An Ontario court has dismissed an appeal against a Capital Markets Tribunal decision that found that contracts for difference (CFDs) counted as securities and that a company that traded CFDs without registration had breached securities rules.
The District Court dismissed an appeal seeking to annul the tribunal’s decision against VRK Forex & Investments Inc. and its founder, Radhakrishna Namburi, in an enforcement case brought by the Ontario Securities Commission (OSC).
They were sanctioned almost $900,000, including $430,192 in restitution, a $250,000 fine and $200,000 costs, and were banned for 10 years by a tribunal after finding that VRK and Namburi had traded without registration, trading CFDs on behalf of investors. Investors lost approximately $1.9 million on the trade.
On appeal, they tried to argue that the tribunal erred in finding that CFDs were securities because they did not meet the criteria for a vehicle to be an “investment contract” established by the Supreme Court of Canada. Instead, they argued that CFD trading was more like a form of online betting.
According to the court, the appellants also argued that a decision of the British Columbia Court of Appeal, which adopted a narrower interpretation of what counts as an investment agreement, should apply. That decision involved a program in which investors purchased precious metals at a markup, which the BC court found did not constitute an investment contract.
However, the District Court found that the BC court’s ruling did not apply to the facts of the VRK case for several reasons.
“In such a case, investors were entitled, for payment, to delivery of precious metals. Investors could sell metals to other entities, including through recognized international markets,” he said. “In this case, investors who purchased CFDs had no right to delivery of any goods – they only had a contract with the CFD provider which they could not assign or sell elsewhere.”
Additionally, in the BC case, investors’ funds were segregated and security contracts purchased with their funds were held in trust, the Ontario court noted.
“The evidence before the Court showed that CFD providers did not segregate investors’ funds or hold in trust any assets purchased with those funds,” the District Court said.
As a result, the Ontario court ruled that the BC decision did not apply to this case.
“The facts established by the Court fully confirm the existence of an investment contract relationship between the investors, the appellants and the trading platforms,” the court said, dismissing the appeal.
The tribunal’s decision deserves deference “in the absence of obvious and overriding error,” he added.
