Canada: When You Ought To Have Known: Court Of Appeal Upholds Liability Against Successive Tippees Who Lacked Actual Knowledge Of The Source Of The Inside Information

Last Updated: February 19 2018
Article by Khrystina McMillan

In a decision released last Thursday, January 25, 2018, the Ontario Court of Appeal considered for the first time the definition of a "person in a special relationship with an issuer" as it applies to successive tippees who possess inside information. In Finkelstein v Ontario Securities Commission, the Court of Appeal upheld findings of liability and significant sanctions against Howard Miller and Francis Cheng – the final two recipients in a five-person long chain of successive tippees – even though neither Miller nor Cheng knew that the source of the information was an insider. According to the Court of Appeal, however, they ought to have known that they were acting on inside information.

Background: The Finkelstein decision arises from the flow of material, non-public information about a reporting issuer – Masonite International Corporation ("Masonite") – through a chain of five people. The information originated from a Bay street mergers and acquisitions lawyer, and was passed through two other individuals before it was received by Miller, who then passed it on to Cheng (both of whom were investment advisors at the same firm).

Subsections 76(1) and (2) of Ontario's Securities Act contain prohibitions against the trading on, or the tipping of, undisclosed materials facts or changes concerning an issuer by persons or companies in a "special relationship" with the issuer. Subsection 76(5)(e) defines a "person or company in a special relationship with an issuer" to include a person or company who receives insider information and "knows or ought reasonably to have known that" the source of the insider information is a person or company in a special relationship with the issuer.

In a 2015 "Merits Decision" , an Ontario Securities Commission ("OSC") panel found that all five individuals were in a special relationship with Masonite and had therefore breached the insider and tipping provisions and acted contrary to the public interest. The Divisional Court dismissed the appeals of all but Cheng, setting aside the findings of liability against Cheng because of errors in the OSC's analysis of the evidence. The Court of Appeal granted leave to appeal to Miller and the OSC in respect of Cheng, but denied leave to the others.

The Court of Appeal Decision: At its heart, the appeal concerned the interpretation and application of section 76(5)(e) of the Securities Act and whether Miller and Cheng "ought reasonably to have known" that their respective tippers stood in a special relationship with Masonite: there was no dispute that Miller and Cheng received material, non-public information about Masonite, nor that neither of them had actual knowledge that the source of the information was a person in a special relationship with Masonite.

The Court of Appeal ultimately rejected Miller's appeal and granted the OSC's appeal in respect of Cheng, restoring the OSC panel's decision. Under subsection 76(5)(e), the tippee does not necessarily need to know the identity of the initial tipper, and, on the facts of this case (including the application of the below factors), both Miller and Cheng ought to have known that their respective tippers were in a special relationship with Masonite.

When You Ought to Have Known: The statutory provision of "ought reasonably to have known" requires an objective test: should a person standing in the shoes of the tippee, reasonably assume that the information passed to her originated with an insider?

The bulk of the evidence in insider trading and tipping cases is usually comprised of circumstantial evidence of the tippee's knowledge of the source of information. The Court of Appeal therefore held that it was reasonable for the OSC to identify certain factors to assist in drawing permissible inferences as to whether it was more likely that not that insider trading and tipping had occurred. The following factors, while not exhaustive, serve as a "reasonable guideline that can be applied in the vast majority of situations" when considered in light of totality of the evidence:

  1. What is the relationship between the tipper and tippee?
  2. What is the professional qualification and standing of the tipper? 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? Does her profession or position put her in a position to know she cannot take advantage of confidential information and therefore a higher standard of alertness is expected of her than from a member of the general public?
  4. How detailed and specific is the information? The more detailed and specific the information, the less likely it could result from a rumour.
  5. How long after he receives the information does he trade? A shorter period of time may give rise to the inference that the information is more likely to have originated from an insider.
  6. What intermediate steps before trading does the tippee take, if any, to verify the information received? The absence of any independent verification may suggest a belief on the part of the tippee that the information 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?

The Takeaway: The Finkelstein decision is a stark reminder that you don't need to actually know that you are acting on information received from a company insider to be liable for insider tipping or trading. Recipients of non-public information may face significant sanctions, even where the source of the information is unclear or unknown to the tippee: in Miller and Cheng's cases, such sanctions include monetary penalties totalling about $525,000 and $225,000 respectively, as well as a ten-year ban on trading (with carve-outs), registration, and acting as directors or officers of a reporting issuer. Individuals who receive non-public information about a company should seek legal advice before trading on that information or sharing it with others.

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

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

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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