An Ontario court has rejected an appeal brought by the chair of a cannabis company, who was found to have violated the prohibition on disclosing insider information when he sought a friend’s input on a proposed business deal.
In 2023, Ontario’s Capital Markets Tribunal found that Michael Paul Kraft, the chair of WeedMD Inc., breached securities rules by disclosing information about a possible “expansion” transaction to a friend, who then traded on that information.
As a result, the panel imposed a $200,000 fine, a four-year ban and ordered $150,000 in costs against him (along with sanctions on the trader).
Kraft appealed the ruling and the penalty to the Ontario Superior Court of Justice.
According to the court’s decision, among other things, he argued that the tribunal erred by ruling that the disclosure didn’t qualify for an exception from the prohibition on disclosing material, non-public information for disclosures made in the necessary course of business (NCOB).
Kraft argued that the information about the proposed transaction — which involved leasing greenhouse space to expand the company’s business — was disclosed for a valid business reason, to get advice from his friend, who was a former consultant to the company with real estate experience.
He also argued that the tribunal erred in rejecting the idea that the prohibition on tipping in securities law violates the right to free expression under the Charter of Rights and Freedoms. And, he argued that the sanctions imposed by the tribunal were excessive.
The Ontario Securities Commission (OSC) defended the tribunal’s findings, arguing that the NCOB exception didn’t apply in the circumstances and that the sanctions were appropriate.
The OSC also pushed back against the proposed Charter challenge, maintaining that the provision against tipping in securities law represents a reasonable limit on the right to free expression. The attorney general of Ontario also participated in the case as an intervenor, defending the prohibition on tipping in securities law.
Ultimately, the court rejected the appeal, upholding the tribunal’s ruling and the sanctions it imposed.
“The tribunal’s conclusion that the NCOB exception was not available to Mr. Kraft was made after a thorough review of the factual matrix. The tribunal drew fair inferences from the evidence which, when viewed cumulatively, support the finding that the disclosure of [inside information]… was not necessary in the course of WeedMD’s business,” it said. “Mr. Kraft has failed to demonstrate that the tribunal made any palpable or overriding error in this regard.”
It also upheld the panel’s finding that the facts he disclosed were material, and the tribunal’s dismissal of his Charter challenge — which acknowledged that the prohibition on tipping does limit free speech, but found that the infringement is justified, “since the speech at issue is economic speech and the limitation only places a partial restriction on a narrow class of speech.”
Finally, the court also rejected the appeal on sanctions.
“Contrary to Mr. Kraft’s submissions, we are satisfied that the sanctions imposed on him were responsive to his misconduct, it said, noting that the tribunal “recognized that his misconduct (unlike some other cases) involved a single act of tipping and was not motivated by personal or professional advantage.”
It noted that the tribunal imposed market bans that were shorter than the OSC sought, and it concluded that the sanctions were not punitive.
“Significant monetary sanctions and market bans have been imposed (and upheld on appeal) in other insider tipping and trading cases,” it noted. “In comparison, the sanctions imposed against Mr. Kraft appear modest. We see no error in principle in the tribunal’s reasoning or any indication that the sanctions imposed were clearly unfit.”