conduct over two years, which demonstrated a significant lack of honesty and integrity.  In addition, the investor was deprived of her funds for several years, suffered emotional harm and had to seek recourse to the courts for recovery.  Accordingly, the Commission found that the significant risk Mr. Davis posed to the integrity of the capital markets and to investors warranted (re)ordering permanent market prohibitions.


This decision serves as a reminder that participants in the securities industry are held to high standards of honesty and integrity. As a result, they should expect that the securities regulators will impose significant sanctions if they commit securities fraud, even “small” ones.


The author would like to thank Maha Mansour, articling student, for her contribution to this article.

From boom to busted: TMF deems PlexCoins as investment contracts

The legal noose is tightening around the necks of rogue cryptocurrency issuers in Quebec. PlexCorps’s legal troubles, as covered in our previous post, have deepened.

In Autorité des marchés financiers c. PlexCorps, 2018 QCTMF 91, the Tribunal des Marchés Financier (TMF) qualified PlexCoin as an investment contract within the meaning of Quebec’s Securities Act. This should come as no surprise as all TMF decisions to date have qualified cryptocurrency products as investment contracts.[1]

Background: a Burgeoning Crypto-Fraud Business

PlexCorps offered a cryptocurrency called PlexCoin along with financial services such as the PlexCard, PlexWallet and PlexBank. It was run by Dominic Lacroix and, his spouse, Sabrina Paradis-Royer.

The whitepaper stated that it targeted people across the world except in Quebec, Canada and the United States. Nonetheless, residents in all three jurisdictions had access to the presale of PlexCoin.

The respondents were not registered to act as investment dealers under the Securities Act. They had neither issued a prospectus nor been exempt from the issuance thereof. Undeterred, PlexCorps promised staggering returns of between 200% and 1,354% upon purchase of PlexCoin on its website and in its whitepaper.

PlexCorps’ claims to riches captured the imagination of many. By July 18, 2017, more than 50,216 people were subscribed on the PlexCoin website for the presale of the cryptocurrency. The PlexCoin Facebook page counted more than 49,254 likes. More importantly, between July 3, 2017 and October 4, 2017, 108,028 investors participated in the presale of PlexCoin, with $2,201,154.92 raised in September 2017.

In considering the above, the TMF issued the following two ex parte orders:

  • On July 20, 2017, a cease and desist order against the respondents ordering, among other things, the removal of their websites and Facebook pages and the withdrawal of their ads and solicitations.
  • On September 21, 2017, a freeze order and a cease trade order against Sabrina Paradis-Royer.

The respondents contested these orders, which led to a de novo hearing before the TMF. We focus on the discussion surrounding the applicability of the definition of investment contracts to PlexCoin below.

Key Takeaways

  • To determine the appropriateness of the orders, the TMF determined whether PlexCoin was an investment contract within the meaning of the Securities Act. To do so, the TMF analyzed the four elements of an investment contract:

Investors undertook to participate in a venture

The fact that a person could subscribe to the presale of PlexCoin and/or its subsequent acquisition constituted an undertaking within the meaning of an investment contract.

Having been led to expect profits

PlexCorps’ website, its whitepaper and Facebook page published content that created an expectation of profit. For instance, the whitepaper stated that the “ROI” on PlexCoin could be 1,354% after 29 days of purchase if purchased in the first phase of sales.

Investors participated in the risk of a venture by a contribution of capital or loan

The TMF rejected the view that the purchase of PlexCoins – a purported currency of sorts – was not a “venture.” The PlexCoin venture included the issuance of PlexCoins, its marketing, the maintenance of its liquidity and security, and the creation of a viable market for its trading. The creators of PlexCoin had a responsibility beyond the issuance of the coin and were essential in the operations of the PlexCoin venture.

The TMF distinguished PlexCoin from Bitcoin on the basis that it was “centralized.” In other words, a human organization led by a few individuals steered the PlexCoin project. In purchasing PlexCoins, investors were participating in the risks of the venture led by this same organization.

Without having the required knowledge to carry on the venture or without obtaining the right to participate directly in decisions concerning the carrying on of the venture

The investors in PlexCoin had only one decision: to invest or not to invest. Beyond that, they exerted no other form of control over the PlexCoin venture. The TMF highlighted that the creators of PlexCoin specifically targeted potential investors that did not have knowledge in the cryptocurrency space.

As a result, PlexCoin satisfied all four criteria of an investment contract.

