Court of Appeal for Ontario

Date: January 25, 2018

Docket: C63514 & C63502

Judges: Simmons, Rouleau and Brown JJ.A.

Between

Mitchell Finkelstein, Paul Azeff, Korin Bobrow, Howard Jeffrey Miller and Man Kin (Francis) Cheng

Appellants (Appellant/Respondent/Appellant by way of cross-appeal)

and

Ontario Securities Commission

Respondent (Respondent/Appellant/Respondent by way of cross-appeal)

Counsel

Simon Bieber and Iris Graham, for the appellant Howard Jeffrey Miller

Janice Wright and Greg Temelini, for the respondent Man Kin (Francis) Cheng

Jennifer M. Lynch and Christie Johnson, for the respondent/appellant Ontario Securities Commission

Heard: October 17, 2017

Procedural History

On appeal from the order of the Divisional Court (Marrocco A.C.J.S.C.J. and Justices Nordheimer and Thorburn), dated December 2, 2016, with reasons reported at 2016 ONSC 7508, affirming in part and setting aside in part the decisions of the Ontario Securities Commission dated March 24, 2015 and August 24, 2015.

I. OVERVIEW

[1] These appeals require this court to consider for the first time the interpretation and application of part of the insider trading and tipping scheme in the Securities Act, R.S.O. 1990, c. S.5 (the "Act"), specifically the definition of a "person in a special relationship with an issuer" found in s. 76(5)(e) as it applies to successive tippees who possess material, non-public information about an issuer.

[2] The Ontario Securities Commission ("OSC") initiated administrative proceedings against five individuals, including the appellant Howard Miller and the respondent Francis Cheng, alleging they had breached the Act's insider trading and tipping provisions and had acted contrary to the public interest by recommending to family and clients the purchase of shares in a reporting issuer, Masonite International Corporation ("Masonite"). The OSC alleged Miller and Cheng stood in a special relationship with Masonite and had informed another person of a material fact with respect to the issuer before the material fact had been generally disclosed.

[3] The OSC alleged the material, non-public information about Masonite flowed through a chain of five people. Dissemination of the information originated with Mitchell Finkelstein, a mergers and acquisitions lawyer in Toronto who was working on a takeover bid involving Masonite. Finkelstein informed an investment adviser friend in Montreal, Paul Azeff, of material facts about the bid. In turn, Azeff informed a Montreal accountant, L.K., who passed the information on to the appellant, Howard Miller, an investment advisor in Toronto, who then conveyed the information to his associate, Francis Cheng, an investment advisor at the same firm. (Azeff also conveyed the information to Kevin Bobrow, his close friend and fellow investment advisor at the Canadian Imperial Bank of Commerce in Montreal.)

[4] The OSC brought proceedings against Finkelstein, Azeff, Bobrow, Miller, and Cheng, but not L.K.

[5] By Reasons and Decision dated March 24, 2015 (the "Merits Decision"), the OSC hearing panel (the "Panel") found that Finkelstein, Azeff, Bobrow, Miller, and Cheng were in a special relationship with Masonite and had informed others of material facts concerning Masonite before they had been generally disclosed, contrary to s. 76(2) of the Act and contrary to the public interest in violation of s. 127. As well, the Panel found Azeff, Miller, and Cheng each purchased Masonite securities with knowledge of undisclosed material facts contrary to s. 76(1) and the public interest. The Panel imposed administrative sanctions on the five by reasons dated August 24, 2015 (the "Sanctions Decision").

[6] All five appealed those decisions. The Divisional Court dismissed the appeals of Finkelstein, Azeff, Bobrow, and Miller, but allowed Cheng's appeal. Miller sought and obtained leave to appeal to this court, as did the OSC in respect of Cheng. This court dismissed Azeff and Bobrow's motion for leave to appeal.[1]

[7] On this appeal, there is no dispute Miller and Cheng received material, non-public information about Masonite. As well, it is agreed they did not have actual knowledge that their immediate source of information – L.K. in the case of Miller, and Miller in the case of Cheng – stood in a special relationship with Masonite or another person in a special relationship with Masonite. At issue on this appeal is the Panel's interpretation and application of s. 76(5)(e) to find that Miller and Cheng "ought reasonably to have known" that their respective tippers stood in a special relationship with Masonite.

[8] For the reasons set out below, I would dismiss Miller's appeal and grant that of the OSC.

II. THE EVENTS

[9] In 2004, Finkelstein was a corporate lawyer at Davies Ward Phillips & Vineberg LLP ("Davies") in Toronto. Masonite, a reporting issuer, was a client of Davies. At the time, Kohlberg Kravis Roberts & Co. ("KKR"), an American private equity firm, was interested in acquiring all of Masonite's shares. Finkelstein was Masonite's lead lawyer on the takeover.

[10] The Panel found that on November 16, 2004 Finkelstein learned KKR and Masonite had agreed to a takeover transaction, priced at approximately $40 per Masonite share, in an all-cash deal, which was to be completed quickly, likely by Christmas. Miller and Cheng concede this information was material, non-public information as defined by the Act. Adopting the language used by the Panel, I will refer to the material, non-public information regarding Masonite as the "Masonite MNPI".

[11] The Panel concluded Finkelstein passed the Masonite MNPI on to Azeff sometime between November 16 and 19, 2004. At the time, Azeff was an investment advisor at the CIBC in Montreal. He and Finkelstein were good friends. The Panel found Azeff started to buy Masonite shares upon receiving the Masonite MNPI from Finkelstein.

[12] Azeff, in turn, communicated the Masonite MNPI to his good friend, L.K., a Montreal accountant. L.K. admitted he purchased Masonite shares as a result.

[13] L.K. also admitted he conveyed the information to Miller, who was a Vice-President and senior investment advisor at TD Securities in Toronto. Miller had over 15 years' experience in the securities industry and had been a registrant since 1995.

[14] L.K. stated he told Miller that Masonite was "in play" at a 20% premium (which would approximate $40 per share given Masonite's trading price at the time). Shortly after receiving the information from L.K., Miller began purchasing Masonite shares.

