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Securities - Securities Act - Insider Trading
MORE CASES
Part 2
. Kraft v. Ontario (Securities Commission) [NCOB]
In Kraft v. Ontario (Securities Commission) (Ont Divisional Ct, 2025) the Divisional Court dismissed an appeal, here from "two decisions of the Capital Markets Tribunal (the “Tribunal”) in regulatory proceedings brought under the Securities Act, R.S.O. 1990, c. S.5 (the “Securities Act” or the “Act”) by the respondents the Ontario Securities Commission (the “OSC”) and the Chief Executive Officer of the OSC".
Here the court considers an allegation of securities 'tipping' [SA s.76(2)], particularly the issues of "other than in the necessary course of business" (NCOB) and who the related burden of proof lies on:A. OSC staff’s allegations
[10] In its Statement of Allegations dated October 13, 2021, OSC staff brought regulatory proceedings against Mr. Kraft and Mr. Stein under the Act. The OSC staff alleged that Mr. Kraft had engaged in illegal “tipping” of material non-public information (“MNPI”) about WeedMD, contrary to s. 76(2) of the Act, and that Mr. Stein had engaged in insider trading, contrary to s. 76(1) of the Act. Those provisions state:Trading where undisclosed change
76 (1) No person or company in a special relationship with an issuer shall purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed.
Tipping
(2) No issuer and no person or company in a special relationship with an issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed. [Emphasis added.] [11] There was no dispute that Mr. Kraft, as chairman and a director of WeedMD, was a person in a special relationship with WeedMD: see Securities Act, s. 76(5).
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V. Onus to establish NCOB
[33] Did the Tribunal err in finding that Mr. Kraft had the onus of establishing that his disclosure to Mr. Stein was made “other than in the necessary course of business”?
[34] As outlined above, the question of whose onus it was to establish that Mr. Kraft’s disclosure to Mr. Stein was made “other than in the necessary course of business” depends upon whether this was an element of the tipping offence or was an exception to the general rule that MNPI may not be generally disclosed. As the Tribunal found, its caselaw establishes that respondents bear the burden of proving any exceptions they seek to rely upon.
[35] Mr. Kraft argued that the NCOB exception is an element of the tipping offence and, therefore, the OSC had the onus of proving that he did not make the disclosure in the necessary course of business. The Tribunal disagreed, finding that it was an exception to the general rule. Therefore, Mr. Kraft bore the onus of proving that he made the disclosure to Mr. Stein in the ordinary course of business. Mr. Kraft submits that this was an error of law.
[36] There is no dispute that this issue raises a question of law, subject to the correctness standard. It involves interpreting s. 76(2). For ease of reference, that section is reproduced again:76(2) No issuer and no person or company in a special relationship with an issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed. [37] As the Tribunal noted, the guiding approach to statutory interpretation was articulated by the Supreme Court of Canada in Rizzo & Rizzo Shoes Ltd. (Re), 1 S.C.R. 27, at para. 21, where the Court stated “that statutory interpretation cannot be founded on the wording of the legislation alone…. [T]he words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”
[38] The Tribunal relied on the Court of Appeal’s decision in Finkelstein v. Ontario (Securities Commission), 2018 ONCA 61, 139 O.R. (3d) 161[2] for its analysis of the purpose of the tipping prohibition. In Finkelstein the Court of Appeal started by setting out the aim of the securities regulation framework as a whole, which is to “protect the investor, promote capital market efficiency, and ensure public confidence in the securities system”: at para. 19. According to the Court of Appeal, the tipping prohibition is a significant component of that scheme. It exists for three reasons:(1) Fairness requires that all investors have access to information about an issuer that would likely affect the market value of the issuer’s securities;
(2) Insider trading may undermine investor confidence in the capital markets; and
(3) The efficiency of the capital markets depends upon the full and timely disclosure of all material information: Finkelstein, at paras. 23-25. [39] The fact that the tipping prohibition (which, as the Tribunal points out, is “an enabler of insider trading”: Merits Decision, at para. 238) contributes to achieving all of the purposes of the securities regulation framework, is a factor in the Tribunal’s conclusion that “s. 76(2) of the Act is properly construed as a broad prohibition against selective disclosure of MNPI by an issuer or person or company in a special relationship with an issuer, subject to the stated narrow exception, proviso or carve-out for communications ‘in the necessary course of business’”: Merits Decision, at para. 235.
