A key component of illegal insider trading is that the trader—or person who tipped the trader—is in a “special relationship” with the company whose shares were traded. This case addresses the test for when a person who receives a tip of potentially inside information reasonably ought to know the tipper is in a special relationship with the issuer.
Soave was an investment advisor (IA) who had a long-standing relationship with Aston Hill, through selling its investment products to his clients. A feature of the IA’s relationship with Aston Hill was routinely receiving recommendations and market information from its portfolio managers and sales people. On the evening of June 12, 2014, online gambling company Amaya announced a material transaction. Prior to Amaya’s announcement on June 11 and 12, an Aston Hill sales person known to the IA, Rothstein, contacted the IA and suggested he buy Amaya shares based on an expected transaction. The IA bought shares after hearing from Rothstein and before Amaya’s announcement, and sold the shares at a profit on the day after the announcement. Around this time, analysts and internet bloggers were broadcasting rumours of Amaya being involved in a significant transaction. Unbeknownst to the IA, Aston Hill participated in the financing that was part of the Amaya transaction with the result that Aston Hill (including Rothstein) was in a special relationship with Amaya, and was prohibited under the Securities Act from tipping the IA.
The main issue before the Commission was whether the evidence showed that the IA knew or ought to have known Rothstein was in a special relationship with Amaya, thereby putting the IA himself in a special relationship with Amaya and imposing on him a prohibition on trading. A second issue was whether the fact that publications were reporting statements made by market participants as to a possible transaction meant the Amaya transaction had been “generally disclosed” even before the company’s announcement, providing a defence to insider trading allegations.
On the detailed factual record before the OSC, the Tribunal found the IA did not in fact know Rothstein was in a special relationship with Amaya. The Tribunal also found that although the IA—as an experienced broker and registrant—should have had “a higher standard or alertness [than a non-registrant]” to question and assess whether Rothstein was in a special relationship with Amaya, the kind of information the IA received from Rothstein was consistent with information and the practices of fund managers and fund wholesalers like Aston Hill and Rothstein: “it was not unreasonable for [the IA] to believe that the information [from Rothstein] came from a portfolio manager or gaming sector analyst following Amaya…[who] would be expected to know of rumours and other developments.”
Though unrelated to the issue of what the IA ought to have known regarding Rothstein and the source of his information, the OSC made additional important findings relating to the insider trading rules. On the issue of when a material fact is “generally disclosed” (such that it is no longer non-public information for insider trading purposes), the Tribunal confirmed that “it is possible that material information may be generally disclosed” by entities other than the issuer. That is, for insider trading purposes, non-public information may be disclosed by the issuer pursuant to its disclosure obligations, or by another person; the important point is that the information is in the market and there is a level playing field before trading by insiders occurs. However, for disclosure to rise to the level of being generally disclosed, it must contain specific information about the transaction or other matter, as opposed to general rumours.
What you need to know
- The insider trading rules can create trading prohibitions down a line of tipees, depending on what is known by someone trading about the source of their information. However, this case is an example of a regulator finding, on the applicable test, that despite relationships and background, the IA was not brought within the ambit of persons prohibited from trading. It is important to note the significant onus and very high regulatory expectation on securities registrants (such as investment advisors) to carefully assess whether information they receive is material and from someone in a special relationship with the issuer of the recommended securities.
- There is little guidance on what counts as information being “generally disclosed” for the purposes of permitting insiders to trade. The OSC helpfully set a standard as to the nature of the information that must be disclosed, a standard that merits caution for those contemplating trading. The disclosure of material non-public information has to rise above mere rumours and actually be disclosed specifically, whatever the source of that disclosure.
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