Ontario Securities Commission v. Traders Global Group Inc.

COURT FILE NO.: CV-23-00709536-00CL

DATE: 2023-12-21

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: ONTARIO SECURITIES COMMISSION, Applicant

AND:

TRADERS GLOBAL GROUP INC., 15003865 CANADA INC., KAZMI 2795 SAPPHIRE HOLDINGS INC., and MUHAMMAD MURTUZA KAZMI (a.k.a. MURTUZA KAZMI), Respondents

BEFORE: KIMMEL J.

COUNSEL: Sarah McLeod and Hansen Wong, for the Applicant Alexander Rose, Eliot Kolers, Jordan Wajs and Hannah Kellett, for the Respondents

HEARD: November 30, 2023

ENDORSEMENT (OSC application to appoint receiver)

Procedural History

[1] The Ontario Securities Commission (the “Commission”) is concerned that the respondents, Traders Global Group Inc. (“TGG”[^1]) and Muhammad Murtuza Kazmi (“Kazmi”), have engaged in fraud contrary to subsection 126.1(1)(b) of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”). After receiving a Request for Assistance (“RFA”) made by the United States Commodities Futures Trading Commission (“CFTC”) on November 21, 2022, the Commission began investigating the respondents TGG and Kazmi. It issued orders under s. 11 of the Act in both January and April 2023 in furtherance of its investigation.

[2] The Commission eventually issued nine freeze directions on August 29, 2023 and one freeze direction on September 17, 2023 (the “Directions”), as well as a temporary cease trade order (“TCTO”). This occurred the day after the CFTC filed a Complaint for Injunctive Relief, Civil Monetary Penalties and Other Equitable Relief against TGG, Kazmi and a related TGG entity located in New Jersey (the “CFTC Proceeding”), in the United States District Court for the District of New Jersey (the “U.S. Court”).

[3] A temporary receiver was appointed in the CFTC Proceeding on August 28, 2023 (the U.S. Temporary Receiver”). The Commission says that it did not originally apply to appoint a receiver in Ontario because the U.S. Temporary Receiver had indicated they would seek recognition of the U.S. receivership order in Ontario. Although unprecedented, having obtained the Directions and TCTO, the Commission was prepared to allow the U.S. receivership process to play out before taking steps to seek the appointment of a receiver in Ontario.

[4] The U.S. Temporary Receiver never applied for recognition in Ontario. On October 26, 2023, the U.S. Court indicated that the U.S. Temporary Receiver would be removed and ordered the parties propose a new receiver. A new receiver was proposed by the parties in the CFTC Proceeding but the U.S. Court decided not to appoint a new receiver in a decision released on November 14, 2023 (the “U.S. Court Decision”). When it became evident that the U.S. Temporary Receiver would not be replaced, the Commission immediately brought this application to appoint Grant Thornton Limited as receiver and manager (in such capacities, the “Receiver”), without security, of all of the assets, undertakings and property of each of the respondents, including all proceeds thereof (the “Property”).

The Ontario Enforcement Proceedings

[5] The Commission states that, due to the confidential nature of the investigation and the assistance it was providing to the CFTC, the Commission was unable to take certain necessary steps in its own investigation that would have been required for it to bring enforcement proceedings in Ontario at the same time as the CFTC Proceeding. The Commission was concerned that if the respondents became aware of its investigation they might dissipate assets prior to the motion for preliminary injunction in the U.S. Court on August 28, 2023 and the Commission’s TCTO and Directions that were made on August 29, 2023.

[6] The Commission states that it still requires additional time to complete its investigation into the alleged breaches of Ontario securities law prior to bringing any proceedings in Ontario. To date, no Notice of Allegations has been issued by the Commission. This is not an open-ended process and, as noted later in this endorsement, the court expects that the Commission will advance its investigation sufficiently to enable it to make a decision about whether to commence enforcement proceedings in relatively short order.

The Receivership Application

[7] In the meantime, the Commission brings this urgent application for an order, pursuant to s. 129 of the Act, for the appointment of a receiver over the Property of the respondents, which would include all of their Property currently subject to the Directions. The Commission acknowledges that, if the Receiver is appointed, the Directions will no longer be required. As part of the appointment of the Receiver, the Commission has indicated to the court that it will revoke the Directions upon the Receiver taking possession or control of the respondents’ Property and this is provided for in the draft receivership order. In other words, it is seeking to replace the Directions with the appointment of the Receiver. The Commission has pivoted, in light of changed expectations regarding the appointment of a receiver by the U.S. Court, to request the appointment of the Receiver in Ontario.

[8] A hearing had been previously scheduled for January 16, 2024 for the court to consider whether the Directions should continue, and, if so, on what terms. A hearing is scheduled before the Ontario Capital Markets Tribunal (the “Tribunal”) a few days later to consider the continuation of the TCTO. The Commission satisfied the court when this urgent receivership application was scheduled that there were pressing issues, relating to the preservation of the value of some of the Property, that could not be deferred to the January 16, 2024 hearing date.

[9] A receiver and manager may be appointed under s. 129 of the Act over all or any part of the property of any person or company if the court is satisfied that:

a. it is in the best interests of the creditors of the person or company, persons or companies whose property is in the possession or under the control of the person or company, or the security holders of or subscribers to the person or company; or

b. it is appropriate for the due administration of Ontario securities law.

