Canada: Alberta Securities Commission Establishes High Threshold For Due Diligence In Insider Trading Settlement

Last Updated: October 9 2013
Article by Keenan Woods

On July 31st, 2013, Anthony Lambert, formerly the President and Chief Executive Officer of Daylight Energy Ltd. (now "Sinopec Daylight Energy") reached a settlement agreement with the Alberta Securities Commission wherein he agreed to pay the Commission $229,000, to refrain from becoming a director or officer of a reporting issuer for a period of two years, and to refrain from trading securities for a period of two years.

Lambert's settlement agreement brought to an end the investigation into 60,000 Daylight Energy shares that he purchased on August 8th, 2011. The investigation and subsequent charges related to the following timeline of events:

  • August 4, 2011: Lambert purchased securities of Daylight with the understanding that Daylight shares were undervalued – and stated his intention to buy future shares should the under-valuation persist
  • August 5, 2011: representatives from Canaccord Financial forwarded Lambert both an unsolicited letter and an unsolicited email from SIPC, showing interest in a "major" investment transaction between Daylight and SIPC
  • That same day:
    • Lambert enquired of Daylight's General Counsel whether the letter and email were "material information", thereby precluding Lambert from future trading – and Lambert was told that they were immaterial
    • Daylight's General Counsel then forwarded the letter and email from Sinopec to the Chair of Daylight's Governance Committee – who also expressed the view that the information was immaterial
    • Daylight's General Counsel forwarded the letter and email to Daylight's external legal counsel – who also expressed the view that the information was immaterial
  • August 8, 2011: Lambert purchased 60,000 Daylight shares (eventually realizing a profit of $129,000 on those shares)
    • That same day, Lambert, along with Daylight's General Counsel, sent a confidentiality agreement along with a letter to SIPC stating that Daylight was interested in exploring opportunities between the two companies
  • Between that date and December 23, 2011:
    • Daylight imposed a trading blackout on Daylight's Board (in September)
    • Daylight and SIPC issued a news release announcing the acquisition (in October)
    • The deal was finalized (in December)

Regardless of Lambert's attempts to ensure he was not offside in following through on his previously-stated intention to purchase shares of a company he believed to be under-valued – first, by consulting his company's General Counsel; second, by consulting the chair of his company's Governance Committee; and third, by consulting external legal counsel - Anthony Lambert was investigated and subsequently charged by the ASC with insider trading and tipping. The charges were settled on July 31st, 2013.

The ASC's published settlement agreement acknowledged that Daylight had previously received numerous letters expressing interest like the letter from SIPC, none of which progressed beyond preliminary stages. The settlement also acknowledged that the letter from SIPC was unsolicited, and contained no reference to any terms or prices.

The settlement finally acknowledged that Daylight was not "in play", in the sense of not having retained financial advisors to seek out potential purchasers. The settlement contains the following passage, highlighting Lambert's defences to an insider trading accusation:

Notwithstanding that Lambert's purchase of Daylight's securities[...] was not motivated by the August 5 [letter and email from Canaccord], that he did not believe himself to be in possession of material undisclosed information [and that] he made enquiries in that regard as aforesaid, he acknowledges that he made an error in judgment in purchasing Daylight securities

The charges against Lambert (and the subsequent settlement) create an unclear atmosphere for securities trading for directors and officers in Alberta. Though Lambert created an arguable due diligence defence through his actions prior to purchasing the 60,000 shares in Daylight, he was still charged by the ASC. This creates a difficult situation for directors and officers of successful corporations: if your company is doing well enough to receive unsolicited letters of interest from potential investors, you cannot purchase shares in your company. If your company is not successful enough to receive unsolicited letters of interest, you are free to purchase shares in your unsuccessful company.

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.

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