Ontario court decision to appoint receiver of company accused of securities fraud highlights Canada-U.S. differences

In the recent decision of Ontario Securities Commission v. Traders Global Group Inc., 2023 ONSC 7165, the Ontario Superior Court of Justice, Commercial List (the Court) used its authority under the Securities Act (Ontario) (the Act) to appoint a receiver of a company and its sole shareholder’s property following allegations that they had engaged in fraudulent activities. Interestingly, the Ontario court’s decision to appoint a receiver followed a New Jersey court’s refusal to continue a U.S. receivership proceeding commenced by the United States Commodities Futures Trading Commission (CFTC). This decision highlights distinctions between American and Canadian securities laws and their application in cross-border regulatory activities—in particular, how the test for the appointment of a receiver under securities laws in Canada differs from, and will be considered independently of, that in the U.S.

What you need to know

• The Securities Act (Ontario) allows the OSC to seek the appointment of a receiver. Section 129 of the Act authorizes the Ontario Securities Commission (OSC) to apply to the Court to appoint a receiver and manager over the property of a person or a company where, among other things, it is appropriate for the due administration of Ontario securities law.
• Serious allegations of fraud can justify a receivership. The OSC obtained a receivership order under the Act over Traders Global Group Inc. (TGG) and its sole shareholder following the discontinuance of a temporary receivership in respect of the same respondents before the New Jersey court. In light of the OSC’s fraud allegations, the Court held that the interest of the respondents’ customers and the integrity of capital markets would be better served if property received from the alleged fraud did not remain under the respondents’ control.
• Ontario and U.S. securities laws can lead to different outcomes. The reasoning of the New Jersey court in refusing to continue the U.S. receivership proceedings is not determinative of the Ontario court’s analysis regarding the appointment of a receiver under section 129 of the Act. The Court emphasized that, unlike in the U.S., Ontario law does not require proof that the respondents intend to abscond with funds. Furthermore, the Court highlighted that if a breach of Ontario securities law was found, the respondents could be ordered to disgorge all of the funds they had received in contravention of the law, not just the amount frozen in the New Jersey proceeding.
• Implications for cross-border cooperation. Traders Global highlights that, while Canadian and American securities regulators can be expected to cooperate, the different statutory regimes and regulatory environments may result in inconsistent decisions for respondents. As such, when responding to multi-jurisdictional regulatory proceedings, respondents should be sensitive to the legal regimes applicable in each relevant jurisdiction.

The details

Background

Traders Global Group Inc. purported to offer customers the opportunity to trade TGG’s capital against third parties in exchange for a registration fee. According to TGG, if a customer’s trades were successful, that customer would have an opportunity to share in the profits. The OSC alleged that virtually no real trading occurred on TGG’s platform. Instead, customer trades occurred in a simulated environment where TGG was the counterparty to nearly every trade. This meant that if investors made money, TGG lost money. While certain customers did receive payments for their “profits”, these were allegedly paid from other customers’ registration fees rather than actual market profits (in the manner of a Ponzi scheme).

This business came under regulatory scrutiny from the CFTC in the U.S. and from the OSC in Ontario.

The American receivership application

In an application before the New Jersey court, the CFTC obtained a temporary receiver appointed over the respondents. However, the New Jersey court subsequently removed the temporary receiver and declined to appoint a new receiver on the basis that there were sufficient liquid assets available to satisfy the amount that the court had ordered to be frozen (US$12 million). No receiver was therefore required to supervise the respondents’ assets.

The U.S. court also was influenced by the fact that the CFTC had made an error in their evidence when they had made their initial ex parte application and that the court had subsequently determined that the respondents were not a flight risk.

