On December 6, the Ontario Divisional Court released its decision in Finkelstein v. Ontario, an appeal from the high-profile decision of the Ontario Securities Commission holding that a Bay Street lawyer and two Montréal investment advisers had engaged in tipping contrary to the provisions of the Ontario Securities Act.1 The same day, the U.S. Supreme Court released its decision in Salman v. United States, resolving a split between the Second and Ninth Circuits about whether a "personal benefit" received by a tipper for making a tip must have tangible value in order to hold the tipper and tippee liable under Rule 10b-5.2 Both cases clarify the law of tipping in Canada and the United States, and render tipping cases easier to prove.
What You Need To Know
- In Finkelstein, the Ontario Divisional Court continued the trend recently observed in OSC and appellate decisions, holding tippers liable on the basis of circumstantial evidence.
- To establish an allegation of tipping in Ontario, there is no requirement for the OSC to prove that the tippee knew or ought to have known the source of the information all the way back up the tipping chain. Rather, section 76(5)(e) of the Securities Act only requires that the tippee knew or reasonably ought to have known that the person he or she received the tip from is in a "special relationship" with the issuer. Proving that the tippee "ought to have known" that his or her tipper was in a special relationship can include consideration of objective factors such as:
- the relationship between the tipper and tippee
- the tipper’s profession (does it give her access to material non-public information)
- the tippee’s profession (does it suggest he should know he cannot make use of confidential information)
- how detailed and specific is the material non-public information
- what steps does the tippee take before trading to verify the information received
- In Ontario, motive does not have to be proved to establish tipping, but the presence or absence of motive can take many forms, including gaining a client’s trust, or self-aggrandizement. Equally, personal benefit is not required to prove tipping and sanctions for this conduct may be severe even in the absence of any financial gain by the tipper.
- In the U.S., to prove a tippee has breached section 10(b) of the U.S. Securities Exchange Act of 1934 and Rule 10b-5, it must be proved that (i) the tipper breached a fiduciary duty prohibiting the use of corporate inside information by disclosing that information for a personal benefit; and (ii) the tippee knew the information was disclosed in breach of the fiduciary duty (thus "acquiring" the fiduciary duty himself). In Dirks v. SEC, the Supreme Court held that a personal benefit can be inferred where the tipper makes a gift of confidential information to a trading relative or friend.3
- The petitioner in Salman argued that a recent decision from the Second Circuit suggested a personal benefit to the tipper had to include receipt of something with a pecuniary or similarly valuable nature.4 However, the Supreme Court clarified that this requirement was inconsistent with Dirks. The Court confirmed that when a tipper gives a gift of trading information to a relative or friend (the alleged tippee), this is a personal benefit to the tipper because it is equivalent to the tipper trading himself and then giving a gift of the proceeds. The tipper need not receive something of pecuniary value in exchange for this gift of confidential information to a trading relative or friend.
1 2016 ONSC 7508 (Div. Ct.)
2 -- U.S. --, 2016 WL 7078448 (Dec. 6, 2016).
3 463 U.S. 646 (1983)
4 United States v. Newman, 773 F. 3d 438.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2019 by Torys LLP.
All rights reserved.