A ‘Victimless’ Crime Just Lost its Perpetrators

By: Bryce Tingle

PDF Version: A ‘Victimless’ Crime Just Lost its Perpetrators

Case commented on: Walton v. Alberta (Securities Commission), 2014 ABCA 273

In Walton v. Alberta (Securities Commission), 2014 ABCA 273 (the “Eveready” decision), the Alberta Court of Appeal has just decided the most important insider trading case in recent memory. It may also be the last insider trading case for a long time.

Here is how insider trading happens: a business person in possession of inside information is chatting with friends or family members. Someone asks him how his company is doing and he replies along the lines that, “I can’t really tell you what is going on, but it might be a really good idea to buy some stock in the next month or so.” Maybe he isn’t that discrete. Maybe he actually says, on the golf course or over lunch, “listen, there is a pretty good chance we’re going to be acquired in the next month or two, you might think about grabbing some stock.”

Why does he do this? Well, he might feel responsible: he can help a less well-off family member without giving them something that feels like charity. But it could also be showing-off, doing a favour, of just making himself feel big. We are a species that likes being liked, that likes having people feel grateful to us, and disclosing inside information advances these objects.

It doesn’t hurt that the victims in insider trading are difficult to see. The seller’s decision was freely made; the trade presumably was in its interests. Perhaps the seller decided to sell because she needed the money right away. In any event, the counterparties to an insider trade usually remain forever anonymous. Some corporate law scholars debate whether insider trading should even be against the law, given that it sends valuable pricing signals to the market.

For all of these reasons there is a considerable amount of insider trading in Canada’s markets. One recent study that looked at 1,859 merger and acquisition (M&A) deals in Canada and the U.S. found evidence that roughly 25% of all transactions were accompanied by abnormal trading in the options market during the run-up to the deal announcement. The odds of the trading abnormalities they identified arising by chance were “three in a trillion.” Another study found aberrant trading patterns in the shares of target companies in 41% of deals in the U.S. and 63% in Canada. (America’s superior performance may be due to the fact that America has the strictest insider trading laws in the world, affords a private cause of action against individuals that engage in the practice and seems to have higher rates of prosecutorial success. It also doesn’t hurt that, unlike Canada, American insiders regularly go to jail for increasingly long periods of time.)

The impact of insider trading is material. In testimony to Congress one American scholar noted that, “beginning about 12 days before takeovers or a merger, roughly 30 to 50 percent of the premium that is going to be ultimately paid… is already reflected in the stock’s price…” A 2009 study found that only 49% of leaked deals complete, compared with 72% of non-leaked transactions. Leaked deals also took 70% longer to complete.

Most of us feel that insider trading should be against the law, if only because it doesn’t seem fair for someone to be trading with a massive informational advantage. As well, the best evidence is that vigorous enforcement of insider trading laws significantly reduces the cost of equity for all firms in a market. Unfortunately, insider-trading cases are notoriously difficult to prosecute. Unless one of the parties confesses and turns evidence against the others, or the insider trading is sufficiently organized and consistent that law enforcement authorities can mount a long-term investigation with wiretaps and microphones, there is never any direct evidence.

The instances of alleged insider trading that reach triers of fact are almost always, therefore, decided on the basis of circumstantial evidence: a suspicious trade was made, there is some connection between the buyer of the stock and an insider, there is some reason for the insider to have disclosed the information to the person making the trade. The significance of the Alberta Court of Appeal’s decision in Eveready is that it sets the standards for making this circumstantial case so high that it is difficult to imagine it being met.

The facts in Eveready are typical of insider trading cases. An insider, Holtby, is accused of tipping a wide circle of associates during the run-up to an acquisition of his company, Eveready Inc. His investment advisor admitted to the Commission that he had been tipped and entered into a settlement agreement. Everyone else issued denials and provided alternative explanations for their unusual purchases of Eveready shares. Nearly all of them were found guilty by the Alberta Securities Commission, but let off by the Court of Appeal.

How they got off:

1. A statute that presents challenges – The “insider trading” offense under the Securities Act, RSA 2000, c S-4 (the “Act”) provides in s. 147(2) that someone in a “special relationship” to an issuer commits an offense if she trades. This “special relationship” includes anyone who has learned material, non-public information from someone they know to be an insider (even if this information is communicated second-hand). There can thus be a chain of people in a special relationship connecting an accused to the original insider, like a felonious version of the children’s game “telephone”.

Of course, if no material fact is disclosed, or if the accused didn’t know the information came from an insider, there is no crime. An insider can be prosecuted for “encouraging” others to trade in securities (s. 147(3.1)), but the recipient of this encouragement does not offend the Act if she trades. Thus, the enforcement staff of the Securities Commission must, from circumstantial evidence, prove the trade followed the communication of information by an insider and also prove that the information contained material non-disclosed facts and was not just a vague encouragement to purchase stock. This is difficult to do without wiretaps or email.

