Canada: Circumstantial Evidence And Insider Trading


It is trite law that evidence will not be inadmissible simply because it is circumstantial, rather than direct. However, the appropriate use and weight to be given to such evidence varies with the context of each case and the area of law in which it arises. In the case of the regulatory and quasi-criminal offences of insider trading and tipping, particular care must be taken to avoid a mechanistic application of certain factors, recently developed by the provincial securities regulators (including the Ontario Securities Commission (the "OSC" or the "Commission")) to create a compelling inference of the offences.

Insider trading and tipping are offences under provincial securities legislation and may be prosecuted criminally as a provincial offence. Direct proof of insider trading or tipping often does not exist and instead triers of fact are asked to consider circumstantial evidence. Reliance upon relevant circumstantial evidence may be appropriate where its value is carefully considered and proper weight assigned to it by the trier of fact. In assessing weight, the trier of fact must consider the strength of the inferences that can be drawn from the evidence itself. Such inferences are central to the application of circumstantial evidence to the legal and factual questions put to the trier fact. The methodologies relied upon by the trier of fact, whether administrative or judicial, to draw such inferences must be scrutinized to ensure that they do not themselves alter the requisite standards that must be met by various parties or convert an otherwise holistic assessment of the evidence into a mechanistic calculation.

The provincial securities commissions in Ontario and Alberta, particularly, have developed a set of circumstantial factors to which they will look to create a "compelling inference" of the elements of insider trading and tipping. The Alberta Court of Appeal has recently weighed in to challenge what some have criticized as this formulaic approach to a serious offence. In Holtby, Re,1 the Court of Appeal overturned the Alberta Securities Commission's finding that the respondent had engaged in insider trading using the five-factor approach. The court held that the evidence must be weighed in context and that drawing reasonable inferences has its limits, no matter the offence or difficulty in proving its elements. A similar approach was also recently adopted by the OSC in Re Azeff, where the commission relied upon "firmly established" circumstantial evidence to support several findings of tipping and insider trading.2

Holtby and Azeff demonstrate that reliance upon circumstantial evidence may be appropriate, but only to the extent that the evidence as a whole satisfies the requisite standard of proof and establishes the statutory requirements of the offence. A predetermined set of factors may lead the trier of fact away from an analysis of the evidence as a whole and into a checklist which might in one case not otherwise satisfy the burden of proof or make it unduly onerous in another. It is in this context that we consider the application of circumstantial evidence by provincial securities commissions before and after the decision in Re Suman,3 as well as the assessment of such evidence in criminal law, and fraudulent conveyances and civil conspiracy cases. While the Suman factors may serve as a useful guide in insider trading and tipping cases, a strict application risks altering the legal test set in the provincial securities legislation and bringing the OSC's decisions out of step with the treatment of circumstantial evidence by courts and other provincial securities commissions.

1. The Elements of the Offence and the Use of Circumstantial Evidence

In order to establish the offence of insider trading under s. 76(1) of the OSA, OSC Staff must prove the following elements:

  1. at the material time, the respondent(s) was in a "special relationship" with a reporting issuer;
  2. the respondent(s) purchased or sold securities of that reporting issuer;
  3. the trade(s) was made with knowledge of a material fact or material change; and
  4. the material information had not been generally disclosed to the public.4

Similarly, for the offence of tipping, the following elements must be established by OSC Staff:

  1. at the material time, the respondent(s) was in a "special relationship" with a reporting issuer;
  2. the respondent(s) informed another person or company of a material fact or material change with respect to that reporting issuer;
  3. this disclosure was not made in the necessary course of business; and
  4. the material information had not been generally disclosed to the public.5

In administrative proceedings, the standard of proof is on a balance of probabilities, that is, the trier of fact must decide whether there was "clear, convincing and cogent" evidence that the alleged events were more likely than not to have occurred.6

In many cases involving securities law, circumstantial evidence is the only sort of evidence available, particularly where knowledge or intent forms part of the offence or cause of action. This evidence is not to be excluded or disregarded by reason of being circumstantial. It must be treated as any other kind of evidence. The weight accorded to it depends upon the strength of the inference that can be drawn from it.7 If it is relevant, it will be received and considered. Moreover, in some cases, relevant circumstantial evidence will be decisive.8

With respect to drawing proper inferences, only those which can be reasonably and logically drawn from a fact or group of facts established by the evidence may be relied upon. A trier of fact must be careful to distinguish between an inference and speculation. There can be no inference without objective facts from which to infer the fact or event that the party seeks to establish. The trier of fact is not permitted to assume facts that have not been proven. Moreover, the facts must be sufficiently linked to the inferences sought to be drawn.9 Neither mere possibility nor suspicion is sufficient to satisfy the required standard of proof; nor can an inference be made where it is objectively unreasonable or illogical.10

