At some point this year the federal government plans to enact the Capital Markets Stability Act. The new legislation is part of plans to implement the Cooperative Capital Markets Regulatory System, a centralized regulatory authority that would oversee shares, bonds, and other types of investments in participating provinces. British Columbia has signed on as a supporter of the new system, along with Ontario, Saskatchewan, New Brunswick, Prince Edward Island and the Yukon. The new act creates criminal offences for insider trading and tipping but sets a lower standard of proof than the current federal law.
Acumen Law has been researching this topic for over a year. We conducted an analysis of the insider trading provisions under the proposed Capital Markets Stability Act and concludes that the proposed changes are unconstitutional. Insider trading, essentially using confidential information to buy or sell stock for personal gain, and tipping, divulging undisclosed sensitive company information, are serious offences with severe consequences but, as we shall see, widening their scope is not in the interests of justice.
Current treatment of insider trading
Insider trading is currently an offence both federally under the Criminal Code and through each province’s respective securities acts.
The Crown mainly relies on provincial securities acts for its convictions because they have a lower standard of proof, can be applied to a wider range of situations and the penalties are more flexible.
Proving someone is guilty of insider trading under the Criminal Code can be difficult. The Crown must show an accused person knowingly used inside company information to trade a security. Similarly, for tipping, the Crown must prove the accused actually knew there was a risk that the person they divulged the information to would use it to buy or sell a security. Under provincial legislation, however, this same standard of proof does not exist.
Provincial insider trading laws generally have a wider scope than the Criminal Code. Unlike the Criminal Code, under provincial securities acts you can be convicted of insider trading, not only if you learn material facts that could affect the value of a stock from someone who has a “special relationship” with the company, such as an executive, employee or business partner, but also if that information is passed down to you via someone else. The Court only needs to determine you ought to have known that the information came from someone in a special relationship for you to be found guilty. Say a director of a company tells his barber about an upcoming merger and his barber then tells his daughter who then trades on this knowledge. Under provincial law, the barber’s daughter could be convicted of insider trading if its found that she ought to have known that her father obtained this information from a company insider, even if she had no actual knowledge of where her father got this information.
What the Capital Markets Stability Act Proposes
The Capital Markets Stability Act proposes radical changes to the criminal treatment of insider trading by imposing elements of both federal and provincial legislation. For one, it eliminates the need to show actual knowledge during a transaction and adopts the ought to know standard used by provincial legislation. A person will be found criminally guilty for insider trading if they trade in securities with information they ought to have known came from someone in a special relationship with the issuer.
Similarly, someone in a special relationship with an issuer can be found guilty of tipping if they disclose material facts to someone when they ought reasonably to know that the person might use the information in a transaction or pass it onto a third party who then makes a transaction.
Mr. Mitchell explained that “this essentially lowers the standard of proof to that of a negligence standard.”
Constitutional issues with the new Act
Mr. Mitchell argues that “the proposed negligence standard for insider trading-related offences under the Capital Markets Stability Act is likely an unconstitutional limit on liberty that cannot be supported in accordance with the principles of fundamental justice.”
For serious criminal offences, the Crown must prove a minimum level of intent or knowledge of committing a crime. This was explained in R v Vallaincourt, where it was found that the stigma attached to a conviction for some offences, or the available penalties attached, can require a minimum level of intent to be proven.
If you compare the offence of insider trading to that of fraud, which has already been held to require a minimum level of intent to prove, the threshold for proving intent under the proposed Capital Markets Stability Act is unconstitutionally low.
Mr. Mitchell explained that “there are strong indicators that insider trading is actually a subset of fraud itself.” For example, the Criminal Code recognises insider trading as a subset of fraud when it comes to sentencing an accused.
Mr. Mitchell added: “There are several factors that suggest that insider trading is either more serious, or at least on par, with the offence of fraud… It’s safe to propose that fundamental justice would require the mens rea (intent) associated with insider trading to at least be on par…”
Stigma Associated with insider trading
Under the new Act, anyone found guilty of insider trading would be liable to a 10-year prison sentence.
Mr. Mitchell argues that this punishment suggests that there is a strong stigma associated with an insider trading conviction.
“It is a well-established law that fraud is a serious allegation which carries a stigma and requires a high standard of proof,” he said. “It would be absurd to suggest that a person who defrauds the public of millions through insider trading and receives a 10-year prison sentence would carry less stigma than a person who committed a fraud of less than $5,000 to a single person and received less than two years imprisonment.”
Mr. Mitchell explained that “insider trading is mostly dealt with provincially because it is easier to seek a conviction. Just because something is easier doesn’t mean you should lower the standard criminally.”