The Court of Appeal found that Cheng and Miller ought to have known that their tipper was in a special relationship with the issuer and that the material they received was, therefore, inside information.
Lawyer Gillian Dingle of Torys LLP, who was not involved in the case, says the decision clarifies the law on tipping and tipping chains in insider trading cases.
“This decision reinforces the ability of the OSC to rely on a reasonable inference drawn from fact,” she says.
In the decision, the Court of Appeal upheld a number of factors the original OSC panel set out to determine whether an individual is in a special relationship.
The Securities Act holds that no person or company in “a special relationship with an issuer” should buy or sell securities of that issuer with knowledge of “a material fact or material change with respect to the issuer that has not been generally disclosed.”
The act also bars the sharing of that information with anyone before the information is disclosed.
The Court of Appeal found that there are two categories of a “person in a special relationship with an issuer.” One category is a person who is very closely connected to the issuer, and the second category is a person who is further removed but who received the non-public information.
In 2004, Finkelstein was the lead lawyer in a proposed takeover of Masonite International Corp. by an American private equity firm called Kohlberg Kravis Roberts & Co.
The OSC found that Finkelstein had given insider information about the Masonite Deal to his friend Azeff, who was a CIBC investment advisor at the time. Azeff then relayed that information to others, the OSC decision said. Cheng, who was the last link in the chain below Miller, argued in his appeal to the Divisional Court that Miller had told him the information was a rumour.
A 2017 Divisional Court ruling had allowed the appeal of Cheng, who was allegedly the last link in the tipping chain, as the court found the panel made mistakes in assessing the evidence.
The OSC appealed that ruling and the Court of Appeal reinstated the panel’s original decision, saying its finding of liability against Cheng was reasonable.
Janice Wright, one of the lawyers representing Cheng, says her client is disappointed with the result.
“We are considering his options, including the possibility of an appeal,” she says.
The Divisional Court had dismissed Miller’s appeal, who then appealed that decision to the Court of Appeal.
Simon Bieber, one of the lawyers who represented Miller, says that going forward it remains to be seen whether the same factors will be used in future cases.
“I think the court’s decision leaves it open for the next panel to pick some of these and perhaps incorporate new ones,” he says.
He adds that the court “sidestepped” the issue of standard of review, which he said was unusual. Cheng and Miller had argued that the standard of review should be correctness, but the Court of Appeal found the applicable standard of review to the panel’s interpretation of the act should be reasonableness.
At press time, Bieber could not say whether his client intended to seek leave to appeal the decision to the Supreme Court of Canada.
The Divisional Court had also dismissed the appeals of Finkelstein, Paul Azeff and Korin Bobrow, who made up the other links in the tipping chain.
Anita Anand, a law professor at the University of Toronto says the decision shows the high level of deference the Court of Appeal will show the OSC because of its level of expertise in the area.
“The definition of special relationship in the Securities Act is complex and it is not often considered by tribunals or courts, and here we have the definition of special relationship considered by both and in fact upheld by the highest court in Ontario,” she says.
In an emailed statement, Jennifer Lynch, senior litigation counsel with the OSC’s enforcement branch, said the Court of Appeal decision confirms that “reasonable inferences of fact are expected and necessary in proving insider tipping and trading cases.”