Top court said 'analysis must recognize the transnational nature of modern securities regulation'
Stock market manipulators and fraudsters working pump-and-dump schemes looking to avoid the consequences of their actions will sometimes count on provincial borders to protect them, but a Supreme Court of Canada case released today could make that more difficult.
In Sharp v. Autorité des marchés financiers 2023 SCC 29, the majority of the justices ruled that four British Columbia-based appellants were, in fact, subject to the authority of the Autorité des marchés financiers (AMF), an administrative agency that regulates Quebec’s financial sector and the Financial Markets Administrative Tribunal (FMAT). Only Justice Suzanne Côté dissented. (Justice Russell Brown did not participate in the final disposition of the judgment.)
“[T]he Quebec securities legislation constitutionally applies to the appellants. The Quebec legislature has exercised its prescriptive legislative jurisdiction – its power to enact binding rules applicable to out-of-province parties with a real and substantial connection to Quebec. Those rules are engaged in the circumstances of this case. As a result, the FMAT also has adjudicatory jurisdiction, or the authority to hear this matter involving the appellants,” wrote Justices Richard Wagner and Mahmud Jamal for the majority.
The fact that the appellants, Frederick Langford Sharp, Shawn Van Damme, Vincenzo Antonio Carnovale and Pasquale Antonio Rocca, resided outside of the province did not deter the court from determining that there was a “real and substantial connection” between them and the province of Quebec. (Sharp has made the news in the past for his financial dealings. The CBC describes him as “a former lawyer who became the Canadian agent in the mid-1990s for Panamanian lawyers at Mossack Fonseca – the now-disbanded firm whose documents were leaked and formed the Panama Papers.”)
The “real and substantial connection test” (or a “sufficient connection”) arises out of an earlier Supreme Court of Canada decision, Unifund Assurance Co. v. Insurance Corp. of British Columbia, 2003 SCC, which established that there must be that connection between the two parties for the province and its securities regulatory body to have jurisdiction over an out-of-province resident. In Sharp, the court found that the appellants primarily targeted Quebec residents, that the company whose share price they were inflating, Solo, was a Quebec-based reporting issuer, that the president of the company was a Quebec resident and that the aspect of the company they were hyping involved mining activities in Quebec, making Quebec “the face” of their scheme.
In addition to the Quebec connections, the court in Sharp v. Autorité des marchés financiers wrote, “The ‘sufficient connection’ analysis must recognize the transnational nature of modern securities regulation and the public interest in addressing international market manipulation. Securities regulation raises unique considerations that highlight the need for transnational enforcement. As this Court noted in Global Securities Corp. v. British Columbia (Securities Commission), 2000 SCC 21, the ‘securities market has been an international one for years’ and the ‘Internet has greatly increased the ability of securities traders to extend across borders’. To effectively regulate the securities market, ‘regulators must equally be able to respond, and surmount borders where legally possible’.”
In essence, the appellants’ actions put them into Quebec’s jurisdiction, according to the court: “Applying the Quebec regulatory regime is fair to the appellants. The appellants chose to enter Quebec’s securities marketplace.”
This case came about originally when the AMF alleged that the four appellants bought shares in a shell company, made efforts to give it “a legitimate face,” promoted its business, sold the shares and divided the profits. The AMF went before the FMAT and argued that those actions contravened the Quebec Securities Act. The defendants challenged FMAT’s jurisdiction, arguing they were out-of-province defendants and filed for a declinatory exception, which was dismissed. FMAT ruled that it did have jurisdiction according to s. 93 of the Act respecting the Autorité des marchés financiers, which grants the FMAT jurisdiction to make determinations under the Securities Act.
The defendants asked the Supreme Court of Quebec for a judicial review, which was dismissed. That court held that the FMAT properly assumed jurisdiction and said that “the FMAT correctly applied the Unifund test for the constitutional applicability of provincial legislation.”
Following that decision, the defendants went to the Court of Appeal of Quebec, which also dismissed them, concluding “that the real and substantial connection test in Unifund addresses the constitutional applicability of the Quebec securities scheme to non‑residents who allegedly engaged in a securities manipulation scheme with connections to Quebec, and that the FMAT correctly concluded there is a real and substantial connection between Quebec and the defendants and properly assumed jurisdiction”
Like the lower courts, the Supreme Court of Canada turned to Unifund in considering the case, but that was only after going through several steps to determine that the Civil Code of Quebec (CCQ) did not explicitly provide a basis for the FMAT’s jurisdiction in this case. In fact, the court emphasized that the CCQ must be the starting point when considering any legal interpretation of the province’s laws or regulations.
