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.

Background

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.

Takeaways

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.