Securities enforcement | S2 EP13

Disputed - Discussions to keep your business risk-ready

September 21, 2022
Disputed episodes


What do cryptocurrency and cannabis have in common? They both attract new and unseasoned investors who may be exposed to significant risks when representations about a business turn out to be misleading. The Ontario Securities Commission (OSC) watches this activity and introduces legislation to protect investors. Joining us to discuss what this all means are Jeff Kehoe and Linda Fuerst. Jeff is the director of enforcement at the OSC and previously spent time as the VP of enforcement at the Investment Industry Regulatory Organization of Canada (IIROC), and Linda is a senior partner and co-chair of our Toronto litigation group. 

This episode qualifies for 30 minutes of CPD credit in Ontario and 30 minutes of CPD credit in British Columbia.

Securities enforcement | S2 EP13



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Andrew McCoomb  00:10
Welcome to Disputed, a Norton Rose Fulbright podcast. This episode is about securities enforcement. It is a tumultuous time for the capital markets and securities regulators are as busy as ever. New financial products – read: crypto – raise novel investor protection issues and call for scrutiny around what new business models do and how they should be regulated. New industries – read: cannabis – invite in eager, unseasoned investors who may be exposed to a significant risk when representations about a business turn out to be misleading. And new legislation aims to revamp the way the OSC approaches regulation at the capital markets, including enforcement. To get the insider's perspective on all these developments, we welcome Jeff Kehoe to the podcast. Jeff is Director of Enforcement for the Ontario Securities Commission. He joined the OSC in 2016, having spent more than a decade running enforcement for the Investment Industry Regulatory Organization of Canada, or IIROC. And before that he was a Crown Attorney and Crown Counsel with the Department of Justice. Joining Jeff is Linda Fuerst. Linda is one of the chairs of the Toronto litigation group at Norton Rose. She's a commercial litigator who focuses on securities litigation, class actions and regulatory issues. Before going into private practice, Linda also worked as senior investigation counsel with the enforcement branch of the OSC, where she also undertook a rotation with the SEC in Washington DC. Between them, Linda and Jeff have many decades of securities enforcement experience and a clear window into developments into this space. We were very grateful for the chance to speak with them and we hope you enjoy our conversation. 

So first of all, Jeff, Linda, thank you so much for joining the podcast. We really appreciate having you here.

Linda Fuerst  02:03
Happy to be here.

Jeff Kehoe  02:04
Thank you so much.

Andrew McCoomb  02:06
So, Jeff, let me start with you. And I'm going to ask a question about-- about the Commission. You know, it goes without saying we're in the midst of a tumultuous time when it comes to all things. But obviously, you know, litigation and regulation and enforcement, what has been the impact, as far as you can tell of the COVID pandemic on OSC enforcement?

Jeff Kehoe  02:34
That's a really good question and an important question. There's been some wonderful benefits, really, that have really developed out of the pandemic, and there have been some challenges. So, initially, when the pandemic hit, we had to restructure, sort of, how we do both investigations and hearings. And what I mean by that is that we always did our examinations, as Linda knows, in person. And immediately we had to sort of essentially be in and create, of virtual investigation rooms, where we were able to put documents, to witnesses, documents of the those that are subject possibly to an investigation virtually, and at the same time, sort of try as best as possible to make the examination interview flow naturally, as if it was in person. And that took some months. And once we sort of got into the groove of it, it's worked out really well so that we can now sort of do hybrid interviews, where some people are in person, some people are on the screens. So that has worked out well. The-- the second challenge was the fact that our hearings were adjourned for approximately seven months. So from March until the fall, we had no hearings, because the panel was really waiting to find out what the impact of the pandemic was going to have on stuff that, on having in person-- in person hearings. As a result, we did have to create virtual hearings in the last year and a half. And that has been a wonderful thing. It's been a wonderful thing, because, we now can put on hearings that people from all across Ontario, all across Canada, in fact, all across the world, can dial into. They can participate in a way that they couldn't in the past. So it's greater access to justice, and it really aligns quite nicely with the open court principle. So we are hoping, and anticipating that the virtual hearing room is going to continue even when it returns to in person hearings.

Linda Fuerst  04:45
Is the Commission seeing though that a lot of people are in fact dialing into the hearings more so than with the attending physically, if the hearing was conducted as it usually was at 20 Queen Street West in person?

