Insider TradingWhat Directors & Officers Need to

Know

Ontario Securities Act

Insider Trading

Trading76. (1) No person or company in a special relationship with an

issuer shall purchase or sell securities of the issuer with the

knowledge of a material fact or material change with respect to

the issuer that has not been generally disclosed.

Tipping(2) No issuer and no person or company in a special relationship

with an 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 issuer before the material

fact or material change has been generally disclosed

Ontario Securities Act

Insider Trading

Recommending(3.1) No issuer, no person or company in a special relationship with an

issuer, and no person or company that is considering or evaluating

whether, or that proposes to take one or more of the actions described

in clause (3) (a), (b) or (c) shall recommend or encourage, other than in

the necessary course of business, another person or company to

purchase or sell securities of the issuer with the knowledge of a

material fact or material change with respect to the issuer that has not

been generally disclosed. 2016, c. 5, Sched. 26, s. 2 (1).

“Material Fact”

“Material Change”

Material Fact

A fact that would reasonably be expected to have a significant effect

on the market price or value of the securities

Material Change

A change in the business, operations or capital of the issuer that

would reasonably be expected to have a significant effect on the

market price or value of any securities of the issuer

A decision to implement such a change made by the board of

directors or by senior management who believe that confirmation of

the decision is probable

“Special Relationship”Includes a person who is a director, officer or employee of

the issuer

a subsidiary of the issuer

a person or company that controls the issue

A company that is proposing to become a party to a reorganization, amalgamation, merger or arrangement or similar business combination with a reporting issuer, or engaging in or proposes to engage in any business with a reporting issuer

Any person or company that learns of material undisclosed information about the issuer from anyone else who is a person in a “special relationship” with the issuer, and knew or ought reasonably to have known that the other person was in such a relationship

Insider Trading

Elements of the trading offence

At the material time, the respondent was in a “special relationship”

with a reporting issuer

The respondent purchased or sold securities of that reporting issuer

The trade was made with knowledge of a material fact or material

change (but no need to prove that the information was actually used

or relied upon)

The material information had not been generally disclosed to the

public

Tipping

Elements of the tipping offence

At the material time, the respondent was in a “special relationship”

with a reporting issuer

The respondent informed another person or company of a material

fact or material change with respect to that reporting issuer

This disclosure was not made in the necessary course of business

The material information had not been generally disclosed to the

public

Securities Act Penalties Administrative: s. 127

Administrative fine in the amount of up to $1 million per

breach of the Act

Disgorgement of the amounts obtained as a result of the

breach

Prohibition from acting as an officer or director of any

issuer (including private companies)

Quasi-Criminal Prosecution: s. 122

Minimum fine of the profit made or loss avoided and

maximum fine of the greater of $5 million or triple the

profit made or loss avoided, and/or imprisonment of up to

5 years less a day

Criminal Code Insider Trading

A person is guilty of an indictable offence and liable toimprisonment for a maximum term of 10 years if he or she,directly or indirectly, buys or sells a security knowingly usinginside information that he or she possesses As a shareholder of the issuer

In the course of a business or professional relationship with theissuer

In the course of a proposed takeover, reorganization, amalgamation,merger or business combination with the issuer

In the course of his or her employment, office, duties or occupationwith the issuer or a person referred to above

Obtained from a person who possesses or obtained the informationin a manner referred to above

Criminal Code Tipping

A person is guilty of an indictable offence and liable to

imprisonment for a maximum term of five years, or an offence

punishable on summary conviction

If that person knowingly conveys to another person inside

information that he or she possesses or obtained in a manner

referred to above, knowing that there is a risk that the other person

will use the information to buy or sell, directly or indirectly, a security

to which the information relates, or

That the person may convey the information to another person who

may buy or sell such a security

Civil Liability Liability of insider

138(5) An insider who, in connection with a transaction in a security of the corporation or any of its affiliates, makes use of any specific confidential information for the insider’s own benefit or advantage that, if generally known, might reasonably be expected to affect materially the value of the security,

(a) is liable to compensate any person for any direct loss suffered by that person as a result of the transaction, unless the information was known or in the exercise of reasonable diligence should have been known to that person; and

(b) is accountable to the corporation for any direct benefit or advantage received or receivable by the insider as a result of the transaction.

