The Divisional Court’s recent decision in Fiorillo,[1] upholding the findings of the Ontario Securities Commission (the “Commission”) that three traders violated the insider trading provisions of the Ontario Securities Act[2], sustained rulings by the Commission on important evidentiary and procedural issues, and serves as a reminder that the Divisional Court generally defers to the Commission in securities enforcement cases.

The Commission found that Mr. Fiorillo, Mr. Wing, Ms. Stephany, and Pollen Services Limited (for which Mr. Wing has signing authority) (the “appellants”) traded on material non-public information provided to them by Ms. Agueci, who was the administrative assistant of the Chairman of an investment bank.[3] Ms. Agueci did not appeal the Commission’s finding that she had tipped the appellants about material non-public information.[4]

The compelled examination transcript of a respondent who does not testify can be read-in

The Commission permitted Staff to read-in the compelled evidence of Ms. Agueci at the end of Staff’s case, after Ms. Agueci’s counsel had declined to give an undertaking to call her to testify. The Court rejected the appellants’ argument that the Commission erred in law by doing so. First, the Court held that hearsay evidence, such as Ms. Agueci’s examination evidence compelled under section 13 of the Securities Act, is admissible in an OSC enforcement proceeding. Second, the court noted that the appellants themselves could have called, examined, and cross-examined Ms. Agueci but elected not to. Lastly, the court pointed out that one of the appellants had also read-in evidence from Ms. Agueci’s compelled examination, in which she denied that she had tipped anyone.

The Commission is entitled to control its process and hear allegations together

The appellants argued that it was improper for the Commission to hear all of the allegations against the appellants together in the same hearing. This occurred, they argued, because the Notice of Hearing alleged a “trading ring” among the respondents, which was not supported by the evidence called by Staff. In rejecting this argument, the court found that no unfairness resulted from the Commission hearing the matters together. The Commission was alive to the need to consider the allegations and evidence against each respondent, and denied Staff’s requests to admit similar fact evidence from one respondent against other respondents, as well as Staff’s request that evidence and findings in respect of one allegation be used to support inferences in other circumstances.[5]

The Commission’s findings that are reasonably grounded in the evidence will be given deference

The court rejected the appellants’ arguments that the decision was “simply speculation” without “objective probative evidence or factors to base the speculation upon”, [6] and that the Commission reversed the burden of proof on the appellants. In keeping with well-established jurisprudence, the court noted that circumstantial evidence usually forms the bulk of the evidence in cases where insider trading and tipping are alleged and declined to re-try the allegations when the Commission’s findings, including inferences, fell within a range of reasonable possible outcomes. The appellants also argued that the Commission was obliged to adhere to the approach described in the Commission’s reasons in Re Azeff[7] and the Alberta Court of Appeal’s reasons in Walton[8] when determining whether insider trading and tipping had occurred.

In Azeff, the Commission observed that various types of circumstantial evidence can be the indicia of insider trading or tipping such as (a) unusual trading patterns; (b) a timely transaction in the stock shortly before a significant public announcement; (c) a first time purchase of the stock; (d) an abnormal concentration of trading by one brokerage firm or with one or a few brokers; and (e) a trade that represents a very significant percentage of the particular portfolio.[9]

In Walton, the Alberta Court of Appeal held that it was possible to draw an inference of insider trading from unusual or anomalous trading patterns, particularly well-timed, highly uncharacteristic, risky and highly profitable trades. The Court rejected the argument that the Azeff and Walton reasons prescribed a “rigid” approach, noting that Re Azeff recognized that “[i]nsider trading and tipping cases are established by a mosaic of circumstantial evidence which, when considered as a whole, leads to the inference that it is more likely than not that the trader, tipper or tippee possessed or communicated material nonpublic information”.[10]

The Commission’s sanctions decision will be given deference

The Divisional Court dismissed Mr. Fiorillo’s and Mr. Wing’s appeals of the sanctions that the Commission imposed on them. In keeping with well-established jurisprudence, the Court deferred to the Commission’s expertise in determining “what is necessary to achieve the goals of specific and general deterrence, as well as protecting the public.”[11]

Mr. Wing also argued that the calculation of profit for the disgorgement remedy ordered by the Commission should be based on the increase in trading price during the period when Mr. Wing and Pollen possessed material non-public information only, and should not include any increase after the information became public.[12] The difference reduced the calculation of profit to $35,000 from $171,065. In addition, the difference would significantly reduce the administrative penalty ordered against the appellants since that was based on a 3x multiple of the profit.[13] The court rejected Mr. Wing’s argument, holding that the Commission had broad authority to order disgorgement of actual profits because s. 127(1) clause 10 of the Securities Act applies to “any amounts obtained as a result of the noncompliance”.[14]

This decision is another reminder of the difficulty in appealing findings from OSC enforcement proceedings to the Divisional Court, due to the deference given to the Commission on merits, sanctions and even questions of procedural fairness. Accordingly, respondents to an enforcement proceedings must be zealous in presenting their factual narrative, and advancing every reasonable procedural complaint, at the hearing.