[40] Another factor is the words themselves. The Tribunal found that the words “other than” that precede “necessary course of business” signal an exception. In doing so, the Tribunal considered the language in a related section of the Act. Section 76(3) reads:No person or company that is considering or evaluating whether, or that proposes,
(a) to make a take-over bid, as defined in Part XX, for the securities of an issuer;
(b) to become a party to a reorganization, amalgamation, merger, arrangement or similar business combination with an issuer; or
(c) to acquire a substantial portion of the property of an issuer;
shall inform another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed except where the information is given in the necessary course of business relating to the take-over bid, business combination or acquisition. (emphasis added). [41] The Tribunal found that in s. 76(3) communications in the necessary course of business are clearly stated to be an exception to the prohibition. In the Tribunal’s view, the words “other than” in s. 76(2) “operates as a synonym to ‘except’”: Merits Decision, para. 241.
[42] Mr. Kraft argues that the Tribunal committed three errors in its analysis of this issue. First, it erred in characterizing the “necessary course of business” carveout as an exception, when other Tribunal cases and criminal proceedings that are brought on the basis of similar behaviour treat it as an essential element of the offence. Second, it erred in finding that the words “other than” signal an exception when there is caselaw in the criminal context that says otherwise. Third, communicating MNPI is done every day and all the time by corporate officials. If that conduct is presumptively unlawful, this will have the effect of discouraging corporate officials from seeking the advice they need in order to properly discharge their duties to their corporations.
[43] With respect to the first argument, Mr. Kraft relied on the Tribunal’s decisions in Roxborough (Re), 2022 ONCMT 11 and Kitmitto (Re), 2022 ONCMT 12, aff’d 2024 ONSC 1412 (Div. Ct.). Kitmitto (Re) makes no mention of the carveout at issue. Roxborough (Re) does state that the carveout is an element of the offence of tipping. However, it does so without analyzing the issue as it was not in dispute in the case. For this reason, the Tribunal gave it little weight. With respect to the criminal cases, they are of limited assistance, since the values underlying the debate in the criminal context are very different than those that exist in the administrative context. Classifying a carveout as an exception has important implications for the presumption of innocence since it forces the accused to testify. The presumption of innocence is a right that is guaranteed by s. 11 of the Charter. The Supreme Court of Canada has confirmed that “[s]ection 11 protections are available to those charged with criminal offences, not those subject to administrative sanctions”: Guindon v. Canada, 2015 SCC 41, [2015] 3 S.C.R. 3, at para. 44, citing R. v. Wigglesworth, 1987 CanLII 41 (SCC), [1987] 2 S.C.R. 541, at para. 25.
[44] With respect to his second argument, Mr. Kraft relied on R. v. Liptak, 2009 ABPC 342, 481 A.R. 116, a decision of the Alberta Provincial Court, where the accused was charged with unlawfully operating a motor vehicle while disqualified from doing so. The offence contains a carveout for people who are registered in an alcohol ignition interlock device program. That carveout is preceded by the words “other than”. The court found that the Crown had the onus of proving that the accused was not registered in an alcohol ignition interlock device program. In doing so, the court did focus on the fact that the legislation at issue uses the words “other than” rather than “unless”. However, central to its reasoning on this issue was its finding that the carveout at issue in that case did not “refer to facts which are peculiarly in the knowledge of the accused. Whether the accused was ‘registered in an alcohol ignition device program’ is as much within the knowledge of the Crown (being part of the government which establishes and runs such programmes) as it is within the knowledge of the accused. Proving that the accused is not registered in such a programme will create no real difficulty for the Crown.”: Liptak, at para. 41, point 2. This is not true for the carveout in this case. Mr. Kraft has more knowledge of the circumstances giving rise to the disclosure at issue than the OSC does.
