Divisional Court Upholds Significant OSC Insider Trading Case

Recently, we provided a brief update on the release of the Finkelstein v. Ontario (Securities Commission) appeal decision (update available here), which upheld the OSC’s judgment that four out of the five respondents had engaged in insider trading/tipping contrary to the Securities Act (for our past publications on this case, see here, here and here). Significantly, the Ontario Divisional Court’s decision confirmed the ability of OSC Staff to build a case regarding insider trading/tipping by relying almost exclusively on circumstantial evidence. The Divisional Court also shed some light on the reach of insider trading/tipping prohibitions down the tipper/tippee chain based on the concept of a “special relationship”.


Briefly, the Finkelstein case involved a chain of actors who disclosed and traded on material, non-public information (MNPI), contrary to the insider trading prohibitions of the Securities Act.

In this case, a former partner at a prominent Bay Street law firm, Mitchell Finkelstein, used his position at his firm to acquire MNPI concerning pending corporate transactions and disclosed the MNPI to his friend, Paul Azeff, who in turn tipped other respondents. The total tipping chain comprised four separate levels.

Ontario Divisional Court upholds Panel’s reliance on circumstantial evidence

In reviewing the reasonableness of the OSC Panel’s decision in Finkelstein, the Divisional Court reiterated the principal difficulty associated with prosecuting insider trading/tipping cases involving multiple levels of down-stream tippees – i.e., there is often a lack of direct evidence associated with offences of this nature. The Court also reiterated that Staff seeking to establish insider trading/tipping liability in front of the relevant securities commissions must only satisfy the lower civil standard of proof of “on a balance of probabilities”.

The Divisional Court agreed with Staff’s extensive use of circumstantial evidence to draw “reasonable and logical inferences” surrounding tipper/tippee misconduct with respect to three separate transactions. According to the Divisional Court, these reasonable and logical inferences included:

  • The Panel’s finding that Finkelstein tipped Azeff in reliance on the following facts:
    • In each case, Azeff and Finkelstein would call each other, and shortly thereafter, Azeff or Azeff along with his trading friend would buy a significant number of securities of the company involved in the transaction.
    • Azeff or Azeff and his trading friend would pass along the MNPI to others, who also purchased shares shortly after the MNPI was passed; at least one person directly testified that he received MNPI from Paul Azeff.
    • In one transaction, while Finkelstein was accessing deal documents containing MNPI, he made a call to Azeff, who traded in the securities involved shortly thereafter.
    • All of these events happened in close proximity in timing to each other.
    • Finkelstein and Azeff were very good friends.
    • Finkelstein and Azeff called each other very often, and thus had the opportunity for disclosure.
  • The Panel’s findings of insider trading and tipping further down the “chain”, beginning from Azeff and continuing to secondary and tertiary tippees, were made in reliance on the following facts:
    • The good personal or working relationship of the parties.
    • That large blocks of trades were made at similar times without prior research, and outside the individuals’ normal trading patterns.
    • Testimony of at least one person who stated that he received MNPI from Azeff.
    • In one instance, the exchange of emails between a tippee and his client talking about a “tip”.
    • The opportunity for communication between the parties based on phone records.

Divisional Court finds one appellant liable and another not liable under the “ought reasonably to have known” branch of the “special relationship” definition

Significantly, one downstream tippee, Howard Jeffrey Miller, was found liable for insider trading because he fell under branch (e) of the definition of a “person or company in a special relationship with an issuer” under subsection 76(5) of the Securities Act. This term is significant, as it acts as the trigger for insider trading and tipping liability under Ontario securities law (other provinces have like concepts).

In essence, this branch of the definition provides that if a recipient of MNPI knows or “ought reasonably to have known” that he/she received the MNPI from a person in a special relationship with the issuer (i.e. a director, officer, or a person who likewise fell under branch (e) of the definition), then the recipient is deemed to be in a special relationship and likewise cannot trade or disclose the MNPI.

The Panel found that Miller “ought reasonably to have known” that the MNPI came from a person in a special relationship. The Divisional Court affirmed this finding due to a host of factors, including that:

  • The tipper, L.K., and the downstream tippee knew each other well.
  • The tipper was a partner in a prominent accounting and auditing firm, which meant that the tippee would understand that the tipper would have clients, business relationships and friends with people involved in transactional activities.
  • The tippee was an experienced registrant, who could be expected to know the prohibitions against insider trading contained in the Securities Act.
  • The information the tippee received was very specific, and the tippee himself considered it to be reliable.
  • The tippee bought a large number of shares for a number of clients as well as himself.
  • The tippee did not conduct any independent research prior to the purchase.

Conversely, the Divisional Court overturned the Panel’s finding of liability for insider trading with respect to another alleged downstream tippee – Francis Cheng. The Divisional Court found that the Panel misstated certain facts with respect to this alleged tippee, failed to consider certain relevant facts, and did not weigh the totality of the relevant evidence in finding him liable under branch (e) of the definition of a “person or company in a special relationship with an issuer”.

Based on these findings, the Divisional Court found that the Panel’s decision with respect to Cheng was unreasonable. However, it is important to note that this finding was made based on what the Divisional Court found to be the OSC Panel’s flawed consideration of the evidence available before it, rather than the inadequacy of the evidence (whether direct or circumstantial) itself.

The Impact of Finkelstein on future decisions will be closely monitored

As in the recent Divisional Court decision in Fiorillo v Ontario (Securities Commission), the Divisional Court’s approach to the Finkelstein appeal generally suggests that the appellate court will interfere with the findings of the OSC only in extraordinary circumstances. In particular, substantial deference will be accorded to the OSC’s application of evidence and use of circumstantial evidence in insider trading cases.

Given the Divisional  Court’s consideration of the “special relationship” definition in the Securities Act, Canadian compliance officers and directors should keep in mind that compliance policies should consider the importance and impact of the “ought reasonably to have known” branch of the special relationship definition, which may cast a broader net than that allowed under the colloquial understanding of insider trading/tipping.