The first week of December 2016 has proven to be a big one for pursuers of alleged insider traders on both sides of the border.
On December 2, 2016, the Ontario Superior Court of Justice (Divisional Court) released its appeal decision in Finkelstein v. Ontario (Securities Commission) (“Finkelstein”), which reiterated the degree of deference accorded to securities commission decisions. The Divisional Court affirmed an OSC panel’s (the “Panel”) finding of insider trading/tipping liability with respect to four of five respondents, notwithstanding the Panel’s significant reliance on circumstantial evidence. It also upheld the sanctions imposed against those appellants.
On December 6, 2016, the United States Supreme Court (“SCOTUS”) released its long awaited decision in Salman v. United States (“Salman”). In this case, SCOTUS partially rejected the controversial decision of the Second Circuit Court of Appeals in United States v. Newman (“Newman”), and instead followed the SCOTUS decision of Dirks v SEC in holding that a tipper does not have to receive something of a “pecuniary or similarly valuable nature” in exchange for a gift of confidential information to a “trading relative or friend” in order to satisfy the “personal benefit” element of tippee liability.
While involving somewhat different legal regimes, both of these decisions further clarify the evidentiary burden that regulators/prosecutors must overcome in order to succeed in proceedings alleging insider trading/tipping.
SCOTUS provides guidance in determining tippee liability
We have previously written on the implications of the Second Circuit Court of Appeals decision of Newman, released in December 2014, which had the effect of creating a difficult evidentiary obstacle that prosecutors were forced to overcome in order to successfully prosecute insider trading/tipping cases in the US (see here, here, here and here).
In essence, Newman states that in order for a court to find an alleged “tipper” guilty of “tipping”, prosecutors must demonstrate that he/she received a “personal benefit” for providing the tip, and that the personal benefit must be “of a pecuniary or similarly valuable nature”. Correspondingly, to succeed against the “tippee”, the prosecutor must prove that the tippee knew of the personal benefit obtained by the “tipper”. As a result, post-Newman, insider trading/tipping proceedings often hinged on the prosecution’s ability to meet its onus to establish that a tipper received a personal benefit of a pecuniary or similarly valuable nature, and that a tippee knew of the tipper’s fiduciary duty/the personal benefit received. The practical implications of the Newman decision can readily be seen – for example, insider trading charges against Michael S. Steinberg of SAC Capital Advisors and six cooperating witnesses were reportedly dropped following release of the Newman decision.
In Salman, Maher Kara was an investment banker at Citigroup who tipped his brother, Michael Kara, about deals he was working on. Michael Kara in turn tipped Salman, Michael’s friend and relative-by-marriage. A central issue before SCOTUS was whether Salman was liable for insider trading in light of the Newman decision.
After considering Newman, SCOTUS overruled Newman with respect to its decision regarding tips given to “trading relatives or friends”, stating that “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends”, that holding is incorrect in law. SCOTUS in Salman inferred that a personal benefit was received by the tipper because tipping to a trading relative is akin to the tipper “trading on the information, obtaining the profits, and doling them out to the trading relative. The tipper benefits either way”.
After struggling to successfully bring insider trading/tippee prosecutions in the wake of Newman, the Salman decision may tip the balance back in the favour of American securities prosecutors. Prosecutors in future prosecutions can be expected to, as much as the facts allow, characterize the relationship between the alleged tippers and tippees as one between relatives or friends in order to make full use of the personal benefit inference.
Ontario Divisional Court relies on circumstantial evidence to dismiss appeals of four out of five appellants
We have previously written about the implications of the Finkelstein decision on insider trading/tipping prosecutions in Canada (see here and here). The facts of Finkelstein and a summary of the Panel’s decision can be found here.
The three judge panel of the Divisional Court dismissed the appeals of four of the five respondents, confirming the great deference afforded by appellate courts to decisions made by OSC panels. In dismissing the appeals of four of the applicants, the Divisional Court confirmed the Panel’s reliance on circumstantial evidence put forward by OSC Staff, to draw “reasonable and logical inferences” surrounding tipper/tippee misconduct. In the case of the successful appellant, who was a further down-stream tippee, the Divisional Court’s ruling may be interpreted as a reminder of the evidentiary difficulty faced by regulators in pursuing tippees that are down the “tipping chain”.
The impact of Salman and Finkelstein will be closely followed
Both Salman and Finkelstein address questions about the evidentiary burden that needs to be met in insider trading/tipping cases.
It is yet to be determined how future cases will be affected by these decisions. We will give further consideration to the implications of these cases in future publications.