US Supreme Court puts an end to untimely piggyback class actions

Companies confronting serial class actions won much needed relief from the US Supreme Court yesterday, in a decision that held that a class action tolls statutes of limitations only for putative class members’ individual claims, and not for later-filed class actions. A second class action must be filed within the limitations period, or it is barred. The opinion in China Agritech v. Resh (“Resh”), written by Justice Ginsburg, is a welcome development for companies that have been subject to repeated class action lawsuits raising the same claims.

The Resh decision stems from a perceived ambiguity in earlier decisions that established the class action tolling doctrine. In American Pipe & Construction Co. v. Utah, 414 U. S. 538 (1974), the US Supreme Court ruled that the timely filing of a class action suspends the running of the applicable statute of limitations for all putative or absent class members until class certification has been denied. At that point, those putative class members may then bring their individual claims, even if the claims would otherwise be untimely under the statute of limitations. The American Pipe rule was instituted to further efficiency and economy of litigation, allowing individual class members to rely on the class action vehicle to protect their individual rights and, thus, avoiding flooding federal courts with numerous individual actions. As the court recognized in Resh, however, the American Pipe decision and subsequent Supreme Court decisions interpreting class action tolling only addressed successive individual claims brought by absent class members and did not address successive claims that were alleged on behalf of a class.

Applying American Pipe over the subsequent decades, lower courts divided over the question of whether a class action tolls class claims. Several courts of appeals ruled that class action tolling did not apply to later-filed, otherwise-untimely class action claims. However, other courts of appeals—including the Ninth Circuit in Resh—reached the opposite conclusion. The Ninth Circuit held that American Pipe’s underlying policy objectives justified extending class action tolling to piggyback class actions, meaning that a putative class member in one class action could wait until the first class was denied certification, and then file a second suit, making the same class allegations, without being barred by limitations. That second class action would then, under this theory, toll limitations again, so that defendants would potentially face a litany of copycat class actions.

In Resh, the plaintiff had done just that—he filed a securities fraud class action on the heels of two previous class action cases, raising the same class claims, where class certification had been denied on superiority, typicality, and adequacy grounds. While the two previous class actions had been timely filed within the two-year statute of limitations, the Resh plaintiff’s case was undisputedly filed after the two-year limitations had expired. The district court dismissed the piggyback class claims as untimely, and the Ninth Circuit reversed.

Recognizing the circuit split, the Supreme Court granted certiorari to address the question of whether “a putative class member, in lieu of promptly joining an existing suit or promptly filing an individual action, [may] commence a class action anew beyond the time allowed by the applicable statute of limitations.” And, in its June 11 opinion, the court unequivocally stated: “Our answer is no. . . . We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action. The ‘efficiency and economy of litigation’ that support tolling of individual claims, do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.”

A contrary rule, the court explained, would result in “limitless” piggyback class actions, where a denial of class certification in one class action would only lead to successive class actions, one stacked behind the other, with no end. The court further explained that its ruling in Resh will aid in the efficient and economical adjudication of class actions by encouraging any would-be class representatives to come forward early, before the limitations period expires, allowing district courts to make informed decisions in selecting class representatives and class counsel and in determining class certification, which would be “litigated once for all would-be class representatives.”

The Resh decision provides important protections for class action defendants. Under Resh, successfully defeating a class action no longer raises the specter of a hollow victory, where the defendant must litigate class claims over and over again, even when limitations has run. Now, the defendant can invoke the statute of limitations to defeat any subsequently filed, out-of-time class actions.

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UPDATE: No Room for Double Talk: The Ontario Court of Appeal Addresses Restatements, the Reasonable Investigation Defence and the Test for Leave in Rahimi v. SouthGobi Resources Ltd.

On May 31, 2018, the Supreme Court of Canada denied SouthGobi Resources Ltd.’s application for leave to appeal the decision of the Ontario Court of Appeal, which I provided an update on October 7, 2018.  The Court of Appeal decision provides guidance concerning the availability of the defence of reasonable investigation to a claim under Part XXIII.1 of the Ontario Securities Act  in the context of a restatement, and the test for leave to bring such a statutory claim.   


