Canada: Broad Reach For Canadian Securities Regulators For Insider Trading

In a settlement agreement recently endorsed by the Ontario Securities Commission (OSC), respondent Anand Hariharan agreed to settle insider trading allegations made by OSC enforcement staff (Staff) against him. The settlement is notable in that Mr. Hariharan had not actually contravened the insider trading provisions set out in Ontario's Securities Act, as the relevant issuer was not a reporting issuer in Ontario. Staff had instead sought sanctions against Mr. Hariharan pursuant to the OSC's general power to sanction "conduct contrary to the public interest."

As such, the settlement demonstrates that even following recent decisions suggesting limitations on the scope of the public interest power, in certain cases the OSC may continue to use the public interest power to effectively broaden the scope of the prohibition on insider trading. In particular, the OSC may sanction individuals for insider trading activities even if those activities relate to a company that is not a reporting issuer in Ontario and whose securities are generally publicly traded elsewhere. Accordingly, those who engage in improper activities in relation to foreign public companies may be subject to sanctions under Ontario securities laws where the individuals have other connections to Ontario capital markets (such as being an Ontario resident or a director or officer of an Ontario reporting issuer).


The settlement's agreed facts indicate that in June 2012, Mr. Hariharan, an Ontario resident, received a tip about the impending purchase of a subsidiary of an issuer called Loral Space & Communications (Loral) by MacDonald, Dettwiler & Associates Inc. (MDA). Loral was not a reporting issuer in Ontario, but was based in New York and its shares traded on NASDAQ. The tip came from a friend of Mr. Hariharan's, also in Ontario, who worked in MDA's IT department.

Mr. Hariharan proceeded to purchase options for 22,000 Loral shares. Following public disclosure of the MDA acquisition, Loral's shares increased significantly in value and Mr. Hariharan profited.

At the time Mr. Hariharan received the tip and acquired the Loral options, the impending MDA acquisition was an undisclosed material fact. As Loral was not an Ontario reporting issuer, Mr. Hariharan's trading did not constitute illegal insider trading pursuant to provisions of Ontario's Securities Act. In electing to proceed against Mr. Hariharan pursuant to the OSC's public interest power, Staff essentially sought to broaden the scope of Ontario's jurisdiction to capture conduct relating to foreign public companies, which are not Ontario reporting issuers, on the basis of the individual's connections to Ontario.


Mr. Hariharan's settlement has important implications for the scope of the OSC's jurisdiction for market activities in companies outside Ontario, in which the participants have a connection to Ontario.

The settlement is particularly notable in that it arrives in the wake of the recent Baffinland decision, which also involved allegations of insider trading. In the Baffinland decision, the activities complained of related to a former consultant of an Ontario reporting issuer participating in a hostile take-over bid for that company. The OSC determined in Baffinland that the activities did not constitute insider trading, as the information known to the consultant was not material. The OSC staff nonetheless sought sanctions against the consultant on the basis of the public interest power, arguing that the information, if not material, was confidential and was used in breach of a confidentiality agreement with the target issuer. The OSC, however, found against staff, and in doing so, suggested that the public interest power could not be used to expand on the scope of insider trading set out in the Securities Act. For more information, see our September 2014 Blakes Bulletin: OSC Adopts Restrained Interpretation of 'Public Interest' Jurisdiction in Baffinland Case.

With Mr. Hariharan's settlement, the OSC has now demonstrated that while Baffinland may impose some limitations on the use of the public interest power to prosecute insider trading activity that does not fall within the scope of the insider trading provision in the Securities Act, there are nonetheless still circumstances in which the public interest power can be used in this manner.

In particular, Mr. Hariharan's settlement indicates that even following Baffinland, participants with connections to Ontario may be sanctioned for insider trading activities (or other contraventions) relating to non-Ontario reporting issuers through the use of the public interest power, despite the fact that the express insider trading provisions in the Securities Act are limited to Ontario reporting issuers. As such, market participants who have a connection to Ontario should be mindful that, in addition to any consequences they may face in foreign jurisdictions, they may also be exposed to regulatory action in Ontario for actions relating to public companies outside of Ontario, even if they have not contravened the requirements of the Ontario securities legislation.

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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