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Securities - 'Stock Secured Financings'. Valentine v. Ontario Securities Commission
In Valentine v. Ontario Securities Commission (Ont Div Ct, 2025) the Ontario Divisional Court dismissed an appeal, this from a Capital Markets Tribunal decision that found that the appellant had breached a 2004-issued 15-year ban "by the Ontario Securities Commission (the “Commission”) from participating in Ontario’s capital markets".
Here the court describes 'stock secured financings', here as a form of security trading:[4] The Stock Secured Financings all shared the same general structure: the borrower would borrow money from the lender; as security the borrower would pledge publicly listed Hong Kong securities; and the loans were satisfied by the sale of the pledged shares. The loans were “non-recourse” loans, which meant that the borrowers were free to walk away from the loans whenever they wanted. The lenders sold the pledged shares before default in the case of some Stock Secured Financings and after default in others. In 11 of the 16 Stock Secured Financings at issue, the borrower was noted in default before the borrower ever made a single payment on the loan.
[5] Mr. Valentine’s role in the Stock Secured Financings included sourcing the financing for the transactions and analyzing the value of the pledged equities, which the Tribunal found Mr. Valentine knew the lenders intended to sell. Mr. Valentine’s considerable compensation for his role was based on the profits realized by the lenders when they sold the pledged securities.
[6] The Tribunal found that when the lenders sold the pledged securities to third parties these were “trades”. It found that Mr. Valentine committed acts in furtherance of those trades. Thus, his participation in the Stock Secured Financings constituted a breach of the Trading Ban.
[7] Mr. Valentine appeals this finding and the penalty that flowed from it, arguing in his written material that the Tribunal erred in holding that the realization by the lenders on the securities pledged as collateral for a good faith loan were “trades” within the meaning of the Securities Act, R.S.O. 1990, c. S.5 (the “Act”).
[8] The definition of “trades” in the Act contains a “carve-out” for “a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith.” However, during oral argument, Mr. Valentine’s counsel conceded that when the lenders sold the pledged securities to third parties, these acts were independent trades that were not part of the initial good faith loans and were not covered by the “carve-out”. Since all of the Stock Secured Financings involved sales by the lender of the pledged securities to third parties, this concession is essentially a concession that the Tribunal was correct when it found that the Stock Secured Financings were “trades” with the meaning of the Act.
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