Ontario’s new Capital Markets Tribunal weighs circumstantial evidence in insider trading decision
Under the Ontario Securities Act (the Act), a tribunal must be satisfied that (i) a person in a “special relationship” with an issuer (ii) purchased or sold the issuer’s securities (iii) with knowledge of a material fact or change and (iv) that fact or change had not been generally disclosed. And while, in Ontario, a tribunal need only be satisfied of these elements on a “balance of probabilities” civil standard (rather than the “beyond reasonable doubt” criminal standard), securities law enforcers are challenged to prove impermissible insider trading definitively.
In both Canada and the U.S., Securities Commission Staff often need to rely on circumstantial evidence, rather than direct evidence, to prove insider trading and tipping allegations. Precedent suggests that given the elusiveness of direct evidence of “knowledge,” adjudicators may draw inferences from such circumstantial evidence. Nonetheless, as a recent case reiterates, for Staff to meet its burden of proof in these proceedings, those inferences must be “reasonably and logically drawn from a fact or group of facts established by the evidence, should be drawn from the combined weight of the evidence, and cannot be drawn from speculated facts.”
As we wrote this spring, the Ontario Securities Commission (OSC) was restructured recently to separate its regulatory and adjudicatory responsibilities, which included the launch of the new Capital Markets Tribunal. In one of its first cases released, on May 26, 2022, a Panel of the Capital Markets Tribunal (the Tribunal Panel) released its decision in Kitmitto (Re), 2022 ONCMT 12, a proceeding involving allegations of insider tipping and trading in securities of an issuer (the Issuer) relating to an acquisition (the Acquisition). Written with a separate decision dissenting in part, the Tribunal Panel found that Staff had failed to prove some of its case, but the majority found that it had successfully proven insider tipping and trading allegations against some of the named Respondents, and accepted Staff’s reliance on circumstantial evidence to prove those allegations.
The insider tipping and trading allegations in Kitmitto related to a group of individual respondents, most of whom knew each other and held close relationships.
Staff alleged that beginning on April 25, 2014, Majd Kitmitto (Kitmitto), one of the respondents, became aware of material non-public information (MNPI) about the Issuer. Staff alleged that between April 25 and June 12, 2014 (the Relevant Period), this MNPI was shared amongst various individuals and insider tipping and trading occurred, contrary to section 76 of the Act. Staff also alleged that certain respondents misled Staff, contrary to section 122(1)(a) of the Act, and that one respondent concealed trading from his employer, which both engaged an animating principle of the Act and was abusive.
While the Tribunal Panel found that Staff failed to prove several of the allegations and dismissed certain of those allegations, the majority of the Tribunal Panel did find that Kitmitto unlawfully “tipped” a number of the alleged traders, who then traded on the inside information and/or tipped others during the Relevant Period. However, one panelist — the recently appointed Chair of the newly established Board of Directors to the OSC — dissented in part.
As a preliminary step, the majority considered whether the relevant information at issue about the Acquisition was MNPI. In particular, the Tribunal Panel rejected Staff’s submission that Kitmitto received MNPI on April 25 and 28, 2014, on the basis that the only information that Kitmitto had at that time was information about a “potential transaction” and that the Issuer was “considering a strategic transaction.” The full Tribunal Panel disagreed with Staff and held that information about a “potential transaction” did not constitute MNPI.
The majority of the Tribunal Panel found that Kitmitto was made aware of MNPI, but only once he attended a meeting with the Issuer’s management, where he learned about particular details of the Acquisition. At that meeting, Kitmitto received a slide deck that revealed specific information including
- the intended purchase price and details about funding sources
- the specific breakdown of equity and debt financing
- the involvement of several large-scale financial institutions in the transaction
- a timeline indicating the precise announcement date
Given the specifics known at that time, the majority of the Tribunal Panel found that the “tipping chain” in relation to the MNPI proceeded from that point onward.
In its detailed reasons, the majority assessed the evidence presented by Staff to support its allegations against each respondent and ultimately concluded that certain respondents had engaged in insider tipping/trading contrary to the Act. The majority acknowledged that some of the relevant evidence was circumstantial, including that these respondents had the opportunity to learn about particular details of the Acquisition and that their trades in the Issuer were “timely, uncharacteristic and profitable”. The majority considered several factors, including what information was available in the public sphere, each respondents’ trading history and patterns, their experience in the relevant industry of the Issuer, and the timing of communications between the respondents in relation to the timing of developments related to the Acquisition. The majority also flagged unusual conduct of particular respondents in order to fulfill the trades, such as repaying the advance on a line of credit to acquire more shares.
In her opinion, the dissenting Panelist concluded that Staff did not substantiate any of its allegations on a balance of probabilities. The dissenting Panelist questioned the sufficiency of the circumstantial evidence relied upon, concluding that there were other equally likely inferences that could be drawn from the combination of such evidence.
The definition of MNPI, and whether uncertain or contingent information can constitute MNPI, was also contested as between the majority and dissenting panelists. The majority found that Kitmitto was in possession of the Issuer’s MNPI on April 29, 2014, due to considerable indicia of interest in the transaction at the time and the details about the transaction that were revealed to Kitmitto. In contrast, the dissenting Panelist stated that due to the uncertainty of information and the fact that there were many conditions yet to be fulfilled, the information known to Kitmitto did not constitute MNPI.
On June 21, 2022, the Tribunal ordered [PDF] that a hearing regarding sanctions and costs is to be heard on October 11 and 13, 2022.
The differing approaches taken by the majority and the dissent highlight the issues related to the quality of evidence required to establish insider trading in administrative enforcement proceedings in Canada: When is circumstantial evidence acceptable? To what extent can it support a finding that the insider trading and tipping provisions of the Act have been breached? These have been challenging questions on both sides of the border — notably, a recent court ruling in the U.S. challenged the Securities and Exchange Commission’s circumstantial trading evidence, as discussed in a previous blog post.
Although the majority of the Tribunal Panel in Kitmitto was comfortable with relying upon circumstantial evidence for its findings that certain insider tipping and trading had occurred, it emphasized that an opportunity to learn about MNPI alone is not sufficient to prove insider trading or tipping. Rather, such opportunities must be examined in conjunction with evidence supporting well-timed, uncharacteristic and profitable trades. The dissenting Panelist went further by specifically stating that trading volume, opportunity or profitability are not determinative factors in insider tipping and trading cases, and challenged several inferences drawn by the majority based on the evidence presented by Staff.
A determination of insider trading can be irreparably damaging to an individual’s professional and personal reputation. It will be interesting to see whether the Capital Markets Tribunal picks up on the dissenting reasons in future insider tipping and trading cases, and how Staff contends with what may be seen as a heightened burden of proof for proving these complex allegations.