JEAN-LOUIS LEVASSEUR, en sa qualité d’exécuteur de la SUCCESSION DE DANIEL LEVASSEUR (défunt), et EDWARD KAVANAUGH et les parties désignées dans l’annexe A PLAINTIFFS - v. -, 2023 NBKB 142

2023 NBKB 142 EC-55-2011 IN THE COURT OF KING’S BENCH OF NEW BRUNSWICK TRIAL DIVISION JUDICIAL DISTRICT OF EDMUNDSTON BETWEEN: JEAN-LOUIS LEVASSEUR, en sa qualité d’exécuteur de la SUCCESSION DE DANIEL LEVASSEUR (défunt), et EDWARD KAVANAUGH et les parties désignées dans l’annexe A PLAINTIFFS - and - AUTORITÉ DES MARCHÉS FINANCIERS and BRUNO BERNIER DEFENDANTS BEFORE: Justice Ivan Robichaud AT: Edmundston, New Brunswick DATES OF HEARING: October 3-6, 11-13, 18-20 and 24-26, 2022 DATE OF DECISION: August 14, 2023. APPEARANCES: Kevin C. Toner, for the plaintiffs Sophie Perron and Olga Redko, for the defendants [TRANSLATION]

Robichaud, J.

I - INTRODUCTION [ 1 ] Between 2006 and 2009, the 54 plaintiffs invested with Québec companies owned by a certain Patrick Gauthier (“Gauthier”), namely Centre de traitement d’information de crédit (“CTIC”), CITCAP Financial Group Inc. (“CITCAP”) and Gestion financière des Appalaches inc. (collectively, the “issuing corporations”), in the form of annual loans, renewable automatically unless prior notice to the contrary has been given and generating annual returns of 12% or more, payable monthly. [ 2 ] These investments were made through selling agents, namely Robert and Aline St-Onge, Jules Bossé, but mostly by Pierre Émond and Armel Drapeau. [ 3 ] In May 2009, the issuing corporations made proposals to their creditors, which were rejected, leading to their bankruptcy.

Patrick Gauthier also declared bankruptcy, and the investors were only able to recover approximately 11% of their investments. [ 4 ] The plaintiffs filed a claim against the Autorité des marchés financiers (“AMF”) and one of its employees, Bruno Bernier (“Bernier”). [ 5 ] In their Amended Statement of Claim, the Plaintiffs allege among other things that the defendants owed a duty of care to the plaintiffs and that they breached their duty. [ 6 ] They submit that Bruno Bernier knew or should have known as early as 2007 that the issuing corporations were not in compliance with Québec securities legislation and that he failed in his duty to inform the plaintiffs and by having the New Brunswick Securities Commission (“SC”) agree to refrain from informing the plaintiffs of the risks they were taking. [ 7 ] They submit that there was a breach of the duty to disclose to the SC the relevant information that the defendants had in their possession. [ 8 ] They submit that the defendants failed to obtain an order freezing the issuing corporations’ bank accounts in a timely manner, and that they acted in bad faith and allowed the issuing corporations to misappropriate the funds and declare bankruptcy, to the prejudice of the plaintiffs. [ 9 ] They also submit that if the defendants had acted in a timely manner, the plaintiffs would not have suffered losses, and that they acted with serious recklessness. [ 10 ] The defendants respond that the defendant Bruno Bernier at all times acted within the scope of his duties, that the investigations are conducted in camera and are confidential, that the defendants benefit from immunity and, alternatively, that they committed no acts that would engage their liability towards the plaintiffs. [ 11 ] The plaintiffs also filed a claim against the SC and two of its employees (File No.

EC-34-2011). The parties agreed that the two actions be tried together with the same evidence. However, since the actions were not consolidated and that the applicable law differs in each case, two separate decisions are issued, although the whole of the evidence was considered in each one. [ 12 ] Finally, a consent order severed the issue of liability and the issue of assessment of damages. This decision thus deals only with the issue of liability. [ 13 ] The parties agreed on the admissibility of the vast majority of the exhibits that were admitted into evidence. Several binders

containing thousands of pages were filed, as well as additional exhibits filed by way of a thumb drive and also containing thousands of pages. This cooperation between the parties greatly reduced the length of the trial. II ISSUES (

a) Do the defendants benefit from immunity? (

b) If not, are the defendants liable in negligence towards the plaintiffs? (

c) Did the defendants commit the tort of misfeasance in public office? (

d) Did the defendants deliberately cause economic losses? III ANALYSIS (

a) Do the defendants benefit from immunity? [ 14 ] In order to analyze the impact of certain statutory immunities, it is necessary to determine what are the roles and responsibilities of securities commissions and to determine what the defendants knew and when they became apprised of those facts. (

i) Role and responsibilities of securities commissions [ 15 ] The evidence on the record has shown all securities commissions in Canada have similar roles and responsibilities. As Professor Mark Gillen explains in Securities Regulation in Canada [1] : Securities regulation seeks to provide investor protection, public confidence and an efficient market primarily through disclosure and the regulation of persons such as brokers, dealers, underwriters, portfolio managers and advisors.

Disclosure at the point of distribution of securities in the primary market and, in response to the Kimber report, continuous disclosure in support of secondary market trading, provides information for the purpose of assessing the returns and risks associated with securities. It is intended to provide all investors with “equal access” to information.

The regulation of brokers, dealers etc., is directed to providing public confidence by addressing concerns such as pressure selling, conflicts of interest, professional competence, and the risk of broker-dealer business failure. [ 16 ] The authors of Canadian Securities Regulation [2] further explain: Canadian securities regulation rests, in theory, on several assumptions. First, regulation should not impose excessive cost or intervention (note that the reality is different than this theory). Second, investors and issuers cannot escape some level of risk—ranging from minimal to severe.

Not all investors thoroughly understand this point. Third, experience demonstrates a proven correlation between risk and return. Potential returns and losses increase with greater risk. For example, investors may deliberately expose themselves to a higher degree of risk for the chance of a higher return (even if they suspect fraud or illegality). Thus, regulation cannot, and should not, eliminate risk, though it is a daunting task to evaluate risk realistically. These underlying assumptions have led to our disclosure-based system.

Essentially, Canadian securities legislation is disclosure-based (investors must have full information on which to make an informed decision), not merit-based (under which an agency would assess whether a proposed investment has merit). [ 17 ] The Ontario Securities Commission, in its decision in 3iQ Corp. (Re) , [3] states the following: [3] This application is not about the merits of the units to be offered by The Bitcoin Fund. It is not the role of securities regulators to approve or disapprove of the merits of securities being offered to the public.

In fact, there is clear language to this effect on the face of the fund’s prospectus and on the face page of every prospectus filed in Ontario and in Canada: No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.

[4] It is also outside the scope of the authority of securities regulators to immunize investors against risk or against loss. And, it is not the job of securities regulators to ban speculation or risk-taking. [ 18 ] The undisputed evidence shows that the securities commissions must balance competing interests: on the one hand, protecting the investing public by promoting a healthy market, without, on the other hand, imposing excessive barriers.

These purposes and principles are set out in sections 4 and 8 of the Act respecting the regulation of the financial sector [4] that, prior to 2018, was called the Act respecting the Autorité des marchés financiers . [ 19 ] Mark Brown, expert witness, provided a good

summary of this dichotomy: The two primary objectives or purposes of securities regulation are investor protection and fostering capital markets. These two objectives are always in competition. A regulatory system which provides the highest level of investor protection would impose multiple requirements to be met by an issuer before the issuer is allowed to trade its security to the public. If those requirements are too extensive or too costly an issuer will choose not to access the capital markets. Alternatively, the most efficient markets will have limited and, arguably, no regulatory requirements.

While this facilitates an issuer’s access to capital, it also increases the possibility of Issuers acting in a manner that is misleading or harmful to investors. The role of the securities regulator is to balance these competing interests, within the limits of the authority set out in the legislation.

Balancing these competing interests also means the needs of the market as a whole, and not the needs of an individual investor or issuer will guide the decisions made by the securities regulator (both the staff division and the tribunal). [ 20 ] In Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) , [5] the Supreme Court states that it is an error to focus only on the fair treatment of investors.

The securities regulatory authority must also consider the protection of investors and the efficiency of capital markets, as well as public confidence in capital markets in general. [ 21 ] The evidence, even the expert evidence provided by the plaintiffs, indicates that securities legislation confers on its compliance officers general powers to investigate and that, when they are unable to obtain the information sought on a voluntary basis, an investigation order may be issued giving them additional powers, in particular the power to call and examine witnesses.

