What are the key elements of a criminal charge under the Canadian Criminal Code's provisions on fraud and insider trading?

Prohibited insider trading

382.1 (1) Every person is guilty of an indictable offence and liable to imprisonment for a term of not more than 10 years or is guilty of an offence punishable on summary conviction who, directly or indirectly, buys or sells a security, knowingly using inside information that they

(a) possess by virtue of being a shareholder of the issuer of that security;

(b) possess by virtue of, or obtained in the course of, their business or professional relationship with that issuer;

(c) possess by virtue of, or obtained in the course of, a proposed takeover or reorganization of, or amalgamation, merger or similar business combination with, that issuer;

(d) possess by virtue of, or obtained in the course of, their employment, office, duties or occupation with that issuer or with a person referred to in paragraphs (a) to (c); or

(e) obtained from a person who possesses or obtained the information in a manner referred to in paragraphs (a) to (d).

Tipping

(2) Except when necessary in the course of business, a person who knowingly conveys inside information that they possess or obtained in a manner referred to in subsection (1) to another person, knowing that there is a risk that the person will use the information to buy or sell, directly or indirectly, a security to which the information relates, or that they may convey the information to another person who may buy or sell such a security, is guilty of

(a) an indictable offence and liable to imprisonment for a term not exceeding five years; or

(b) an offence punishable on summary conviction.

Saving

(3) For greater certainty, an act is not an offence under this section if it is authorized or required, or is not prohibited, by any federal or provincial Act or regulation applicable to it.

Definition of inside information

(4) In this section, inside information means information relating to or affecting the issuer of a security or a security that they have issued, or are about to issue, that

(a) has not been generally disclosed; and

(b) could reasonably be expected to significantly affect the market price or value of a security of the issuer.

Trading where undisclosed change

76 (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. R.S.O. 1990, c. S.5, s. 76 (1); 2015, c. 20, Sched. 39, s. 2 (1-3).

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. R.S.O. 1990, c. S.5, s. 76 (2); 2015, c. 20, Sched. 39, s. 2 (1-4).

Same

(3) No person or company that is considering or evaluating whether, or that proposes,

(a) to make a take-over bid, as defined in Part XX, for the securities of an issuer;

(b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with an issuer; or

(c) to acquire a substantial portion of the property of an issuer,

shall inform 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 except where the information is given in the necessary course of business relating to the take-over bid, business combination or acquisition. R.S.O. 1990, c. S.5, s. 76 (3); 2013, c. 2, Sched. 13, s. 2 (1, 2); 2015, c. 20, Sched. 39, s. 2 (1-3).

Recommendation

(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).

Defence

(4) No person or company shall be found to have contravened subsection (1), (2), (3) or (3.1) if the person or company proves that the person or company reasonably believed that the material fact or material change had been generally disclosed. R.S.O. 1990, c. S.5, s. 76 (4); 2016, c. 5, Sched. 26, s. 2 (2).

Definitions

(5) For the purposes of this section,

“insider” includes a person or company that would be an insider of an issuer if the issuer were a reporting issuer; (“initié”)

“issuer” means,

(a) a reporting issuer, or

(b) any other issuer whose securities are publicly traded; (“émetteur”)

“person or company in a special relationship with an issuer” means,

(a) a person or company that is an insider, affiliate or associate of,

(i) the issuer,

(ii) a person or company that is considering or evaluating whether to make a take-over bid, as defined in Part XX, or that proposes to make a take-over bid, as defined in Part XX, for the securities of the issuer, or

(iii) a person or company that is considering or evaluating whether to become a party, or that proposes to become a party, to a reorganization, amalgamation, merger or arrangement or similar business combination with the issuer or to acquire a substantial portion of its property,

(b) a person or company that is engaging in any business or professional activity, that is considering or evaluating whether to engage in any business or professional activity, or that proposes to engage in any business or professional activity if the business or professional activity is,

(i) with or on behalf of the issuer, or

(ii) with or on behalf of a person or company described in subclause (a) (ii) or (iii),

(c) a person who is a director, officer or employee of,

(i) the issuer,

(ii) a subsidiary of the issuer,

(iii) a person or company that controls, directly or indirectly, the issuer, or

(iv) a person or company described in subclause (a) (ii) or (iii) or clause (b),

(d) a person or company that learned of the material fact or material change with respect to the issuer while the person or company was a person or company described in clause (a), (b) or (c),

(e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship; (“personne ou compagnie ayant des rapports particuliers avec un émetteur assujetti”) R.S.O. 1990, c. S.5, s. 76 (5); 2010, c. 26, Sched. 18, s. 30 (1); 2013, c. 2, Sched. 13, s. 2 (3-5); 2015, c. 20, Sched. 39, s. 2 (1-3, 5-7).