[10] The respondents oppose the appointment of the Receiver and ask the court in Ontario to fall in line with the approach taken in the U.S. Court Decision. They also intend to oppose the continuation of the Directions at the scheduled January 16, 2024 hearing if the Receiver is not appointed.

The Property

[11] The Commission estimates that over CAD $90 million in funds and assets were frozen by the Directions, including over USD $50 million in bank and brokerage accounts, two real estate properties, multiple luxury vehicles and approximately CAD $19 million in crypto assets. According to the Commission, only approximately USD $860,000 out of these total assets is located in the United States.

[12] The Commission alleges that this is all Property of the respondents that would come under the receivership if granted. The respondents dispute this and say some of the assets that have been frozen under the Directions are owned by others and do not form part of their Property. They also contend that some of the Property frozen under the Directions can be sourced to assets that were acquired before TGG and/or or came from sources outside of TGG’s activities. The scope of the Property that is covered by the Directions and that would be covered by the proposed receivership is disputed.

The Alleged Breaches of Ontario Securities Laws

[13] In an application to appoint a receiver under s. 129 of the Act, the Commission does not have to prove a breach of the Act. Rather, it is sufficient for the Commission to establish that there is a serious concern with respect to the alleged breaches of the Act by the respondents. See Ontario Securities Commission v. Sbaraglia (December 23, 2010), Toronto, Court File No CV-10-883-00CL (Ont. S.C.), at p. 26. Similarly, for the continuation of the freeze Directions, the Commission would only need to establish that there is a “serious issue to be tried” with respect to the alleged breaches of the Act. See Ontario Securities Commission v. Future Solar Developments Inc., 2015 ONSC 2334, at para. 31.

[14] While a Notice of Allegations has not been issued (for reasons indicated earlier in this endorsement) the Commission has alleged in this application the following breaches of the Act by the respondents TGG and Kazmi:

a. They have breached s. 126.1(1)(b) of the Act, which provides that no person or company shall engage in any act, practice or course of conduct relating to a security or derivative that the person or company knows or reasonably ought to know may perpetrate a fraud on any person or company.

b. They engaged in the business of selling securities without registration, contrary to s. 25(1) of the Act.

a) Concerns About the Alleged Fraudulent Conduct and Practices

[15] The Commission contends that the evidence on this application supports the same findings being made by this court as were made in the U.S. Court Decision regarding the prima facie fraud committed by TGG and Kazmi (who was at the material times the sole shareholder and directing mind of TGG).

[16] The U.S. Court Decision found that there was a prima facie case that the respondents had engaged in unlawful conduct in violation of the U.S. Commodity Exchange Act and Regulations, and that the respondents had committed fraud under U.S. law. The CFTC made a prima facie showing that TGG had made misrepresentations by conveying “the overall message that customers with so-called ‘live accounts’ were trading Traders Global’s capital against third parties, i.e., ‘liquidity providers,’ in the ‘market,’” and in “failing to disclose that customer trading in the ‘live accounts’ occurred in a ‘simulated’ environment.” (See paras. 17-21)

[17] In reality, despite repeatedly representing to prospective and existing customers that after they had paid their registration fees and set up their accounts, upon qualifying for “live” trading in their Rapid or Evaluation Accounts (or upon paying a higher registration fee for a “live” Accelerated account from the outset), they would have the opportunity to trade with TGG’s money in real markets, there was virtually no real trading taking place through TGG’s trading platform. Instead, even for the customers who had qualified for live trading in their accounts, the trades were “internalized” by TGG and TGG was the counterparty to nearly every trade, which meant that when investors made money, TGG lost money. TGG did pay some investors “profits” for their trading, but did so with the registration fees collected from other investors.

[18] The U.S. Court Decision held that Kazmi had knowledge of the fraud, noting that Kazmi appears to have been aware that payments to successful customers came from customer fees, and not from trading against “liquidity providers” and that he is the sole signatory to TGG’s bank and crypto asset-related accounts.

[19] The U.S. Court Decision further found (at p. 23) that: “During the almost two-year Relevant Period, Defendants continuously engaged in fraud in connection with retail forex and retail commodity transactions through Traders Global ... In the absence of preliminary injunctive relief, Defendants are likely to resume their conduct.”

[20] The evidence that was before the U.S. Court and that is now before this court establishes a prima facie case of fraud and misrepresentation by the respondents.

a. All customers were solicited on the basis that in exchange for the payment of their registration fees (averaging USD $230–250) they would have the opportunity to be funded by TGG and “earn as a professional trader” in foreign exchange (“forex”) and various other commodities and contracts for difference (“CFDs”). The cost to them was their registration fee and after that they were assured that they would have only upside in profit splitting with TGG from the trades they executed. TGG proclaimed that “we only make money if you make money” and “if you lose, we lose”.

b. However, the reality was that the few customers who graduated to so-called live trading and became entitled to any profits were paid out of the registration fees of other customers because they were not actually trading with real counterparties but were still, unbeknownst to them, trading in a simulated environment controlled by TGG.