[15] Miller did not testify before the Panel. However, most of his compelled interview with the OSC obtained pursuant to s. 13 of the Act was placed into evidence. The Divisional Court summarized the salient parts of Miller's evidence at paras. 106 to 108 of its reasons:

[Miller] admitted getting information from L.K. about Masonite. After receiving that information, Miller began to buy Masonite shares. He bought shares for himself, and then for his clients. His purchases, over the next few days, for his own account represented his largest equity position at the time.

Two days later, on November 24, 2004, Miller emailed one of his clients, D.W., with what Miller referred to as a "tip" about Masonite shares. The email exchange was as follows:

Miller: Call me I have a tip

DW: i'll take your tip. you've steered me right in the past. Just let me know what you are buying/selling/shorting so I can clear it hear [sic] first.

Miller: Stock trades on TSX at around $34 - cash takeover of $40[.] Timing should be before xmas but you never know with lawyers[.] I'm long[.]

DW: what's the name of the issuer?

Miller: Masonite – MHM

Miller admitted that the source of the email information was L.K. and, specifically, that knowledge of the timing of the takeover came from L.K. Miller also admitted passing the information on to Cheng …

[16] Cheng worked as a registered salesperson for TD Securities in the same office as Miller. He was an investment advisor with approximately 10 years' experience in the securities industry.

[17] Cheng did not testify before the Panel, but his entire compelled interview was entered into evidence. The Panel summarized Cheng's evidence at paras. 144 to 148 of its reasons:

Francis Cheng, Miller's colleague and mentee was away in Asia from November 20 to November 29. Nevertheless, Miller told him about MHM:

Q. Did you share the information that you obtained from [LK] with Francis?

A. Yes.

On November 29, Cheng started buying MHM shares, at first for his wife, then for his brother in Hong Kong, other family members and clients. The MHM shares purchased for Cheng's wife accounted for 98% of the value of her portfolio at the end of November 2004. In total, the five accounts of the Cheng family purchased 9,100 shares for $308,789 and Cheng clients purchased, on recommendation from Cheng, a further 4,100 shares of MHM for $139,372.

On December 7, Cheng sent an email to SK, a client who had previously complained about Cheng's investments on her behalf: "I'm back in town and would like to talk to you about your account. Kindly contact me at your convenience. I'm buying MHM on Toronto Exchange for clients and 20% return is expected before Christmas. I'm looking forward to seeing you soon."

Cheng also elected not to testify, even though he attended the hearing. His compelled testimony was admitted in the record. In it, he admitted that the specific information in the email came from Miller. He said he heard from Miller that the takeover would be before Christmas and that there would be a 20% premium to the current stock price.

On the next day, Cheng sent another email to a person in Chicago whom he had recently met while standing in a ferry line for a trip from Hong Kong to Macau:

Take a look at MHM [...] listed on the Toronto Stock Exchange. It's a takeover target and I was told that it'll be done at Cdn$40.00 before Christmas. It's currently trading at Cdn$34.00 and I don't see much downside from here even if the deal ended up falling through.

[18] Miller stated in his compelled interview that he did not share the information L.K. had given him about Masonite with any TD investment adviser other than Cheng because he "had a close relationship with Francis or closer…than with other IA's."

III. THE STATUTORY SCHEME

The Purpose of Insider Trading and Tipping Prohibitions

[19] The securities regulation framework aims to protect the investor, promote capital market efficiency, and ensure public confidence in the securities system: Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557, 114 D.L.R. (4th) 385, at p. 589.

[20] The prohibitions against insider trading, and the related conduct of tipping information and trading by the "tippee", are contained in Part XVIII of the Act dealing with "Continuous Disclosure." To put the prohibitions in context, s. 75(1) requires a reporting issuer to "forthwith issue and file a news release" where a material change occurs in its affairs. A corollary of that obligation is the prohibition against trading on confidential inside information. Section 76 "represents the second cornerstone of timely disclosure under the Act": Victor P. Alboibi, Securities Law and Practice, 2nd ed. (Toronto: Carswell, 1984) (loose-leaf edition), at pp. 18-29.

[21] The prohibitions against the trading on, or the tipping of, information where there is an undisclosed material fact or material change concerning an issuer are found in ss. 76(1) and (2) of the Act:

76 (1) No person or company in a special relationship with an issuer shall purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed.

(2) No issuer and no person or company in a special relationship with an issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed.

[22] The prohibition in s. 76(1) against insider trading "is a significant component of the schemes of investor protection and of the fostering of fair and efficient capital markets and confidence in them": Re Woods (1995), 18 OSCB 4625. The jurisprudence offers several rationale for the prohibitions against insider trading and tipping.

[23] First, an important premise of securities law is that all investors and prospective investors ought to be given access to material information about securities so that prospective purchasers can value them accurately and make informed investment decisions: Danuke (Re) (1981), 2 OSCB 31 C, at p. 40C. Any information about an issuer that likely would affect the market value of the issuer's securities should be available on an equal basis to all potential investors: Jeffrey MacIntosh and Christopher Nicholls, Securities Law (Toronto: Irwin Law, 2002), at p. 225. As put by the OSC in Woods (Re): "It would be grossly unfair to permit a person who obtains undisclosed material information with respect to a reporting issuer because of his relationship with the issuer to trade with the informational advantage this gives him or her."

[24] A second rationale concerns the risk that insider trading will undermine investor confidence in the capital markets. If prospective investors have reason to fear insiders will be free to trade on the basis of undisclosed information, they might refuse to purchase securities: MacIntosh and Nicholls, at p. 229. The OSC has described insider trading as "a cancer that erodes public confidence in the capital markets": M.C.J.C. Holdings (Re), (2002), 25 OSCB 1133; Donnini (Re), (2002), 25 OSCB 6225, at para. 202.

[25] Finally, a principle of Canadian securities regulation is that markets operate efficiently on the basis of timely and full disclosure of all material information. Prohibitions against insider trading and tipping in the absence of full disclosure support this principle: Illegal Insider Trading in Canada: Recommendations on Prevention, Detection and Deterrence, Insider Trading Task Force, November 2003 ("Task Force Report"), at p. 3.