The best circumstantial evidence a prosecutor has – the timing of the conversation relative to the trade – is thus nearly valueless. As the Court of Appeal says (at para 29), “even if a certain trading pattern might be consistent with ‘tipping’, it might equally be consistent with merely having been ‘encouraged’.”

2. A high standard of proof – The Court in Eveready articulates the appropriate standard of proof for these cases as being very high: “given the serious consequences of a finding of culpability, clear and cogent evidence should be expected before any particular inference is drawn” (at para 29). In practice, this obviously makes any case based on circumstantial evidence very difficult prove. Inferring “knowledge of a material fact, merely because of opportunity and general motive, is weak” (at para 33).

This high standard of proof is displayed in a variety of ways throughout the decision. One accused is a “bare acquaintance” of Holtby; the Court doesn’t believe Holtby would therefore bother to tip him (at para 69). There was an atmosphere of “cautious optimism” about the stock at the time an accused made his trades – that is sufficient explanation for them (at para 72). Holtby’s brother made a big investment in Eveready shares ahead of the acquisition, but he had recently inherited some money and why wouldn’t he have invested in his brother’s company? His investment could have been a “fortuitous coincidence” (at para 101). His brother’s close friend also made an unprecedented acquisition of Eveready stock, but there is no evidence he received inside information or knew Holtby was an insider of Eveready (at para 97). Holtby’s accountants made a series of equally fortuitous trades ahead of the announcement, but their trades didn’t happen immediately after the relevant conversations with Holtby (at para 135), and they had other explanations to do with tax planning (at para 138).

None of this is to say the Court of Appeal is wrong either in its articulation of the “clear and cogent” standard of proof or its application to the facts in Eveready; it is to say that it is better to be a fortuitous trader than to be employed in prosecuting them.

3. A narrow view of the purpose of penalties – All the evidence cited earlier in this post suggests that a significant amount of insider trading occurs in Canada. A casual review of the enforcement records of the securities commissions suggests that little of it is discovered and prosecuted. Worse, Eveready shows that successfully prosecuting it is extremely challenging.

In these circumstances securities commissions have only one tried and tested tool: large penalties. The lower the chances of something occurring, the greater the penalties must be to act as a deterrent. (Lotteries are predicated on this kind of logic: people will buy even very remote chances to win a prize, provided the prize is very large.) The Court in Eveready found the Securities Commission’s awards against Holtby and the others too high: “The resulting penalty [$1,750,000] is very severe and one can argue that it extends well beyond what the public interest might require” (at para 160). The matter of sanctions was remanded back to the Commission for reconsideration – though with the strong implied suggestion they be reduced significantly.

What are the take-away lessons of Eveready? First, the Securities Commission should focus its enforcement activities somewhere else. Unless someone admits wrongdoing the chances of success are too low to justify much expenditure on insider trading cases. Second, the best advice for someone accused of wrongdoing is to deny it. Third, if we are serious about keeping insider trading a crime, we will have to rethink our enforcement practices.

Why focus on enforcement practices rather than our legislative provisions? The United States is the most effective jurisdiction in the world at prosecuting insider trading. When scaled for the relative size of our markets, the U.S. prosecutes 20 times the number of trading violations that we do. They also impose penalties 17 times greater than ours. But their insider laws, which have an element of scienter mostly absent from ours, set a higher standard for prosecutors. The difference in prosecutorial success seems most likely, therefore, to be a function of the additional tools afforded prosecutors of white-collar crime in America. These would need to be the subject of another post, but there is a reason they haven’t evolved in Canada.

To subscribe to ABlawg by email or RSS feed, please go to http://ablawg.ca

Follow us on Twitter @ABlawg

Posted in Securities | 1 Comment

Tweeter or Twitter? Teaching a Federation Approved Legal Ethics Course

By: Alice Woolley

PDF Version: Tweeter or Twitter? Teaching a Federation Approved Legal Ethics Course

This summer I again provided the Federation of Law Societies with the syllabus for my legal ethics course. The Federation requested the syllabus for, presumably, the purpose of verifying that the University of Calgary’s course complies with the Ethics and Professionalism Competency as set out in Table B of the Federation’s Implementation Report for the Approved Law Degree. As it did the past two summers fulfilling the Federation’s request left me feeling both uneasy and uncertain.

Uncertain because I am not sure what the Federation wants to do with the syllabus. Are they simply ascertaining that it is a stand-alone course on professional responsibility? Is this just something to let them demonstrate that they really are reviewing those programs they approve? Or are they going to review it more substantively to see if it addresses the broad variety of topics set out in Table B (noted below and here)? Will they tell me if they do not think I am teaching the right topics? Will they go beyond the syllabus to see what I am actually teaching in various areas? And – ultimately – is the status of our degree as approved at stake as a result of what my syllabus contains? How much freedom do I still have?