JSOT

Joint Serious Offences Team

Enforcement partnership between

OSC

RCMP Financial Crime program

Ontario Provincial Police Anti-Rackets Branch

Issues of Proof

Administrative: s. 127 of the Securities Act

Balance of probabilities – that is, the trier of fact must decide whether there was “clear, convincing and cogent” evidence that the alleged events were more likely than not to have occurred

Hearsay admissible

Compelled transcript of the respondent may be admissible against him/her

Criminal/Quasi Criminal Prosecution

Beyond a reasonable doubt

Hearsay rule applies

Transcripts of evidence of the accused compelled by the OSC are inadmissible

Circumstantial Evidence

The Suman factors:

Access to the information

Relationship between the tipper and the tippee

Timing of the contact between the tipper and the tippee

Timing of the trades

Pattern of the trades, including their uncharacteristic size

Any attempts to conceal the trades or the relationship between the

tipper and the tippee

together create a “compelling inference”

Circumstantial Evidence

Azeff, Re (OSC)

The Suman factors are a non-exhaustive list of the type of

circumstantial evidence that can be indicia of tipping and insider

trading

Not necessary that all indicia be established in every case:

Insider trading and tipping cases are established by a mosaic of

circumstantial evidence which, when considered as a whole,

leads to the inference that it is more likely than not that the trader,

tipper or tippee possessed or communication material non-public

information

Circumstantial Evidence

Azeff, Re (Div Ct)

The function of circumstantial evidence [ ] is to fill an evidentiary gap

created by the fact that there is no direct evidence of a particular fact

or event. In other words, circumstantial evidence is used to

establish a missing or absent fact that cannot be proved directly.

Public Interest JurisdictionRe Moore

Experienced investment banker anticipated a merger transaction based on his

special expertise

Element of insider trading of “materially undisclosed fact” not met

The respondent settled on the basis that his conduct was contrary to the public

interest even if the insider trading provision itself was not breached

Re Finkelstein

OSC used public interest jurisdiction to impugn brokers’ conduct where

recommended clients purchase securities of a company

Not an offence for a person in a special relationship with an issuer and with

knowledge of material undisclosed information to recommend or encourage

another to trade

Prevents tipping or informing others of the material undisclosed information

Despite the absence of a technical breach of the Act, the OSC found that the

brokers had acted contrary to the public interest

Public Interest Jurisdiction

Re Baffinland

Demonstration of restraint by the OSC where the respondents are not

market participants

OSC concluded that its public interest jurisdiction was not engaged by

the respondent’s conduct because the respondent was a consultant,

and not a director or officer of the company in issue

Indemnification (OBCA)

Indemnity

A corporation may indemnify a director or officer of the corporation

against all costs, charges and expenses, including an amount paid

to settle an action or satisfy a judgment in respect of any civil,

criminal, administrative, investigative or other proceeding in which

the individual is involved because of that association with the

corporation or other entity

Limitation A corporation shall not indemnify an individual unless the individual

acted honestly and in good faith with a view to the best interests of

the corporation or, as the case may be, to the best interests of the

other entity for which the individual acted as a director or officer or in

a similar capacity at the corporation’s request.

Indemnification (Contractual)

ELEMENTS

Advance payment of costs

Consistency with corporate bylaws

Consider insurance policies

LIMITATION

Usually contains a fiduciary duty, good faith and/or best interest of

company limitation

Whistleblower Program

OSC’s whistleblower program introduced in July 2016

offers compensation of up to $5 million to individuals who

come forward with tips that lead to enforcement action

SEC program has awarded over $100 million to

whistleblowers (including one payment of $30 million)

Potential Enforcement Targets

Directors

Officers

Lawyers

Compliance personnel

IT staff

Brokers/Dealers

Citations and Case-law

Suman (Re), 2012 LNONOSC 176 at para. 31, aff’d by 2013 ONSC 3192 (Div. Ct.)

Kusumoto (Re), 2007 ABASC 40

R. v. Rankin (2011), 34 O.S.C.B. 11797, leave to appeal refused, 2007 ONCA 127, additional reasons, 2007 ONCA 426

Azeff (Re), (2015) O.S.C.B. 2983

Azeff ats OSC, 2016 ONSC 7508

Moore (Re), <http://www.osc.gov.on.ca/documents/en/Proceedings-SET/set_20130408_moorerb.pdf>

Baffinland (Re), <http://www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20140826_waheed-walter.pdf>

Thank you

Linda Fuerst Norton Rose Fulbright Canada LLP

Royal Bank Plaza, South Tower

Suite 3800

200 Bay Street, P.O. Box 84

Toronto, ON M5J 2Z4 Canada

T: 416.216.2951 | F: 416.216.3930

linda.fuerst@nortonrosefulbright.com

Shara N. RoyLenczner Slaght LLP

130 Adelaide Street West

Suite 2600

Toronto, ON M5H 3P5 Canada

T: 416.865.2942 | F: 416.865.3973

sroy@litigate.com