The content of an investigator’s report to the commission is privileged and inadmissible in proceedings that are outside the scope of the securities legislation, and generally, the information obtained during the investigations is confidential, but it may be disclosed to other securities commissions if the investigation involves more than one jurisdiction. [ 22 ] The evidence also shows that specific rules must be followed when sharing information with police forces, in order to avoid violating constitutional rights. [ 23 ] John Sliter, the expert witness called by the plaintiffs, was, for a period of five years, Director of the Integrated Market Enforcement Teams (IMET), which consist of special units of the RCMP whose mandate is to investigate fraud or serious criminal offences of national importance involving corporations trading on public markets and whose capitalization is significant enough to threaten investors’ confidence and Canada’s economic stability.

He confirms that even at that level, during investigations, there are often delays, it is necessary to work on several files at the same time, it is sometimes necessary to wait for answers from third parties and it is necessary to set priorities among the files. [ 24 ] Regulations respecting registration and prospectus exemptions are similar if not identical from one province to the other. Both Québec and New Brunswick use National Instrument 45-106 to govern these exemptions. (ii) The facts.

[ 25 ] The essential facts are found in the documentary evidence filed by consent of the parties, but also in the testimonies at trial. [ 26 ] The facts are set out in chronological order of their discovery by the defendants, since for purposes of analysis, it is necessary to determine what the defendants knew and when they became apprised of those facts. [ 27 ] On April 6, 2006, an informer, on condition of anonymity, provides the SC with a copy of a financing contract between CTIC and a New Brunswick investor.

The informer indicates that individuals in New Brunswick are investing with CTIC, a Québec corporation, and are promised high returns. The Court of Appeal of this province has confirmed that information that could identify the informer must be kept confidential. [6] [ 28 ] The contract is for $100,000, provides for returns of one per cent per month, payable monthly. It also provides for automatic annual renewal, unless prior notice to the contrary. The amount invested is personally guaranteed by Patrick Gauthier.

The contract names Pierre Émond as the agent. [ 29 ] Since the issuer of the securities is a Québec corporation, Ed LeBlanc, an investigator with the SC, contacts the AMF on April 18, 2006, to verify if CTIC is known to them, is registered with the AMF or is registered as a corporation. In the days that follow, the AMF replies that CTIC is not known to them, is not registered as an issuer, but is registered as a Québec corporation incorporated in 1996.

The AMF indicates that its legal counsel will check to determine whether the contract involves a security and whether exemptions apply. [ 30 ] On July 24, 2006, Jake Van der Laan, Director of Enforcement or Compliance with the SC, contacts the AMF in order to inquire whether legal counsel have produced their legal opinion. In September 2006, the AMF informs him that its counsel have concluded that the contract involves a security under Québec law, but that it is exempt from the requirement to file a prospectus, again under Québec law.

The AMF indicates that it would be interesting to know how the contract has been negotiated, in order to determine whether the automatic renewal clause is the result of good faith negotiations or is more of an attempt to circumvent the prospectus requirements and benefit from the exemption for short-term investments. The SC does not seem to have followed up on this last suggestion. [ 31 ] Mr. Van der Laan also asks the SC’s legal counsel to check whether the same findings apply under New Brunswick law. On January 25, 2007, the legal counsel finds that the contract involves a security, but is exempt. Mr.

Van der Laan therefore closes the file in April 2007. [ 32 ] On June 28, 2007, the AMF receives a telephone call from a potential investor in CTIC who provides it with a copy of a term loan contract. [ 33 ] On July 4, 2007, Mr. Bernier checks the corporate information on CTIC. He notes that this company has only one director, Mr. Gauthier, who is also the company’s majority shareholder. The company is in good standing with the Registraire des entreprises. Mr. Bernier also finds an Industry Canada web page dealing with factoring and indicating that this activity is likely to expand.

Finally, he finds some advertising by CTIC. [ 34 ] On July 5, 2007, Mr. Bernier contacts the potential investor involved in order to obtain details on the representations made by Mr. Gauthier. He also visits CTIC’s web site describing its factoring services. [ 35 ] On July 6, 2007, Ed LeBlanc is contacted by the AMF, who informs him of the information it has received from the potential investor. Mr. Bernier indicates that he has reasons to believe that this investment is not exempt, and he asks Mr. LeBlanc to check with the 2006 informer in order to identify CTIC’s financial institution. Mr.

Bernier asks him to refrain from doing anything that could alert Mr. Gauthier or CTIC to the AMF’s investigation, and Mr. LeBlanc agrees. [ 36 ] Ed LeBlanc then reviews the 2006 file and concludes that the transaction that was disclosed to the SC in 2006 is perhaps not exempt after all. He contacts the legal counsel who issued the legal opinion in January and who acknowledges that he made a mistake and that the 2006 contract is not exempt, at least not with respect to the short-term loan exemption. Mr. LeBlanc therefore resumes his

investigation. [ 37 ] Ed LeBlanc contacts his informer who sends him a copy of the promotional material used by CTIC and confirms that Pierre Émond is acting as an agent for CTIC, that Mr. Émond allegedly sold securities for over two million dollars to New Brunswickers and that the returns promised seem too good to be true. [ 38 ] The documents that were sent include Pierre Émond’s business card, which identifies him as CTIC’s development director, as well as documents produced by CTIC describing factoring.

These documents include articles published in Le journal économique in 2000 and in PME in 2003, which explain what is factoring and describe in a positive way CTIC’s activities in this sector. These documents are forwarded to the AMF. [ 39 ] The identification of the financial institution is also obtained and forwarded to the AMF. On July 11, 2007, Mr. Bernier communicates with Hélène Barabé, head of investigation services with the AMF, requesting an investigation order with respect to Patrick Gauthier and CTIC.

Such an order will allow him to obtain bank statements directly from the financial institution without notifying CTIC, to identify the investors, to conduct the appropriate examinations and to determine if it is appropriate to obtain a freeze order on CTIC’s accounts. [ 40 ] The order is issued on July 12, 2007. [ 41 ] On July 17, 2007, Mr. Bernier obtains Equifax credit reports on CTIC and Mr. Gauthier, which do not raise any concerns. Mr. Gauthier’s credit report states the following: [TRANSLATION] No indication of fraud detected . [ 42 ] On August 7, 2007, Mr. LeBlanc sends Mr.

Bernier the information that he obtained on CTIC from the New Brunswick Corporate Affairs Registry. Mr. Bernier informs him that he is making progress in his investigation and that he wants more time before an official investigation is opened on CTIC. This request is accepted. [ 43 ] On the same day, Mr. Bernier issues a subpoena to CTIC’s financial institution ordering it to provide CTIC’s statements of account from January 1, 2006. The subpoena also indicates the following: [TRANSLATION] Under

section 245 of the Securities Act , the undersigned investigator issues an order prohibiting you from disclosing to anyone, except your legal counsel, any information relating to this investigation, including the fact that an investigation has been opened and that you have been served with a subpoena . [ 44 ] Mr. Bernier receives the bank statement on August 13, 2007. It shows transactions made by monthly cheques, which Mr. Bernier interprets as possible payments to investors, representing 1% of the investments, the percentage that is indicated on the contract obtained from the potential investor.

He also notes what seems to be reimbursements of capital on maturity of the loans. [ 45 ] Having obtained copies of the cheques, Mr. Bernier is able to produce a list of investors with an estimate of the amounts invested by each and their address. At that time, there is more than 3.6 million dollars in the account. [ 46 ] On August 27, 2007, Mr. Bernier writes to Hélène Barabé, indicating that he will communicate with the investors and then with Mr. Gauthier. He plans on completing his investigation in mid-fall. [ 47 ] On September 7, 2007, Mr. Bernier sends Mr.

LeBlanc a table that he prepared with the banking information, which lists 42 New Brunswick investors in CTIC. The list contains the names, addresses and amounts invested. Several of the transactions listed are for less than $50,000 and would not be exempt under the exemption relating to the value of the transactions. Mr. Bernier asks Mr. LeBlanc to notify him when the SC begins its investigation. [ 48 ] Ed LeBlanc continues with his investigation, without, however, contacting the investors. He makes credit checks on Mr.

Émond and on the 2006 investor and searches the SC’s databases, but does not find anything unusual.