[26] The OSC regards insider tipping as conduct just as serious as illegal insider trading because tipping undermines confidence in the market place: Pollitt (Re) (2004), 27 OSCB 9643, at para. 22. As stated by the OSC in Suman (Re) (2012), 35 OSCB 2809, at para. 23:

[I]nsider tipping and insider trading are not only illegal under the Act but also significantly undermine confidence in our capital markets and are manifestly unfair to investors. Insider tipping of an undisclosed material fact is a fundamental misuse of non-public information that gives the tippee an informational advantage over other investors and may result in the tippee trading in securities of the relevant reporting issuer with knowledge of the undisclosed material fact, or tipping others.

Persons in a Special Relationship with an Issuer

[27] The prohibitions in ss. 76(1) and (2) apply to a "person in a special relationship with an issuer." Broadly speaking, s. 76(5) creates two categories of a "person in a special relationship with an issuer." The first encompasses those who are part of, or very closely connected to, the issuer, as set out in ss. 76(5)(a)-(d):

76(5) For the purposes of this section,

"person or company in a special relationship with an issuer" means,

(a) a person or company that is an insider, affiliate or associate of,

(i) the issuer,

(ii) a person or company that is considering or evaluating whether to make a take-over bid, as defined in Part XX, or that proposes to make a take-over bid, as defined in Part XX, for the securities of the issuer, or

(iii) a person or company that is considering or evaluating whether to become a party, or that proposes to become a party, to a reorganization, amalgamation, merger or arrangement or similar business combination with the issuer or to acquire a substantial portion of its property,

(b) a person or company that is engaging in any business or professional activity, that is considering or evaluating whether to engage in any business or professional activity, or that proposes to engage in any business or professional activity if the business or professional activity is,

(i) with or on behalf of the issuer, or

(ii) with or on behalf of a person or company described in subclause (a)(ii) or (iii),

(c) a person who is a director, officer or employee of,

(i) the issuer,

(ii) a subsidiary of the issuer,

(iii) a person or company that controls, directly or indirectly, the issuer, or

(iv) a person or company described in subclause (a)(ii) or (iii) or clause (b),

(d) a person or company that learned of the material fact or material change with respect to the issuer while the person or company was a person or company described in clause (a), (b) or (c)…

[28] The second category of persons in a special relationship with an issuer are those further removed from the issuer but who receive material, non-public information in the circumstances specified in s. 76(5)(e). The sub-section, which came into force in 1987, states:

76(5) For the purposes of this section,

"person or company in a special relationship with an issuer" means,

(e) a person or company that learns of a material fact or material change with respect to the issuer from any other person or company described in this subsection, including a person or company described in this clause, and knows or ought reasonably to have known that the other person or company is a person or company in such a relationship.[2]

[29] The core of this appeal concerns the interpretation of s. 76(5)(e) and its application to the circumstances of Miller and Cheng. Specifically: were Miller and Cheng persons who learned of a material fact with respect to the issuer, Masonite, from any other person who was a "person in a special relationship with the issuer" and ought they reasonably to have known that the other person was a person in such a relationship?

IV. STANDARD OF REVIEW

[30] On an appeal from a decision disposing of an application for judicial review or appeal from an administrative tribunal, the appellate court must determine whether the court below identified the appropriate standard of review and correctly applied it. "The appellate court steps into the shoes of the lower court, with its focus on the administrative decision": Taylor-Baptiste v. Ontario Public Service Employees Union, 2015 ONCA 495, 126 O.R. (3d) 481, at para. 39.

The Positions of the Parties on the Standard of Review

[31] Before the Divisional Court, the parties agreed the reasonableness standard of review applied to the Panel's decision, including its interpretation of the Act. They affirmed that position in their factums and oral submissions before this court. Those positions reflected the consistent jurisprudence that the standard of review of a securities commission's interpretation of its home statute is presumed to be one of reasonableness: McLean v. British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 S.C.R. 895, at para. 19; Ontario Securities Commission v. MRS Sciences Inc., 2017 ONCA 279, [2017] O.J. No. 1696, at paras. 21 to 23; Taub v. Investment Dealers Assn. of Canada, 2009 ONCA 628, 98 O.R. (3d) 169, at para. 21.

[32] Following the hearing, however, counsel for Cheng and Miller wrote the court requesting an opportunity to make further submissions on the standard of review as a result of the OSC's reference during oral argument to the decision of the British Columbia Court of Appeal in Poonian v. British Columbia Securities Commission, 2017 BCCA 207, 98 B.C.L.R. (5th) 319. They now submit Poonian provides a basis upon which to argue the standard of review applicable to the OSC's interpretation of the provisions of the Act in issue ought to be correctness. Counsel for the OSC opposes the request, taking the position it represents a serious change in position by Cheng and Miller and the appeal should be decided on the existing record.

[33] The court advised the parties it would entertain brief submissions concerning Poonian, including whether the panel should entertain a revised position from Miller and Cheng at this stage. The court has received and reviewed those submissions.

The Parties' Further Submissions

[34] The Poonian decision was released on May 31, 2017 after Miller had filed his factum, but before Cheng had filed his. Counsel for Miller and Cheng both submit they were unaware of the Poonian decision until counsel for the OSC referred to it at the October hearing. They argue that in those circumstances this court should consider their further submissions about Poonian and follow the standard of review analysis employed by the British Columbia Court of Appeal in that case.

[35] The issue in Poonian was whether s. 161(1)(g) of the Securities Act, R.S.B.C. 1996, c. 418, permits the British Columbia Securities Commission to make joint and several disgorgement orders. There, the appellants argued that another section of the British Columbia Securities Act granted courts similar powers to make disgorgement orders. Applying the decision of the Supreme Court of Canada in Rogers Communications Inc. v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 35, [2012] 2 S.C.R. 283, the British Columbia Court of Appeal held the presumption that the reasonableness standard applied was rebutted where the Legislature had granted jurisdiction to both the Securities Commission and the court to apply near-identical statutory language in the first instance. The British Columbia Court of Appeal held the correctness standard applied to its review of the Commission's interpretation of the statutory provision.

[36] Miller and Cheng submit this court should adopt Poonian's correctness standard because the Act authorizes both the OSC and the court to consider the insider trading and tipping provisions in the first instance in their respective administrative and criminal proceedings.