The party relying upon the circumstantial evidence is not required to prove that the inferences they seek to draw are the only inferences that can be drawn from the evidence.11 As discussed in further detail below, this approach is different from the use of circumstantial evidence in criminal cases, where the existence of an alternative explanation sufficient to create a reasonable doubt renders the circumstantial evidence incapable of supporting a conviction.12 However, in the civil context, where the circumstantial evidence is consistent with either an improper intent or an innocent intent, it would be insufficient to conclude that two alternative inferences are equally plausible and then to infer the improper intent. The evidence would have to clearly and cogently support the inference of improper intent.13

Therefore, in assessing circumstantial evidence put forward by OSC Staff, as well as the inferences sought to be drawn, the Commission must focus on the standard of proof borne by OSC Staff. It is not for the respondent to provide clear, cogent and convincing evidence of an innocent explanation for circumstantial facts tendered by OSC Staff in support of the offences of insider trading and tipping. Rather, that standard must be met by OSC Staff alone.

2. The Suman Factors

Suman arose out of allegations that Shane Suman, who worked in the IT Department of MDS Sciex, communicated an undisclosed material fact to his wife, Monie Rahman. The material fact was that MDSInc. was proposing to acquire Molecular Devices Corporation ("Molecular"), a public company listed on NASDAQ in the United States. Staff alleged that during the relevant time, Mr. Suman and Ms. Rahman purchased securities of Molecular with knowledge of the proposed acquisition. These trades were conducted several days before the proposed acquisition was publically announced.14 The key issues in dispute were whether Mr. Suman learned of the proposed acquisition through his IT role at MDS Sciex, whether he informed Ms. Rahman of it, and whether Mr. Suman and Ms. Rahman purchased the Molecular securities with knowledge of the proposed acquisition. Notably, Molecular was not a "reporting issuer" as defined by the Act. Staff therefore alleged that the trading was contrary to the public interest.15

In its analysis, the OSC outlined the appropriate standard of proof in administrative proceedings, as well as the proper use of circumstantial evidence.16 Relying upon a decision of the U.S. Court of Appeal, it then went on to consider the following six factors, which it found created a "compelling inference" of knowledge of material non-public information:

  1. the tippee's access to the information;
  2. the relationship between the tipper and the tippee;
  3. the timing of the contact between the tipper and the tippee;
  4. the timing of the trades;
  5. the pattern of the trades, including their uncharacteristic size; and
  6. any attempts to conceal the trades or the relationship between the tipper and the tippee.17

Based on these factors, the OSC found that Mr. Suman had the ability and opportunity to acquire knowledge of the proposed acquisition though his IT role atMDSSciex. In particular, it found that in his IT role, Mr. Suman had the ability and opportunity to view emails relating to the proposed acquisition.18 There was, however, no direct evidence that Mr. Suman actually viewed the impugned emails.19

In particular, the circumstantial evidence put forward by OSC Staff included:

  1. Mr. Suman's ability and opportunity to view emails relating to the proposed acquisition;20
  2. the timing and length of a phone call between Mr. Suman and Ms. Rahman, as well as the respondents' evidence that they decided to purchase Molecular securities during this phone call;21
  3. internet searches conducted by Mr. Suman at material times of terms, such as "monument inc.",22 and websites relating to the insider trading charges laid against Martha Stewart;23
  4. the timing of the respondents' purchase of Molecular securities, the new analytic approach the respondents' claimed to apply to the trade, and the "unprecedented" size of the respondents' profit;24
  5. a large number of calendar fragments on Mr. Suman's computer relating to the proposed acquisition;25
  6. Mr. Suman's denial during his first interview with OSC Staff that he had purchased Molecular securities;26 and
  7. Mr. Suman's installation and use of a computer program which permanently wipes data and information from a computer after being warned by OSC Staff to not delete data on his office computer.27

On this basis, the OSC found that Mr. Suman contravened s. 76(2) of the Act by informing Ms. Rahman of the proposed acquisition, and that the respondents' purchase of the Molecular securities was contrary to the public interest.28 In particular, it found that Mr. Suman had the ability and opportunity to acquire knowledge of the proposed acquisition though his IT role at MDS Sciex. It further found that the respondents' well-timed, highly uncharacteristic, risky and highly profitable purchases of the Molecular securities constituted a fundamental shift in the nature of the respondents' trading that was not satisfactorily explained.29 In reaching this conclusion, the OSC emphasized the respondents' pattern of trading, the timing of their trades, the timing of Mr. Suman's communication with Ms. Rahman, and Mr. Suman's attempt to conceal the impugned trades.30

The OSC's decision in Suman was upheld by the Divisional Court in a brief oral judgment delivered by Justice Harvison Young. On appeal, Mr. Suman and Ms. Rahman argued that it was unreasonable for the Commission to conclude that Mr. Suman knew of the proposed acquisition in the absence of a finding of fact that he had actually viewed the emails disclosing the fact of the proposed acquisition, as opposed to merely having had the opportunity to view these emails.31 Relying upon the OSC's findings relating to the timing of the appellants' trades, their pattern of trading, the timing of their communications, and Mr. Suman's attempt to conceal the trades, the court held that the inference that Mr. Suman knew of the proposed acquisition was reasonable.