The Ontario receivership application

While the CFTC indicated to the OSC that it would seek recognition of this receivership order in Ontario, it never did so. Accordingly, following the New Jersey court’s decision not to appoint a receiver, the OSC immediately applied to the Court to appoint a receiver. While the vast majority of the funds at issue were already subject to the various freezing orders and a cease trade order previously issued by the OSC, the OSC argued that, given the significant quantum of funds held by the freezing directions ($90 million), a receiver was better equipped to secure, manage, and preserve the assets than a capital markets regulator. The OSC also argued that there may be a need for a receiver to expand its role to make required payments, locate and secure other assets of the respondents and, if necessary, manage the orderly wind-down of the property.

The respondents, on the other hand, argued that the alleged fraudulent acts did not relate to a security or derivative within the meaning of the Act, meaning the respondents’ conduct fell outside of the Act’s purview. The respondents therefore argued that the OSC had failed to prove that there was a serious concern that the respondents had breached the Act—a necessary requirement for the appointment of a receiver under the Act.

The Court’s decision

Justice Kimmel of the Court granted the OSC’s application for the appointment of a receiver.

Justice Kimmel held that the OSC had met the criteria under section 129(2)(b) of the Act for the appointment of a receiver—that the proposed receivership was appropriate for the due administration of Ontario securities laws. Additionally, while TGG’s business was not a traditional investment model, it held out the prospect of access to capital markets to customers and, therefore, the OSC had raised a serious issue to be tried on whether the respondents had been acting in breach of the Act.

Justice Kimmel also noted that the interest of customers and the integrity of capital markets would be better served if the property received from the respondents’ alleged scheme did not remain under the respondents’ control. There was no concern that the appointment of a receiver would disrupt the operations of a legitimate business, since the cease trade order issued by the OSC and an injunction in the U.S. prevented TGG from operating its business. There was also no tangible alternative to the appointment of a receiver given the fact that the OSC was, by their own admission, ill-equipped to manage the frozen assets.

Justice Kimmel also noted that the appointment of a receiver under the Act is a “collateral safeguard” and that one can be appointed even prior to the OSC issuing a notice of allegations. Justice Kimmel did state however that the OSC was required to complete its investigation and initiate any appropriate enforcement proceedings within a reasonable time.

Justice Kimmel then turned to the differences between U.S. and Ontario law that justified the appointment of a receiver in Ontario despite the fact that the New Jersey court had refused such an appointment. In finding that the Ontario appointment was indeed justified, Justice Kimmel highlighted that:

• The OSC’s allegations related to all of the respondents’ customers, not just the subset of customers that the New Jersey court focused on in calculating the amount it froze.
• The New Jersey court’s decision had been based in part on an error in the CFTC’s evidence when it obtained the initial ex parte order—a defect not present in the OSC’s application.
• Unlike in the U.S., the OSC was not required under Ontario law to establish that the respondents were likely to remove property from the jurisdiction. Rather, the test under the Act for the appointment of a receiver is merely whether the Court is satisfied that: (i) it is in the best interests of the stakeholders; and (ii) it is appropriate for the due administration of Ontario securities law.

In light of her conclusion that the appointment of a receiver was appropriate for the due administration of securities law, Justice Kimmel expressly did not rule on whether the appointment of a receiver was in the interest of the respondents’ stakeholders. Justice Kimmel did however comment in obiter that TGG only had one shareholder and a small number of creditors. As such, it was an open question as to whether the respondents’ customers should be considered as relevant stakeholders to justify the appointment of a receiver despite not fitting into one of the categories outlined in the Act.

Key takeaways

Traders Global emphasizes the significant deference that courts often provide to securities regulators when determining whether to appoint a receiver under the Securities Act (Ontario). The Court granted the OSC’s request for a receiver even though the OSC had not issued a notice of allegations, it had based its claims against the respondents on novel and untested legal principles, and it brought its application following a contrary decision in a different jurisdiction.

This decision also highlights the nuances that exist between Canadian and American securities laws. Despite the OSC’s and the CFTC’s close collaboration on their respective investigations and the similar issues raised before the Ontario and New Jersey courts, the different regulatory regimes led to different outcomes on essentially the same question. As such, when faced with multi-jurisdictional regulatory activities, market participants should be aware of the legal landscapes of all relevant jurisdictions.