Mitchell Finkelstein in the hall way of the Ontario Securities Commission during his trial, November 10, 2011.Brett Gundlock/The Globe and Mail
In a high-profile victory for the Ontario securities regulator in its crackdown on insider trading, a former Bay Street lawyer has been found to have tipped an old fraternity buddy with confidential information about three impending corporate deals.
Mitchell Finkelstein, who lost his job as a partner at Davies Ward Phillips & Vineberg LLP after the Ontario Securities Commission launched its case against him in 2010, fed the tips to Paul Azeff, a friend and former CIBC investment adviser in Montreal, an OSC panel has ruled. The panel ruled that several others were also involved in passing on information including former CIBC broker Korin Bobrow.
The decision marks one of the few times a Canadian regulator has successfully prosecuted so-called market gatekeepers, lawyers, bankers, brokers or financial advisers, for violating insider trading rules.
"This is an important case that deals with role of gatekeepers in our market. It gives the Street a clear message about how the OSC will rule on insider-trading cases," said Larry Ritchie, a partner with Toronto-based Osler Hoskin & Harcourt LLP who was previously an OSC vice-chairman.
The decision is also a rare win for the regulator in a tipping case. These types of cases can be notoriously difficult to prove since the evidence is almost always circumstantial.
Gordon Capern, a lawyer for Mr. Finkelstein, said he expected his client will appeal, saying the decision raises "serious issues about how the panel used circumstantial evidence."
But Mr. Capern welcomed the dismissal of what he called the "most serious allegation" that Mr. Finkelstein received cash for tips.
Lawyers for the other men involved said they were reviewing the decision and deliberating whether to appeal.
A hearing on the sanctions the men will face is set for May 21. Because this case was heard by an OSC tribunal, and not a criminal court, the possible penalties include fines of up to $1-million for each violation, trading bans or bans on serving as corporate directors or officers, but not jail time. Panels can also order violators to hand over the profits they made from illegal trades.
The regulator's last major insider-trading case against a Bay Street official involved former RBC Dominion Securities banker Andrew Rankin in 2008.
That case ended in a minor settlement with the OSC after an Ontario court overturned Mr. Rankin's conviction.
In the Finkelstein case, the OSC chose to argue at a regulatory hearing, where evidence standards are more relaxed. In Wednesday's decision, a panel of three commissioners, led by prominent Bay Street litigator Alan Lenczner, concluded there was sufficient circumstantial evidence to find that Mr. Finkelstein, Mr. Azeff and a chain of associates engaged in illegal insider tipping and trading.
"This decision signals a more liberal approach by the OSC to assessing the evidence," Mr. Ritchie said. "The OSC is prepared to take the facts, even when circumstantial, weigh them and draw conclusions about what happened."
The three deals at the centre of the case date from 2004 to 2007 and include the 2004 leveraged buyout of Mississauga-based Masonite International Corp. by U.S. private equity fund Kohlberg Kravis Roberts & Co.
The OSC panel concluded that Mr. Finkelstein gave insider information on the deals to Mr. Azeff, who traded on it himself, passed it on to clients and handed it to Korin Bobrow, another investment adviser then at CIBC, who also either traded on it himself or passed it to clients.
Before the December, 2004, announcement of the Masonite deal, Mr. Azeff, Mr. Bobrow and the others involved bought more than $9.5-million in Masonite shares that would jump 20 per cent in value in the transaction.
However, the panel also rejected allegations against Mr. Finkelstein and the others involving three other corporate deals.
And it also rejected suggestions that large cash deposits made by Mr. Finkelstein after meetings with Mr. Azeff were related to the tips. Mr. Finkelstein testified that he tended to keep large amounts of cash – as much as $30,000 – around his house in metal tins, and would deposit it in his bank accounts from time to time. The panel ruled that since OSC lawyers did not cross-examine him on this issue, the commissioners had no reason to "disbelieve Mr. Finkelstein on his explanations and accounting."
The OSC case relied on the cross-referencing of Davies computer records that showed when Mr. Finkelstein accessed law-firm files on certain deals, phone records that showed calls between him or his house and Mr. Azeff and large trading in the stocks in question just before corporate deals became public.
In his testimony, Mr. Finkelstein denied passing any confidential information to his friend. He said Mr. Azeff often spoke with his wife, not with him, when he called their house.
But the OSC panel concluded that his "manner of giving evidence lacked spontaneity and was well rehearsed" and that he did not offer explanations for his frequent conversations with Mr. Azeff.
In addition to the Masonite deal, the OSC panel ruled that Mr. Finkelstein tipped Mr. Azeff off in advance of the 2007 takeover of Dynatec Corp. by Toronto-based Sherritt International Corp. and the 2007 acquisition of the Legacy Hotels Real Estate Investment Trust by Cadbridge Investors LP and InnVest REIT.
In the Masonite case, the panel also found that two former TD Bank investment advisers, Howard Miller and Francis Cheng, received the inside tip, and both bought the shares and recommended them to clients.
It was related to this case that OSC staff had entered a November, 2004, e-mail from Mr. Miller into evidence, in which he tells a client, "Call me, I have a tip," and reveals the price and timing of the Masonite deal more than a month before it was announced. "Timing should be before xmas but you never know with lawyers," Mr. Miller wrote.