The Ontario Securities Commission (the "OSC") in Re Azeff found Mitchell Finkelstein, a corporate lawyer at
a prominent Bay Street law firm, as well as four investment
advisors at large financial institutions, guilty of insider tipping
and/or trading. In doing so, the OSC sent a clear message to Bay
Street: it will not tolerate misconduct by individuals who, in the
normal course of their work, have access to material non-public
information about publically traded companies and who try to take
advantage of that information.
In Azeff, the OSC held that Finkelstein obtained
material non-public information from his law firm regarding six
mergers or acquisitions of publically traded companies between 2004
and 2007. Regarding three of those transactions, Finkelstein
disclosed or "tipped" the material non-public information
to his old friend Paul Azeff, an investment advisor, who in turn
tipped a colleague, Korin Bobrow, contrary to section 76(2) of the
Ontario Securities Act (the "Act"). Azeff and
Bobrow proceeded to trade on the material non-public information,
contrary to section 76(1) of the Act, and also tipped some clients.
The OSC also found that the other two respondents obtained material
non-public information through a friend of Bobrow's and
proceeded to trade on that information on one occasion, contrary to
section 76(1) of the Act.
The OSC found that the respondents violated section 76 of the
Act despite evidentiary shortcomings in the evidence against them.
First, OSC Staff alleged that large cash deposits made by
Finkelstein to his bank account were payments for the tips and
provided a motive for his conduct. However, OSC Staff did not
cross-examine Finkelstein's evidence that he regularly kept
large sums of cash around his house as savings, a practice he
learned from his father. The failure to cross-examine Finkelstein
meant that an evidentiary principle applied to prevent OSC Staff
from challenging Finkelstein's evidence on that point. As a
result, OSC Staff had no evidence of motive for the tipping. The
OSC nevertheless held that the presence or absence of motive was
not determinative as it was not an element of the offence in
section 76(1), and concluded that the evidence on balance favoured
a finding that Finkelstein did tip Azeff, even without evidence of
Second, OSC Staff relied on circumstantial evidence to infer
that insider tipping and trading occurred. Specifically, Staff
relied on Finkelstein accessing documents containing material
non-public information on his law firm's document management
system, followed by phone calls to Azeff, and trades made by Azeff
and/or Bobrow shortly thereafter, as circumstantial evidence from
which an inference of insider tipping and trading could be drawn.
Although securities regulators across Canada have held in the past
that circumstantial evidence can be used to infer knowledge of
material non-public information, the OSC has in recent cases been
weary of its use, and OSC Staff has been unsuccessful in mounting
prosecutions based on circumstantial evidence.
In Azeff, however, the OSC noted the inherent
difficulties in obtaining direct evidence of insider tipping and
trading because, usually, the only individuals with direct
knowledge of the prohibited conduct are the wrongdoers themselves.
The OSC concluded that the circumstantial evidence in this case was
"firmly established" and the inferences to be made flowed
"naturally and logically" from the established facts. As
a result, the OSC was satisfied that it could, and it did, rely
upon circumstantial evidence to find that the respondents committed
insider tipping and trading.
One of the purposes of the Act is to foster fair and efficient
capital markets and confidence in capital markets. The OSC's
willingness to apply relaxed evidentiary standards in the
Azeff case sends a strong message to lawyers, investment
advisors, and others who have regular access to material non-public
information: the integrity of the capital markets will be protected
and misuse of that material non-public information will not be
tolerated. The Azeff case may be the beginning of a trend
toward more successful prosecutions at the OSC based on the
evidentiary thresholds articulated in Azeff, particularly
in the case of professionals who regularly have access to inside
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
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