SECURITIES REGULATION AND IR

Historically, Canadian securities regulators have encountered great difficulty in proving insider trading and/or tipping violations. However, given a series of recent decisions by certain Canadian securities regulators, this trend may be changing. Several recent high profile cases discussed below demonstrate that regulators are able to successfully prosecute insider trading and/or tipping by relying on circumstantial evidence, provided that the inferences are reasonably and logically drawn from the facts established by the evidence. 

Ontario securities legislation[1] prohibits insider trading, which is the purchase or sale of securities of a reporting issuer by a person in a “special relationship”[2] with the reporting issuer, with knowledge of a “material fact”[3] or “material change”[4] with respect to the reporting issuer that has not been generally disclosed. Such legislation also prohibits tipping, which occurs when a person in a special relationship with a reporting issuer (a tipper) informs another person (a tippee), other than in the necessary course of business, of a material fact or material change with respect to the reporting issuer.

In the first case, In the Matter of Eda Marie Agueci et al. (11 February 2015), a panel of commissioners of the Ontario Securities Commission (the OSC) held that Agueci, an executive assistant working at GMP Securities L.P., improperly tipped certain other persons about various proposed M&A transactions. The OSC panel also concluded that certain of the tippees engaged in insider trading based on the tipped information. The OSC panel’s decision was based in part on the circumstantial evidence surrounding the trades. In its decision, the OSC panel referenced prior decisions in which circumstantial evidence had been relied upon and stated that it agreed that factual inferences may properly be drawn from circumstantial evidence, provided such inferences are reasonably and logically drawn from the facts established by the evidence.

A second recent case before the OSC was In the Matter of Paul Azeff et al. (24 March 2015) involving, among others, Mitchell Finkelstein, a securities law partner at a Toronto law firm. Finkelstein’s firm represented target companies in a series of M&A transactions from 2004-2007. Enforcement staff of the OSC alleged that shortly before public announcements of certain of such transactions, Finkelstein tipped material undisclosed information related to such transactions to Paul Azeff, his longtime friend and an investment advisor with CIBC in Montreal. OSC enforcement staff also alleged that Azeff and three other investment advisors tipped this information and engaged in insider trading.

In the end, the OSC panel held that Finkelstein engaged in tipping in certain of the transactions. In addition, each of the other respondents was held to have contravened securities laws in at least one of the transactions. In making its determination, the OSC panel relied heavily on circumstantial evidence to prove the allegations. The circumstantial evidence included the evidence of communication, the relationship between the parties, the knowledge of the tipper informant, the knowledge of the tippee, the trading by the tippee and/or successive tippees, and the timing and volume of the trades in relation to the initiating conversations and successive tips. 

In its decision, the OSC panel provided a non-exhaustive list of types of circumstantial evidence that can be the indicators of insider trading or tipping. This list includes:

(a)    unusual trading patterns;

(b)    a timely transaction in a stock shortly before a significant public announcement;

(c)    a first time purchase of the stock;

(d)    an abnormal concentration of trading by one brokerage firm or with one or a few brokers; and

(e)    a trade that represents a very significant percentage of a particular portfolio.

The OSC panel noted that all of the respondents in this case were professionals who were aware of the seriousness with which securities regulators view illegal tipping and illegal insider trading and the need for confidentiality of material undisclosed information.

This case also provided valuable guidance with respect to the interpretation of subsection (e) of the meaning of person in a “special relationship”. For indirect tippees to have engaged in insider trading, they would have needed to have known, or ought reasonably to have known, that the material undisclosed information originated from a person in a special relationship with the issuer. The OSC panel set out a list of factors in making this determination:

(a)    What is the relationship between the tipper and tippee? Are they close friends? Do they also have a professional relationship? Does the tippee know of the trading patterns of the tipper, successes and failures?

(b)    What is the professional qualification and standing of the tipper? Is he a lawyer, businessman, accountant, banker, investment adviser? And does the tipper have a position that puts him in a milieu where transactions are discussed?

(c)    What is the professional qualification of the tippee? Is he an investment adviser, investment banker, lawyer, businessman, accountant, etc.? Does his profession or position put him in a position to know he cannot take advantage of confidential information and therefore a higher standard of alertness is expected of him than from a member of the general public?

(d)    How detailed and specific is the material non-public information? Is it general, such as X Co. is ‘in play’? Or is it more detailed in that the material non-public information includes information that a takeover is occurring and/or information about price, structure and timing?

(e)    How long after he receives the material non-public information does he trade? Does a very short period of time give rise to the inference that the material non-public information is more likely to have originated from a knowledgeable person?

(f)     What intermediate steps before trading does the tippee take, if any, to verify the information received? Does the absence of any independent verification suggest a belief on the part of the tippee that the material non-public information originated with a knowledgeable person?

(g)    Has the tippee ever owned the particular stock before?

(h)    Was the trade a significant one given the size of his portfolio?

The list of factors may vary depending on the factual context and the actors involved but it provides a reasonable guideline that can be applied to determine if someone ought reasonably to have known that the material undisclosed information came from a person in a special relationship.

A third recent case involving insider trading and/or tipping before the British Columbia Securities Commission (the BCSC) was In the Matter of Robert Frederick Weicker and Amina Umutoni Weicker (2 April 2015). The BCSC panel considered whether the respondents, Robert Weicker (Robert) and his wife, Amina Weicker (Amina), had engaged in insider trading and/or tipping. The BCSC panel found that there was no direct evidence that Amina traded with knowledge of material undisclosed information. However, the BCSC panel considered the circumstantial evidence surrounding the trades (including unusual trading pattern and unnaturally timely trades) and concluded that either Amina knew of the material undisclosed information, being undisclosed negotiations between two reporting issuers, or someone recommended or encouraged her to purchase securities of one of the reporting issuers involved in the undisclosed negotiations. The BCSC panel further inferred, without any direct evidence, that Amina received the material undisclosed information from Robert and therefore held that Robert engaged in tipping contrary to securities laws.

It remains to be seen whether the recent run of successful prosecutions will continue, as insider trading and tipping remain difficult to prove. At the very least, however, it is now well accepted that the evidentiary onus for insider trading and tipping may be satisfied by inferences made from circumstantial evidence, provided that such inferences are reasonably and logically drawn from the facts established by the evidence.