In previous entries posted on this blog, we have identified challenges securities regulators and prosecutors face in successfully bringing insider trading cases on both sides of the border. A recent Alberta Court of Appeal (“Court of Appeal”) decision inWalton v Alberta (Securities Commission) could be seen as adding to the apparent prosecutorial setbacks. At the same time, a recent appeal decision from the Alberta Court of Queen’s Bench in R. v. Kirk reminds us that authorities have a range of options – administrative, quasi-criminal and criminal – to deploy in the appropriate circumstances to combat capital markets fraud and other misdeeds. Changes to the current national framework could present an opportunity to have a more coordinated, coherent and focused approach.
Walton v Alberta (Securities Commission)
The Alberta Securities Commission (“ASC”) Staff brought charges under the Alberta Securities Act (the “Act”) against several individuals, claiming that they had obtained knowledge of a potential takeover of Eveready Inc. by Clean Harbours Inc. and made improper use of that material information prior to the press release in April 2009 that disclosed the transaction to the public. An ASC Panel (the “Panel”) found that one individual had engaged in insider trading and improperly disclosed the material fact of the transaction to others, and that he and others were liable for tipping and recommending or encouraging others to purchase shares of Eveready prior to the transaction’s public announcement.
The Panel ordered sanctions against five of the individuals, including significant administrative penalties, the disgorgement of profits, costs for the investigations and prohibitions from trading in securities and acting as directors and officers. The sanctions ordered against the individuals totaled $2.8 million, of which $1.75 million was to be paid solely by the individual who was found to have engaged in insider trading.
The Court of Appeal upheld the findings in respect to two of the individuals but set aside the sanctions ordered against them and remitted the sanctions back to the Panel for reconsideration because on the record before it, the Court could not determine if the sanctions were reasonable as the sanctions lacked justification, transparency and intelligibility. The Court of Appeal also noted that it appeared the sanctions over emphasized the principle of deterrence at the expense of considering the individual circumstances of the individual. Additionally, the Court of Appeal set aside the findings of culpability against the remaining individuals, finding that the Panel had improperly interpreted the Act’s provisions related to “recommending or encouraging” and that the Panel in coming to its conclusions had relied on speculation, and presumption that was not based in the evidence.
R. v. Kirk
In R. v. Kirk, the Court of Queen’s Bench dismissed an appeal of a decision of the Provincial Court by three individuals charged with breaches of the Act (including fraud), who argued that aspects of the Act that allow the court to impose penal sanctions such as heavy fines and imprisonment are ultra vires the Alberta Legislature’s authority and infringe on federal authority under the Constitution Act, 1867 over matters of a criminal nature.
In August 2011, the Crown charged three individuals with contravening certain provisions of the Act,which included allegations of fraud, misleading investors, and unregistered advising (the “Impugned Provisions”) The accused brought an application before the Provincial Court alleging that the Impugned Provisions were ultra vires the Alberta Legislature because they relate to criminal law and fall within the exclusive jurisdiction of Parliament under the Constitution Act, 1867, s. 91(27). The Provincial Court dismissed the application holding that the Impugned Provisions fell within provincial jurisdiction. The accused appealed the Provincial Court decision to the Court of Queen’s Bench.
On appeal, the Court of Queen’s Bench applied the two part test from Reference re Firearms Act (Canada),  1 SCR 783 (“Firearms”) to determine first the “pith and substance” or essential character of the law, and second to classify the “essential character by reference to the heads of power under the Constitution Act, 1867 in order to determine whether the law comes within the jurisdiction of the enacting government. If it does, then the law is valid.” The Court of Queen’s Bench held that despite certain criminal law characteristics of the Impugned Provisions, their essential character when looked at in the context of the overall purpose of the Securities Act “is to protect the investing public, to effect and maintain the integrity and public confidence in the public markets that are subject to Alberta security laws and the suppression of conditions that are likely to erode those objectives.” The Court of Queen’s Bench held that the Impugned Provisions were part of the comprehensive regulatory scheme in place in Alberta to deal with securities law and served to deter and prevent rather than punish. Under the second part of the Firearms test, the Court of Queen’s Bench relied on the double aspect doctrine and held that the Impugned Provisions were inter vires the Alberta Legislature:
In this case, there is overlap between the provincial and federal aspects of the Impugned Provisions. Because these aspects are of roughly equal importance, this Court applies the double aspect doctrine for judicial restraint to uphold the validity of those sections. They are not ultra viresthe Alberta Legislature.
While authorities continue to face challenges in successfully prosecuting alleged insider trading, the decision in Kirk highlights the role that the provinces, under provincial jurisdiction, could more effectively play to complement the federal criminal powers in a more coordinated, comprehensive securities regulatory scheme.
The governments of Ontario, British Columbia, Saskatchewan, New Brunswick and Canada released draft legislation for the new co-operative capital markets regulator, the federal Capital Markets Stability Act and the Provincial Capital Markets Act on September 8, 2014. The proposed cooperative capital markets regulatory system reflects a desire to pool jurisdiction over capital markets including enforcement of violative behavior.
The participating jurisdictions say that the “Cooperative System will provide the comprehensive enforcement capacity needed to quickly detect and take action against misconduct”, and that “[t]he consolidation of administration and enforcement under the [Cooperative Authority] will also facilitate better cooperation with law enforcement agencies, prosecution services and other foreign and domestic regulatory authorities by providing a single point of contact.”