  • The economic reality of PlexCoin was such that the only purpose for an investment in PlexCoin was for its alleged financial upside. No other use for PlexCoin existed as its ancillary services were unavailable at the time of its sale. Moreover, just because PlexCoin was tradable on an open market was not sufficient, in of itself, to exempt from it from being an investment contract.
  • The TMF carefully distinguished PlexCoin from Bitcoin on the basis that:
    1. PlexCoins were not issued via a mining process;
    2. PlexCoin’s supply was entirely controlled by the respondents;
    3. the respondents kept a list of all purchasers and credited them with bonuses; and
    4. PlexCoin was governed by a human organization while Bitcoin is not.
  • The TMF is alive to US case law. The TMF held that because the SCC considered SEC v. W.J. Howey Co. in Pacific Coast Coin Exchange, it was open for Canada to examine US law in determine the scope application for investment contracts.

[1] See Autorité des marchés financiers c. CreUnite, 2018 QCTMF 8; Autorité des marchés financiers c. Usi-Tech Limited, 2018 QCTMF 24; Autorité des marchés financiers c. Simard, 2017 QCTMF 126.

Ontario Court Imposes Custodial Sentence for Securities Act Offences

The Ontario Superior Court of Justice has released what appears to be the final chapter in the Ontario Securities Commission’s (OSC) prosecution of Daniel Emerson Tiffin and Tiffin Financial Corporation.


In July 2014, the Ontario Securities Commission’s administrative proceedings against Rezwealth Financial Services Inc., Pamela Ramoutar, Justin Ramoutar, Tiffin Financial Corporation, Daniel Tiffin, 2150129 Ontario Inc., Sylvan Blackett, 1778445 Ontario Inc. and Willoughby Smith, resulted in an order under s. 127 of the Securities Act (the Act) prohibiting Daniel Emerson Tiffin (Mr. Tiffin) and TFC from trading in securities or relying upon any exemption in Ontario securities law for a period of five years.  Despite this sanction, Mr. Tiffin subsequently issued fourteen promissory notes to a number of his investment clients for the purpose of raising money for his company, Tiffin Financial Corporation (TFC), and for his own personal use.  The OSC then charged Mr. Tiffin and TFC with breaches of s. 122(1)(c) of the Act for issuing promissory notes while subject to a cease trade order.

As previously discussed in two prior posts, Mr. Tiffin and TFC were initially acquitted of all charges, with the Ontario Court of Justice finding that promissory notes could not be considered “securities” within the meaning of the Act.  That decision was overturned on appeal. Justice Charney of the Ontario Superior Court of Justice rejected the “family resemblance” test applied by the lower court and held that a promissory note was a “note or other evidence of indebtedness” and therefore fell within the definition of a “security” under the Act.  As a result, the appeal was allowed and the Court substituted a conviction under s. 121(b)(ii) of the Provincial Offences Act.  A sentencing hearing was scheduled.


On September 26, 2018, the Ontario Superior Court of Justice released reasons for Mr. Tiffin’s sentence.  In imposing a six month custodial sentence and 24 months of probation, Charney J. took into account the following aggravating and mitigating factors:

  • Aggravating Factors:
    • Tiffin took advantage of his position of trust and his knowledge of his clients’ financial circumstances to borrow money for his own personal gain;
    • Tiffin used a portion of the borrowed money to pay for personal loans on luxury items, suggesting that he was motivated by greed rather than need;
    • Tiffin was a repeat offender and under a temporary cease trade order when a number of the promissory loans were issued; and
    • Tiffin still owed substantial amounts in principle, interest, restitution, costs and administrative penalties.
  • Mitigating Factors:
    • Tiffin received letters of support from five of the six lenders from whom he borrowed;
    • Tiffin was transparent with his clients about his desperate financial situation, suggesting that he did not seek to deceive or defraud;
    • Tiffin showed remorse and demonstrated an intention to repay the money that he borrowed from his clients; and
    • Tiffin had made attempts at repayment.

Ultimately, Justice Charney concluded that while Mr. Tiffin’s offences were of a regulatory rather than criminal nature, both general and specific deterrence require that serious penalties be imposed on individuals who abuse positions of trust and violate securities law.  In Mr. Tiffin’s case, His Honour found that restitution and financial penalties alone were not sufficient, as they would simply amount to a “license fee” for violating the law.  Rather, analogous case law suggested that a custodial sentence of 6 months was appropriate in the circumstances.  Mr. Tiffin was also sentenced to 24 months’ probation, the conditions of which, among other typical probationary requirements, prohibit Mr. Tiffin from trading in securities.

The decision stands as a stark reminder that serious violations of Ontario securities law may result in significant penal consequences.


The author would like to thank Brandon Burke, articling student,  for his contribution to this article.

When do inferences become unreasonable and contrary to the rules of procedural fairness?

As there is almost never direct, ‘smoking gun’ type evidence of insider trading, securities regulators often rely on circumstantial evidence in enforcement proceedings, from which they invite the specialized securities tribunals to draw inferences.

What is the line not to cross for these inferences to become unreasonable and contrary to rules of procedural fairness?

