Securities Fraud in Canada: A Perilous Situation

Canadian legal landscape

In Canada, persons who are suspected of having engaged in fraudulent activity relating to the capital markets may be prosecuted and sanctioned in a variety of ways. Which procedural avenue is pursued has a significant impact on the rights of persons suspected of having engaged in the prohibited activities and on the consequences of a finding of wrongdoing.

Increasingly, provincial securities regulators are taking the lead in commencing regulatory proceedings alleging fraud under provincial securities legislation rather than laying a quasi-criminal charge or leaving it to police authorities to lay criminal charges. This may be highly prejudicial to suspected perpetrators due to:

• the broad powers of investigation granted to securities regulators;
• diminished procedural protections available to suspects during investigations by securities regulators in circumstances where it is likely that only regulatory proceedings will be commenced;
• the lower standard of proof that applies at a securities regulatory hearing; and
• the extensive array of sanctions that can be imposed at the conclusion of a securities regulatory proceeding in which a breach of the legislation is established.

Procedural Routes for Prosecuting Securities Fraud

Currently, there are three principal procedural routes for prosecuting securities fraud in Canada:

• a prosecution under Section 380 of the Criminal Code, RSC 1985, c C-46;
• a prosecution under provincial securities legislation (Canada does not have a federal securities regulator); or
• a regulatory proceeding before a provincial securities regulatory tribunal.

Criminal and Quasi-Criminal Prosecution of Securities Fraud

Criminal Code fraud offence and penalties

A charge of fraud alleging the offence of fraud under the Criminal Code (a federal statute) may be laid by police authorities. It is a criminal offence under the Criminal Code for a person or company to defraud the public or any person of any property, money, valuable security or service using deceit, falsehood or other fraudulent means, and to affect the public market price of stocks or shares by deceit or other fraudulent means with intent to defraud (Section 380(1), (2)). The maximum penalty upon conviction is up to 14 years’ imprisonment and/or imposition of a fine (Section 380(1)(a), (2)).

Conviction for the Criminal Code offence of fraud requires the prosecution to prove that the accused has dishonestly deprived someone else of something of value. However, proof of fraud does not always require showing that the alleged victim relied upon the fraudulent conduct or was induced by it to act to their detriment: “[w]hat is required in all cases is proof that there is a sufficient causal connection between the fraudulent act and the victim’s deprivation” (R v Riesberry, 2015 SCC 65).

Quasi-criminal prosecutions under provincial securities legislation

Alternative to the foregoing, Canadian securities regulators can lay a charge alleging breach of a fraud provision under provincial securities legislation. In Ontario, Section 126.1 of the Securities Act, RSO 1990, c S5 (the “Act”) prohibits any person or company from directly or indirectly engaging or participating in any practice or course of conduct relating to securities or derivatives that the person or company knows or reasonably ought to know “perpetrates a fraud on any person or company” (Section 126.1(1)(b)). Breach of this provision constitutes an offence under Section 122 of the Act. The maximum penalty is incarceration for five years less a day and/or a fine of up to CAD5 million per breach (Act, Section 122(1)). A charge laid under Section 122 for breach of Section 126.1 constitutes a “quasi-criminal” offence that is created by a regulatory statute and attracts penal liability. As is the case with prosecution of the Criminal Code fraud offence, in the context of such “quasi-criminal” proceedings for breach of Section 126.1, inducement or reliance by the alleged victim is not required to be proven. Rather, “what is necessary is that the dishonest conduct is the cause of the risk of deprivation to the economic interests of the victim” (Ontario Securities Commission v Katmarian, 2025 ONSC 4356).

Procedural protections for Criminal Code and quasi-criminal offences

Charges of fraud laid under the Criminal Code and under Section 122 of the Act for breach of Section 126.1 are tried by a court. At trial, strict rules of evidence apply, the accused enjoys the presumption of innocence, and guilt must be established by proof beyond a reasonable doubt. As part of the Canadian Constitution, the Canadian Charter of Rights and Freedoms affords persons who are charged with either the Criminal Code offence of fraud or the offence under securities legislation certain procedural rights and protections. These protections include, for example, the right of suspects to remain silent during pretrial questioning by the authorities. At trial, the accused person cannot be compelled to testify against themselves.

Regulatory Proceedings Before Securities Enforcement Tribunals

Framework for regulatory proceedings

This contrasts sharply with the third way in which securities fraud can be investigated, tried and sanctioned in Canada. Either as an alternative to or in combination with the laying of a charge of securities fraud under provincial securities legislation or the Criminal Code, securities regulators may bring regulatory proceedings against a person or company alleging fraud relating to securities or derivatives (in Ontario, breach of Section 126.1 of the Act). In Ontario, for example, the Ontario Securities Commission can commence a regulatory proceeding under Section 127 of the Act that can result in the imposition of sanctions “in the public interest”, including for, but not necessarily requiring, breach of the Act (Section 127(1)). The sanctions that can be imposed where a breach of the Act is proven include:

• an administrative fine of up to CAD1 million per breach:
• a temporary or permanent ban on a person acting as an officer or director of any company;
• a temporary or permanent prohibition on trading in securities; and
• an order for disgorgement of all monies obtained as a result of the wrongdoing (Section 127(1)).

Lowered standards of proof, evidence and procedural safeguards

In Ontario, a proceeding under Section 127 is tried by the Capital Markets Tribunal (CMT), a quasi-judicial tribunal which is separate from but funded by the Ontario Securities Commission. In Section 127 proceedings alleging breach of Section 126.1 of the Act, “fraud” has been interpreted as having the same meaning as in the Criminal Code (Hogg (Re), 2024 ONCMT 15). At the hearing of a proceeding commenced pursuant to Section 127, hearsay evidence which is considered by the CMT to be reliable may be admitted into evidence (Cartu (Re), 2022 ONSEC 4) and allegations of breach of Section 126.1 need only be proven on a balance of probabilities, which is the standard of proof that applies in civil litigation (Solar Income Fund Inc (Re), 2022 ONSEC 2; 3iQ Corp (Re), 2019 ONSEC 37). This makes it significantly easier for the Ontario Securities Commission to establish liability in comparison to the laying of a charge alleging fraud under the Criminal Code or a prosecution under Section 122.