[37] The OSC submits this court should not entertain a revised position from Miller and Cheng on the standard of review for two reasons. First, they had ample time and notice to advance a correctness standard argument before and after the Poonian decision. Second, a consideration of a completely different standard of review at this juncture would require a re-argument of the entire appeal.

Conclusion on the Standard of Review

[38] The Poonian decision did not employ a novel standard of review analysis. On the contrary, the British Columbia Court of Appeal drew its standard of review analysis from the principles enunciated in the 2012 decision in Rogers Communications. In its 2013 decision in McLean, the Supreme Court of Canada considered Rogers Communication but did not apply it in the circumstances of that case. Miller included in his book of authorities the decision of the Divisional Court in Cornish v. Ontario (Securities Commission), 2013 ONSC 1310, [2013] O.J. No. 1233, where that court, at para. 35, rejected a correctness standard of review argument based on Rogers Communications. Those three decisions pre-dated the Panel's Merits Decision. Accordingly, it was open to Miller and Cheng to advance a standard of review argument based on Rogers Communications before the Divisional Court and on this appeal. They did not. Instead, at both levels they affirmed that a reasonableness standard of review applied.

[39] In those circumstances, it would be unfair to the OSC to permit Miller and Cheng to change their positions on the applicable standard of review after the hearing. What effect, if any, the Poonian decision may have on the standard of review analysis of the OSC's interpretation of a provision of the Act is a question for another case at another time.

[40] I therefore will proceed on the basis that the standard of review applicable to the Panel's interpretation of the Act is the deferential standard of reasonableness. That standard also governs the review of the Panel's findings and conclusions made when applying the provisions of the Act to the specific circumstances of this case: Rowan v. Ontario Securities Commission, 2012 ONCA 208, 110 O.R. (3d) 492, at para. 5.

V. ISSUES ON THE APPEALS

[41] These appeals raise four issues:

(i) The reasonableness of the Panel's interpretation of s. 76(5)(e) of the Act;

(ii) The reasonableness of the Panel's finding that Miller contravened ss. 76(1) and (2) of the Act, together with the public interest;

(iii) The reasonableness of the Panel's finding that Cheng contravened ss. 76(1) and (2) of the Act, together with the public interest; and

(iv) In the event the Divisional Court's reversal of the Panel's finding of liability against Cheng is set aside, the reasonableness of the Panel's sanctions against Cheng.

VI. FIRST ISSUE: THE INTERPRETATION OF s. 76(5)(e) OF THE ACT

A. The Panel's Interpretation of s. 76(5)(e)

[42] The parties agree on much of the Panel's interpretation of s. 76(5)(e) of the Act: the context in which the Panel set its interpretation of the section; its identification of the "information connection" and "person connection" components of the section; its interpretation of the "information connection" requirement; and its general approach toward the "person connection" element. However, Miller and Cheng take issue with a set of factors the Panel used to guide its application of the "person connection" requirement to the specific circumstances of the case. In their view, the use of the factors resulted in an unreasonable interpretation and application of s. 76(5)(e).

The Panel's Use of Context as an Interpretive Guide

[43] The parties take no issue with the context in which the Panel situated its interpretation of s. 76(5)(e) of the Act: Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, at para. 26; Committee for the Equal Treatment of Asbestos Minority v. Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132, at paras. 41-45. The Panel stated, at paras. 55 to 57 of the Merits Decision:

The two objectives of the Act are set out in subsection 1(1) of the Act. They are (a) the protection of the investing public; and (b) maintaining the integrity of the capital markets. The interpretation of every section of the Act must proceed from the plain and ordinary meaning given to the literal words in the provision viewed through the lens of the objectives of the Act.

The legislature, in promulgating subsection 76(5)(e) of the Act, intended to proscribe the abusive activities of an indefinite chain of indirect tippees. By using both the subjective element of "knows" and the objective test of "ought reasonably to have known" the intent of the legislature was to encompass a broad spectrum of actors who impair confidence in the capital markets by using confidential information not available to all investors. At the same time, the legislature provided safeguards so that there would not be a regime of indefinite liability.

The Panel's Interpretation of the "Information Connection"

[44] The parties further agree that s. 76(5)(e) contains two requirements to establish liability: an "information connection" and a "person connection": Task Force Report, at p. 37.

[45] The parties regard as reasonable the Panel's interpretation of how the "information connection" is established. The opening language of s. 76(5)(e) describes the "information connection" requirement: the person "learns of a material fact or material change with respect to the issuer" from any other person in a special relationship. The parties accept the Panel's conclusion that to prove the tippee possesses knowledge of a material fact or material change that has not been generally disclosed requires a comparison of what information the tippee has knowledge of, contrasted with whether that information is in the public domain: Merits Decision, para. 61.

The Panel's Interpretation of the "Person Connection"

[46] The dispute on these appeals concerns the Panel's interpretation and application of that part of the "person connection" test in s. 76(5)(e) which requires demonstrating that the recipient of material, non-public information "ought reasonably to have known" that the person who provided the information was in a special relationship with the issuer. As the Task Force Report observed, at pp. 37-38: "The 'person connection' test is not difficult to meet for insiders but becomes more difficult to meet for persons who have knowledge of inside information having acquired that knowledge from persons in a 'special relationship' with the issuer."[3]

[47] The parties take no issue with the Panel's holding that the inquiry into successive tippees under s. 76(5)(e) must ask whether the tippee "received material facts, which he reasonably knew or ought to have known came from someone who, in turn, knew or reasonably ought to have known came from a person in a special relationship": Merits Decisions, para. 59.

[48] In furtherance of that inquiry, the Panel interpreted the "ought reasonably to have known" or objective knowledge aspect of the "person connection" requirement in the following terms, at paras. 63 to 65 of the Merits Decision:

[63] The statutory provision of "ought reasonably to have known" that the MNPI came from a knowledgeable person falls on the spectrum between the two poles. It demands an objective test, which can be articulated by the question: should a person standing in the shoes of the tippee, reasonably assume that the MNPI passed on to him originated with a knowledgeable person?

[64] The answer to that question lies in a list of factors to be considered:

(a) What is the relationship between the tipper and tippee? Are they close friends? Do they also have a professional relationship? Does the tippee know of the trading patterns of the tipper, successes and failures?

