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
("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.