Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Litigation and Regulation, November 2011
On November 16, 2011, the British Columbia Court of Appeal (the Court) released its decision in Kegam Kevin Torudag v. British Columbia (Securities Commission), confirming that the British Columbia Securities Commission has jurisdiction over insider trading activity taking place outside the province by non-residents of British Columbia. The decision rejects a mechanical approach to jurisdiction and recognizes that e-commerce and instantaneous transmissions around the globe make the physical location of participants and trading activity less relevant than in the past. The decision may extend the reach of provincial securities regulators, and could have broader implications for jurisdictional disputes involving online or electronic transactions.
The case involved allegations that Mr. Torudag (Torudag) and another individual contravened what are commonly referred to as the insider trading provisions of the British Columbia Securities Act (Act). The trades at issue involved the securities of Icon Industries Limited (Icon), which was at all material times a reporting issuer in British Columbia listed on the TSX Venture Exchange (Exchange). The British Columbia Securities Commission (Commission), along with the Alberta Securities Commission, is responsible for regulatory oversight of the Exchange.
In 2007, Torudag assisted with the sale of certain Quebec mineral claims to Icon. The agreement for sale was dated March 13, 2007. On the same day, Icon issued a news release disclosing the agreement. Prior to the news release being issued, Torudag bought approximately 120,000 shares of Icon through the Exchange.
At the time the trades occurred, Torudag was in the process of moving from Alberta to Quebec. He was not and had never been a resident of British Columbia. Many of the sellers of Icon shares were residents of British Columbia, but there was no way for Torudag or other purchasers to know either the identity of the sellers or where they resided. The trades were made online through a trading account with Interactive Brokers held by a British Virgin Island Company, with an administrative office in Liechtenstein, controlled by Torudag. The Exchange processes trades through a server in Toronto. Interactive Brokers is based in Connecticut, with an office in Montréal.
Commission's Findings on Jurisdiction
A preliminary application was made to the Commission by Torudag challenging its jurisdiction. Jurisdiction was also challenged by Torudag a second time at the hearing to determine whether Torudag was liable for breaching the Act's insider trading provisions. On both occasions, the Commission determined that it had jurisdiction.
At the Commission hearing, the parties agreed that the test for determining whether the Commission has jurisdiction is whether the subject matter of the allegations has a real and substantial connection with British Columbia. The Commission held that participation in British Columbia markets by making trades through the Exchange was sufficient to establish a real and substantial connection between the subject matter of the allegations and British Columbia. The Commission was also persuaded by the fact that most of those who sold Icon shares were residents of British Columbia.
The Commission found that the fact that the trades were processed on a server located in Toronto did not diminish the real and substantial connection to British Columbia. The Commission concluded that the replacement of physical trading marketplaces with electronic trading platforms makes the physical location of the trade a less useful factor in determining jurisdiction.
British Columbia Court of Appeal Decision
Torudag argued before the Court that the test for determining jurisdiction is whether the impugned conduct has a "meaningful connection" and that somehow that standard is more stringent than a "real and substantial connection". The Court found that "the two phraseologies capture the same concept, namely a state of facts demonstrating circumstances in which it would be appropriate for a tribunal to take jurisdiction over a legal issue or controversy". The Court concluded that it is not a higher standard.
The Court observed that e-commerce and instantaneous transmissions around the globe are the new milieu and cited prior jurisprudence stating that in the world of electronic commerce, physical locations can become almost incidental and other factors assume greater importance.
The Court found that the most significant circumstances which constitute a real and substantial connection are the regulatory functions of the Commission concerning the Exchange and the fact that Icon was a reporting issuer in British Columbia. The Commission is responsible for regulating the activities of the Exchange, and it has a duty to ensure "a level playing field" for investors in Exchange-listed companies. The circumstances of this case fell within that function and were found to manifest a real and substantial connection to British Columbia.
The decision represents a modern approach to the real and substantial connection test by focusing less on physical location when e-commerce is involved. The Court focused primarily on the function of the tribunal rather than where the parties were located. Provincial regulators may look to this decision to extend their regulatory authority and the jurisprudence regarding jurisdiction will likely continue to evolve as online and electronic transactions form the basis of future jurisdictional disputes.
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