[ 49 ] On October 11, 2007, following a discussion with Mr. Bernier, Mr. LeBlanc contacts one of the investors on the list in order to determine whether a certain individual is connected to CTIC. The investor, the plaintiff Jean-Louis Levasseur, indicates that he is not. This information is immediately forwarded to Mr. Bernier. That same day and in the days that follow, Mr. Bernier issues nine subpoenas to witness to Québec investors.

The subpoenas contain the usual warning respecting confidentiality and indicate that the examinations will be held between October 24 and November 9, 2007. [ 50 ] On October 16, 2007, Mr. LeBlanc sends Mr. Bernier what he has found on the Internet with respect to Pierre Émond, and adds that he will continue to refrain from contacting anyone who could inform CTIC of the investigations undertaken by the commissions. In his testimony, Mr.

Bernier points out that in October 2007, he was still unable to determine whether CTIC’s operations were legitimate or not and that confidentiality was necessary in order to avoid adversely affecting operations that were possibly legitimate. [ 51 ] On the list that he received from Mr. Bernier, Mr. LeBlanc notes that Armel Drapeau is an investor. Mr. LeBlanc knows that Mr. Drapeau is a registered agent working for Investia. His research also reveals that a company that has invested in CTIC, Marigen Inc., belongs to Pierre Émond and has the same address as Mr. Émond. He informs Mr.

Bernier of this on October 18, 2007. [ 52 ] On that same day, that is October 18, 2007, the AMF is contacted by a lawyer representing CTIC, who indicates that his client wishes to make a voluntary disclosure, a process by which an issuer acknowledges that it has failed to meet the regulatory requirements and indicates that it wishes to straighten out or normalize its situation. [ 53 ] The communication also indicates that CTIC plans on filing an offering memorandum.

This document has been described as a “mini-prospectus”, a disclosure that is less costly and quicker to produce than a prospectus. [ 54 ] The interviews with the investors begin. Mr. Bernier concludes that several investments do not benefit from the prospectus exemption. He learns that not all of the investments generate returns of one per cent per month.

He obtains documentation that CTIC provided to the investors that shows in particular that CTIC reports the interest that it pays out to tax authorities. [ 55 ] On October 25, 2007, the AMF, represented by Bruno Bernier and Yan Paquet, director of investigations, meets with CTIC’s lawyer and Patrick Gauthier. CTIC wishes to make an application for voluntary disclosure under the normalization process. At trial, Bruno Bernier explains that among the requirements for a normalization process, the issuer must act in good faith and must fully cooperate. CTIC and Mr.

Gauthier are informed that what they say could be used against them, and that even if the situation is straightened out, fines could be imposed.

No formal undertaking to refrain from trading during the normalization process is obtained. [ 56 ] In light of the normalization process, the other examinations that had been planned are cancelled. [ 57 ] On November 5, 2007, CTIC’s lawyer sends an email to Yan Paquet indicating that he is available at any time for a new meeting in order to begin the normalization process. [ 58 ] On November 7, 2007, Yan Paquet writes to CTIC’s lawyer to remind him of the terms of the process: the investigation falls strictly under the purview of the AMF and no intervention or interference will be tolerated.

CTIC must not communicate with an investor who has been summoned to witness. The AMF does not undertake to end the investigation or to waive any remedy that it could pursue, but it will suspend the planned examinations. [ 59 ] A meeting between the AMF and CTIC is scheduled for November 20, 2007. In the meantime, the AMF requests that it be provided with numerous documents, in particular the list of investors, the financial statements and the list of clients. CTIC asks that the meeting be postponed to early December, in order to prepare the documents.

The AMF agrees. [ 60 ] Patrick Gauthier’s examination pursuant to his offer of voluntary disclosure is held on December 7, 2007. CTIC provided two thick binders containing the requested documentation. A letter from the lawyer indicates that if the AMF needs more information, it will be provided on request. CTIC’s lawyer also provides a three-page document summarizing CTIC’s activities since 1996 as well as the information provided to investors.

[ 61 ] The documents that are provided reveal inter alia that: • The loans are usually for a term of twelve months; • The interest is paid monthly; the interest payments have never been in default; • The interest rate varies between 12% and more than 20% annually; • The capital is repaid at maturity, unless the loan is renewed. All due repayments have been made; • Mr. Gauthier personally guarantees the loans; • Since 2006, CTIC holds trade credit insurance on its accounts receivable, providing 90% coverage.

There has never been an insurance claim; • CTIC wishes to normalize its situation as soon as possible in order to issue an offering memorandum. [ 62 ] The information provided includes a list of 97 Québec investors and 58 New Brunswick investors. The lists provide the names and contact information of the investors, the date of the investment, the amount invested and the relationship with Mr. Gauthier, if any.

Although several of the Québec investments are alleged to be exempt, such is not the case with respect to the New Brunswick investors. [ 63 ] The insurance contract with Euler Hermes is provided, as well as a letter from the insurer confirming that there have been no claims. Unaudited financial statements for 2006 are attached. [ 64 ] During the examination conducted on November 7, 2007, Patrick Gauthier is accompanied by two lawyers and a chartered accountant, Mr. Durant.

There are discussions as to CTIC’s sources of income, the number of investors and their possible exemption. [ 65 ] With respect to the sources of income, the accountant explains that they consist of front-end fees, which represent 5% of the loan amount, fixed payment repayments of financing (the “postdated cheques”) and the factoring itself. [ 66 ] Mr. Gauthier explains CTIC’s factoring process: the client needs short term financing while waiting for payment of his accounts receivable. Management fees of 5% are charged. The receivables are sent to the insurer for approval or denial.

If the accounts are approved, the third parties involved are notified of the assignment and may refuse. CTIC purchases the approved accounts and advances its client 80% of the amount and collects the full amount of the receivable. Depending on the elapsed time before the receivables are paid, CTIC returns a portion of the 20% holdback to the client. [ 67 ] According to Mr. Gauthier, the “postdated cheques” are another form of factoring.

The amount loaned is repayable by way of payments made over a period of a few months. [ 68 ] A chattel mortgage, as well as a personal surety from the client’s executive officer and an insurance policy on his or her life, is taken out on the accounts until payment is received. The financing period varies between 30 and 60 days. [ 69 ] With respect to the investments, Mr. Gauthier explains that the returns paid are usually one per cent per month, but that they vary according to the amount loaned.

[ 70 ] During the interview, Mr. Gauthier never refuses to answer the AMF’s questions and never consults his lawyers to determine whether he should answer. Five undertakings are given and are rapidly executed. [ 71 ] Bruno Bernier drafts a document summarizing how CTIC’s factoring works and considers, at trial, that the activity was therefore very profitable. [ 72 ] On January 15, 2008, CTIC’s lawyer sends Mr. Bernier examples of factoring contracts, chattel mortgages and general sureties and requests a follow-up meeting as soon as possible.

A meeting is scheduled for January 26, 2008. [ 73 ] On January 24, 2008, CTIC sends the AMF banking and accounting information. These documents show a net profit of more than $750,000 over a period of twelve months. According to Mr. Bernier, the accounting firm involved is well known and reputable. The chartered accountant, Mr. Durant, seemed credible. [ 74 ] Mr. Gauthier’s examination by Mr. Bernier on January 24 lasts more than three hours.

The subjects raised are the nature of the sources of income, in order to confirm what is understood by factoring, as well as a review of each investment in order to determine whether it is exempt. Mr. Bernier does not insist on a formal written undertaking to refrain from trading during the normalization process. He received a verbal undertaking. [ 75 ] Again, at no time did Mr. Gauthier refuse to answer the AMF’s questions. He shows full cooperation. [ 76 ] The transcript of the meeting is received in early February 2008. It is reviewed and Mr.

Bernier prepares his file for submission to the litigation department. The goal at that time is to obtain a voluntary application for normalization. He therefore prepares his file and forwards it to the litigation department, which then takes it over. [ 77 ] It is important to note that the SC is not given that information at that time. [ 78 ] On February 5, 2008, Ed LeBlanc goes to the offices of Investia. Mr. Émond’s office is located at the same place. Mr. LeBlanc wished to meet with him, but he is out of the office. Mr. LeBlanc meets with Mr.

Drapeau, who works at the same place and who states that he invested in CTIC several times and that he intends to make further investments. However, Mr. Drapeau does not mention that he is also acting as an agent for CTIC. [ 79 ] Mr. LeBlanc therefore contacts Mr. Émond to set up a meeting. Mr. Émond tells him that the AMF informed him that the loans are not investments in securities, but that the investigation continues and that his lawyer will confirm that they are not accepting new investments during the investigation. In the minutes that follow, Mr.

