1. Beyond the Headlines: The Broader Implications of the Finkelstein Decision
Presentation to the Association of Corporate Counsel – June 16, 2015
David A. Hausman Cullen Price Charles Corlett Brad Moore

2. Overview Why should you care? A primer on insider trading and tipping
Review of OSC’s decision in the Finkelstein case
Relevance to registrants and public issuers
Use of circumstantial evidence
Different legislative approaches among provinces
Unique issues for registrants – information containment

3. Why Should You Care?
Insider trading is an offence generally committed by individuals in private, but it has implications at the corporate level for public issuers and registrants
The Finkelstein case has attracted a considerable amount of publicity, largely due to the involvement of a lawyer from a Bay Street firm
Less broadly reported are findings against two investment advisors who were “downstream tippees”
These findings have implications for advisors, portfolio managers and their supervisors

4. Insider Trading – Securities Act s. 76(1)
No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.

5. Tipping – Securities Act s. 76(2)
No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed.
Interesting fact:
In the United States, tipping is illegal only if the tipper gets some tangible or indirect benefit from the tipping, and passes along the tip with the expectation that the recipient will try to profit from it.

6. “Special Relationship”
A “person or company in a special relationship with a reporting issuer” includes:
A person or company that is considering or evaluating whether to make a take-over bid, or that proposes to make a take-over bid
A person or company that:
learns of a material fact or material change with respect to the issuer from any other person or company who is in a special relationship with the issuer, and
knows or ought reasonably to have known that the other person or company is a person or company in such a relationship.
This captures the activities of an indefinite chain of indirect tippees

7. Key Difference Among Provincial Securities Laws
British Columbia and Alberta:
If in possession of material non-public information relating to an issuer, cannot “recommend or encourage” another person to buy or sell a security of the issuer
Implication: whether an act is lawful or not may depend on which province you are in

8. The Finkelstein Decision - Allegations
Finkelstein, an M&A partner at a Bay Street law firm, was in possession of material non-public information relating to several takeover transactions by virtue of either his involvement in the deals or through his accessing of deal documents on the firm’s document management system
Finkelstein tipped an investment advisor and long-time friend, Azeff, that a takeover transaction was about to occur

9. The Finkelstein Decision - Allegations
Azeff tipped his partner Bobrow, and both made significant purchases of shares for themselves, friends and family
Azeff and Bobrow tipped friends, who in turn tipped two more investment advisors: Miller and Cheng, both of whom also bought shares

10. The Finkelstein Decision - Findings
Finkelstein engaged in tipping in respect of three of the six transactions in issue
Some or all of the four investment advisors engaged in insider trading and tipping
Three of the four investment advisors (Bobrow, Miller and Cheng) were “down-stream tippees” who did not receive information directly from Finkelstein
The panel concluded that each of them knew or ought reasonably to have known that the information originated with a person in a special relationship with the issuer

11. “ought reasonably to have known”
Relationship between tipper and tippee
Professional qualification and standing of tipper
Professional qualification of the tippee
“higher standard of alertness is expected” of gatekeepers
Detail and specificity of MNPI
How long until tippee trades
Any intermediate steps by tippee to verify information
Tippee’s trading history with particular issuer
Significance of trade in relation to tippee’s portfolio

12. Circumstantial Evidence and Inferences
Tipping is difficult to prove because the only persons who have direct knowledge of the relevant communications are the wrongdoers themselves
A variety of types of circumstantial evidence can be indicia of insider trading or tipping:
Unusual trading patterns
Timely trade shortly before public announcement
First time purchase of the stock
Abnormal concentration of trading by one firm or a few IA’s
Trade represents very significant percentage of portfolio

13. Relevance to Registrants
Difficult to distinguish between rumours and information of problematic specificity
Registrants have a duty to supervise the activities of advisors
Duty under SRO rules to investigate
Duty to prevent insider trading by clients

14. Insider Trading and Acquisitors
Another significant development is specific to companies public or private that are contemplating acquisitions of public issuers.
Potential acquisition is often impactful non-public information
Securities Act formerly required there to be a “proposal” to acquire for the directors, officers and employees to be in a special relationship
The OSC considered this issue in Donald. Donald found not to be in a special relationship because no “proposal” was on the table when he traded

15. Insider Trading and Acquisitors (cont’d)
Donald was found to have violated public interest
Subsequent amendment to the Securities Act to extend to “considering or evaluating”
Implications for acquiring companies that receive and potentially evaluate numerous solicited or unsolicited M&A proposals.

16. “Recommend or Encourage”
Disparity in laws among provinces
Attempt to expand law in Ontario to recommending or encouraging – Agueci
Interpretation of recommending or encouraging provisions in Alberta – Walton
Includes some intention to convey information with the expectation that it may be relied on
Practical considerations for public issuers and dealers—recommendations at “meet and greet” roadshows

17. Exemptions To The Prohibition Against Insider Trading
Exemptions are set out in the General Regulation under the Securities Act
Exemptions apply when:
the employee(s) of an investment dealer who participate in making the decision to purchase or sell the securities of the reporting issuer do not have actual knowledge of the undisclosed material fact or material change; and
no advice was given by any person or company who had actual knowledge of the undisclosed material fact or the material change.

18. Exemptions To The Prohibition Against Insider Trading (Cont’d)
The Regulations state specifically that in determining whether the exemptions are available, it is relevant whether and to what extent the investment dealer has implemented and maintained “reasonable policies and procedures” to:
prevent contraventions of the prohibition against insider trading by persons making or influencing investment decisions on its behalf, and
prevent the transmission of undisclosed material facts or material changes contrary prohibition against tipping.

19. “Reasonable Policies And Procedures”
“Reasonable policies and procedures” will vary from firm to firm depending on nature of firm’s business, size, clients and the markets in which it operates
Education of employees
Containment of information
Restriction of transactions – grey lists and restricted lists
Compliance – monitoring and supervision
Guidance
OSC Policy – Guidelines for Policies and Procedures Concerning Inside Information
Member Regulation Notice 0377 – Guidelines for Confidential Information Containment