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  • Laura Bewick Howitt, CFA, CIPM, MBA

Bulletin 2: Canadian Regulators Enforcement Update - January 2024

CASES HIGHLIGHTED: INSIDER TRADING / DISCLOSURE OF MATERIAL NON-PUBLIC INFORMATION / EXEMPLARY COOPERATION INSIDER REPORTING VIOLATIONS


This bulletin presents a comprehensive update on recent enforcement actions undertaken by Canadian regulatory authorities, shedding light on cases of insider trading, disclosure of MNPI, and insider reporting violations.




CASE 1: INSIDER TRADING

On February 22, 2023, the Ontario Securities Commission (OSC) entered into a Settlement Agreement with A.W. regarding illegal insider trading in November 2018.


According to agreed to facts:

  • On November 9, 2018, A.W.  received material non-public information from a third party who was in a special relationship with T. Resources Inc. (TRI), a mining company trading on the Toronto Stock Exchange. Based on this information, A.W. bought 100,000 shares of TRI for around $302,935 in two accounts he controlled. He had never purchased TRI shares prior to this and went to significant pains to fund the purchase.

 

  • On November 14, 2018, TRI and PAS Corp. announced an agreement for PAS to acquire TRI. After the Announcement, the closing price of TRI shares rose by 49% relative to the closing price of the previous day. On the morning of the announcement A.W. sold his entire position for a net profit of $125,064 (41%).

A.W. was found to have traded securities of TRI with knowledge of material facts before the information was generally disclosed, contrary to subsection 76(1) of the Securities Act. After being granted credit for cooperation, A.W. was:

  • barred from acquiring or trading in securities or derivatives for five years;

  • barred from being a director or officer of any reporting issuer or registrant or acting as a registrant or promoter for five years;

  • strictly limited in selling securities received as payment for professional services; and,

  • required to pay a penalty of $200,000, disgorge his profit of $125,064 and pay costs of investigation of $15,000.



Key Takeaways:

  1. Trading on equity markets is closely monitored - The Equity Market Surveillance Team of the Canadian Investment Regulatory Organization (CIRO), formerly known as IIROC, conducts Trade Surveillance of equity trading in real time using technology.  The goal is to detect manipulative or unfair trading practices or other breaches of trading rules. The team then conducts post-trade reviews to determine if further investigation is required. When the Trading Review and Analysis team finds evidence of a rule violation, they refer the matter either to the CIRO Enforcement team or other regulator for further investigation and possible disciplinary action.

  2. Insider trading may be fairly easy to detect – The Equity Market Surveillance Team specifically looks for larger trades occurring prior to announcements by publicly traded companies that have the potential to affect the market price of its shares. Using metadata, the surveillance team can trace the trade to the specific institution where the trade occurred and thereby track it to a specific trading account. Large trades immediately prior to a material public announcement are considered highly suspect, particularly when the individual conducting the trade has never previously traded in the security in question.

  3. The consequences of insider trading are severe - Proving insider trading on the balance of probabilities may be more difficult, but the regulators have broad powers to investigate making them more likely to succeed in these cases. Even if the insider trading is not proven, this type of investigation could damage relationships with employers, clients or other parties who may be contacted as part of the investigation.


CASE 2: DISCLOSURE OF MATERIAL NON-PUBLIC INFORMATION / EXEMPLARY COOPERATION

On May 16, 2023, the Alberta Securities Commission entered into a Settlement Agreement with P.R.B. P.R.B. is president and C.E.O. of a mining exploration company trading on the Toronto Stock Exchange (TSX) and a submarket of the London Stock Exchange.


According to agreed to facts, on six occasions between December 2019 and April 2021, P.R.B. emailed draft news releases to a Registrant who administered the company’s Employee Share Purchase Ownership Plan. These news releases all contained material, non-public information (MNPI) related to the company’s exploration activity. The emails were all sent when the markets were closed and the news releases were issued publicly before the markets opened.