Referring to the Alberta Court of Appeal judgment in Walton v Alberta (Securities Commission), 2014 ABCA 273 (CanLII), the Court of Quebec, sitting in judicial review of the Financial Markets Administrative Tribunal’s decision in Dionne-Bourassa v. Autorité des marchés financiers, 2018 QCCQ 5749 (CanLII) , reminds us where that line is drawn:

  • In administrative enforcement proceedings before a securities tribunal, a breach of securities legislation must be proven on a balance of probabilities, based on clear, convincing and cogent
  • Speculation – described as the drawing of an inference when there is an evidentiary gap, based on an “educated guess”, or in situations where there is no “air of reality” to the inference ‑ and conjecture are not the equivalent of proper inferences.
  • The tribunal cannot make unreasonable inferences from the regulator’s circumstantial evidence and then shift the burden of proof to the defendants. In this instance, the Court found that the Tribunal only analysed the circumstantial evidence favorable to the regulator, failing to consider, even summarily, the evidence put forth by the defendants. This was found to have tainted the integrity of the Tribunal’s decision.

The Court also holds that in its written pleadings, the securities regulator must make clear, precise and specific allegations as to when and how the Securities Act would have been breached in order for the defendants to know what they are facing and to have a real opportunity to respond and defend themselves. This is a basic tenant of procedural fairness.

In closing, the Court writes that while the confidence of investors in the financial markets does rest on compliance with the rules set out in the Securities Act and their enforcement, it also rests on there being a fair process before someone is found to have breached the rules.

Leave to appeal by the Autorité des marchés financiers of the Court of Quebec decision was recently denied (2018 QCCA 1468).

The drawing of inferences from circumstantial evidence in insider trading cases has also been discussed in matters before the Ontario Securities Commission. To read recent cases, see

If you are interested in reading more on decisions in securities matter addressing the issue of what constitutes sufficient or insufficient evidence, we also invite you to read

The author would like to thank Dan Ton-That, student, for his contribution to this article.

CSA Proposes Rule Regarding Non-GAAP and Other Financial Measures

Introduction and Background

On September 6, 2018, the Canadian Securities Administrators (CSA) issued a notice and request for comment on Proposed National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (the Proposed Instrument), Proposed Companion Policy 52-112 Non-GAAP and Other Financial Measures Disclosure (the Proposed Companion Policy) and related proposed consequential amendments and changes to various other instruments and policies.[1]

Currently, CSA staff guidance on non-GAAP and other financial measures is contained in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures (SN 52-306), which was first introduced in 2003. Although SN 52-306 has been updated several times to respond to changing circumstances, and despite the fact that Canadian securities regulators have published various staff notices and reports that comment on the topic, the CSA noted in its request for comment on the Proposed Instrument and Proposed Companion Policy that it continues “to find that disclosure practices surrounding non-GAAP financial measures vary.”

If implemented, the Proposed Instrument would replace current CSA guidance, including SN 52-306. Importantly, unlike current CSA guidance, the Proposed Instrument (once final) would be legally binding on issuers.

The Proposed Instrument is intended to address disclosure requirements for non-GAAP and other financial measures. It includes comprehensive disclosure requirements whose overall goal is to improve the quality of information provided to investors.

Overview of the Proposed Instrument

The scope of the Proposed Instrument is broad. It will apply to all issuers[2] (including investment funds), except for SEC foreign issuers, and all documents (e.g., MD&A, press releases, Annual Information Forms, prospectuses, etc.) including other written communications in websites or social media.

There are, however, some exceptions to the scope of the Proposed Instrument. For example, the updated definition of “non-GAAP financial measure” excludes all measures “presented” or “disclosed” (as those terms are defined in the Proposed Instrument) within an issuer’s financial statements.

The Proposed Instrument pertains to and sets out disclosure requirements for four types of financial measures, the latter three of which are new concepts that have been introduced in the Proposed Instrument:

  • Non-GAAP financial measures: A “non-GAAP financial measure” means: (a) “a financial measure of financial performance, financial position or cash flow that is not disclosed or presented in the financial statements and that is not a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements”, or (b) “a financial outlook for which no equivalent financial measure is presented in the primary financial statements”.
    • The Proposed Companion Policy provides that common terms used to identify non-GAAP financial measures may include “adjusted earnings”, “adjusted EBITDA”, “free cash flow”, “pro forma earnings”, “cash earnings”, “distributable cash”, “cost per ounce”, “adjusted funds from operations”, and “earnings before non-recurring items”.
  • Segment measures: A “segment measure” is “a financial measure of segment profit or loss, revenue, expenses, assets, or liabilities that is disclosed in the notes to the financial statements.”
  • Capital management measures: A “capital management measure” is a “financial measure that is disclosed in the notes to the financial statements to enable users of financial statements to evaluate the issuer’s objectives, policies and processes for managing capital.”
  • Supplementary financial measures: A “supplementary financial measure” means a financial measure that is not disclosed or presented in the financial statements and that (a) “is a disaggregation, calculated in accordance with the accounting policies used to prepare the financial statements, of a line item presented in the primary financial statements”, and (b) “is, or is intended to be, disclosed on a periodic basis to present an aspect of financial performance, financial position or cash flow”.