Still in Jeopardy: Supreme Court of Canada refuses leave to appeal BC Court of Appeal decision confirming that a Securities Commission financial penalty does not prevent being penalised in criminal fraud proceedings

This morning the Supreme Court of Canada refused leave to appeal[1] from the decision of the BC Court of Appeal in R. v. Samji[2], which confirms that the Charter does not preclude criminal proceedings where a defendant had already been ordered to pay penalties for fraud under the Securities Act.

Rashida Samji, a former licensed notary public, committed a $100 million fraud involving at least 200 investors through a Ponzi scheme she ran between 2003 and 2012. Proceedings were brought against her in front of both the BC Securities Commission (the Commission) and the BC Provincial Court arising out of this scheme.  The Commission ordered various penalties, including a $33 million administrative monetary penalty (AMP).[3]  The Court sentenced Samji to six months’ imprisonment and made restitutionary orders.

During her criminal trial Samji sought a stay on the basis that the criminal proceedings infringed her Charter rights.  The Provincial Court, upheld by the Court of Appeal, refused this application and found that the financial penalty did not prevent a criminal sanction for the same underlying wrong.  Since leave to appeal has been refused, this result will stand and all appeals of the stay refusal are now exhausted.

The Securities Act proceeding

The Commission undertook a regulatory proceeding in which it found that Samji had perpetrated a fraud contrary to s. 57(b) of the Securities Act, and ordered various penalties, including an AMP of $33 million, disgorgement of over $10 million, and that Samji be permanently banned from participating in BC’s capital markets.

The AMP was imposed under s. 162 of the Securities Act which provides that where the Commission considers it to be in the public interest it may order an AMP of “not more than $1 million for each contravention” of the Securities Act.  Although an AMP of over $100 million was sought based on the hundreds of contraventions, the Commission found that this would be punitive and inappropriate.  Instead, the Commission ordered an AMP of $33 million as an amount that it found reflected the seriousness of the misconduct and served “as a meaningful and substantial general deterrent to others who would engage in similar misconduct”.

Samji did not appeal the Commission’s decision.

The Criminal Trial

Around the same time, the Crown also laid criminal charges against Samji for theft and fraud relating to the same scheme, with the investigation focussed on 14 specific investors. The matter went to trial in 2016, which was after the Commission’s decisions.

Section 11 of the Charter provides that persons have a right not to be tried or punished twice for the same offence, often known as the rule against double jeopardy.  During her criminal trial Samji sought a stay on the basis that proceeding was contrary to this rule.  In an interim ruling,[4] the trial judge considered whether the criminal matter ought to be stayed on the basis that the AMP ordered by the Commission was a “true penal consequence”, such that Samji could not be punished again for the same wrongdoing.  The trial judge dismissed Samji’s application, finding that the AMP served a regulatory purpose and as such did not constitute a true penal consequence, so the Charter did not preclude the criminal proceeding.

Samji also challenged the criminal proceedings as amounting to an abuse of process contrary to s. 7 of the Charter.  The trial judge dismissed this challenge, finding that the criminal proceeding and regulatory proceeding considered two different offences, were tried by two separate and independent entities, and that the regulatory proceeding had not redressed Samji’s misconduct to society at large as the criminal proceeding was intended to do.

Samji was convicted of all counts of theft and fraud on the basis of an agreed statement of facts. The Court subsequently imposed a sentence of six years’ imprisonment for the fraud convictions, as well as restitution orders totalling over $10 million.[5]

The Appeal

The BC Court of Appeal upheld the trial judge’s determination that the regulatory proceeding and imposition of the AMP did not entitle Samji to a stay of the criminal proceedings. The Court also confirmed that the disgorgement order, the purpose of which is neither punitive nor compensatory as per Poonian, summarised previously, is not relevant to the consideration of whether the AMP is a true penal consequence.


