Recent cases, particularly in the U.S., have highlighted the
challenges regulators face in pursuing individuals for tipping
(disclosing material non-public information to third parties) and
trading on the basis of a tip. Securing a criminal conviction or
even a civil sanction has proved difficult because of evidentiary
difficulties and the stringent test that must be met. Despite these
challenges, the SEC in the United States is continuing to pursue
tippers and tippees, as illustrated by the most recent in a string
of tipping decisions, SEC v. Payton et. al.
While Canadian regulators have achieved some success, south of
the border there has been grave concern about enforcement in the
wake of the Second Circuit's decision in United States v. Newman and Chiasson.
Newman, a criminal case, overturned the conviction of
two portfolio managers.
The Second Circuit held "a tippee's knowledge of
the insider's breach necessarily requires knowledge that the
insider disclosed confidential information in exchange for personal
Proving (1) the tippee knowledge requirement and (2) a personal
benefit to the tipper is exceptionally difficult under
Newman resulted in a significant setback for the SEC,
when a New York Federal Court, applying Newman, vacated four guilty pleas for insider trading this
past January. In that case (Conradt) a lawyer working as
outside counsel on an IBM Corp. deal told a research analyst about
IBM's planned acquisition of SPSS in 2009. Allegedly, the
research analyst bought stock and tipped his roommate (a lawyer and
broker), who in turn, tipped three other brokers. Four members of
the alleged tipping chain pled guilty. Their pleas were vacated
because the judge ruled that based on Newman, there was no
longer a sufficient factual basis for the plea. The charges were
In Payton, two of the four individuals whose guilty
pleas were vacated in Conradt moved to have the SEC's
civil claims against them summarily dismissed as well. The Court denied their motion to dismiss. Although Judge
Rakoff stated he was "up in the air" about whether or how to
apply Newman to this matter, he ultimately drew a
distinction between the criminal standard of willful conduct and
the civil standard, which can include reckless conduct. He
therefore held that the civil claims should not be dismissed on a
summary basis. It remains to be seen whether Newman will
be a significant impediment for the SEC in securing a judgment on
the merits, but the fact that the civil claim survived the
pleadings stage is at least a crumb of comfort for SEC staff.
Calls for Legislative Clarity
Regulators in both Canada and the United States continue to face
difficult evidentiary hurdles in their attempts to prove tipping.
The difference between the criminal and civil standards of proof
impact enforcement strategies, which is perhaps why regulators have
been accused of attempting to regulate through
In Payton, Judge Rakoff commented that the appropriate
body to define and properly deter insider trading is Congress, but
"in the absence of Congressional action, such definition has
been largely left to the courts." Judge Rakoff noted that this
creates difficulties because courts proceed on a case-by-case
basis—a problem that Canadian regulators are familiar with.
Barring legislative clarification on either side of the border,
regulators and market participants alike will hope that cases
currently working their way through the system will provide much
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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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