On August 22, 2012, the Ontario Securities Commission
("OSC") released its sanctions and costs decision in the
matter of Shane Suman ("Suman") and Monie Rahman
You may recall the decision on the merits in this matter was released earlier this year. In that decision, the OSC found that, in 2007, Suman had acted contrary to subsection 76(2) of the Ontario Securities Act (the "Act") by providing his wife, Rahman, with material undisclosed information, which he and Rahman then used to carry out trades and earn significant profits. As a result and in addition to the breach of subsection 76(2) by Suman, the OSC also concluded that both Suman and Rahman had acted contrary to the public interest.
Suman had been employed as an IT expert with a company called MDX Sciex ("MDX"), a reporting issuer under the Act. Based only on circumstantial evidence, the OSC concluded that Suman had gained access to materials which revealed that MDX planned to acquire Molecular Devices Corporation ("Molecular"), a NASDAQ listed company in the United States, which he then disclosed to his wife, and both purchased shares and options in Molecular. Following the public announcement of the acquisition, stock prices in Molecular shot up and Suman and Rahman cashed in on their shares and options for a profit of US$954,938.07.
While this case was determined entirely on circumstantial evidence, the evidence was very strong. Factors supporting the OSC's conclusions included the fact that during the relevant period and prior to purchasing the securities, Suman had access to confidential information relating to the acquisition and specifically, had conducted internet searches for Molecular and "Monument", MDX's code name for the acquisition. In addition, phone records showed that Suman had an unusually long telephone conversation with Rahman the day before they began making significant purchases of Molecular shares and options. Further, the OSC's investigation revealed that Suman had caused files to be permanently deleted from several computers, which made Suman's conduct even more suspicious.
Note that while Suman's "tip" to Rahman involved MDX, a reporting issuer under the Act, and was contrary to subsection 76(2), the actual trading in securities by Suman and Rahman did not technically constitute insider trading contrary to subsection 76(1) because the trading was in Molecular, which was not a reporting issuer under the Act. Nonetheless, the OSC found the impugned trading in Molecular securities to be tantamount to insider trading and therefore "conduct contrary to the public interest".
With respect to the sanctions decision at hand, because Rahman was not found to have breached a specific provision of the Act, no disgorgement or administrative monetary penalty could be awarded against her. Instead the OSC could only place restrictions on her future participation in Ontario's capital markets.
As for Suman, who had breached a specific provision of the Act, OSC staff ("Staff") did not pursue a disgorgement order against him either. The rationale for this was that the disgorgement of the profits had already been ordered in a parallel action brought by the Securities and Exchange Commission ("SEC") in the United States.
While Staff did pursue an administrative monetary penalty against Suman, they again took into account the U.S. judgement, which required Suman to pay a civil penalty of US$2 million and Rahman to pay a civil penalty of US$1 million. As a result, Staff indicated that they were pursuing only a $250,000 administrative penalty against Suman rather than the $1 million that they would have otherwise pursued – of course, $1 million would have been substantially more than the administrative penalties ordered in the precedents cited by the OSC.
In determining an appropriate administrative penalty, the OSC considered the circumstances, including the U.S. judgment, the fact that Suman had committed a serious breach of the Act and that Suman had lied about his conduct and otherwise purposely undermined the investigation. In this light, the OSC agreed that $250,000 was appropriate.
Further, despite the fact that Staff did not pursue an order for disgorgement, the OSC nonetheless ordered that Suman disgorge profits in the amount of US$954,938.07. However, any amounts paid as disgorgement pursuant to the U.S. judgment will be credited against this amount and, so long as the SEC takes reasonable steps to recover, the OSC directed Staff not to pursue the amount
The OSC also imposed a permanent ban on Suman from trading, acting as a director or officer of a reporting issuer and from acquiring any securities. With respect to Rahman, the OSC imposed a five year ban on acquiring or trading in any securities and also imposed a permanent ban on acting as director or officer of a reporting issuer.
Finally, the OSC ordered that Suman and Rahman pay a costs award of $250,000, which Staff had argued was reasonable and fair considering the actual costs in the investigation and 19 days of hearings were over $517,373.48. Accordingly, despite the fact that Rahman was insulated from a monetary penalty, she was still left with a significant financial burden in the costs award.
To summarize, the sanctions imposed were:
This decision is yet another example of the fact that illegal insider trading and tipping remain a top priority for the OSC. Indeed, even in taking notice of substantial penalties in the parallel U.S. action, the OSC made a statement by ensuring that stiff financial penalties were also imposed in Ontario and that the respondents were significantly limited in participating in Ontario's capital markets in the future.
This decision also points to the fact that the OSC is not going to shy away from insider trading in the face of a technicality. While, in this case, there was no breach of subsection 76(1) of the Act, the OSC essentially sanctioned Rahman and Suman for insider trading under its broad public interest power – albeit, with more limited penalties than would have been available in the case of a breach of subsection 76(1).
Further, given the OSC's comfort with circumstantial evidence, those contemplating trading in securities should take all reasonable measures, including consulting any workplace blackout lists, to ensure that unfortunate coincidences are avoided.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.