Feb 7, 2020

You can run but you can’t hide: ‎American Court to rule on enforceability of Canadian securities disgorgement order

Lathigee (Re), 2015 BCSECCOM 78 (CanLII)

In May 2019, a district court of Nevada recognized a CAD$21.7 million disgorgement order issued by the British Columbia Securities Commission (the “BCSC”) against Michael Patrick Lathigee (“Lathigee”), a Canadian national residing in Nevada. At the time of the Nevada district court decision, the BCSC stated that it was the first time a court in the United States had recognized an order from the BCSC. This decision has since been appealed to the Nevada Supreme Court. If the District Court decision is upheld, it may mark the first time an American court recognizes an order from a Canadian securities regulator.

Background

The history of this case spans several years. In July 2014, after an administrative hearing before the BCSC, a panel of the BCSC found that Lathigee, together with other respondents (including FIC Group, a company directly controlled by Lathigee and his partners), perpetrated fraud by misleading investors and misusing funds. Lathigee and the other respondents raised CAD$21.7 million from 698 Canadian investors without disclosing important facts about FIC Group’s financial condition to investors. In addition, they raised $9.9 million from 331 investors for the purpose of investing in foreclosure properties which they then primarily used to make unsecured loans to other members of the FIC Group. The proceeds of the unsecured loans were used, at least in part, to pay salaries and other overhead expenses of the FIC Group unbeknownst to investors.

In March 2015, the BCSC ordered Lathigee to pay, jointly and severally with other respondents, excluding administrative penalties, CAD$21.7 million for disgorgement of funds fraudulently obtained from investors pursuant to section 161(1)(g) of British Columbia’s Securities Act (the “BCSA”). Lathigee appealed the decisions of the BCSC to the British Columbia Court of Appeal. After hearing submissions from the BCSC and Lathigee, the Court of Appeal unanimously dismissed the appeal on May 31, 2017.

Disgorgement orders under the BCSA

The section of the BCSA under which the disgorgement order was granted by the BCSC, section 161(1), provides for the judgment debtor to “pay to the [BCSC] any amount obtained, or payment or loss avoided, directly or indirectly, as a result of the failure to comply or the contravention [of the BCSA].” Pursuant to section 15.1 of the BCSA it is mandatory that the BCSC distribute disgorgement funds to proper claimants.

Disgorgement orders made under the BCSA& are not fines or penalties. Instead they are orders for judgment-debtors to repay or disgorge amounts obtained, either directly or indirectly from the judgment-debtor’s misconduct, to the BCSC. Once disgorgement amounts are obtained, the BCSC uses the funds to repay individuals harmed by the judgment debtor’s misconduct. After compensation payments are made to those harmed, the BCSC will use any remaining funds for investor education. Disgorged funds received by the BCSC are not taken in as general revenue or used for operating expenses of the BCSC.

Unsuccessful collection efforts

Before the BCSC was able to enforce the disgorgement order on Lathigee, Lathigee moved from Vancouver, British Columbia, to Las Vegas, Nevada. Doug Muir, the BCSC’s Director of Enforcement stated in a press release, “We’ve done everything in our power to collect from Michael Lathigee, because if we collect, we can return money to his victims.”

Lathigee is not the only individual to breach British Columbia securities laws and avoid collection efforts by the BCSC. According to a 2017 Postmedia News investigation, the BCSC’s collection rate in the past decade for orders of $1 million or more was less than one-tenth of one per cent. Other securities regulators across Canada face similar challenges collecting on monetary sanctions.

In June 2019, the Canadian Securities Administrators (“CSA”), the umbrella organization for Canada’s provincial and territorial securities regulators, published its fiscal 2018/2019 enforcement report. According to that report, Canadian regulators and courts issued orders for restitution and disgorgement totalling nearly $110 million for violations of securities laws. This amount marks and increase from the approximate $59.2 million the earlier year. The provincial and territorial securities regulators imposed close to $77.5 million in fines and administrative penalties in fiscal 2018/2019 compared with $65.6 million a year earlier. As the CSA stated in its report: “[i]mposing a monetary sanction and collecting are two entirely different matters”, because in some instances, “monetary sanctions do not align with a person or company’s ability to pay.” The CSA report goes on to state that its members, “vigorously pursue all available avenues to collect outstanding monetary sanctions” through its broad powers, which include, garnishing wages, registering liens on any property a debtor owns, seizing and selling debtors’ assets and registering orders with the courts and enforcing them as court judgments. Despite these far-reaching collection powers it remains challenging for regulators to collect on their monetary sanctions successfully, as often all funds have already been long spent or hidden away prior to any enforcement proceeding commencing. In other instances, like in Lathigee’s case, the respondent absconds to a different jurisdiction outside of Canada in an attempt to evade the collection efforts of a regulator.