(b) What is the professional qualification and standing of the tipper? Is he a lawyer, businessman, accountant, banker, investment adviser? Does the tipper have a position which puts him in a milieu where transactions are discussed?

(c) What is the professional qualification of the tippee? Is he an investment adviser, investment banker, lawyer, businessman, accountant, etc.? Does his profession or position put him in a position to know he cannot take advantage of confidential information and therefore a higher standard of alertness is expected of him than from a member of the general public?

(d) How detailed and specific is the MNPI? Is it general such as X Co. is "in play"? Or is it more detailed in that the MNPI includes information that a takeover is occurring and/or information about price, structure and timing?

(e) How long after he receives the MNPI does he trade? Does a very short period of time give rise to the inference that the MNPI is more likely to have originated from a knowledgeable person?

(f) What intermediate steps before trading does the tippee take, if any, to verify the information received? Does the absence of any independent verification suggest a belief on the part of the tippee that the MNPI originated with a knowledgeable person?

(g) Has the tippee ever owned the particular stock before?

(h) Was the trade a significant one given the size of his portfolio?

[65] This list of factors that informs the assessment of "ought reasonably to have known" that the MNPI came from a person in a special relationship may vary depending on the factual context and the actors involved, but provides a reasonable guideline that can be applied in the vast majority of situations. The weight to be accorded to each factor will also vary. What is important is that the overall weight given to the aggregate of all the factual criteria compels the Commission to the conclusion that it is more probable than not that the tippee ought reasonably to have known that the MNPI he received originated from a knowledgeable person, i.e. one who was in a special relationship as enumerated in section 76 of the Act.

[49] The parties take no issue with the reasonableness of the Panel's general articulation of the objective knowledge test in para. 63 of the Merits Decision. As well, they acknowledge as reasonable the Panel's interpretation that under s. 76(5)(e) the tippee does not necessarily need to know the identity of the initial tipper: Merits Decision, para. 58.

The Dispute: The Relevance of the Factors

[50] The crux of the dispute in these appeals really involves how the Panel applied the objective knowledge test to the specific facts. Specifically, Miller and Cheng take issue, in different ways, with the factors listed by the Panel in para. 64 of the Merits Decision (the "Factors") to guide the application of the "ought reasonably to have known" element of the "person connection" requirement.

[51] On his part, Miller argues that all the Factors fundamentally diverge from the plain language of s. 76(5)(e) and, therefore, constitute an unreasonable interpretation of the section. He contends the language of the section mandates an inquiry into the informant/tipper's special relationship with the issuer and what the tippee ought to have known about that relationship. Instead, the Factors focus on the relationship between the tipper and the tippee, not on that between the tipper and the issuer. Miller argues the absence in the Factors of any element that touches upon the tipper's relationship with the issuer is a critical error, rendering unreasonable the Panel's interpretation of the "person connection" element of s. 76(5)(e).

[52] Cheng's quarrel with the Factors is narrower in scope. He acknowledges the Factors identified in paras. 64(a) to (d) of the Merits Decisions are relevant to the application of the objective knowledge test. However, he contends two of the Factors are not relevant: the lapse of time between the tippee receiving the information and initiating a trade, and the intermediate steps taken by the tippee to verify the information before trading: Merits Decision, paras. 64(e) and (f).

[53] The OSC disagrees, arguing the Factors ensure that those who, based on all the circumstances, reasonably should have known that the source of their information was in a special relationship with the issuer are not insulated from liability.

B. Analysis

[54] The "knows or ought reasonably to have known" requirement in s. 76(5)(e) focuses on the state of the tippee's knowledge about whether the information was conveyed to him by a person in a special relationship with an issuer. Under s. 76(5)(e), the tipper of the information can include a person described in subsections 76(5)(a)-(d): the insider of an issuer; a director or office of the issuer; or a person engaged in any business or professional activity with the issuer, such as a lawyer like Finkelstein.

[55] But s. 76(5)(e) extends the chain of potential liability further by including as a proscribed source of information "a person or company described in this clause," that is a person whom the tippee "knows or ought reasonably to have known" was a person or company in a special relationship with the issuer. This provision catches tippees who, themselves, convey information they have received to others: MacIntosh and Nicholls, at p. 240. As stated by the Alberta Court of Appeal in Walton v. Alberta (Securities Commission), 2014 ABCA 273, 376 D.L.R. (4th) 448, at para. 15, regarding a similar provision in the Alberta act:

A person who is "tipped", and knows or ought to know that the source of the information is in a special relationship, also becomes a person in a special relationship under [the equivalent of s. 76(5)(e)]. The same consequences apply down a chain of tipping to everyone who ought to know that the source of the information was a person in a special relationship.

[56] Consequently, as Miller correctly submits, s. 76(5)(e) calls for an inquiry into the tippee's knowledge of his tipper's connection with the issuer or any other person in a special relationship with the issuer who stood higher up the information chain and from whom the tipper received the information.

[57] In the present case, there was no dispute that Miller and Cheng did not have actual knowledge that their informant, or tipper, was in a special relationship with Masonite. The question before the Panel was: ought they reasonably to have known?

[58] Insider trading and tipping cases generally lack direct evidence of a tippee's state of knowledge about the relationship between his tipper and the next person back up the information chain. As observed by the Panel, the reality of most insider trading cases is that circumstantial evidence "usually forms the bulk of the evidence in cases where insider trading and tipping is alleged": Merits Decision, at para. 43. In such circumstances, it was reasonable for the Panel to identify certain factors, or groups of circumstantial evidence, that could assist in drawing permissible inferences as to whether it was more likely than not that insider trading and tipping had occurred.

[59] Miller contends the Factors identified by the Panel are unreasonable in the context of an inquiry into a person's state of knowledge because they focus on the type of information received by the tippee, not on his knowledge of anything that was happening above him in the tipping chain, specifically whether his tipper was in a special relationship with the issuer. As such, the Factors only identify evidence relevant to the "information connection" – the type of information conveyed – and not to the "person connection."

[60] I disagree. First, contrary to Miller's contention, the "person connection" is directly addressed by the Factor set out in para. 64(b) of the Merits Decision. It directs a panel to look into the tipper's qualifications and employment to ascertain whether the tipper holds a position that puts him in a milieu where transactions are discussed.