While it may provide cold comfort to investors who are the victims of fraud, this decision confirms that the imposition of financial penalties by a regulatory body, which a wrongdoer may be unable to pay, will not permit them to escape possible criminal sanctions including imprisonment.

In refusing leave, the Supreme Court of Canada has endorsed the Court of Appeal’s finding that criminal sanctions were not precluded by the Commission’s imposition of an AMP.

[1] 37862 (May 31, 2018)

[2] 2017 BCCA 415

[3] 2014 BCSECCOM 186. 2015 BCSECCOM 29

[4] 2016 BCPC 145

[5] 2016 BCPC 301

Divisional Court confirms that interlocutory OSC orders not eligible for appeal, judicial review

In the recent decision of Cheng v Ontario Securities Commission, 2018 ONSC 2502, the Divisional Court held that an interlocutory order of the OSC was not subject to challenge through an appeal or judicial review.


The OSC commenced enforcement proceedings against Benedict Cheng in April 2017 on allegations of insider tipping.  Cheng brought a preliminary motion seeking a stay of the proceeding or alternatively to exclude certain evidence during the hearing on the grounds of solicitor and client privilege.

OSC staff was in possession of the evidence of Mr. K, a lawyer.  Cheng alleged that he and Mr. K had been in a lawyer-client relationship such that documents authored by Mr. K were subject to solicitor and client privilege.  After a five-day hearing, the OSC dismissed the motion, finding that there was no lawyer-client relationship, and thus no privilege.

Cheng appealed that decision; when advised by OSC staff that he could not appeal an interlocutory order, Cheng commenced a judicial review on the same grounds.  The OSC moved to quash the appeal and judicial review.

Appeal dismissed as not being of a final decision

Appeals of OSC decisions are prescribed by s. 9(1) of the Securities Act :

9 (1) A person or company directly affected by a final decision of the Commission, other than a decision under section 74, may appeal to the Divisional Court within thirty days after the later of the making of the final decision or the issuing of the reasons for the final decision.

Cheng argued that, because the motion decision determined his substantive rights, it was a final decision.  He relied on jurisprudence in the context of cases determining the appropriate route of appeal, which often turn on whether a decision is final or interlocutory, and a ruling from the Court of Appeal for Ontario in which it was held that an order depriving a party of a substantive right that could be determinative of the action is a final order.

The Divisional Court disagreed with this approach, relying on prior rulings in which the distinction between final and interlocutory orders from civil courts was not applied to administrative proceedings.  Motivated by policy reasons, the Court reiterated its reasons from Law Society of Upper Canada v Piersanti 2018 ONSC 640 in observing that “the hearing process would soon grind to a halt if mid-hearing rulings were generally subject to immediate appeal.”[1]  The Court also declined Cheng’s argument that there should be a special carve-out to this principle for determination of a solicitor-client privilege issue.

For these reasons, the appeal was quashed for want of jurisdiction.

Judicial review quashed as premature and not giving rise to exceptional circumstances

Cheng’s judicial review application was also quashed on largely policy grounds.

The Court held that the facts of the case were not so rare that early intervention was required for risk of manifest unfairness to the proceedings.  This view appears to have been informed by an interest in expeditious administrative proceedings:  “[i]ndeed, if Mr. Cheng’s argument were accepted, it would open the way for numerous efforts to review evidentiary rulings rejecting a claim of solicitor and client privilege, with the resulting fragmentation and delay of administrative proceeding that the doctrine of prematurity seeks to avoid”.[2]

The Court declined to exercise its discretion to hear a premature application for judicial review.

This ruling confirms the Court’s intention to allow administrative tribunals to resolve cases expeditiously and finally before their decisions come under judicial scrutiny.  Tribunal litigants faced with adverse decisions on a preliminary issue should be advised that Courts will likely prefer to have the tribunal process run its course before considering intervention.


