A recent decision of the Ontario Securities Commission (“OSC”), In the Matter of Paul Donald, provides a rare analysis of the “special relationship” requirement of insider trading under the Securities Act (the “Act”) and also demonstrates the increasing use of the OSC’s public interest jurisdiction powers where a breach of the Act is not found.
The respondent Paul Donald was a Vice-President with Research in Motion (“RIM”) when he purchased shares in Certicom Corp. (“Certicom”). Certicom provided cryptography used by software vendors and wireless device manufacturers to provide security in their products. RIM had been licensing Certicom technology for use in the Blackberry since 2000.
On December 10, 2008, RIM launched a hostile take-over bid for Certicom shares. After Certicom obtained an injunction preventing RIM from proceeding with the take-over bid, RIM and Certicom entered into a plan of arrangement, which was approved by the court on March 23, 2009.
Well before the launch of the take-over bid, on August 20, 2008, Donald attended a golf tournament and dinner for RIM executives. During the dinner, Donald had a conversation with Chris Wormald, another Vice-President, concerning Certicom. Wormald told Donald that RIM had been in acquisition discussions with Certicom and that Wormald thought Certicom’s shares were undervalued. The next morning, Donald placed an order for Certicom shares with his broker which resulted in his purchase of 200,000 shares in Certicom between August 21 and September 15, 2008, at a total cost of $305,000. Donald testified that prior to placing the order that morning, he had conducted his own independent analysis of Certicom online from which he concluded that Certicom was a dramatically undervalued company. Donald received proceeds of $600,000 for his Certicom shares following the implementation of the plan of arrangement for a gross profit of $295,000.
Staff of the OSC alleged that Donald engaged in insider trading by purchasing Certicom shares while he was in a special relationship with Certicom and aware of material facts regarding Certicom which had not been generally disclosed, contrary to section 76(1) of the Act.
The OSC panel found that Donald did indeed purchase Certicom shares while in the possession of three material, undisclosed facts from Wormald regarding Certicom: namely, (i) RIM had previously been in confidential discussions with Certicom about a potential acquisition of Certicom by RIM; (ii) RIM had an ongoing interest in acquiring Certicom; and (iii) Certicom’s then current share price was undervalued based on Certicom’s licensing agreements.
Despite this finding, the OSC panel determined that Donald did not engage in insider trading contrary to the Act since he was not in a “special relationship” with Certicom at the time of his trade.
Staff had argued that Donald was in a “special relationship” with Certicom because: (i) he learned of material facts with respect to Certicom from Wormald, who was himself in a special relationship with Certicom, in circumstances where Donald knew or ought to have known of such relationship; (ii) he learned of material facts with respect to Certicom when RIM was proposing to make a take-over bid for Certicom; and/or (iii) he learned of material facts with respect to Certicom when RIM was engaging in a business or professional activity with Certicom (based on RIM’s existing license arrangements with Certicom).
The OSC panel found that in order for Donald or Wormald to have been a person in a special relationship with Certicom on August 20, 2008, RIM had to have been proposing to make a take-over bid for Certicom, or proposing some other arrangement or business combination with Certicom, within the meaning of subsection 76(5)(a)(ii) of the Act (the panel did not accept that there was a sufficient connection between the ongoing business activity between RIM and Certicom and the material facts to establish a special relationship).
With little guidance available to it, the OSC found that in order for RIM to have been “proposing” to make a take-over bid for Certicom, there would have to be some “significant level of involvement and approval of the process at the highest corporate levels at RIM.”
The panel concluded that as of the date of the RIM golf event, although RIM was interested in acquiring Certicom, it was not yet “proposing” to do so, based on various facts, including that: (i) Jim Balsillie, the Co-CEO of RIM, had not made a decision to proceed with the acquisition of Certicom; (ii) the analysis and valuation underway had not yet been seen or reviewed by Balsillie or RIM's board of directors; (iii) there was no direct communication between Balsillie and the CEO of Certicom regarding the potential acquisition until October 28, 2008; and (iv) RIM had not yet retained external financial or legal advisors in connection with the acquisition.
After finding there was no insider trading, the panel then considered whether Donald engaged in conduct contrary to the public interest. The Commission’s public interest jurisdiction allows it to make sanction orders even where no specific breach of the Act is established.
The panel found that Donald should not have traded in Certicom shares with knowledge of material facts which had not been generally disclosed. In doing so, Donald did not adhere to the high standard of behaviour expected of market participants and officers of public companies and his conduct was abusive of the capital markets. Since Donald’s purchase of Certicom shares directly engaged the fundamental principles of securities regulation, the OSC panel found his conduct to be contrary to the public interest.
Given the inherent difficulty in establishing insider trading violations under the Act, we can expect Staff to continue to vigorously pursue allegations of conduct contrary to the public interest in tandem with these and other types of cases in the future. Although the sanctions are more limited, the OSC can still pursue the purposes of the Act using its general administrative powers in the absence of an express violation of the Act.