Insider Trading: Securities Commission To Think Twice About Excessive Sanctions And Speculation

In a rare appellate court decision, the Court of Appeal in Walton v. Alberta (Securities Commission), 2014 ABCA 273, has set aside a decision by the Alberta Securities Commission and has held that any monetary penalties levied must be proportionate to the circumstances of the offender and supported by reasons. The Court also held that findings cannot be based upon speculation and that the Commission had improperly interpreted the "recommending or encouraging" provisions of the Alberta Securities Act (the "Act") in a decision that is certain to give pause to Securities Commissions across Canada.

Background

At all material times, Eveready Inc. was listed as a reporting issuer on the Toronto Stock Exchange providing services to the industrial and oilfield sectors. In late 2008, Eveready's unit price was depressed such that it attracted the attention of Clean Harbors Inc. as a potential takeover target. The Staff of the Alberta Securities Commission alleged that Holtby, a director of Eveready, was aware of the proposal by Clean Harbors to takeover Eveready and traded in shares of Eveready based upon this knowledge including passing knowledge of the impending takeover to the other appellants, Kowalchuck, Shepert, Burdeyney and Walton, who in turn traded, encouraged others to trade, and made improper use of this non-public information.

Decision Below

In the decision below, Re Holtby, 2013 ABASC 45, the Alberta Securities Commission found the appellants culpable of insider trading, including purchasing securities with knowledge of a material fact, informing others of a material fact and recommending/encouraging others to purchase shares of Eveready all contrary to s. 147 of the Act. Sanctions were imposed against the appellants in Re Holtby, 2013 ABASC 273 including bans from trading in securities, the disgorgement of profits and administrative monetary penalties ("AMPs") ranging from $55,000 to $1,750,000.

Decision

The Court addressed the Commission's interpretation of the requirements of "insider trading", "tipping" and "recommending or encouraging" pursuant to s. 147 of the Act, acknowledging that the Commission's interpretation of the Act is entitled to deference. The Court held that the Commission's interpretation of the mens rea elements of "insider trading" and "tipping" requiring "knowledge of a material fact" and the "passing of information" respectively, were reasonable. However, the Court held that the Commission's interpretation of the...