[21] It appears that the registration fees (which have in turn been traced by the Commission forensic investigator into Kazmi’s (or his affiliates’) hands, including into the remaining Property at issue) were received by the respondents (TGG directly and Kazmi indirectly) through a scheme in which customers were led to believe that they could earn the opportunity to trade on a legitimate forex and commodities trading platform using the platform’s capital in a common enterprise to make profits for the benefit of both the customer and TGG. However, the few who earned that opportunity were in fact almost always trading against the platform as a counterparty such that their interests were not aligned with the interests of TGG despite its representations to them. The opportunity to ever engage in “live” trades was illusory.

[22] The Commission alleges at para. 73(a) of its factum that “TGG and Kazmi have raised at least USD $310 million from investors by representing that TGG is a legitimate foreign exchange and commodities trading firm.” This is based on the evidentiary filings made in the CFTC Proceeding and in this application which demonstrate that more than 135,000 people signed up for accounts with TGG over the approximately two year tenure of its existence. These people paid over USD $296 million through TGG’s payment processor WooCommerce, Inc. (WooCommerce). TGG also accepted payments in crypto assets and received over USD $20.7 million in crypto assets that were transferred to TGG and Kazmi’s Coinbase wallets.

[23] Furthermore, the MFF Website (TGG’s trading platform) discloses that customer trades are subject to “commissions” of $3 per lot (i.e., per contract). However, these commissions were paid to TGG, not a third party “liquidity provider”. The Commission contends that TGG charged over USD $7 million in commissions to customers.

[24] The funds from WooCommerce were deposited into Kazmi and TGG’s bank accounts in the US and then transferred to TGG and Kazmi’s other accounts. A senior forensic accountant on staff with the Commission has traced funds from these accounts into various personal accounts and assets (such as real property valued in excess of CAD $12 million, expensive cars valued in excess of USD $3.3 million, and other funds and securities) held by Kazmi and his companies (named as respondents) and persons affiliated with him. These assets and funds are currently frozen by the Directions. Funds from these accounts have also been traced to payments of significant personal expenses for Kazmi and his affiliates.

[25] The Commission has also provided evidence to demonstrate that registration fees paid by customers (of at least USD $310 million) were used to pay the few customers who “earned” profits (in the manner of a Ponzi scheme). According to the evidence filed in both the CFTC Proceeding and this application, TGG paid approximately USD $139 million through its third-party payroll company called Deel, Inc. (Deel), where customers execute “independent contractor” agreements and submit “invoices” for payment. TGG also paid so-called profits in crypto assets through Coinbase. In their evidence, the respondents acknowledge that the vast majority of TGG’s income came from customer fees and that those customer fees were used to pay successful customers.

[26] There are further allegations made by the Commission about how the “simulated” trading of customers was manipulated to reduce, rather than increase, their chances of successful (profitable) trades. These allegations of manipulation are disputed, and the practices that the Commission seeks to impugn are said by the respondents to be consistent with industry practices. However, the respondents did not provide any independent expert testimony about the industry practices they rely upon, nor did the respondents conduct any external analysis to determine whether the simulated trading actually did mimic the market. In any event, these allegations of manipulation and adopting practices to minimize successful trades are complicated and beyond the scope of the written record on this application. They need not be determined at this time.

[27] The Commission need only satisfy the court at this stage that there is a serious concern that the respondents knew that what was being represented to the customers was not true and that the customers were intentionally misled. That, if proven, would amount to a fraud under Ontario law.

[28] The U.S. Court found that the CFTC had made out a prima facie case that the respondents had engaged in unlawful (fraudulent) conduct in violation of the U.S. Commodities Exchange Act and Regulations based on the identified misrepresentations.

[29] The main challenge that is raised by the respondents against the Commission’s allegation of a breach of s. 126.1(1)(b) of the Act is that the fraudulent acts, practices and/or course of conduct of the respondents at issue did not relate to a “security or derivative” within the meaning of the Act.

[30] Customers of TGG did not invest funds that were exposed to market trading risks. They paid registration fees for the opportunity to eventually trade on live trading platforms in forex and commodities with the potential to share in the upside profits with no downside risk from the actual trades they executed. The respondents argue that since the customers did not “invest” anything, they were not shareholders and because their registration fees were never exposed to market risks on trading platforms, the “scheme” that the Commission is concerned about did not involve a security or derivative.

[31] The Commission has identified previous cases involving solicitations of investors to advance money for investment in purported forex trading, where funds from investors were used to pay earlier investors and for personal spending and expenses of the perpetrators of the fraud. Such schemes were found to be contrary to subsection 126.1(1)(b) of the Act. See, for example, New Found Freedom Financial (Re), 2012 ONSEC 46. However, the respondents argue that there is no precedent for a situation such as this, in which customers paid non-refundable registration fees that were not invested or subject to market risks.

[32] The Commission also contends that the products offered by TGG satisfy the “investment contract” test set out by the Supreme Court in Pacific Coast Coin Exchange v. Ontario (Securities Commission), 1977 CanLII 37 (SCC), [1978] 2 S.C.R. 112, which comprises four elements: (a) an investment of money; (b) with a view to profit; (c) in a common enterprise where the success or failure of the enterprise is interwoven with, and dependent on, the efforts of persons other than the investors; and (d) the efforts made by those others significantly affect the success or failure of the enterprise.