The author would like to thank Shirley Wong, Student-At-Law, for her contribution to this article.


[1] Cheng at para 13, citing Piersanti at para 17 and Law Society of Upper Canada v. Paul Alexander Robson, 2013 ONLSAP 0003 at para 31.

[2] Cheng at para 30.

Ontario Court Rejects “Family Resemblance” Test for Defining Securities under the Securities Act

On May 15, 2018, the Ontario Superior Court of Justice in Ontario Securities Commission v. Tiffin confirmed that the “family resemblance” test cannot be used to answer one of the central questions of securities law: what constitutes a security?


In July 2014, the Ontario Securities Commission (OSC) prohibited Mr. Tiffin from trading in securities or relying upon any exemption under Ontario securities law. Mr. Tiffin subsequently issued fourteen promissory notes on behalf of his company, Tiffin Financial Corporation (TFC), to six clients.  As a result, Mr. Tiffin and TFC were charged with breaches of s.122(1)(c) of the Securities Act (the Act) and stood trial before Kenkel, J of the Ontario Court of Justice.

As we discussed in a prior post, the question before Kenkel, J was whether the promissory notes fell within the definition of a “security” under the Act.  In finding that the notes were not “securities”, Kenkel, J cautioned against a literal interpretation of the term, holding that such an approach in Mr. Tiffin’s case would conflict with the purposes of the Act.  Kenkel, J held that exemptions may be found outside the legislative scheme of the Act and accordingly adopted the “family resemblance” test established by the United States Supreme Court in the case of Reves v. Ernst & Young[1].  The family resemblance test presumes that a note is a security unless it bears a strong resemblance to an instrument falling within a enumerated list of categories.  In applying the test, the charges against Mr. Tiffin and TFC were dismissed.

Ontario Superior Court of Justice Allows Appeal

On appeal, Charney, J of the Ontario Superior Court of Justice held that Kenkel, J erred in law. Because the term “security” is defined in the Act, the court held that importing the family resemblance test was unnecessary and undesirable. The court found that the legislature’s deliberate decision to “cast the net wide” in its definition of the term “security” is consistent with the remedial purpose of the Act as it protects vulnerable members of society.

Charney, J disagreed with Kenkel, J’s interpretation of British Columbia (Securities Commission) v. Gill[2], holding that in Gill the BCCA did not “adopt and apply” the family resemblance test to determine whether the instrument was a security; it applied the test to support the reasonableness of the Commission’s decision. Instead, Charney, J relied on the Alberta Court of Appeal’s recent decision in R. v. Stevenson which rejected the family resemblance test, refusing to create exemptions not otherwise found in the statute.[3]

Ultimately, Charney, J allowed the appeal and held that the TFC promissory notes were “notes or other evidence of indebtedness” and were therefore “securities” within the meaning of the Act.


The author would like to thank Samantha Black, Summer Student, for her contribution to this article.

[1] Reves v Ernst & Young, 494 US 56, 58 USLW 4208 (1990).

[2] British Columbia (Securities Commission) v Gill, 2003 BCCA 169, (CanLII).

[3] R. v Stevenson, 2017 ABCA 420, (CanLII).

OSC Panel Approves Settlement Agreement for Insider Tipping Without Profit Disgorgement or Administrative Penalty

The Ontario Securities Commission’s recent decision in Re Hutchinson confirmed the important role of cooperation with Commission Staff in reducing sanctions for breaches of Ontario’s securities law.


Donna Hutchinson worked as a legal assistant at a large Toronto law firm, assisting with merger and acquisition transactions. Through the course of her work, Ms. Hutchinson routinely gained access to non-public, confidential information regarding certain transactions. Ms. Hutchinson was alleged to have knowingly provided non-public information about six transactions to Cameron Cornish, another respondent in the proceeding, in violation of section 76(2) of the Ontario Securities Act, which prohibits insider tipping.

