Our Securities Litigation and Enforcement Practice Leader, Joven Narwal, and his Team, act for individuals and entities facing three types of legal proceedings – enforcement action by the Securities Commissions across Canada as well as IIROC and the MFDA, civil actions by aggrieved investors, and criminal prosecutions – from the investigation stage through to hearings, trials and appeals. We are responsive, accessible, and committed to our clients 24/7 and can be reached outside of regular business hours to address urgent matters such as demands for production, search warrants and other investigative techniques as they happen in real-time.
We have a proven track record of success on precedent setting cases including the successful appeal of a $7.3 million dollar disgorgement order which then led to the dismissal of $35million in penalties unrelated proceedings; the full dismissal of fraud allegations on our motion for non-suit before the securities commission, and the obtaining of sealing orders to protect our client’s identity during investigations. We have also mounted a variety of constitutional challenges to the legislation and investigative techniques and have a proven track record of success in pre-charge advocacy and preventing the issuance of public allegations or the laying of charges.
We believe development of an effective strategy involves mastery of the underlying facts in order to properly appreciate the client’s jeopardy, and what risks must be avoided. We understand the challenges posed by overlapping regulatory, criminal, administrative and civil proceedings as well as the application of the Charter of Rights and Freedoms to the various stages thereby achieving exceptional results for clients facing parallel investigations by domestic and international regulator and criminal investigators, along side civil suits. We believe the effective navigation of securities investigations requires an understanding of administrative law, criminal law, constitutional law, and their interplay as well as insight into the capital markets, knowledge of investigative techniques and instincts developed through experience. While these cases can be highly complex as nearly every infraction of the Act gives rise to concurrent criminal jeopardy and often involve a multiplicity of parallel proceedings domestically and internationally (including civil actions and investigations brought by the CRA, U.S. SEC and a host of self-regulatory organizations in the capital markets, financial, real estate, accounting and legal professions), securities regulatory investigations also evolve in stages that we are able to reasonably predict.
We carefully consider all angles, from what communications to have with the investigators to how / when to resist statutory compulsion, to how to prepare for compelled interviews. Gauging each step also involves a consideration of how the regulator will react and perceiving when the time might be right to engage in pre-charge advocacy to persuade the regulators not to take further action. We are also mindful that their private privileged communications may be seized or intercepted, and appropriate precautions must be taken to protect privilege.
For more information about the enforcement process in British Columbia, please find below an overview of the lecture on Securities Enforcement in B.C. that our practice leader and adjunct professor of law, Joven Narwal, provides in his upper-level seminar on “White Collar Crime” at the UBC Allard School of Law. He addresses the structure of the B.C. Securities Commission, case progression, investigative techniques, constitutional considerations, and perhaps most notably for practitioners, the recent amendments to the Securities Act occasioned by the 2019 Securities Amendment Act (the “Amendments“).
Overview of Securities Regulation in B.C.
Canadian capital markets are regulated by 13 provincial/territorial securities commissions and two self-regulatory organizations (“SRO”): the Investment Industry Regulatory Organization of Canada (“IIROC”), which oversees all investment dealers and trading activity on debt/equity marketplaces, and the Mutual Fund Dealers’ Association (“MFDA”), which regulates the operations of mutual funds. To coordinate regulation across these entities, an umbrella organization, the Canadian Securities Administrators (“CSA”), attempts to harmonize and streamline access to the markets, including by operating a “passport system” whereby a market participant may register with one regulator and gain access to capital markets in reciprocating passport jurisdictions.
In B.C., the British Columbia Securities Commission (the “Commission”) serves as the independent provincial government agency and Crown Corporation responsible for regulating capital markets through administration of the Securities Act, RSBC 1996, c 418 (the “Act”).
The Commission is essentially divided into two parts: (1) the Commissioners, who serve as the Commission’s Board of Directors, and make rules, issue guidance, oversee exchanges/market places/SROs and act as an administrative tribunal, and (2) the Commission staff, led by an Executive Director (“ED”) who is appointed by the Commissioners to manage the enforcement, financial, and administrative operations of the Commission, as well as exercise delegated powers and duties as permitted under the Act.
