In recent years, the Ontario Securities Commission (OSC) has been relying on its discretionary public interest power to make enforcement orders in circumstances where no actual breach of securities laws has been proven and no egregious violation of recognized conduct standards is necessarily involved. This trend is becoming evident in enforcement proceedings involving insider trading allegations. In this post, we discuss some recent OSC decisions (Donald, Moore and Suman).
The Shifting Scope of the Public Interest Power
The public interest power authorizes the OSC to make discretionary orders imposing a broad range of sanctions in the public interest. Historically, the power had been used where conduct was not specifically prohibited or even spoken to by legislation, but nonetheless had some egregious quality that made the conduct unacceptable and worthy of immediate intervention under the public interest power. For example, in the 1987 Canadian Tire decision, the OSC used its public interest power to stop a transaction which the OSC viewed as abusive to shareholders of Canadian Tire.
By 2010 this approach had begun to change, in the Biovail decision, where the OSC adopted the principle that “where market conduct engages the animating principles of the [Ontario Securities] Act” the OSC may use its public interest power even in the absence of “abusive or egregious conduct.”
Since Biovail, the public interest jurisdiction has expanded to capture conduct that would not necessarily be viewed as egregious because it involves unusual fact patterns and falls outside what is specifically prohibited by reasonably detailed rules already written into the statute. In some of the insider trading cases, the public interest power is arguably being used as an instrument of general deterrence to propound standards of behaviour not specifically mandated by the detailed legislative scheme. This seems to be a departure from the long-standing principle that public interest cases should not be used indirectly to create new standards of behaviour.
In Donald, Moore and Suman, all recent cases, OSC Staff failed to establish that the respondents’ conduct amounted to a breach of the statutory insider trading provisions of the Ontario’s Securities Act (OSA). In Donald and Moore, the impugned conduct was unusual yet held to fall below an expected standard of behaviour.
The Statutory Elements of Insider Trading
The 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.
Donald – No “Special Relationship”
Paul Donald was a vice president at RIM, managing RIM’s relationships with telecom carriers. At an August 2008 golf tournament and dinner for RIM executives, Donald spoke with another RIM vice president, Chris Wormald, who had responsibility for strategic alliances. OSC Staff alleged that during dinner conversation, Donald learned from Wormald about discussions concerning RIM’s potential acquisition of Certicom and became privy to material facts that had not been generally disclosed. Certicom was a software company that supplied RIM and was a reporting issuer with common shares listed on the Toronto Stock Exchange.
The following day, Donald instructed his broker to purchase Certicom shares and continued to accumulate Certicom shares through September 2008. Months later, RIM announced its intention to make an offer to acquire all of Certicom’s shares and, following a number of intervening events, in February 2009 Certicom announced that it had entered into a plan of arrangement with RIM which would acquire all of its common shares at a substantially higher price per Certicom share than Donald had paid in 2008. Following the plan of arrangement, Donald received the proceeds of the sale of his Certicom shares in the amount of $600,000, an almost 100% profit.
While the OSC found after a contested hearing that the information Wormald shared with Donald was material and had not been generally disclosed, the OSC found that Donald did not engage in insider trading contrary to section 76(1) of the OSA because Donald was not in a “special relationship” with Certicom as defined in the OSA.
Nevertheless, the OSC used its public interest power to find that Donald’s conduct was contrary to the public interest because he had failed to adhere to the “high standard of behaviour” expected of market participants and officers of public companies and did so in a manner that “impugns the integrity of Ontario’s capital markets”. Though no technical breach of the OSA was proven, the OSC found, on the “very unusual” facts of the case, that Donald’s actions “directly engage the fundamental principles of securities regulation and the purposes of the [OSA].”
Did Donald deliberately end run the statutory scheme or exploit a loophole? This is not suggested by the OSC panel in the reasons. Also, the relatively elaborate definition of “special relationship” in the OSA did not capture the sort of early-stage discussions RIM and Certicom had been engaged in prior to August 2008. In the aftermath of the Donald decision, legislators amended the “special relationship” definition to capture Donald-like behaviour. It is certainly open to debate whether the public interest demanded an enforcement outcome before the amendment was put in place.
