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Securities - Securities Act - Insider Trading. 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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