P.R.B admitted that he breached section 147(4) of the Act by informing the registrant of material facts or changes regarding the company other than as necessary and before then were generally disclosed. He was found to have demonstrated exemplary co-operation by agreeing to enter into a Settlement Agreement prior to issuance of a Notice of Hearing. In addition: he believed he was permitted to provide the registrant with draft news releases; he did not trade on the MNPI and did not benefit or intend to benefit from it; he promptly accepted responsibility when he found out his actions were considered tipping; and, there was no evidence of anyone trading based on the MNPI.

As a result of the above, the ASC did not ban P.R.B. from being a director or officer for any period of time, but instead fined him $40,000 and required that he complete best practices training for public company governance within 12 months of signing the agreement.


Key Takeaways:

  1. Market participants must ensure adherence to rules and regulations - Even inadvertent breaches can lead to fairly serious sanctions. In this case, it was clear that P.R.B. did not intend for anyone to profit from the release of the MNPI and no one did. Nevertheless, the release of MNPI is considered to be a serious regulatory breach and, notwithstanding P.R.B.’s exemplary cooperation, he was fined $40,000 and a required to complete additional training. No doubt there were also costs in time and resources as well as internal and/or external legal costs involved for the company.

  2. Prompt acknowledgement and cooperation is beneficial – as noted above, P.R.B. “was found to have demonstrated exemplary cooperation”. It is not clear how the regulators first identified the release of MNPI. Since there was no suspect trading, it would not have been through trade surveillance. It may have been during a routine compliance review of either the mining company or the Registrant. In this case, the emails of draft news releases demonstrated clearly that material information had been shared before being generally disclosed. It appears that P.R.B. made a sound decision by accepting responsibility and cooperating fully.


CASE 3: INSIDER REPORTING VIOLATIONS / AGGRAVATING FACTORS

On April 18, 2023, the British Columbia Securities Commission (BCSC) entered into a Settlement Agreement with E.L. regarding his failure to report his acquisition of a controlling interest of MIGI, a biotechnology company trading on the Canadian Securities Exchange (CSE) and other exchanges.  


According to agreed to facts, E.L. used two different identities to acquire and hold 24.3% ownership of MIGI. Between August 25, 2014 and October 13, 2016, E.L. held a controlling interest in more than 10% of the outstanding shares. However, he did not file any insider reports or early warning reports during this period or at any other time. As such, he was found to have breached section 87(2) of the Act, section 3.3 of National Instrument (NI) 55-104 and section 5.2 of NI 62-104.


While, E.L. cooperated in the investigation and admitted to the breaches prior to the hearing, he had a history of securities-related misconduct and had previously pleaded guilty to theft over $5000 related to publicly traded securities. As a result, E.L. was prohibited from any securities-related activity for a period of 20 years, including trading in or purchasing securities, acting as director or officer for an issuer or registrant or advising or otherwise acting in any management or consulting capacity in the securities or derivatives markets. He was also required to pay a $40,000 penalty.


Key Takeaways:

  1. Insider reporting requirements are not just based on ownership   – Both NI 55-104 and 62-104 refer to beneficial ownership of, or control or direction over. This includes both direct and indirect ownership or control. As such, individuals and firms need to track their beneficial ownership and control carefully to avoid exceeding the 10% maximum and/or ensure that any controlling interest over the maximum, whether deliberate or inadvertent, is reported.

  2. Deliberate rules breaches will lead to more serious sanctions – In this case, it appears that E.L. took deliberate steps to hide his ownership interest. This coupled with his prior history of breaches and illegal activity lead to serious sanctions.


Prepared by SGD Compliance Consulting in conjunction with David Borenstein, President, Borenstein Consulting Inc. Expert in Securities Industry and Regulatory Investigations, Policy Development and Training.


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This article was prepared for informational purposes only and is not intended to provide, and should not be relied on for specific advice. You should not act upon the information in this article without an independent assessment of the law or regulations applied to the facts of your situation.

 

SGD Compliance Consulting Inc. is not responsible for the content of websites and information resources that may be referenced in the article. Reference to these sites or resources does not constitute an endorsement by SGD Compliance Consulting Inc. of the information contained therein. Although we have endeavored to ensure that the information contained in this article has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules, and regulations may result in delays, omissions, or inaccuracies in information contained in this article.

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