[61] In any event, the reasonableness of the Factors in the "ought reasonably to have known" inquiry turns on their relevance to the inference drawing process. "An inference is a deduction of fact that may logically and reasonably be drawn from another fact or group of facts found or otherwise established in the proceedings. It is a conclusion the trier of fact may, but not must, draw in the circumstances.": David Watt, Watt's Manual of Criminal Evidence, 2017 (Toronto: Thomson Reuters, 2017), §12.01.

[62] In assessing the relevance of the Factors to the inference drawing process concerning the "person connection" requirement of s. 76(5)(e), consider the application to two different scenarios of the first three Factors: (i) the relationship between the tipper and tippee; (ii) the professional qualification and standing of the tipper; and (iii) the professional qualification and standing of the tippee.

[63] In the first scenario, a truck driver passes through the check-out lane at a grocery store. A cashier whom the truck driver has never met before tells him she has heard some hot information about a particular stock. Here, the lack of a prior relationship between the two means the tippee truck driver has little ability to assess not only the nature of the information, but whether the tipper cashier might have access to sources of information about the company not generally available to the public. As well, the truck driver's line of work typically would not place him in a milieu where securities transactions are discussed, thereby limiting his ability to assess both the nature of the information and the tipper's likely source.

[64] Change the facts, and the application of the three Factors gives rise to inferences pointing in another direction. Take a situation where the tipper and tippee have worked together for some time and both are registrants in the securities market. Such facts could constitute evidence logically relevant not only to the nature of the information conveyed by the tipper – non-public material information – but to the likelihood that the tipper's source of the information was linked to or related in some fashion with the issuer – i.e. that the market registrant tippee ought reasonably to have known the market registrant tipper operated in the confidential information loop and was passing on material, non-public information likely sourced from another person in a special relationship. In this scenario, the three factors could logically and reasonably assist the process of drawing a deduction about the tippee's state of knowledge of the relationship between the tipper and the issuer.

[65] In that sense, those three Factors are relevant to the "ought reasonably to have known" inquiry under s. 76(5)(e) and, therefore, are factors the Panel reasonably could take into account. Put another way, to proscribe, in advance, any consideration of evidence about those three Factors on the issue of the tippee's state of knowledge about the tipper's source could well exclude highly relevant evidence.

[66] The same conclusion applies to the other Factors identified by the Panel. As to the Factor concerning the specificity of the material, non-public information, the greater the detail of the information passed on to the tippee, the greater the availability of the inference that the information came from a person with access to the issuer. As observed by the United States District Court for the Southern District of New York in Securities and Exchange Commission v. Cassano, 61 F.Supp.2d 31, 34 (S.D.N.Y. 1999):

Information about anticipated tender offers ordinarily is tightly held. The bidder does not wish to alert the target lest it take defensive measures or to alert the market for fear that arbitrageurs and others will buy the target stock and run the price up. And while this is second nature to financially sophisticated persons, its essence is obvious even to a näif.

[67] Further, the short lapse of time between the receipt of information and the tippee's start of trading using it could support an inference that the tippee had confidence in the reliability of the information because it came from a source "in the know" about the issuer's affairs.

[68] As well, the presence or absence of any intermediate steps taken by the tippee to verify the information before trading can operate as a relevant factor. As the Panel reasonably observed in its Merits Decision, the absence of any independent verification may suggest a belief by the tippee that the material, non-public information originated with a person in a special relationship.

[69] Such an inference becomes even stronger in the case of tippees who are market registrants. The OSC repeatedly has stated market registrants are well aware of the seriousness with which Canadian securities regulators view illegal tipping and illegal insider trading. They therefore must not attempt to profit, directly or indirectly, through the use of insider information: Danuke (Re), at p. 43C; Suman (Re), at para. 23. A market registrant cannot shelter behind his own inaction: Donnini (Re), at para. 158. As the Panel properly stated in the Merits Decision at para. 203(c), "A higher standard of vigilance and inquiry must be expected from a registrant than from someone who is a retail investor."

[70] In sum, the Factors point to a consideration of certain groups of circumstantial evidence that may permit drawing a deduction, in a logical and reasonable fashion, about the tippee's state of knowledge of the relationship between the tipper and the issuer or another person in a special relationship higher up the information chain. The probative value of such evidence will depend upon the specific circumstances, when considered in light of the totality of the evidence.

[71] The Panel was alive to this point. In its discussion about the use of circumstantial evidence in tipping cases, the Panel stated, at para. 47:

Insider trading and tipping cases are established by a mosaic of circumstantial evidence which, when considered as a whole, leads to the inference that it is more likely than not that the trader, tipper or tippee possessed or communicated material non-public information.

[72] And again, at para. 65, when describing the factors as a "reasonable guideline", the Panel observed:

The weight to be accorded to each factor will also vary. What is important is that the overall weight given to the aggregate of all the factual criteria compels the Commission to the conclusion that it is more probable than not that the tippee ought reasonably to have known that the MNPI he received originated from a knowledgeable person, i.e. one who was in a special relationship as enumerated in section 76 of the Act.

[73] Accordingly, I am not persuaded that the Factors "fundamentally diverge from the plain language in s. 76(5)(e)," as Miller submits, or that some are not relevant to the inquiry into the tippee's state of knowledge about the tipper's source of the information, as Cheng argues. I accept the Panel's characterization of the Factors as "a reasonable guideline that can be applied in the vast majority of situations," recognizing that the Factors are not exhaustive and that the evidence must be considered in its totality and assessed applying the objective test of "ought reasonably to have known."

[74] As a result, I would not give effect to this ground of appeal.

VII. SECOND ISSUE: THE REASONABLENESS OF THE PANEL'S FINDING OF LIABILITY AGAINST MILLER

A. The Issue Stated

[75] Miller submits the Panel's findings that he contravened ss. 76(1) and (2) of the Act and acted contrary to the public interest were unreasonable because it failed to find that L.K., the person from whom Miller received the Masonite MNPI, was in a special relationship with Masonite. According to Miller, the lack of such a finding broke the chain of tippers and tippees. If the Panel did not find L.K. was in a special relationship, then no basis existed to conclude Miller knew or ought reasonably to have known L.K. was in a special relationship with the issuer or a tipper higher up the information chain.

