Insider Trading

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, Western University
• Pages: 305-361

305

CHA PTER 8

INSIDER TR ADING

A. INTRODUC TION

Corporate insiders, such as ocers or directors, 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 l aw that attract more pub-

lic attention than insider tr ading. Many of the villai ns of the highly

publicized securitie s 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 detailed legislative provisions and ch allenging questions

of economics and public policy.

This chapter will consider some of the threshold issues surrounding

Canadian insider-trading regulation. The questions addressed here include:

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

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

• What restrictions should be, and are, placed on t he securities-related

activities of such people?

SECU RITIE S LAW306

B. CORPOR ATE A ND CRIMINA L LAW

PROHIBITIONS ON INSIDER TRA DING

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

rules contained in prov incial securities leg islation. It is also important

to remember that the Canadian Criminal Code1 and some Canadian

corporate law statutes als o contain insider-trading provisions.

1) Criminal Code

Section 382.1 of the Criminal Code was added to the statute in 20 04. The

current version of that provision read s as follows:

382.1 (1) Every pers on is guilt y of an indictable oence and liable to

imprisonment for a ter m of not more than 10 years or is guilt y of an

oence punishable on summ ary conviction who, directly or indi rectly,

buys or sells a secur ity, knowingly using inside in formation that they

(a) poss ess by virt ue of being a shareholder of the iss uer of that

securit y;

(b) posses s by virtue of, or obtained i n the course of, their busi ness

or profession al relation ship with th at issuer;

(c) poss ess by virt ue of, or obtained in the course of, a propose d

takeover or reorgani zation of, or amalgamation, merger or sim ilar

busines s combination with, t hat issuer;

(d) possess by virt ue of, or obtained in the course of, thei r employ-

ment, oce, duties or occupation wit h that issuer or wit h a per-

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

(e) obtained from a per son who possesse s or obtained the inform a-

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

(2) Except when nece ssary in t he course of business, a per son

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 informat ion

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 oence and li able to imprisonment for a term not

exceeding f‌ive year s; or

(b) an oence pu nishable on sum mary convic tion.

1 RSC 1985, c C-46.

Insider Trading 307

(3) For gre ater certainty, an act is not an oence under t his sec-

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

or provincial Act or reg ulation applicable to it.

(4) In t his section, inside informa tion means infor mation relatin g

to or aecting the is suer of a security or a sec urity that they h ave

issued, or are about to is sue, that

(a) h as not been generally disclosed; and

(b) could reasonably be expected to sig nif‌icantly aect t he market

price or value of a securit y of the issuer.

There are at least three features of th is Criminal Code provi sion

worth noting here. First, a key element of the oence is that the culp-

able insider bought or sold securities “knowingly u sing” inside informa-

tion. Before 1988, the insider-trading provisions in Ontario’s Securities

Act included a defence in cases where a person accused of unlawful

insider trading proved th at they did not “make use of ” the undisclosed

information. After th at defence was removed from the statute, Ontario

courts conf‌irmed t hat the “essence” of an insider-trading oence under

Ontario secur ities law, as discussed below, is “not a question of using

insider information but of buying or selling securities of a company

while possessed of insider information.”2 The Criminal Code provision,

however, is dierent. Proof that the accused “knowingly used” the

undisclosed inform ation when they bought or sold securities conti nues

to be an element of the Criminal Code oence. Accordingly, one would

anticipate that successfully prosecuting insider trading under the crim-

inal statute would be more dicult than obtaining a “quasi-cr iminal”

conviction under the insider-trading provi sions of provincial securities

law, discussed later in th is chapter.

Second, the “tipping” oence prescribed in sect ion 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 special 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 provincial

securities stat utes to “knowingly” conveying inside inform ation. More

signif‌icantly, there is also no qualif‌ication in securities statutes that

limits unlaw ful tipping only to those cases in which t he “tipper” knows

that “there is a risk” t hat the tippee will use the information to buy or

sell securitie s, or will convey the inform ation 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 example, OSA, s 76(2).