While the court did not expand further on its reason for rejecting the appellants' position, this decision appears to stand in contrast to that of the Alberta Court of Appeal32 in which the court overturned several findings of insider trading and tipping against multiple individuals, in part, on the basis that a generalized finding of opportunity was not in itself sufficient to support a legal inference that an offence had been committed under the Alberta Securities Act.

It is this principle that the OSC has more recently applied in Azeff, which involved allegations of tipping against a corporate lawyer, Mitchell Finkelstein. On the issue of Mr. Finkelstein's knowledge of certain impugned transactions, the Commission declined to accept OSC Staff's position that knowledge of Mr. Finkelstein's law firm should be imputed to Mr. Finkelstein, despite Mr. Finklestein's opportunity to view such information. The Commission held that this finding would require it to rely upon improper speculation.33

To read this article in full, please click here.

Originally published in Advocates' Quarterly by Canada Law Book a Division of Thomson Reuters Canada Limited.


1. Holtby, Re, 2013 ABASC 45 (Alta. Securities Comm.).

2. Azeff, Re, released March 24, 2015 (Ont. Sec. Comm), at paras. 48 and 343, online: Note that the Chair of the Panel, Alan Lenczner, is counsel at Lenczner Slaght LLP. The authors of this paper were not involved in any way in the proceeding or decision making in Azeff.

3. 2012 LNONOSC 176, 35 O.S.C.B. 2809, 2012 CarswellOnt 2256 at para. 31 (Ont. Sec. Comm.), affirmed 2013 ONSC 3192, 229 A.C.W.S. (3d) 592, 2013 CarswellOnt 8465 (Ont. Div. Ct.).

4. R.S.O. 1990, c. S.5, s. 76(1).

5. Ibid., s. 76(2). Note that, insider trading and tipping are also offences under s. 382.1 of the Criminal Code, R.S.C., 1985, c. C-46.

6. Suman, supra note 3, at para. 31 (Ont. Sec. Comm.); Azeff, supra note 2, at para. 42.

7. Sidney N. Lederman, Alan W. Bryant and Michelle K. Fuerst, The Law of Evidence in Canada, 4th ed. (Markham: LexisNexis Canada Inc., 2014), s. 2.86.

8. Kusumoto, Re, 2007 ABASC 40, 35 B.L.R. (4th) 297, 2007 CarswellAlta 1306 (Alta. Securities Comm.) at para. 74; Azeff, supra note 2, at paras. 48-49.

9. Suman, supra note 3 at paras. 293-300; Azeff, ibid. at para. 48.

10. Rankin, Re (2011), 39 Admin. L.R. (5th) 77, 2011 CarswellOnt 12322, 34 O.S.C.B. 11797 (Ont. Sec. Comm.), affirmed 2013 ONSC 112, 46 Admin. L.R. (5th) 159, (sub nom. Rankin v. Ontario Securities Commission) 113 O.R. (3d) 481 (Ont. Div. Ct.).

11. Suman, supra note 3 at para. 308.

12. R. v. Andrews (June 14, 1991), Paris Prov. J., [1991] O.J. No. 2708 (Ont. C.J.) at paras. 15-17.

13. Podorieszach, Re, 2004 LNABASC 151 (Alta. Sec. Comm.) at para. 78.

14. Suman, supra, note 3 at para. 2.

15. Ibid. at paras. 3-4.

16. Ibid. at paras. 288-300.

17. Ibid. at para. 302.

18. Ibid. at para. 134. Note, however, that there was no direct evidence that Mr. Suman actually viewed the impugned emails (para. 132).

19. Ibid. at para. 132.

20. Ibid. at para. 134.

21. Ibid. at para. 168.

22. Ibid. at paras. 158-59.

23. Ibid. at paras. 210-216.

24. Ibid. at paras. 204-205.

25. Ibid. at para. 235.

26. Ibid. at para. 251.

27. Ibid. at para. 278.

28. Ibid. at para. 352.

29. Ibid. at paras. 341-42.

30. Ibid. at paras. 342-45.

31. Supra note 3 (Div. Ct.) at para. 2.

32. Walton v. Alberta (Securities Commission), 2014 ABCA 273, 376 D.L.R. (4th) 448, [2014] 11 W.W.R. 314 (Alta. C.A.).

33. Azzeff, supra note 2, at para. 83.

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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