This point is perhaps reinforced by considering the conduct in Suman.
Suman – Not a “Reporting Issuer”
In Suman, the OSC used its public interest power to establish liability where no breach of section 76(1) of the OSA had occurred, or was even alleged by OSC Staff.
Shane Suman became aware that his employer was proposing to acquire a US-based corporation. Suman informed his wife, Monie Rahman, of the proposed acquisition and both Suman and Rahman purchased securities of the US target corporation, securing profits of almost 1 million US dollars.
While the OSC found that the information Suman shared with Rahman was material and had not been generally disclosed, neither husband nor wife engaged in insider trading contrary to section 76(1) of the OSA because the US target corporation was not a “reporting issuer” as defined in the OSA. Even though Suman and Rahman would have been in a “special relationship” with the US target company if it were a reporting issuer, this missing element precluded any finding that a statutory insider trading violation had occurred. OSC Staff acknowledged this, but submitted that while the respondents’ purchases did not strictly breach subsection 76(1) of the OSA, those purchases nevertheless constituted conduct that was contrary to the public interest. The OSC agreed and found that the respondents’ conduct was contrary to the public interest because it was “inconsistent with the underlying policy objectives of subsection 76(1) of the [OSA].” In contrast with Donald, this is a more conventional application of the public interest power since the Sumans seemed to be doing an end run around the statute by exploiting the fact that the target was not a reporting issuer. The impugned conduct bore all the factual indicia of insider trading and only a technical defence could be advanced. The OSC also questioned Suman’s credibility and found him to be an evasive witness; Donald, on the other hand, did not attempt to hide his trading.
Moore – No “Materially Undisclosed Fact”
In April 2013, Richard Moore, an investment banker, settled allegations by way of an agreed statement of facts that admitted conduct contrary to the public interest. Moore took his largest ever equity position in a company after deducing that it was the likely object of an acquisition by a pension fund, where a friend of his was a senior representative. The friend had made some comments to Moore of a general nature which were not material or generally undisclosed. Moore subsequently observed this friend having an interaction with the CEO of the target company, and invested in its shares the next day because he deduced that it would likely be acquired. Moore reached this conclusion as a result of his previous knowledge of the target company obtained from public sources including rumours that it would be the subject of a takeover, his observations of his friend and the target’s CEO, and his friend’s comments of a general nature regarding his work.
The settlement agreement is clear that Moore never received any material, generally undisclosed information from his friend and that the target company was not a reporting issuer in Ontario. Nevertheless, Moore agreed that his conduct was contrary to the public interest because it fell “below the standard of behaviour expected from someone in [his] position and given his extensive experience in the capital markets industry”. In particular, he ought not to have made use of information obtained in part by virtue of his position as an employee of a registrant prior to its general disclosure to the public.” Moore seems to be similar to Donald in that it presents unusual facts and matters of first impression.
On the surface, Schloen appears to be unlike the other cases discussed above because the respondent admitted in a settlement agreement to engaging in insider trading in breach of section 76(1) of the OSA.
In Schloen, the respondent was inadvertently “made aware of rumours” by an employee of a company from which Schloen “deduced” that the company was an imminent takeover target. Schloen stipulated in the settlement agreement that all the elements of insider trading were present.
Nonetheless, the facts provided in the settlement agreement and the mitigating circumstances listed by the respondent suggest that Schloen resembles Moore more than Suman.
Like Moore, Schloen “deduced” that a company was the target of an acquisition based on “rumours” and his own research of publicly available information. Also, Schloen asserted in the settlement agreement that, during the material time, he did not consider whether the rumours constituted information of a material fact or change which was not generally disclosed, nor whether buying and selling shares while aware of the undisclosed information would breach the insider trading prohibitions in the OSA. These statements suggest that the admission of insider trading on the facts of the case might have been “borderline”.
In light of the OSC’s increasingly flexible application of the public interest power to establish liability in the absence of a statutory breach, Moore, Donald and Schloen are sobering examples of where the public interest power may be heading.