IN THE SUPREME COURT OF BRITISH COLUMBIA
Citation:
GeneMax Corp. v.
Global Securities Corp. et al.,
2004 BCSC 162
Date: 20040206
Docket: S024914
Registry: Vancouver
Between:
GeneMax Corp.
Plaintiff
And
Global Securities Corporation and
Union Securities Ltd., Arthur Murray Smolensky,
Carol Ann Zosiak, Daniel Caamano,
Blair Alan Bigwood, John Cameron Gardner,
Karl Harry Landra, Peter James Irvine,
John or Jane Doe 1-10
Defendants
Before: The Honourable Mr. Justice Pitfield
Reasons for Judgment
Counsel for the Plaintiff:
Scarlett R. McGladery
Counsel for the Defendants:
Henning W. Wiebach
Gavin C. Crickmore
Date and Place of Hearing:
January 29, 2004
Vancouver, B.C.
[1] The defendants, Global Securities Corporation and Union Securities Ltd., apply for leave to set down a point of law for hearing and disposition before trial. Rule 34(1) provides as follows:
34(1) A point of law arising from the pleadings may, by consent of the parties or by order of the court, be set down by praecipe for hearing and disposed of any time before the trial.
[2] GeneMax Corporation is a public company engaged in medical research. Its shares are traded on the Over the Counter Bulletin Board in the United States. Global and Union are dealers in securities. The substance of the GeneMax claim is that Global, Union, and others, agreed to enter into an "unlawful trading scheme" whereby the defendants established, maintained, facilitated, and/or participated in the sale of "phantom shares", a course of action that they knew or ought to have known would cause, and continues to cause, damage to GeneMax. The statement of claim defines the phantom shares as shares in excess of the actual number of issued free trading shares of GeneMax at the time of the sales in question.
[3] In sum, GeneMax says that Global and Union engaged in the short selling of its shares when there was no prospect of delivering the shares that had been sold because insufficient free-trading shares were available to cover the short positions. The parties refer to the defendants’ course of conduct as “naked short selling” in contradistinction to “covered short selling”.
[4] GeneMax pleads the following in paragraphs 23 and 28 of the statement of claim in respect of the defendants’ actions:
23. The actions of the Global defendants, the Union defendants and the Others and their participation in the Unlawful Trading Scheme are in breach of and/or contravened the spirit and intent of, among other things, sections 56 and 57 of the British Columbia Securities Act, RSBC 1996, c. 418, the compliance requirements for member firms of the Investment Dealer [sic] Association of Canada (“IDA”) when dealing with foreign jurisdictions, IDA Bylaw 29, IDA Regulation 800, IDA Regulation 1300, sections 380 and 382 of the Criminal Code of Canada, Rules 2110, 2120, 3370, 11320, 11810 of the NASD, provisions dealing with Codes of Conduct, section 10B) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Exchange Act Rule 10b-5.
...
28. The Global Defendants and the Union Defendants knew or ought to have known that GeneMax would be and continues to be closely and directly affected by their conduct and the Global Defendants and Union Defendants ought reasonably to have contemplated that their negligence and/or breach of fiduciary duty would likely and has, in fact, caused and continues to cause damage to GeneMax. …
[5] Global and Union say that the conduct of the action would be assisted, and disposition perhaps promoted, if the following question were considered and answered:
Is there any requirement on a short seller of shares or on a broker representing a short seller of shares, whether under ss. 56 and 57 of the [British Columbia Securities Act], the [Investment Dealers Association] Bylaws and Regulations, ss. 380 and 382 of the Criminal Code, the [North American Securities Dealers] Rules, s. 10(b) or under Rule 10b-5 of the [Securities Exchange Act], to make an affirmative determination of control or capacity to borrow an equivalent number of shares, or otherwise provide for the delivery of shares, prior to executing a short sale transaction?
[6] The substance of the defendants’ claim is that they are under no "affirmative determination" obligation and none of the referenced legislative, regulatory or industry rules makes naked short selling unlawful. In the result, the defendants say the action must fail because GeneMax casts its claim in terms of an unlawful trading scheme.
