A significant court decision has smoothed the path for Canada’s largest capital markets watchdog to pursue cases of illegal insider trading.
The Ontario Court of Appeal sided with the Ontario Securities Commission last week — overturning a lower court decision — on how OSC tribunals determine whether someone is in “in a special relationship” with a company at the heart of an insider tipping or trading case.
“It is significant,” Anita Anand, a law professor at the University of Toronto, said of the court decision, which was the first time the higher court had considered and ruled on a “crucial” element of insider trading provisions.
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The Court of Appeal found the OSC had used the proper approach to conclude TD investment advisor Francis Cheng “ought to have known” the information on which he was tipped and recommended trades came from someone knowledgeable and in a special relationship with the company — even though the material, non-public information flowed through a chain of five people.
Determining whether the information comes from someone knowledgeable, or in a “special relationship,” with a company is a key to insider tipping and trading cases in Canada, which turn on the misuse of material non-public information. Those in a special relationship can include directors or officers, or a professionals dealing with the company, such as a lawyer or accountant.
Siding with the OSC this week on the broader interpretation in the Cheng case, and thereby rejecting an Ontario Divisional Court’s finding from 2016, the Court of Appeal “reached an important determination,” Anand said. “In particular, the decision will be useful in interpreting the broad definition of ‘special relationship’ going forward.”
In the case, which now stands, the OSC found that former Davies Ward Phillips and Vineberg lawyer Mitchell Finkelstein had passed material non-public information about pending mergers and acquisitions deals to his friend and investment advisor Paul Azeff, who then told a Montreal accountant identified only by his initials, L.K. The accountant then passed the information to Howard Miller, an investment adviser who worked in Toronto, who in turn passed it to Cheng, an associate at the same firm.
The OSC panel concluded that based on a consideration of factors, including the short lapse in time between the tippee receiving the information and initiating a trade, and the absence of steps taken to verify the information before trading, an inference could be made that both Miller and Cheng believed or “ought to have known” the source of the information was in a special relationship with the company.
In December 2016, following an appeal of the case, a panel of judges in Ontario’s Divisional Court rejected the OSC’s findings about Cheng, ruling that the hearing panel made several errors that led them to improperly conclude he knew or ought to have known he had received improper inside information.
However, that case was appealed and, this week, the Court of Appeal concluded the Divisional Court had “impermissibly re-weighed the evidence” presented to the OSC panel, which is not the role of a reviewing court.
“Instead of applying the deferential principles of appellate review it had properly articulated, the Divisional Court acted as if it was the decision maker in the first instance,” three judges wrote in the Court of Appeal decision.
“The findings of fact made and inferences drawn by the (OSC) Panel in respect of Cheng were reasonably supported by the record,” they concluded.
The Divisional Court had also reversed sanctions against Cheng but those sanctions, including a $200,000 penalty and $25,000 in costs, were restored in this week’s ruling by the court of appeal.
This week’s ruling is also subject to appeal — to the Supreme Court of Canada.
Janice Wright, a lawyer at Temelini LLP who represented Cheng, said her client “is obviously disappointed” with the latest ruling. “We are considering his options, including the possibility of an appeal,” she said.
Securities lawyers say it would not be easy to get a hearing before the highest court in the country.
“Getting leave to the Supreme Court is very difficult,” said Bruce O’Toole, a securities litigator at Crawley MacKewn Brush LLP in Toronto, who called this week’s court of appeal decision “significant.”
He said the 2016 rejection of the OSC’s findings on Cheng by the Divisional Court is the only time he’s aware of where that has happened. Appeals by others in the case were rejected at the Divisional Court level in 2016.
“This means that the OSC’s success on an appeal of the merit of a decision is back to 100 per cent,” O’Toole said. “With a success rate like that it is hard to see how the appeal right is anything other than an illusion.”
The University of Toronto’s Anand said the courts have historically shown a high level of deference to administrative tribunals, such as the OSC, and have therefore been reluctant to overturn their decisions.
Ed Waitzer, a partner at law firm Stikeman Elliott LLP in Toronto, and a former chair of the Ontario Securities Commission, called the Court of Appeal decision “a big win for the Commission.”
Lawyers at Torys LLP issued at note on the court’s decision Monday, which said it “serves as a warning to anyone trading in securities to make reasonable inquiries before using a tip,” or sharing any material non-public information.
“If there is any doubt as to whether the information at issue is MNPI (material non-public information) and originated from a person in a special relationship with the issuer, no use should be made of the information and it should be kept confidential,” lawyers Andrew Gray and Rebecca Wise wrote in the note.