[33] The Commission argues that this test is satisfied because customers who paid fees to TGG were led to believe that this fee would eventually allow them to trade in “securities” or “derivatives” including forex and other CFDs through the MFF Website. Customers sent funds (fees) to TGG with an expectation of future profit sharing in a common enterprise that was, in reality, coming significantly from the efforts of TGG. The ultimate objective was for customers to pass the evaluation (or pay for an accelerated account) so that they (together with TGG) could profit from their trading activities on TGG’s platform. The elements of an investment contract can be established with regard to, among other things, the actions, custody arrangements and interdependency for trades and reliance upon the solvency of the platform for the success of their trading activities. See Polo Digital Assets, Ltd. (Re), 2022 ONCMT 32, at paras. 46 – 49.

[34] The Commission acknowledges that the circumstances of this case are novel and will have to be tested. There is no example of a case where the customer was not putting their own money at risk in the trading. However, the Commission urges a purposive and flexible interpretation of the definition of “security” under the Act, suggesting that it “is flexible and capable of adaptation to address the breadth and variability of investment schemes devised in the capital markets”. See VRK Forex & Investments Inc (Re), 2022 ONSEC 1, at para. 22, aff’d 2023 ONSC 3895 (Div. Ct.); Mek Global Limited (Re), 2022 ONCMT 15, at para. 36.

[35] The court is not required to make a final determination of the issue of whether or not TGG customers were told when they signed up and paid their registration fees to TGG that they would have the opportunity to operate under what ought to be properly characterized as an investment contract in respect of forex and commodities trading. The test should be interpreted broadly to include “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Pacific Coast, at p. 127. It is enough that the Commission has raised a serious issue to be tried, or a serious concern, that this is what TGG and Kazmi were doing, and that misrepresentations were made about the true nature of the opportunity, in breach of s. 126.1(1)(b) of the Act.

b) Concerns About TGG’s Failure to Become a Registrant under the Act

[36] In addition to the allegation of fraud, the Commission believes that there is sufficient evidence to raise concerns that TGG and Kazmi were engaged in the business of selling securities without registration, contrary to s. 25(1) of the Act. Neither TGG nor Kazmi are registered with the Commission in any capacity. The Commission contends that there is sufficient evidence that TGG and Kazmi were regularly and actively promoting the TGG products, were directly and indirectly soliciting investors, and engaged in activities similar to those of a registrant.

[37] Long before receiving the RFA from the CFTC or opening its current investigation into the respondents, Commission staff had been in communication with TGG and Kazmi about the business activities of TGG with a view to determining whether TGG needed to be registered with the Commission. This began with a letter dated May 12, 2021. After some back and forth, and TGG’s agreement to make certain amendments to its standard form of independent contractor (trader) contract and an agreed communication to traders regarding compliance with securities laws, the Commission staff closed their file on the question of registration in November of 2022.

[38] The Commission says that the same misrepresentations were made to its staff, as are now alleged to have been made to customers, about the nature of TGG’s business and the relationship between TGG and its customers/traders.

[39] I am reluctant to make a preliminary or prima facie finding about this alleged breach of securities laws without a better appreciation of the full context and a better understanding of how what was represented by Commission staff in the course of these registration inquiries was material to the decision of staff not to pursue the matter further at the time. However, it is not necessary for me to do so given my finding that the Commission has raised a serious concern about breaches of s. 126.1(1)(b) of the Act. That is sufficient for purposes of this receivership application. Further, the previous inquiries and communications between TGG and the Commission regarding its registration status are not a bar to a later reconsideration of that issue with the benefit of the fuller context.

The Appointment of a Receiver

[40] Given the significant value and of the Property at issue, the specific nature of some of the assets, the need to preserve them and the tracing exercise that has given rise to concerns that the Property was acquired from the proceeds of a fraud committed by the respondents in breach of Ontario securities law, the Commission asks that a Receiver be urgently appointed to take control of the Property for the benefit of TGG customers and other stakeholders and for the due administration of Ontario securities law.

[41] The Commission is concerned that the Property ($90 million of which is already frozen under the Directions) will require oversight and that ongoing funds may be required to preserve and maintain assets, possibly requiring the liquidation of assets and in any event requiring ongoing investment and re-investment. It believes that the best way to do this is through the Receiver, rather than having Ontario’s capital markets regulator make ongoing asset preservation decisions and/or returning to court for recurring requests to vary the Directions. There may also be a need for the Receiver to assess the scope of the Property under its administration and the source of funds for its acquisition and claims of ownership by non-parties, as well as to consider requests for funds to cover approved expenses of the respondents, all of which the Commission has indicated can be accommodated within a receivership but it considers itself ill-equipped to deal with.

[42] While the more typical means of protection chosen by the Commission in fraud cases is to issue cease trade orders and freeze directions and shut down the trading operation, it is not limited to that recourse where there is a role for the Receiver that cannot be practically fulfilled by the company (given the prima facie case of fraud that has been established) or the Commission (in light of the above concerns its lack of expertise to manage this significant amount of money).

a) Reconciling the U.S. Court Decision Not to Appoint a Receiver

[43] Based on the applicable legal regime in the U.S., the U.S. Court Decision continued the asset freeze, but limited it to USD $12 million based on a calculation of assets potentially subject to disgorgement in the CFTC Proceeding. The U.S. Court Decision found that no receiver was necessary to supervise that asset freeze since there were liquid assets available in that amount that could be simply set aside to be “frozen”.

