This article first appeared in French on the blog of Conseiller.ca on October 28, 2015.

This past May 20, I drew attention to the decision of the Ontario Securities Commission (OSC) in the Finkelstein case. To recap four investment advisors and a lawyer were found guilty of breaching Ontario’s Securities Act by engaging in illegal insider trading and disseminating privileged information regarding three reporting issuers.

This was the most recent decision rendered in Canada concerning insider trading. 

Following the guilty verdict, the sentencing hearing for the five defendants was held on June 17, 2015.

Each of the accused faced a maximum penalty of $1 million per infringement of the Securities Act, in addition to a prohibition to act as a registered advisor or as a director or officer of a public company, and to trade the securities of a reporting issuer.

The lawyers for the OSC sought fines totalling $2,250,000 against some of the accused, while the latter pleaded for much less severe penalties.

On August 24 2015, the OSC rendered its sentencing decision, and the penalties were exceptional. In addition to significant fines, the four advisors were prohibited from acting as such or trading in the securities for ten years.

The OSC’s reasons for imposing the sanctions

In determining which sanctions should be imposed on each of the five accused, the OSC considered the general objectives of the Securities Act, which are to protect investors from unfair or fraudulent practices, and to foster confidence in fair and efficientcapital markets.

According to the OSC, the goal of the sanctions under the Act is not to punish, but rather to prevent offenders from harming investors and undermining the integrity of capital markets in the future.

Sanctions imposed on each of the accused in this case:

Accused 1: lawyer Mitchell Finkelstein

Finkelstein was found guilty of “tipping” (or having disclosed privileged information) on three occasions. According to the evidence, he was a lawyer at the time of the infractions and knew that securities laws prohibited him from passing on privileged information to third parties.

Nevertheless, Finkelstein was the instigator of all of the insider trades in this matter, which had serious repercussions on the financial markets and their integrity. The OSC panel decided that he must bear the consequences.

The profits earned by the family, friends and clients of the five accused totalled some $2 million. While the OSC, as mentioned above, could have imposed a fine of $1 million per contravention, it considered that Finkelstein had already suffered by losing his career, that his earning power was now diminished, that he had a young family and that there was little likelihood that he would re-offend.  

Sanctions imposed:

  1. A fine of $450,000, i.e. $150,000 per infraction of disclosure of privileged information, 50% of which was payable on or before October 24, 2015 and the remainder of which is payable over two years;
  2. A permanent ban on becoming an officer or director of a reporting issuer, registrant or investment fund manager;
  3. A ten-year ban on trading and acquiring securities, with some exceptions;
  4. Plus costs of $125,000.

Accused 2 and 3: investment advisors Paul Azeff (senior) and Korin Bobrow (junior)

Azeff and Bobrow attempted to conceal their illegal transactions by compiling a file of analysts’ reports on the securities in question in order to argue that they were following the analysts’ recommendations.

Azeff made a profit of $49,996, while Bobrow made $10,217.

The OSC considered the fact that the two advisors were both in their 40s and had built a substantial portfolio.

As registrants, they should have understood the Act’s prohibitions against insider trading and disclosing privileged information.

Moreover, Azeff had at one time been a branch manager and was responsible for supervising other registrants.

Both Azeff and Bobrow were fired on account of the allegations against them by the OSC, but had found employment elsewhere in the securities industry.

During their four years with their new employer, they had complied with all securities-related rules.      

Sanctions imposed on Azeff:

  1. A fine of $750,000, i.e. $150,000 per insider trade, 50% of which was payable on October 24, 2015 and the remainder of which is payable over two years;
  2. A permanent ban on becoming an officer or director of a reporting issuer, registrant or investment fund manager;
  3. A ten-year ban on trading and acquiring securities, with some exceptions;
  4. Disgorgement of profits obtained from insider trading;
  5. A ten-year ban on acting as a registrant, investment fund manager or promoter;
  6. Plus costs of $175,000. 

Sanctions imposed on Bobrow:

  1. A fine of $300,000, i.e. $150,000 per insider trade, 50% of which was payable on October 24, 2015, and the remainder of which is payable over two years;
  2. A permanent ban on becoming an officer or director of a reporting issuer, registrant or investment fund manager;
  3. A ten-year ban on trading and acquiring securities, with some exceptions;
  4. Disgorgement of profits from the insider trading;
  5. A ten-year ban on acting as a registrant, investment fund manager or promoter;
  6. Plus costs of $125,000.

Accused 4 and 5: investment advisors Howard Miller (senior) and Francis Cheng (junior)

Miller and Cheng were registered investment advisors at a brokerage firm when they engaged in insider trading.

Miller passed on privileged information to Cheng. He also made a profit of $24,485 on his own illegal trades, while Cheng made a profit of $36,100 in his brother’s account.

Sanctions imposed on Miller:

  1. A fine of $450,000, i.e. $150,000 per infraction, 50% of which was payable on October 24, 2015, and the remainder of which is payable over two years;
  2. A ten-year ban on becoming an officer or director of a reporting issuer, registrant or investment fund manager;
  3. A ten-year ban on trading and acquiring securities, with some exceptions;
  4. Disgorgement of profits from the insider trading;
  5. A ten-year ban on acting as a registrant, investment fund manager or promoter;
  6. Plus costs of $50,000.

Sanctions imposed on Cheng:

  1. A fine of $200,000, i.e. $100,000 per infraction, 50% of which was payable on October 24, 2015, and the remainder of which is payable over two years;
  2. A ten-year ban on becoming an officer or director of a reporting issuer, registrant or investment fund manager;
  3. A ten-year ban on trading and acquiring securities, with some exceptions;
  4. Disgorgement of profits from the insider trading;
  5. A ten-year ban on acting as a registrant, investment fund manager or promoter;
  6. Plus costs of $25,000.

On September 23, 2015 the accused appealed the OSC’s decision. The Finkelstein affair is thus far from over.