Canada: Insider Trading And Tipping – The Finkelstein Decision

Last Updated: April 6 2018
Article by Emily McDermott


A recent decision of the Ontario Court of Appeal1 finds that tippees far down the information chain can be liable for insider trading and tipping and affirms the list of non-exhaustive factors to consider in determining whether tippees "ought to have reasonably known" that a tipper was in a special relationship with an issuer.


The Ontario Securities Commission (OSC) initiated administrative proceedings against five individuals, alleging that each had breached the insider trading and tipping provisions of the Ontario Securities Act (the OSA). The matter originated with a mergers and acquisitions lawyer in Toronto who acted as lead counsel to Masonite International Corporation (Masonite) in respect of a takeover bid involving the acquisition of all of Masonite's shares by a private equity firm.

The lawyer (Finkelstein) informed an investment adviser friend (Azeff) in Montreal of material facts about the takeover bid, namely that Masonite and the private equity firm had agreed to a takeover transaction priced at $40 a share in an all-cash deal expected to close quickly. In turn, Azeff informed a Montreal accountant (L.K.), who informed a Toronto investment adviser (Miller), who informed another investment advisor (Cheng) of the material facts. Azeff also conveyed the information to an investment advisor friend (Bobrow). (See diagram at end of article.)

The OSC found that Finkelstein, Azeff, Bobrow, Miller and Cheng (but not L.K.) each stood in a special relationship with Masonite and informed other persons of material facts before the material facts were disclosed contrary to section 76(2) of the OSA. The OSC also found that Azeff, Miller and Cheng purchased Masonite securities with knowledge of undisclosed material facts contrary to section 76(1) of the OSA. The OSC imposed sanctions on all five individuals.

Only Cheng was granted an appeal by the divisional court. Miller sought and obtained leave to the Ontario Court of Appeal as did the OSC in respect of Cheng.

Statutory Scheme

The prohibitions against insider trading and tipping are contained in Part 18 of the OSA (there are parallel provisions in Part 15 of the Alberta Securities Act (the ASA)). Section 76(1) of the OSA (and Section 147(3) of the ASA) provides that no person or company in a special relationship with an issuer shall purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed. Section 76(2) of the OSA (and Section 147(4) of the ASA) provides that no issuer and no person or company in a special relationship with an issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed.

Ontario Court of Appeal Decision

The Ontario Court of Appeal (the Court of Appeal) considered the definition of "person in a special relationship with an issuer". At the core of the appeal was the court's interpretation of Section 76(5)(e) of the OSA which provides that a "person ... in a special relationship with an issuer" means a person ... that learns of a material fact or material change with respect to the issuer ... and knows or ought reasonably to have known that the other person is a person in such a relationship"2. In this case the Court of Appeal focused specifically on whether Miller and Cheng "ought to have reasonably known" that their respective tippers were in special relationships with Masonite. The Court of Appeal upheld the OSC's findings of liability against Miller and Cheng and affirmed the following non-exhaustive list of factors to consider in determining whether a person "ought to have reasonably known" that a tipper was in a special relationship with an issuer:

  • The relationship between the tipper and tippee
  • The professional qualification and standing of the tipper and tippee
  • The extent of the detail and specifics of the relevant material non disclosed information
  • The length of time the tippee trades after receiving the material non disclosed information
  • The steps taken by the tippee prior to trading to verify the information
  • The issue of whether the tippee owned the security at issue previously
  • The significance of the trade given the size of the tippee's portfolio


The goals underlying securities regulations are to protect investors, promote capital market efficiency and ensure public confidence in the securities system. Tippees are considered to be in a special relationship with an issuer where they receive a tip and know or ought to know that the source of the information is in a special relationship with the issuer. In determining whether a person ought to have known, a panel will look at the professional qualifications and employment (among other factors) of the tippee and tipper to determine whether the tippee and tipper hold positions where transactions are discussed. Persons working in fields where securities transactions are regularly discussed will be held to a higher standard than others.


1 Finkelstein v Ontario Securities Commission 2018 ONCA 61 

2 A similar definition is set out in section 9 of the ASA

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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