A Panel of the Ontario Securities Commission (the Panel) accepted a settlement agreement (the Agreement) reached between Donna Hutchinson and the Commission Staff which provided for a number of sanctions but notably excluded disgorgement of profits or administrative penalties.  Neither Mr. Cornish nor any of the other respondents were party to the Agreement.


The Panel noted that Ms. Hutchinson’s breaches of Ontario securities law were serious and could contribute to a lack of confidence in and cynicism towards the fairness of public markets. Although Ms. Hutchinson did not herself trade on the information, her tipping actions were sufficient to undermine public confidence in capital markets.

However, in accepting the Agreement, the Panel identified a number of mitigating factors:

  • Ms. Hutchinson’s acknowledgement of her involvement in the matter saved the Commission from having to expend further resources to establish her liability. The Panel also noted that there was some evidence of remorse on Ms. Hutchinson’s part;
  • Ms. Hutchinson’s employment was terminated, leaving her with extremely limited future career prospects in the legal industry and limited means to pay monetary sanctions;
  • In contrast to the larger profits made by other respondents in the proceeding, Ms. Hutchinson received relatively small profits as a result of her misconduct;
  • Ms. Hutchinson had no prior record of breaching Ontario securities law;
  • Ms. Hutchinson was not and had never been a registrant; and
  • Ms. Hutchinson had been manipulated by an experienced trader.  Based on these mitigating factors, the Panel held that the reduced sanctions proposed under the Agreement aligned with the policy objectives of the Revised Credit for Cooperation Program to promote self-policing, self-reporting, and self-correction by market participants of potential breaches or other conduct contrary to the public interest.
  • The sanctions against Ms. Hutchinson included a reprimand, mandatory resignation from any directorship or officer positions held by her, and time-limited prohibitions on trading, acquisition of securities, registration under the Act, or acting as an officer or director of any issuer, registrant, or investment fund manager.
  • In addition, the Panel emphasized Ms. Hutchinson’s cooperation with Staff, identifying it as a significant mitigating factor.  In March 2014, the Commission published Staff Notice 15-702, “Revised Credit for Cooperation Program” to encourage market participants to cooperate with Commission Staff in exchange for “Credit” in the form of narrower allegations, limited enforcement, reduced sanctions, and/or settlement. Ms. Hutchinson agreed to cooperate with Staff in its investigation of the other respondents and to testify against them in any future proceedings. Given that insider tipping cases tend to be difficult to prove and usually rely on circumstantial evidence, the Panel noted that Ms. Hutchinson’s direct evidence in the matter would be valuable in the proceedings against the other respondents.


Re Hutchinson is note-worthy because the sanctions against Ms. Hutchinson excluded disgorgement of profits and administrative penalties, which usually form part of the sanctions for insider tipping.  This decision stands in contrast to Cheng, Benedict et al, 2017 ONSEC 14, another insider tipping decision that imposed sanctions including disgorgement of profits and an administrative penalty in the amount of $5,500.  In differentiating between the conduct of Ms. Hutchinson and Mr. Rothstein, it appears the Panel placed significant weight on Ms. Hutchinson’s cooperation and her testimony against the other respondents.  While the Panel did suggest that its findings would be limited to the circumstances of this decision, it may open the door to future arguments that deterrence may be served, even with reduced sanctions.


The author would like to thank Kassandra Shortt, student-at-law, for her contribution to this article.

OSC Continues Mediation Program on a Permanent Basis

On April 9, 2018, the Ontario Securities Commission (OSC) announced that its Mediation Program, which began as a pilot program in May 2015, will be continuing on a permanent basis.

The Mediation Program provides respondents represented by counsel, as well as enforcement staff, with the option to seek resolution through an independent third party mediator. Mediations will only occur with the consent of Staff and participating respondents, who must be represented by counsel. The ultimate aim of the program is to resolve outstanding enforcement matters in an efficient and cost-effective way. With respect to costs, each party is to pay an equal portion of the total costs of the mediation.