Jeff Kehoe  04:58
That's a really good question. So we are tracking those stats. And for certain cases, that is, it is true. For example, crypto settlement agreements seem to attract people from around the world. And so, we had a few settlement agreements where we had, like I’ll call it significant numbers, dial in to hear about the-- the presentation, the settlement agreement, and some of what the sanctions were going to be. Other matters as Linda said, it's still really akin to traditional in person matters. There's less interest in, I’ll call it more routines sort of hearings

Ailsa Bloomer  05:39
Are there any changes in the trends of the types of matters, then that are coming to the enforcement or coming to the attention of the OSC?

Jeff Kehoe  05:47
So there are two parts to that question. And the first part is that, we select our cases based on the priorities of the Commission. So every year, the Commission and the Commissioners decide what presents the greatest risk to the capital markets. So we use what's called a risk-based approach to identifying cases. And so we tailor our case assessments of the model to pick those cases that the Commission has identified as-- as a priority for that for-- for a given year. For example, we are very, very interested in crypto and we are doing a lot of those, but we are looking at ESG issues now. So we're starting to focus on that, because that's a priority for the Commission. We're looking at gatekeeper issues. And we are still focused on some of the more traditional types of violations such as insider trading. The second part of my answer is that, we also get a number of referrals and complaints from stakeholders, complainants, both in Ontario and really, across Canada. And what we're seeing is that there is a huge spike in crypto-related complaints. And that seems to be something that we anticipate is going to continue for the next few years. We also, we’re getting a lot of complaints about emerging, I’ll call it capital markets, companies such as cannabis companies, as well, in terms of valuation issues, in terms of I’ll call it some challenges to some of-- some of their growth. And I think those are two things that will continue for the next few years.

Ailsa Bloomer  07:31
Do you mind talking a bit more about what the crypto complaints look like specifically, and where these complaints are coming from?

Jeff Kehoe  07:38
Yes, really good question. So there are a number of different types of crypto complaints. The most predominant complaint is fraud. And there are a number of websites around the world that advertise of making a fortune on crypto, advertisings of how to teach you to invest in crypto. In fact, there are even dating sites that also talk about investing in crypto, if you can believe it. So the predominance of that type of complaint is, I gave a crypto platform my credit card, and I lost $5,000. So that's the number one complaint. There are also complaints about existing platforms in Canada, of service issues, I can't seem to get my money out of the platform, or I've been trying to do trading and it doesn't seem to be-- to be done fast enough. So those are other complaints as well.

Linda Fuerst  08:35
Kind interesting Jeff, though, isn't it that you know, in terms of the crypto frauds it's really kind of a variation on a theme of the old boiler rooms? It's kind of the same actors probably beside-- behind some of those frauds as we've seen in previous years’ operating securities boiler rooms.

Jeff Kehoe  08:52
Linda, that's absolutely right. So it's the fraudsters remain the same, but it's the products and the technology that's changed. And really, that's it, because it's the same hype, it's the same type of promises that are made, and it's the same inducements, which is you can make a fortune overnight. And we all know that's not true. Anything that seems too good to be true, is too good to be true. But people on a daily basis are induced to submit to that-- to buy into it. But Linda is absolutely right, it resembles a number of the types of frauds that we've seen in the past.

Andrew McCoomb  09:27
So Linda, give us your perspective, from the civil side on trends that you're seeing in private securities litigation.

Linda Fuerst  09:35
Yeah, so I guess you know, class actions and securities class actions in particular, is the biggest thing. You know, we saw an increase in the number of securities class actions, a number of years ago, I think it was in 2021, match the all-time high of 15 in one year in Canada, which is a high number for Canada compared to the US, and then a significant drop the following year. And you know, one of the factors that seems to have contributed significantly to that trend, the uptick and then the decrease, were the cannabis class actions. You know, as we know, there were quite a number of cannabis class actions that were commenced a few years ago, then that dropped off. And I think that that accounts for that-- that change. Another trend that we've seen in the past few years is the focus of class counsel on allegedly excess fees charged or being collected by financial institutions in the mutual fund space. And, you know, we've seen both fund manufacturers and discount brokers who sold mutual funds, being the target of those class actions in a number of provinces, it's not just Ontario, it's also BC and Quebec. The trial of one fund manufacturer in a case in BC, for having allegedly participated in something called closet indexing was decided recently in favour of the financial institution. But there are a number of class actions relating to similar practices that are still in the works. And we're going to see how those-- those shakeout over the next few years and those cases are interesting because they involve some, you know, novel issues about the application of trust law, to mutual fund trustees, you know that in Canada, mutual funds were set up as trust. So some interesting issues that will be determined on a legal basis in those cases. And then just briefly, a couple of other trends we've noted is, you know, we're seeing many more securities class actions being commenced in British Columbia, as opposed to Ontario. And that appears to be as a result of changes to the Ontario Class Proceedings Act, which have changed the test for certification. There's also the Ragoonanan Principle that applies in Ontario that doesn't in BC. You know, the result of that, is that in BC, it's easier for a single plaintiff to bring an action against a bunch of defendants who engaged in the same kind of conduct than it is in Ontario. So those are some of the things that we're seeing right now.