[45] Of more relevance than Liptak is Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, where the Supreme Court found that a statute that contained a prohibition with a carveout introduced by the words “otherwise than” was “structured as a prohibition with a limited exception”: para. 32. Further, in Ontario (Securities Commission) v. Tiffen, 2020 ONCA 217, 150 O.R. (3d) 714, the Court of Appeal considered the definition of the word “security” in the Act, which includes “(e) a bond, debenture, note…other than, (i) a contract of insurance…” (emphasis added). The court had this to say about the wording of the Act, at paras. 28-29:I accept that the scheme of the Act is “catch and exclude”. In other words, the Act defines key terms very broadly, and thereby captures a great many instruments and activities in its wide regulatory scope, and then provides for many exemptions from the Act’s requirements, discussed further below, to tailor this regulatory scope to its purposes.
The term “security” is defined at s. 1(1) of the Act. It consists of a non-exhaustive list of 16 clauses expressed in general terms, evidencing an intention for breadth. The clause most centrally at issue in this case is clause (e), which reads “a bond, debenture, note or other evidence of indebtedness”. Section 1 provides for only two explicit exceptions to clause (e):(i) a contract of insurance… [Emphasis added]. [46] Thus, contrary to Mr. Kraft’s submission, there is ample authority to support the Tribunal’s view that the words “other than”, which has the same meaning as “otherwise than”, denote an exception.
[47] This brings us to Mr. Kraft’s third argument, which is essentially that treating the carveout as an exception puts too much of a burden on corporate officials who are communicating about MNPI on a daily basis. As the Supreme Court of Canada explained in British Columbia Securities Commission v. Branch, 1995 CanLII 142 (SCC), [1995] 2 S.C.R. 3, at para. 57, “[p]ersons who carry on the business of trading in securities realize that the industry is heavily regulated and for good reason. It is a crucial part of our economy that is at stake.” As already discussed, controlling the sharing of MNPI is a key component of the securities regulatory scheme. Therefore, it is not surprising that the Legislature chose to prohibit the behaviour, subject to a narrow exception based on necessity.
[48] For these reasons, we find that the Tribunal correctly placed the onus on Mr. Kraft to establish that his disclosure to Mr. Stein was made in the necessary course of business. . Kitmitto v. Ontario (Securities Commission) ['special relationship']
In Kitmitto v. Ontario (Securities Commission) (Div Court, 2024) the Divisional Court considers (and dismissed) related appeals from two Capital Markets Tribunal (CMT) decisions, one respecting 'merits' and one respecting 'sanctions' [under Securities Act (SA), s.10(1)], here addressing SA 76 "which prohibits insider trading and tipping" ['Part XVIII - Continuous Disclosure ' ('Trading where undisclosed change' and 'Tipping')].
Here the court considers a finding of a 'special relationship' [as per SA 1(1) and 76(5)], as it bears on insider trading law:D. “Special relationship” with Amaya
[125] Mr. Candusso submits that the Tribunal majority erred in finding that he was in a “special relationship” with Amaya. Mr. Candusso argues that there was no evidence that he received Amaya MNPI from a person that he knew was in a special relationship with Amaya.
[126] Since Mr. Candusso does not otherwise have a relationship or close connection with Amaya, Mr. Candusso would be a person in a special relationship with Amaya if he learned Amaya MNPI from another person that he “knows or ought reasonably to have known” was a person in special relationship with Amaya: Securities Act, s. 75(5)(e). Mr. Kitmitto would be a person in a special relationship with Amaya if he was engaging in (or proposed to engage in) any business or professional activity with or on behalf Amaya or learned of Amaya MNPI while engaged in such activity: s. 75(5)(b) and (d).
[127] Mr. Candusso says that based on the definition of a person in a “special relationship” with an issuer, the onus was on OSC staff to prove, based on clear and cogent evidence, that he knew or ought reasonably to have known that Mr. Kitmitto learned of the Amaya acquisition while he was engaged in a business or professional activity with or on behalf of Amaya. Mr. Candusso argues that no such evidence exists in this case.