Bernier receives an email from CTIC’s lawyer inquiring as to what is going on. Mr. Bernier contacts Mr. LeBlanc and asks him to refrain from meeting with Mr. Émond. Mr. Bernier explains that the AMF is negotiating with CTIC in the context of a normalization process. Therefore, Mr. LeBlanc does not meet with Mr. Émond. He then learns from Mr. Bernier that the AMF did not obtain any written undertakings to refrain from trading, whereas he had assumed that that had been done. [ 80 ] On February 11, 2008, Mr. Bernier writes to Mr.

LeBlanc to tell him that he asked CTIC’s lawyers to inform him of CTIC’s solicitation activities in New Brunswick, and he asks Mr. LeBlanc to provide the name of the investors that have been solicited. He suggests that a formal undertaking to refrain from soliciting pending a normalization agreement be obtained. [ 81 ] The same day Mr. LeBlanc contacts Mr. Émond, who informs him that he never stopped soliciting new investors or selling them investments in CTIC, and that he has new investors almost every month.

He states that he is willing to stop soliciting new clients, but that he will continue to sell these products to his existing clients. He claims that the AMF has completed its investigation and that everything is in order. [ 82 ] Mr. LeBlanc informs Mr. Bernier of these developments and indicates that, unless written undertakings to cease trading pending the completion of the investigation are given, he will take steps to prevent new transactions.

[ 83 ] Mr. Bernier replies that CTIC’s lawyer will check to see what the situation is and that the AMF could possibly obtain formal undertakings to cease trading. [ 84 ] On February 15, 2008, Mr. LeBlanc writes to Mr. Émond and Mr. Gauthier to inform them that it seems that CTIC is making non-exempt transactions without prospectuses or registration. He demands a detailed account of the transactions to date and a written undertaking, in a form attached to the letter, to cease trading without the permission of the SC. He gives them until February 21, 2008 to act. [ 85 ] CTIC’s lawyer contacts Mr.

LeBlanc and gives a verbal undertaking on his client’s behalf to refrain from soliciting new investments. He states that he is working with the AMF to normalize procedures. Written undertakings from Mr. Émond, Mr. Gauthier and CTIC are provided on February 18, 2008. [ 86 ] On February 21, 2008, Ed LeBlanc receives a call from a representative of Investia, Armel Drapeau’s employer, stating that he believes that Mr. Drapeau is acting as an agent for CTIC. Although Mr. Drapeau had been listed as an investor, this was the first time that Mr.

LeBlanc learned that there might be another agent in New Brunswick. [ 87 ] On February 25, 2008, CTIC’s lawyer provides Mr. LeBlanc with a list of the New Brunswick investors. The list shows that there are 58 investors. All the investments listed were made before the end of 2007. The total amount invested exceeds 6 million dollars. [ 88 ] On April 14, 2008, Ed LeBlanc examines Pierre Émond, who refuses to be recorded. Mr. Émond declares, during the examination that lasts an hour and a half, that he has been obtaining loans for CTIC for two years. He has 40 investors, but he refuses to give their names. Mr.

LeBlanc tells him that if he does not cooperate, an order will be obtained and the names will have to be disclosed. Mr. Émond explains that the investments total 3.4 million dollars and that he receives a commission of 24%, that Mr. Drapeau works for him, has approximately 20 clients, and receives the same commission. [ 89 ] On April 15, 2008, Mr. LeBlanc examines Armel Drapeau in Saint John. Mr. Drapeau agrees to the recording of the examination, and the transcript was admitted in evidence. Mr.

Drapeau indicates that he has 17 clients. [ 90 ] On May 8, 2008, Ed LeBlanc writes to CTIC informing them that the SC has learned that Armel Drapeau is also acting as an agent and that the list of investors provided by CTIC is inaccurate.

He demands that an affidavit be provided before May 20, 2008, giving a detailed list of the transactions with residents of New Brunswick, a copy of the contracts for these transactions, a list of vendors (agents), a list of the compensation paid to the vendors, as well as a copy of CTIC’s most recent audited financial statements. [ 91 ] On May 12, 2008, Ed LeBlanc sends an email to Ms. Barabé expressing his concerns and asking questions. The email reads as follows: Could you please assist in getting some information for me?

BACKGOUND The AMF advised me last year that it was investigating CTIC and asked that I hold off investigating in NB so as not to interfere with the AMF investigation. At one point CTIC became aware of the AMF investigation. At that stage, I was lead to believe that CTIC undertook to the AMF not to trade until the investigation was concluded and I agreed to hold off. I recently began asking questions in NB and found that CTIC was still trading in NB.

To date CTIC have provided me with very inaccurate information as to the number salespersons and number of trades, and amounts of money raised in NB. If needed, I intend to recommend that we obtain an investigation order and a CTO against them while we investigate further. It would be relevant to know the date CTIC became aware that their activities were not in compliance with Quebec securities law. CTIC staff in NB advised me, that as soon as CTIC found out that the AMF was asking questions, CTIC immediately contacted the AMF and cooperated fully.

The date of this contact or meeting would be relevant in proving that especially after that date they knew or ought to have known they were also not compliant with the NB law but continued to violate the law. If CTIC undertook to the AMF not to trade that specific date would also be relevant to us. PONZI I am not completely knowledgeable about the business of CTIC but at first glance it has the feel of a possible Ponzi. Out of each dollar invested CTIC pays 12% in annual sales commissions, 12% rate of return to the investor and keeps 12% to manage its operations.

As the remaining 64% has to continually generate 50% annual returns to continually pay these amounts, we remain concerned of the possible Ponzi aspect this investment might involve. INFORMATION SOUGHT I seek information as to 1. Where is the money? Can or does CTIC operate a viable operation? Is the money still available to be reimbursed? Can the trades be reversed ? 2. When did CTIC know it was off-side? 3. When did CTIC undertake to the AMF not to trade? 4. Does the AMF have information as to how much CTIC raised in NB? If so, can it share that information with NB? 5.

Is the AMF is contemplating administrative or penal actions? If so, can or should these actions be coordinated with NB actions? Your assistance in these matters is appreciated. [ 92 ] Mr. Bernier prepares a first draft of the response to Mr. LeBlanc and forwards it to Ms. Barabé. At Ms. Barabé’s suggestion, the reference to the discussion between Mr.

Bernier and the litigation department on the need to obtain a formal undertaking to refrain from soliciting investments during the investigation, the litigation department’s response that this was not the investigators’ responsibility, but rather that of the litigation department, as well as the reference to the fact that Mr. Bernier takes full responsibility for the lack of a

written undertaking are removed from the proposed response. [ 93 ] The AMF’s response to Mr. LeBlanc, sent on May 13, 2008, provides him with several pieces of financial information, in particular the fact that there are over six million dollars in CTIC’s bank account, that factoring accounts for approximately 90% of its income, that the company generates increasing net profits, that CTIC has known that it was possibly in violation of Québec law since September 2007, and that the litigation department will determine whether proceedings will be instituted in spite of the normalization process.

According to the information that AMF has, the investments made by residents of New Brunswick would amount to approximately two million dollars. [ 94 ] On May 14, 2008, CTIC’s lawyer writes to the AMF, indicating, inter alia , that his client plans on raising between two and five million dollars by way of an offering memorandum that would comply with Regulation 45-106 and on continuing to obtain its financing through qualified (exempt) investors by filing each time the required exemption documentation with the AMF. The unaudited financial statements for 2008 are included, as well as a table of all the investors.

That information is sent to the Capital Markets Division and is not received by Mr. Bernier. [ 95 ] The next day, Ed LeBlanc again writes to the AMF. He states that he still has concerns with respect to CTIC’s ability to generate the funds needed to pay the interest and the agents’ commissions.

He indicates that, according to information he received, New Brunswickers would have invested more than five million dollars. [ 96 ] On May 16, 2008, CTIC’s lawyer contacts Mark McElman, of the SC, to inform him that CTIC does not have audited financial statements and that he is not certain whether all the unaudited statements can be provided by May 20, 2008. Mr. McElman informs Mr. LeBlanc of this by email and expresses concern with respect to the lack of audited statements. An extension of a few days is granted. [ 97 ] On May 20, 2008, the lawyer representing Armel Drapeau and Pierre Émond contacts the SC.

