Québec Financial Market Administrative Tribunal’s long reach

On September 15, 2021, the Court of Appeal of Québec rendered an important decision regarding the territorial jurisdiction of the Financial Markets Administrative Tribunal (the FMAT) in the context of an alleged transnational “pump and dump” scheme by which the Appellants/Applicants, residing in British-Columbia, would have committed wrongdoings, through offshore companies, both inside and outside the province of Québec.

The applicants vehemently contested by way of a preliminary declinatory exception application the jurisdiction of the FMAT.

The Court of Appeal’s ruling is clear: the FMAT has jurisdiction over these alleged wrongdoings, even though, notably, the applicants were not residing in the province of Québec. According to the Court, the FMAT must have jurisdiction over transnational matters when there is a real and substantial connection with the province. Amongst its reasons, the Court emphasized the role of the FMAT, which is to protect Québec investors and to ensure the efficiency of Quebec’s securities market and public confidence therein.

Facts

In October 2011, Michel Plante, a Québec resident, bought a majority stake in Solo International Inc. (Solo) which was, at that time, available to purchase as a shell company. Plante effectively took control of Solo and its subsidiary.

During the fall of 2011, without any prior experience in this field of work, Solo bought, through its subsidiary, mining claims in Québec, and offshore entities linked to the appellants financed this venture. Between September 2011 and March 2012, most of Solo’s original shares were transferred to offshore entities linked to the appellants (the Offshore Entities).

The first alleged “pump” happened in January and February 2012 when Solo, whose shares were traded in the United States and considered a reporting issuer in Québec under Regulation 51-105 respecting Issuers Quoted in the U.S. Over-the-Counter Markets^[1] (Regulation 51-105), published six press releases, some of which were issued in Montreal, to promote its mining venture. The press releases touted Québec’s infrastructure, mining exploration incentives and favourable policy environment. Solo stated in one or more of these press releases that it carried on business in Québec, had a business address in Montreal, and was under the direction of a Québec, resident. The second alleged “pump” occurred in November 2012 at, which time, several promoters marketed Solo’s shares. These promotion efforts were financed by the Offshore Entities. During this period, the appellants allegedly sold a total of 46,189,908 shares for an accumulated profit of C$2,631,975.

On February 28, 2017, the Québec securities regulator, the Autorité des marchés financiers (the AMF) brought an action before the FMAT against the appellants alleging that they had participated in a transnational “pump and dump” scheme whereby the appellants are accused of having improperly influenced and manipulated the stock prices of Solo in order to fraudulently increase the shares’ value and subsequently sell their shares for a profit.

Contestation by the appellants of FMAT’s jurisdiction

In June 2017, the appellants filed motions for declinatory exception, arguing the lack of jurisdiction of the FMAT over the matter. The FMAT acknowledged the transnational nature of the alleged wrongdoings, but nevertheless confirmed it had jurisdiction based on a “real and substantial connection” between the alleged wrongdoings and the province of Québec.

In December 2017, the appellants filed a motion for judicial review before the Superior Court of Québec. This motion was dismissed on the basis that the key allegations of the proceedings contained sufficient objective connecting factor with the province of Québec to justify the FMAT’s jurisdiction over the matter.

The appellants subsequently appealed this decision to the Court of Appeal of Québec which had to decide on the following two issues:

• Did the Superior Court judge fail to properly identify the standard of review and to apply it to the FMAT decision?
• Did the Superior Court misconstrue the applicable rules limiting the FMAT’s extraterritorial jurisdiction by failing to apply the private international law rules of the Civil Code of Québec (C.C.Q.) or, in the alternative, by finding a real and substantial connection with the province of Québec?

It is worth noting that Justice Mainville concurred with the outcome of the appeal, but dissented on the specific issue of the applicability of private international rules provided by the C.C.Q.

Analysis

Standard of review

The Superior Court decision was rendered prior to the Supreme Court of Canada decision in the Vavilov case, which introduced a new framework for determining the applicable standard of review.

The appellants argued in appeal that the appropriate standard of review in this case is correctness, given that the application of private international law rules inevitably raises constitutional issues, which commands a correctness standard. On the contrary, the respondent AMF argued that the presence or lack of a real and substantial connection with the province of Québec is dependent upon the facts of each case, and should therefore be reviewed under the reasonableness standard.

The Court of Appeal ruled the applicable standard of review was correctness because the case raised a constitutional issue since “the issue relates to the constitutional applicability of a provincial law to foreigners or to matters with extraterritorial aspects”^[2]. Correctness is the appropriate standard, even if the determination may give rise to questions of mixed facts and law. The Court noted that the real and substantial connection test should be applied in its “constitutional law dimension” to determine whether the provisions of the Québec Securities Act and the Acts respecting the regulation of the financial sector, relied upon by the AMF to institute their proceedings, were applicable to the appellants, which were located outside the province.

FMAT’s jurisdiction

The appellants argued that the Superior Court judge erred in failing to apply private international law rules provided by the C.C.Q. They submitted that, in the absence of explicit provisions in the Québec Securities Act governing the FMAT’s jurisdiction over extraterritorial offences, private international law provisions of the C.C.Q. should apply. 

The Court of Appeal rejected that argument and ruled that private international law from the C.C.Q. rules were not applicable, and that the FMAT and Superior Court judge correctly relied on the real and substantial connection test. The Court specified that the jurisdictional issue at stake in this case is not about FMAT’s extraterritorial jurisdiction, but rather about the FMAT’s territorial jurisdiction over out-of-province individuals for alleged wrongdoings that have a connection with the province. The Court acknowledged that this situation might lead to the application of more than one set of laws, but this would trigger the principle of international comity. That being said, this does not prejudice the FMAT’s jurisdiction over alleged violations that were performed both inside and outside the province.

The Court ruled that “the scope of Book Ten [private international law] cannot be broadened to the point of determining jurisdiction in matters of public or criminal law that do not call for private international law rules, where the primary basis of jurisdiction is not personal or real but territorial, such as in the present case” [Emphasis in the original]^[3]. Indeed, there was no conflict of jurisdiction, nor any conflict of laws, that would justify the application of private international law rules and the Court reminded that “there is in fact nothing precluding a provincial law from applying to persons who do not reside on its territory for actions that occur on its territory”^[4]. The issue is one of constitutional applicability of public law statutes to persons located abroad which calls for the real and substantial connection test.

The Court further noted that public interest commands regulating the securities market in its modern reality and protecting consumer from fraudulent practices. As such the public interest supports a flexible approach to the determination of the sufficiency of the real and substantial connection.

Finally, the Court held that there was a real and substantial connection in the case at hand. For instance, Solo had a business address in Montréal and was under the direction of a Québec resident, some press releases were issued in Québec and, most importantly, the alleged pump aspect of the violation was dependent on business carried on in Québec. The Court concluded that the appellants used Québec as the “face” of their pump and dump scheme and, in doing so, established a real and substantial connection justifying the FMAT’s jurisdiction over the case.

Commentary

This case is a reminder of the FMAT’s territorial jurisdiction over alleged wrongdoings that are conducted both inside and outside the province, such as a transnational pump and dump scheme, when there is a real and substantial connection with Québec. The Court of Appeal confirmed that rules of private international law provided by the C.C.Q. do not apply to the analysis of extraterritorial effects of public law statutes, which are governed instead by the constitutional interpretation of the real and substantial connection test. While this decision may still be appealed by one or more parties, it reiterates and grounds the FMAT’s jurisdiction over out-of-province defendants that have established by their alleged wrongdoings a real and substantial connection to Québec.