Insider trading

• Author: Christopher Nicholls
• Pages: 250-300

250

CHA PTER 8

INSIDER TR ADING

A. INTRODUC TION

Corporate insiders, such as off‌icers or di rectors, regularly buy and sell

shares issued by t heir companies. They are generally permitted by l aw

to do so, provided they comply with two sorts of rule s. First, corporate

insiders must report their t rades to securities regulators in a form that

becomes available as a public record. Second, they must not trade when

they have conf‌idential inside information.

There are few subjects in securities law that attract more pub-

lic attention than insider trading. Many of the villa ins of the highly

publicized securities scandals of the 1980s and more recent f‌inancial

debacles were (or were thought to be) notorious insider traders who

used their inform ational advantages to scoop up hefty (illegal) prof‌its.

Yet, despite the morality-play rhetoric that often accompanies condem-

nation of insider trading, an i nformed view of the issue require s a care-

ful analysis of det ailed legislative provisions and challenging que stions

of economics and public policy.

This chapter will consider some of the threshold issues surround-

ing Canadian insider-trading regulation. The questions addre ssed here

include:

• What is the precise policy goal of laws restricting insider trading?

• Whom does the law consider to be “insiders”?

• What restrictions should be, and are, placed on t he activities of such

people?

Insider Trading 251

B. CORPOR ATE AND CR IMINA L LAW

PROHIBITIONS ON INSIDER TR ADING

The discussion of insider tr ading in this chapter relates prim arily to the

rules contained in provincial securities leg islation. It is also important

to remember that the Canadian Criminal Code1 and some Can adian

corporate law statutes als o contain insider-trading provisions.

1) Criminal Code

Section 382.1 of the Criminal Code, which was added to the statute in

200 4, provides as follows:

382.1 (1) A person is guilt y of an indictable offence and liable to

imprisonment for a ter m not exceeding ten years who, dire ctly or

indirectly, buys or sells a se curity, knowingly using i nside informa-

tion that they

(a) posse ss by virtue of being a sha reholder of the issuer of that secur ity;

(b) possess by v irtue of, or obtained in the course of, their bu siness

or profession al relations hip with th at issuer;

(c) posse ss by virtue of, or obta ined in the course of, a proposed

takeover or reorgani zation of, or amalgamation, merger or si mi-

lar busi ness combination w ith, that is suer;

(d) possess by virtue of, or obtai ned in the course of, their employ-

ment, off‌ice, duties or occupation w ith that issuer or wit h a per-

son referred to in par agraphs (a) to (c); or

(e) obtained from a pers on who possesses or obt ained the informa-

tion in a manner refer red to in paragraphs (a) to (d).

(2) Except when necessary in the cour se of business, a person

who knowingly conveys in side information th at they possess or

obtained in a ma nner referred to in subsection (1) to another person,

knowing th at there is a ri sk that the person will use t he information

to buy or sell, directly or i ndirectly, a security to which t he infor-

mation relates, or th at they may convey the inform ation to another

person who may buy or sell such a s ecurity, is guilty of

(a) an indictable offence and li able to imprisonment for a term not

exceeding f‌ive year s; or

(b) an offence punish able on summary convict ion.

1 R SC 1985, c C-46.

SECU RITIE S LAW252

(3) For greater cert ainty, an act is not an offence under thi s sec-

tion if it is authoriz ed or required, or is not prohibited, by any federal

or provincial Act or regu lation applicable to it.

(4) In this section, i nside infor mation mean s informat ion relat-

ing to or affecting t he issuer of a security or a secur ity that they have

issued, or are about to is sue, that

(a) ha s not been generally disclosed; and

(b) could reasonably b e expected to signi f‌icantly affect the m arket

price or value of a securit y of the issuer.

There are at least three features of this Criminal Code provi sion

worth noting here. First, a key element of the offence is that the i nsider

bought or sold securities “knowingly using” inside information. Before

1988, the insider-trading provisions i n Ontario’s Securities Act included

a defence in cases where a person accused of unlawful insider trading

proved that they did not “make use of” the undisclosed information.

After that defence was removed from the statute, Onta rio courts con-

f‌irmed that the “essence” of an insider-trading offence under Ontario

securities law, as discussed below, is “not a question of using insider

information but of buying or selling securities of a company while pos-

sessed of insider in formation.”2 The Criminal Code prov ision, however,

is different. Proof that the accused “knowingly used” the undisclosed

information when they bought or sold securities conti nues to be an ele-

ment of the Criminal Code offence. Accordingly, one would anticipate

that successfully pros ecuting insider trading under the cri minal statute

would be more diff‌icult than obtaining a “quasi-crimin al” conviction

under the insider-trading provisions of provincial securities law, dis-

cussed later in this chapter.

Second, the “tipping” offence prescribed in section 382.1(2) is also

considerably narrower than the comparable provision in provincial

securities laws. Unlawful tipping, for securities l aw purposes,3 occurs

whenever an issuer or a person in a specia l relationship with an issuer

discloses a mater ial fact or material change other than in the neces-

sary course of busine ss. There is no reference in the typical provin-

cial securities statutes to “knowingly” conveying inside information.

More signif‌icantly, there is also no qual if‌ication in securities st atutes

that limits un lawful tipping only to those c ases in which the “tipper”

knows that “there is a ri sk” that the tippee will u se the information to

buy or sell securities, or will convey the information to someone else

who will use it for that purpose.

2 R v Woods, [1994] OJ No 392 at para 15 (Gen Div).

3 See, for e xample, OSA, s 76(2).