Jake Van der Laan informs him that Mr. Drapeau must sign an undertaking to refrain from trading in CTIC’s securities during the ongoing investigation. The undertaking is received the same day. [ 98 ] On May 22, 2008, CTIC’s lawyer provides the information requested on May 8, but only unaudited statements for 2006 and provisional unaudited statements for 2008 are produced. The lawyer indicates that the statements for 2007 will follow shortly and gives assurance of his client’s full cooperation. [ 99 ] For the first time, Mr.

LeBlanc learns that Jules Bossé and Robert St-Onge (through S&L Ltée, owned by his wife) also act as agents for CTIC in New Brunswick. [ 100 ] In his testimony, Ed LeBlanc states that he was at that time under the impression that CTIC was cooperating fully and in a timely manner. However, after having reviewed the transaction records received on May 22, 2008, he realizes that a transaction occurred on March 4, 2008, that is after the written undertakings given by CTIC, Mr. Gauthier and Mr. Émond.

Although the agent is Armel Drapeau, who only signed an undertaking on May 20, 2008, CTIC had already given its undertaking, and Mr. Drapeau was aware of this. Mr. LeBlanc realizes that CTIC continues to renew the contracts at maturity. [ 101 ] On May 28, 2008, Ed LeBlanc writes to Bruno Bernier and informs him that CTIC is renewing loan agreements and that at least one transaction occurred after the written undertaking given on February 18. Since Mr. Bernier had recently informed him that he had learned that a potential investor in New Brunswick was contemplating a $500,000 investment, Mr.

LeBlanc asks him to provide this person’s contact information. Mr. LeBlanc suggests that, according to the financial statements, only 8% of income is generated by the factoring activities and that there are at least three different versions of the contracts used by CTIC granting various rights to investors. He asks whether the assets and liabilities indicated in the financial statements match the banking information that the AMF has and whether the AMF has more information concerning CTIC’s sales figures.

Within the next minute, he sends a second email asking whether the AMF has the financial statements for 2007. [ 102 ] These revelations concerning renewals and sales worry Mr. Bernier, since there were not supposed to be any transactions during the normalization process. An interdepartmental meeting between the investigators, the capital markets division and the litigation department is held the following day. It is decided to put an end to the normalization process and to resume the investigation.

[ 103 ] On May 30, 2008, the AMF sends Mr. LeBlanc an internal accounting data printout from CTIC for 2007. Mr. LeBlanc forwards the documents to the SC’s in-house accountant for review and comments. On June 3, 2008, he sends his comments to Mr. Bernier together with questions to ask CTIC, particularly with respect to the management fees and the “postdated cheques”. On the same day, Mr. LeBlanc again contacts Mr. Bernier to see if the AMF has already received that information. Still on the same day, Mr.

Bernier answers that the management fees are in fact front-end fees and that he has a detailed log for the “postdated cheques”, and he offers to provide a copy to the SC. Mr. LeBlanc confirms that he wants them, but on June 6, 2008, Mr.

Bernier informs him that he will have to wait for his superior’s return before proceeding. [ 104 ] On June 4, 2008, Ed LeBlanc sends an email to the Mutual Fund Dealers Association of Canada, stating that a representative of Investia who is not in good standing is trading in securities and that he will question Armel Drapeau, of Investia’s office in Edmundston, concerning sales of these securities totalling more than 1.7 million dollars. He also indicates that he will question an officer of CTIC, who is not registered, who manages an office of CTIC in Investia’s premises.

The Association immediately opens an investigation and writes to Investia. [ 105 ] On June 6, 2008, Ed LeBlanc examines Pierre Émond in the presence of his lawyer. Mr. Émond states that in 2006, he inquired about CTIC and factoring. He often met with Patrick Gauthier and with CTIC’s accountants and lawyers. In his view, the AMF completed its investigation and found that CTIC’s operations are in order and that there were only regulatory breaches that are in the process of being sorted out.

He explains the information that he gives his clients before selling them CTIC securities. [ 106 ] A teleconference between the AMF and the SC is scheduled for June 10, 2008. The AMF informs Ed LeBlanc and Jake Van der Laan that for them to provide the SC with all of the documents in CTIC’s file, the SC must make a formal request for cooperation. [ 107 ] On June 11, 2008, while preparing for an examination scheduled for the following day, and in the days that followed the meeting, Mr.

LeBlanc receives, through Armel Drapeau, a statement of account for CTIC showing that more than 7 million dollars are held in a bank account, a confirmation from the insurer that there have been no claims, information on factoring and contracts with CTIC, and a confirmation from the investor of March 4, 2008, Amusement K.D. Inc., that it is an “accredited investor”. Mr. LeBlanc writes to CTIC’s lawyer to remind him that the financial statements for 2007 must be received no later than June 13.

The lawyer replies a few hours later, stating that he checked with the accountants and that a preliminary version will be ready by June 16, but that the final version will only be available around June 23. Mr. LeBlanc indicates that the preliminary documents are required no later than June 16 and the final version no later than June 27. [ 108 ] On June 12, 2008, the SC sends the AMF the formal request for cooperation. The same day, Mr. LeBlanc examines Armel Drapeau, who states that when he sells one of CTIC’s products to an existing client, he uses one of Investia’s opening of account forms.

He too describes the information that he gives his clients: an explanation of the nature of factoring, the fact that CTIC takes a mortgage on accounts receivable, that everything is insured, etc. With respect to the March 4th transaction, he states that he was informed that the investor was an “accredited investor”, that is, an individual who owns sufficient assets for the registration or prospectus exemption to apply to the transaction. [ 109 ] On June 13, 2008, Mr.

Bernier prepares a memo to Hélène Barabé, summarizing the facts in support of the request for cooperation with the SC and recommending that all documents that the AMF has on CTIC be forwarded to the SC. [ 110 ] On June 16, the AMF informs Mr. LeBlanc that the process for an order of cooperation has been launched. On the same day, notice is sent to CTIC’s lawyer informing him that a meeting will be held on June 19, 2008, in the offices of the AMF. The purpose is to inform CTIC of the reasons that persuaded the AMF to put an end to the normalization process. [ 111 ] Still on June 16, 2008, Mr. LeBlanc informs Mr.

Bernier of what he learned during the recent examinations. He sends him the contracts, explaining that most of them state that the funds will be used for the sole purpose of factoring and that contracts for 1.7 million dollars were signed after the AMF notified CTIC that it was not in compliance with the regulations. He describes the representations made by the agent during sales and asks that the AMF notify him if they obtain information on whether the funds are used only for factoring and whether CTIC’s operations are insured and for what risks.

He attaches, inter alia , a list of 63 New Brunswick investors and a table of the fees paid to the agents. [ 112 ] During the June 19, 2008, meeting, since CTIC claims that despite the wording of the undertaking given to the SC on February 18, 2008, it had been agreed that exempt transactions with accredited investors could continue, Mr. Bernier writes to Mr. LeBlanc to inquire about it.

[ 113 ] On June 25, 2008, Mr. LeBlanc sends a detailed reply that is worth reviewing. He states the following: • On February 5, 2008, he went to Armel Drapeau’s office, which is located on the same premises as Pierre Émond’s office. • At that time, Mr. LeBlanc was not aware of the fact the Mr. Drapeau was acting as an agent, and Mr. Drapeau indicated only that he had personally invested with CTIC. • On the same day, he contacted Mr. Émond to

schedule a meeting. Less than 30 minutes later, Mr. Bernier called him to ask him not to meet with Mr. Émond. • Shortly thereafter, Mr. LeBlanc realized that the AMF had not obtained written undertakings to refrain from trading. Mr. LeBlanc insisted on obtaining such undertakings and obtained them on February 18. He had then discussed the normalization efforts with CTIC’s lawyer, but he does not recall that the possibility of continuing to trade with exempt persons was discussed.

His request was for an undertaking to refrain from trading, with no exceptions. • He spoke with Pierre Émond on three occasions, and each time, Mr. Émond claimed that the AMF had completed its investigation and that CTIC was free to continue trading. During the April 15th meeting, Mr. Émond inquired about the exemption provided in Regulation 45-106 with respect to accredited investors, and Mr.

LeBlanc informed him that the undertaking to refrain from trading would be lifted only when the investigations being conducted by the SC and the AMF were completed and that permission to trade would only be granted if CTIC filed a prospectus or proved that the transactions were exempt. Mr. LeBlanc also reminded Mr.

