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ONCA: Miller and Cheng “Ought Reasonably to Have Known” Better

by Dana Carson, Alistair Crawley and Bruce O’Toole

On January 25, 2018, the Court of Appeal for Ontario released its much-anticipated decision in Finkelstein et al. v Ontario Securities Commission, 2018 ONCA 61 (“Finkelstein”) in which it considered the insider trading and tipping provisions of the Ontario Securities Act, R.S.O. 1990, c. S.5 (the “Act”).  In a case involving a chain of tips about an unannounced takeover transaction originating from a lawyer at the Toronto firm working on the deal, the Court of Appeal opined on the application of those provisions to successive tippees for the first time.

OSC and Divisional Court Decisions

The Ontario Securities Commission (the “OSC” or the “Commission”) commenced administrative proceedings in 2014 against five individual respondents who were alleged to have engaged in insider trading and tipping contrary to the Act.  OSC Staff alleged that information about the takeover transaction was passed from the Toronto lawyer through two financial professionals in Montreal, before being tipped to a Toronto investment advisor, Howard Miller, and his associate, Francis Cheng.    

The OSC’s decision on the merits was released in March 2015.  The Commission held that each of the five respondents had breached section 76 of the Act, which prohibits any person in a special relationship with an issuer from (i) trading in securities of the issuer with knowledge of a material fact or material change that has not been generally disclosed, or (ii) informing anyone else of a material fact or material change that has not been generally disclosed.  Section 76(5) defines “a person in a special relationship with an issuer” to include anyone who learns of a material fact or change and “knows or ought reasonably to have known” that the person who tipped them stood in a special relationship with an issuer. 

The Commission’s decision relied heavily on inferences drawn from circumstantial evidence.  In its reasons, the panel set out a number of factors to be considered in insider trading cases, including the relationships between the tippers and tippees, the professional qualifications of the respondents, any steps taken by the tippee to verify the information received and whether the tippee had ever owned the stock before. 

All five respondents appealed to the Divisional Court.  It is noteworthy that, historically, decisions of the OSC have been granted significant deference by the courts and no appeal of an OSC decision on the merits has been successful.  However, in a decision released in December 2016, the Divisional Court permitted the appeal brought by Mr. Cheng, finding that the Commission made a number of errors in its analysis of the relevant evidence in respect of his liability.  The appeals of the other individual respondents were dismissed.

ONCA Decision

The Court of Appeal granted leave to the OSC to appeal the decision in relation to Mr. Cheng and to only one of the individual respondents, Howard Miller.  Those appeals were heard together in October 2017.  In its January 2018 decision, the Court of Appeal dismissed Mr. Miller’s appeal but granted that of the OSC, restoring its decision in relation to Mr. Cheng. 

At the outset of its reasons, the Court of Appeal confirmed that there was no dispute that neither Mr. Miller nor Mr. Cheng had actual knowledge that his tipper was in a special relationship with the issuer.  Accordingly, the key issue was framed as an objective one – whether each of the respondents “ought reasonably to have known” that the person who provided the information to him was in a special relationship with the issuer.

Both Mr. Cheng and Mr. Miller took issue with the factors set out by the Commission to guide its application of the objective knowledge test.  Reiterating the Commission’s observations about the difficulties associated with prosecuting insider trading cases commonly arising from a lack of direct evidence, the Court of Appeal found that it was reasonable for the Commission to have identified certain factors from which it could draw permissible inferences.

Ultimately, the Court of Appeal agreed with the Divisional Court’s finding that the Commission’s decision in respect of Mr. Miller was reasonable.  However, in permitting the OSC’s appeal, the Court of Appeal found that the Divisional Court had “succumbed to the temptation” of placing itself in the position of the decision maker of first instance and comparing the decision it “would have reached” with the one made by the Commission.  Despite confirming that the Commission had misstated some of the evidence, the Court of Appeal found that the Commission had been “aware of the true state of affairs” and that the Divisional Court had erred in impermissibly reweighing the evidence.  Accordingly, the Court of Appeal restored the Commission’s decision in respect of Mr. Cheng’s liability while dismissing his cross-appeal in relation to sanctions.


Finkelstein confirms that the Commission may consider a “mosaic of circumstantial evidence” in drawing inferences in insider trading and tipping cases; direct evidence is not required.  The Court of Appeal has also reinforced that it is futile to seek to overturn such inferences drawn by the Commission on appeal.

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