An insider trading decision of the Alberta Securities Commission (the “Commission”) released on April 10, 2013, provides a thoughtful and practical approach by a securities commission to its assessment of what constitutes a “material fact”.
In Re Stan et al., 2013 ABASC 148 (“Re Stan”), the Staff of the Alberta Securities Commission (“Staff”) alleged that five insiders of a publically traded coal mining and production company, Grande Cache, had engaged in illegal insider trading by trading in securities of that company while in possession of material facts that had not been generally disclosed. It was also alleged that one of those insiders, Robert Stan, had provided his wife with this information and encouraged her to trade in Grande Cache’s securities.
By way of overview, on May 26, 2008, approximately two months into Grande Cache’s first quarter, the respondents became aware of results showing that the company’s sales and coal production were well below Q1 forecasts, in part due to certain issues encountered at one of its mining operations.
On May 27, 2008, Grande Cache issued a press release announcing the company’s fourth quarter results from the previous year and repeating the company’s earlier stated expectation that it would achieve its forecasts for the upcoming year. In a Management Discussion and Analysis attached to this release, Grande Cache did disclose that production in Q1 was “below plan” due to temporary issues, but that the company believed these problems would be resolved through improved sales and production over the year. However, the company did not quantify the sum by which its production and sales were falling short in Q1.
Between late May and July, 2008, each of the respondents proceeded to trade in securities of Grande Cache, a time period during which the company’s share price was particularly strong due to record highs for metallurgical coal prices.
On August 14, 2008, Grande Cache announced its Q1 financial results, which revealed that the company’s coal production was 46% below forecasts and sales were 40% below forecasts. However, the company still expressed confidence that it would achieve its annual forecasts.
Staff alleged that the details of the low Q1 production and sales were “material facts” that had not been generally disclosed to the market until August 14, 2008. A “material fact” is defined under the Alberta Securities Act as a fact that “would reasonably be expected to have a significant effect on the market price or value of” particular securities. In support of its contention, Staff pointed to the following:
- Grande Cache’s share prices dropped after the August 14, 2008, announcement of Q1 results;
- Market Analysts viewed the Q1 results as material; and
- Grande Cache failed to ultimately meet its annual performance forecasts, supporting that the low Q1 results were important.
However, the Commission rejected Staff’s argument that the Q1 results were material facts, noting that hindsight cannot be applied to determine materiality: “A materiality assessment, given the definition of "material fact" in the [Alberta Securities] Act, is directed not at what eventually transpired but rather at what would reasonably have been expected to transpire.”
As directed by precedents and securities policies, the Commission opted to take a holistic view of the surrounding circumstances and factors at play during the relevant time. In this respect, the evidence established that Grande Cache operated on an annual basis rather than quarterly, with coal sales being governed by annual contracts which fixed prices and volumes for the entire “coal year”, which corresponded with Grande Cache’s financial year.
The Commission concluded that the understanding in the coal industry at the particular time was that sales missed in one quarter would be delayed, not lost. Further, historically Grande Cache’s quarterly production varied significantly, and it was concluded that market participants would appreciate this fact in considering quarterly results.
Moreover, the accepted evidence was that, at the relevant time, a resolution of issues being experienced by Grande Cache in Q1 was anticipated and it was expected that Grande Cache would rebound through the year to meet its annual forecasts. The fact that the company eventually did not achieve forecasts for the year was largely due to the 2008 global financial crisis, which was not anticipated and cannot be applied as a factor with hindsight.
Based on the totality of the circumstances, the Commission was not satisfied that there was clear, convincing and cogent evidence that a significant effect on the Grande Cache share price would have been the likely consequence of Grande Cache quantifying its lower production and sales volumes to the market.
The Re Stan decision stands as an important precedent of a securities commission understanding and appreciating how the totality of circumstances of a particular industry and/or company may impact upon materiality. Further, the rejection of a hindsight approach reaffirms the onus on Staff to put forward clear, convincing and cogent evidence of materiality rather than simply drawing conclusions from results.
Notwithstanding their decision, however, the message delivered by the Commission is that it continues to be important that insiders exercise significant care and scrutiny when trading in securities of companies to which they have an insider relationship; particularly so given that the difficult exercise in determining materiality will not always produce a favourable result.
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