On July 21, the Ontario Securities Commission (OSC) approved a settlement agreement (Settlement) with Coinsquare Ltd. (Coinsquare) and several of its current and former executives (collectively, the Individual Respondents) concerning inflated trading volumes, misleading statements, and reprisals against an internal whistleblower. We think that the Settlement and related decision approving the settlement (Decision) are interesting for several reasons:

  • It’s the first time the OSC has settled a case involving market manipulation on a crypto asset trading platform. According to the Settlement, Coinsquare substantially inflated the trading volume on its platform between July 2018 and December 2019.
  • Senior executives directed, implemented and/or acquiesced in the misconduct. Coinsquare’s then chief executive officer (CEO) Cole Diamond directed Virgile Rostand (Coinsquare’s founder, president and chief technology officer) to develop and implement the algorithm that inflated the reported trading volumes.
  • Coinsquare misrepresented its trading volume through its website and application programming interface (API), as well as in statements to existing and future customers even as people questioned the reasons for the sudden increase in trading volume beginning in July 2018.
  • The illegal activity occurred while Coinsquare was engaging with regulators to register Coinsquare Capital Markets Ltd. (CCML) as an investment dealer and operator of an alternative trading system (ATS). Coinsquare representatives did not disclose the wash trading activity to OSC staff and instead, asserted that the company was taking steps to prevent market manipulation.
  • Breach of prohibition on reprisals against whistleblowers. This is the first finding (albeit in a settlement agreement) by the OSC that a firm breached the prohibition in the Ontario Securities Act (Act) on taking reprisals against an internal whistleblower. According to the Settlement, an employee who played a key role on the automated trading strategies team repeatedly escalated concerns about the wash trades to senior management, including Messrs. Diamond and Rostand. He was told that the issue wasn’t open for discussion and that continuing to raise such concerns would impact his employment. He took a stress leave in October 2019 and was formally terminated in early December 2019. The Settlement also includes a finding that Coinsquare’s CEO breached the Act by authorizing, permitting or acquiescing in Coinsquare’s breach of the whistleblower provision.
  • Coinsquare’s Chief Compliance Officer (CCO) acted contrary to the public interest. Felix Mazer held the title of CCO from May 2018 until he resigned in June 2020. Although he wasn’t acting in a registered capacity in his role as the CCO of Coinsquare, he was held out as the CCO within Coinsquare and to the general public. According to the Decision, although he became aware of the wash trading activity in March 2019, he failed to take steps that a reasonable CCO would have taken in the circumstances, contrary to the public interest.
  • Enforcement orders designed to quash and deter misconduct, not innovation. The Settlement provides for a package of administrative penalties and contributions to the OSC’s investigation costs, while also outlining a path forward for Coinsquare to tap into the Individual Respondents’ expertise and for CCML to become a registrant in the future. The Settlement provides for $2.25 million in penalties and costs, with the lion’s share ($2 million) payable by Messrs. Diamond and Rostand. The Individual Respondents are also subject to bans on serving as officers or directors of issuers or registrants for varying periods, but the Settlement makes it clear that the boards of Coinsquare and CCML can request information from them, provided that the independent directors determine that the information is needed to fulfil their duties and is in the best interests of the relevant company, and provided that appropriate records of the information requested and received are maintained. The Settlement also includes undertakings by Coinsquare and CCML relating to their firms’ governance, whistleblower, compliance, and internal control functions and provides for CCML to resubmit its application for registration as an investment dealer and ATS.

The Settlement and Decision, read together with guidance from the Canadian Securities Administrators (CSA), serve as a reminder for participants in Canada’s crypto asset industry that, if securities laws apply to their activity, they are expected to meet the same high standards of honesty and responsible conduct that apply in traditional capital markets. With our extensive experience assisting firms with registration and ongoing regulatory compliance matters and our knowledge of the crypto asset space, AUM Law can help you get it right the first time and stay on course as your business develops. Please don’t hesitate to contact us for a free consultation.

July 31, 2020