Court of Appeal clarifies that the FMAT has jurisdiction if 'real and substantial' connection
A Quebec appeal court ruling confirms that the Financial Markets Administrative Tribunal for the province has jurisdiction over an alleged transnational “pump and dump” scheme that involves offshore companies outside Quebec.
In a decision released in September, the Court of Appeal of Quebec clarified the issue of whether the FMAT has jurisdiction over matters when there is a “real and substantial” connection with the province. In ruling that the FMAT did have jurisdiction over the case, it upheld an earlier decision of the tribunal.
Fabrice Benoît, a lawyer with Osler, Hoskin & Harcourt LLP, says, “this is probably the first detailed decision on the subject [of FMAT jurisdiction] here in Quebec.” He adds that “we now have the highest court in Quebec confirming the issue of jurisdiction, which is important to our securities law world.”
Benoît’s colleague Quentin Montpetit also notes that the ruling clarifies that the tribunal has jurisdiction over such cases if the province is the “face” of an operation.
“It doesn’t necessarily need to be grounded in material action in Quebec or prove there are or are not victims based in Quebec, as long as Quebec society and the Quebec market is used and presented in a way to influence the market.”
Both lawyers point out that the appeal court emphasized the primary role of the FMAT to protect investors and ensure public confidence in Quebec’s securities market.
The case relates to Michel Plante, a Quebec resident, who bought a majority stake in a shell company, Solo International, in 2011, effectively taking control of Solo and its subsidiary. Three others involved with Solo resided in British Columbia.
During the fall of 2011, Solo bought, through its subsidiary, mining claims in Quebec, financed by offshore entities linked to the company. This is despite the players having no apparent connection to the mining industry.
The allegations are that those associated with Solo were involved in a so-called pump and dump operation. This scheme attempts to boost the price of a stock or security through fake recommendations, often based on false, misleading, or greatly exaggerated statements. Perpetrators of such a scheme typically already have a position in the company’s stock and sell their positions after the hype has led to a higher share price.
Both Montpetit and Benoît say that the case's merits are not part of what the appeal court ruled on. That will be decided as the case moves forward.
The first alleged “pump” happened in January and February 2012 when Solo, whose shares were traded in the United States on the “Pink Sheets” in New York. It was considered a reporting issuer in Quebec under Regulation 51-105 respecting Issuers quoted in the U.S. over-the-counter markets.
There were six published press releases, some of which were issued in Montreal, promoting the mining venture. The press releases touted Quebec’s infrastructure, mining exploration incentives and favourable policy environment. In one or more of these press releases, Solo indicated that it carried on business in Quebec, had a business address in Montreal, and was under the direction of a Quebec resident.
The second alleged “pump” occurred in November 2012 at, which time several promoters marketed Solo’s shares. These promotion efforts were financed by the offshore entities.
During this period, those involved with Solo allegedly sold a total of 46,189,908 shares for an accumulated profit of $2,631,975 (the “dump”).
In 2017, the Quebec securities regulator, the Autorité des marchés financiers (the AMF), brought an action before the FMAT, alleging those involved with Solo were engaged in a transnational pump and dump operation.
In June 2017, those accused of running the alleged scheme filed motions for a declinatory exception, arguing the lack of jurisdiction of the FMAT over the matter. The tribunal acknowledged the transnational nature of the alleged wrongdoings. Still, it confirmed it had jurisdiction based on a “real and substantial connection” between the alleged transgressions and the province of Quebec.
In December 2017, the case was taken to the Superior Court of Quebec for judicial review, a motion dismissed because the court found the key allegations of the proceedings contained sufficient connection to Quebec to justify the FMAT’s jurisdiction over the matter.
The case was then taken by those involved with Solo to the Court of Appeal of Quebec, which had to decide on the following two issues:
- Did the Superior Court judge fail to identify the standard of review correctly and apply it to the FMAT decision?
- Did the Superior Court misconstrue the applicable rules limiting the FMAT’s extraterritorial jurisdiction by failing to apply the private international law rules of the Civil Code of Quebec (C.C.Q.) or, in the alternative, by finding a real and substantial connection with the province of Quebec?
The appellants argued in the appeal that the appropriate standard of review, in this case, is correctness, given that the application of private international law rules inevitably raises constitutional issues, which commands a correctness standard. The respondent, AMF, argued the presence or lack of a real and substantial connection with the province of Quebec is dependent upon the facts of each case and should therefore be reviewed under the reasonableness standard.
The Court of Appeal ruled the applicable standard of review was correctness because the case raised a constitutional point, as “the issue relates to the constitutional applicability of a provincial law to foreigners or to matters with extraterritorial aspects.” Correctness is the appropriate standard, the court ruled, even if the determination may raise questions of mixed facts and law.
The court noted that the real and substantial connection test should be applied in its “constitutional law dimension” to determine whether the provisions of the Quebec Securities Act and the laws on the regulation of the financial sector applied to the appellants, some of whom were located outside the province.
The appellants also argued that the Superior Court judge erred in failing to apply private international law rules provided by the Civil Code of Quebec. They argued that, in the absence of explicit provisions in the Quebec Securities Act governing the FMAT’s jurisdiction over extraterritorial offences, private international law provisions of the C.C.Q. should apply.
The Court of Appeal rejected that argument and ruled that private international law from the C.C.Q. rules were not applicable, and that the FMAT and the Superior Court judge correctly relied on the real and substantial connection test.
The court specified the jurisdictional issue at stake is not about FMAT’s extraterritorial jurisdiction. Rather, it is about the FMAT’s territorial jurisdiction over out-of-province individuals for alleged wrongdoings that have a connection with the province.
The Court noted that public interest commands regulating the securities market in its modern reality and protecting consumers from fraudulent practices. As such, the public interest supports a flexible approach to determining the sufficiency of the real and substantial connection.
Finally, the Court held that there was a real and substantial connection in the case at hand. For instance, Solo had a business address in Montreal and was under the direction of a Quebec resident; some press releases were issued in Quebec and, most importantly, the alleged pump aspect of the violation was dependent on business carried on in Quebec.
The court concluded that the appellants used Quebec as the “face” of the operation and, in doing so, established a real and substantial connection justifying the FMAT’s jurisdiction over the case.
While the appeal court decision may still be appealed, Benoît says the ruling reiterates and grounds the FMAT’s jurisdiction over out-of-province defendants that have established by their alleged wrongdoings a real and substantial connection to Quebec.
Adds Montpetit: “The Court of Appeal reasoning is that the Quebec securities regulator has the mandate to protect the public interest and ensure the safety of Quebec securities market and public confidence in this market as well.”