Idem

(6) For the purpose of subsections (1) and (3.1), a security of the issuer shall be deemed to include,

(a) a put, call, option or other right or obligation to purchase or sell securities of the issuer;

(b) a security, the market price of which varies materially with the market price of the securities of the issuer; or

(c) a related derivative. R.S.O. 1990, c. S.5, s. 76 (6); 2010, c. 26, Sched. 18, s. 30 (2); 2015, c. 20, Sched. 39, s. 2 (1, 3); 2016, c. 5, Sched. 26, s. 2 (3).

“material fact”, when used in relation to securities issued or proposed to be issued, means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities; (“fait important”)

[19] The securities regulation framework aims to protect the investor, promote capital market efficiency, and ensure public confidence in the securities system: Pezim v. British Columbia (Superintendent of Brokers), 1994 CanLII 103 (SCC), [1994] 2 S.C.R. 557, 114 D.L.R. (4th) 385, at p. 589.

[20] The prohibitions against insider trading, and the related conduct of tipping information and trading by the “tippee”, are contained in Part XVIII of the Act dealing with “Continuous Disclosure.” To put the prohibitions in context, s. 75(1) requires a reporting issuer to “forthwith issue and file a news release” where a material change occurs in its affairs. A corollary of that obligation is the prohibition against trading on confidential inside information. Section 76 “represents the second cornerstone of timely disclosure under the Act”: Victor P. Alboibi, Securities Law and Practice, 2^nd ed. (Toronto: Carswell, 1984) (loose-leaf edition), at pp. 18-29.

[21] The prohibitions against the trading on, or the tipping of, information where there is an undisclosed material fact or material change concerning an issuer are found in ss. 76(1) and (2) of the Act:

76 (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. 

(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. 

[22] The prohibition in s. 76(1) against insider trading “is a significant component of the schemes of investor protection and of the fostering of fair and efficient capital markets and confidence in them”: Re Woods (1995), 18 OSCB 4625. The jurisprudence offers several rationale for the prohibitions against insider trading and tipping.

[23] First, an important premise of securities law is that all investors and prospective investors ought to be given access to material information about securities so that prospective purchasers can value them accurately and make informed investment decisions: Danuke (Re) (1981), 2 OSCB 31C, at p. 40C. Any information about an issuer that likely would affect the market value of the issuer’s securities should be available on an equal basis to all potential investors: Jeffrey MacIntosh and Christopher Nicholls, Securities Law (Toronto: Irwin Law, 2002), at p. 225. As put by the OSC in Woods (Re): “It would be grossly unfair to permit a person who obtains undisclosed material information with respect to a reporting issuer because of his relationship with the issuer to trade with the informational advantage this gives him or her.”

[24] A second rationale concerns the risk that insider trading will undermine investor confidence in the capital markets. If prospective investors have reason to fear insiders will be free to trade on the basis of undisclosed information, they might refuse to purchase securities: MacIntosh and Nicholls, at p. 229. The OSC has described insider trading as “a cancer that erodes public confidence in the capital markets”: M.C.J.C. Holdings (Re), (2002), 25 OSCB 1133; Donnini (Re), (2002), 25 OSCB 6225, at para. 202.

[25] Finally, a principle of Canadian securities regulation is that markets operate efficiently on the basis of timely and full disclosure of all material information. Prohibitions against insider trading and tipping in the absence of full disclosure support this principle: Illegal Insider Trading in Canada: Recommendations on Prevention, Detection and Deterrence, Insider Trading Task Force, November 2003 (“Task Force Report”), at p. 3.

[26] The OSC regards insider tipping as conduct just as serious as illegal insider trading because tipping undermines confidence in the market place: Pollitt (Re) (2004), 27 OSCB 9643, at para. 22. As stated by the OSC in Suman (Re) (2012), 35 OSCB 2809, at para. 23:

[I]nsider tipping and insider trading are not only illegal under the Act but also significantly undermine confidence in our capital markets and are manifestly unfair to investors. Insider tipping of an undisclosed material fact is a fundamental misuse of non-public information that gives the tippee an informational advantage over other investors and may result in the tippee trading in securities of the relevant reporting issuer with knowledge of the undisclosed material fact, or tipping others.

