The Ontario Court of Appeal recently released a significant decision on the insider trading provisions of provincial securities legislation. In Finkelstein v. Ontario Securities Commission, 2018 ONCA 61, the Court considered for the first time the insider trading and tipping scheme in the Securities Act, R.S.O. 1990, c. S. 5 (the “Act”), and particularly, the definition of a “person in a special relationship with an issuer” as it applies to successive tippees who share insider information.


The Ontario Securities Commission (the “OSC”) brought proceedings against five individuals on the grounds that they breached the Act’s insider trading and tipping provisions by recommending the purchase of shares in a reporting issuer, Masonite International Corporation (“Masonite”). The OSC alleged that material, non-public information about Masonite (the “MNPI”) flowed through a chain of five people, beginning with a lawyer who was working on a takeover bid involving Masonite (Mitchell Finkelstein), who informed an advisor friend (Paul Azeff) of material facts about the bid. Azeff informed an accountant, L.K., who passed along the information to an investment advisor Howard Miller, who in turn communicated the MNPI to his colleague Francis Cheng. Finkelstein, Azeff, Miller, Cheng, and another person informed by Azeff were charged.

The OSC hearing panel (the “Panel”) found that all five respondents were in a special relationship with Masonite and had informed others of the MNPI contrary to s. 76(2) and s. 127 of the Act. All five respondents appealed the decision to the Ontario Divisional Court. The Divisional Court only allowed Cheng’s appeal, holding that the Panel had made a number of factual errors in its analysis of the evidence that undermined its conclusion that Cheng ought to have known he was receiving insider information. The OSC appealed the Divisional Court’s decision in respect of Cheng, and Miller also obtained leave to appeal to the Court of Appeal.

The Court of Appeal Decision

The primary issue on appeal was the Panel’s interpretation of a “person in a special relationship with the issuer”. In particular, the section 76(5)(e) captures in the definition of “person in a special relationship with an issuer” any individual who receives a tip and knows or ought reasonably to have known that the person they received the tip from is in a special relationship with the issuer. This provision therefore extends liability down a chain of tipping to everyone who ought to have known the information came from an insider.

There was no suggestion that Miller or Cheng had actual knowledge that their immediate source of the information stood in a special relationship with Masonite. Rather, Miller and Cheng took issue with the factors relied on by the Panel to determine whether they “ought reasonably to have known” their respective tippers stood in a special relationship with Masonite.

The Panel considered the following factors:

  1. What is the relationship between the tipper and tippee?
  2. What is the professional qualification of the tipper, and does his position put him in a milieu where transactions are discussed?
  3. What is the professional qualification of the tippee, and does his position mean he should know that he cannot take advantage of confidential information?
  4. How detailed and specific is the MNPI?
  5. How long after the tippee receives the MNPI does he trade? Can it be inferred that the tippee has confidence in the source of the tip?
  6. What steps does the tippee take, if any, to verify the information received before trading?
  7. Has the tippee ever owned the particular stock before?
  8. Was the trade a significant one given the size of his portfolio?

The Court rejected Miller’s argument that the factors fundamentally diverge from the plain language of s. 76(5)(e) by focusing on the relationship between the tipper and tipee rather than the relationship between the tipper and issuer. Similarly, the Court was not persuaded by Cheng’s submission that factors five and six were not relevant to an objective inquiry into the tippee’s state of knowledge about the tipper’s source of information.

The Court of Appeal agreed that the factors set out by the Panel point to the types of circumstantial evidence that may permit the Panel to reasonably infer the tippee’s state of knowledge, and are a reasonable guideline that can be applied in the vast majority of situations. Significantly, the Court found that the Panel’s emphasis on circumstantial evidence was reasonable given that there is generally little direct evidence in insider trading and tipping cases.

In respect of the OSC’s appeal of the Divisional Court decision setting aside the finding of liability against Cheng, the Court of Appeal held that the Divisional Court had improperly acted as if it were a decision-maker of first instance and reinstated the Panel’s decision that Cheng was liable.

Key Take-Aways

This decision clarifies the applicable test for determining when people further down the tipping chain will be liable under the Act where they ought reasonably to have known that the originating source of the information was in a close relationship with the issuer.

This case also confirms that circumstantial evidence, which usually forms the bulk of the evidence in insider trading and tipping cases, can reasonably be relied on to draw permissible inferences as to whether it is more likely than not that insider trading or tipping has occurred.

Case Information

Finkelstein v. Ontario Securities Commission, 2018 ONCA 61

Dockets: C63514; C63502

Date of Decsion: January 25, 2018