In Qin v. Ontario Securities Commission, 2021 ONCA 165 ("Qin"), the Ontario Court of Appeal considered whether a prior judicial finding that a freeze order under s. 126(5.1) of the Ontario Securities Act was "reasonable and expedient" in the circumstances precluded a party from arguing in a malicious prosecution claim that the Ontario Securities Commission did not have "reasonable and probable cause" to commence proceedings under s. 127 of the Act.
The Court of Appeal emphasized that the two questions are qualitatively different, and that the applicable standard for the first question - i.e. whether allegations underlying a freeze order issued by the Commission raise a "serious issue to be tried" - is an easier standard to satisfy. This distinction has important implications for Commission proceedings and freeze orders issued under the Securities Act. Notably, as was the case in Qin, the Court of Appeal's distinction means that the adjudication of a motion to continue a freeze order issued by the Commission will not, on its own, estop parties targeted by that freeze order from later asserting a claim of malicious prosecution against the Commission.
Facts
Mr. Qin and various companies he controlled were involved in the development and management of solar energy projects in Ontario and elsewhere. Mr. Qin attempted to raise capital for his projects, especially in China, using an immigration program sponsored by the Ontario government, which allowed persons who made substantial investments in Ontario businesses to apply for permanent residence status in Canada. Mr. Qin raised several million dollars. No prospectus was filed in connection with the capital raise and neither Mr. Qin nor any of the companies were registered to sell securities.
Procedural History
In February 2015, the Commission issued a temporary order freezing the assets of Mr. Qin and the companies under s. 126 of the Securities Act. In March 2015, the Commission commenced proceedings under s. 127 of the Securities Act based on allegations that Mr. Qin and the companies had contravened the Securities Act by trading securities without proper registration and distributing securities without filing a prospectus. In May 2015, Patillo J. of the Ontario Superior Court allowed a motion by the Commission continue the freeze order against Mr. Qin and the companies indefinitely.1
In May 2016, a panel of the Commission dismissed the allegations against Mr. Qin and the companies, finding that they were not required to register under the Securities Act and were exempt from filing a prospectus under the private issuer exemption. In May 2018, Mr. Qin and one of the companies sued the Commission and three of its employee investigators for malicious prosecution, alleging that they had commenced the proceedings and issued the freeze order without reasonable and probable cause.
In response to the malicious prosecution claim, the Commission and its employees brought a motion in the Ontario Superior Court to strike the lawsuit on the grounds that Mr. Qin's claim raised the same question that had been addressed by Patillo J. in the May 2015 decision to continue the freeze order - namely, whether there was enough evidence or reasonable and probable cause for the freeze order to have been issued and the proceeding to have been investigated. The motion to strike was heard in February 2020, and in April 2020, Dow J. of the Superior Court allowed the motion and struck Mr. Qin's statement of claim on the grounds of issue estoppel and abuse of process. Mr. Qin appealed.
The Court of Appeal's Decision
The Court of Appeal allowed the appeal, holding that Dow J. erred in his issue estoppel analysis.2 Issue estoppel is a judicial doctrine that protects against the abuse of the court's process by preventing an unsuccessful party from re-litigating a material fact or issue previously and finally decided in proceedings involving the same parties. Issue estoppel is a flexible doctrine that extends to findings that are "necessarily bound up" in the findings made in a prior proceeding.3
Writing for the Court of Appeal, Doherty J.A. held that Mr. Qin's appeal turned on whether a determination that the Commission had reasonable and probable cause to commence the proceedings (a central question in the malicious prosecution claim) was "necessarily bound up" in Pattillo J.'s May 2015 finding on the motion to continue that the Commission's allegations raised "a serious issue to be tried". Justice Doherty held that it was not. The two questions were qualitatively different.
On one hand, Patillo J. had applied a three-part test to determine whether continuing a freeze order would be reasonable and expedient in the circumstances in accordance with the requirements of s. 126 of the Securities Act. In particular, Patillo J. asked whether:
- there was a serious issue to be tried in respect of the alleged breaches of the Securities Act or other securities laws in another jurisdiction;
- there was a basis to suspect, suggest or prove a connection between the frozen assets and the conduct at issue; and
- the freeze order was necessary for the due administration of securities laws or the regulation of capital markets, in Ontario or elsewhere.4
Justice Patillo had expressly described the serious issue to be tried requirement as a "lesser standard than the requirement to establish a strong prima facie case or even a prima facie case."5 Further, Patillo J. had indicated that he was not weighing the exculpatory material before the court on the motion, reflecting the preliminary nature of his assessment of the allegations on the order to continue.
In contrast, the reasonable and probable cause standard for a malicious prosecution claim "invites scrutiny of the record to determine the likelihood or probability, at the time the proceedings were commenced, that the [Commission] could ultimately establish the allegations."6
Accordingly, Doherty J.A. found that although Patillo J.'s decision may have evidentiary value when it comes to deciding whether Mr. Qin and the companies ultimately can prove that the Commission and its investigators did not have reasonable and probable cause to commence the proceedings. However, when "viewed in their proper context, it is clear the presence of reasonable and probable cause does not flow from a finding of a "serious issue to be tried" and cannot be described as "necessarily bound up" in that finding."7
As a result of the difference between these two questions, the Court of Appeal found that nothing decided by Pattillo J. would preclude the appellants from arguing the Commission did not have reasonable and probable grounds to believe the appellants had breached the Securities Act, either when they initiated the freeze order, or when they commenced proceedings, and hence, that issue estoppel did not apply.
Conclusion
The Commission has broad discretion to issue freeze orders pursuant to section 126 of the Securities Act. However, this discretion is limited by the statutory check under section 126(5) of the Securities Act, which requires that the freeze order be continued by a subsequent order of the Superior Court.
The Court of Appeal's decision in Qin confirms that an order to continue a freeze order under section 126(5) is based on a relatively low threshold and does not involve "an assessment of the ultimate merits" of the case.8 One of the implications of this distinction is that a party subjected to a freeze order by the Commission will not be estopped from bringing a claim of malicious prosecution simply because the freeze order passed the judicial check in s. 126 of the Securities Act on a motion to continue.
Footnotes
1. OSC v Future Solar, 2015 ONSC 2334.
2. The Court of Appeal held that although Dow J. referred to abuse of process, on the facts of the case, there was no basis apart from issue estoppel to argue the malicious prosecution claim constitutes an impermissible re-litigation of decided facts.
3. Qin v. Ontario Securities Commission, 2021 ONCA 165 at para 18.
4. OSC v Future Solar, 2015 ONSC 2334 at para 31.
5. OSC v Future Solar, 2015 ONSC 2334 at para 28.
6. Qin v. Ontario Securities Commission, 2021 ONCA 165 at para 22.
7. Qin v. Ontario Securities Commission, 2021 ONCA 165 at para 22.
8. Qin v. Ontario Securities Commission, 2021 ONCA 165 at para 24.
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