The enforcement division investigates potential breaches of the Act and conducts legislative and regulatory compliance audits.
The enforcement process begins with Case Assessment, wherein complaints, “tips” from the public, and concerns arising from market surveillance as well as regulatory compliance audits are assessed for potential contraventions of the Act. Where sufficient grounds exist, matters are then referred for Administrative Investigation and/or Criminal Investigation.
Section 142 of the Act allows for the issuance of an investigation order (“IO”), which in most cases is obtained near the beginning of an investigation, and provides staff investigators with statutory powers of compulsion including the power to (1) summon a witness for an interview, (2) compel witnesses to give evidence, and (3) compel witnesses to provide records.
The Amendments grant investigators enhanced powers to enter a business premises, conduct searches of electronic systems on that premises, and direct persons “in charge of a place” or even “in the place” to provide any and all assistance the investigators demand to fulfill the purpose of the compliance audit or investigation. Investigators have also been granted the power to order the production of records from information processors, benchmark administrators, or contributors directors, or officers of persons or entities distributing securities using a prospectus exemption, as well as former market participants. Furthermore, investigators are now expressly permitted to question a person under investigation about property for the purposes of collections and may ask third parties (family members and non-family members who may have received property from a person under investigation) questions about their property and the property of the person under investigation.
In addition to these powers of compulsion, administrative investigators may also harvest evidence through a variety of investigative techniques, sources, and databases, including:
- Market Integrity Through Computer Analysis (“MICA”), software used to detect securities fraud, suspect trading practices, insider trading and market manipulation by producing reports on the purchase/sale of securities on recognized stock exchanges and dealer markets.
- IIROC’s Trade Orders and Quotes Report (TOQ Report) which tracks the purchase and sale of securities including some transactions that may not appear in MICA.
- System for Electronic Document Analysis and Retrieval (“SEDAR”), which issuers use to file public securities documents and information with the CSA as set out in National Instrument 13-101.
- DisclosureNet, a research tool providing access to Canadian and US securities filings and allows for the search of any record on SEDAR and the Electronic Data Gathering, Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”), used by the U.S. Securities and Exchange Commission (“SEC”).
- Altia Solutions, an investigative tool that extracts tabular data from scanned documents such as bank statements and phone bills.
- Party Reference database, also referred to as SCAN, a BCSC internal database used to search and view parties’ personal information including date of birth, addresses, documents, and registration information.
- iBase, an enforcement and corporate finance division intelligence database which centralizes notes and other information generated by staff and is updated every 24 hours.
- System for Electronic Disclosure by Insiders (“SEDI”), established by the Canadian Securities Administrators (“CSA”) under National Instrument 55-102 to facilitate the filing and public dissemination of insider reports via the internet.
- Bloomberg Terminal, a provider of 24-hour financial news and information, including real-time and historic price data, financial data, trading news, and analyst coverage.
- BC Online, a provincial government access portal for data stored in BC provincial and municipal databases such as corporate records, personal property records for individuals and companies registered in BC including general debt and vehicle leases, ownership and value of property and searches of court registries.
- Covert telephone, email, and social media communications and attending conferences, seminars and places of business in an undercover capacity.
Where an administrative investigation is pursued for enforcement action, the ED issues a Notice of Hearing, and informs the public of the Notice of Hearing through various means including press releases and publication on the Commission website.
The allegations in the Notice of Hearing are then adjudicated in a public hearing before a panel of Commissioners. If the allegations are proven, the Commission may ban those involved in the misconduct from the securities market, issue administrative penalties – which are now up to $5 million per contravention – and order payment of monies obtained as a result of contravening the Act to the Commission. The Commission cannot order imprisonment or otherwise restrict the liberty of an individual through this process.
In addition, the Amendments have introduced an administrative monetary penalty regime, unique to B.C., allowing the ED to impose penalties by issuing a notice (without holding a hearing) for contraventions of the regulations, decisions, or prescribed provisions of the Act – together with a dispute process.
