In its recent decision in AMF vs Filiatreault, the Tribunal administratif des Marchés Financiers (TMF) finds that: a) an accountant who was asked by the CEO to provide job opportunities for him in the near future was in possession of insider information relating to the potential sale of the issuer; and b) stock options (in favour of certain employees and board members) contemplated prior to, but voted by the board after receipt of, a verbal offer constitute insider trading as prohibited by section 187 of the Quebec Securities Act. The TMF finds that such operations are contrary to the fundamental principle of equality for all investors in terms of knowledge at the time of operations on an issuer's stock. As such, the TMF levied administrative penalties equivalent to twice the value of the gross profits gained by each plus $20,000 for each director.
This matter involves operations in the stock of NSTEIN during negotiations for its acquisition by Open Text in 2010 and was discoverd during the AMF's investigation into significant insider trading by an IT team leader working for a prominent Montreal law firm (see AMF vs Dominic Côté) where fines of over $1.3M were levied.
The TMF refers to the definition of "spring loading" developped in US caselaw: "The practice of « spring loading » stock options involves making market-value options at a time when the company possesses, but has not yet released, favorable, material non-public information that will likely increase the stock price when disclosed."
At paragraph [74] of its decision, the TMF states the the legislator established the principle of equitable use of information for purposes of investing in reporting issuers because it is essential for maintining public confidence in capital markets and to undermine this fundamental principle in setting up operations that essentially seek to skirt it is tantamount to nothing more that cutting off the branch upon which the whole modern market ecomony rests.
The Respondents raised various grounds of defence to justify the issuance of the stock options, all of which were rejected by the TMF based on the evidence on file. Perhaps most importantly, the TMF found that while the internal decision to issue the options may have been desirable or useful for the issuer, it was certainly not "necessary in the course of the issuer's business" which would otherwise exempt from insider trading as per section 187 of the Quebec Securites Act.
This decision is important as it reviews all of the fundamental principles underpinning insider trading legislation, and spotlights the importance of who knew what, when, and how this affects the decisions that the board of a reporting issuer is prevented from making when in possession of sensitive information.
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.
