Appointing a receiver where the US court has refused?

Ontario Securities Commission v. Traders Global Group Inc., 2023 ONSC 7165
Can the court appoint a receiver if the US court has refused?

Overview: In this case, the Ontario court considered a receivership application brought by the OSC where the US court refused to appoint a receiver. The US court found that a receiver was not necessary to supervise an asset freeze that had already been ordered. The Ontario court agreed with the OSC that it was not bound to come to the same conclusion as the US court that a receiver was not necessary in Ontario. Rather, considering the issue with regard to Ontario law, the court agreed with the OSC that this level of asset management (approximately CAD $90 million) was beyond the scope of the OSC’s expertise and role as a capital markets regulator, and that a receiver would be better equipped to deal with these matters.

After receiving a Request for Assistance made by the United States Commodities Futures Trading Commission (“CFTC”) on November 21, 2022, the Ontario Securities Commission (the “Commission”) began investigating Traders Global Group Inc. (“TGG”) and Muhammad Murtuza Kazmi. The Commission eventually issued nine freeze directions on August 29, 2023 and one freeze direction on September 17, 2023 (the “Directions”), as well as a temporary cease trade order. This occurred the day after the CFTC filed a Complaint for Injunctive Relief, Civil Monetary Penalties and Other Equitable Relief against TGG, Kazmi and a related TGG entity located in New Jersey (the “CFTC Proceeding”), in the United States District Court for the District of New Jersey (the “U.S. Court”).

A temporary receiver was appointed in the CFTC Proceeding on August 28, 2023. The Commission did not originally apply to appoint a receiver in Ontario because the U.S. temporary receiver had indicated they would seek recognition of the U.S. receivership order in Ontario. However, the temporary receiver never applied for recognition in Ontario and, on October 26, 2023, the U.S. Court indicated that the temporary receiver would be removed. The parties in the CFTC Proceeding proposed a new receiver but the U.S. Court decided not to appoint one. Based on the applicable legal regime in the U.S., the U.S. Court continued the asset freeze, but limited it to USD $12 million based on a calculation of assets potentially subject to disgorgement in the CFTC Proceeding. The U.S. Court found that no receiver was necessary to supervise that asset freeze since there were liquid assets available in that amount that could be simply set aside to be “frozen”.

Consequently, given the significant value and of the property at issue, the specific nature of some of the assets, the need to preserve them and the tracing exercise that had given rise to concerns that the property was acquired from the proceeds of a fraud committed by the respondents in breach of Ontario securities law, the Commission immediately brought this application to appoint a receiver to take control of the property for the benefit of customers and other stakeholders and for the due administration of Ontario securities law.

A receiver and manager may be appointed under s. 129(2) of the Ontario Securities Act over all or any part of the property of any person or company if the court is satisfied that:

1. it is in the best interests of the creditors of the person or company, persons or companies whose property is in the possession or under the control of the person or company, or the security holders of or subscribers to the person or company; or

2. it is appropriate for the due administration of Ontario securities law.

In an application to appoint a receiver under s. 129, the Commission does not have to prove a breach of the Act. Rather, it is sufficient for the Commission to establish that there is a serious concern with respect to the alleged breaches of the Act by the respondents. The U.S. Court found that there was a prima facie case that the respondents had engaged in unlawful conduct in violation of the U.S. Commodity Exchange Act and Regulations, and that the respondents had committed fraud under U.S. law. The Commission argued that the evidence on this application supported the same findings being made by this court. The Commission also contended that this Court was not bound to come to the same conclusion that a receiver was not necessary or appropriate in Ontario. Rather, it was required to consider the issue with regard to Ontario law. The Court agreed that the reasoning of the U.S. Court to discharge the temporary receiver was not determinative of this Court’s analysis regarding the appointment of a receiver under s. 129 of the Securities Act.

With respect to the appointment test under s. 129(2) of the Act, the Commission argued that both criteria were satisfied. Specifically, any assessment of whether the appointment of a receiver is appropriate for the “due administration of Ontario securities law” must be animated by, and consistent with, the purposes set out in s. 1.1 of the Act, which include: (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets.

The Court agreed that the appointment of a receiver under s. 129(2)(b) was appropriate for the due administration of Ontario securities law. So far, property in the names of the respondents with an estimated value of USD$90 million was frozen under the Directions. The Commission, as a capital markets regulator, did not consider itself to be in the best position to be monitoring approximately CAD $90 million in funds and assets and making ongoing decisions about asset preservation. The Court agreed that this level of asset management is beyond the scope of its expertise and role, and the receiver would be much better equipped to address such matters. A receiver would be able to maintain the value of the funds and assets that were subject to the Directions, make required payments such as unpaid employee salaries, locate and secure other funds and assets of the respondents, and, if enforcement proceedings were successful, ensure an orderly wind-down of the property under supervision of the Court and distribute proceeds on an equitable basis. There was no evidence of a tangible alternative to an Ontario receiver, as there was no longer a U.S. receiver who could apply for recognition in Ontario.

In light of the Court’s decision to appoint the receiver under s. 129(2)(b), it held that it did not need to be satisfied that it was also appropriate to do so under s. 129(2)(a). Kazmi was the sole security holder (shareholder) of TGG and the other corporate respondents. There were no public security holders whose interests the Commission needed to protect through the appointment of the receiver based upon the alleged fraud said to have been committed by Kazmi and TGG. The question of whether the interests of a “stakeholder” that does not squarely fall within one of the identified categories (of security holders, creditors and/or beneficial owners of assets under administration) would be sufficient to justify the appointment of a receiver was left for another day.

Judge: Justice Kimmel

Counsel: Sarah McLeod and Hansen Wong for the Ontario Securities Commission

Alexander Rose, Eliot Kolers, Jordan Wajs and Hannah Kellett of Stikeman Elliott for the Respondents