) ) VRK FOREX & INVESTMENTS INC. v. RADHAKRISHNA, 2023 ONSC 3895

CITATION : VRK Forex & Investments Inc. v. Ontario Securities Commission, 2023 ONSC 3895 DIVISIONAL COURT FILE NO.: 619/22 DATE: 20230629 ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT Sachs, Coats & Leiper JJ.

BETWEEN: ) ) VRK FOREX & INVESTMENTS INC. and RADHAKRISHNA NAMBURI ) ) Bruce O’Toole , for the Appellant, Radhakrishna Namburi ) ) ) Appellants ) ) – and – ) ) ONTARIO SECURITIES COMMISSION ) ) Erin Hoult and Vincent Amartey , for the Respondent ) ) ) Respondent ) ) ) ) ) ) HEARD at Toronto: June 29, 2023 LEIPER J. (Orally) Introduction [ 1 ] This is an appeal from a decision of the Capital Markets Tribunal, which found that the Appellants’ business trading in “Contracts for Difference” (“CFD”) amounted to trading and advising in unregistered securities, contrary to the Securities Act, R.S.O. 1990, c.

S.5 . [ 2 ] A CFD is a financial instrument offered through online trading platforms, “over the counter” rather than on an exchange basis, in which investors purchase interests in assets without taking ownership or delivery of the underlying asset, which may be commodities, currency or equities. [ 3 ] The investors here, on the Appellants’ recommendations, traded on two on-line platforms, Oanda (Canada) Corporation ULC (“Oanda”) and Vantage Global Prime Pty LLP (“Vantage”), who acted as principals and counterparties to the CFD trades.

These trades were often highly leveraged, meaning that the potential for losses (or profits) was amplified relative to the amounts invested. Most of these transactions traded at 50:1 leverage. The Appellants had trading authority, monitored the accounts and received portions of the profits associated with the accounts on these platforms. [ 4 ] During the relevant period, the investors in the CFDs lost approximately $1.9M. Following its findings on the merits, the Tribunal imposed sanctions.

These included orders imposing restrictions on the Appellants, an order to disgorge $430,192.50 in profits, an administrative penalty of $250,000, and costs of $200,000. [ 5 ] For the reasons below, I would dismiss the appeal. The Tribunal applied the test for investment contract to the facts. It made no palpable or overriding error in its apprehension of the facts. Issue [ 6 ] The sole issue on appeal is whether the Tribunal erred in finding that the CFDs were securities because they are “investment contracts.” Standard of Review

[7] On appeal, the question of the application of legal principle to the facts of the case to determine whether the CFDs weresecurities is one of mixed fact and law. Accordingly, it is subject to a standard of determining whether the Tribunal fell into palpable andoverriding error: Housen v. Nikolaisen 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 8; Vavilov 2019 SCC 65 at para. 37. Analysis [8] The Appellants promoted CFD trading as an investment opportunity with potential for significant returns via various means,including a storefront sign, online, at investment conferences, and in one-on-one meetings.

Some materials circulated by the Appellantsdiscussed the potential for investors to earn daily returns of 1% to 5%. Mr. Namburi told investors he had expertise and experience in,among other things, CFD trading. [9] Mr. Namburi had most investors sign an agreement in which they agreed to: (

a) open and fund online accounts with the CFD Providers for investment in CFDs on margin; (

b) give the Appellants access to the investors’ accounts for the purposes of trading C FDs and monitoring CFD holdings in theiraccounts; and ` (

c) pay the Appellants 50% of the monthly net realized profits for all CFD trading in their accounts. [10] The Appellants traded in CFDs on the investors’ accounts and provided advice to the investors on CFD trading. As a result ofthese trades, the Appellants earned approximately $400,000 in profits as part of the profit-sharing agreement. Collectively the investorslost approximately $1.9 M. [11] The Appellants argue that in this case, the Tribunal erred when it found there were investment contracts because the thirdcomponent of the four-part test has not been established.

The test is found in the leading case of Pacific Coast Coin Exchange v. OntarioSecurities Commission, (SCC), [1978] 2 SCR 112. [12] An investment contract will be found where there is: (

a) an investment of money; (

b) with a view to a profit; (

c) in a common enterprise where the success or failure of the enterprise is interwoven with, and dependent on, the efforts of personsother than the investors; and (

d) the efforts made by those others significantly affect the success or failure of the enterprise. [13] A “common enterprise” will arise where “the success or failure of the enterprise is interwoven with, and dependent on, theefforts of persons other than the investors;” The Appellants argue that because the CFD providers are counterparties and do not share inthe profits or losses, that the “common enterprise” component of the investment contract test is not met. [14] Before the Tribunal, the Appellants submitted that this arrangement was not an investment contract, but was more like a formof betting, such as that offered on gaming websites. [15] The Tribunal rejected this argument.

It appropriately adopted a flexible approach to whether the investment opportunity wasan investment contract, in the context of the investor protection purpose of the Act. The Tribunal rejected a formulaic or rigid approach.It found that there were multiple elements which created a common enterprise with the CFD provider on the facts including the followingelements: 1.

