U.S. investors denied redress from Quebec fund

A couple of investors who were allegedly victimized by a Ponzi scheme in Quebec had their bid for compensation from Quebec’s investor protection fund denied because they lived in the U.S. at the time.

According to a decision of the Quebec Superior Court, the Autorité des marchés financiers (AMF) denied a claim for compensation from the province’s fund that covers losses due to industry misconduct that was brought by a pair of investors. The claim, from Mylène Arnold and James Castonguay, concerned a purchase of financial products from a rep of Cape Cove Financial Management Inc.

In 2021, the court placed the firm — which was registered as a fund dealer, an exempt market dealer and a portfolio manager — into receivership at the request of the AMF, amid concerns about possible misconduct at the firm. 

In 2022, the regulator invited clients of the firm that may have lost money to file claims for compensation from the provincial fund — following a report from the receiver, Raymond Chabot, which alleged that investors were defrauded in a scheme that involved the firm and several related issuers.

According to that report, the receiver found that, “in all likelihood the facts show that a large portion of funds were misappropriated in a ‘Ponzi scheme’.” 

However, the AMF ultimately rejected the claims from Arnold and Castonguay, concluding that the compensation fund didn’t cover investors that bought their investments while living in the U.S.

The regulator noted that the investors moved to the U.S. in 2016, and weren’t residents of Quebec when they purchased their investments in 2018.

As a result, the AMF ruled that the investors weren’t eligible for compensation from the protection fund, as it’s is designed to cover losses from misconduct that occur in the province’s financial industry — and in their case, it found that the rep was not acting within the scope of their registration by selling products to U.S.-based investors.

The investors asked the court to review that ruling, which they argued was unreasonable.

However, on appeal, the court upheld the regulator’s finding, ruling that its reasoning was “understandable,” represents a reasonable exercise of the AMF’s jurisdiction, and that the denial of claims based on the investors’ residence is consistent with the legislation governing the operation of the compensation fund.

“The fund is financed by the industry since its purpose is to compensate victims of fraud in this sector,” the court said in its decision (translated from French). “The legislation does not allow the AMF to exceed its powers and compensate individuals who do not meet the eligibility requirements for claims.”

According to the AMF, the fund has paid out $9.1 million to 414 claimants in this case. 

Fraud charges have also been filed against two men in connection with the scheme, and the AMF is taking regulatory action against third person. None of the allegations have been proven.