Application to the District Court of Nevada for recognition of the BCSC order

On March 30, 2018, the BCSC filed an application with the Eighth Judicial Court of Nevada, in Clark County, for recognition of a foreign country judgment. The BCSC relied upon the Recognition of Foreign-Country Money Judgments Recognition Act, (the “Revised Recognition Act”) and the principle of international comity to enforce and collect on its disgorgement order against Lathigee in the state of Nevada. The Revised Recognition Act has been enacted into law by thirteen states, including Nevada. The Revised Recognition Act provides simple court procedures for the enforcement of foreign-country money judgments and corrects and clarifies gaps in a previous version enacted in 1962.

On May 14, 2019, the District Court of Nevada recognized and upheld the disgorgement order of the BCSC against Lathigee. In making its decision, the District Court relied on the fact that the disgorgement order was pronounced by the BCSC, registered with the British Columbia Supreme Court, and subsequently upheld on appeal. Therefore, according to the District Court, the BCSC order is, in all respects, a foreign-country judgment. The Revised Recognition Act defines “foreign-country judgment” as “a judgment of a court of a foreign country” and defines “foreign court” as a court of a foreign country. The District Court also summarized the grounds for denying recognition of a foreign country judgment under the Revised Recognition Act. These reasons include: (i) the judgment was rendered under a judicial system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law; (ii) the foreign court did not have personal jurisdiction over the defendant; (iii) or the foreign court did not have jurisdiction over the subject matter. The District Court found that none of these grounds applied in Lathigee’s case. Further, the District Court considered the principle of international comity, summarized by the District Court as the principle whereby “the courts of one jurisdiction give effect to the laws and judicial decisions of another jurisdiction out of deference and respect.”

In its May 14, 2019 decision, the Nevada District Court stated that the American national securities regulator, the Securities and Exchange Commission (the “SEC”), often works with Canadian provincial securities commissions, including the BCSC, because the proximity and relations of the two countries make it easy for fraud to move between the two countries. The United States and many provinces of Canada are parties to a Memorandum of Understanding (to which the SEC and the BCSC are signatories), which provides that the “[a]uthorities will provide the fullest mutual assistance… to facilitate the performance of securities market oversight functions and the conduct of investigations, litigation or prosecution…”

The Nevada District Court pointed out that British Columbia courts have upheld SEC disgorgement orders on multiple occasions, including recently in United States (Securities Exchange Commission) v Peever. The District Court emphasized the mutual and reciprocal nature of international law in stating, “if we want Canada’s Provinces to continue to recognize our securities judgments, then we need to recognize theirs.” The District Court opined that “[i]t is critically important that we maintain our good relations and ties with Canada by giving effect to its Province’s judgments, as it gives effects to ours, especially those meant to provide some restoration to the victims of securities fraud.” The District Court concluded by stating that, if American courts fail to uphold Canadian securities judgments, “[Canadian courts] may very likely refuse to uphold ours, and in that situation the citizens of both countries are worse off…”

Appeal to the Nevada Supreme Court

The BCSC stated that the Nevada District Court’s ruling “sends a strong message that people can’t just leave the country to avoid the consequences of their wrongdoing.” However, Lathigee’s Nevada counsel called the BCSC proceedings against Lathigee akin to “kangaroo court proceedings” and appealed the Nevada District Court’s decision to the Nevada Supreme Court. That appeal was filed on May 29, 2019 and as of the publishing of this article remains pending.

Takeaways

If the Nevada District Court’s judgment is upheld, Canadian provincial securities regulators seeking to have their disgorgement orders recognized under the Revised Recognition Act will likely need to convert their disgorgement orders into orders of a Superior Court of the province. In Alberta, an example of a Superior Court’s order is a Writ of Enforcement in the Court of Queen’s Bench.

If the Nevada Supreme Court upholds the Nevada District Court’s judgment, the reach of Canadian provincial securities regulators’ may extend into American jurisdictions. In effect, this would allow Canadian securities regulators to pursue respondents beyond Canadian borders to enforce disgorgement orders and return monies to Canadian investors harmed by respondents. Such a decision would likely encourage provincial regulators to pursue similar techniques as the BCSC in Lathigee, such as obtaining a superior court’s order, to strengthen their enforcement efforts.

The collection challenges faced by securities regulators due to the ease in which securities misconduct permeates national borders may soon be addressed by the Nevada Supreme Court in its upcoming decision. As such, if the Nevada District Court’s decision is upheld, the Nevada Supreme Court’s decision may mark a significant change in the status quo.

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.