• Insider Trading Through Deductive Reasoning: Canada and the United States Take Different Approaches
  • May 16, 2013 | Author: Robert N. Black
  • Law Firm: Davis LLP - Toronto Office
  • Introduction

    The Ontario Securities Commission and a veteran investment banker, Richard Moore, recently reached a settlement agreement regarding claims by the OSC of improper securities trading by Moore. The OSC alleged that trades in the securities of Tomkins plc made by Moore while he was at CIBC World Markets were contrary to the public interest and that Moore engaged in insider trading and acts contrary to the public interest with respect to trades he made in the securities of HOMEQ Corporation while he was at UBS Securities Canada Inc.

    Under his settlement agreement with the OSC, Moore received a reprimand and fines under the OSC’s “public interest” jurisdiction, pursuant to section 127 and 127.1 of the Securities Act (Ontario), with respect to the Tomkins trades. It was also determined that Moore’s conduct in relation to the HOMEQ trades was contrary to section 76(1) of the Securities Act (Ontario). The penalties for Moore included substantial restrictions on his securities trading and a prohibition on acting as a director or officer of any reporting issuer, both for ten years following the settlement. Moore agreed to pay a total of approximately $500,000 in respect of penalties, a voluntary repayment, investigative costs and disgorgement of his profits.

    At the same time, Moore also entered into a settlement with the U.S. Securities and Exchange Commission regarding the Tomkins trades, which the SEC had jurisdiction over because some of the trades were made on the New York Stock Exchange. As an interesting contrast with the OSC approach, the SEC filed an insider trading claim against Moore under the antifraud provisions pursuant to section 10(b) of the U.S. Securities and Exchange Act of 1934 and the related rules, which led to Moore agreeing to pay approximately US $340,000 in fines and penalties, representing a little more than two times the profits made by Moore through his trades on the NYSE. Moore also agreed to an SEC administrative order pursuant to section 15(b) of the U.S. Securities and Exchange Act of 1934 that would bar him from association with various market participants and from participating in certain stock offerings.


    Moore had more than twenty years of experience as an investment banker and was employed by CIBC for the major part of his career. In 2010, Moore covered a wide range of CIBC clients from different business sectors (including the Canada Pension Plan Investment Board).

    Moore developed a relationship with a Mr. A, a Managing Director at the CPPIB, who he frequently socialized with at various events and stayed in touch through emails, phone calls and meetings. After working with Mr. A on a going private transaction for a Canadian brokerage company, Moore sensed that, according to the SEC claim, Mr. A’s “availability was diminishing”. Unbeknownst to Moore, the CPPIB had been contacted by Onex Corporation, a major Canadian holding company, about the possibility of jointly acquiring Tomkins, a U.K.-based engineering company, whose shares were trading on the London Stock Exchange. After negotiations, Mr. A was assigned as the lead CPPIB person on the transaction and this became his main source of work for the remaining part of 2010.

    Through email correspondence, Moore learned that Mr. A was working on a major deal and was often travelling to the U.K. Moore was unsuccessful at trying to get CIBC involved in the transaction. In mid-June 2010, during a charity event, Moore observed Mr. A speaking to the CEO of Tomkins but Mr. A declined to introduce Moore to him, or to reveal his identity. Moore learned the Tomkins CEO’s identity through one of his colleagues. These events, coupled with the information that Moore had learned while trying to get involved in the transaction, led Moore to conclude that the CPPIB was working on a transaction involving Tomkins.

    The day after the charity event, Moore contacted his offshore private bank in the Channel Islands, where he had two banking and brokerage accounts. Contrary to CIBC’s internal compliance policy, Moore had never disclosed these accounts to CIBC. Following an email exchange, Moore purchased common shares of Tomkins listed on the LSE and American Depository Receipts (ADRs) of Tomkins that were listed on the NYSE. Two weeks later, Moore purchased more Tomkins shares through his offshore account. The Tomkins trades conducted by Moore represented, in aggregate value, the single largest equity purchase of his life and approximately one-third of his total net worth.

    Following the announcement by Tomkins that it had received an offer to be acquired by the CPPIB and Onex Corporation, the Tomkins share price increased 31.6%, while the ADRs rose 27% in value. Moore’s total profit was approximately CDN $275,000 for the common share trades and approximately US $163,000 for the ADR trades.

    The OSC Settlement

    In most Canadian provinces, securities legislation requires that a defendant be “in a special relationship with a reporting issuer” in order to trigger insider trading prohibitions. As Moore was not “in a special relationship” with Tomkins (the issuer), the OSC did not charge him under the Ontario insider trading rules in relation to his trades of Tomkins common shares and ADRs. The settlement agreement also stated that in no specific instance did Mr. A ever provide Moore with any material, generally undisclosed information.

    The OSC instead found that Moore had acted “contrary to the public interest” and that it was in the public interest to issue certain orders pursuant to section 127 and 127.1 of the Securities Act (Ontario). The OSC generally holds the view that the purpose of an order under section 127 is to restrain future conduct that is likely to be prejudicial to the public interest in fair and efficient capital markets.

    According to the settlement agreement between Moore and the OSC, his “...conduct [...] fell below the standard of behaviour expected from someone in Moore’s position and given his extensive experience in the capital markets industry”. He made use of information gained “...in part by virtue of his position as an employee of a registrant prior to its general disclosure to the public”.

    The SEC Settlement

    Under U.S. securities law, a person who does not fit under the category of a classical insider can still be found guilty of insider trading, if there is evidence that the individual took information for his or her own profit from a party to whom he or she owed a fiduciary duty. The SEC alleged in its claim that “Moore, on the basis of information that he knew, or was reckless in not knowing, was material, non-public, and had been acquired in the course of his employment, knowingly or recklessly misappropriated the information from the employer for his personal benefit by purchasing Tomkins ADRs ahead of the announcement that Tomkins had received an acquisition offer”.


    Even when a person has not technically breached the insider trading rules in Canadian securities legislation, securities regulators in Canada will usually take action when it is concluded that such conduct is contrary to the public interest and calls into question the integrity of the capital markets. Another example of this is the 2012 decision by the OSC in the Re Donald case. In that instance, the OSC used its public interest jurisdiction to punish trading behaviour that it viewed as inappropriate and which was not otherwise caught under the applicable insider trading rules. The Donald decision involved an officer of Research in Motion who acquired securities of one of RIM’s possible take-over targets, after overhearing information about the potential acquisition at a golf event. The OSC concluded that Donald was not in a special relationship with the target issuer, as the proposed transaction discussions were not yet sufficiently advanced. However, for engaging in conduct contrary to the public interest, the OSC reprimanded Donald, ordered him to pay $150,000 in respect of investigation and litigation costs and imposed a five year ban on him from being an officer or director of a reporting issuer

    Questions are now arising as to whether the “special relationship” criteria is altering the insider trading rules in Ontario and other provinces. The SEC continues to take a tough stance towards insider trading through an expansive interpretation of the antifraud provisions of U.S. securities legislation. However, in Ontario, as can be seen from the Moore settlement and the Donald decision, it seems that the OSC’s preference is to rely on its public interest jurisdiction, rather than to try to fit certain behaviour under the existing Ontario insider trading rules. This narrow treatment of insider trading across Canadian jurisdictions may not, however, be uniform. For example, had Moore’s conduct taken place in Québec, the outcome of his case may have been different, as the applicable provisions in the Québec Securities Act do not have the same “special relationship” requirement and Québec insider trading rules therefore capture a different spectrum of people and trading activities.