The disclosure requirements in the Proposed Instrument are substantially similar to the guidance provided in the current SN 52-306. For instance, it requires that an issuer not disclose a non-GAAP financial measure unless: (a) it is labelled appropriately given its composition and in a way that distinguishes it from totals, subtotals and line items presented in the primary financial statements; (b) it is presented with no more prominence in the document than the most directly comparable financial measure presented in the primary financial statements; (c) the document presents the same non-GAAP financial measure for the comparative period; and (d) the document complies with certain other requirements that apply when the measure first appears in the document. The requirements for the other types of financial measures – segment, capital management, and supplementary – are similar.

With that being said, issuers (and other stakeholders) may be pleased to find that the Companion Policy contains significantly more guidance than the current SN 52-306.


Publication of the Proposed Instrument, the Proposed Companion Policy and related materials signals that securities regulators across Canada are taking a closer look at issuers’ disclosure practices.

Although not yet final, the Proposed Instrument and Proposed Companion Policy provide additional guidance concerning regulatory expectations of issuers as it relates to non-GAAP disclosure practices. Issuers are reminded that Staff Notice 52-306 “cautions issuers that regulatory action may be taken if an issuer discloses information in a manner considered misleading and therefore potentially harmful to the public interest.” We expect an increase in regulatory reviews and enforcement once the Proposed Instrument becomes final.

In the interim, use of non-GAAP measures in a manner that leaves a misleading impression of the issuer’s true financial position may also expose an issuer to class action risk. Provincial securities legislation contains statutory causes of action for misrepresentations in offering documents and continuous disclosure.

As scrutiny on this issue sharpens, Canadian public companies should carefully review their accounting and related disclosure practices to ensure adequate transparency with respect to non-GAAP metrics. This is better done proactively than at the behest of a regulator, in the teeth of an activist attack, or in the glare of media scrutiny.

Stakeholders will have until December 5, 2018 to provide comments on the Proposed Instrument, the Proposed Companion Policy and the consequential amendments.


The author wishes to thank Scott Thorner, articling student, for his contribution to this article.

[1] Including Multilateral Instrument 45-108 Crowdfunding (MI 45-108); Companion Policy 45-108 Crowdfunding (45-108CP); Companion Policy 51-102CP Continuous Disclosure Obligations (51-102CP); Companion Policy 51-105CP Issuers Quoted in the U.S. Over-the-Counter Markets (51-105CP); and Companion Policy 52-107CP Acceptable Accounting Principles and Auditing Standards (52-107CP).

[2] Interestingly, the Proposed Instrument uses the language “issuer”, implying that its potential application would not be limited to reporting issuers.

Targets of investigations by Quebec’s security regulator not protected by Charter

The creator of a new cryptocurrency made headlines last year for all the wrong reasons as the target of an investigation by the Autorité des marchés financiers (AMF), Quebec’s securities regulator, and of various court orders.

Dominic Lacroix fought back against the AMF and the judgment in Autorité des marchés financiers v. Lacroix2018 QCCS 3894 is compelling for two reasons.

First, it provides an insight into the powers of the receiver appointed at the request of the AMF.  Second, it holds that the target of an ongoing AMF investigation cannot avail itself of Charter rights such as the right to protection against self-incrimination when subpoenaed to testify and disclose documents by the receiver.

Lacroix v. AMF

Lacroix fell into the crosshairs of the province’s security regulator after raising money for PlexCoin, the cryptocurrency he created to compete against Bitcoin.  Quebec’s Superior Court, at the request of the AMF, named a receiver tasked with managing and securing his assets.  A receiver is a third party appointed by the court and is responsible for securing and selling assets in jeopardy for the benefit of creditors.  Lacroix challenged this appointment, contesting the receiver’s selection and conduct.

The power of the receiver

Referring to article 19 of the Act respecting the AMF, the judge in this case confirmed that the receiver has vast powers. Notably, a receiver has the right to compel someone to appear, to interrogate them, to force them to turn over documentation and to impose punishment in case of contempt of court. The rationale behind such significant empowerment is to protect the investors and, most importantly, the public’s confidence in the financial system and markets.

The target’s rights

Lacroix’s challenge was not, however, to the receiver’s inherent far-reaching powers.  Rather, he argued that the receiver’s subpoena, in requiring him to testify and to turn over documents, infringed on his Charter rights such as the right to protection against self-incrimination. In assessing this claim, the Court determined that a target at the investigation stage is not an accused as no formal charges have yet been laid by the AMF and therefore, the person is not entitled to Charter protection against self-incrimination. Consequently, Lacroix could not claim a violation of his Charter rights at this stage.