[173] In R. v. Woods ("Woods"), Farley J. stated that the offence of insider trading "is in essence not a question of using insider information but of buying or selling securities of a company while possessed of insider information". He broke down the offence into four elements:

(a) the defendant is in a special relationship with the public company;

(b) the defendant purchases or sells securities of that public company;

(c) the defendant has knowledge of material information about that public company;

(d) which material information has not been generally disclosed.

(R. v. Woods, [1994] O.J. No. 392 (Gen. Div.) at para. 15)

[174] Justice Farley noted that until February 15, 1988, a person charged with insider trading had to demonstrate that he or she "did not make use of knowledge of material fact...in purchasing or selling securities." That defence is no longer available. (R. v. Woods, [1994] O.J. No. 392 (Gen. Div.) at para. 18)

[175] Accordingly, it is not necessary to prove actual use of inside information. An insider's reasons or motivations for trading are irrelevant at law. It is sufficient to establish trading while in possession of undisclosed material information.

[176] It is also unnecessary to establish that the respondent benefited personally from the misuse of inside information.

[177] In the Woods decision, the defendant traded for the account of one Richardson. Richardson agreed to allow Woods to arrange for short sales, when Woods convinced him it would be useful to hedge his investment. Woods was found guilty of insider trading for these short sales on Richardson's behalf.

[178] Justice Farley noted that "[w]ithout Woods, there would have been no short sales . . .," and stated:

The ordinary meaning of 'sell' does not imply a sale of one's beneficial interest. For instance, we have no difficulty in talking of a sales clerk in a department store selling merchandise but it is of course merchandise of the department store/company. Then there is the real estate agent who has sold the house, but it is the house of the vendor. As well one refers to the consignee selling goods, but it is the goods of the consignor which are sold. The section [75(1), now 76(1)] does not state that "no owner shall sell" but rather no person should do so.

(R. v. Woods, [1994] O.J. No. 392 (Gen. Div.) at para. 32)

[179] With respect to the interpretation of the insider trading provisions of the Act, Justice Farley stated:

Given the mischief rule and its application, it appears that the mischief to be corrected in the present instance was that of unequal opportunity in the securities market – i.e. someone in a special relationship with a company (a director) might employ insider information to buy or sell shares of the company to the disadvantage of those without such insider information. It does not seem to me that the person in a special relationship must benefit from the misuse of insider information; this is obvious from the prohibition against tipping since the tippee is the one who benefits.

(R. v. Woods, [1994] O.J. No. 392 (Gen. Div.) at para. 36. See also Re Donnini, (2002), 25 O.S.C.B. 6225 at paras. 111,112, and 113)

[180] By the same reasoning, we find that subsection 76(1) of the Act also applies to a registrant who is an insider of a reporting issuer and who engages in discretionary trading in the securities of the issuer in respect of which he is an insider on behalf of the beneficial owner of the securities.

[...]

[183] The phrase "generally disclosed" is discussed in subsection 3.5(2) of NP 51-201. This policy explains that information has been generally disclosed if:

(a) the information has been disseminated in a manner calculated to effectively reach the marketplace; and

(b) public investors have been given a reasonable amount of time to analyze the information.

[184] The time necessary for such analysis varies from case to case, however an insider should generally wait a minimum of one full trading day after the release of the information before trading (Re Harold P. O'Connor et al. (1976) Vol. II (O.S.C.B. 149 at 175).

THE STANDARD OF PROOF

[13] While the standard of proof in administrative proceedings is the civil standard of the balance of probabilities, Staff conceded that, this being an alleged violation of subsection 76(1) of the Act, it could only discharge its burden by clear and convincing proof based on cogent evidence.

[14] This standard of proof was recently affirmed in Investment Dealers Association of Canada v. Boulieris (2004), 27 O.S.C.B. 1597 (O.S.C.) at paras. 33 and 34, affirmed 2005 CanLII 16629 (ON SCDC), [2005] O.J. No. 1984 (Div. Ct.) where the Commission considered the standard required for proving a serious complaint against a person. The Commission noted in that case that the standard of proof and the nature of the evidence which is required to meet that standard, are integral to the duty of administrative tribunals to provide a fair hearing.

[15] We accept, as a matter of a fundamental fairness, that reliable and persuasive evidence is required to make adverse findings where those findings will have serious consequences for a respondent.

[31] One of the key elements of subsection 76(1) of the Act is the existence of a material fact with respect to the reporting issuer that had not been generally disclosed at the time of the disposition of the shares.

[...]

[73] To establish, for the purposes of subsection 76(1) of the Act, that a respondent knew an undisclosed material fact at the time of the disposition of shares, it must be shown that the respondent had subjective or actual knowledge of that alleged fact at that time.