On June 26, 2024, the Supreme Court of British Columbia (per Francis J.) granted the United States Securities and Exchange Commission (SEC) a Mareva injunction freezing the assets of Frederick Sharp, described by the Court as the "mastermind" of a complex pump-and-dump securities fraud scheme involving encrypted communications, shell companies, and a "clear pattern of deceptive behaviour."
When a Mareva injunction is granted, the defendant must typically prepare a list of their assets to aid in enforcement of the order. Mr. Sharp had opposed the injunction and sought a stay of proceedings on the basis that compelling him to produce an asset list potentially jeopardized his constitutional rights in both Canada and the United States, due to a technical distinction between his rights against self-incrimination under the Canadian Charter and the United States constitution.
Background
In 2022, the SEC obtained default judgment in the United States against Mr. Sharp and other B.C. residents. Although the SEC obtained a US$29 million disgorgement award against Mr. Sharp, it was only able to secure US$2.2 million through orders of the BC Securities Commission. Shortly after obtaining default judgement in the United States, the SEC commenced enforcement proceedings in Canada and applied for a Mareva injunction over Mr. Sharp's assets. The SEC obtained summary judgment against the defendants in B.C. in 2024, and its application for a Mareva injunction was heard by the BC Supreme Court shortly after.
Mr. Sharp opposed the injunction and argued that the Canadian Charter of Rights and Freedoms mandated a stay of the enforcement proceedings for the duration of Canadian criminal proceedings against him. The SEC argued that sufficient procedural safeguards were in place in Mr. Sharp's criminal proceedings and that the SEC should be granted the injunction because it had only secured US$2.2 million of its US$29 million judgment against Mr. Sharp.
The stay of proceedings
Mr. Sharp's application for a stay of proceedings relied on the distinction between "use immunity" under the Charter, and his Fifth Amendment right to remain silent under the United States constitution. Sections 7 and 13 of the Charter provide immunity to a witness who is compelled to testify but risks self-incrimination: the evidence they are compelled to provide cannot be used in criminal proceedings against them. The Fifth Amendment, on the other hand, provides a right to remain silent, but no immunity if the witness testifies or provides evidence. As a result, if Mr. Sharp were compelled to provide an asset list under the terms of the Mareva injunction in Canada, the asset list could (in theory) be used in criminal proceedings against Mr. Sharp in the United States. On an application for a stay of proceedings where there are both civil and criminal proceedings pending and arising out of the same facts, the principles that apply to a stay application are: there is a presumption against the granting of any stay of civil proceedings; the applicant bears a high burden of establishing exceptional or extraordinary circumstances justifying the order of a stay; and even if there are such exceptional or extraordinary circumstances, the applicant bears the further burden of establishing that there are no means available in the civil proceedings to address or ameliorate the concerns of potential prejudice.1 The applicant must show that there is some specific or particular way they will be prejudiced in their criminal trial. The court will look for exceptional or extraordinary circumstances which show that the rights of the accused cannot adequately be protected by the rules governing civil proceedings or by a remedy in the criminal process.2
Francis J. dismissed Mr. Sharp's application for a stay of proceedings because adequate safeguards were in place to protect Mr. Sharp from self-incrimination. Both sides tendered expert opinion evidence regarding U.S. law, and the disagreement between the experts turned on the application of a decision of the Second Circuit Court of Appeal,3 and its impact on Fifth Amendment rights as they apply to compelled evidence in a foreign proceeding.
Francis J. accepted the evidence of the SEC, and particularly, the lead prosecutor in a case against Mr. Sharp in the U.S. Francis J. found that Mr. Sharp did not meet the applicant's heavy burden, as the evidence established, at highest, that there was a risk that a court in the U.S. would not provide immunity in the circumstances. Further, the lead prosecutor in Mr. Sharp's criminal trial deposed that Mr. Sharp would have protections in place in his trial in the United States, and that authorities in the United States had no interest in viewing the asset list. He also requested that the Mareva injunction include a term prohibiting the SEC from sharing the asset list with law enforcement. In addition, Francis J. found that Mr. Sharp had not shown that no means were available in the civil proceedings to address or mitigate the risk of prejudice in his criminal proceedings.
The Mareva injunction
A Mareva injunction mitigates the risk of harm to a creditor by preventing dissipation or removal of assets pending judgment.4 The court must (1) consider whether there is a strong prima facie case or a good arguable case; and (2) balance the interests of the parties by considering (i) all relevant factors including the existence of exigible assets by the defendant both inside and outside the jurisdiction; and (ii) whether there is evidence of a real risk of disposal or dissipation of those assets that would impede the enforcement of a judgment in the plaintiff's favour.5
Because the SEC had successfully obtained a Mareva injunction against six of Mr. Sharp's co-defendants the year before,6 the issue of a "strong prima facie case" was a foregone conclusion, as was the risk of dissipation of assets (given that Mr. Sharp was the "mastermind" of the scheme, as the Court put it). In this case, Francis J. found that there was a risk of asset dissipation despite the delay in getting the matter to court, the SEC's judgment was under-secured (the SEC had only secured $2.2 million of a $29 million judgment), there was not a sufficient risk to Mr. Sharp's constitutional rights in either jurisdiction and Mr. Sharp's assets were present in B.C. As a result, the Court granted the Mareva injunction and ordered Mr. Sharp to produce an asset list which would be sealed pending final determination of the U.S. criminal proceedings.
Key takeaways
Securities regulators continue to aggressively pursue enforcement proceedings without regard for territorial challenges. This is consistent with the statutory amendments in B.C. to provide greater enforcement powers to securities regulators which we discussed in a previous blog post: "Amendments to British Columbia's Securities Act grant BCSC new powers". Regulators and courts appear to be willing to craft procedural solutions to attempt to mitigate the risks to an accused from concurrent civil and criminal proceedings in different jurisdictions but to allow enforcement to proceed. In this case, an asset list was critical to the usefulness of the Mareva injunction, and the Court crafted terms that could protect against the risk that the asset list could impede the defendant's right to a fair trial in the U.S. criminal proceedings. Sharp illustrates that "some risk" to constitutional rights in another jurisdiction is not synonymous "real and substantial risk" and will not be sufficient to establish the need for a stay of proceedings or prevent the Court from issuing a Mareva injunction.
Footnotes
1. See British Columbia (Director of Civil Forfeiture) v. PacNet Services Ltd., 2023 BCSC 1557, citing Stickney v. Trusz, 1973 CanLII 423 (Ont. S.C.).
2. The Director of Criminal Property and Forfeiture v. Gurniak, 2020 MBCA 96, at paras. 39–41.
3. United States v. Allen, 864 F.3d 63 (2d Cir. 2017).
4. See Tracy v. Instaloans Financial Solutions Centres (B.C.) Ltd., 2007 BCCA 481, at para. 45.
5. Kepis & Pobe Financial Group Inc. v. Timis Corporation, 2018 BCCA 420, at para. 18.
6. See 2023 BCSC 425.
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