The Commission has also made increasing use of the extraordinary power to issue freeze orders under the Act prior to any allegations being made, which allow for the freezing of bank accounts and property pending the outcome of an investigation and hearing. While our firm is currently involved in a challenge to the constitutionality of the freeze order provisions of the Act, we anticipate that these orders will continue to be made with increasing frequency considering the enhanced powers available to the Commission through the Amendments, which extend the Commission’s powers to property received by third parties from a person who is sanctioned or under investigation, as well as the Commission’s enhanced powers to make orders to transmit or dispose of property to itself for safekeeping, or to retain its value until the conclusion of a proceeding, or otherwise make orders to restrain the disposition or transmission of any property.
The Commission’s liberal use of freeze orders is blatantly calculated to ensure it can collect on the financial penalties it imposes. The Amendments have also provided enhanced collections powers, enabling the ED to provide notice to ICBC requiring it not to issue or renew a driver’s licence or a numbered plate for a vehicle owned by a person who is in default of any financial sanction ordered by the Commission, indefinitely garnish a person who is likely to become indebted to a person who owes money to the Commission, and now provides the Commission with a priority over claims of any other person, except claims secured before the Commission’s Notice of Hearing or claims under the Employment Standards Act or the Family Maintenance Act. Further, the Commission has new powers to seek court orders requiring third parties who receive property from persons subject to disgorgement orders to prove they were dealing at arms-length, or even to seek an order that the third party’s property, if received from a person subject to a disgorgement order, be forfeited.
Criminal Investigations and Enforcement
The Criminal Investigations division investigates:
- Offences under the Criminal Code such as fraud [s. 380(1)]; forgery [s. 366]; false prospectus [s.400]; fraudulent manipulation of stock exchange transactions [s. 382]; gaming [s. 383]; short sales against margin accounts [s. 384]; insider trading [s. 382.1] and offences that tangentially affect securities regulation such as perjury [s. 131], false statements in extra-judicial proceedings [s.134] and use of mails [s. 381], and
- Quasi-criminal offences under the Act such as fraud, misrepresentations, illegal distributions, unregistered trading, market manipulation, insider trading and new offences created by the Amendments arising from the enhanced definitions for promotional activities [s. 50], wider-net of misconduct captured through the removal of restrictions that limited misrepresentations to persons engaging in investor relations activities or effecting a trade [s. 50(2)], the creation of offences for attempting to commit a fraud [s. 57.2] and contributing to another person’s fraud [s. 57(1)(b) and (c)].
With respect to sentencing, there is now a mandatory minimum sentencing regime for fraud offences under the Act which is unique to B.C., a new maximum jail sentence of five years for all offences and an increase in maximum fines to $5 million. The court may impose jail, fines, restitution, and disgorgement.
Generally, criminal investigations rely on voluntary cooperation of witnesses and targets, as well as judicial authorizations, which allow for the issuance of search warrants, production orders, and even wiretap authorizations under Part VI of the Criminal Code. The Amendments have provided enhanced powers, which are unique among Canadian securities regulators, for use in investigating offences under the Act which allow for judicial authorizations for production or preservation of information, obtaining certain telecommunications data and obtaining gambling records from casinos in a scope similar to what is available under Part XV of the Criminal Code.
Criminal investigators are, however, constitutionally prohibited from using the administrative compulsion powers under the Act in furtherance of criminal investigations. However, there is some nuance to this general prohibition, and our office has encountered instances in which there was cross-contamination of compelled processes with criminal investigations, which will be addressed in greater detail below.
Criminal investigations are referred to provincial Crown Counsel for charge assessment and, if approved, the provincial Crown prosecutes the case.
Cross-Contamination of Administrative and Criminal Investigations
Securities investigations are fraught with complexity due to the asymmetrical application of the Charter to administrative versus criminal proceedings. For instance, while the Commission can compel information for use before its own administrative tribunal, two Charter rights prohibit testimonial compulsion in criminal proceedings:
- The right against self-incrimination is a long-recognized principle of fundamental justice under section 7 of the Charter, which ensures that individuals are not conscripted by the state to give evidence against themselves. Section 7 also encompasses a right to silence in the pre-trial context.
