The Supreme Court of British Columbia has granted the U.S. Securities and Exchange Commission (SEC) a freeze order against five B.C. residents the SEC alleges were involved in a long-running pump and dump scheme.
The SEC sought the injunction to freeze the residents’ assets beyond the those that were covered by temporary restraining orders already issued against them in the U.S. and preservation orders issued by the B.C. Securities Commission (BCSC).
The SEC’s bid stemmed from a complaint filed in U.S. district court alleging that the defendants were involved with a massive international microcap fraud scheme that allegedly raised more than US$1 billion in gross proceeds and “caused significant harm to retail investors.”
Those allegations have not been proven.
In granting the injunction, the B.C. court concluded the SEC has a “good arguable case” against the defendants that justifies freezing their assets until the case against them in the U.S. is heard.
The court rejected arguments that the order sought by the SEC violated the Charter of Rights and the defendants’ U.S. constitutional right to avoid self incrimination, among other challenges to the regulator’s motion.
The court ruled that the protections against self incrimination only relate to criminal proceedings, whereas the SEC is pursuing a civil enforcement action.
The B.C. court also dismissed claims that the BCSC had violated the defendants’ Charter rights by compelling evidence from them, noting that “the commission has the authority to compel documents and information in the course of an investigation.”
The court concluded that the SEC has a case for an injunction: the regulator is seeking US$55 million in disgorgement and prejudgement interest against the defendants, but the freeze orders in the U.S. only cover US$29 million in assets, leaving the regulator potentially “under-secured.”
The court also identified a risk that the defendants’ assets in B.C. could be dissipated without an injunction.
“The plaintiff has alleged, with some evidence in support, that the defendants were engaged in a complex securities fraud scheme that involved shell companies, secret encrypted communications, and a clear pattern of deceptive behaviour. In my view, this is precisely the kind of case in which it is appropriate for the court to infer, on the basis of the fraudulent conduct alleged in the proceeding, that there is a real risk of asset dissipation in advance of judgment,” the court said in its decision.
Ultimately, the judge in the case granted the injunction, saying they were “satisfied on the basis of all the evidence […] that the plaintiff has demonstrated that it has a strong prima facie case and that the balance of convenience favours the plaintiff.”
The SEC’s applications for injunctive relief against two other defendants in B.C. have been scheduled for later this year, the court noted, as scheduling issues prevented all applications from being heard together.