Émond that even if the investor were shown to be an accredited investor, a report of exempt distribution would need to be filed, which was not done. • He has not yet determined with CTIC whether CTIC renewed contracts in New Brunswick after February 18 or whether reimbursements had been made with respect to contracts that had reached maturity. [ 114 ] On June 27, 2008, Mr. LeBlanc receives the unaudited financial statements for 2007. [ 115 ] On July 3, 2008, CTIC has a new lawyer, who writes to the AMF, more specifically to its litigation department.

The letter contains an undertaking to cease soliciting investments and confirms that an action plan will be submitted to ensure the continuation of CTIC’s operations. Mr. Bernier will be informed in the following days. [ 116 ] On July 10, 2008, having failed to receive a reply to the request for cooperation sent to the AMF, Mr. Van der Laan writes to the AMF to inquire where things stand. The AMF answers that the person in charge was on vacation, but that another person is dealing with it.

The AMF hopes that the order will be issued during the week or, if not, the following week. [ 117 ] On July 23, 2008, Ed LeBlanc writes to CTIC’s lawyer requesting a copy of the ledger and the company’s trial balance for the period covering the year 2007 up to the present. The documents are required for August 11, 2008. Since he has not received a response, he leaves a message with the lawyer on August 12, 2008. On August 13, the new lawyer calls, informing him that he is now representing CTIC. He informs Mr.

LeBlanc that the AMF has granted CTIC 90 days to submit an offering memorandum and that there are still 35 days remaining. The request made on July 23, 2008, is therefore forwarded to this new lawyer. [ 118 ] On August 8, 2008, the AMF’s secretary issues an authorization to disclose the documents in the investigation file to the SC. [ 119 ] On August 21, 2008, Mr. LeBlanc writes to CTIC’s lawyer to inform him that the response times are unacceptable and that actions are being contemplated.

The next day, Patrick Gauthier sends the trial balance, the income statement for the month of May 2008 and the balance sheet as of May 31, 2007, directly to Mr. LeBlanc.

[ 120 ] On August 25, 2008, CTIC’s lawyer calls Mr. LeBlanc to check whether additional documents are required. Mr. LeBlanc indicates that he will check. [ 121 ] On August 26, 2008, Mr. LeBlanc contacts Mr. Bernier to say that the AMF took a lot of time in issuing the authorization to disclose the information and, furthermore, that the documents received have nothing to do with CTIC. It seems that there was a mistake, and the proper documents are sent. [ 122 ] On September 4, 2008, CTIC’s lawyer writes to the AMF’s litigation department for a meeting [TRANSLATION] “to properly align the file”.

He explains that New Brunswick is growing impatient and is waiting for Québec. [ 123 ] On September 16, 2008, at Mr. Bernier’s suggestion, the AMF contacts Mr. Van der Laan to update him on the file. [ 124 ] On September 23, 2008, Mr. LeBlanc receives the documents from the AMF, consisting of two large binders and other documents. Mr. LeBlanc begins his review. [ 125 ] On the same day, the AMF formally notifies CTIC that it is putting an end to the normalization process and returning the file to the inspections and investigations department.

The AMF issues subpoenas to twelve Québec investors, to examine them on November 13 and 14, 2008. [ 126 ] On November 5, 2008, CTIC’s lawyer writes to Mr. Bernier to inform him that CTIC’s investors will be reimbursed, but that a new company has been incorporated, named CITCAP Groupe Financier inc. This company will obtain financing under conditions similar to that of the loans to CTIC, but in perfect compliance with applicable regulations. An offering memorandum will be filed, and CTIC’s investors will be able to [TRANSLATION] “continue” their investment with CITCAP.

The lawyer considers that it is premature and [TRANSLATION] “highly prejudicial” to subpoena investors for questioning while CTIC is attempting to comply. He argues that the AMF could be held liable for losses and asks that the examinations be cancelled. [ 127 ] On November 6, 2008, Mr. LeBlanc writes to CTIC’s lawyer indicating that the 90-day period discussed on July 23 has expired and asking for a copy of the offering memorandum, if it has been filed.

He also requests specific information on factoring for the years 2006 to 2008 (in particular the percentage of income that it represents), insurance coverage, the lease financing activities, the financing of the contracts and sales orders, the discount on postdated cheques, as well as details of all the investments made since October 31, 2007 (CTIC’s fiscal year ending on October 31).

This information is to be provided before November 20, 2008. [ 128 ] On November 10, 2008, the AMF’s litigation department replies to the lawyer, forbidding him from claiming that the restructuring is the result of instructions or directives from the AMF, indicating that the examinations will in fact be held, that they will be held in camera and that the persons involved are prohibited by law from disclosing to anyone any information pertaining to an investigation. The lawyer replies, basically to assert that CTIC and CITCAP are separate entities. [ 129 ] The examinations are held.

Their purpose is to obtain information on the circumstances in which the loans were obtained and to check on possible exemptions. The investors who were met are surprised by the proceeding and have no complaints against CTIC. Transcripts of the examinations are requested. [ 130 ] The AMF concludes that none of the investments made by the investors examined are exempt. [ 131 ] On November 13, 2008, Mr. LeBlanc contacts an investor to check whether he was recently solicited by Mr. Émond. The investor informs him that Mr.

Émond paid him a visit the previous week to inform him that the AMF had checked CTIC’s books and had concluded that everything was in order. Mr. LeBlanc informs him that their investigation has not been completed. The investor indicates that he did not know that the SC was also investigating. [ 132 ] On November 20, 2008, Mr. LeBlanc is informed that the filing of the offering memorandum is imminent. He agrees to wait until November 28.

[ 133 ] An offering memorandum is filed on December 1, 2008, not by CTIC, but by CITCAP, the new corporation that is evidently merely an attempt to circumvent CTIC’s undertakings to refrain from trading. CITCAP’s audited financial statements are attached, but they reveal nothing since it is a new corporation. [ 134 ] The offering memorandum provides for an annual compensation of 5% for agents, well under what had been paid up until that time. [ 135 ] On the same day, Mr.

LeBlanc sends the document to the SC’s accountant, in order to compare the data with the information on file and to determine whether the memorandum qualifies for an exemption under National Instrument 45-106. [ 136 ] On December 5, 2008, Mr. LeBlanc writes to CTIC’s lawyer to inform him that he received the offering memorandum, but not the other information required. He asks that the information be sent to him immediately. The lawyer replies the same day, stating that the former accountant (CTIC thus seems to have changed accountants) needs a few days to finish compiling the information.

He indicates that, according to his client, the insurer covers the receivables, but not the other forms of financing, and that there has been no financing coming from New Brunswick since October 31, 2007. [ 137 ] Mr. LeBlanc knows that transactions were made in New Brunswick after October 31, 2007. Therefore, on December 8, he writes to the lawyer informing him that this information does not tally with the information he has.

He therefore wants a list of all investors since October 31, 2007, with particulars of the transaction dates and the amounts invested. [ 138 ] On December 11, 2008, CTIC’s lawyer sends the detailed list to Mr. LeBlanc. The transaction made on March 4, 2008, appears on the list. The letter indicates that the rest of the information will be provided as soon as it is received from the accountants. [ 139 ] On December 15, 2008, Mr. LeBlanc writes to CTIC’s lawyer. The information contained in this correspondence includes the following: • All of CTIC’s transactions in New Brunswick are deemed separate offences.

Transactions that occurred after February 18, 2008, are particularly disturbing, given the written undertaking to refrain from trading. • The information requested on November 6, 2008, has not yet been provided, despite the fact that it is computerized information that can be produced in a few minutes. • The total of the transactions provided in the most recent list does not tally with the SC’s information. A detailed list is required. • Mr.

LeBlanc will produce his report shortly, which will indicate the following: o Since September 2007, CTIC has been trading in New Brunswick in spite of the fact that it was notified by the AMF that it was not in compliance. o Since February 18, 2008, CTIC has traded in New Brunswick, after having given a written undertaking to cease doing so. o There are contradictions in some of the information received. o There are prolonged delays in providing information.

• Even if the SC were to allow trading under an offering memorandum or otherwise, CTIC may only pay commissions to authorized agents. [ 140 ] The next day, CTIC’s lawyer calls to assure Mr. LeBlanc that the information will be provided shortly and asks for a copy of the undertakings to refrain from trading, which is sent to him immediately. [ 141 ] On December 18, 2008, Mr. LeBlanc writes to the lawyer and requires that CTIC’s ledger for 2007 be received by December 24, 2008. [ 142 ] On December 22, 2008, Mr.

