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“Insider” Trading: Who Is an Insider?

By Erin Hoult, David Badham
January 30, 2018

The Ontario Court of Appeal’s decision in Finkelstein v. Ontario Securities Commission clarifies when a recipient of material, non-public information (MNPI) about a public issuer (a “tippee”) may be liable for insider trading or tipping. In particular, the court addresses when a person may be inferred to be in a “special relationship” with an issuer sufficient to ground liability. The answer will depend on a variety of factors, including whether the tippee in question is a registrant.


A person may be found liable for insider trading in Ontario if they trade in securities of an issuer when in possession of MNPI while in a “special relationship” with the issuer. A person in a special relationship with an issuer also may be found liable for tipping in Ontario if they inform another person of MNPI other than in the ordinary course of business.

The scope of people who may be in a special relationship with an issuer is very broad. It may include affiliates, directors, officers and employees of the issuer, or those who have or are considering business relationships with the issuer, such as consultants, accountants, IT service providers and lawyers. It will also include people working in similar capacities for another company that is considering or seeking to acquire or combine with the issuer. One may also be in a “special relationship” with an issuer if they learn of MNPI from another person who they know — or ought to know — is in a special relationship with the issuer.


In Finkelstein, the alleged MNPI was that an issuer was the target of a take-over bid. Information regarding the bid, including specific information about timing and price, was obtained by a lawyer working on the bid who then told an investment adviser, who in turn passed the MNPI to an accountant, who conveyed the MNPI to the respondent Miller, who then passed it along to his colleague, the respondent Cheng. Both Miller and Cheng were investment advisors, and purchased the issuer’s stock for themselves, family members and/or their clients. They also each informed at least one of their clients of the MNPI.

The court had to consider whether Miller and Cheng, as recipients of information at the tail-end of the chain, were in a “special relationship” with the issuer.

Each of Miller and Cheng had been held liable for insider trading and tipping by a panel of the Ontario Securities Commission (OSC) along with other respondents who were not parties before the Court of Appeal. The Divisional Court upheld the findings against Miller but overturned the findings against Cheng. The Court of Appeal upheld the OSC’s findings of insider trading and tipping against both Miller and Cheng.


It was acknowledged that neither Miller nor Cheng actually knew that the source of the MNPI was someone in a special relationship with the issuer. Therefore, the court had to apply the objective test of whether those respondents “ought to have known” that the MNPI originated from such a source.

The court concurred with the OSC that a variety of factors inform whether someone “ought to have known” that information they received originated from a person in a special relationship with an issuer. As a shorthand, the court referred to this aspect of the insider trading and tipping analysis as the “person connection.”

Relevant factors to determining the “person connection” may include the professional qualifications of both the tipper and the tippee, the nature of the relationship between the tipper and tippee, how detailed and specific the MNPI is, how quickly one trades after receipt of the MNPI, whether any verification of the MNPI was undertaken before trading, and the scope of the impugned trading.

In this case, the court held that it was appropriate to infer that Miller and Cheng “ought to have known” that the MNPI originated from a source with insider knowledge, especially because they are registrants. The court accepted the OSC’s holding that a “higher standard of vigilance and inquiry must be expected from a registrant than from someone who is a retail investor.” Further, the court noted the OSC’s finding that it was incumbent on Miller and Cheng, as registrants, to inquire as to the source of the information they each received: lack of inquiry will not be a defence to a charge of insider trading or tipping.


The Court of Appeal’s decision provides guidance on when successive tippees may be liable for insider trading or tipping in Ontario. It serves as a particular reminder to market participants to exercise caution and diligence when in receipt of a stock “tip” to take steps to ensure they are not acting or passing on material non-public information.

For further information, please contact any member of our Securities Litigation group.