The judge nevertheless did leave the door open to Lacroix to raise his Charter rights later down the road, if and when charges are laid, to support a claim to exclude the evidence compelled by the receiver.


The author would like to thank Dan Ton-That, articling student, for his contribution to this article.

Court of Appeal for Ontario expands on auditors’ duty of care

Key take-aways

On September 5 the Court of Appeal for Ontario issued its decision in Lavender v. Miller Bernstein LLP, 2018 ONCA 729.

  • The decision is now the leading judgment by Ontario’s highest court on the duty of care owed by auditors.
  • The Court of Appeal held that an auditor does not owe a duty of care to account holders with a securities dealer simply by virtue of auditing the dealer’s annual registration renewal requirements filed with a securities regulator.
  • The decision confirms that the legal determination of the class of persons to whom an auditor owes a duty of care at law will turn on the facts of each case, in keeping with the Supreme Court of Canada’s decision in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63.


In 2001, the Ontario Securities Commission (OSC) suspended the registration of a securities dealer and placed the dealer into receivership for failing to segregate investor assets and maintain a minimum level of net free capital.[i] Clients with investment accounts at the firm lost millions.

A class action was commenced on behalf of all clients with accounts at the securities dealer alleging that the dealer’s auditor negligently audited an annual registration renewal requirement filed with the OSC (known as Form 9 Reports). The dealer’s Form 9 Reports incorrectly stated that the dealer was in compliance with regulatory segregation and minimum capital requirements.[ii]

A motion judge of the Superior Court of Justice granted summary judgment to the class concluding that the auditor owed class members a duty of care in conducting audits of the dealer and that the auditor fell below the required standard of care.

The auditor appealed the summary judgment decision to the Court of Appeal.

Key holdings

Historically, courts applied the two-stage analysis outlined in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) and Cooper v. Hobart, 2001 SCC 79, to determine the threshold question of whether a duty of care exists in negligence cases. The first stage of the test considers whether a prima facie duty of care exists based on a relationship of proximity and reasonable foreseeability of injury, while the second stage considers whether there are any residual policy reasons for denying liability notwithstanding a finding of duty in the first stage.[iii]

The Supreme Court of Canada’s 2017 Livent decision explained how the Anns/Cooper framework applies to define the duties of care owed by auditors. In that judgment, the Supreme Court reaffirmed that the applicable analysis comprises the following steps:

  • The court will first determine whether a prima facie duty of care exists by:
  • Examining whether the relationship between the auditor and the plaintiff falls within, or is analogous to, a previously established category in which proximity has already been found to exist. If a risk of reasonably foreseeable injury can also be shown—or has already been shown through an analogous precedent—the first stage of the Anns/Cooper framework is complete and a duty of care may be identified. If no established proximate relationship can be found, the court must undertake a full proximity analysis.
  • To determine proximity, the court will examine the circumstances of the relationship between the auditor and the plaintiff—including expectations, representations, the interests involved, and any statutory obligations—to determine whether it is sufficiently close to impose a duty of care.
  • If proximity is established, the court will determine whether the plaintiff’s injury was reasonably foreseeable by looking to whether the auditor should reasonably understand that the plaintiff would rely on its representations and whether such reliance would be reasonable in the circumstances.
  • Where a prima facie duty of care is recognized, either through an existing category or on the basis of a full proximity and reasonable foreseeability analysis, the court must go on to ask whether there are any public policy concerns beyond the relationship of the parties, including the effects of recognizing a duty on other legal obligations, the legal system, and society more generally, that may negate imposing a duty of care.[iv]

Applying this analysis, the Court of Appeal vacated the judgment below, granted summary judgment to the auditor, and dismissed the class’s claim for negligence.[v]

The court held that the motion judge did not have the benefit of the Livent decision at the time the motion was considered,[vi] and as such the motion judge conflated the questions of proximity and foreseeability and made factual findings that amounted to palpable and overriding errors.[vii] Specifically, it found that the relationship between the auditor and the investors was too remote because it was attenuated by the intermediary relationship between the securities dealer and the OSC, and thus the motion judge’s decision stretched proximity “beyond its permissible bounds.”[viii]

The court also noted that the auditor made no representations to the investors directly[ix] and that there was no reliance (or even awareness of) the auditor’s functions by the investors.[x] For these reasons, there was no proximity or reasonable foreseeability to sustain a determination that a duty of care existed, and the court declined to conduct a second-stage policy analysis.