[128] Mr. Candusso submits that knowledge of a tipper’s relationship with the issuer can be a matter of inference, but any such inference must reasonably flow from facts that are proved in evidence: Cheng (Re), 2019 ONSEC 8, at para. 74. Mr. Candusso says the Tribunal majority’s reasons in support of finding that he knew or out reasonably to have known that Mr. Kitmitto was in a special relationship with Amaya were scant and incapable of appellate review, being limited to one paragraph, para. 261:We also find, based on the above evidence, that Christopher [Candusso] was in a special relationship with Amaya. We conclude that Staff has established both the “information connection” (Christopher learned about the Amaya MNPI from Kitmitto, who was in a special relationship with Amaya) and the “person connection” (Christopher knew or ought reasonably to have known that Kitmitto was in a special relationship with Amaya), given:
a. Christopher’s close, personal relationship with Kitmitto;
b. the opportunities that resulted from their relationship and their living arrangements for Christopher to learn about the Acquisition from Kitmitto; and
c. the timely, uncharacteristic, risky, and profitable nature of Christopher’s trading in Amaya shares. [129] Mr. Candusso submits that none of these three factors listed above, either individually or in totality, support an inference that he knew that Mr. Kitmitto was a person in a special relationship with Amaya. Mr. Candusso says that the Tribunal majority failed to engage in the “careful analysis” that previous case law indicates should be applied to determinations of special relationship, given the potentially serious consequences for the defending parties: see Hutchinson, at paras. 125, 127, 136.
[130] I disagree. Mr. Candusso’s analysis ignores the opening words of para. 261, in which the Tribunal majority makes its “special relationship” finding relating to Mr. Candusso and Mr. Kitmitto as being “based on the above evidence”. The Tribunal majority explicitly incorporated by reference its substantial multi-page earlier analysis of evidence to support the conclusion that Mr. Kitmitto communicated Amaya MNPI to Mr. Candusso and Mr Candusso traded while in possession of MNPI. The Tribunal majority did not err in doing so: R.E.M., at paras. 25, 37.
[131] The factors that indicate a person possessed MNPI overlap considerably with those indicating that a person is in a special relationship with the issuer: Hutchinson, at para. 128. Accordingly, Mr. Candusso’s challenge to the finding that he was in a special relationship with Amaya fails on a similar basis as the finding that he possessed Amaya MNPI.
[132] In addition, there was no dispute that Mr. Kitmitto’s position at Aston Management placed him in a professional environment where investments are assessed and transactions discussed. Mr. Candusso “knew that Kitmitto worked as an analyst for Aston Asset Management, which he understood to mean that Kitmitto researched different companies in the gaming and tech industry and provided recommendations to fund managers”: Merits Decision, at para. 249. The evidence also indicated that Mr. Candusso knew that Mr. Kitmitto covered Amaya and knew more about Amaya than Mr. Candusso. The cumulative effect of the evidence, together with the overlapping factors establishing Mr. Candusso’s possession of MNPI, is a reasonable basis for the Tribunal majority’s finding that Mr. Candusso knew or ought to have known that Kitmitto was in a special relationship with Amaya.
[133] Accordingly, I have concluded that the Tribunal majority did not err in finding that Mr. Candusso was in a “special relationship” with Amaya. . Kitmitto v. Ontario (Securities Commission) [Suman factors]
In Kitmitto v. Ontario (Securities Commission) (Div Court, 2024) the Divisional Court considers (and dismissed) related appeals from two Capital Markets Tribunal (CMT) decisions, one respecting 'merits' and one respecting 'sanctions' [under Securities Act (SA), s.10(1)], here addressing SA 76 "which prohibits insider trading and tipping" ['Part XVIII - Continuous Disclosure ' ('Trading where undisclosed change' and 'Tipping')].