[44] The U.S. Court’s decision was also partly influenced a concern about an error in the CFTC’s evidence (about the legitimacy of previous payments by TGG that were not to the respondents although alleged to have been) that had been relied upon to obtain an earlier ex parte order that was granted in the U.S., an error that does not exist in the Commission’s evidence. Further emphasis was placed on the U.S. Court’s assessment that the respondents (and their assets) were not a “flight risk”, having regard to the quality of the respondents’ counsel, their participation in the U.S. CFTC Proceeding and statements that they intended to respect the court’s orders, coupled with the lack evidence that they were intending to abscond with further assets and/or flee the jurisdiction.

[45] The Commission contends that this court is not bound to come to the same conclusion that a receiver is not necessary or appropriate in Ontario, and must consider the issue with regard to Ontario law. I agree. I must consider this from an Ontario law perspective.

[46] The US Court Decision to freeze only USD $12.08 million was based on rough calculation of residual registration fees that could be disgorged in the CFTC Proceeding. As summarized by the respondents in their factum on this application (at para. 45) this was based on “the gravamen of the CFTC’s complaint that the Defendants failed to disclose to B Book customers that they were in a simulator, not trading in the real market. The court therefore finds that it is appropriate to limit the amount of an asset freeze to Defendants’ profits associated with the 8% of customers who had ‘live accounts’ in either the B Book or the A Book, which is approximately US$12.08 million.”

[47] The math to arrive at this freeze figure was as follows: TGG received USD $310 million in fees from all customers and paid out to customers who traded successfully USD $159, leaving USD $151 million in registration fees at the respondents’ disposal. Without accounting for legitimate expenses and simply for purposes of arriving at an amount to be subject to the freeze order, 8% (representing only those customers who had actually qualified for live trading but who may have been unwittingly still only trading on a simulator) of the USD $151 million, or USD $12.08 million, was ordered to be frozen.

[48] The US Court Decision was concerned with putting in place protection to ensure that the assets implicated in the fraud alleged by the CFTC would be available following a hearing on the merits. The gravamen of that fraud and the associated remedy was focused on those 8% of customers.

[49] The Commission contends that the alleged fraud that it is concerned about was perpetuated against all customers at the time they paid their registration fees on the basis of the representation that they could eventually qualify to trade on a live platform. The Commission seeks as well to preserve the funds, securities and properties that could be the subject of a disgorgement order made pursuant to s. 127(1) of the Act if its investigation results in enforcement proceedings. The Commission relies upon s. 127(1)10 of the Act that provides that an order could ultimately be made in the public interest by the Tribunal requiring the respondents to disgorge to the Commission any amounts they obtained as a result of their non-compliance with Ontario securities laws.

[50] If the respondents are found to have breached s. 126.1(1)(b) of the Act by their alleged misrepresentations concerning the eventual benefits that a customer could expect to receive from the payment of their registration fees, then the entirety of the USD$ 310 million in registration fees paid under that false pretext could be subject to disgorgement under Ontario law. Since only $90 million in funds and assets (out of the original USD$310 million) have thus far been identified and made subject to the Directions, the Commission argues that all of that Property should either be the subject of a receivership order or remain in Ontario.

[51] The respondents argue that the Commission has an onus to demonstrate that there is some real basis for believing that a disgorgement order would be made in respect of all of the registration fees if there is a finding that a fraud was committed in breach of Ontario securities laws, and that it is not enough that this is a remedy that the Tribunal has the power to make. It suggests that the absence of an authority for such an order being made in comparable circumstances is problematic. I do not agree that the novelty of the argument is fatal to the Commission’s request for the receivership order in respect of Property derived from the registration fees paid under false pretexts. Having concluded that the Commission has established a basis for its concern that the fraud affected not just the customers who had graduated out of the simulated trading environment, but also those who aspired to do so, there is a sufficient foundation for the prospect of a remedy for the disgorgement of the registration fees received from all customers.

[52] The Commission points out certain circumstances of this case that establish a connection to Ontario. The two primary operators of the business scheme at issue were located in Ontario. Kazmi is an Ontario resident, TGG is a Canadian company. This implicates the Ontario capital markets. The vast majority of funds and assets (Property) belonging to the respondents that are already the subject of the freeze Directions are located in Canada. These funds and assets are readily amendable to the supervision of an Ontario court under Ontario law. The fact that vast majority of customers were located outside of Ontario (and outside of Canada), with the largest majority of them being located in the U.S., does not detract from the concerns about the implication on the Ontario capital markets that the Commission is tasked with administering and protecting.

[53] Both this court and the U.S. District Court have jurisdiction over this matter. Given the cross-border nature of many frauds, regulators from multiple jurisdictions may exercise jurisdiction over the same scheme. As the Supreme Court of Canada has recently held, this is “a feature, not a flaw” of modern securities regulation. See Sharp v. Autorité des marchés financiers, 2023 SCC 29, at paras. 134–35.