In reaching its conclusion, the court commented that negligence claims for pure economic loss require more heightened scrutiny than other negligence claims.[xi]

The court’s decision provides important guidance to auditors facing claims in negligence, and should be carefully considered by counsel in developing effective defence strategies. In particular, the decision appears to limit the liability of defendant auditors who make no representations to members of a putative class,[xii] whose existence or involvement with a dealer is unknown to investors,[xiii] or whose work product is not shared with plaintiffs or relied on by them in making investment decisions.[xiv]


The author wishes to thank law student Maha Mansour for her help in preparing this article.


[i]       2018 ONCA 729, at para. 1.

[ii]       Ibid, at para. 2.

[iii]      Ibid, at para. 29.

[iv]      Ibid, at paras. 30-41.

[v]       Ibid, at paras. 76-77.

[vi]      The motion was argued on June 27 and 29, 2017, and reasons for judgment were issued on July 12, 2017. The Supreme Court of Canada’s Livent decision was not released until December 12, 2017.

[vii]     2018 ONCA 729, at para. 68.

[viii]     Ibid, at paras. 25-26.

[ix]      Ibid, at para. 65.

[x]       Ibid, at para. 67.

[xi]      Ibid, at para. 72.

[xii]     Ibid, at para. 66.

[xiii]     Ibid.

[xiv]     Ibid, at para. 67.

Quebec Court of Appeal clarifies the essential elements of the offences of market manipulation and complicity under the Quebec Securities Act

On September 5, 2018, the Quebec Court of Appeal rendered a unanimous judgment in Autorité des marchés financiers c. Forget, 2018 QCCA 1419 (Forget) clarifying the essential elements of the mens rea offence of market manipulation set out at section 195.2 of the Quebec Securities Act (QSA):

195.2. Influencing or attempting to influence the market price or the value of securities by means of unfair, improper or fraudulent practices is an offence.

and of the offence of complicity set out at section 208 QSA :

208. Every person who, by act or omission, aids a person in the commission of an offence is guilty of the offence as if he had committed it himself. He is liable to the penalties provided in section 202, 204 or 204.1 according to the nature of the offence.

The same rule applies to a person who, by incitation, counsel or order induces a person to commit an offence.


The Autorité des marchés financiers (AMF) charged the founding shareholder and CEO of Les Technologies Clémex (Clémex) with the offence of market manipulation under section 195.2 QSA for :

  • having purchased 20,000 shares of Clémex at market price (which ended being in the range of $0.22 to $0.24 per share) on July 29, 2008, a few days before the announcement of a private placement of Clémex shares at a price of $0.20 (the July transactions); and
  • having purchased 15,000 shares of Clémex at market price with a cap of $0.20 per share on December 9, 2008, when the then most recent transaction was at a price of $0.04 per share (the December transactions).

His financial advisor was also charged under section 208 of the QSA, for having aided the CEO in the commission of an offence.

In respect of the July transactions, the AMF mainly argued that they had caused the Clémex share price to move up 41% to $0.24 per share, that their timing was close to the upcoming announcement of the private placement at $0.20 per share and that the CEO had an ‘indeniable interest’ in having the Clémex share price increase ahead of the private placement to ensure that it could close at the agreed-upon price of $0.20 per share. In respect of the December transactions, the AMF argued that they sought to ensure a higher closing price on December 9 than $0.04 per share.

The first instance judge acquitted the CEO and his financial advisor, finding that the AMF had failed to meet its burden of proving all elements of the offences beyond a reasonable doubt. The Superior Court dismissed the AMF’s appeal of the acquittal. The Court of Appeal confirmed the acquittal and seized the opportunity to clarify the essential elements of the offences of market manipulation and of complicity.

The Decision

The Court of Appeal begins with an important introductory comment to the effect that the importance of protecting the integrity of the financial markets in no way diminishes the prosecution’s burden of proof. In any penal proceeding, the AMF has to prove the essential elements of the offences beyond a reasonable doubt to secure a conviction.

The essential elements of the offence of market manipulation

The Court confirms at the outset that section 195.2 creates a mens rea offence, requiring proof of the accused’s intent, as opposed to a strict liability offence not requiring any proof of intent.

The actus reus of the offence of market manipulation will be established by proof, beyond a reasonable doubt, of a dishonest act, namely the use of an unfair, improper or fraudulent practice, which influenced or attempted to influence the market price or the value of a security.

The Court confirms that an “unfair, improper or fraudulent practice” must be dishonest, failing which many legitimate transactions which do influence the market price of a security could wrongly fall under section 195.2 QSA. As all courts involved in this case pointed out, “any stock market transaction is likely to influence the price of a security, particularly in the case of an illiquid, low-price security: this cannot, in itself, lead to the conclusion that this effect stems from an unfair, improper or fraudulent practice[1].

In the words of the Court of Appeal, the common denominator to the three adjectives used in section 195.2 QSA – unfair, improper and fraudulent – is a “dishonesty attached to thwarting the mechanisms of the free market, to manipulate it (in the pejorative sense of the term): we are talking here about subterfuge, artifice, machination[2].

