In the recent Azeff [1] decision which followed a contested hearing, the Ontario Securities Commission (OSC) accepted several insider tipping and trading allegations based on “firmly established” circumstantial evidence against an M&A lawyer and four registrants. Cases based on circumstantial evidence have been successfully contested by respondents in other cases in Canada.[2]

Summary of Facts

OSC Staff alleged that, in connection with six separate M&A transactions between 2004 to 2007, a lawyer (Finkelstein) tipped his friend (Azeff), an investment adviser, and that four investment advisers (Azeff and his partner Bobrow, Miller and his associate Cheng) engaged in insider trading or tipping for themselves, family members and clients while in possession of material non-public information. Azeff and Bobrow did not know Miller and Cheng. Staff alleged that Miller and Cheng learned of material non-public information from “LK”, a friend and client of Azeff and Bobrow.

The OSC determined, on the balance of probabilities, that in three of the six alleged instances, Finkelstein tipped Azeff and Bobrow about material non-public information, and that they traded on such information. Miller and Cheng were determined to have committed insider trading in one instance.

OSC is entitled to draw inferences from “firmly established” circumstantial evidence

Staff has the onus to prove its allegations with evidence that is cogent, clear and convincing. It is often unclear whether this onus can be discharged in a circumstantial case. The OSC noted that a “mosaic of circumstantial evidence” is necessarily the foundation for inferences of insider trading and tipping because the only persons with direct knowledge of the relevant communications are the wrongdoers themselves. Circumstantial evidence includes evidence that a communication occurred, the parties’ relationship, the tippee’s knowledge, and the timing and volume of trading by the tippee and/or successive tippees in relation to the initiating conversations and successive tips.

Staff led evidence about, among other things, Finkelstein’s knowledge of pending M&A transactions that his firm was involved in, calls from Finkelstein to Azeff the broker, trading by Azeff and Bobrow after Finkelstein’s calls, and calls and emails between Azeff and Bobrow and other tippees. In some instances, Finkelstein deposited relatively large sums of cash after meeting with Azeff.

The OSC relied heavily on circumstantial evidence to draw inferences against the respondents. Importantly, the OSC confirmed that it could only draw inferences that, objectively determined, flowed “naturally and logically” from “firmly established” circumstantial evidence.[3] With respect to the allegations it accepted, the Panel determined that there was “no other reasonable explanation” for the trading pattern of Azeff and Bobrow after Azeff received calls from Finkelstein.[4]

The OSC rejected Staff’s argument that the six transactions should be viewed “through the lens of a pattern and similar fact evidence”. Staff had argued that the recurring pattern of conduct led to the “inescapable conclusion” that Finkelstein, Azeff and Bobrow were engaged in insider tipping and trading in all six cases alleged by Staff. Instead, the OSC examined the circumstances surrounding the six transactions individually.[5]

Indirect tippees must consider the source of an undisclosed material fact

The insider trading prohibition in the Securities Act (Ontario) applies to trading on undisclosed material facts originating from someone in a “special relationship” with an issuer. A special relationship is broadly defined. Special relationship persons include officers and directors of the issuer and a company engaged in a business or professional activity with or on behalf of the reporting issuer, such as Finkelstein’s law firm.

In a chain of multiple successive tippees (such as Bobrow, Miller and Cheng), do the insider trading and tipping prohibitions of the Act apply down the line? Does it matter if a tippee does not know that the information originated from a person in a “special relationship” with the issuer?

The OSC held that the Act is intended “to proscribe the abusive activities of an indefinite chain of indirect tippees” but is not “a regime of indefinite liability”. The OSC determined that:[6]

  • If a person “knows” that the material non-public information originated with someone in a special relationship with an issuer, then that person is caught by the Act regardless of whether the informant has any direct involvement with the issuer.
  • If a person receives “very detailed” material non-public information from an informant and “ought reasonably to have known” that the information originated from someone in a special relationship with an issuer, then that person is caught by the Act regardless of whether the informant has any direct involvement with the issuer.

The following non-exhaustive factors will inform whether a person “ought reasonably to have known” that the information originated from someone in a special relationship with an issuer:[7]

  1. What is the relationship between the tipper and tippee?
  2. What is the professional qualification and standing of the tipper?
  3. What is the professional qualification of the tippee?
  4. How detailed and specific is the material non-public information?
  5. How long after s/he receives the material non-public information does s/he trade?
  6. What intermediate steps before trading does the tippee take, if any, to verify the information received?
  7. Has the tippee ever owned the particular stock before?
  8. Was the trade a significant one given the size of his portfolio?

Miller and Cheng acknowledged receiving information from “LK” but did not know the source and therefore the reliability of that information. They argued that they were trading on rumours in the marketplace. Trading on a rumour does not contravene the Act.[8]

The OSC determined that there was “no evidence of rumours” in the marketplace that the subject issuer was a takeover target. In contrast, the information that Miller received from LK was “detailed and very specific”. Miller knew that the issuer was “in play”, for $40, in cash, and that the transaction would be announced before Christmas. The OSC accepted that such information could arise from a rumour but held that a “registrant should inquire of his tipper the source of the information” and that “[f]ailure to inquire is not a defence.”[9]

Absence of motive is not determinative

The OSC did not find compelling evidence to support Staff’s allegation that Finkelstein received cash consideration for providing tips to Azeff. The OSC confirmed that motive in the form of consideration received by a tipper “can form an important factor in concluding that tipping occurred”. However, the “[a]bsence of motive is not a determinative factor in favour of no tipping having occurred.”[10]


[1] The OSC’s heavy reliance on circumstantial evidence may be viewed as lowering Staff’s evidentiary onus to prove insider trading and tipping allegations. However, the Azeff Panel noted two important limits that inform the approach to circumstantial evidence.

First, circumstantial evidence must be “firmly established”; speculation cannot be used to fill in the gaps. For instance, even though the Panel noted that Finkelstein’s habit of keeping relatively large sums of cash at home was unusual, it was not prepared to connect the cash to ill-gotten gains when there was no corresponding evidence of cash withdrawals from Azeff’s account or monies from other sources.[11]

Second, inferences drawn from circumstantial evidence should flow “naturally and logically”. Although Azeff’s and Bobrow’s clients purchased MSDI shares prior to a takeover announcement, the Panel held that the MSDI allegations were undermined because neither Azeff nor Bobrow bought MSDI shares.[12] Similarly, Azeff’s clients sold Pacer Dome shares prior to the takeover announcement which the Panel felt was “illogical” if Azeff had been tipped by Finkelstein.[13]

[2] The Panel’s broad interpretation of the “special relationship” element of insider trading should give registrants and other persons who qualify as “market participants” pause before they share or rely upon material non-public information. Market participants standing in the “indefinite chain of indirect tippees” have little control over how the material non-public information they share will be used by recipients.

[3] Registrants should take affirmative steps to inquire about the likely source of the material non-public information they receive, even if they reasonably believe it is a rumour. Registrants should consider documenting their affirmative consideration of this issue.