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INSIDER TRADING - Tipping - Special relationship with a reporting issuer

Thursday, February 22, 2018 @ 9:41 AM  


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Appeals by Miller and the Securities Commission from a Divisional Court decision setting aside the Commission’s decision regarding Cheng and dismissing Miller’s appeal. Cross-appeal by Cheng from the sanctions imposed. The Commission alleged the material, non-public information about Masonite International flowed through a chain of five people. The Commission found Miller and Cheng and three others breached the insider trading and tipping provisions and had acted contrary to the public interest by recommending to family and clients the purchase of shares in Masonite. Both Miller and Cheng were investment advisers at the same firm. Miller received the information from LK, an accountant. Cheng learned of the information from Miller. Miller and Cheng did not have actual knowledge that their informant was in a special relationship with Masonite. The Commission found, however, that Miller and Cheng ought reasonably to have known that their respective tippers stood in a special relationship with Masonite. Miller and Cheng disputed the Commission’s interpretation of the “person connection” element of s. 76(5)(e) of the Securities Act. Miller argued the Commission’s findings against him were unreasonable because it failed to find that LK was in a special relationship with Masonite. The Divisional Court allowed Cheng’s appeal holding that the Commission made a number of factual errors in its analysis of the evidence concerning Cheng that undermined the foundation upon which the Panel concluded Cheng ought to have known he was receiving inside information. Cheng argued the sanction orders against him were unreasonable.

HELD: Appeal by Miller dismissed. Appeal by Commission allowed. Cheng’s cross-appeal dismissed. The factors considered by the Commission in determining the tippee’s state of knowledge of the relationship between the tipper and issuer did not fundamentally diverge from the plain language in s. 76(5)(e). All of the factors considered were relevant to the inquiry into the tippee’s state of knowledge about the tipper’s source of the information. The factors pointed to a consideration of certain groups of circumstantial evidence that could permit drawing a deduction, in a logical and reasonable fashion, about the tippee’s state of knowledge of the relationship between the tipper and the issuer or another person in a special relationship higher up the information chain. The characterization of the factors as a reasonable guideline that could be applied in the vast majority of situations, recognizing that the factors were not exhaustive and that the evidence was to be considered in its totality and assessed applying the objective test of “ought reasonably to have known” was appropriate. The Commission’s findings against Miller were reasonable. While the Commission did not make an express finding that LK was in a special relationship, it undertook an analysis of the issue, and a finding that LK stood in a special relationship was implicit in its reasons. The Commission’s reasons disclosed it knew that finding LK was in a special relationship was necessary in order to consider whether Miller and Cheng were persons in a special relationship. It was reasonable for the Commission to find that Miller ought to have known the Masonite information passed on by LK came from a person in a special relationship with the issuer. The Divisional Court erred in setting aside the Commission’s findings against Cheng. Instead of applying the deferential principles of appellate review, the Divisional Court acted as if it was a decision-maker of first instance. The Divisional Court impermissibly re-weighed the evidence and substituted inferences it would make for those reasonably available to the Commission. The findings of fact made and inferences drawn by the Panel in respect of Cheng were reasonably supported by the record. While the Commission’s mistake in stating Cheng bought Masonite shares for himself was palpable, it was hardly overriding when considered in the context of the overall purchases made by Cheng on behalf of his family using Masonite information. The sanctions imposed against Cheng were not unreasonable. The Commission’s merits decision did not conflict with its sanctions decision regarding Cheng’s state of mind.

Finkelstein v. Ontario (Securities Commission), [2018] O.J. No. 489, Ontario Court of Appeal, J.M. Simmons, P.S. Rouleau and D.M. Brown JJ.A., January 25, 2018. Digest No. TLD-Feb192018008