Court rules in favour of labour-sponsored venture fund against fund manager

The Ontario Superior Court of Justice (Divisional Court) has rejected the appeals of several brokers and a securities lawyer who sought to challenge an Ontario Securities Commission (OSC) ruling against them in a high-profile insider-trading case. However, the court did overturn the OSC’s ruling against one broker, citing flaws in the hearing panel’s reasoning.

Specifically, the court dismissed the appeals of securities lawyer Mitchell Finkelstein and brokers Paul Azeff, Korin Bobrow, and Howard Jeffrey Miller. In 2015, an OSC hearing panel upheld various allegations against them, ruling that they circulated inside information about upcoming merger and acquisition deals that Finkelstein learned about at his firm, Davies Ward Phillips & Vineberg LLP and that the brokers, who worked at CIBC World Markets Inc. and TD Securities Inc., traded on that information.

The appellants argued that the OSC hearing panel relied on circumstantial evidence and reached unreasonable conclusions without solid evidence, according to the court’s decision. However, the court ruled that, overall, the OSC hearing panel’s reasoning and decisions in the case were reasonable.

“As will be important throughout the consideration of all of these appeals, one must always remember that the standard of proof before the panel is proof on a balance of probabilities. It is not the higher criminal standard of proof beyond a reasonable doubt,” the court noted in its decision.

“On the evidence that was before the panel, both direct and circumstantial, there is no basis for questioning the reasonableness of the panel’s conclusion that Finkelstein ‘tipped’ Azeff,” the decision stated. Similarly, the curt found that it was reasonable for the OSC hearing panel to conclude that Azeff and Bobrow were tipped, and that they, in turn, tipped others, including clients.

“The panel’s conclusion that Azeff and Bobrow received material non-public information, and used that information to tip others, is a reasonable one that was open to the panel based on the evidence,” the court said in its decision.

Furthermore, the court found that the hearing panel was reasonable in concluding that Miller traded on information that he should have known came from a credible source: “That is a reasonable conclusion for the panel to have drawn from the available facts. It is also consistent with the approach taken in the United States, where courts have held that knowledge that the likely source of the information is an insider can be inferred from the nature of the information itself.”

However, the court found that the OSC hearing panel’s reasoning was flawed in the case of broker Francis Cheng.

The OSC panel, in its decision, ruled that Cheng ought to have known that information he received originated from an insider. Yet, the court found that “The panel made a number of factual errors in its analysis of the evidence against Cheng. These errors undermine the foundation upon which the panel concluded that Cheng ought to have known that he was receiving inside information.”

As a result, the court found that the hearing panel’s decision regarding Cheng is “both an unsafe and an unreasonable one.” It ordered that the hearing panel’s finding in his case and the sanctions imposed against him must be set aside.

The court upheld the sanctions imposed against the others in the case, including administrative penalties and costs awards, ruling that the penalties were reasonable in the circumstances. “It is not for this court to second guess that conclusion, or to substitute our opinion for that of the panel,” it said.

Commenting on the court’s judgment, the OSC’s new director of enforcement, Jeff Kehoe, said: “This is a very important decision and the first in Canada to uphold the commission’s approach where there are multiple offenders in a chain of insider trading and tipping. It affirms our decision to prosecute cases that are complex and notoriously hard to detect.”

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