On August 24, 2015, the Ontario Securities Commission (“OSC”) released its long awaited Reasons and Decision on Sanctions and Costs in the Finkelstein/Azeff insider trading and tipping matter.
Former Bay Street lawyer, Mitchell Finkelstein, who was found to have engaged in tipping in breach of section 76(2) of the Securities Act in respect of three separate transactions, will receive a ten-year trading ban (with limited carve-out); a permanent ban on becoming an officer or director of a reporting issuer; and an administrative penalty in the amount of $450,000, representing $150,000 per contravention of the Act.
While OSC Staff requested a lifetime trading ban, a lifetime exclusion as a director and officer of a reporting issuer and administrative penalties totalling $1.5 million, being $500,000 of a possible $1 million for each of the three contraventions of the Act, the Panel found this to be excessive. Rather, the Panel noted that, with regards to Finkelstein, the imposed sanctions of a ten-year trading ban and an administrative penalty in the amount of $450,000, among other things, would “meet the objective of future protection of the capital markets, specific personal deterrence and general deterrence, and which would not be so excessive that it would tilt toward being punitive”.
In arriving at this penalty, the Panel took specific regard to Finkelstein’s personal circumstances, including the fact that he had a young family, that he was unlikely to work again in a major law firm, and that the proceeding and decision had caused significant reputational harm. Nevertheless, the Panel emphasized that Finkelstein was a lawyer and partner in a law firm, and as such, was in a “position of trust to whom clients and the firm entrusted confidential information” and that “…those in a position of trust, like Finkelstein, can have a significant impact on the markets and require suitable deterrence”.
With regard to the other main respondent, Paul Azeff, who was found to have engaged in insider tipping and trading in breach of section 76(1) and (2) of the Securities Act on seven occasions, the Panel found that continued registration for Azeff, even under strict supervision by his current employer, would not be sufficient. More specifically, the Panel held that supervision would not provide a sufficient shield to the market since the Panel had “no confidence” that Azeff would resist the temptation to do harm again. As a result, the Panel ordered a 10-year trading ban, a permanent prohibition on becoming an officer or director of a reporting issuer, disgorgement of $49,996 (being the amount he profited from the insider trading); and an administrative penalty in the amount of $750,000. The Panel rejected OSC Staff’s request for a lifetime trading ban, since that would be “too long” for a man in his 40s, and Staff’s request for an administrative penalty in the amount of $2,250,000, since that would be “too high”, particularly for a man with a young family and once all factors had been considered.
The Purpose of Sanctions
In its Reasons, the Panel made a number of important statements with regards to the purpose of sanctions generally, and the imposition of administrative penalties in particular. Among other things, the Panel noted that:
- sanctions should not be imposed to punish past conduct, but rather to remove the opportunity for violators from harming investors in the future and from lowering the integrity of the capital markets; sanctions should be carefully tailored to the particular breaches of the Act, the role of the perpetrator and the particular circumstances applicable to each respondent;
- sanctions ought to accomplish three goals: investor protection, future personal deterrence and an expression of general deterrence to like-minded individuals;
- while sanctions (including the imposition of an administrative penalty) can be used as a tool of specific and general deterrence, the layering on of sanctions must not aggregate to a result that is punitive rather than protective and deterrent – punishing is not a permissible goal of sanctions;
- it would not be an appropriate exercise of discretion to slavishly follow prior sanctions decisions and make adjustments to them based on the amount of profit garnered in these situations, or of the number of breaches; and
- when considering the quantum of an administrative penalty, a balance should be struck between an administrative penalty that is not so light as to be viewed as simply a cost of doing (unseemly) business, but not so excessive that it becomes punitive.
In addition to ordering sanctions, the Panel awarded OSC Staff its costs in a global amount of $500,000. The Panel rejected OSC Staff’s request for costs in the amount of $1,000,000 on the basis that this figure failed to appropriately recognize the divided success resulting from the “well-defended merits hearing”. The Panel also disagreed with Staff’s proposed apportionment of costs since not all of the respondents were involved in all the allegations and the volume of evidence for each respondent varied significantly.