In a recent settlement, the Alberta Securities Commission (ASC) sanctioned the President and Chief Executive Officer (the “CEO”) of a Toronto Stock Exchange listed oil and gas company (the “Company”) for sharing draft news releases with a registered dealer during off-market hours. The sanctions came despite an acknowledgement by the ASC that not only had the CEO showed exemplary cooperation, no intention to benefit and no previous record, but also that there had been no trading or discernible harm to the capital markets (the “Mitigating Factors”). These sanctions, in spite of the Mitigating Factors, underscore that tipping and insider trading violations will be enforced by regulators on a strict-liability basis (i.e. with no requirement to prove mens rea, or intent).
Background
At the centre of the settlement were allegations of “tipping”, which the ASC described as when a person in a special relationship with an issuer provides “selective disclosure of confidential material information [which] confers unfair informational advantages to particular investors and creates opportunities for insider trading” under section 147(4) of the (Alberta) Securities Act (“ASA”), which states: “No issuer and no person or company in a special relationship with an issuer shall, other than when it is necessary in the course of business, 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” (with similar language being found in Section 76(2) of the (Ontario) Securities Act.)[1] As President and Chief Executive Officer, the CEO was obviously in a “special relationship” with the company, a TSX listed issuer.
Over a 17-month period, the CEO sent six draft news releases with material non-public information to a registered investment dealer who was a long-time acquaintance and administered the Company’s stock option plan. These releases related to exploration drilling results and disclosure of the draft releases occurred during the evening or weekends, with the Company ultimately releasing a final version to the public before markets opened for trading. As such, it would not have been possible for the dealer representative who received the information to act on that information before it became available to the public.
However, after an investigation the ASC determined that, notwithstanding the Mitigating Factors, disclosure of this information technically constituted “tipping” under ASA section 147(4) and did not fall under the “necessary course of business” exemption. The ASC took the position that the CEO had a strict obligation to avoid selective disclosure of confidential material information (as it could create the opportunity for insider trading). As part of the sanctions, the CEO agreed to pay $40,000 to the Commission and complete a training series on “best practices for public company governance.”[2] However, due to the CEO’s “early and significant” cooperation and “acceptance of responsibility”, the ASC decided against imposing market access or other director and officer bans pursuant to ASC Policy 15-601 Credit for Exemplary Cooperation in Enforcement Matters (which is equivalent to Ontario Securities Commission Policy 15-702 Revised Credit for Cooperation Program).
Take-Aways
Neither the lack of ill-intent nor the lack of opportunity to trade (both factors acknowledged by the ASC) provided any legal defence for tipping. Tipping and insider trading are matters of heavy emphasis for securities commissions across Canada that they will continue to enforce them on a strict-liability basis. If issuers or management are at all in doubt as to whether certain disclosures constitute selective disclosure or tipping, they would be wise to reach out to seasoned securities counsel for advice. If tipping has unwittingly occurred, issuers should also consider “coming clean” with regulators, as early into the process as possible, to get credit for cooperation.
If you have questions about this matter or any concerns about the application of securities laws to you, a member of our business law group would be more than happy to discuss at your convenience.
[1] Settlement Agreement, page 1.
[2] Settlement Agreement, page 4, paragraph 23.2.