The OSC alleged that Finkelstein, a partner at a prominent Bay
Street law firm, "sought out and acquired material,
non-public information concerning pending corporate
transactions", handled by his firm. It is alleged that
he then communicated this message to his friend Paul Azeff, who in
turn, improperly tipped other respondents, one of whom, it is
alleged, then passed information to another accused, who is alleged
to have informed yet another accused.
OSC Staff were tasked with proving not only the information
received was material and non-public, but also that those who had
or received the information, knew or reasonably ought to have known
that the person who gave them the information was a person with a
special relationship to the issuer. Establishing an alleged
'tippee's' level of knowledge regarding the source of
the information he receives, is an onerous burden, especially where
purported tip recipients are several people within a chain of
persons, and therefore removed from the source of the information.
The task in Finkelstein is made more difficult by the fact
that allegations relate to alleged trading activity that took place
7 – 10 years ago.
The US Court of Appeals' December 10, 2014 decision in United States v. Newman
("Newman"), vacating the convictions of two
former hedge fund managers, on insider trading charges, highlights
the difficulties associated with proving improper
As in Finkelstein, the facts in Newman
involved an alleged tip that made its way from insiders to two
hedge fund managers through the intervention of 3 or 4 other
intermediaries. The American Government chose to prosecute only the
hedge fund managers because, "as sophisticated traders, they
must have known that information was disclosed by insiders in
breach of a fiduciary duty, and not for any legitimate corporate
This case will be examined in greater detail in a future post,
but for now it is notable that, the trial decision in
Newman was overturned by the appeal court for two main
there was insufficient evidence that the alleged insiders
received a personal benefit; and,
there was no evidence that the defendants knew they were
trading on information disclosed by insiders in violation of their
Unlike Finkelstein, an administrative case that is
likely to apply civil standards of proof, Newman was a
criminal case wherein the standard of proof was explicitly stated
as 'beyond a reasonable doubt'. The Appeal
Court's discussion of the requisite mens rea is
particularly instructive: "under the common law, mens
rea, which requires that the defendant know the facts that
make his conduct illegal, is a necessary element in every
crime." The onus is on the Government to establish that
the tippee knew of the tipper's breach, that is, he knew the
information was confidential and divulged for personal benefit. As
has been mentioned in an
earlier post, the degree of proof required in Canadian
regulatory matters of this kind is the subject of the Walton v Alberta
(Securities Commission) decision, leave to appeal
having been sought to the Supreme Court of Canada.
As a matter of prosecutorial strategy, in contrast to the
focused prosecution in Newman, the OSC in
Finkelstein pursued a more factually comprehensive
approach, naming each party to the chain. While this perhaps tells
a fuller narrative, it also required the OSC to launch an ever more
complicated fact pattern to prove its allegations.
The Alberta Court of Appeal's decision in
Walton v Alberta (Securities Commission), and the Ontario
Securities Commission's decision in
Baffinland show that proving insider trading allegations is a
real challenge for Canadian securities regulators. How cases
are framed factually by securities regulators may also be a factor
in their ease of prosecution and outcome. With this in mind,
watchful eyes await the decision in this case.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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