Canada: Another Tipping And Insider Trading Case Based Exclusively On Circumstantial Evidence

In the recent Weicker¹ decision which followed a contested hearing, the British Columbia Securities Commission (BCSC) accepted Staff's insider tipping and trading allegations against a geologist and his wife based on circumstantial evidence that included the "unnaturally timely" trading by the geologist's wife.

Summary of Facts

BCSC Staff alleged that Robert Weicker, a geologist in a special relationship with Geo Minerals Ltd., informed his wife, Amina Weicker, about Geo's impending takeover by New Gold Inc. before it was generally disclosed and that Ms. Weicker traded on this material non-public information.

At the relevant time, Geo was a junior mining company listed on the TSX Venture Exchange with mining properties in the Blackwater area of British Columbia. Public mining companies with properties in that area were being consolidated.

In June 2011, New Gold confidentially expressed an interest in Geo's properties in the Blackwater area. Geo's CEO and Mr. Weicker, who was Geo's consulting geologist, attended a meeting with New Gold in July, 2011 that went well.

On October 17, 2011, Geo and New Gold announced that they had entered into an agreement whereby New Gold would acquire all outstanding Geo shares.

The timing of Ms. Weicker's purchases

In mid-August, 2011, Mr. Weicker drafted proposed terms for New Gold's acquisition of Geo, which Geo's CEO forwarded to New Gold. Days later, Ms. Weicker opened an online trading account.

On September 11, Mr. Weicker confirmed to Geo's CEO that Geo's significant shareholders were supportive of the existing terms offered by New Gold. The next day, Ms. Weicker purchased Geo shares. At the hearing, Ms. Weicker's September 12 telephone call with the online broker was played which demonstrated that she was extremely anxious to immediately acquire as many Geo shares as she could. She wanted to use 100% of her liquid funds to purchase Geo shares and even asked the representative if she could use a credit card for payment.

Ms. Weicker's next trades occurred in late September, days after New Gold improved its terms. Ms. Weicker continued purchasing Geo shares in October.

Ms. Weicker sold her Geo shares on December 7, 2011 earning a profit of $40,000.

The lack of a credible explanation for the urgent purchases

Although Ms. Weicker testified that she was following various companies in the Blackwater area throughout 2011, she could not credibly explain why she suddenly purchased Geo shares in September, 2011. The Panel found it significant that Geo's shares were trading lower in the Spring and Summer of 2011 than in September, 2011. Ms. Weicker was also unable to credibly explain her frantic need to acquire Geo shares.

Ms. Weicker's decision to hide the online purchases

Mr. and Ms. Weicker initially acquired Geo shares from a private placement in early 2011. When Mr. and Ms. Weicker signed lock up agreements to support New Gold's acquisition of Geo's outstanding shares, Ms. Weicker did not disclose that she had acquired further Geo shares in the secondary market. The Panel inferred that she was deliberately hiding these purchases from public disclosure.

Credibility issues due to inconsistencies

The Panel placed no weight on Ms. Weicker's oral evidence at the hearing because of:

• The inconsistencies between her evidence and Mr. Weicker's evidence. For instance, although Ms. Weicker testified that she was a sophisticated investor in her compelled interview, Mr. Weicker said that she was not. Ms. Weicker could not explain what a short sale was and could not identify the kinds of stocks that she had previously sold or purchased.
• The inconsistencies between her hearing evidence and the evidence at her compelled interview with BCSC Staff. At her compelled interview, Ms. Weicker testified that she did not know that Mr. Weicker was a consultant for Geo. At the hearing, she contradicted this evidence. The Panel found that it was simply not believable that Mr. Weicker's involvement with Geo in 2011 would not have come to Ms. Weicker's notice.

Mr. Weicker's evidence also changed in one material respect between his compelled interview and the hearing. Mr. Weicker was in Africa during Ms. Weicker's initial purchase of Geo shares in September. At his compelled interview, Mr. Weicker stated that he was not in touch with Ms. Weicker when he was in Africa. At the hearing, Mr. Weicker acknowledged that he communicated with Ms. Weicker from the hotel's email and his colleague's cell phone.

The BCSC's Findings

First, the BCSC Panel determined that Ms. Weicker likely traded on material non-public information about Geo's impending acquisition by New Gold. Given the "unnatural timing" of Ms. Weicker's trading, the Panel determined that only two inferences could be drawn: that Ms. Weicker knew about the ongoing negotiations between Geo and New Gold or someone encouraged her to buy Geo shares. The Panel preferred the first inference because there was no evidence that Ms. Weicker was encouraged to purchase Geo shares as a good investment.

Then, the Panel determined that Ms. Weicker's only source of knowledge about the New Gold negotiations was Mr. Weicker. The Panel acknowledged that there was no direct evidence that Mr. Weicker had tipped Ms. Weicker about the negotiations. However, absent any other explanation, the Panel determined that Mr. Weicker had tipped Ms. Weicker about the negotiations.

Staff had also alleged that Mr. Weicker also engaged in insider trading because the funds Ms. Weicker used to purchase Geo shares came from joint accounts and the proceeds of sale of the Geo shares from Ms. Weicker's online account were to a joint account. The Panel found that this, in and of itself, was not sufficient to find that Mr. Weicker engaged in any transaction with respect to Geo shares during the relevant period. There was no evidence to indicate that Mr. Weicker purchased any shares of Geo, provided any instructions to Ms. Weicker or her broker to purchase Geo shares, or in any other way directly engaged in a transaction in respect of Geo shares during the relevant period.

Takeaways

1. The BCSC's Weicker decision, along with the OSC's recent Azeffm decision, may be viewed as lowering Staff's evidentiary onus to prove insider trading and tipping allegations. The Azeff Panel placed two limits on the circumstantial evidence it was prepared to rely on. First, the evidence must be "firmly established". Second, inferences drawn from circumstantial evidence need to flow "naturally and logically". These limits were implicitly acknowledged by the Weicker Panel, which noted that (1) in drawing inferences, it could not "assume a fact that has not been proven", and (2) inferences drawn should be "reasonable based on the facts that have been proven".²
2. The Weicker Panel recognized that it is inappropriate to draw prejudicial inferences against a respondent from allegations of prior misconduct unrelated to the conduct at issue. The Panel refused to draw inferences from allegations of prior misconduct by Mr. Weicker, only some of which related to securities regulation. The Panel found that it was "inappropriate" to include allegations unrelated to the conduct at issue as its "only purpose" was to "prejudicially sway" the Panel.³

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Footnotes

1 2015 BCSECCOM 19, http://www.bcsc.bc.ca/Enforcement/Decisions/PDF/2015_BCSECCOM_19/ ("Weicker").

2 Weicker, para. 80.

3 Weicker, paras. 4-5.

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