- Section 11(c) of the Charter provides “[any] person charged with an offence has the right […] (c) not to be compelled to be a witness in proceedings against that person in respect of the offence”. It is intended to “protect the individual against the affront to dignity and privacy inherent in a practice which enables the prosecution to force the person charged to supply the evidence out of his or her own mouth” and addresses pragmatic concerns about the inherent unreliability of such evidence, as well as the potential for the abusive use of power.
However, complexities arise where the information compelled pursuant to administrative powers under the Act, or testimony given during Commission administrative hearings, are sought to be used in criminal proceedings, thereby engaging the following principles:
- While section 7’s residual protection against self-incrimination provides complete immunity from compelled testimony where it was obtained for the predominant purpose of obtaining evidence for criminal prosecution, where compelled testimony is not obtained in furtherance of, for the predominant purpose of, determining penal liability, the evidence may be admissible in a criminal trial. Under the framework set out in R v Jarvis, 2002 SCC 73, ascertaining when the “rubicon has been crossed,” and compulsion powers are being used to investigate crimes, is not a straightforward exercise. It is subject to a multi-factored contextual assessment designed to strike a balance between allowing audits and administrative processes to advance and not be defeated in their regulatory purpose. The court held that it is only once the “predominant purpose” of the administrative process becomes penal liability that section 7 of the Charter applies and investigators may not use powers of compulsion but must rather rely on voluntary cooperation or appropriate judicial authorizations. Counsel for individuals being audited or investigated through statutory compulsion powers must always be alive to the prospect that compelled information that has been gathered may be used in a criminal prosecution. To add a further nuance, in any event, all evidence gathered before “crossing the rubicon” may be used in a subsequent criminal case.
- Section 13 of the Charter complements the privilege against self-incrimination afforded under sections 7 and 11(c) and provides that “a witness who testifies in any proceeding has the right not to have any incriminating evidence so given used to incriminate that witness in any other proceeding, except in a prosecution for perjury or for the giving of contradictory evidence”. Its purpose is to foster the truth-seeking objectives of the justice system by guaranteeing immunity to a witness in respect of any self-incriminating testimony and thereby assuages the witness’ fears that their testimony may expose them to criminal jeopardy. The state, when compelling a witness to testify in a proceeding, thus offers the witness a quid pro quo: in exchange for full and frank testimony, the state will not use any incriminating testimony so given to incriminate the witness in a subsequent proceeding. Counsel must, however, be mindful of the Supreme Court of Canada’s ruling in R v Nedelcu 2012 SCC 59, in which it was held that the compelled testimony of an accused at a civil discovery for the same subject matter as the criminal charge could be put to them in cross-examination by the Crown in the criminal proceeding for impeachment purposes.
- The Canada Evidence Act and B.C. Evidence Act provide parallel use immunity but require the witness to expressly claim the statutory protections at the time the evidence is given.
Constitutional Concerns in U.S. Cross-Border Investigations
Unlike the United States, compelled witnesses in Canada are not entitled to refuse to answer questions, but are instead afforded derivative use immunity under section 7 and section 13 of the Charter. Given the reality of extensive cooperation between U.S. and Canadian regulators in the capital markets, a concern often materializes over what use could be made in the U.S. of compelled testimony given in Canada. So far, the admissibility of foreign compelled testimony has only been considered once by an appellate court in the U.S., where it was held that compelled testimony from the U.K. could not be used, however, the ruling is limited in its application as it did not consider the Canadian constitutional framework, and is limited in its territorial application to the Second Circuit.
Counsel faced with such complexity has the option of obtaining assurances, applying for an order imposing restrictions on the use of compelled evidence, or in the alternative, where the circumstances are grave enough to warrant such action, negotiate a safe-passage agreement with the U.S. regulator whereby the client could travel across the U.S. border to plead the fifth with the assistance of U.S.-based counsel. Counsel must also be mindful of ethical concerns on advice relating to non-cooperation and in advising the client about the risks associated to findings of contempt.
To learn more about Joven Narwal and his team, please visit his Profile, or contact our office to speak with us directly or schedule an appointment.