Security Pledgees Need Not Hire Watson

When a bank accepts pledged shares, is it obligated to investigate the origin of the shares and how they came to be in possession of the party pledging them? In i Trade Finance Inc v Bank of Montreal,¹ the Supreme Court of Canada recently had to balance the interests of creditors seeking residual funds after a fraud was unraveled. The Court's conclusion results in a greater onus on the party with closer proximity to the fraudulent party to inspect their transactions and to void transactions as soon as fraud is discovered.

the facts

Mr. A and others were convicted of fraud. Mr. A obtained financing from i Trade Financing Inc. ("i Trade") for one of his companies on the basis of computer services contracts which did not exist (the "i Trade Financing"). Consequently, Mr. A and his spouse obtained credit from the Bank of Montreal ("BMO") by pledging shares which had been purchased using proceeds of the i Trade Financing.²