[7] Before a point of law is separated from the trial, the court must consider whether there will be a saving of expense to the parties or a saving of time of the court itself, or whether the question of law ought properly to be determined in the main proceedings: see Hunt v. T&N, plc, et al. (1991), 77 D.L.R. (4th) 375. In considering the matter, the court should have regard for the factors described by MacFarlane J. in Alcan Smelters and Chemicals Ltd. v. C.A.S.A.W., Local 1 (1977), 3 B.C.L.R. 163 (B.C.S.C.) at p. 165, in the following terms:
...The following principles must be observed in considering an application under R. 34:
1. The point of law to be decided must be raised and clearly defined in the pleadings: see Dutton-Williams Bros. Ltd. v. Inland Natural Gas Co. (1960), 31 W.W.R. 575 (B.C.C.A.);
2. The rule is appropriate only to cases where, assuming allegations in a pleading of an opposite party are true, a question arises as to whether such allegations raise and support a claim or a defence in law: see Reichl v. Rutherford-McRae Ltd. (1964), 47 W.W.R. 227 at 231 (B.C.C.A.);
3. The facts relating to the point of law must not be in dispute and the point of law must be capable of being resolved without hearing evidence: see Dutton-Williams Bros. Ltd. v. Inland Natural Gas Co., supra; Banks Industrial Supply Ltd. v. Ritchie Bros. Auctioneers Ltd., [1972] 1 W.W.R. 231 (B.C.C.A.); and Armstrong v. Levine (1964), 47 W.W.R. 635 at 636-37 (B.C.);
4. Whether a point of law ought to be decided before the trial of the action is discretionary, and it must appear that the determination of the question will be decisive of the litigation or a substantial issue raised in it: see Banks Industrial Supply Ltd. v. Ritchie Bros. Auctioneers Ltd., supra;
5. In deciding whether the question is one which ought to be determined before trial the court will consider whether the effect of such a decision will immeasurably shorten the trial, or result in a substantial saving of costs; see Dutton-Williams Bros. Ltd. v. Inland Natural Gas Co. (1959), 30 W.W.R. 421 at 425-26, reversed 31 W.W.R. 575 (B.C.C.A.). ...
[8] In the context of the Alcan factors, the following is relevant. The statement of claim does not make the question of affirmative determination the pivotal issue. Rather, it alleges that the conduct of Global, Union and other defendants was undertaken in a manner that caused harm to GeneMax for which the defendants are liable. That harm may be the result of unlawful activity, or lawful activity undertaken for a purpose and in a manner than supports a cause of action.
[9] With respect, the defendants’ characterization of the GeneMax claim focuses too much on the label used in paragraph 23 of the statement of claim and overlooks the substance of the claim, as evidenced in paragraph 28 and other parts of the statement of claim. That substance is that the defendants did not determine whether shares they, or clients, were selling were available for delivery, they knew or ought to have known such shares were not available for delivery, and, in proceeding as they did, they knew or ought to have known that loss and damage would be caused to GeneMax.
[10] The issue for determination in the action is whether that which Global, Union and other defendants did is actionable from GeneMax’s perspective. A determination that the manner in which Global and Union conducted business was lawful or unlawful may not be determinative of the issue. It is not certain, therefore, that the absence of an affirmative determination obligation provides a defence in law.
[11] The fact that something done by Global or Union may be proved to have been unlawful in the sense that it was against the requirements of a statute, regulation, or governance rule may not resolve the claim in favour of the plaintiff any more than a finding that what was done did not offend any such requirement would necessarily result in dismissal of the GeneMax action. Moreover, whether the securities transactions will be found to have been lawful or unlawful will depend upon the evidence adduced. The trial judge will have to assess and weigh all of the evidence in order to make the necessary findings of fact.
[12] The situation being as I have described it, an answer to the question framed by the defendants, if an answer could be provided, would not shorten the trial. All of the evidence the plaintiff may wish to adduce in relation to the defendants’ conduct will have to be received, considered and weighed in the course of the trial in order to permit a finding with respect to liability. There will be no saving of trial time or cost.
[13] In my opinion it is not appropriate to submit the question as framed by Global and Union to the court for determination in advance of trial. The application for leave is dismissed. Unless otherwise ordered by the trial judge, costs of this application will be costs in the cause.
“I.H. Pitfield, J.”
The Honourable Mr. Justice I.H. Pitfield |
