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In the decision of Finkelstein v. Ontario (Securities Commission), 2016 ONSC 7507, Mitchell Finkelstein (Finkelstein), Paul Azeff (Azeff), Korin Bobrow, Howard Miller (Miller), and Francis Cheng (Cheng, and together, the appellants) appealed the decision of the Ontario Securities Commission (OSC) dated March 24, 2015 in which they were held to have breached certain provisions of the Securities Act (Ontario) (the Act). More particularly, the OSC determined that the appellants were found to have engaged in tipping by passing along material non-public information (MNPI), and the appellants, other than Finkelstein, were also found to have engaged in insider trading as well as acted contrary to the public interest. (My summary dated April 13, 2015 of the OSC decision may be found under the category, “Insider Trading” on my Blog.)

Before beginning its analysis, the Ontario Divisional Court (the court) provided the following commentary at paragraph 25 setting out the proper approach for the appellate review of the OSC’s decision:

Before beginning my analysis of each of the appeals, I want to discuss what I consider to be the proper approach to appellate review of a tribunal’s decision. Appellate review does not require a minute examination of each piece of evidence or of each witness. It does not require a response to every argument advanced or every challenge made to the findings below. Nor does it require a re-writing of the tribunal’s decision or a re-examination of every aspect of the case. What is required is a general review of the process used by the tribunal in arriving at its factual findings, the analysis undertaken, the legal principles applied, and the ultimate result reached, all with a view to determining whether that result is a reasonable one. Appellate review also does not turn on being able to point to a single error in the tribunal’s reasons, or to one error of fact, unless that error goes to a core finding. It is not unheard of to find small individual errors in lengthy reasons arising out of a complex proceeding. Reasons are seldom perfect. The real question is whether any such errors are fundamental to the reasonableness of the conclusion reached. [Emphasis added.]

Not surprisingly, the court showed its usual deference to the OSC and held that there was no basis for questioning the reasonableness of the OSC’s decision against the appellants except in Cheng’s case. The court found that the OSC made factual errors in its analysis of the evidence against him, which ultimately undermined the foundation on which the OSC concluded that Cheng ought to have known that he was receiving MNPI. The balance of this article will discuss why Cheng was successful in his appeal.

Cheng Appeal
To summarize, the OSC found that Finkelstein passed MNPI about the Masonite transaction to Azeff who, in turn, passed it to LK. LK was Azeff’s accountant and his good friend. LK, who lived in Montreal, telephoned Miller, his friend and senior investment adviser with TD in Toronto and told Miller about Masonite. Miller then told Cheng, his associate. The OSC held that Cheng ought to have known that the MNPI originated from an insider.

Before beginning its review of the OSC’s findings against Cheng, the court pointed out that there were factual differences between Cheng’s relationship with Miller and that of the other appellants. These differences were: Miller and Cheng were not friends; they did not socialize or otherwise have contact outside of the workplace; and although they eventually became partners at TD, this did not occur until 2007, long after the Masonite transaction.

The OSC held that Cheng ought to have reasonably known that Miller was in a special relationship with Masonite based on the following four factors:
1. Miller was Cheng’s mentor and supervisor;
2. Cheng sent an email to a client that the Panel found demonstrated Cheng’s belief in the reliability of the MNPI;
3. Cheng did not make any inquiries on the source of Miller’s information about Masonite; and
4. Cheng’s purchases of Masonite shares.

Mentor and Supervisor
The court found the evidence did not establish that Miller was Cheng’s mentor and supervisor. In fact, the court found that the contrary was true since Cheng stated in his compelled interview that, “[Miller] wasn’t a mentor or anything like that, that got assigned to me.”

The Email
The OSC placed significant importance on an email that Cheng had sent to a client, with whom he had a difficult relationship, about the Masonite transaction. Cheng stated in this email that he was buying Masonite for his clients because it was expected to earn a 20% return before Christmas. The OSC concluded that Cheng would not have risked passing speculative information, which could have proven to be wrong, to an already complaining client.

The court found that although the OSC’s conclusion was one inference that could have been drawn from Cheng’s email, it was not the only one. The court stated that it could equally be the case that Cheng was making one last attempt to salvage his relationship with this client. The court further held that the OSC’s inference was not a strong one nor did it provide a solid foundation for the OSC’s final conclusion that Cheng breached the tipping, insider trading, and public interest provisions of the Act.

Further Inquiries
The court stated that the failure to make further inquiries does not necessarily avoid the effect of the expanded definition of “special relationship” of the Act , and highlighted that the question to ask will always be whether, in the particular circumstances, further inquiries about the source of information was required.

It was Cheng’s normal practice after hearing a “rumour” to check the Newswire for a few weeks or months depending on the circumstances and review the stock’s chart. He would also talk to other people to determine if any of them had heard the same rumour. The court found that the OSC failed to consider all of the facts related to Cheng, including his explanation, before concluding he ought reasonably to have known that the source of the MNPI was an insider.

The OSC found that Cheng “precipitously” bought a large position for himself and his family. It was not clear to the court why the OSC concluded Cheng’s purchases were precipitous. Although he purchased shares for his family, he did not purchase any for himself. While it was true he purchased large positions in some of his family’s accounts, it was also true that the dollar value of those positions was small. The OSC’s lead investigator acknowledged at the hearing that the trading of Masonite shares in the accounts was not unusual given the overall trading history of those accounts.

When determining whether purchases were the result of inside information, the court stated:

In reaching their conclusions, the [OSC] was entitled to take into account the large position taken, in Masonite, in these accounts. However, before drawing a negative inference from the fact that a large position was taken in Masonite, the [OSC] was obliged to consider the history of the accounts. The [OSC] was also obliged to consider the relative dollar value of those positions. That was a necessary step in evaluating the reasonableness of drawing the inference that the purchases were the result of inside information.

The court held that the OSC failed to carry out the proper analysis of Cheng’s purchases of Masonite.

The court held that the OSC had stated the following evidence incorrectly: Miller was Cheng’s mentor/supervisor when they did not have such a relationship; and Cheng purchased shares for himself when he did not. The court set aside the OSC’s decision against Cheng as well as the sanctions imposed on him.


This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer for matters related to your situation before relying on any of the statements made in this article.