CFDs are securities, court agrees

An Ontario court dismissed an appeal of a Capital Markets Tribunal decision that found contracts for difference (CFDs) count as securities, and a firm that traded CFDs without registration violated securities rules.

The Divisional Court dismissed the appeal seeking to overturn a tribunal decision that went 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 disgorgement, a $250,000 penalty and costs of $200,000 — and banned for 10 years by the tribunal after it found that VRK and Namburi traded without registration when they traded CFDs on behalf of investors. The investors ended up losing about $1.9 million from the trading.

On appeal, they tried to argue that the tribunal erred when it found that CFDs amounted to securities because they don’t meet the test for a vehicle to be considered an “investment contract” that has been established by the Supreme Court of Canada. Instead, they argued that CFD trading is more like a form of online betting.

According to the court, the appellants also argued that a decision by the British Columbia Court of Appeal that took a narrower interpretation of what counts as an investment contract should apply. That decision involved a scheme that saw investors buying precious metals on margin, which the B.C. court ruled didn’t represent an investment contract.

However, the Divisional Court found that the B.C. court’s ruling doesn’t apply to the facts of the VRK case for several reasons.

“In that case, the investors were entitled, upon payment, to delivery of precious metals. The investors could sell the metals to others including via established international markets,” it said. “Here, the investors who purchased CFDs had no right to delivery of any goods — all they had was an agreement with the CFD provider, which they could not assign or sell elsewhere.”

Additionally, in the B.C. case, the investors’ funds were segregated, and the hedging contracts purchased with their funds were held in trust, the Ontario court noted.

“The evidence tendered before the Tribunal here showed that CFD providers did not segregate investor funds nor hold in trust any assets purchased with those funds,” the Divisional Court said.

As a result, the Ontario court ruled that the decision in B.C. doesn’t apply in this case.

“The facts as found by the Tribunal amply support an investment contract relationship among the investors, the appellants, and the trading platforms,” the court concluded in dismissing the appeal.

The tribunal’s decision is entitled to deference “absent palpable and overriding error,” it added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.