Andrew McCoomb  11:59
So Jeff, what-- what does the existence of that robust class action bar and securities, civil litigation bar, mean for enforcement? Does that let you train your-- your focus on certain types of matters and give you some confidence that the civil system will provide relief for people who suffered losses to some extent, does that free up your resources a bit to tackle other problems?

Jeff Kehoe  12:26
The answer to that question is complicated. But it's both yes and no. And first of all, yes, like a robust class actions, I’ll call it bar. And so that landscape is very, very important, because civil remedies really sort of lend themselves to sort of all investors getting their money back. The challenge with an enforcement-- enforcement proceeding is that there may be 5,000 investors in a particular product, in a particular company, and enforcement may interview 10, 20 or 30 of those investors. And, if in fact, we do a settlement agreement or a hearing, we may include five or 10 of them as part of our hearing process. The challenge is that if in fact we then have a sanction hearing, we are not able to say Okay, the loss by all investors is X amount, that's simply sort of not something that is easily done in enforcement, because enforcement was never designed, really, to sort of ensure that all investors get their money back since, you know, within sort of the enforcement process. So we're-- we're very, very pleased that the-- the class action cases that are brought on behalf of investors are robust, and some of them are successful. That being said, the class actions are a great opportunity for enforcement in certain situations for the enforcement arm of the OSC to get money to investors, and sort of where we can, we will use the existence of a class action to forward money to the class action. And we've done that in a few cases, they, I think, a prominent example is, the Home Capital case, where we use the class action to forward tens of millions of dollars to the investors and to so called-- to the-- to the class action itself for disposition. The other challenge we have is, if in fact, we do take an action, and we do try to get the money back to investors, as we did in something called Market Timing. Decades ago, decades ago, we did this. We then find that that there were some investors that did not sort of know about the class, I’ll call it the process, and did not know that they could get money back at the time. And so they've initiated their own class action, which is still ongoing. So it’s-- there so, it's a complicated area, so we applaud the existence of class actions. We utilize them where we can. And they do present challenges for us if, in fact, we take action, but we don't cover the territory of all investors.

Linda Fuerst  15:17
I’d like to just kind of pick up on an another angle, I think that comes out of that, it is kind of interesting to see the interplay between the decisions that the civil courts are rendering in the secondary market securities class actions. And, you know, the reliance of the courts on the developed jurisprudence that the OSC has, relating to things like, you know, the definition of materiality and what constitutes a material change. And it's going to be interesting to see to what extent now that the commission may, in fact, rely on some of those cases emerging in the civil context, when they're dealing with disclosure issues and whether there's going to be mutual reliance on-- on the decisions of the other.

Jeff Kehoe  15:54
And there's certainly going to be robust debate-- debate about that and Linda's right, so we may see some civil concepts sort of creeping into enforcement cases down the road.

Ailsa Bloomer  16:05
This might be slightly off topic, but something occurred to me as you were talking about the class actions, and you've mentioned ESG issues earlier, as well as another trend that we're seeing. We recorded an episode on greenwashing claims last week, and greenwashing litigation. And I'm just thinking in some companies are increasingly facing action, potentially class actions, when it comes to engaging in greenwashing activities. Is that something that is coming onto the OSC’s radar at all, the nature of investigating greenwashing activity? And how would, what would that look like in terms of this dynamic with class action activity when it comes to greenwashing?

Jeff Kehoe  16:42
So that's a really good question. And the idea of-- of greenwashing is something that we take very seriously, essentially, it's misleading disclosure. And that's-- that's how we would look at it in the context of securities regulation, is that you're representing, for example, that you're doing so many good things, to-- to protect the planet, and in fact, you're not. And so, if in fact, we-- we discern, we discover that you are misrepresenting what-- what you are doing, then we will take action, and we are looking for those cases, right now, it's early days, the existence of a class action sometimes can be a great referral for us, if, in fact, we see, let's say a class action has initiated, and it's an allegation of greenwashing, we need to investigate ourselves to see if, in fact, we can find an enforcement case out of that class action. And we've done that in the past.

