A recent decision of the Ontario Superior Court of Justice highlights the unique utility of Ontario receivership remedies to respond to cross-border investment fraud concerns.
In the second half of 2023, both the United States Commodities Futures Trading Commission (the US CFTC) and the Ontario Securities Commission (the OSC) identified concerns that the business of Traders Global Group Inc. (TGG) was conducted in violation of applicable securities laws. The concerns included fraud contrary to the Ontario Securities Act.
The OSC described the TGG business as follows:
A participant in the TGG structure was able to place trades worth many multiples of the amount of cash posted by that participant due to the apparent involvement of liquidity providers to cover the bulk of the capital for trading.
The model is a version of what would often be described as a proprietary trading firm. The rationale is to provide individual investors access to capital, trading activities, and trading resources that those individuals would not be able to access on their own. Even if legitimate trading takes place, the structure is not without significant risk as investors can be required to contribute significant cash to the endeavour with limited transparency about the mechanics of the trading process or the counterparties.
In the TGG case, however, the OSC alleged that “There is virtually no real trading taking place at TGG. For the vast majority of investors, trading is simulated by TGG”. In aggregate, the OSC and CFTC believed TGG had generated more than US$310 million in cash inflows from trading participants through this model, with virtually no real trading occurring. The OSC provided evidence to demonstrate that registration fees paid by customers were used to pay the few customers who notionally generated profits from their trading, in the manner of a Ponzi scheme.
The CFTC filed a Complaint for Injunctive Relief, Civil Monetary Penalties, and other Equitable Relief against TGG in New Jersey. A temporary receiver was appointed by the United States District Court for the District of New Jersey in August 2023.
The OSC issued several freeze directions in respect of TGG as well as a temporary cease trade order in August and September of 2023. No further immediate remedies were sought in Ontario in view of the temporary receivership in New Jersey, which could be recognized in Canada.
Complications arose when the temporary receivership in New Jersey was terminated by the US District Court. This was a significant concern to the OSC, which estimated that over CDN $90 million in funds and assets needed to be preserved through a receivership either the US or in Canada.
The OSC moved for the appointment of a receiver in Ontario notwithstanding the decision of the US District Court to terminate the US receivership. Given the cross-border nature of the potential fraud, regulators from multiple jurisdictions may exercise jurisdiction over the same scheme. The fact that the matter was pursued by the US CFTC to a different outcome, does not prevent the matter from being pursued by the OSC in Ontario.
The allegations by the OSC included that TGG:
Importantly, under applicable law in Ontario, the OSC did not need to prove a breach of the Ontario Securities Act or prove that funds or assets were at risk of imminent dissipation or theft, as may be required in some other jurisdictions to support the appointment of the receiver. A receiver could be appointed by the OSC upon establishing there was a serious concern with respect to the alleged breaches of Ontario securities law by TGG. These questions were already largely dealt with in the US District Court, which found that there was a prima facie case that TGG had made misrepresentations regarding their business and a prima facie case that they had engaged in fraudulent conduct in violation of the US Commodity Exchange Act and Regulations.
In Ontario, the receiver can be appointed even before the OSC’s investigation has been completed and before any formal Notice of Allegations of breach of securities laws has been issued by the OSC, provided that the OSC then completes its investigation within a reasonable time. The OSC receivership process is described as a ‘collateral safeguard’.
In addition, whereas the US District Court determined the assets that could be disgorged under US law were limited to US$12 million, the potential reach of the receivership in Ontario was significantly broader. The US District Court’s approach was focused only on a subset of the funds generated by TGG that were attributed to fees paid by a subset of loss generating participants. In contrast, under Ontario law, the receivership would include any amounts received by TGG in contravention of Ontario securities laws, without the need to connect these amounts to a specific loss by a specific investor.
The Ontario court concluded that freeze orders already granted in the United States over limited assets were not sufficient to foster fair and efficient capital markets or confidence in capital markets in Canada. As a result, the Ontario court engaged the broader receivership remedy available under Ontario securities law where a serious concern about an alleged breach of Ontario securities law has occurred and appointed a receiver over TGG’s assets in Ontario.
As retail investors continue to have increased access to global investment markets, one can expect regulators to seek to protect their local investing public from cross-border threats. However, the scope of that authority is not limitless. Unless recognized outside the local jurisdiction, a receiver appointed in the Ontario court will not be expected to take control of assets in other countries. The receivership order is only as powerful as the assets the receiver can access either directly or on behalf of the investment firm subject to receivership.
A receiver is a very well understood, powerful, and commonly used tool in the commercial court’s toolkit in Ontario and in other Canadian jurisdictions. The receiver is usually a licensed insolvency firm with expertise in restructuring and forensic matters.
Most often, a receiver is appointed by a secured creditor to realize upon collateral. Where a secured creditor seeks to appoint a receiver, courts in Ontario exercise their authority keeping in mind that the appointment of a receiver is an extraordinary remedy and proceed to review a variety of factors including the risk of irreparable harm and the balance of prejudice between parties.
The analysis is different where an Ontario securities regulator seeks the appointment of a receiver to establish a temporary ‘collateral safeguard’ as a preliminary step in an investigative process. The TGG case suggests in such a case the regulator need only identify a serious concern. The Ontario court, needed to be satisfied only that: “there is a serious concern the respondents knew that what was being represented to customers was not true and that customers were intentionally misled.”
Market participants engaged in cross-border securities dealings that have a material connection to Canadian jurisdictions must be aware of this regulatory authority to take broad control over assets where serious concerns of a breach of law exist.
As just one example, one could see this remedy deployed by Ontario securities regulators in the cryptocurrency space. Securities regulators have made extensive efforts in Canada and other jurisdictions to determine an appropriate characterization of crypto assets as securities under applicable law and to regulate dealings with those assets accordingly. Cryptocurrency operations are regularly cross-border in scope. In at least one recent crypto asset case, the Ontario securities regulators have provided guidance that: “This matter should serve as a warning that all persons who deal in crypto securities with Ontario investors, wherever the business is domiciled, cannot circumvent compliance with, or evade enforcement of, Ontario securities law.” Based on the experience in the TGG case, there is a route to utilize the Ontario securities regulatory regime to take control of crypto assets that may be active in the local market through similar receivership processes if deemed necessary by the regulators—even if similar remedies may not be available in other jurisdictions.
The receivership remedy is also a powerful tool in more traditional investment frauds or Ponzi scheme cases, where it may not be possible at the outset to prove a fraud but there is serious concern about an alleged breach of securities laws. In those cases, no individual participant may have a sufficient economic interest in commencing a proceeding to seek remedies. If those participants bring sufficient attention of these matters to a regulator in Ontario, a receiver can be appointed by the regulator quickly to aid in the investigation process and safeguard assets and significant value may be preserved.
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