Continue reading

Posted in Ethics and the Legal Profession | 1 Comment

Learnings from the Demographic Data on Litigants Without Counsel

By: John-Paul Boyd

PDF Version: Learnings from the Demographic Data on Litigants Without Counsel

The demographic information on litigants without counsel available to date reveals a number of interesting patterns: most litigants appear to be 40 years old and older, and people in that age range are involved in litigation at rates far higher than those in younger age groups; although most litigants have lower incomes, a significant number have incomes around or exceeding the average income; and, litigants’ often high incomes match their educational achievements, which often exceed the average. All of this information strikes me as potentially useful when designing services and reforming processes for litigants without counsel.

Continue reading

Posted in Access to Justice | Leave a comment

Federal Court of Appeal Reviews CEAA “Justification” Determination for Lower Churchill Falls

By: Martin Olszynski

PDF Version:  Federal Court of Appeal Reviews CEAA “Justification” Determination for Lower Churchill Falls

Case commented on: Council of the Innu of Ekuanitshit v. Canada (Attorney General), 2014 FCA 189

At least three times in the course of the past year, an environmental assessment (EA) panel convened under the Canadian Environmental Assessment Act 2012, SC 2012, c 19 (CEAA, 2012) has concluded that a project is likely to result in significant adverse environmental effects: Shell’s Jackpine Mine Expansion, Taseko’s New Prosperity Mine, and Enbridge’s Northern Gateway Pipeline.  In the case of both Jackpine and Northern Gateway, the federal Cabinet determined that these effects were “justified in the circumstances,” but not so for New Prosperity. In none of these instances, however, did the relevant “Decision Statement” pursuant to section 54 of CEAA, 2012 contain any explanation or reasons for Cabinet’s decision. The Federal Court of Appeal’s recent decision in Council of the Innu suggests that this approach is wrong. This litigation involved the Lower Churchill Hydroelectric Project proposed by Nalcor in Newfoundland. This project was reviewed under the previous CEAA regime but the relevant provisions are virtually unchanged. Like the three EAs referred to above, the panel concluded that the project was likely to result in significant adverse environmental effects. Unlike the three projects referred to above, however, the government did provide a detailed explanation for its determination that the significant adverse environmental effects were justified in the circumstances. The Council challenged this determination (the Council also challenged the sufficiency of Aboriginal consultation; this post focuses only on the justification issue).  Continue reading

Posted in Administrative Law, Environmental | Leave a comment

Judicial Dissent over Priorities in Civil Justice: Queue-Jumping and the Commercial List

By: Sarah Burton

PDF Version: Judicial Dissent over Priorities in Civil Justice: Queue-Jumping and the Commercial List

Cases Considered: Lustre Studio Inc. v West Edmonton Mall Property Inc, 2014 ABQB 525

In Lustre Studio Inc. v West Edmonton Mall Property Inc, 2014 ABQB 525, the Honourable Mr. Justice B.R. Burrows provided a candid window into judicial frustrations with access to justice in Alberta.  In pointed words, he expressed dissatisfaction with the courts’ willingness to prioritize and accommodate commercial cases through mechanisms unavailable in family and non-commercial matters. While Justice Burrows clearly criticizes this preferential treatment, he also expresses resignation in quelling the tide. This decision implicitly questions the priorities of our justice system and the preference given to commercial matters over non-commercial cases, even when they urgently require the court’s attention. Practically speaking, Justice Burrows may be correct in stating that expanded accommodations for commercial cases are here to stay. If so, this innovative project should be harnessed to create equally effective mechanisms for family and other non-commercial cases. Continue reading

Posted in Access to Justice | 1 Comment

Federal Court to Syncrude: Climate Change is a Real, Measured Evil, Whose Harm has been Well Documented

By: Martin Olszynski

PDF Version: Federal Court to Syncrude: Climate Change is a Real, Measured Evil, Whose Harm has been Well Documented

Case commented on: Syncrude Canada Ltd. v Attorney General of Canada, 2014 FC 776

“The fall term in the 1997-1998 academic year,” wrote Professor David Beatty, “was a constitutional law teacher’s dream.” Professor Beatty was referring to the release of two Supreme Court of Canada decisions that touched some of the “most politically charged issues” of the day and which “together raised almost every important issue in constitutional law” (one of which was R v. Hydro Quebec, [1997] 3 SCR 213, 1997 CanLII 318 (SCC), central to the Syncrude decision being commented on here; see David Beatty, “Canadian Constitutional Law in a Nutshell” (1998) 36(3) Alta L Rev 605). As it turns out, the summer of 2014 has shaped up to be an environmental law teacher’s dream.  In May, the Federal Court released its decision in Greenpeace Canada v Canada (Attorney General), 2014 FC 463 (CanLII), a decision that I have suggested represents a major development in Canadian environmental assessment law. Then in August, the Federal Court handed down its judgment in Syncrude, which my colleague Professor Nigel Bankes has observed is the “first case in which a party has challenged the constitutional validity of any federal greenhouse gas regulations.”  This post focuses on that very issue; Professor Shaun Fluker has also written a post on the decision, focusing on the administrative law issues.

