Canada: The Ontario Securities Commission’s Message to Bay Street: No Nonsense

The Ontario Securities Commission (the "OSC") in Re Azeff[1] 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 motive.

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 information.


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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Brian N. Radnoff
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