Specifically, the court took to Book Ten of the CCQ and decided that “Book Ten of the CCQ does not determine jurisdiction in matters of public or criminal law where the primary basis of jurisdiction is neither personal nor real but territorial, such as in this case. The majority saw no conflict of jurisdiction or any conflict of laws that would require the application of private international law rules to this case.”
Following that, the court recognized the FMAT’s jurisdiction in this matter was granted under two special statutes: the Quebec Securities Act and the Act respecting the Autorité des marchés financiers. Justice Côté, however, said viewing the FMAT’s authority to regulate out-of-province residents through the Unifund lens was the wrong approach.
She wrote: “In my view, at this stage of the proceedings, the case raises no issue regarding the constitutional applicability of the [Quebec Securities Act] but rather concerns the FMAT’s adjudicative jurisdiction. Consequently, the limits of the FMAT’s jurisdiction must instead be analyzed in light of the rules of private international law set out in Title Three of Book Ten of the C.C.Q. Applying those provisions to this case, I conclude that the appeals should be allowed on the basis that the FMAT does not have adjudicative jurisdiction over the appellants and therefore cannot hear the matter brought before this Court. I agree with my colleagues that correctness is the applicable standard of review; the only issue is thus whether the FMAT has adjudicative jurisdiction over the appellants, who are domiciled outside Quebec.”
She continued her argument by saying, “this dispute relates to the FMAT’s adjudicative jurisdiction, more particularly its territorial component (jurisdiction ratione personae), and consequently that the C.C.Q.’s rules on the international jurisdiction of Quebec authorities are applicable. Because there is no provision in the SA, the Act respecting the Autorité des marchés financiers or the C.C.Q. that gives the FMAT adjudicative jurisdiction over the appellants in the specific proceedings brought against them by the Autorité des marches financiers I conclude that the appellants’ declinatory exceptions should have been allowed.”
When it comes to this decision, Simon Seida thinks it will have a reach that goes far beyond securities regulations. Seida is a Montreal-based partner in Blake, Cassels & Graydon’s commercial litigation group, and his practice involves administrative tribunal work and cases in the securities litigation sphere.
“What I think will have the most impact in subsequent litigation is really the first part of the Supreme Court judgement, which really reiterates… that even when you’re dealing with specific statutes in Quebec, the starting point and the foundation of everything is the Civil Code. I suspect, it will be used by litigants in front of different administrative tribunals, not only securities, others as well, to argue that any type of precedent that tries to ignore or set special rules that are in conflict with general legal provisions of the Civil Code should be revised and brought in conformity with the general civil law of Quebec.”
With regards to the securities-specific laws and regulations, Seida says there are a few key takeaways. One is that the court’s decision is what he calls a “good example of the modern, cooperative federalism approach.” By that, Seida refers to the court’s statement, which says, “applying Quebec’s securities regulatory scheme to the appellants does not offend the principle of order or the related concept of interprovincial comity. Given the cross-border nature of securities manipulation and securities fraud, regulators from multiple jurisdictions may exercise jurisdiction over the same scheme.”
Seida adds that while there is a great deal of cooperation between provincial regulators and that although provincial governments have worked to create a great deal of conformity in their securities regulations, he can envision a scenario where competing jurisdictions, say, for example, Quebec and British Columbia, each pursue legal action and wind up with two different outcomes.
The other key point of the decision involves just how broadly the court says Unifund can be applied. According to Seida, Unifund was “traditionally viewed as imposing limits on the application of provincial laws outside the province. Now, it is also viewed as one that establishes the limit of administrative tribunals exercising a regulatory function.” With this judgment, since the court didn’t impose limits on administrative tribunals, “their territorial jurisdiction should be as broad as Unifund permits it.”
He explains that Justice Côté zeroes in on this aspect of the decision and finds it problematic and something that might lead to an overreach in power.
“Usually, when governments and legislators are given jurisdiction, they seek to exercise it as much as they can,” he says. “I can see Justice Côté’s point, but if tomorrow, you ask the Quebec National Assembly to please clarify what territorial limits you want to apply to the Securities Act, the legislator’s answer will probably be ‘as broad as we’re allowed to.’”
While the decision provides clarity in a number of aspects of the law, it does still leave room for some clarifications and questions, says Seida. In particular, he points to the sufficient connection test. In this case, the test was met, and the court was given four reasons why Quebec’s jurisdiction should apply to British Columbia-based appellants. The fact that the company was a reporting issuer in the province is, in Seida’s view, the strongest argument in this specific case. But he wonders about cases in the future where those arguments might not be as clear-cut.
“I guess the unanswered question is, what are the factors? What’s the bare minimum to consider there’s a sufficient nexus for the purpose of accepting territorial jurisdiction under Unifund?” he asks. “Would three out of the four have been sufficient?”