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Divisional Court weighs in on tipping chain

Toronto lawyer loses insider trading appeal
Lawyers say a Divisional Court’s rejection of Toronto Lawyer Mitchell Finkelstein’s appeal of an Ontario Securities Commission finding he was part of a tipping chain will make it easier for the regulator to prove such insider trading cases.

Divisional Court weighs in on tipping chain
Gillian Dingle says a recent decision brings clarity to the law concerning tipping chains.
In Finkelstein v. Ontario, the court upheld the OSC’s finding that Finkelstein, a former partner with Davies Ward Phillips & Vineberg LLP, provided insider information to a friend who then passed it to others to trade on.

The Divisional Court allowed the appeal of Man Kin Cheng, a former investment advisor at TD Securities Inc., who was allegedly the last link in the chain, as the court found the panel made mistakes in assessing the evidence in his case. But the court dismissed the appeals of Paul Azeff, Korin Bobrow and Howard Jeffrey Miller, who together made up the rest of the tipping chain. 

The court found it was reasonable for the panel to draw its conclusions based on the entirety of the circumstantial evidence that was before them.

“At the very least, it was open to the Panel to conclude that it was more likely than not that Azeff’s source was Finkelstein,” Justice Ian Nordheimer wrote in the decision, on behalf of a three-judge panel.

“As will be important throughout the consideration of all of these appeals, one must always remember that the standard of proof before the Panel is proof on the balance of probabilities. It is not the higher criminal standard of proof beyond a reasonable doubt.”

Lawyer Gillian Dingle, of Torys LLP, says the decision is consistent with others in allowing the heavy reliance on circumstantial evidence, but it also brings clarity to the law concerning tipping chains.

Dingle, who was not involved in the case, says that regulators do not need to prove someone lower down in the chain knows the identity of the original tipper. It is enough to be able to prove that the tippee is aware the person giving them the inside information is in a “special relationship” with the person above them in the chain.

“It would be tough to be able to make out a case that if I’m the fifth person in a chain of tipping that I know who the original tipper was and their relationship to the issuer,” she says.

“The court says you don’t have to know that. You don’t have to go back that far. You just have to go one link back in the chain.”

Finkelstein was the lead lawyer in a proposed takeover of Masonite International Corp. by an American private equity firm, Kohlberg Kravis Roberts & Co., in 2004. 

In the 2015 decision, which is subject to the appeal, the OSC found that Finkelstein had given inside information about takeover deals, including the Masonite deal, to his friend Azeff, who was a CIBC investment advisor at the time. 

Azeff then took that information and relayed it to others, forming the tipping chain, according to the OSC decision.

Simon Bieber, a lawyer representing Miller, says his client has sought leave to appeal the decision to the Ontario Court of Appeal.

Bieber says that as you get further away from the original source of information, it should be more difficult to establish insider trading. 

“And that is because there is a lot more uncertainty about whether the information is actually ‘inside’ information or just an unsubstantiated rumour that is no different than what you find in Internet chat rooms,” says Bieber, who is a partner at Wardle Daley Bernstein Bieber LLP.

The person down the chain needs to know something about how the information left the company and got to him or her but not necessarily the identity of the original tipper, Bieber says.

He added that the Divisional Court’s ruling lacks an analysis of the distinction between trading based on speculation and trading when you know or should know you have inside information.

Cheng, who was the last link in the chain below Miller, argued in his successful appeal that the OSC’s finding against him was unreasonable, as Miller had told him that the information was a rumour.

“He was what we’ve called the most outside insider ever to have been accused of insider trading by the OSC,” says Janice Wright, of Wright Temelini LLP, who represented Cheng.

“By way of example, he didn’t know any of the other players in the case, save and except the one person from whom he received the impugned information.”

The court found that the OSC failed to take evidence into account that absolved Cheng and that the commission’s conclusion on his case was “unsafe” and “unreasonable” and must be set aside.   

In Finkelstein’s appeal, he argued that the evidence did not prove contact had actually taken place between him and Azef.

Nordheimer noted that while he accepted Finkelstein’s argument, the panel was entitled to look at the evidence in its entirety. 

“. . . [F]actual conclusions are not based on viewing evidence in water tight compartments,” he wrote. “Rather, factual conclusions are drawn from a consideration of all the evidence. When one pieces different portions of the evidence together, factual conclusions may be available that are not apparent from a single piece of evidence.”

Lawrence Ritchie, of Osler Hoskin & Harcourt LLP, says the decision shows the high degree of deference the courts give the OSC panels in their decisions and how hard it is to overturn such a decision on appeal. 

“I think it makes it very clear that only in extraordinary circumstances will the appeal court interfere with the findings of the securities commission and in particular the application of evidence, particularly circumstantial evidence in insider trading cases,” says Ritchie, who was not involved in the case.

The Finkelstein decision was released on the same day as a Supreme Court of the United States decision, Salman v. United States, which clarified the law concerning tipping in that jurisdiction. Salman partially rejects a controversial decision in the Second Circuit Court of Appeal, United States v. Newman, which held that in order to find a tipper was guilty of tipping, prosecutors had to demonstrate they received a personal benefit of pecuniary value. 

The Salman decision broadened the scope of what that personal benefit can be to things such as friendship, lessening the evidentiary burden on prosecutors, Ritchie says.

“The combined impact or effect of both Salman and the Divisional Court’s confirmation of Finkelstein suggest that prosecutors have greater leeway in the type of evidence and the need of a factual basis in order to successfully prosecute an insider trader case on both sides of the border,” he says.

Lawyers representing Finkelstein and Azeff did not respond to requests for comment. 


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