The SEC Comes To BC For A Mareva

• Jurisdiction: United States,Federal
• Law Firm: Cassels
• Subject Matter: Corporate/Commercial Law, Wealth Management, Litigation, Mediation & Arbitration, Compliance, Wealth & Asset Management, Court Procedure, Securities
• Author: Mr Carey Veinotte, Rajit Mittal and Campbell Brooks
• Published date: 26 April 2023

OVERVIEW

The British Columbia Supreme Court (the Court) recently released a decision¹ granting the United States Securities and Exchange Commission (the SEC) a Mareva injunction against four defendants from British Columbia. The injunction was granted in connection with ongoing SEC proceedings (the US Proceeding) against the defendants before the United States District Court, District of Massachusetts (the US Court). In the US Proceeding, the SEC seeks disgorgement remedies from the defendants as well as civil monetary penalties for their roles in a "pump and dump" scheme that allegedly defrauded investors of approximately $1.3 billion. In granting the Mareva, the Court considered arguments relating to: breach of the defendants' Canadian and US constitutional rights; the Court's jurisdiction to grant the Mareva; and concerns around overlapping or duplicative orders.

The Court's decision demonstrates the ability of the SEC to seek and obtain pre-trial remedies from Canadian courts against defendants in Canada in aid of US civil proceedings.

THE ALLEGATIONS

In the US Proceeding, the SEC alleges that the defendants acted in concert to raise the share prices of two public companies, "Vitality" and "Arch," which were secretly controlled by the defendants' affiliates, and then to rapidly sell their shares at an artificially inflated price - a classic "pump and dump" scheme. The defendants allegedly assisted their clients in concealing their identities, thereby allowing their clients to avoid reporting and disclosure requirements applicable to large share sales and allowing them to anonymously hire stock promotors in furtherance of the "pump and dump." These services included encrypted communication devices called xPhones, and servers located in Curacao through which the defendants maintained encrypted communications. They also used a separate accounting system and offered clients the use of offshore nominee companies that could be used to hold shares.

SEC INVESTIGATION

The SEC obtained a temporary restraining order in the US Proceeding, freezing the assets of the defendants, and preliminary injunction orders against certain defendants. Additionally, under the reciprocity rules between the British Columbia Securities Commission (BCSC) and the SEC, the BCSC issued preservation orders against the defendants.

Nonetheless, the SEC also sought a Mareva injunction from the Court on the basis that it is under-secured with respect to its claim for disgorgement against...