First published in The National Post
By: Anita Anand
The Ontario Securities Commission recently finished prosecuting what it termed "the biggest insider trading case in Canadian history." The verdict in this case, involving tipping and insider trading charges against Andrew Rankin, was touted as a victory for the OSC since Rankin was convicted on four counts of tipping. Others viewed the case as only a moderate win since the insider trading charges were not successful. Regardless of the end result, the case suggests that prosecution of insider trading pursuant to provincial legislation is alive and well. But the case also raises the question of whether additional or revised insider trading laws are necessary. The federal government believes that they are, as recent amendments to the Criminal Code contained in Bill C-13 evidence. The problem is that the Bill C-13 reforms add confusion to an already complex body of regulatory and constitutional law.
Bill C-13 was the federal government's response to the supposed crisis in investor confidence in Canada that coincided with a similar crisis in the United States following the fall of Enron. The amendments resemble provincial legislation in prohibiting insider trading and tipping. But there are some differences. First, Bill C- 13 targets "inside information" as a whole while the provincial law focuses on knowledge of undisclosed "material fact" or "material change." The definitions of material fact and inside information are almost identical; indeed, the definition of inside information appears to encompass both material change and material fact.
Second, the Bill C-13 amendments contain a higher degree of knowledge for insider trading and tipping. The accused will be guilty of insider trading for "knowingly using inside information" as opposed to "knowing" a material fact or change under provincial legislation. To be convicted of tipping, the accused must knowingly convey inside information and know that there is a risk that the person will use the information whereas provincial tipping provisions do not have these knowledge requirements.
Third, there is a difference between the two pieces of legislation in terms of who is caught by the respective provisions. For example, insider trading prohibitions under securities legislation apply mainly to reporting issuers while the Criminal Code appears to have a broader catchment as it now extends to non- reporting issuers also.
What was the federal government's purpose in passing Bill C-13? Provincial securities legislation already contains prohibitions on insider trading and tipping. Did the federal government believe that the provincial laws were too weak? Or, more realistically, was the federal government attempting to send a political signal that it was responding to a "crisis" in investor confidence?
The federal reforms in Bill C-13 overlap with provincial legislation significantly. Of course, overlapping regulation is not a new thing. We see conflict between federal criminal laws and provincial laws in many areas, including fraud, market manipulation, distributing false prospectuses, etc. Legislation at two levels of government frequently contains different mens rea requirements and punishments for the same conduct, for example.
Established law tells us that under paramountcy, the federal law survives and the provincial law is ultra vires but only to the extent of the overlap. To be clear, paramountcy is a constitutional doctrine adopted to address conflicts between federal and provincial legislation. Under the doctrine, where federal and provincial laws deal with the same matter, the federal law will prevail and the provincial law will be rendered inoperative to the extent that it is inconsistent with the federal law.
Determining whether two laws are inconsistent is not a straightforward process. In Multiple Access Ltd v. McCutcheon, the Supreme Court of Canada sought to resolve overlap between federal corporate laws and provincial securities regulation in respect of insider trading provisions. The court determined that the doctrine of paramountcy did not apply to make the provincial provisions inoperative and upheld the provincial securities law at issue.
The question arises as to whether the Bill C-13 amendments would supervene provincial securities act provisions under the doctrine of paramountcy. Committing the federal offence with a higher mens rea would necessarily make the accused guilty of the provincial offence. In this case, a paramountcy question would not arise. But if the accused is charged with the provincial offence, she could argue that the provincial law is unconstitutional by virtue of the paramountcy of the federal legislation.
Jurisprudential history tells us that provincial law is unlikely to be struck down because of paramountcy. But practically speaking, as long as there is substantial overlap between differing federal and provincial insider trading laws, questions will persist as to the constitutionality of provincial insider trading legislation under the doctrine of paramountcy.
The federal legislation also leads to a potential double jeopardy problem. The double jeopardy rule, enshrined in s. 11(h) of the Charter, is that an accused cannot be prosecuted twice (criminally) for that same offence. Provincial offences (quasi-criminal offences) are covered by s. 11 protections and this would include double jeopardy (R. v. CIP Inc). Now, when someone such as Rankin is prosecuted in provincial court under the Ontario Securities Act for a quasi-criminal offence (i.e. under section 122), there would be a double jeopardy issue if the feds also attempted to prosecute under the Bill 13 amendments.
But where the OSC is pursuing an administrative law remedy such as a ban on trading under section 127, the double jeopardy problem will likely not arise. I say "likely" here because there is the possibility that sanctions levied by the OSC under section 127 are penal in nature as opposed to the deterrents (general or specific) that they are supposed to be in order to contribute to market protection (following Cartaway). Once ostensible administrative sanctions become penal, a case could be made that section 11 of the Charter is triggered. Indeed, Cartaway provides significant latitude for regulatory bodies to levy what are in reality penal as opposed to administrative sanctions, especially since the principles the case enunciates -- i.e. general and specific deterrence -- are fundamental components of criminal sanctions also.
My point is that Bill C-13 gives rise to complex issues relating to paramountcy and double jeopardy. Without question, the reforms have a significant impact on the regulatory and constitutional landscape. These issues add confusion to an already dense body of securities and constitutional law regarding insider trading.
Why do governments put so much faith in law as a mechanism for change, especially when the real difficulty appears to relate to detection of contraventions and willingness to enforce these violations? The new offences under Bill C-13 are more difficult to prove than provincial insider trading tests since it contains a requirement for "knowledge" on the part of the insider or the tippee. Because the federal offence is more difficult to prove than provincial securities act violations, it is less likely to be enforced often.
So, what do the insider trading provisions in Bill C-13 add to the overall legislative scheme? In the absence of a national regulator that would remove legislation of this sort at two levels of government, we need to recognize that Bill C-13 adds confusion to law of insider trading. It highlights the often told story that legislation enacted for purely political reasons is usually costly and unnecessary.