LeBlanc informs CTIC’s lawyer that he will finish his report to the compliance department the following day, requesting that regulatory proceedings be filed. The lawyer immediately replies that the information will be sent the next day. [ 143 ] On December 29, 2008, Mr. LeBlanc writes to the lawyer, stating that he has still not received the information. [ 144 ] On December 31, 2008, CTIC’s lawyer sends the SC a letter as well as a table of CTIC’s financial data, the ledger for 2006, 2007 and 2008, an updated list of investments in New Brunswick and a copy of the contracts signed for these investments.

The letter, dated December 23, apologizes for the delays on CTIC’s behalf, and explains that CTIC wishes to establish and maintain strict compliance with the regulations. The letter adds that CTIC no longer trades, transactions henceforth being made by CITCAP under an offering memorandum. CTIC’s investors will be reimbursed, but they will be able to reinvest in CITCAP if they so desire. [ 145 ] On January 5, 2009, Mr. LeBlanc writes to CTIC’s lawyer, asking him to provide information on New Brunswick investments in the same format as the table previously sent, with updated information. On the same day, Mr.

LeBlanc sends the lawyer another email requesting the following particulars: whether an offer was made to New Brunswick investors to transfer the investments in CTIC to CITCAP; whether CITCAP received funds from New Brunswick and filed the exemption forms required by law. The information is to be provided before January 12. [ 146 ] The next day, Mr. LeBlanc writes to the lawyer informing him that upon reviewing the file, he notices that some information requested on November 6 has not yet been provided and that such information is required before January 16. [ 147 ] On January 14, 2009, Mr.

LeBlanc receives the list of investments in the province, in the requested format, from CTIC’s lawyer. It shows only one investment transaction after February 15, 2008, that is the March 4th transaction. In fact, several transactions in 2008 are reimbursements to investors. [ 148 ] On January 15, 2009, CTIC’s lawyer asks permission to provide the information during the following week, its accountant having been ill. A copy of the accountant’s email is attached. [ 149 ] On January 21, 2009, CITCAP sends the SC a report of exempt distribution for a transaction made on January 14, 2009, for $200,000.

The agent is Armel Drapeau, who received a commission of $10,000. The investor is identified as Dana Gillespie, who signed a statement confirming that he was informed that he assumes the risks, that he understands that he can lose everything, that the finder is not registered and that the finder has received a commission of $10,000. A copy of the contract signed with CITCAP is provided. [ 150 ] On January 23, 2009, the lawyer representing CTIC/CITCAP confirms that CITCAP had only one investor in New Brunswick, namely Mr. Gillespie.

The same day, the data from the ledger is provided as part of several thousand pages. [ 151 ] On January 27, 2009, Ed LeBlanc contacts Mr. Gillespie, who informs him that he learned of CTIC/CITCAP through a friend who had invested. The investor therefore went to Mr. Drapeau’s office, and Mr. Drapeau explained to him the nature of factoring, that all the loans for factoring are insured, that the insurer checks the credit before approving a transaction and that the company has been in business for 14 years and has never had to submit a claim to its insurers. He signed the documents.

He had received the offering memorandum from his friend. Mr. LeBlanc tells him that he is attempting to determine whether the company is using the funds for factoring and if the representations are true.

[ 152 ] On January 28, 2009, Ed LeBlanc contacts Armel Drapeau’s lawyer in order to examine him again, this time with respect to the transaction with CITCAP. In preparation for the meeting, he asks the lawyer to provide detailed information on the transactions with CTIC and with CITCAP. [ 153 ] According to the undisputed evidence, agents such as Armel Drapeau are not registered directly with the SC; they are registered through the brokerage firm that employs them. In the case of Mr. Drapeau, this is therefore Investia. The agent is only authorized to trade in securities approved by the brokerage firm.

Ed LeBlanc therefore contacts Investia on January 27, 2009, in order to verify whether the investments in CITCAP are approved by Investia. Investia’s representative indicates that they never heard of CITCAP. Mr. LeBlanc therefore immediately contacts Investia’s compliance department to inform them of the $200,000 transaction. He is told that investments in CITCAP are not approved and that the matter will be investigated. [ 154 ] On January 30, 2009, Ed LeBlanc receives a call from the lawyer representing CTIC/CITCAP, who wants to know why Mr. Drapeau is being questioned. Mr.

LeBlanc replies that he considers that CITCAP has not complied with its obligations by paying a commission to Mr. Drapeau, and that Patrick Gauthier and CTIC have breached their undertakings. [ 155 ] On February 2, 2009, Ed LeBlanc writes to the Investment Dealers Association of Canada, informing them that Patrick Gauthier has incorporated CITCAP, a corporation whose sole purpose is to raise funds for CTIC. CITCAP pays investors the same rate of interest, that is 1% per month. He informs them of the transaction made through Armel Drapeau and states that, although Mr.

Drapeau may not strictly speaking have breached his undertaking, he has certainly breached its intent. [ 156 ] On the same day, Ed LeBlanc notes in his file that his review has revealed inconsistencies between the information received in May and that received in December 2008. [ 157 ] On February 3, 2009, Mr. LeBlanc writes to Investia, inquiring as to the measures taken to ensure that Mr. Drapeau does not engage in off-the-record trades and as to what Investia intends to do as a result of the new information. He explains the information that Mr. Drapeau wrote in the risk acknowledgment obtained from Mr.

Gillespie. He also makes inquiries of the Investment Dealers Association of Canada with respect to their regulation prohibiting off-the-record transactions. [ 158 ] On the same day, he receives a letter from the lawyer representing CTIC/CITCAP indicating that CTIC is in the process of reimbursing its investors, that CTIC and CITCAP are separate legal entities, that the undertaking that was signed is binding only on CTIC, that since CITCAP has learned that Mr.

Drapeau does not hold the required authorizations, CITCAP has suspended all trades until the situation is cleared up and that CITCAP will, from now on, trade only with authorized agents. He adds that although CTIC may have committed certain irregularities, it has been able, for the past 13 years, to manage a good investment program that has been profitable for the investors and for businesses needing temporary financing, and that no one has ever lost any money.

He states that the SC’s actions could cause unreasonable harm to the company, which is doing everything it can to become compliant. [ 159 ] On February 4, 2009, Mr. LeBlanc writes to the lawyer representing CTIC/CITCAP inquiring as to who received offers of reimbursement from CTIC, which reimbursements were made and who was solicited by CITCAP, and as to whether the solicitation is occurring at the same time as CTIC’s reimbursements.

He wants a response before February 10, 2009. [ 160 ] The next day, the lawyer replies that the reimbursements are being made through meetings with an intermediary, and that the investors can reinvest with CITCAP if they so wish. In Québec, some investors were reimbursed, but the process has “barely” begun in New Brunswick. He confirms that CITCAP’s sole transaction in this province was the one involving Mr. Gillespie. [ 161 ] Still on February 5, 2009, Ed LeBlanc submits his report to Mr. Van der Laan, who is in charge of compliance. Mr.

LeBlanc asks for a formal investigation order, which allows, inter alia , issuing a subpoena to both CTIC and CITCAP, as well as an order against CTIC, CITCAP, Patrick Gauthier, Armel Drapeau and Pierre Émond prohibiting them from trading. He also recommends that statements be obtained from the investors and that the agents Mr. Bossé and Mr. St-Onge be examined. During his testimony, Mr.

LeBlanc indicates that there was nothing that prevented him from examining the 15 investors who had invested less that $50,000 before that date, but that he did not do so because of limited resources, time available and his undertaking towards the AMF. [ 162 ] Mr. LeBlanc’s report sets out the facts. One can see, by comparing the different versions of the contracts used by Mr. Bossé, Mr. Drapeau and Mr. Émond, that the investors’ rights and CTIC/CITCAP’s obligations vary. He explains that, despite his request, the

meeting with Mr. Drapeau has not yet been held, and he states that since October 2007, when CTIC learned that it was being investigated by the AMF, investments totalling $1,330,000 were made in New Brunswick, of which $130,000 after the undertakings given in February 2008. False representations would have been made with respect to the use of the funds, the insurance coverage and the risk. [ 163 ] The SC issues the investigation order on February 10, 2009. [ 164 ] On February 12, 2009, Armel Drapeau sends his responses to the questions asked on January 28.

He states that he is no longer involved with CTIC and that he has not received any money from CTIC or CITCAP since June 2008. He provides a list of 13 persons with whom he discussed CITCAP. He includes the documents received concerning CITCAP, states that he has been prohibited from trading for almost a year and that the offering memorandum was sent, and asks if there is anything missing. [ 165 ] In the documentation provided, one can see that, in November 2008, CTIC owed him close to $80,000 in commissions and that he is concerned about this. Mr.