Significantly, as a regulatory proceeding before the CMT alleging securities fraud cannot result in any deprivation of the respondent’s liberty, protections available to persons suspected of or charged with a criminal or quasi-criminal offence carrying penal consequences do not apply. Consequently, a person suspected by the Ontario Securities Commission of having engaged in securities fraud can be subjected to a compulsory examination under oath during an investigation into potential wrongdoing and required to answer questions even if that may result in the person incriminating themselves (the Act, Section 13). Should a person summoned to attend before the Ontario Securities Commission to testify under oath or produce documents refuse to do so, they are liable to be committed for contempt by a court (the Act, Section 13(1)). The only substantive limitations on the subsequent use of compelled evidence obtained by the Ontario Securities Commission during an investigation are:

• a statutory prohibition on the admission of such compelled testimony against the person who provided it in a prosecution of that person under Section 122 of the Act (Section 18); and
• a statutory prohibition on the disclosure of compelled testimony to police forces and persons responsible for the enforcement of criminal law in Canada or elsewhere, in the absence of the written consent of the person from whom the testimony was obtained (Section 17(7)).

Use of compelled testimony in enforcement proceedings

Until the recent decision of the CMT in TeknoScan Systems Inc (Re), 2024 ONCMT 32, a respondent’s compelled testimony given during such a compelled examination conducted pursuant to Section 13 of the Act could be filed in evidence against them at a subsequent regulatory hearing before the CMT, even if the respondent had asserted a statutory right available under a provincial evidence statute not to have their compelled evidence used against them to establish their criminal or civil liability in a subsequent proceeding (Eda Marie Agueci et al (Re), 2013 ONSEC 45). It was the standard practice of the Ontario Securities Commission to “read in” portions of respondents’ compelled evidence gathered during its investigation for use against the respondents in regulatory proceedings commenced under Section 127 of the Act, should those respondents elect not to testify in their own defence (Eda Marie Agueci et al (Re), 2013 ONSEC 45; Kitmitto (Re), 2022 ONCMT 12). In TeknoScan, the CMT reversed course, finding that, when the compelled evidence sought to be filed for use against a respondent is an admission against interest, it is inadmissible where the respondent has properly invoked the statutory prohibitions against self-incrimination (in Ontario, these protections are found in Section 9 of the Evidence Act, RSO 1990, c E 23). In so finding, the CMT noted that it would remain open to the Ontario Securities Commission to consider summoning a respondent to testify as part of its own case.

As an administrative tribunal, the CMT is not bound by its own decisions. It is therefore unclear whether the Ontario Securities Commission will attempt to revert to past practice and seek to file excerpts of compelled evidence for use against respondents who elect not to testify, notwithstanding the decision in TeknoScan.

Sanctions and costs awards

The imposition of sanctions by the CMT for breach of securities legislation is stated to be for a protective purpose and not for the purpose of punishment (Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission), 2001 SCC 37). Practically speaking, this is a distinction without a difference. In imposing sanctions, the CMT is entitled to and does consider the need for both general and specific deterrence (Hogg (Re), 2024 ONCMT 15), both of which are principles that apply to the sentences imposed by criminal courts in respect of Criminal Code offences (Section 718(b)).

While incarceration cannot be imposed by the CMT in a Section 127 proceeding, other available sanctions can have a crushing effect on a respondent. An order prohibiting a person from acting as an officer or director of any company can result in loss of employment. A finding of fraud by the CMT can make it impossible for an individual to find other employment. Disgorgement orders are particularly problematic with potentially devastating consequences. The CMT’s power to order disgorgement is not limited to net profits obtained by the wrongdoers from the misconduct. Rather, the power extends to “any amounts obtained as a result of the non-compliance” (the Act, Section 127(1)(10)). Such orders can be imposed on respondents jointly and severally, with the result that a respondent who gained little or nothing as a result of the wrongdoing may still be liable to repay the entire amount (North American Financial Group Inc v Ontario Securities Commission, 2018 ONSC 136; Paramount Equity Financial Corporation (Re), 2023 ONCMT 20). To further complicate matters, disgorgement orders made by the Ontario Securities Commission will survive bankruptcy (Poonian v British Columbia (Securities Commission), 2024 SCC 28). In addition, as any amount that must be disgorged is ordered to be paid to the regulator and does not necessarily end up in the pockets of persons who were injured by the fraud, compliance with the disgorgement order will not necessarily reduce the payor’s exposure to a damages award ordered by a court at the conclusion of a civil action relating to the same matter.

Finally, a respondent who is found to have breached the securities fraud provision can be ordered to pay the costs of the securities regulator’s investigation of and prosecution against them. Unlike in civil litigation before Canadian courts, costs orders before the CMT are a one-way street. A respondent who is successful in avoiding a finding of wrongdoing has no ability to recover the costs of the defence, which can be extremely expensive in complex matters. In proceedings approaching seven hearing days, recent costs awards have varied significantly, ranging from approximately CAD200,000 to CAD600,000 (Feng (Re), 2023 ONCMT 43; Paramount Equity Financial Corporation (Re), 2023 ONCMT 20). In lengthier proceedings, costs can be even more significant. In a recent decision, a combined total of over CAD1.2 million in costs was ordered to be paid by two respondents (Bridging Finance Inc (Re), 2025 ONCMT 10).