Investor reliance on the CFD provider: a. for access to CFDs with underlying exposure to assets such as equities, commodities, or currencies; b. for the performance of the CFDs as there was no market for the CFDs and the CFDs were not transferable (i.e., once a CFD positionwas opened, the investor was restricted to closing the position with the CFD provider); c. to provide access to, and operate, the online proprietary trading platform; and d. to hedge risk, including credit risk, performance risk and misappropriation risk appropriately so that the CFD provider could satisfy itspayment and performance obligations. 2.

The existence of the key attributes of the common enterprise to buy or sell CFDs, including by providing investors: a. CFDs, and exposure to markets and instruments that may not otherwise be directly available, or available in a cost-effective manner,and acting as counterparty; b. access to leverage their investment using margin; and c. an online platform for the execution of purchases and sales of CFDs. [16] Thus, the Tribunal found that the investors were dependent on the CFD providers to provide the opportunities to trade in theseover-the-counter, often highly-leveraged, investments.

The Tribunal’s conclusion was well-supported on the facts.

[17] In doing so, the Tribunal properly bore in mind that the Act is remedial legislation, with one of its primary purposes theprotection of investors: Pacific Coast Coin at para. 127.

The Act defines “security” via a non-exhaustive list of 16 clauses which areexpressed in general terms, thus “evidencing an intention for breadth.” The Court of Appeal has described the scheme of the Act and thisbreadth of scope in this way: …the Act defines key terms very broadly, and thereby captures a great many instruments and activities in its wide regulatory scope, andthen provides for many exemptions from the Act’s requirements … to tailor this regulatory scope to its purposes. Ontario Securities Commission v.

Tiffin, 2020 ONCA 217 at para. 28. [18] The Appellants rely on a 1985 decision of the British Columbia Court of Appeal in support of a narrower

interpretation of theattributes of what constitutes an investment contract: British Columbia (Superintendent of Brokers) v. Lazerman Invt. Metals Int. Inc., (BCCA). In that decision, the court upheld a finding by the Corporate and Financial Services Commission thatarrangements through which customers could acquire the right to delivery of precious metals, including on margin, did not give rise to acommon enterprise. [19] Lazerman involved hedged liability on the part of investors who sold the right to purchase precious metals on margin. Asnoted in R. v.

Sisto Finance NV, [1994] OJ No. 1184 at paras. 212-213, the facts in Lazerman were similar enough to the elements inPacific Coast Coin which amounted to an investment contract that amounted to a “distinction without a difference.” The legal analysis inLazerman amounted to a more rigid application of the test, which was not the approach taken by the Supreme Court of Canada in PacificCoast Coin.

For that reason, it has not been followed in Ontario, either in Sisto Finance by the Ontario Court of Justice, or by theTribunal in Universal Settlements International Inc., 2006 ONSC 18 at paras. 8, 10, 117-121. [20] The Appellants did not raise the Lazerman decision with the Tribunal. [21] The facts in Lazerman are not those in the case at bar. In that case, the investors were entitled, upon payment, to delivery ofprecious metals. The investors could sell the metals to others including via established international markets.

Here, the investors whopurchased CFDs had no right to delivery of any goods – all they had was an agreement with the CFD provider, which they could notassign or sell elsewhere. These investors were only entitled to payment in prescribed circumstances. [22] Second, in Lazerman, the investors’ funds were segregated, and the hedging contracts purchased with their funds were held intrust.

The evidence tendered before the Tribunal here showed that CFD providers did not segregate investor funds nor hold in trust anyassets purchased with those funds. [23] For these reasons, I would decline to find that Lazerman represents the correct approach to the question of assessinginvestment contracts. It is also distinguishable on its facts from the facts here.

I conclude that the Tribunal did not err in law nor inapplying the law to the facts by failing to adopt the approach used by the BCCA in Lazerman. [24] In concluding that the third branch of the Pacific Coast Coin test is met when the scheme exists “for the benefit of thesupplier of capital (the investor) and of those who solicit the capital (the promoter)” the Tribunal did not fall into palpable and overridingerror. [25] The facts as found by the Tribunal amply support an investment contract relationship among the investors, the Appellants, andthe trading platforms.

The focus is on the relationship, and a common enterprise will be found to exist where “the investor’s role islimited to the advancement of money, managerial control over the success of the enterprise is that of the promoter; therein lies thecommunity”: See Pacific Coast Coin at para. 129. [26] The Tribunal’s findings are amply supported by the record. They are entitled to deference on appeal absent palpable andoverriding error. Such error has not been made out by the Appellants. Conclusion [27] I would dismiss the appeal.

Costs [28] The Commission seeks costs and those costs have been agreed by the parties at $12,500. In accordance with that agreement,costs are ordered payable to the Commission by the Appellants in the amount of $12,500. ___________________________ Leiper J. I agree

___________________________ Sachs J. I agree ___________________________ Coats J. Date of Oral Reasons for Judgment: June 29, 2023 Date of Written Release: July 4, 2023 CITATION : VRK Forex & Investments Inc. v. Ontario Securities Commission, 2023 ONSC 3895 DIVISIONAL COURT FILE NO.: 619/22 DATE: 20230629 ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT Sachs, Coats & Leiper JJ. BETWEEN: VRK FOREX & INVESTMENTS INC. and RADHAKRISHNA NAMBURI Appellants – and – ONTARIO SECURITIES COMMISSION Respondent ORAL REASONS FOR JUDGMENT LEIPER J.

Date of Oral Reasons for Judgment: June 29, 2023 Date of Written Release: July 4, 2023