Ailsa Bloomer  17:43
I think it also speaks to an interesting question about the evolving role of the regulator and to what extent it is proactive or reactive. Do you think it is, particularly with the rise of ESG issues, do you think it is transitioning from a reactive role to a more proactive role?

Jeff Kehoe  18:00
In certain areas, we do have to be more proactive, and I think we are trying to be proactive, I think ESG is going to be a bit of a challenge to be as proactive as we would like right now. And the reason for that is the international standards for ESG are not quite settled yet. There are actually competing standards that are being developed around the world. And so it's a challenge for a regulator to say, well, you picked the wrong set of standards. So I think we're going to take our guidance from both the internal experts at the OSC, our corporate finance department that is developing expertise around, let's say, greenwashing, it's appropriate to have standards in ESG itself, before we really launch into a number of cases. But to answer your question, it's-- I really wish, I've got to be careful what I say because we're just, we're really just starting on ESG. But let me pivot to another area where we are trying to be much more proactive. And that's into the, I'll call it internet-based misconduct, and internet-based misconduct does not easily lend itself to-- to traditional enforcement action. And the reason for that is, if in fact the assets go from jurisdiction to jurisdiction, which they do, especially in the crypto space, it only takes one jurisdiction to tell us that they're not going to cooperate with us, that then that sort of renders the enforcement action difficult to complete. So as a matter of, I think necessity, enforcement is now looking to international disruption, to be more proactive, how do we stop the harm in its tracks, and so we're working with other regulators around the world to develop practices and principles around disruption, and we hope to really just-- arrive at a body of accepted protocols where we can be more proactive. And I would love that to expand into some other areas of capital markets. Because if you could stop the harm in its tracks, then some of the investors really get much more meaningful sort of investor protection.

Linda Fuerst  20:16
Really an age old problem, Jeff, isn't it. I mean, from-- from my days at the Commission many, many years ago, you know, there were difficulties sometimes getting foreign regulators to assist OSC staff in investigating cross-border misconduct and the smart, you know, smart bad guys out there know which jurisdictions to pick and to operate out of because they know that certain regulators are going to be less-- less cooperative in those kinds of cross-border investigations. And I think that's why so much work was done in the past, a bit of developing memoranda of understanding and, you know, becoming IOSCO becoming the more robust international organization that it is now.

Jeff Kehoe  20:54
Exactly right. And it even goes beyond assets. We've had recent examples where we can't even find the principals of an existing entity, because they are scattered around the world. And they-- there is no head office there-- there is no bricks and mortar of these entities. And as a result, it is very difficult to find the individuals that are in charge of these, I’ll call it capital markets, entities, whether it's crypto, or others, but it's presenting problems for us. And like Linda said, the problems already-- has always been there. But it's becoming increasingly more challenging to-- to affect the traditional enforcement action, because really, of internet-based misconduct, internet-based capital raises, and the fact is that this next generation realizes we don't have to have a head office, I can be in Singapore, the CFO can be in Malta, and the Chief Compliance Officer in Canada.

Linda Fuerst  21:59
And is this something that OSC enforcement is discussing with the RCMP and the criminal authorities as well, because they face the same issue, don’t they? 

Jeff Kehoe  22:08
They do. And we have been in discussions with law enforcement, RCMP, some other law enforcement, as well as our IOSCO members. We're going to have to, at one point, sometime down the road, really grapple with the collaboration that's needed to get the bad guy, so to speak.

Andrew McCoomb  22:29
Jeff, you mentioned the traditional securities enforcement action, but of course, your organization is undergoing considerable change as well right now. I mean, you've formed the Capital Markets Tribunal for adjudication of enforcement issues, there’s a new board of directors whose roles and responsibilities have changed as a new Office of the CEO. How is that impacting enforcement?

Jeff Kehoe  22:52
So we're not seeing really any demonstrable changes, so far, the--the internal workings of the commission are-- are different. They're very, very different. But enforcement is always enjoyed a little bit of a separation. And in the past, that was because of the actual structure of the commission itself. The commissioners were both tribunal-- they were tribunal members, they were policy members, and they were the Board. Now there is that separation. So internally, I'm unable to talk more about what enforcement does, because the commissioners are no longer tribunal members. But there’s still that that healthy separation between enforcement and what we’ll call board governance. And as a result, there's really no changes so far. There's no changes really, at the level of the tribunal, because it still functions in the same way that it did, it's just separated. There is that, I’ll call it acknowledgement, that they are a completely separate tribunal. We are trying to work out new types of documents, new types of arrangements with them. And the biggest change of anything is that we now are very conscious of the fact that we will need to do everything so that, let's say, requires reform, with the Bar. So Linda has to be at the table if in fact, we want to change a document. We can't simply, go like we did in the past where we'd have an internal discussion, because that's realistically the way it was done, because it was part of the commission. Now it's not. So we're going to sort of in the future use the body known as SPAC, which is essentially some enforcement people from the commission side, as well as the Bar such as Linda, who will also participate in discussions about how to run the tribunal process better.