Continue reading

Posted in Climate Change, Constitutional, Environmental | Leave a comment

Syncrude v Canada: Where is the gatekeeper when you need one?

By: Shaun Fluker

PDF Version: Syncrude v Canada: Where is the gatekeeper when you need one?

Case commented on: Syncrude Canada Ltd v Attorney General of Canada, 2014 FC 776

This post continues on from the introductory comment posted by Nigel Bankes on September 11, 2014 (here) concerning this case, and discusses the administrative law aspects in Justice Zinn’s decision. Briefly put, Syncrude challenges the validity of the Renewable Fuels Regulations, SOR/2010-109 enacted pursuant to section 140 of the Canadian Environmental Protection Act, 1999, SC 1999, c 33 [CEPA]. Section 139 of CEPA together with the Renewable Fuels Regulations require diesel fuel produced, imported or sold in Canada to contain renewable fuel of at least 2% by volume.  Syncrude produces diesel fuel, and is thus subject to this requirement unless it can successfully argue the Renewable Fuels Regulations are ultra vires the authority of the  Governor in Council or that there is some other legal defect in how the rules have been administered against it. My comment focuses on two points in the decision, namely: (1) are the Renewable Fuels Regulations unlawful because they do not conform to the regulation making powers of the Governor in Council set out in section 140 of CEPA?; and (2) did the Minister err in law by failing to afford Syncrude procedural fairness in administering the regulations?

Continue reading

Posted in Administrative Law, Climate Change, Environmental | Leave a comment

The Federal Renewable Fuels Regulations Survive an Aggressive and Comprehensive Challenge from Syncrude

By: Nigel Bankes

PDF Version: The Federal Renewable Fuels Regulations Survive an Aggressive and Comprehensive Challenge from Syncrude

Case commented on: Syncrude Canada Ltd. v Attorney General of Canada, 2014 FC 776

In the dog days of summer (August 6, 2014) Justice Russel Zinn of the Federal Court of Canada handed down his judgement in a case in which Syncrude sought to challenge the validity of the federal Renewable Fuels Regulations, SOR/2010/189 (RFR) on both constitutional and administrative law grounds. The judgment seems to have passed almost without comment in the media. The RFR require that diesel fuel produced, imported or sold in Canada must contain renewable fuel of at least 2% by volume. This requirement can be met by blending diesel with biodiesel (although this can be challenging at cold temperatures). Failure to comply with the RFR is an offence although a regulated entity can achieve compliance by purchasing compliance units from other regulated entities who have exceeded their own compliance targets. See the judgement at para 4.

Continue reading

Posted in Climate Change, Environmental | 3 Comments

The Vicious Spiral of Self-Representation in Family Law Proceedings

Written by: John-Paul Boyd

PDF Version: The Vicious Spiral of Self-Representation in Family Law Proceedings

A lot of good research on litigants without counsel has been published in the last three years, most notably, in my view, Julie Macfarlane‘s Identifying and Meeting the Needs of Self-represented Litigants, a trio of papers published by the Canadian Research Institute on Law and the Family on the views of Alberta judges and family law lawyers, and a report by the Canadian Research Institute on Law and the Family with professors Nicholas Bala and Rachel Birnbaum (in press) on the results of a national survey of judges and lawyers. Although this research doesn’t necessarily label it as such, I’ve noticed that there’s a bit of a slippery slope effect to litigating without counsel, in which the decision to self-represent, whether a choice was involved or not, seems to trigger a cascade of adverse effects that ultimately result in litigants without counsel achieving worse results in every major area of family law than would have been achieved with counsel. Continue reading

Posted in Access to Justice, Family | Leave a comment

The Quiet Decline of Canada’s IPO Markets

By: Bryce Tingle

PDF Version: The Quiet Decline of Canada’s IPO Markets

The Toronto Stock Exchange’s parent company has been travelling the country raising the profile of its new venture, TSX Private Markets.  At the same time, Canada’s securities commissions are engaged in the most comprehensive overhaul of the private placement regime in more than a decade.  In Ontario, in particular, this would reverse the increasingly restrictive trends of previous reforms and liberalize its private capital markets.

This is a curious state of affairs. The TSX is chipping away at the incentives for a company to go public and the Ontario Securities Commission (OSC) is making it easier for companies to raise money outside of its regulatory “gold standard”: the public company prospectus system.  What is going on?

Continue reading

Posted in Corporate / Commercial, Securities | Leave a comment