Canada: The Ontario Court Of Appeal Affirms The Test For Tippee Liability: Finkelstein v. Ontario Securities Commission

In the recently released decision in Finkelstein v. Ontario Securities Commission, the Ontario Court of Appeal (the Court) considered for the first time the definition of "person in a special relationship with an issuer" found in s. 76(5)(e) the Securities Act (the Act) as it applies to successive tippees who possess material, non-public information about an issuer.

The decision confirms that a person may be found to have contravened the insider trading or tipping provisions of the Act where he ought reasonably to have known that the source of the material non-public information about the issuer in his possession emanated from a "person in a special relationship" with the issuer. Subjective knowledge that his information source was in fact "in a special relationship with the issuer" is not required.

The Commission hearing panel (the Panel)'s identification and reliance upon certain factors or types of circumstantial evidence that could assist in drawing inferences as to whether it was more likely or not that insider trading or tipping had occurred, including the professional qualifications of the alleged tipper and tippee and their access to information about transactions, was upheld as reasonable.

Background

The Ontario Securities Commission (the OSC) initiated proceedings under s. 127 of the Act against five individuals including Mitchell Finkelstein (Finkelstein), Howard Miller (Miller) and Francis Cheng (Cheng), alleging that they breached the Act's insider trading and tipping provisions and acted contrary to the public interest by recommending to family and clients the purchase of shares in Masonite International Corporation (the Corporation). The OSC alleged that the material, non-public information (MNPI) flowed through a chain of five people, originating with Finkelstein, a mergers and acquisitions lawyer who was working on a take-over bid involving the Corporation. Finkelstein shared the MNPI with a friend who worked as an investment advisor, who in turn shared it with L.K., an accountant. L.K. shared the information with Miller who then conveyed it to Cheng.

At the conclusion of a contested hearing, the Panel found that all of the Respondents were in a special relationship with the Corporation, and had informed or "tipped" others of MNPI concerning the Corporation before that information had been generally disclosed, contrary to s. 76(2) of the Act. As well, the Panel determined that Miller and Cheng had contravened the prohibition against insider trading in s. 76(1) by purchasing the Corporation's securities with knowledge of undisclosed material facts.

All five respondents appealed the Panel's decision to the Divisional Court. All but Cheng's appeal was dismissed. The Divisional Court held that the Panel made a number of factual errors in its analysis of the evidence concerning Cheng that undermined the foundation upon which the Panel concluded Cheng ought to have known he was receiving inside information.

Miller obtained leave to appeal to the Court of Appeal. The OSC appealed the Divisional Court's decision to allow Cheng's appeal from the decision of the Panel.

The Decision

The primary issue on the appeal was the Panel's interpretation and application of s. 76(5)(e) of the Act, in particular, whether it reasonably interpreted that section to find that Miller and Cheng ought reasonably to have known that their respective tippers stood in a special relationship with the Corporation. According to the Court, s. 76(5)(e) is intended to catch tippees "who, themselves, convey information they have received to others", making a person who was 'tipped" a person in a special relationship with the issuer.

Cheng and Miller did not challenge the Panel's finding that the inquiry into successive tippees under section 76(5)(e) must ask "whether the tippee received material facts, which he reasonably knew or ought to have known came from someone who, in turn, knew or reasonably ought to have known came from a person in a special relationship". Similarly, the parties did not dispute the Panel's articulation of the objective knowledge test or the Panel's determination that a tippee need not necessarily know the identity of the initial tipper. There was also no dispute that neither Cheng nor Miller had actual, subjective knowledge that the person who tipped each of them was in a special relationship with the Corporation.

Rather, the focus of the appeal was on how the Panel applied the objective test set out in s. 76(5)(e) to the specific facts. In particular, Miller and Cheng took issue with the factors (the Factors) used by the Panel to guide the application of the "ought reasonably to have known" element of s. 76(5)(e) of the Act:

  1. What is the relationship between the tipper and tippee? Are they close friends? Do they also have a professional relationship? Does the tippee know of the trading patterns, including successes and failures, of the tipper?
  2. What is the professional qualification and standing of the tipper? Is he a lawyer, businessman, accountant, banker, investment adviser? Does the tipper have a position which puts him in a milieu where transactions are discussed?
  3. What is the professional qualification of the tippee? Is he an investment adviser, investment banker, lawyer, businessman, accountant, etc.? Does his profession or position put him in a position to know he cannot take advantage of confidential information and therefore a higher standard of alertness is expected of him than from a member of the general public?
  4. How detailed and specific is the MNPI? Is it general such as X Co. is "in play"? Or is it more detailed in that the MNPI includes information that a takeover is occurring and/or information about price, structure and timing?
  5. How long after he receives the MNPI does he trade? Does a very short period of time give rise to the inference that the MNPI is more likely to have originated from a knowledgeable person?
  6. What intermediate steps before trading does the tippee take, if any, to verify the information received? Does the absence of any independent verification suggest a belief on the part of the tippee that the MNPI originated with a knowledgeable person?
  7. Has the tippee ever owned the particular stock before?
  8. Was the trade a significant one given the size of his portfolio?

Miller submitted that the Factors diverged from the plain language of the provision, and therefore constituted an unreasonable interpretation. Cheng argued that two of the Factors, 5 and 6 above, were not relevant.

The Court rejected these arguments, finding that the Factors constituted an appropriate guideline to use when applying the objective test of "ought reasonably to have known." Given that circumstantial evidence usually forms the bulk of the evidence in insider trading cases, it was reasonable for the Panel to identify certain groups of circumstantial evidence, such as the Factors, to assist in drawing logical and reasonable deductions about the tippee's "state of knowledge of the relationship between the tipper and the issuer or another person in a special relationship" with the Corporation. The probative value of such circumstantial evidence will be dependent upon the specific circumstances and the totality of the evidence.

The Court also rejected Miller's argument that the Panel's finding that he contravened the tipping and insider trading prohibitions was unreasonable because the Panel failed to determine that the person from whom Miller received the Corporation's MNPI, L.K. (who was not named as a respondent in the OSC proceeding), was in a special relationship with the Corporation. The Court ruled that, in treating L.K. as a "knowledgeable person", the Panel had implicitly found that he had a special relationship with the Corporation.

Finally, the Court granted the OSC's appeal with respect to the Divisional Court's decision to overturn the Panel's finding that Cheng contravened the tipping and insider trading provisions, finding that the Divisional Court had impermissibly re-weighed the evidence, and substituted inferences it would have made had it been in the Panel's position. The Court confirmed that the role of the reviewing court is to determine whether the tribunal's decision "contains an analysis that moves from the evidence before the tribunal to the conclusion that it reached", not whether the decision is the one that the reviewing court would have reached. The findings of fact and inferences drawn by the Panel were reasonably supported by the record.

The authors would like to thank Fahad Diwan, articling student, for his contribution to this article.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Affleck Greene McMurtry LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Affleck Greene McMurtry LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions