In the recent Re Lum decision, the British Columbia Securities Commission (BCSC) dismissed insider trader and tipping allegations against an investment analyst and his sister because the trading occurred on the basis of information that already had been generally disclosed. In the circumstances, the tipping that occurred, though not endorsed by the BCSC, was not found to warrant the imposition of a public interest penalty. The Panel’s approach to the public interest point is consistent with other decisions in BC and Ontario where a public interest penalty is denied after an underlying insider trading case has failed.
Summary of Facts
BCSC Staff alleged that Victor Lum and his sister, May Lum, traded on undisclosed material information about Baja Mining Corp (Baja), a reporting issuer in British Columbia. Staff also alleged that the respondents’ conduct breached the public interest.
Mr. Lum was an analyst at a “global institutional investment and advisory firm” (MK Capital). MK Capital and Mr. Lum were not registrants under the Securities Act (British Columbia). Following an internal investigation, MK Capital alleged that Mr. Lum had breached its policies and procedures by trading, and assisting his sister to trade, in companies held in MK Capital’s portfolios while possessing undisclosed material information about those companies. During ensuing litigation between MK Capital and Mr. Lum over bonuses, MK Capital informed various regulatory authorities, including the BCSC, about its allegations of misconduct against Mr. Lum.
Insider trading and tipping allegations dismissed
Starting in September 2010, a company owned and controlled by Ms. Lum (Apulum) purchased $363,000 worth of Baja shares. Approximately five months later, MK Capital first purchased Baja shares. By November 2011, MK Capital and its related parties held 19.9% of Baja shares.
Staff’s insider trading and tipping allegations concerned Apulum’s sale of Baja shares on May 18 and June 5, 2012. The May 18 sale was triggered by Mr. Lum’s instructions to Ms. Lum via text messages. There was no evidence that Mr. Lum instructed Ms. Lum to sell Baja shares on June 5. Prior to both transactions, Mr. Lum and a MK Capital team had visited Baja’s Bolea Project site. Staff alleged that Apulum’s trading was driven by Mr. Lum’s knowledge of undisclosed material information about the Project’s completion percentage and ongoing funding issues that were not publicly disclosed until Baja filed a news release and material change report on June 21.
The BCSC dismissed the insider trading and tipping allegations, finding that the alleged undisclosed material information had been generally disclosed prior to Apulum’s trading on May 18. On April 23, prior to Mr. Lum’s site visit, Baja issued a news release and material change report regarding capital cost overruns and related funding issues with the Project. Also, on May 16, Baja issued another news release and first quarter report with further details about the Project’s capital cost overruns and funding issues. Even several analysts following Baja commented on the Project’s construction falling behind and Baja’s ongoing liquidity issues.
To buttress its finding that the alleged undisclosed material information was known prior to June 21, the Panel examined market reaction to Baja’s disclosures from April to June 21. After Baja’s April 23 disclosure, its share price dropped to a low of $0.34/share from a pre-disclosure high of $0.98/share. In contrast, there was “no significant market reaction” following the June 21 disclosure, which Staff had alleged was the first public disclosure of the cost overruns on which Apulum traded.
Public interest allegations dismissed
The BCSC followed the recent decision in Wood (Re) where a BCSC Panel observed that the public interest authority “must be exercised cautiously … where protection of the public interest requires it.” Like other recent BCSC cases, the Panel cautioned against finding conduct contrary to the public interest where the same conduct was unsuccessfully alleged to have contravened a specific provision of the Act. The BCSC therefore did not consider the respondents’ conduct underlying the insider trading and tipping allegations (which were dismissed) to assess whether they acted contrary to the public interest.
Instead, the Panel focussed on Staff’s allegation that Mr. Lum breached the public interest by deceiving MK Capital and contravening its policies and procedures by (a) not disclosing his interest in issuers held in MK Capital’s portfolios, and (b) not seeking approval to trade in issuers in MK Capital’s portfolios or named in MK Capital’s Restricted List.
The BCSC determined that Mr. Lum’s alleged non-compliance with MK Capital’s policy manual did not, by itself, breach the public interest. It found that Mr. Lum’s compliance with the manual and his employment agreement were matters governed by foreign law. Nevertheless, the Panel held that Mr. Lum did not breach MK Capital’s manual.
- The Panel was not satisfied that Mr. Lum was deceptive when he filed confirmations with MK Capital stating that he held no trading accounts and did no trading. Apulum’s account was not Mr. Lum’s personal account.
- MK Capital did not inform all of its employees about the issuers on its Restricted List. There was no evidence that Mr. Lum knew that the issuers involved in the public interest allegations against him were on the Restricted List.
- There was no evidence Mr. Lu had any undisclosed material information about the other issuers, or was involved in MK Capital’s decision to invest in those issuers.
Despite the foregoing, the BCSC emphasized that Mr. Lum’s involvement in Apulum’s trading was potentially problematic, noting:
“We do not condone the conduct of Victor Lum. His conduct was potentially adverse to the interests of MK and MK’s clients. To have an employee of MK directing and instructing a third party to trade in securities known by the employee to be held in his employer’s investment portfolios potentially puts the employee and that other party in competition with the employer and its clients.”
- The BCSC continued the trend seen in the OSC’s Waheed case and its recent Carnes decision, by declining to make a public interest order where Staff alleged but failed to show an express statutory violation. It is unclear whether the BCSC would have reached the same conclusion if Staff’s case was entirely founded on the public interest allegations, including Mr. Lum’s conduct relating to Baja which the Panel held was “potentially adverse to the interests of MK and MK’s clients”.
- Canadian securities regulators generally do not commence enforcement proceedings based on private law disputes that are before a Court. MK Capital and Mr. Lum were litigating whether Mr. Lum had breached the company’s policies. Despite this, Staff’s public interest allegations were largely based on Mr. Lum’s breach of MK Capital’s policies. Additionally, despite expressing some reluctance in making a public interest finding against Mr. Lum for breaching MK Capital’s policies, the BCSC nonetheless made a determination that he did not breach any MK Capital policies thereby taking a position on one of the issues in the ongoing litigation between MK Capital and Mr. Lum.
- Canadian securities regulators do not necessarily consider the lack of nexus between the alleged wrongdoer and their jurisdiction as foreclosing the exercise of the public interest power. In Lum, the BCSC was reluctant to make a public interest finding against the respondents where the issuers and the respondents had “limited, if any, connection” to British Columbia. The Panel noted that if Mr. Lum’s conduct had affected MK Capital’s ability to make accurate regulatory filings in British Columbia, a public interest finding could be made “at least regarding issuers with a substantial connection to British Columbia, such as being a reporting issuer with a head office in Vancouver.”