Jeff Kehoe, Director of Enforcement at the OSC, delivered the following statement expressing optimism about eh continuing role of the mediation program:  “Our Mediation Program has proven to be successful in fostering fast and fair resolutions in appropriate cases. We’re pleased to permanently add this valuable resource to our growing enforcement toolkit.”

While a full discussion on the procedure under the mediation program may be accessed through the OSC’s website, some key considerations are set out below:

  • Mediators can assist with multiple action items, such as facilitating the negotiation of settlement terms, determining an agreed statement of facts, and resolving other enforcement issues.
  • Mediators are mutually selected from a list of candidates produced by the OSC. Mediators serve on the Program’s roster for a three-year term.
  • Mediation takes place according to standard terms of a mediation agreement.
  • Each party is required to provide the mediator with a briefing document.
  • Both the parties and the mediator are free to withdraw from and terminate the mediation at any time.

The OSC encourages the use of mediation in order to facilitate the expedient resolution of outstanding enforcement-related issues. However, the OSC is also clear that mediation will not be permitted to negatively impact or delay any investigation or proceeding, and should not be used to delay any parties’ disclosure or other pre-hearing obligations or the hearing of the matter.

The author would like to thank Justine Smith, articling student, for her contribution to this article.

Yahoo Settles Cyber Security Class Action Lawsuit

On March 5, 2018, Yahoo! Inc. (Yahoo) announced that it had accepted a proposed settlement in In re Yahoo! Inc. Securities Litigation – a U.S. class action lawsuit launched in the United States District Court for the Northern District of California. The settlement has yet to be approved by the court.

The Yahoo class action was filed in California in January 2017 in response to cyber security breaches experienced by Yahoo.  The first, occurring in 2013, involved the theft of names, email addresses, telephone numbers, dates of birth, hashed passwords and security questions from more than 1 billion Yahoo user accounts.  The second, occurring in late 2014, involved the theft, allegedly by state-sponsored hackers, of similar data from more than 500 million user accounts.

Yahoo disclosed both cyber security breaches in late 2016. Upon these disclosures, Yahoo’s share price dropped. Subsequently, several shareholders launched class action lawsuits, which were eventually consolidated into one proceeding.

The Plaintiffs alleged that, between 2013 and 2016, Yahoo had made materially false and/or misleading statements in its quarterly reports to the Securities and Exchange Commission (SEC). Specifically, the Plaintiffs alleged that Yahoo neglected to disclose that:

  • it had failed to encrypt its users’ personal information and/or failed to encrypt its users’ personal data with an up-to-date and secure encryption scheme;
  • sensitive personal account information from more than 1 billion users was vulnerable to theft; and
  • a data breach resulting in the theft of personal user data would foreseeably cause a significant drop in user engagement with Yahoo’s websites and services.

After extensive mediation, the parties agreed to the settlement announced on March 5, 2018.  Under the terms of the agreement, Yahoo will settle the claims for $80 million dollars paid to shareholders, but will not admit to violating securities law or misleading investors.

However, one of the named Plaintiffs did not agree to the settlement terms. Yahoo has moved to dismiss the claims being pursued by this non-settling plaintiff.

With increased inter-connectivity, political tensions, and criminal sophistication, entities that safeguard large amounts of customer data, such as financial institutions and technology companies, frequently face more attacks of an increasingly sophisticated nature.  Given this and associated risks arising from a data breach,  regular reviews of cyber security practices and the adoption of current industry best practices may help to mitigate this risk.

For more on cyber security within the securities context, please refer to our previous postings on the matter:

Only 61% of issuers address cyber security in their risk factor disclosure. Is your company one of them?

More Cyber Security Lessons from the Canadian Securities Administrators


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

Not All’s Fair in Disgorgement and Fraud

On April 18, 2018, the Ontario Superior Court of Justice released its reasons in Ontario Securities Commission v. Bluestream Capital Corporation which is a useful illustration of the Ontario Securities Commission (OSC)’s power to garnish funds held by victims of investment fraud that are payable as debts to the perpetrator of the fraud.

