It is now easier for regulators and Courts in Canada and the United States to prove liability in insider trading and tipping cases as a result of two recent decisions – the decision of the Ontario Superior Court of Justice (Divisional Court) in Finkelstein v. Ontario (“Finkelstein”) and the decision of the Supreme Court of the United States in Salman v. United States (“Salman”).
In Finkelstein, the Ontario Court supported the use of circumstantial evidence in establishing liability for tipping and insider trading and reiterated its deference to decisions of securities commissions. Also, the Court broadened its interpretation of the definition of “special relationship” in the Securities Act (Ontario) to include tippees who “ought reasonably to have known” that they received material non-public information from a person in a special relationship with the issuer. Accordingly, insiders should be careful not to share material non-public information, and individuals who receive material non-public information should not share that information or trade on it, as they can now more easily be found to have a “special relationship” with the issuer and accordingly be held liable for insider trading or tipping.
In Salman, the U.S. Supreme Court held that a tipper does not have to receive something of a “pecuniary or similarly valuable nature” in exchange for confidential information to a “trading relative or friend” in order to satisfy the “personal benefit” element of tippee liability. A personal benefit is received by the tipper because tipping to a trading relative is considered the same as the tipper “trading on the information, obtaining the profits, and dolling them out to the trading relative.” As a result of the decision in Salman, we will likely see prosecutors increasingly try to characterize tippees as “trading relatives and friends” of tippers in order to make use of the personal benefit inference stemming from this sort of relationship. However, it remains unclear what evidence will be needed to establish a personal benefit in situations where the tippees are not trading relatives or friends. In addition, the government must prove that the tippee knew that the tipper disclosed the insider information for a “personal benefit” in enforcement proceedings, the number of which are likely to increase as a result of the Salman decision.
If you would like more information about the law on insider trading and tipping, contact any member of Clark Wilson LLP’s Capital Markets, Securities, Mergers & Acquisitions Group.