Yesterday, the OSC approved a settlement agreement between OSC Staff and Anand Hariharan in a case involving allegations of tipping, insider trading and conduct contrary to the public interest. Hariharan agreed to a reprimand and significant restrictions on trading for 10 years. The settlement also envisages a disgorgement of profits but, surprisingly, only a portion of them.
Hariharan learned from a friend that a subsidiary of Loral Space & Communications Inc. (“Loral”) was going to be acquired by another company (“MDA”). Hariharan’s friend was an MDA employee and the acquisition was a material fact to both Loral and to MDA. As a result of this tip, before the acquisition was publicly announced, Hariharan bought call option contracts for Loral shares which he sold the day after the announcement, realizing a 623% return in one day. Loral was not a reporting issuer in Ontario.
The statutory elements that constitute insider trading are set out in section 76(1) of the OSA and require (i) a special relationship with the reporting issuer; (ii) the purchase or sale of a security of the reporting issuer; and (iii) knowledge of a material fact or material change not generally disclosed. An insider trading violation can only be established if all the elements are proven.
OSC Staff acknowledged that Hariharan’s conduct did not technically constitute prohibited insider trading because Loral was not a reporting issuer in Ontario. Nonetheless, the settlement agreement concludes Hariharan’s conduct was contrary to the public interest because it “impugned the integrity and fairness of the capital markets because of the misuse of material, confidential information obtained from [his friend]”.
The Hariharan settlement is the latest example of how the OSC can rely on its discretionary public interest power to make enforcement orders in circumstances where no actual breach of securities laws has been proven or even alleged. In a 2014 post Can the OSC’s Public Interest Power Be Used to Expand Insider Trading Liability? we commented that this trend was becoming evident in enforcement proceedings involving insider trading allegations and discussed a number of recent OSC decisions, including Donald, Moore and Suman.
The Hariharan settlement resembles Suman in that both cases involve respondents, who are not market participants, doing an end run around the statute by exploiting the fact that the acquisition target was not a reporting issuer. In both cases the impugned conduct bears all the indicia of insider trading where only a technical defence might be advanced.