The Background

Peter Balazs solicited a number of people to invest in his companies.  However, neither Mr. Balazs nor any of the companies were registered with the OSC, as required by the Ontario Securities Act, and the majority of the “invested” funds were used by Mr. Balazs for personal expenditures.  The OSC made a number of orders against Mr. Balazs and his companies, including that they jointly and severally disgorge over $1,500,000 to the OSC which was to be allocated for the benefit of third parties.

One of the victims of Mr. Balazs’s investment scheme was an electrician living in Vaughan named Fred Camerlengo.  Mr. Camerlengo and his sons invested significant sums of money in one of Mr. Balazs’s companies, Bluestream International Investments (Bluestream).  Mr. Camerlengo was required to participate in a compelled interview with OSC investigators pursuant to s. 13 of the Ontario Securities Act where the OSC learned the details of a $200,000 loan made by Bluestream to Camerlengo Holdings Inc., a company controlled by Mr. Camerlengo.  In his interview, Camerlengo said that the loan had nothing to do with his investments with Bluestream, but was a favour to him.  He had not repaid the loan because Mr. Balazs had disappeared.

Upon learning of the loan, the OSC issued a Notice of Garnishment to Camerlengo Holdings requiring it to pay its debts to Bluestream to the Sheriff.  Mr. Camerlengo argued that him and his family were owed $622,008.01 by Bluestream and that this amount ought to be set-off against the debt owed by Camerlengo Holdings.  The OSC brought a motion seeking to enforce its garnishment.

The Decision

Justice Schreck granted the OSC’s motion for a declaration that Camerlengo Holdings owed a debt of $200,000 to Bluestream and an order that Camerlengo Holdings pay that debt to the Sheriff.

The chief issue was whether Mr. Camerlengo and his company were entitled to set-off.  There was no dispute that Mr. Camerlengo was not entitled to contractual set-off, leaving only claims for legal and equitable set-off.

In order to claim legal set-off, Schreck J. held that the law is clear that “[f]or a valid claim of legal set-off there must be mutuality which requires that the debts be between the same parties and that the debts be in the same right”.  In this case, Schreck J.  found that the debts were not between the same parties.  The loan was from Bluestream to Camerlengo Holdings.  None of the investments funds came from Camerlengo Holdings.

Turning to Mr. Camerlengo’s claim for equitable set-off, Schreck J. held that it could not be said that the equitable ground goes to “the very root of the plaintiff’s claim” or that the cross-claim is “clearly connected with the demand of the plaintiff” as required for a claim of equitable set-off.  To the contrary, while he attempted to reverse this position on the motion, Mr. Camerlengo told the OSC investigators under oath that the loan to Camerlengo Holdings had “nothing to do with the investment”.  Further, the monies said to be owed by Bluestream are to Mr. Camerlengo, his sons, and two numbered companies, while the loan from Bluestream was to Camerlengo Holdings.  Justice Schreck held that the absence of mutuality was further evidence that the claims were not “clearly connected”.

Finally, Schreck J. held that permitting set-off would be unfair to other investors who suffered losses due to their investments with Mr. Balazs.  If Camerlengo Holdings was permitted to set-off its losses against the loan owed to Bluestream, this would have the practical effect of giving the Camerlengo family priority over other investors with equally valid claims for compensation.  Justice Schreck held that the Camerlengo family should not be in a better position than other investors simply because they had the benefit of a loan from Bluestream while others did not.

The Takeaway

While the decision in Bluestream is a fairly straightforward application of the principles of set-off, Justice Schreck’s holding that discretionary remedies like equitable set-off should not be exercised to protect defrauded investors in a manner that puts them in a better position than other defrauded investors – even if that means defrauded investors have to repay loans arranged with the fraudster, is of interest.  If justice is fairness, it may not always feel that way to everybody.

