The Supreme Court of Canada has affirmed the rights of provincial securities regulators to prosecute stock fraud cases that transcend multiple jurisdictions, with a near unanimous decision announced Friday.
University of B.C. securities and financial law professor Cristie Ford says the ruling against four B.C. residents, who hoped to discharge allegations from Quebec’s securities commission, is a win for all of the country’s provincial regulators who now have clearer direction to proceed in complex inter-jurisdictional schemes.
“I like this decision; it will have positive and practical effects. It makes clear that securities are different. You have to be able to respond to transnational fraud in a transnational way,” said Ford.
In the case before the court, West 91原创 resident Frederick Langford Sharp (along with co-respondents Shawn Van Damme, Vincenzo Antonio Carnovale and Pasquale Antonio Rocca) argued Quebec’s Financial Markets Administrative Tribunal did not have the authority to adjudicate administrative charges brought by the Autorité des Marchés Financiers (AMF), Quebec’s equivalent of the B.C. Securities Commission.
At issue was the Sharp orchestrated a “pump and dump” scheme in 2012, from B.C. using a Nevada-incorporated shell company that was a registered to issue shares in Quebec.
In such a scheme, promoters issue false or misleading marketing material to increase the value of a company’s stock. The AMF alleged the group earned $2.6 million from the promotion of Solo International Inc., which purported to be mining in Quebec. Most of Solo’s original shares were transferred to several offshore entities linked to Sharp’s group, the AMF alleged.
But before the regulator’s case could be heard Sharp filed for a “declinatory exception,” arguing the Quebec tribunal was out of its lane.
The tribunal denied the application but Sharp applied for a judicial review at Quebec Superior Court. That review was denied and Sharp appealed to the Quebec Court of Appeal, which dismissed the appeal as well. The Supreme Court of Canada heard the case earlier this year.
Given that the justices agreed with the tribunal that the alleged scheme had “sufficient connections” to Quebec, “it would defeat the purpose of the cross鈥慴order nature of modern securities regulation to allow the defendants to escape the reach of Quebec’s regulatory oversight,” the ruling stated.
Ford says it was important for the decision to have applied to all 91原创 provincial regulators by bypassing the relevance of Quebec’s civil code, as Sharp argued it should. The nine justices, with the exception of Justice Suzanne Cote, made the ruling based on a prior case (Unifund) that established interjurisdictional rights, albeit one that didn’t specify securities regulations.
“So this makes clear it applies in securities. The most important thing this ruling does is it connects the value of extraterritorial jurisdiction to the nature of securities regulations,” said Ford.
Case highlights lack of national securities regulator, slow proceedings on fraud cases
Of course, at the root of how and why this matter even got to the highest court is because Canada does not have a national securities regulator, as like the U.S. Securities and Exchange Commission (SEC). Rather, Canada is a mishmash of provincial regulators with some level of coordination taking place by the 91原创 Securities Administrators.
There have been past efforts to establish one but constitutional and federal issues, especially with respect to Quebec, have hung up proceedings — a matter of frustration for Ford.
“I really don’t think we’ll have a national regulator in my lifetime. I have long thought a national regulator would be good,” said Ford.
While provincial regulators may offer the advantage of being closer to their communities and local priorities, “not having a national securities regulator means enormous duplication and coordination problems,” noted Ford.
The AMF case against Sharp, Van Damme, Carnovale and Rocca was brought to the administrative tribunal in 2017, and the allegations have not being tested before a panel of adjudicators.
As such this case also exemplifies the slow nature of securities fraud cases, said Ford.
“That’s not unusual in securities cases because the defendants typically have deep pockets and effective lawyers. It’s in securities that you tend to see cases that go on for a long time,” said Ford.
And any future tribunal ruling against the foursome may always be appealed.
As alleged by AMF, Sharp used the company Terra Equity LLC (Saint Kitts and Nevis of the Lesser Antilles), Peaceful Lion Holdings Ltd. (Samoa) and Morris Capital Inc. (Belize) “to conceal its central involvement in the scheme to manipulate the value of Respondent Solo's stock.”
Sharp facing criminal charges in U.S. and civil claim in B.C.
Sharp, a former B.C. lawyer, is not a stranger to court and administrative hearings.
Last May he was barred by the B.C. Securities Commission from any participation in this province’s capital markets, but only after he was found civilly as alleged by the SEC, which called him the "mastermind."
After not responding to the charges, a U.S. judge ordered Sharp to pay disgorgement and prejudgment interest of US$28,934,433 and a civil penalty of US$23,990,781. Sharp is now barred from future trading in U.S. stocks.
The SEC also brought securities fraud charges against Carnovale on Dec. 2, 2021, which remain unproven in court.
With respect to the civil claim, Sharp faces parallel criminal charges brought in August 2021 by the Federal Bureau of Investigation.
Sharp is also engaged in a complex and longstanding constitutional challenge against the Canada Revenue Agency, which is investigating his offshore tax arrangements. , alleging Sharp’s business, Corporate House Group of Companies (Corporate House), was involved in a complex tax evasion scheme. In 2016, Corporate House arrangements were revealed in the Panama Papers leak.
While he did not respond to the SEC case against him, against the and seize some of his assets.