The Alberta Securities Commission (the "ASC") recently issued its reasons in Re Kilimanjaro Capital Ltd., 2021 ABASC 14 (the "Decision"). The ASC concluded the control person of Kilimanjaro Capital Ltd. ("Kilimanjaro"), Ashmit Patel, engaged in, among other things, market manipulating conduct intended artificially to inflate Kilimanjaro's share price so that he could profit.
The Decision highlights the extensive cross-border cooperation between the United States Security and Exchange Commission (the "SEC") and Canadian Securities Administrators ("CSAs"). The Decision also strengthens the existing legal framework relating to misleading promotional materials. As we have written previously, regulators are grappling with how to regulate an evolving market in which information posted on social media can significantly influence market valuations. The Decision lays useful groundwork that can be used to regulate legitimate trading practices used for improper purposes.
Kilimanjaro is a Belizean company incorporated in 2011. In the autumn of 2012, Patel approached Zulfikar Rashid about using a shell company for a project involving future contingent oil, gas, and mineral rights in Africa ("FCAs"). Unable to find a willing investor group, Rashid decided to use his own company Kilimanjaro Capital Ltd. ("Kilimanjaro Canada"). At all material times, Kilimanjaro Canada and Rashid (its CEO) had addresses in Calgary.
Shortly after Patel and Rashid reached an understanding, Kilimanjaro Canada issued several news releases relating to Kilimanjaro Canada's acquisition of FCAs from various exiled governments in Africa (the "2012 News Releases"). The FCAs were contingent on the self-determination of the countries where the FCAs were located.
In March 2013, Kilimanjaro acquired Kilimanjaro Canada at which point Kilimanjaro assumed joint responsibility for all of Kilimanjaro Canada's contracts. On August 29, 2013, Kilimanjaro listed its shares on GXG Markets ("GXG"), a Danish-regulated microcap stock exchange. Beginning in or around October 2013, Kilimanjaro's shares were traded on the Over-the-Counter ("OTC") market. In November 2013, Rashid dissolved Kilimanjaro Canada.
In 2014, Kilimanjaro issued several news releases regarding its existing agreements with the exiled governments and additional "evolving interests" including a letter of intent to acquire certain oil and gas assets in Alberta (the "2014 News Releases"). None of the rights or assets outlined in the 2012 or 2014 News Releases ever vested with Kilimanjaro or Kilimanjaro Canada.
Notably, and notwithstanding the fact Rashid allowed himself to be held out as Kilimanjaro's CEO, the ASC found that Patel, not Rashid, was Kilimanjaro's guiding mind.
ASC infers connection between the accused and impugned promotional materials
Section 93(a) of the Alberta Securities Act (which is substantially similar to section 126.1 of the Ontario Securities Act and section 57 of the British Columbia Securities Act) prohibits conduct that results in or contributes to a misleading appearance of trading activity or an artificial price for a security. Market manipulation occurs where a person's actions cause a market distortion, and the person knew or ought to have known that distortion would result. Notably, the ASC affirmed the reasoning in Re Siddiqi, 2005 BCSECCOM 416, where the British Columbia Securities Commission held legitimate trading practices can be unlawful if they are used to manipulate the market.
The ASC concluded the 2012 and 2014 News Releases contained fabricated and misleading information about transactions that never consummated. They also failed to comply with applicable National Instruments. Similarly, a promotional "tout" campaign run in 2014 led to the further dissemination of the misleading news releases. The ASC had no doubt these promotional efforts were aimed at falsely portraying Kilimanjaro as an active and well capitalized company which, in turn, resulted in an artificial share price.
Significantly, the ASC was unable to establish a direct link between the promotors posting "touts" and Patel. Notwithstanding this dearth of evidence, the ASC inferred Patel had been communicating with these promoters based on the circumstantial evidence surrounding the timing of the promotions, the Kilimanjaro news releases, and the liquidation of Kilimanjaro shares. This conclusion is important and provides the foundation upon which regulators can begin to regulate anonymous social media posts aimed at creating market distortions.
ASC provides useful overview on pump-and-dump schemes
In addition to an illegal promotional campaign, the ASC also considered whether Patel engaged in a pump and dump scheme. Typically, these schemes involve a small group of individuals secretly exercising control over an issuer and its share transactions. This small group engages in promotional activities to stimulate the demand for shares, thus artificially increasing the price, while simultaneously liquidating the issuer's shares into the market. This allows the controlling group to profit from their manipulative conduct.
In this case, Patel hid behind Rashid and two other Kilimanjaro directors. He obtained control over Kilimanjaro's share transactions, drafted all but one of the 2012 and 2014 News Releases, and engaged third parties to promote Kilimanjaro. He then coordinated the liquidation of Kilimanjaro's shares into the market so that he could personally profit from the artificially increased price. The ASC had little difficulty concluding Patel's conduct amounted to a pump and dump scheme.
CSAs may take jurisdiction even where issuers have limited connections to Canada
The Decision also illustrates the all-hands-on-deck approach market regulators take in preserving the integrity of capital markets.
Kilimanjaro is not a Canadian company. It was traded in Denmark and the United States, and most those trades took place through American brokerage accounts. Further, during the relevant time periods, several of the accused, including Patel, did not reside in Canada.
Notwithstanding Kilimanjaro's limited connections to Alberta, it was deemed a reporting issuer pursuant to Multilateral Instrument 51-105 Issuers Quoted in the U.S. Over-The-Counter Markets and the ASC took jurisdiction over the matter. The SEC then assisted the ASC by conducting compelled interviews and allowing the ASC to participate remotely. Transcripts of these interviews were then tendered at the hearing.
The cooperation between the SEC and ASC is just one example of the cross-border collaboration between regulators. The Decision highlights the increasingly globalized approach regulators are taking in policing global markets, and makes it clear they are well equipped to regulate complex, cross-border transactions.
The Decision serves as a timely reminder that regulators in Canada and abroad will coordinate their efforts across jurisdictions to protect the integrity of capital markets. Given recent market volatility—and the market behaviour that spurred it—the ASC's updated legal framework on market manipulation may assist regulators as they grapple with regulating the sudden influx of non-traditional platforms over which promotional materials are being shared.
Originally Published by Osler Hoskin, March 2021
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