Here the court cites 'Suman factors', which are factors used by the CMT to detect use of 'insider information' [aka 'material non-public information' ('MNPI')]:[98] In drawing the inferences that Mr. Kitmitto tipped Mr. Candusso with Amaya MNPI and that Mr. Candusso traded while in possession of MNPI, the Tribunal majority relied on a non-exhaustive set of factors developed in the Tribunal’s jurisprudence to assist in inferring possession of MNPI by a defending party, known as the Suman factors: see Suman (Re), 2012 ONSEC 7, at para. 307; Hutchinson, at para. 121; Azeff (Merits), at para. 45. In the Merits Decision, at para. 160, the Tribunal majority set out those factors:Prior Commission decisions have set out a non-exhaustive list of characteristics that may suggest knowledge of material facts:
a. timely trades;
b. unusual trading patterns;
c. unusually risky trades, including because they represent a significant percentage of the portfolio;
d. highly profitable trades; or
e. a first-time purchase of the security. [99] Reflecting consideration of the Suman factors, the Tribunal majority found, at para. 258, that Mr. Candusso’s trading in Amaya shares was “timely, risky, uncharacteristic, and profitable”. The Tribunal majority cited that conclusion as one of the reasons (together with additional considerations set out in paras. 258(a) to (d)) that they did not find “credible” Mr. Candusso’s evidence about “why he bought Amaya shares when he bought them”. They found that it “supports an inference that it was more likely than not that Kitmitto tipped [Mr. Candusso]”.
[100] Mr. Candusso submits that the Suman factors are only guidance principles and not a mechanistic list of requirements. He argues that neither suspicious timing and profitability of a trade, nor an opportunity to receive MNPI, are sufficient, without more, to ground an inference of insider trading. Opportunity to receive MNPI is of limited probative value: “[e]vidence of opportunity, by itself, cannot realistically prove anything more than opportunity”: Walton v Alberta (Securities Commission), 2014 ABCA 273, 580 A.R. 218, at para. 31. Likewise, aside from coincidence, the timing and profitability of a share purchase can be explained by a market movement: Rosborough (Re), 2022 ONCMT 11, at para. 85; Minority Reasons, at para. 513.
[101] Mr. Candusso submits that the circumstantial evidence before the Tribunal did not justify the Tribunal majority’s finding that his Amaya purchases were timely, risky, uncharacteristic, and profitable. He says that the circumstantial evidence before the Tribunal did not justify that conclusion. Mr. Candusso also challenges those findings taking into account (among other things) his general trading patterns and the information about Amaya already circulating in the market prior to the announcement of the PokerStars transaction. . Kitmitto v. Ontario (Securities Commission)
In Kitmitto v. Ontario (Securities Commission) (Div Court, 2024) the Divisional Court considers (and dismissed) related appeals from two Capital Markets Tribunal (CMT) decisions, one respecting 'merits' and one respecting 'sanctions' [under Securities Act (SA), s.10(1)], here addressing SA 76 "which prohibits insider trading and tipping" ['Part XVIII - Continuous Disclosure ' ('Trading where undisclosed change' and 'Tipping')]:[7] Amaya Gaming Group Inc. (“Amaya”) is a publicly traded company in the online gaming business. On June 12, 2014, Amaya announced the acquisition of another, much larger gaming operation that owned the PokerStars brand. The Tribunal decisions under appeal involved allegations by staff of the respondent Ontario Securities Commission (“OSC”) that the appellants were involved in illegal tipping and insider trading prior to the public announcement of that acquisition: Merits Decision, at paras. 1, 3.
[8] The prohibition against insider trading and tipping is found in s. 76 of the Securities Act, which at the relevant time provided in part as follows:Trading where undisclosed change
76 (1) No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.
Tipping
(2) No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed. [9] Under s. 76(5) of the Securities Act, a person in a special relationship with a reporting issuer was defined to include (i) certain persons that were closely connected to the issuer (see ss. 76(5)(a) to (d)), and (ii) persons that had no direct connection to the issuer but received material information with respect to the issuer from another person that the recipient knew or ought reasonably to have known to be a person in a special relationship with the issuer (see s. 76(5)(e)).
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