Evidence of unfair, improper or fraudulent practice will be established in accordance with the objective standard of the reasonable person, without it being necessary to try to distinguish between the unfair, the abusive and the fraudulent.

The mens rea of the offence of market manipulation will be established by proof, beyond a reasonable doubt, that the accused “had the subjective knowledge that he was committing a prohibited act (the dishonest act incarnated in the unfair, improper or fraudulent practice) and the subjective knowledge that this act would influence or be likely to influence the price or the value of the security, or that he did not care about either of them[3].

The essential elements of the offence of complicity

The Court begins its analysis of the charge against the financial advisor by recalling that section 208 QSA ‑ which provides that any person (in this instance, the financial advisor) who aids a person (in this instance, the CEO who was the ‘principal author’ of the offence) in the commission of an offence is guilty of the offence as if he had committed it himself – does not create a distinct offence but rather a mode of participation in the offence committed by the ‘principal author’.

The actus reus of the offence under section 208 QSA will be established by proof, beyond a reasonable doubt, of the commission of an offence by the ‘principal author’[4] and of aid provided by the accused to the commission of the offence by the ‘principal author’. Referring to the Court of Appeal’s decision in Desbiens c. Autorité des marchés financiers, [2017] QCCA 1690 (Desbiens), the Court reminds us that the aid referred to in section 208 QSA must “be connected, temporally and logically, with the commission of the offence; it must have had the real effect of aiding the commission of the offence by the principal author[5].

Finally, the Court specifies that proof of the commission of an offence by the ‘principal author’ need only be made against the charged accomplice and does not require that the ‘principal author’ have been charged, nor convicted.


The reminder by the Court of Appeal that the mission of the AMF to protect the integrity of the financial markets does not lighten its burden of proof when it chooses to engage penal proceedings ensures that Courts will hold the AMF to the same standard of proof – beyond a reasonable doubt ‑ as all public prosecutors in order to secure a conviction.

It is now firmly established – barring a successful appeal of the AMF to the Supreme Court of Canada – that the offence of market manipulation is a mens rea offence, requiring proof of intent, and that the actus reus requires proof, beyond a reasonable doubt, of a dishonest act, namely the use of an unfair, improper or fraudulent practice.

Courts should thus no longer convict on the basis of a fluctuation in the market price of a security, without evidence, beyond a reasonable doubt, that a dishonest practice caused the fluctuation.

[1] Unofficial translation, Forget, para 51.

[2] Unofficial translation, Forget, para 35.

[3] Unofficial translation, Forget, para 37.

[4] Unofficial translation, Forget, para 84: “one cannot of course, within the meaning of this provision, be criminally responsible for having helped a person who has not committed an offense”.

[5] Unofficial translation, Desbiens, para 43.




Quebec Superior Court dismisses action for damages against Autorité des marchés financiers

In Mallat c. Autorité des marchés financiers de France, 2018 QCCS 3867, Cohen J. granted a motion to dismiss an action brought by three Ubisoft executives (Plaintiffs) against the Autorité des marchés financiers de France (AMFF) and the Autorité des marchés financiers du Québec (AMFQ).

Among many demands[1], the Plaintiffs requested declarations that the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the MMoU) ‑ to which more than one hundred securities regulators world-wide are parties ‑ was invalid, that the subpoena sent by the AMFQ compelling the testimony of the Plaintiffs was an illegal search and seizure, that the evidence gathered, namely through the compelled interviews, was illegally obtained and abusive and sought $3.2 million in damages.

Cohen J. unequivocally disagreed with all of Plaintiffs’ submissions, finding no basis for any of the conclusions sought by them.


On February 21, 2014, pursuant to the terms of the MMoU, the AMFF requested the AMFQ’s assistance in connection with an investigation of Ubisoft Montreal employees. The Plaintiffs had allegedly sold Ubisoft shares before an October 2013 public announcement about delays in the delivery dates of Watch Dogs and The Crew, two much-anticipated videogames.

On March 10, 2014, further to a request of the AMFF, the AMFQ sent a subpoena to Plaintiffs requesting the disclosure of documents, including their work emails. In response thereto, to the knowledge of Plaintiffs, Ubisoft France remitted the requested documents to the AMFF directly.

Six month later, the AMFQ informed the Plaintiffs that the AMFF wanted to meet with them on a voluntary basis. The Plaintiffs refused to meet unless compelled to do so. The Plaintiffs were subsequently subpoenaed by the AMFQ. Their examinations were held in the AMFQ’s offices in the presence of AMFQ and AMFF investigators. The latter had been designated as AMFQ investigators for the sole purpose of the compelled examinations. The role of the AMFQ investigators was essentially limited to reading them their rights under the Canadian Charter[2] and the Quebec Charter while the AMFF investigators asked all the questions.[3] Following the examinations, the AMFQ closed its investigation file while the AMFF continued on with its investigation.