B. Analysis

[76] The Divisional Court rejected a similar argument made by Miller concluding that while the Panel did not make an express finding L.K. was in a special relationship, it undertook an analysis of the issue, and a finding that L.K. stood in a special relationship was implicit in its reasons.

[77] I agree with the Divisional Court's conclusion. It is open to a reviewing court to find that the tribunal has made an implicit decision on a critical issue: Alberta (Information and Privacy Commissioner) v. Alberta Teachers' Association, 2011 SCC 61, [2011] 3 S.C.R. 654, at para. 50. The Panel's reasons disclose it knew that finding L.K. was in a special relationship was necessary in order to consider whether Miller and Cheng were persons in a special relationship. At paras. 202 to 204 of the Merits Decision, the Panel stated:

The more difficult assessment of special relationship is with respect to Miller and Cheng. For a finding of breach of subsection 76(1) of the Act to be made against them, it must be determined that LK knew or ought to have known that the material facts he received from Azeff came from a person, namely Azeff, who himself was in a special relationship with the issuer, i.e. that Azeff knew or ought to have known that his information came from a knowledgeable person and additionally that Miller, when he received the material facts from LK, knew or ought to have known that LK was in a special relationship, i.e. that he ought to have known that the information came from a knowledgeable person.

In addressing the allegation that Miller and Cheng breached subsections 76(1) and (2) of the Act, we must determine whether each of them was in a special relationship with MHM. We find that neither Miller nor Cheng knew that the MNPI Miller received from LK and that Cheng received from Miller came from a knowledgeable person. In determining whether each of Miller and Cheng ought reasonably to have known that the MNPI they received came from a knowledgeable person we applied the factors enumerated earlier and find as facts:

(a) LK and Miller knew each other well in 2004. They had re-established an earlier friendship in 2002 or 2003 and from then on LK and Miller spoke often by phone. Their conversations revolved around their professional activities, LK speaking and asking Miller about stocks and the market, and Miller asking for tax and accounting advice. They each respected the other's positions and expertise in their respective disciplines. They each had confidence in the information and advice given from one to the other;

(b) LK was a partner in a prominent Montreal accounting and auditing firm, a fact known to Miller. Miller would understand that LK had clients, business relationships and friends involved in transactional activities in Montreal;

(c) Miller was a senior investment adviser, with a big book of business at TD. He knew or is deemed to know the provisions of the Act and the prohibition on trading on MNPI. A higher standard of vigilance and inquiry must be expected from a registrant than from someone who is a retail investor;

(d) The information that Miller received from LK was detailed and very specific. It was not just that MHM was "in play". That information alone could result from a rumour. Even in that event, a licensed registrant should inquire of his tipper the source of the information. Failure to inquire is not a defence. But, in this case, LK provided Miller with details of the "in play" i.e. a takeover: that it was for $40, in cash and by X-mas. That this information was reliable is exemplified by Miller's emails to DW "Call me I have a tip" and "Stock trades on TSX at around $34 – cash takeover at $40 Timing should be before xmas".

(e) Within a very short time, Miller bought, for himself, a significant number of shares of MHM and then for his family and for 22 accounts of clients. There is no evidence that he did any research into the company. He acted on the MNPI provided; and

(f) Cheng learned of the MHM Material Facts from Miller and subsequently purchased MHM shares.

From these established facts, we conclude that Miller ought to have known that the MNPI LK gave him derived from a knowledgeable person. The relationship between the tipper and tippee, the essential details of the MHM takeover bid, the precipitous, anomalous, significant trading by Miller, the registrant, make it more probable than not that he ought reasonably to have known that LK was in a special relationship with MHM and the MHM Material Facts originated from a person in a special relationship. [Emphasis added]

[78] These reasons show the Panel treated L.K. as a "knowledgeable person," its short-hand for a person in a special relationship. That conclusion was defensible in respect of the facts: Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190, at para. 47. Accordingly, it was reasonable for the Panel to find that Miller ought to have known the Masonite MNPI passed on by L.K. came from a person in a special relationship with the issuer.

[79] Accordingly, I would not give effect to this ground of appeal, and I would dismiss Miller's appeal.

VIII. THIRD ISSUE: THE REASONABLENESS OF THE PANEL'S FINDING OF LIABILITY AGAINST CHENG

A. The Issue Stated

[80] The Panel found that Cheng learned of the Masonite MNPI from Miller, a person whom he ought reasonably to have known was in a special relationship with Masonite. Cheng therefore was a person in a special relationship with Masonite within the meaning of s. 76(5)(e). The Panel concluded Cheng purchased Masonite securities with knowledge of material facts not generally disclosed, contrary to s. 76(1) of the Act and the public interest. The Panel also held that Cheng, with knowledge of the Masonite MNPI, recommended a client purchase Masonite securities thereby acting contrary to the public interest.

[81] The Divisional Court set aside those findings and allowed Cheng's appeal. It held that the Panel made a number of factual errors in its analysis of the evidence concerning Cheng that undermined the foundation upon which the Panel concluded Cheng ought to have known he was receiving inside information.

[82] The OSC appeals, arguing the Divisional Court entered into an improper and selective reassessment of the evidence concerning Cheng resulting in that court improperly substituting its own inferences and findings of fact for those of the Panel. The OSC asks that the order of the Divisional Court be set aside and the orders of the Panel against Cheng restored.

[83] Cheng submits the Divisional Court did not err in setting aside the Panel's decision against him. However, if this court sets aside the Divisional Court's order, Cheng cross-appeals arguing there are additional errors and inconsistencies in the Panel's decision that render it unreasonable.

B. The Divisional Court's Reasons

[84] The Divisional Court began its reasons by recognizing the restraint with which an appellate court must approach a tribunal's factual findings:

(i) A high threshold must be met before an appellate court may interfere with a tribunal's findings of fact and inferences drawn from factual findings: at para. 22;

(ii) Inferences drawn by a tribunal are not to be overturned by an appellate court just because there may be other inferences that could have been drawn, even if those other inferences might be said to be more persuasive: at para. 21. Appellate scrutiny is limited to determining whether inferences drawn by the tribunal are reasonably supported by the evidence: H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401, at para. 74; and

(iii) The evidence must be examined and weighed in its entirety. Each piece of evidence should not be viewed in isolation. As well, appellate review does not require a minute examination of each piece of evidence: at paras. 24 and 25.