[54] If this court is satisfied that the test for the appointment of a receiver has been satisfied then the principles of comity should be invoked to ensure that any broader protections put in place in Ontario can also serve to satisfy the requirements of the more limited freeze order that was made by the U.S. Court Decision. That may entail some additional reporting and accountability to the U.S. Court regarding the USD$12.08 million in assets that, subject to further order of the U.S. Court, will be required to remain frozen by any Receiver who is appointed, or by the Commission and the respondents for so long as the Directions remain in place.

[55] The reasoning of the U.S. Court’s Decision to discharge the U.S. Temporary Receiver and to grant a limited freeze order are not determinative of this court’s analysis regarding the appointment of a receiver under s. 129 of the Act.

b) The Test for the Appointment of a Receiver Under the Act

[56] Section 129 of the Act permits the Commission to apply to the court for an order appointing, among other things, a receiver and manager of all of the property, assets and undertakings of a person or company. Such an order shall be made where the Court is satisfied that such an appointment is

a. in the best interests of the company’s creditors or the security holders of or subscribers to the company; or

b. appropriate for the due administration of Ontario securities law.

[57] The Commissions contends that both criteria are satisfied.

[58] The respondents have indicated that, while not their preference because of the added cost, the court can appoint a receiver, but only over those assets implicated in the alleged fraud based on the findings in the U.S. Court Decision (approximately USD$12.08 million). This is said to balance proportionally the interests of those impacted by the alleged fraud with the respondents’ interests in using the other remaining funds and assets to pay off debts and pay Kazmi’s living expenses and those of his family members who he supports. This implies that the appointment is appropriate, but the scope should be curtailed. I turn now to consider whether the appointment of the Receiver is appropriate having regard to s. 129 of the Act.

Is the Appointment of the Receiver Appropriate for the Due Administration of Ontario Securities Laws? (s. 129(1)(b))

[59] The Commission contends that any assessment of whether the appointment of a receiver is appropriate for the “due administration of Ontario securities law” must be animated by, and consistent with, the purposes set out in s. 1.1 of the Act, which include: (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets.

[60] While not a traditional investment model, the scheme that was used by the respondents resulted in them receiving over USD $310 million from customers in registration fees over a relatively short period of time in exchange for the privilege of eventually having the opportunity to trade in forex and commodities in a joint profit sharing enterprise; in reality, even the customers who met the criteria for live trading would still only be trading in a simulated environment that was controlled by TGG and Kazmi. The profit sharing enterprise was supposed to hold out the prospect of access to the capital markets.

[61] So far, Property in the names of the respondents with an estimated value of USD$90 million is frozen under the Directions. It is not unreasonable for the Commission to suggest that funds and assets of this significant value might be better secured, managed and preserved under the control of the Receiver with experience in doing that and in reporting to the court and to stakeholders. The Commission, as a capital markets regulator, does not consider itself to be in the best position to be monitoring approximately CAD $90 million in funds and assets and making ongoing decisions about asset preservation.

[62] This is particularly the case where, as here, there may be a need to liquidate assets to cover carrying costs, there may be assets that need to be invested or reinvested and there may be legitimate consideration that needs to be given to allowing the respondents to have some access to their Property to cover their living and other expenses. The respondents recently brought an urgent motion to vary the Directions to permit mortgage payments. They have also advised that ongoing maintenance costs are necessary, such as insurance payments and utility payments.

[63] The Receiver will be much better equipped to address all of this than a capital markets regulator is. It is a fair concession for the Commission to make that this level of asset management is beyond the scope of its expertise and role. As was noted by the court in Sextant Strategic Opportunities Hedge Fund L.P., [2009] O.J. No. 3063 (at para. 56), one of the advantages of appointing a receiver is to provide an independent, verifiable review and analysis.

[64] The Commission has also advised the court that there is precedent for a court appointed receiver administering distributions following disgorgement orders made by the Tribunal pursuant to s. 127(1) of the Act, the need for which could later arise in this case (although that remains to be determined).

[65] In the meantime, a receiver will be able to maintain the value of the funds and assets that are currently subject to the Directions, make required payments such as unpaid employee salaries, locate and secure other funds and assets of the respondents, and, if enforcement proceedings are successful, ensure an orderly wind-down of the Property under supervision of the court and distribute proceeds on an equitable basis. While the proposed form of Receivership Order does not currently contemplate the Receiver’s role to extend beyond taking possession of and preserving the Property, the Commission has acknowledged that, subject to the court’s direction, it would support the expansion of the Receiver’s role to address these other concerns.

[66] The Commission also contends (at para. 59 of its factum) that: the interest of customers and the integrity of the capital markets would be better served if the respondents did not remain in control over the Property frozen by the Directions or other Property derived from the proceeds of TGG, in light of the tracing of TGG proceeds that have been historically used to fund purchases of property and personal expenses of Kazmi and his family members. Given the significant level of the monthly expenses that Kazmi has detailed in his affidavit filed on this motion, I find that some independent oversight and verification and vetting of living expenses by the Receiver would be appropriate. Again, the Commission does not object to this expansion of the Receiver’s role.