The AMFF prepared an investigation report which included references to the transcripts of the Plaintiffs’ examinations conducted in Quebec as well as their emails and voicemails disclosed by Ubisoft France further to the AMFQ subpoena. On the basis of this investigation report, the College of the AMFF instituted penal proceedings in France against the Plaintiffs for insider trading.

In a December 7, 2016 decision, France’s “Commission des sanctions” (Commission) decided that the transcripts of the Plaintiffs’ examinations conducted in Quebec should be struck from the record due to violation of French law, namely violation of the protection against self-incrimination[4] afforded to Plaintiffs, but nevertheless condemned the Plaintiffs to pay sums of several hundred thousand euros.

The Issues and the Decision

Cohen J. decided numerous issues, her most salient conclusions being the following:

The Quebec Superior Court does not have jurisdiction to determine the constitutionality of the MMoU

Citing art. 529 of the Code of Civil Procedure, Cohen J. determined that the Superior Court of Quebec did not have jurisdiction to declare that a private international accord, such as the MMoU, is invalid because it is neither a law, a regulation or a governmental decree.

The AMFQ’s actions did not breach any of Plaintiffs’ Charter rights

Relying on the SCC’s guidance in Branch[5], Cohen J. affirmed that the AMFQ’s power to compel testimony and production of documents in the context of securities investigation does not violate articles 7 and 8 of the Canadian Charter.[6] The Court held that the AMFQ’s conduct was within its competence as prescribed by the Securities Act[7] and the MMoU, signed and executed in accordance with article 33 of the Act respecting the Autorité des marchés financiers[8] (the LAMF).

The subpoena and seizures were not abusive

The Court declined to recognize the seizures of Plaintiffs’ documents as abusive. Indeed, the seizure was done by way of a subpoena as opposed to a search warrant and Plaintiffs had a low expectation of privacy towards their work emails. The Court questioned the Plaintiffs delay in opposing the disclosure of documents. The Court observed that the Plaintiffs only objected to the document subpoena in early 2017, three years after the voluntary delivery of documents to the AMFF.

Cohen J. further reasoned that even if there had been a violation of the Canadian Charter by the AMFQ and AMFF in issuing a subpoena and requesting disclosures, article 24 of the Canadian Charter could not provide adequate remedies as no further procedures were instituted against the Plaintiffs in Canada.

The compelled examinations did not breach Plaintiffs’ right to remain silent

Cohen J. held that Plaintiffs did not have a right to remain silent when questioned by investigators of the AMFQ as its investigation is administrative in nature, as opposed to criminal or penal. Under the Securities Act, a compelled person is obliged to answer questions put to her by AMFQ investigators, failing which the person is in contempt. In return for being so obliged, the person benefits from the protection of Canada’s Evidence Act and the person’s compelled answer shall not be used or admissible in evidence against her in any criminal trial or other criminal proceeding, other than a prosecution for perjury in the giving of that evidence or for the giving of contradictory evidence. In this instance, no criminal or penal proceedings were ever instituted against the Plaintiffs in Canada.

The AMFQ is protected from any recourse against it by its immunities

The Court recalled articles 283 of the LAMF and 32 of the Securities Act, which grant the AMFQ absolute immunity from proceedings, “no matter the nature of the recourse against it”, for official acts done in good faith in the execution of their duties.[9] Cohen J. added that articles 240 of the Securities Act and 16 of the Act respecting public inquiry commissions[10] afford additional immunity in the context of investigations. The Court found that the AMFQ had acted within its competence and the execution of its duties, and was thus protected by its immunities.



A foreign regulator can request and obtain the assistance of the AMFQ in the context of a foreign securities investigation under the MMoU, which can include (1) the designation of the foreign investigators as AMFQ investigators and (2) the conduct of compelled interviews of targets by these foreign investigators in Québec.

In this instance, the French regulator essentially took advantage of the legal regime in Québec – which prohibits the target of an “administrative securities investigation” to refuse answering questions – to compel the testimony of the Plaintiffs when the French legal regime would have given those targets protection against self-incrimination.


The authors would like to thank Saam Pousht-Mashhad, associate, for his contribution to this article.


[1] For a full list of conclusions sought by the Plaintiffs, see Mallart, para 48.

[2] The Constitution Act, 1982, Schedule B to the Canada Act 1982 (UK), 1982, c 11.

[3] Charte des droits et libertés de la personne, RLRQ c C-12.

[4] Mallat, para 40.

[5] British Columbia Securities Commission c. Branch, [1995] 2 R.C.S. 3.

[6] Mallat, para 108.

[7] CQLR c V-1.1.

[8] CQLR c A-33.2.

[9] Unofficial translation, Mallat, para 170.

[10] CQLR c C-37.