On August 26, 2014, a panel of the Ontario Securities Commission released its decision in a high-profile enforcement proceeding brought by OSC Staff against Jowdat Waheed and Bruce Walter. Staff had made a series of allegations against Waheed and Walter, including allegations of insider trading and conduct contrary to the “public interest,” arising out of a hostile take-over bid the respondents had commenced for Baffinland Iron Mines Corporation (Baffinland) in 2010. In a decision that sets out important guidance in respect of both the test for insider trading and the scope of the OSC’s “public interest” jurisdiction, the panel dismissed all of Staff’s allegations.

BACKGROUND

The events in issue date to early 2010. At that time, Baffinland was a junior mining company attempting to develop iron ore interests it held in Nunavut. In February 2010, Baffinland retained Waheed as a consultant to advise on strategic options for the company, including partnerships and financing options. Waheed served as a consultant until April 2010, but remained in contact with the company through the summer of 2010.

In September 2010, Waheed and his colleague Walter commenced a hostile take-over bid for Baffinland. The take-over bid triggered a bidding war for the company and ultimately resulted in a successful joint bid being made by Waheed and Walter, in conjunction with ArcelorMittal S.A., in early 2011.

On January 9, 2012, almost a year after the completion of the take-over of Baffinland, Staff issued a Statement of Allegations against Waheed and Walter alleging insider trading and conduct contrary to the “public interest.” The insider-trading allegations were premised on allegations that at the time they commenced their bid in September 2010, Waheed and Walter were in possession of material non-public information about Baffinland that Waheed had allegedly obtained in the course of his work as a consultant earlier in 2010.

In addition to the insider-trading allegations, Staff alleged that Waheed and Walter had engaged in conduct “contrary to the public interest.” The OSC has a general power to make orders that are in the “public interest” of upholding the principles of Ontario securities law. These “public interest” orders can include sanctions against individuals who have been found to have acted contrary to the public interest.

Staff made two overarching “public interest” allegations. First, Staff made what was essentially an additional insider-trading allegation, to the effect that Waheed and Walter had traded while in the possession of “confidential information” and had thus acted contrary to the “public interest” of fair and transparent capital markets. While the allegation of trading while in possession of “confidential information” largely mirrored the conventional insider-trading allegation, it would have (if accepted by the panel) allowed Staff to avoid the obligation of proving that the non-public information in question was “material” information.

Staff’s second “public interest” allegation related to Waheed’s conduct earlier in 2010, both during and following the period in which he was a consultant to Baffinland. Staff alleged that Waheed breached obligations of loyalty to Baffinland during this period, including by exploring options for electing new management of Baffinland. Staff asserted that by doing so Waheed had harmed not only Baffinland, but also the broader public interest.

THE DECISION

In its decision, the panel dismissed all of the allegations against Waheed and Walter. The allegations of insider trading were dismissed on the basis of the panel’s finding that the two individuals did not possess any material undisclosed information about Baffinland at the time they commenced their take-over bid, while the “public interest” allegations were dismissed on the basis that the allegations brought by Staff did not properly fall within the OSC’s public interest jurisdiction, and in any event were not contrary to the public interest. Both the insider trading and public interest findings constitute important securities law precedents.

Insider Trading and “Material Facts”

In regard to the insider-trading allegations, the panel found after detailed consideration of the facts that the various items of information allegedly possessed by Waheed (and passed along to Walter) were either never material, or had ceased to be material by the time of the September take-over bid as a result of being stale-dated.

Ontario’s prohibition on insider trading only applies to trading on “material” inside information, with the test for materiality being essentially whether the information would affect the market price of the company’s stock. Therefore, the finding that Waheed and Walter did not possess “material” information about Baffinland as of September 2010 meant that they had not engaged in insider trading when they commenced their take-over bid.

Although the panel’s decision on the insider-trading allegations largely turns on the facts before it, the decision nonetheless carries precedential value for future insider-trading proceedings. In particular, the decision is significant in that the panel found that while the information obtained by Waheed may have been material when first obtained in early 2010, it had become stale-dated and had ceased to be material by September 2010. As such, the panel’s decision affirms that in a dynamic business environment, information can lose its “materiality” over a period of as little as a few weeks or months. As such, the panel’s decision could serve as an important precedent for parties to future securities litigation arising out of fast-evolving “deal” environments.

Conduct Contrary to Public Interest

In regard to the “public interest” allegations, the panel found that as a foundational question of law, the allegations made by Staff fell outside the scope of the OSC’s “public interest” jurisdiction.

First, in regard to Staff’s quasi-insider-trading allegation of trading on “confidential information,” the panel determined that since Ontario’s actual insider-trading laws are expressly limited to trading on “material” undisclosed information, it would not be appropriate to make a finding in the “public interest” based on a lesser standard of trading on any “confidential” information. Since the panel had already found that Waheed and Walter did not violate Ontario’s insider-trading laws in the course of their take-over bid, it also dismissed the further allegation that the bid was somehow contrary to the “public interest.” In doing so, the panel essentially rejected the use of the “public interest” jurisdiction as a lower-threshold replacement for proving the requirements for insider trading as set out in Ontario law.

Second, in regard to Staff’s allegation that Waheed had acted contrary to the public interest by allegedly breaching his obligations as a consultant to Baffinland, the panel again found that Staff’s allegation fell outside of the appropriate exercise of the OSC’s “public interest” jurisdiction. The panel found that the question of a breach by Waheed of his contractual duties to Baffinland was a matter of private dispute between Waheed and Baffinland, and that it was up to Baffinland to have commenced court proceedings against Waheed on its own behalf if it felt that such proceedings were warranted. As a result, the panel also dismissed Staff’s second allegation of conduct contrary to the “public interest.”

Both of the above findings constitute important precedents in favour of a restrained and conservative interpretation of the OSC’s “public interest” jurisdiction. As such, the decision is likely to be an important precedent for respondents to securities regulatory proceedings in the coming years.