Judge gavel, scales of justice and law books in court

The Ontario Court of Appeal ruled on Thursday that the decisions of an Ontario Securities Commission (OSC) panel were reasonable in concluding that a pair of investment advisors traded on insider information passed along by Bay Street lawyer Mitchell Finkelstein.

Howard Miller and Francis Cheng worked together at TD Securities Inc. at the time the insider trading occurred. The OSC ruled in 2015 that Finkelstein violated securities rules by tipping inside information on three separate occasions, and that the advisors also engaged in insider trading and tipping based on that information.

The appeal court rejected an appeal by Miller, but upheld an appeal by the OSC, overturning an Ontario Superior Court of Justice (Divisional Court) ruling that allowed an appeal by Cheng.

The court of appeal’s decisions essentially restore the original conclusions of the OSC panel, which found that Miller, Cheng and two other advisors, breached securities laws by trading on material, non-public information that originated with Finkelstein.

At the heart of the appeal was whether Miller and Cheng ought to have known the information they received about a pending M&A transaction amounted to inside information. Neither advisor knew the actual source of the information, so the issue was whether there was enough circumstantial evidence to conclude that the pair should have known it came from insiders. The information was allegedly transmitted from Finkelstein to his friend, an advisor in Montreal, to an accountant, and then on to Miller and Cheng.

In 2015, the OSC panel found Miller and Cheng should have known that they were trading on inside information, a conclusion that was largely upheld in a judicial review by Ontario’s Divisional Court in 2016.

However, the divisional court did grant an appeal from Cheng, ruling that the OSC panel erred in analyzing the evidence against him, which undermined the panel’s conclusions. The divisional court set aside the panel’s findings against Cheng and allowed his appeal.

On Thursday, the appeal court ruled that OSC panel was reasonable in concluding that the advisors should have known that they were acting on inside information. The appeal court found that the factors the OSC panel considered to determine whether Miller and Cheng ought to have known were reasonable.

The appeal court also found that the divisional court erred in granting Cheng’s appeal.

In restoring the panel’s decision against Cheng, the appeal court states: “The panel offered justification, transparency, and intelligibility in its decision-making process finding Cheng liable for breaches of the [Securities] Act. Its decision regarding Cheng’s liability fell within a range of possible, acceptable outcomes defensible in respect of the facts and law.”

The appeal court also rejected Cheng’s argument that the sanctions ordered by the OSC panel were unreasonable.