Gauthier informs him that he cannot pay the commissions until he is authorized to do so by the AMF. [ 166 ] On February 16, Ed LeBlanc writes to the lawyer representing CTIC/CITCAP, as a follow-up to the report of exempt distribution received on January 21 and the letter dated February 2, 2009. He states that he has reviewed these documents and that he is convinced that the offering memorandum contains misrepresentations, or fails to mention a material fact, and that it is in serious violation of National Instrument 45-106.

He insists on obtaining a written undertaking from CITCAP to refrain from trading until the investigation has been completed. A reply is required no later than the next day at 4:30 p.m. [ 167 ] Still on February 16, 2009, Ed LeBlanc receives a reply from Investia concerning the measures taken with respect to Armel Drapeau. The lawyer representing CTIC/CITCAP requests an extension to February 18, 2009, for sending the undertaking to refrain from trading. [ 168 ] On February 18, 2009, Ed LeBlanc writes to the lawyer representing CTIC/CITCAP.

His eight-page letter describes the offences committed by CTIC and the misrepresentations contained in the offering memorandum. [ 169 ] On February 20, 2009, having not yet received CITCAP’s undertaking, Mr. LeBlanc sends an email giving them until noon to do so. The lawyer representing CTIC/CITCAP first responds by an email in which he asks which corrections can be made to the offering memorandum to make it compliant and maintains that CTIC and CITCAP are separate corporations.

He does not understand why an undertaking to refrain from trading is required. [ 170 ] Ed LeBlanc immediately replies that there is no way that investments obtained on the basis of misrepresentations will be allowed to continue and that a mere correction of the offering memorandum is out of the question. If the undertaking is not given voluntarily, proceedings will be commenced and the public will be notified. [ 171 ] The lawyer representing CTIC/CITCAP replies, [TRANSLATION] “formally challenging” the opinion that CITCAP and CTIC are not separate entities.

He submits that the request to refrain from trading is improper and unreasonable, and he threatens legal action for the losses caused by the SC’s drastic measures. [ 172 ] On February 23, the lawyer representing CTIC/CITCAP sends an amended offering memorandum, from which certain representations were merely removed. The next day, Ed LeBlanc writes to tell him that the memorandum will be carefully reviewed, but that a simple preliminary review shows that it is not compliant with the National Instrument.

He asks that an admission, a denial or an explanation with respect to the offences alleged in the letter dated February 18 be sent to him before February 27, 2009. Mr. LeBlanc asks his litigation department to draft subpoenas for Pierre Émond and Armel Drapeau and to draft a motion for interim relief with supporting evidence. [ 173 ] On February 26, 2009, there is a meeting of the SC’s compliance team. The decision is made to file as soon as possible a motion for an order to cease trading in New Brunswick, a ban on using exemptions and an order to obtain CTIC’s and CITCAP’s audited financial statements.

The AMF will be notified once the motion is filed, since they have jurisdiction where the corporations are located. Ed LeBlanc and the SC’s accountant will review the updated financial information and the audited statements, if they are received. The investigation concerning the agents will continue for the purpose of obtaining final orders. Statements from the investors will be

required. [ 174 ] On February 27, 2009, subpoenas are issued requiring Mr. Émond and Mr. Drapeau to appear on March 4, 2009, each one at a different time. [ 175 ] Mr. Drapeau is out of the country, but Pierre Émond’s examination is held on March 4, 2009, in the presence of his lawyer. Mr. Émond is furious that the SC has been preventing him from trading for the past year. When Mr. LeBlanc mentions that the SC does not have jurisdiction in Québec, Mr. Émond thinks that he has found a loophole. He states that he will work in Dégelis, close to the border with New Brunswick.

Once the examination is over, he decides to let off steam: no one has lost any money with CTIC. Rather, it is the SC that has caused them to lose the possibility of obtaining good returns.

He could have made sales of more than 2 million dollars, had it not been for the requirement that he refrain from trading. [ 176 ] On March 5, 2009, a motion against CTIC, CITCAP and Patrick Gauthier is filed with the SC’s secretary requesting an order preventing them from raising exemptions from legal obligations, an order preventing Patrick Gauthier from becoming or acting as an officer or director of any issuer, registrant or mutual fund manager, and an order that CITCAP’s offering memorandum be amended to include CTIC’s audited financial statements. [ 177 ] It can be seen from the motion that the SC considers that CTIC made approximately 109 transactions with 63 residents of New Brunswick for a total of approximately $5,746,000. [ 178 ] CTIC is accused of having added verbal conditions that were not included in the contracts and of having told the investors that all of the funds were being used in factoring activities and were insured, whereas the financial data that was obtained indicates that factoring accounts for only a portion of CTIC's income and that the majority of CTIC’s transactions are therefore uninsured. [ 179 ] The motion claims that Patrick Gauthier and CTIC traded in March 2008, after having undertaken not to do so.

Patrick Gauthier also breached his personal undertaking when he endorsed a loan in favour of CITCAP. Finally, CITCAP paid a commission to Mr. Drapeau, who was not then registered except for the sale of mutual funds, and CITCAP made misrepresentations and is merely a front for CTIC. [ 180 ] The hearing is scheduled for April 15, 2009. [ 181 ] A notice to the public is published. [ 182 ] Ed LeBlanc’s affidavit in support of the motion describes the facts. It can be seen that, starting in September 2007, Mr. LeBlanc regularly spoke to Mr.

Bernier, the AMF’s investigator, with respect to the AMF’s investigation and, each time, Mr. Bernier reiterated his request to refrain from acting in a manner that would jeopardize the AMF’s investigation and was cryptic about what the AMF had discovered and about what it was actually doing in this matter. [ 183 ] On March 6, 2009, the SC notifies the AMF that a motion for interim relief has been filed against CTIC, CITCAP and Patrick Gauthier. The SC states that it hopes that the audited statements will provide answers to certain concerns about CTIC’s business model and explains the nature of these concerns.

Shortly thereafter, Ed LeBlanc sends another email summarizing his examination of Pierre Émond, stating that Mr. Émond said that he has found a loophole and wants to make sales from Dégelis in order to remove himself from the SC’s jurisdiction. A telephone conference between the SC and the AMF is scheduled for March 10, 2009. The AMF indicates that it may appear before the Court of Québec to obtain orders. [ 184 ] On March 12, 2009, Ed LeBlanc writes to the AMF, summarizing the conference and confirming that he will send them a transcript of Mr.

Émond’s examination as soon as he receives it; he also indicates that he would appreciate the AMF’s assistance in obtaining a copy of the insurance contracts covering CTIC, Patrick Gauthier’s responses to the questions that he asked on February 18, 2009, a copy of which is attached, as well as details of the reasons for an advance of 2.9 million dollars from CTIC to Gestion financière des Appalaches. At trial, Mr. LeBlanc explains that, at that time, he knew nothing about Gestion financière des Appalaches, other than an entry mentioning the advance in a financial statement.

[ 185 ] Mr. Bernier has been drafting his investigation report since January 2009. The final version, consisting of 57 pages and 23 schedules, is signed on March 13, 2009, and submitted to the litigation department. [ 186 ] Although the report mentions irregularities, there is no mention of a Ponzi scheme.

The evidence that the AMF has received up to that time indicates that all the investors received their interest payments or were reimbursed at maturity when they chose not to renew their investment. [ 187 ] The report recommends that the evidence that has been gathered be forwarded to the litigation department, so that it can examine the possibility of filing charges or undertaking administrative actions against CTIC, Patrick Gauthier, CITCAP or any other person, including, but not limited to, Benoit Mercier and Réjean Lessard.

The latter are agents in Québec. [ 188 ] On March 13, 2009, while reviewing CTIC’s ledger for 2008, Mr. LeBlanc notices entries that suggest possible investments in CITCAP even before CITCAP filed its offering memorandum, and he asks the AMF if they have more information. [ 189 ] On March 18, 2009, he sends the AMF even more detailed information on what he discovered in CTIC’s ledger and asks the AMF to provide information in its file.

The same day, the AMF issues a subpoena to CTIC’s financial institution for the statements of account from August 1, 2007 onwards. [ 190 ] On March 20, 2009, Armel Drapeau is again examined by Ed LeBlanc. He states that he was fired by Investia and that it is Mr. LeBlanc’s fault. He says that CTIC informed him that his commissions would no longer be paid, even the commissions that were already payable, because of legal

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