[67] The MFF Website has been shut down since the Directions were issued and the CFTC’s SRO Motion was granted on August 29, 2023. There is a TCTO in Ontario and a preliminary injunction in place in the U.S. that prevents the respondents from continuing to operate the business. There is therefore no concern that the appointment of the Receiver would disrupt the operations of a legitimate ongoing business because there is no longer a legitimate or ongoing business. The respondents suggest that this is a straw man argument since the business has only been shut down as a result of cross-border regulatory steps. They also point out that the traditional role of a court appointed receiver would be to run or wind down the business, neither of which is required in this instance. On the latter point, while that is the traditional role it is not the only role of a receiver. I find that the other justifications for the appointment of the Receiver detailed above render it appropriate in the circumstances of this case.

[68] The Commission acknowledges that the appointment of the Receiver would not be appropriate if there were tangible alternatives. However, there is no evidence of a tangible alternative to an Ontario receiver. There is now no U.S. receiver that is able to apply for recognition in Ontario. The Commission is ill-equipped to manage the USD$90 million frozen by the Directions.

[69] Having regard to the scope of potential remedies under Ontario law for the disgorgement of all amounts received by the respondents if the misrepresentations and breaches of Ontario securities laws are proven, I agree with the Commission that the limited asset freeze ordered by the U.S. Court’s Decision, which would allow most of the estimated USD$90 million in frozen funds and assets said to have been sourced from TGG customer registration fees to be returned to the respondents, aside from the USD $12.08 million, does not adequately foster fair and efficient capital markets or confidence in capital markets in Canada.

[70] There are several reasons for this distinction between the U.S. and Ontario approaches (most of which have already been mentioned in this endorsement):

a. Under Ontario law, if there is a finding of a breach of the Act, the respondents could be ordered by the Tribunal to disgorge any amounts they received in contravention of Ontario securities law (i.e. the full USD $310 million), not just the left over fees after accounting for the portion of fees received that were used to pay some of the customers for their “successful” trades. In addition, the Commission’s concerns regarding the potential breaches of Ontario securities law relate to all of TGG’s customers, not only the limited subset of the estimated 8% of customers who had achieved the A Book or B Book designations that were supposed to take them out of simulated trading and into the live trade platform used by the U.S. District Court to calculate its potential disgorgement order. These points are all ultimately still open to argument and determination, but the scope of the disgorgement order appears to be broader in Ontario based on the wording of s. 127(1)10 of the Act that contemplates an order for disgorgement of “any amounts obtained as a result of the non-compliance [with Ontario securities laws].”

b. The U.S. Court’s Decision appears to be based in part upon on its concern about an error in the CFTC’s evidence at the time it obtained its initial ex parte order, which left the impression that significant funds paid to the CRA in Canada for corporate taxes had been paid to Kazmi and used or dissipated b him. In contrast, these payments are correctly identified in the Commission’s evidence.

c. The U.S. Court’s Decision appears to be based on a lack of evidentiary foundation for any suggestion that the respondents would abscond with or hide the Property and take it out of the reach of the court’s jurisdiction if it is returned to them. However, proof of the likelihood of removal of the Property from the jurisdiction, or that the respondents will abscond with the Property, is not required for the appointment of the Receiver under s. 129 of the Act. The Commission’s concern is that Kazmi will continue to use the Property (sourced from customer fees) to fund his estimated CAD $55,000 in monthly living expenses, unchecked, if the Receiver is not appointed (and the Directions do not remain in place). Kazmi has admitted that, if TGG funds were returned to him, that he would continue paying his living expenses with TGG funds “without having to continue to justify the manner or cost of doing so to OSC Staff”.

[71] The court would expect the Receiver to take stock of the Property that is subject to the Directions and that is brought under the umbrella of the receivership. The Receiver should ensure that it is only the Property of the respondents and not the property of other non-parties, and that due consideration be given to carving out of the receivership any Property of the respondents that is demonstrated not to have been sourced to TGG and the registration fees it received. If qualified in scope to reflect these considerations, I find that the appointment of the Receiver is appropriate for the due administration of securities laws in Ontario.

[72] Unlike some receivership applications under other statutes, the appointment of the Receiver in this case is a collateral safeguard. A receiver can be appointed under s. 129 of the Act before the Commission’s investigation has been completed and before a Notice of Allegations has been issued. However, the court will require that the Commission complete its investigation and make its decision and, if determined appropriate, initiate any enforcement proceedings it intends to take within a reasonable time. No specific submissions were made about the anticipated timing for this to be completed. It seems reasonable to ask that the Commission either do so prior to the January 16, 2024 court date (that will be repurposed to deal with issues arising out of the appointment of the Receiver), or come to that hearing seeking a later deadline with an explanation for why the additional time is required.

[73] Finally, beyond the expenses associated with the preservation of the Property (such as keeping the mortgage current and the Property insured and attending to other carrying costs deemed to be necessary by the Receiver), there should be some mechanism put in place in this receivership to allow the respondents to request funds under receivership to cover their reasonable living expenses incurred since the Directions were issued and going forward. They will have to justify any such expenses and some parameters will need to be established for them to be determined. This is a qualification or carve out to the receivership order that the respondents requested. It is a fair and equitable accommodation in the circumstances, where all of the respondents’ Property was frozen and will now be made subject to a receivership prior to the Commission issuing a formal enforcement proceeding and any final findings being made.

