Canada: Broker’s Report

In August, we reported Andrew Rankin’s conviction on ten counts of tipping under subsection 76(1) of the Securities Act. On October 27, 2005, Justice Khawly sentenced Rankin to six months in jail on each of the ten counts, to be served concurrently. OSC staff was seeking a prison sentence of between three and five years. Counsel for Rankin argued that he should receive a suspended sentence.

On October 14, 2005, the Ontario Securities Commission (the "Commission" or "OSC") released its decision in ATI Technologies Inc., et al. At issue was whether former ATI Technologies ("ATI") chief executive officer, K.Y. Ho, and his wife, Betty Ho, traded their shares of ATI with knowledge that ATI would not meet its third quarter forecasts contrary to subsection 76(1) of the Securities Act (the "Act"). The Commission found that OSC staff had not met their burden of establishing, by clear and convincing proof based on cogent evidence, that any violation had occurred.

As a preliminary matter, the Commission addressed the respondents’ objection that staff was relying almost entirely on hearsay evidence. The vast majority of staff’s evidence against the respondents consisted of e-mails between senior executives at ATI during the relevant period. None of the individuals whose e-mails were introduced into evidence were called as witnesses by staff. Staff relied on subsection 15(1) of the Statutory Powers Procedures Act, which generally permits tribunals to admit evidence irrespective of whether it would be admissible in court. However, noting that there was no opportunity to cross-examine the authors of the e-mails and no evidence as to the authors’ thinking when they wrote the e-mails, the Commission held that little weight should be given to these documents.

In order to find that a violation of subsection 76(1) had occurred, staff was required to prove that:

1. it was a fact at the time of the respondents’ disposition that ATI would fall short of its forecasted revenue and earnings for Q3-2000, and;
2. the respondents knew at the time of the disposition that ATI would fall short of its forecasted revenue and earnings for Q3-2000.

Because the allegations against K.Y. Ho were the result of a charitable donation of ATI shares, a related issue was whether a charitable donation constituted a "sale" for the purpose of subsection 76(1). The Commission found that staff’s case fell short on each issue. Witnesses called by the respondents, many of whom wrote the e-mails relied upon by staff, testified that during the relevant period they had confidence that ATI would meet, or even surpass, its forecasts for the third quarter. These witnesses allowed the Commission to place the e-mails and other documents relied upon by staff "in context".

Accordingly the Commission held it was not a fact at the time of disposition that ATI would fall short of its forecasts. As a result, there was no need to decide the remaining issues. Nonetheless, the Commission reviewed the evidence in respect of these remaining issues. It noted that staff had improperly changed its allegations against the respondents in its closing written submissions. However, even on the amended allegations, staff had not met its burden. Both respondents had testified as to their knowledge at the time of disposition, and Mrs. Ho testified as to her reasons for disposing of her ATI shares. The Commission accepted the evidence of both respondents.

Finally, the Commission considered the novel question of whether charitable donations were "sales" for the purpose of subsection 76(1). In this respect, staff relied on evidence that the donation of shares can result in considerable tax savings for the donor. These tax savings, it was argued, represented consideration for the "sale" of the shares. The Commission did not introduce evidence of any savings realized by K.Y. Ho, nor did it address an OSC Policy which states that disposition by way of gift was not a "trade" within the meaning of subsection 1(1) of the Act. Moreover, counsel for Mr. Ho relied on U.S. case law which held that a gift to charity could not be considered a sale when made in good faith and without pretence or subterfuge.

There was no evidence that the donations were not made in good faith, and as such the Commission concluded that the donation of shares were not "sales" for the purpose of subsection 76(1).

On October 11, 2005 the Investment Dealers Association ("IDA") ordered Union Securities Ltd. ("Union") to pay a $50,000 fine and $30,000 in investigation costs for failing to provide free access to certain records requested by the IDA Enforcement Department ("Staff"). The IDA acknowledged that Union provided access to all records it felt were relevant, however, it refused access to records it believed were irrelevant or purely personal to its employee.

In determining the penalty, the IDA cited the Ontario District Council’s decision in IDA v. Derivative Services Inc. [2000] I.D.A.S.C.D. No. 26: "Failure to provide information requested in an investigation undermines the integrity of the self-regulatory system and the effectiveness of its operations". The IDA noted that as a result of Union’s refusal to provide access to the documents, Staff’s investigation was effectively stalled for eight months or more, and as a result of that delay, Staff’s investigation has "probably suffered some prejudice".

This decision reinforces By-law 19.5(b), which provides that the right to determine relevance rests with the IDA, and not with the member. Finally, the IDA noted: "a failure to cooperate, even if based on a matter of principle, strikes at the very integrity of the [IDA’s] duty and ability to police itself."

This newsletter is prepared by Christina K. Litt and Kara L. Beitel as a service for our clients and other persons dealing with broker liability and compliance issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.