U.S. Securities and Exchange Commission Proposes “Best Interest” Standard for Retail Broker Dealers

On April 18, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced proposed rules that would require broker-dealers to act in the best interests of their retail clients when recommending investments. The SEC opened the proposed rules to a 90 day comment period.

This announcement follows a March 15, 2018 decision by the U.S. Fifth Circuit Court of Appeals that vacated the so-called “Fiduciary Rule” promulgated by the U.S. Department of Labor (“DOL”) covering retirement fund investment advice. The Fiduciary Rule, in actuality a package of seven rules that broadly reinterpret the term “investment advice fiduciary” and related exemptions codified in the Employee Retirement Income Securities Act of 1974, 29 U.S.C. § 1001, et seq. (“ERISA”), and the Internal Revenue Code, 26 U.S.C. § 4975, would have expanded the definition of fiduciary thereunder to the extent a person is compensated in connection with a “recommendation as to the advisability of” buying, selling, or managing “investment property.”  29 C.F.R. § 2510.3-21(a)(21) (2017).  The Rule imposed on all those within the expanded definition of fiduciary an obligation to act in the best interest of their clients and avoid conflicts of interest.

Following the adoption of the Fiduciary Rule by the DOL, the SEC began its own consideration of broadening the scope of fiduciary obligations under SEC rules. While the SEC’s newly proposed rules are more lenient than the Fiduciary Rule, their advancement nevertheless will have a major impact on the investment community.

The Fifth Circuit Decision

On March 15, 2018, the Fifth Circuit Court of Appeals vacated the DOL’s Fiduciary Rule in its entirety. Chamber of Commerce of the United States of America, et al. v. United States Department of Labor, No 17–10238 (5th Cir. March 15, 2018).  That decision was grounded on two major findings.  First, the court ruled that the DOL did not have the authority to adopt a definition of “fiduciary” that is inconsistent with the statutory definition in ERISA.  Second, the court found that the DOL violated the Administrative Procedures Act by acting in an arbitrary and capricious manner in adopting an unreasonable definition.

An earlier decision by the Tenth Circuit Court of Appeals affirmed a lower court decision upholding the Fiduciary Rule as related to fixed indexed annuity sales. The DOL may pursue further appeals from the Fifth Circuit decision, either by petitioning the Fifth Circuit for rehearing en banc or by petitioning the U.S. Supreme Court for permission to appeal.

The SEC Proposed Rule

On April 18, 2018, the SEC voted in favor of proposing a package of two new rules and interpretations affecting both broker-dealers and investment advisers. The package, known as “Regulation Best Interest,” has several components.  First, broker-dealers would be required to act in the best interest of their retail customers when making recommendations of any securities transaction or investment strategy involving securities.  Second, Regulation Best Interest includes an interpretation that reaffirms and clarifies the SEC’s views of the fiduciary duty that investment advisers already owe to their clients.  Third, it would require that investment professionals provide their retail customers a short form disclosure document, known as a customer or client relationship summary, setting forth a simple and easy to understand summary of the nature of their relationship with their investment professionals.  Lastly, Regulation Best Interest would restrict certain broker-dealers and financial professionals from using the terms “advisor” or “adviser” as part of their name or title with retail investors, unless they are actually registered as one.

The proposal was adopted by a four to one vote of SEC Commissioners. One SEC Commissioner, Kara Stein, dissented saying that the proposed standards fall short of the real reform that is necessary to curtail conflicts that impact individual investors.  She additionally complained that nowhere in the proposed changes was a definition established of what constitutes an investor’s best interest.  And while Commissioner Robert Jackson voted in favor of opening the package of proposals for public comment, he said he would not ultimately vote to adopt them if they remained in their current form.


The SEC’s Regulation Best Interest proposal has a long way to go to get across the finish line of adoption. The 90 day comment period undoubtedly will be robust.  Uncertainty exists over whether the proposal will ever be adopted.  But if it is, it seems likely it will be in a substantially different form than that currently proposed.