[74] The Commission confirmed during the hearing of this application that it would not object to the Receiver having the authority to make payments to reimburse past and cover going forward reasonable living expenses to Kazmi and his dependents based on established parameters.

[75] I am ordering that the Receiver be appointed under s. 129(2)(b) because I have determined it to be appropriate for the due administration of Ontario securities law to do so. The appointment order will need to take into account some of the scope qualifications and other roles envisioned for the Receiver detailed above.

Is the Appointment of the Receiver in the Best Interests of TGG’s Creditors or Other Stakeholders? (s. 129(1)(b))

[76] In light of my decision to appoint the Receiver under s. 129(2)(b) I do not need to be satisfied that it is also appropriate to do so under s. 129(2)(a).

[77] Kazmi is the sole security holder (shareholder) of TGG and the other corporate respondents. There are no public security holders whose interests the Commission needs to protect through the appointment of the Receiver based upon the alleged fraud said to have been committed by Kazmi and TGG.

[78] The respondents have disclosed that there may be some unpaid trade creditors and that there are some employees who are owed wages. The Directions have prevented these creditors from being paid. The amounts they are owed are relatively small and could be readily protected by a freeze order along the lines of what was ordered in the U.S. Court’s Decision, if they were the only stakeholders whose interests were in need of protection.

[79] The justification for the appointment of the Receiver that is proffered in the Commission’s factum (at para. 58) is that: TGG customers paid approximately USD $310 million in funds to TGG during the Material Time and it appears from the Commission's investigation that these funds were obtained in contravention of Ontario securities law. It is in the best interest of these investors, as well as other stakeholders of TGG such as employees, service providers and other potential creditors, to appoint a receiver.

[80] The respondents argue that this approach is that the Commission conflates customers with investors in order to shoe horn into s. 129(2)(a) of the Act. While the Commission sometimes refers to the TGG customers as investors, the respondents maintain that they are not investors in the traditional sense. They have not purchased securities in TGG or provided funds for TGG to invest on their behalf. They paid non-refundable registration fees for the privilege of accessing TGG’s online trading platform. It is postulated that, even if the arrangements by which they were to be afforded the opportunity to trade could be characterized as an investment contract (per: Pacific Cost Coin), that does not necessarily turn the customers into investors within the meaning of the Act.

[81] The way in which the Commission hopes the court will take into account the best interests of customers who are said to have been affected by the alleged fraud is by extending the scope of s. 129(2)(a) to a broader concept of “stakeholders” in TGG’s business enterprise or scheme. The Commission relies upon various authorities for the proposition that under s. 129(2)(a) of the Act, the court can and should have regard to all of the circumstances when considering whether it is in the best interests of the company’s “stakeholders” for a receiver to be appointed. This is said to be based on earlier decisions of this court in: Sextant, at para. 54 and Ontario Securities Commission v. Go-To Developments Holdings Inc., 2021 ONSC 8133, at para. 21, aff’d 2022 ONCA 328, leave to appeal refused, [2022] S.C.C.A. No. 236.

[82] I prefer to leave for another day the question of whether the interests of a “stakeholder” that does not squarely fall within one of the identified categories (of security holders, creditors and/or beneficial owners of assets under administration) would be sufficient to justify the appointment of a receiver. I do not need to decide this question because I have already decided that it is appropriate to appoint a receiver under s. 129(2)(b), for the reasons outlined in the previous section of this endorsement.

Order

[83] The Receiver is appointed. The scope of its mandate should reflect the added scope qualifications and expanded roles discussed in this endorsement. I have not signed the proposed draft order and will wait to be provided with a further revised order for my review and consideration. Preferably this will be settled and approved as to form and content by counsel. A case conference may be scheduled before me if further assistance and directions from the court are required.

[84] I understand there is some urgency to deal with the mortgage arrears owing to TD Bank in respect of a property located in Richmond Hill, Ontario that is in default. As of October 21, 2023 the mortgage arrears were estimated to be approximately of $128,000 and they would have increased by the monthly rate of $42,565.65 since then. These should be addressed as a priority to avoid mortgage enforcement action and preserve that property while the Receiver gets up to speed. Any payments that are needed to bring this mortgage into good standing and avoid such enforcement action should be made, if necessary, even before the receivership Order has been settled.

[85] The Commission confirmed during oral submissions that it does not seek any costs of this receivership application at this time.

[86] For the time being, I have not vacated the hearing time on January 16, 2024 that was intended to deal with the continuation of the Directions. While the Directions will be superceded by the Receivership Order, if the Receiver considers that it might be able to get sufficiently up to speed to prepare an initial report and recommendations before that date and would like to use that court time to seek any initial directions that it might need from the court, the time can be repurposed for that. It could also be used to address any unresolved issues regarding the extent of the Property to be covered by the receivership order and/or living or other expenses that Kazmi is requesting and/or to settle the terms of the Order. The Commission will also be expected to address the timing of the next steps in its enforcement proceedings.

Kimmel J.

Date: December 21, 2023

[^1]: TGG operated as “MyForexFunds”, sometimes referred to herein as “MFF”.