A recent case from the British Columbia Court of Appeal is illustrative of the power of provincial securities regulators to penalize misconduct in circumstances where the link between the regulator’s province and the misconduct may be weaker than the link between the misconduct and another jurisdiction. In McCabe v. British Columbia (Securities Commission), the Court of Appeal held that the B.C Securities Commission was acting within its jurisdiction in bringing enforcement proceedings against Mr. McCabe. Mr. McCabe, a resident of British Columbia, was found to have made misreprentations about Guinness Exploration Inc. in certain publications that were printed and distributed in the United States.
Mr. McCabe is the sole shareholder, director and officer of a publishing company named Jake Landon Publishing. Through Landon, Mr. McCabe published stock recommendations in a monthly report called the Elite Stock Report. Between December 2009 and May 2010 Mr. McCabe wrote and published reports in the Elite Stock Report promoting shares in Guinness (the “Guinness Reports”). The Guinness Reports were written in British Columbia before being emailed to South Dakota, where the Guinness Reports were distributed by direct mail from South Dakota to roughly 3 million homes in the United States. No Guinness Reports were distributed in Canada. For preparing the Guinness Reports, in total, Mr. McCabe was paid $2.65 million into his British Columbia bank account after invoicing a marketing services company located in British Virgin Islands.
The Guinness Reports contained false and unsupported claims related to the amount of gold at Guinness’s mining property. The B.C Securities Commission found that the misrepresentations in the Guinness Reports were intended to increase trading volumes in Guinness shares to inflate the stock price. The B.C. Securities Commission issued a notice of hearing that alleged in part that Mr. McCabe made misrepresentations contrary to the B.C. Securities Act. Mr. McCabe was subsequently found liable and appealed the B.C. Securities Commission’s finding of liability and its order for him to pay approximately $4.5 million in disgorgement and administrative penalties.
The Decision of the British Columbia Court of Appeal
At the Court of Appeal, the facts of the case were not contested. Rather, Mr. McCabe’s appeal was focused on whether the B.C. Securities Commission had jurisdiction to find that Mr. McCabe had breached the misrepresentation provisions of the B.C. Securities Act. The Court of Appeal determined that the appropriate test to be satisfied was whether there was a real and substantial connection between British Columbia and the conduct at issue. In regards to the real and substantial connection test, the Court of Appeal noted the B.C. Security Commission’s wide mandate to protect investors, foster capital market efficiency, and promote public confidence in the system.
The Court of Appeal then went on to review several related cases where jurisdiction was at issue in the securities context. In particular, the Court of Appeal reviewed the Supreme Court of Canada’s decision in Gregory & Co. v. Quebec (Securities Commission), where it was held that the Quebec Securities Commission could order sanctions against a company whose head office and place of business was in Quebec, but who dealt with and mailed promotional bulletins exclusively to persons outside of Quebec. Similarly, the Court of Appeal reviewed the more recent Ontario Divisional Court’s decision in Crowe v. Ontario Securities Commission, where it was held that a substantial connection exited between Ontario and the conduct of the appellants despite the fact that the impugned securities were sold by the appellants to offshore investors. The Court of Appeal specifically referenced the Ontario Divisional Court’s findings in Crowe that the Ontario Securities Commission was within its jurisdictional scope to pursue the appellants, as the appellants’ conduct negatively affected the reputation and integrity of Ontario’s capital markets. Further, the Court of Appeal appeared to be further persuaded by an excerpt of the Crowe decision that stated “Provincial securities legislation can also be applied to regulate corporations or individuals within the province in order to protect investors outside the province from unfair, improper or fraudulent activities.”
Following its review of the relevant case law and its application of the law to the facts at issue, the Court of Appeal concluded that a real and substantial connection existed between McCabe’s misconduct and British Columbia, and that the B.C. Securities Commission acted within its jurisdiction when it commenced proceedings and ultimately made orders against McCabe for his misconduct. In reaching its conclusion the Court of Appeal noted in particular that “the [Guinness Reports] were written in British Columbia, by a resident of British Columbia, who was paid in British Columbia for his services.”
The Court of Appeal noted in its decision that “[t]he analysis of whether a real and substantial connection exists must reflect the realities of modern securities regulation. For instance, conduct involving securities will often be transnational in nature, crossing provincial and state borders.” This comment by the Court of Appeal should further emphasize the need for market participants to garner an appreciation of how their business conduct may attract scrutiny from regulators in multiple jurisdictions. The modern realities of securities regulation referenced in McCabe requires market participants to develop strategies and create policies to reduce regulatory proceedings that may arise from multi-jurisdictional aspects of operating.