A recent decision [PDF] from the Law Society of Alberta (LSA) Hearing Committee highlights the particular responsibility of professionals not to allow themselves to be caught up in the misconduct of others. The LSA considered the case of a lawyer in Alberta who admitted to
- failing to have taken proper or sufficient steps to identify if his client was in breach of Alberta securities law
- issuing accounts to his client from his professional corporation that improperly identified legal services, having failed to distinguish between legal fees and disbursements
The LSA accepted the parties’ joint submission on sanctions and issued a one-month suspension of the respondent, plus $52,302.83 in costs.
The LSA’s disciplinary proceeding arose from the same factual matrix that led to an Alberta Securities Commission (ASC) settlement agreement in 2019. In that case, the respondent admitted to having breached section 93(a)(ii) of the Securities Act (Alberta),[1] by engaging or participating in an act, practice or course of conduct relating to a reporting issuer that he ought to have known resulted in or contributed to an artificial price for those securities. The respondent agreed to pay the ASC a monetary settlement of $70,000 plus $20,000 in costs, and to be subject to an eight-year market participation ban.
The LSA’s decision and the related ASC settlement highlights the importance of lawyers taking sufficient steps to identify “red flags” raised by their clients’ conduct. Significantly, where lawyers act as a “dupe” for an unscrupulous client in the securities law context, their conduct may not only lead to the applicable securities regulator taking enforcement action against them, but may also lead to sanctions issued against them due to their failure to meet professional obligations under rules governing their professional conduct.
Background
The respondent admitted to having assisted his acquaintance by incorporating an offshore international business company (IBC) in Belize for his acquaintance’s personal use. The Respondent’s acquaintance held shares in Bluforest Inc., a Nevada-based corporation, whose securities were quoted for trading on the U.S. OTC Markets Group Inc. quotation board (OTC). Bluforest’s current status with the Nevada Secretary of State is listed as “Revoked”.
On July 31, 2012, Bluforest became a reporting issuer in Alberta.
During 2013, the respondent’s acquaintance organized and directed a promotional campaign intended to artificially inflate the price and volume of Bluforest securities on the OTC (i.e., a “pump and dump” scheme). The respondent was not directly aware of the promotional campaign, but acknowledged before the ASC that he failed to take proper steps to identify if his acquaintance was running a pump-and-dump scheme.
In mid-2013, the respondent was aware that Bluforest shares were trading in large volumes on the OTC. In July 2013, an ASC Staff investigator sent an email to the respondent, in his role as then-counsel to his acquaintance, expressing concern about a recent marked increase in unsolicited spam about Bluforest.
In August 2013, at his acquaintance’s direction, the respondent completed and signed a Client Identity Verification Form as beneficial owner of an account for Lightship at Unicorn International Securities LLC of Belize (Unicorn). The respondent knew that Unicorn was controlled and operated by his acquaintance.
Based on these underlying facts, the respondent admitted to having engaged or participated in an act, practice or course of conduct relating to a reporting issuer that he ought to have known resulted in or contributed to an artificial price for those securities.
Key takeaways
Previous cases show that while provincial law societies have oversight over “rogue” lawyers who advise on securities-related matters found to be improper, securities regulators may also assert jurisdiction to hold such participants accountable for non-compliant activities.[2] In this case, the respondent’s sanctions before the ASC and the LSA arose not from his intentional misconduct, but rather from his failure to identify — and to act as an effective gatekeeper to prevent — the misconduct of someone else. It highlights the unique role and responsibility that professionals have in the securities market, and in many other contexts as well.
[1] R.S.A. 2000, c. S-4, as amended.
[2] Daley (Re), 2021 ONSEC 12; Volk (Re), 2018 ONSEC 31; Grmovsek (Re), Order dated October 26, 2009 [PDF]; Belteco Holdings Inc. et al., Re (1998), 21 OSCB 6399, aff’d 2003 CanLII 2451 (ONSC (Div. Ct.)).
