Yesterday’s decision by the Ontario Securities Commission against former deals lawyer Mitchell Finkelstein for insider tipping gives staff prosecutors a clear roadmap for proving these sorts of cases based mainly on circumstantial evidence.
In its decision, an OSC panel chaired by litigator Alan Lenczner found while there was little direct evidence of tipping or proof that Finkelstein was paid for information, the sheer number of coincidences was enough to satisfy the tribunal’s evidentiary standard.
Staff prosecutors ultimately were able to prove, for three of the six alleged instances, that circumstantial evidence provided a “clear, convincing, and cogent” argument that, on a balance of probabilities, Finkelstein tipped off his old fraternity buddy, former CIBC investment adviser Paul Azeff.
In one such example of a circumstantial “smoking gun,” staff prosecutor cross-referenced computer and phone records to show Finkelstein had called Azeff while looking at a file on a particular deal. Sixteen minutes later, Azeff’s clients began purchasing stock in the targeted company.
Larry Ritchie, a partner at Osler Hoskin & Harcourt LLP and former vice chairman of the OSC, says the decision draws a stark contrast between the standard of evidence required in a criminal court and the one required in an administrative tribunal.
“The tribunal says that circumstantial evidence is clearly admissible,” says Ritchie, “and that circumstantial evidence, taken as a whole, can be sufficient to establish the requisite inferences to engage the provisions in the public-interest jurisdiction.”
Indeed, the decision went so far as to take into account Finkelstein’s demeanour while giving testimony:
“Mr. Finkelstein’s manner of giving evidence lacked spontaneity and was well rehearsed,” the panel wrote. “He left the impression that his evidence was tightly controlled. The substance of his testimony ignored or touched lightly upon important elements that needed explanation.”
While staff prosecutors failed to establish a connection between large cash deposits totaling $42,000 and instances of tipping, the tribunal determined that lack of motive in an administrative proceeding did not, on its own, offer a strong defence.
“They said that, in tribunal proceeding, the motive to act improperly, or proof of a motive to act improperly, is irrelevant to the decision — or at least is not determinative of the outcome,” says Ritchie.
This, again, contrasts sharply with criminal proceedings, where motive must be established, he notes.
In light of the findings, Ritchie says it’s important for so-called gatekeepers of confidential corporate information — officers, directors, lawyers, and other advisers — to be careful about maintaining an arm’s length from those who could be perceived to be in conflict or those who could misuse leaked details about a deal.
“You don’t want to create an environment where lawyers and advisers who are involved in these deals have to join a monastery until the deal is done,” he says. “But at the same time, I think it’s incumbent upon gatekeepers to be absolutely scrupulous as to whom they are dealing with and what they’re talking about in the course of transactions that are not public.”
Finkelstein’s lawyer, Gordon Capern, says his client is considering an appeal to Ontario’s Divisional Court. If it goes that far, Ritchie says the legal issues will likely focus on the deference accorded tribunals, and whether the tribunal applied the evidentiary standard correctly.
Update March 31: Correction made to name of bank where Paul Azeff was a former investment adviser.
In its decision, an OSC panel chaired by litigator Alan Lenczner found while there was little direct evidence of tipping or proof that Finkelstein was paid for information, the sheer number of coincidences was enough to satisfy the tribunal’s evidentiary standard.Staff prosecutors ultimately were able to prove, for three of the six alleged instances, that circumstantial evidence provided a “clear, convincing, and cogent” argument that, on a balance of probabilities, Finkelstein tipped off his old fraternity buddy, former CIBC investment adviser Paul Azeff.
In one such example of a circumstantial “smoking gun,” staff prosecutor cross-referenced computer and phone records to show Finkelstein had called Azeff while looking at a file on a particular deal. Sixteen minutes later, Azeff’s clients began purchasing stock in the targeted company.
Larry Ritchie, a partner at Osler Hoskin & Harcourt LLP and former vice chairman of the OSC, says the decision draws a stark contrast between the standard of evidence required in a criminal court and the one required in an administrative tribunal.
“The tribunal says that circumstantial evidence is clearly admissible,” says Ritchie, “and that circumstantial evidence, taken as a whole, can be sufficient to establish the requisite inferences to engage the provisions in the public-interest jurisdiction.”
Indeed, the decision went so far as to take into account Finkelstein’s demeanour while giving testimony:
“Mr. Finkelstein’s manner of giving evidence lacked spontaneity and was well rehearsed,” the panel wrote. “He left the impression that his evidence was tightly controlled. The substance of his testimony ignored or touched lightly upon important elements that needed explanation.”
While staff prosecutors failed to establish a connection between large cash deposits totaling $42,000 and instances of tipping, the tribunal determined that lack of motive in an administrative proceeding did not, on its own, offer a strong defence.
“They said that, in tribunal proceeding, the motive to act improperly, or proof of a motive to act improperly, is irrelevant to the decision — or at least is not determinative of the outcome,” says Ritchie.
This, again, contrasts sharply with criminal proceedings, where motive must be established, he notes.
In light of the findings, Ritchie says it’s important for so-called gatekeepers of confidential corporate information — officers, directors, lawyers, and other advisers — to be careful about maintaining an arm’s length from those who could be perceived to be in conflict or those who could misuse leaked details about a deal.
“You don’t want to create an environment where lawyers and advisers who are involved in these deals have to join a monastery until the deal is done,” he says. “But at the same time, I think it’s incumbent upon gatekeepers to be absolutely scrupulous as to whom they are dealing with and what they’re talking about in the course of transactions that are not public.”
Finkelstein’s lawyer, Gordon Capern, says his client is considering an appeal to Ontario’s Divisional Court. If it goes that far, Ritchie says the legal issues will likely focus on the deference accorded tribunals, and whether the tribunal applied the evidentiary standard correctly.
Update March 31: Correction made to name of bank where Paul Azeff was a former investment adviser.
