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On October 14, 2025, the Capital Markets Tribunal released the sanctions decision1 in TeknoScan Systems Inc. (Re), following the merits decision,2 released December 23, 2024. After hearing 19 days of evidence, the Tribunal found that the respondents had perpetrated securities fraud contrary to s. 126.1(1)(b) of the Ontario Securities Act (the Act), by sending shareholders a notice that failed to indicate uncertainty that funding for a transaction may not materialize. The Tribunal made such a finding in spite of the respondents subjectively believing that such funding would be available. In its sanctions decision, the Tribunal ordered that TeknoScan and two of its directors and officers be permanently banned from participating in the capital markets and that the third officer and director be banned for 20 years. The Tribunal also imposed officer and director bans on all three individuals, monetary penalties against the executives, and $400,000 in costs against the parties, to the benefit of the Commission.
The facts
In December 2016, TeknoScan sent the notice to shareholders touting a transformative sale whereby a "Canadian Strategic Investor" would buy up to approximately 50% of TeknoScan's common shares at US$20 per share. Preferred shareholders were told they could participate only if they converted all their preferred shares to common shares by January 31, 2017. This communication resulted in a 92.3% conversion of preferred shares, and, as a result, dividend, redemption, and in some cases royalty rights of the preferred shareholders were extinguished.
However, the notice failed to indicate that the funding for the transaction was uncertain, that the transaction relied on unconventional, non-arm's length funding arrangements, and that the transaction may not materialize. In the end, the transaction did not close.
The merits decision
At the merits hearing, the Tribunal found that TeknoScan and its three directing minds — Hyams (CEO), Kung (CFO), and Tam (Chair) — perpetrated fraud under s. 126.1(1)(b) of the Act and that TeknoScan made a materially misleading statement under s. 126.2(1), which the individual directors acquiesced to.
In its merits decision, the Tribunal dismissed the Commission's allegation that the respondents knew and believed that the third-party funding for the transaction was implausible and nonsensical at the time of the notice. To the contrary, the Tribunal found that the respondents believed in the funding but knew that the transaction was uncertain and that the third-party funding might not materialize. The fraud, according to the decisions, consisted of sending shareholders the notice which failed to indicate that uncertainty and instead conveyed that the funding was not an issue.
Use of compelled testimony
The merits decision also limited the future use of compelled testimony by the Commission in Capital Markets Tribunal proceedings.
During their compelled examinations by the Commission, Kung and Tam asserted the protection of s. 9 of the Evidence Act, which prohibits the use of any evidence resulting from the examination in a subsequent proceeding. In two previous Tribunal decisions, the Tribunal had held that the Commission was still entitled to use evidence resulting from the compelled testimony at the merits hearing in the same proceeding, as such proceeding was not a "subsequent proceeding".
In deviating from these prior two decisions, the Tribunal held that where respondents properly invoke the protections of s. 9 of the Evidence Act and choose not to testify in their defence at a s. 127 proceeding before the Tribunal, evidence obtained as a result of compelled examinations was inadmissible.
The sanctions decision
In the sanctions decision, the Tribunal highlighted that fraud is "the most egregious violation of securities law" but noted that the fraud at issue in this case is not the most egregious kind and that the fraud would have been more severe if the transaction had been a complete sham. Nonetheless, the Tribunal stated that the fraud "remains serious and warrants meaningful sanctions to protect the integrity of the capital markets".
In the end, TeknoScan, Kung, and Tam were permanently banned from participating in the capital markets, and Hyams was banned for 20 years. Administrative penalties were also set at $150,000 for TeknoScan, $450,000 for Kung, $350,000 for Tam, and $250,000 for Hyams. Costs totaled $400,000, with $100,000 payable by TeknoScan and $300,000 payable jointly and severally by the individual respondents.
Implications
TeknoScan underscores several key takeaways.
First, evidence obtained as a result of compelled testimony may not be usable during merits hearings where respondents invoke the protections of s. 9 of the Evidence Act and choose not to testify in their own defence.
Second, fraud, within the meaning of the Securities Act, can be found based on disclosure omissions and will carry significant consequences for market participants, even where such fraud is "not the most egregious kind". Despite the Tribunal's purported reliance upon the Supreme Court of Canada's leading fraud decision in R. v. Théroux, 1993 CanLII 134, the Tribunal's decision appears to veer away from the Supreme Court's guidance, perhaps given the administrative context of the proceeding, finding that a failure to disclose uncertainties in communications with shareholders can establish the mens rea element of fraud. In contrast to the Tribunal's conclusion, the Supreme Court in Théroux suggested that negligent or careless misrepresentation is not sufficient to establish fraud:
The requirement of intentional fraudulent action excludes mere negligent misrepresentation. It also excludes improvident business conduct or conduct which is sharp in the sense of taking advantage of a business opportunity to the detriment of someone less astute. The accused must intentionally deceive, lie or commit some other fraudulent act for the offence to be established. Neither a negligent misstatement, nor a sharp business practice, will suffice, because in neither case will the required intent to deprive by fraudulent means be present. A statement made carelessly, even if it is untrue, will not amount to an intentional falsehood, subjectively appreciated. Nor will any seizing of a business opportunity which is not motivated by a person's subjective intent to deprive by cheating or misleading others amount to an instance of fraud. Again, an act of deceit which is made carelessly without any expectation of consequences, as for example, an innocent prank or a statement made in debate which is not intended to be acted upon, would not amount to fraud because the accused would have no knowledge that the prank would put the property of those who heard it at risk. We are left then with deliberately practised fraudulent acts which, in the knowledge of the accused, actually put the property of others at risk. Such conduct may be appropriately criminalized, in my view.
The merits and sanctions decisions in TeknoScan highlight the importance of ensuring that corporate communications to shareholders are made openly and transparently.
Footnotes
1 2025 ONCMT 12 [PDF].
2 TeknoScan Systems Inc. (Re), 2024 ONCMT 32 [PDF].
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