Linda Fuerst  24:54
So just picking up, Jeff, on what you just said about the new structure of the commission. I think you know, In general, respondents counsel, with the private side of the bar was reassured by the appointees to the new enforcement, or rather than new Capital Markets Tribunal, they all seem to be well qualified. But I think, you know, there is a concern that over time some of the expertise that the former hearing panel members had by virtue of the fact that they were also commissioners and involved in the making of policy and had a very sound understanding of securities law and practices, that that could be lost, and was a result of that there may be less expertise at the tribunal level as time goes on. And it was that expertise that led the courts originally to give so much deference to commission decisions. So I think there is a potential impact in future again, depending on the quality of the appointees going forward.

Ailsa Bloomer  25:48
Okay, so we've talked about a crypto trading platform enforcement, activity enforcement, ESG trends, illicit internet activity. Linda, specifically, what more general trends can we expect to see in this space in the next year or so? What trends are you looking at most closely when it comes to OSC enforcement activity?

Linda Fuerst  26:09
So I'm going to answer that both with respect to OSC enforcement activity and civil litigation, if that's okay. You know, obviously, there's a lot of economic disruption going on right now, we've got interest rates going up, we have the threat of a recession. And, you know, typically, and historically, when markets have dropped in Canada, investors tend to look for deep pockets to try to pursue to try to recover, you know, investment losses. So, I think that the outcome of that is going to be, we're going to see a lot more investor complaints to the securities regulators, we're also going to see an uptick in civil litigation, and in particular in securities class actions, over the coming months, and, you know, potentially years. So that's one trend I think that shouldn't be a surprise to anyone. You know, Jeff spoke about an increase in the regulatory attention being paid to cryptocurrency. We're also seeing that on the civil side, and I know Andrew has had some experience with this himself, being involved in a number of civil crypto disputes. But I expect we're going to see that trend continuing. We've already seen courts being very active in terms of making things like Anton Piller orders and Mareva injunctions in the context of cryptocurrency-related disputes, you know, issues relating to loss of tokens by investors. And I think that that trend is just going to accelerate as cryptocurrency continues to be an evolving, you know, financial instrument in the coming years.

Andrew McCoomb  27:41
Jeff said as well about the cannabis space, because it's a market where so much activity happened so quickly, so many people flooded in. And so many businesses are struggling now, with, it seems like every aspect of that business to be in and so the level of scrutiny that's going to be applied to public statements made about how businesses are functioning and how investors are being treated, at every level seems to me to be a continuing area of focus for regulators, and for class action attorneys, and for all types of disputes. So that's another-- another clear one.

Linda Fuerst  28:18
And then, you know, finally, there was already a reference to ESG and greenwashing. And seeing, you know, some expectation of increased regulatory action there. I know we have done a previous podcast about litigation arising out of that, but we do expect to see more civil litigation coming down the pipes in that area. Certainly, there's a lot of shareholder activism in the ESG space in Canada that our firm has been involved in. And I expect, there's going to be more of that. This is an area that the insurers are paying very close attention to, because it'll, it has obvious implications for their risks. So we are paying close attention to that we expect that we're going to see a lot more of that, it's something that we're all getting ready to deal with. And, obviously an area of concern for a lot of publicly traded companies out there as well. 

Andrew McCoomb  29:08
So Jeff, Linda, thank you so much. I think we might invite you back to pick up on some of these trends and follow up on where things are in the future. But thanks for your time today.

Ailsa Bloomer  29:16
Thank you very much.

Jeff Kehoe  29:17
Thank you so much, and I'd be happy to come back.

Linda Fuerst  29:19
Thanks so much, Jeff. We really appreciate it.

Ailsa Bloomer  29:22
We hope you enjoyed this episode of Disputed. If you'd like to find out more about this topic, or how to contact our guests, please visit Also, if you have any questions, feedback, or topics that you'd like us to cover in a future episode, please do email us at And if you would like to hear more, please subscribe to Disputed on Apple Podcasts, Spotify or wherever you get your podcasts. 

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