[85] The Divisional Court then reviewed the Panel's findings about Cheng. The Panel had set them out in para. 205 of its Merits Decision, stating:

Cheng, too, relied on the same factual basis tipped to him by Miller, his mentor and supervisor. Cheng's email to SK underscores his reliance on the reliability of the MNPI that Miller gave him. He would not have risked passing speculative information, which may prove wrong, to an already complaining client. Cheng, too, as a registrant, failed to inquire of Miller the source of Miller's information. Cheng too did no due diligence on MHM and undertook no research. He relied entirely on the MNPI given to him by Miller and precipitously bought a large position for himself and family members of MHM, a stock neither he nor they had owned previously. On the basis of all the facts regarding Cheng, we conclude, on a balance of probabilities that he ought reasonably to have known that Miller was in a special relationship with MHM and the MHM Material Facts originated from a knowledgeable person.

[86] The Divisional Court subjected the Panel's factual findings to an intense parsing, leading that court to conclude the Panel had made three kinds of factual errors:

(i) The Panel mis-stated certain evidence, specifically that: (i) Miller was Cheng's mentor/supervisor when in fact "there was no such close relationship at the material times"; and (ii) Cheng bought stock for himself, when he did not;

(ii) The Panel drew inferences from the facts with which the Divisional Court took issue, specifically with respect to Cheng's December, 2004 email to a client, S.K.; and

(iii) The Panel "appears not to have taken into account" several pieces of evidence, specifically that: (i) Miller told Cheng the information was a "rumour"; (ii) Cheng said he would have made inquiries of others about the stock; (iii) the dollar value of the purchases made by Cheng was small; and (iv) the history of trading in the Cheng family accounts.

[87] These perceived problems with the Panel's factual findings led the Divisional Court to conclude, at para. 146:

The cumulative effect of these errors renders the Panel's conclusion regarding Cheng both an unsafe, and an unreasonable, one. It cannot be said, with any degree of confidence, that the decision is "justified, transparent and intelligible". Consequently, the finding that Cheng ought reasonably to have known the information he received, and passed on, originated from an insider must be set aside, as must be the sanctions imposed.

C. Analysis: The OSC's Appeal Regarding Cheng

[88] As this court observed in Ottawa Police Services v. Diafwila, 2016 ONCA 627, [2016] O.J. No. 4331, at para. 66, there is a "standing temptation" for a court conducting a reasonableness review to place itself in the position of the decision-maker of first instance and compare the decision it would have reached with that actually made at first instance. A review of the Panel's reasons and the record before it discloses the Divisional Court succumbed to this temptation. Instead of applying the deferential principles of appellate review it had properly articulated, the Divisional Court acted as if it was a decision-maker of first instance.

Mis-statements of the Evidence

[89] The Divisional Court correctly recognized, at para. 25 of its reasons, that:

Appellate review also does not turn on being able to point to a single error in the tribunal's reasons, or to one error of fact, unless that error goes to a core finding. It is not unheard of to find small individual errors in lengthy reasons arising out of a complex proceeding. Reasons are seldom perfect. The real question is whether any such errors are fundamental to the reasonableness of the conclusion reached.

[90] The Divisional Court accurately pointed out that the Panel mis-spoke when it wrote that Cheng bought stock for himself. He did not. But the Panel's reasons disclose it was aware of the true state of affairs. At para. 145 of the Merits Decision, the Panel correctly set out the evidence regarding Cheng's purchase of Masonite shares "at first for his wife, then for his brother in Hong Kong, other family members and clients." As the Panel summarized: "In total, the five accounts of the Cheng family purchased 9,100 shares for $308,789 and Cheng clients purchased, on recommendation from Cheng, a further 4,100 shares of [Masonite] for $139,372." That evidence provided ample support for the Panel's ultimate conclusion that his family members had purchased "a large position" based on the information he had received from Miller. While the Panel's mistake in stating Cheng bought Masonite shares for himself was palpable, it was hardly overriding when considered in the context of the overall purchases made by Cheng on behalf of his family using Masonite MNPI.

[91] The Divisional Court also found the Panel incorrectly stated Miller was Cheng's mentor/supervisor "when in fact there was no such close relationship at the material times": at para. 144. With respect, the Divisional Court's conclusion does not accord with the record before the Panel. In her closing submissions before the Panel at the Merits hearing, Cheng's counsel stated: "Miller was an unofficial mentor to Mr. Cheng." That submission provided the Panel with an obvious basis upon which to make its finding about the strength of the working relationship between Miller and Cheng.

Improper Inferences of Fact

[92] On December 7, 2004 Cheng sent an email to S.K., a client who had previously complained about Cheng's investments on her behalf, advising he was buying Masonite for clients and a "20% return is expected before Christmas." The Panel stated the email to S.K. underscored Cheng's reliance on the reliability of the information Miller had passed on, reasoning: "He would not have risked passing speculative information, which may prove wrong, to an already complaining client."

[93] While the Divisional Court acknowledged the Panel drew an available inference from the email, it observed that inference was "not the only inference available." The Divisional Court then articulated the inference it would have drawn. Although the Divisional Court was careful to state the Panel was entitled to draw the inference it did, it classified the Panel's inference as one of the "factual errors" and suggested the Panel's inference was "not a strong one."

[94] With respect, having acknowledged it was open to the Panel to draw the inference it did, it was not open to the Divisional Court to engage in its own inference-drawing exercise. By so doing, it over-stepped the proper bounds of appellate review.

Ignoring Evidence

[95] Finally, the Divisional Court held the Panel "appears not to have taken into account" several pieces of evidence, identified in para. 86(iii) above. With respect, those "errors" identified by the Divisional Court amount to nothing more than that court impermissibly reweighing the evidence.

[96] Cheng stated in his compelled interview that he recalled Miller telling him he heard rumours Masonite was a takeover target or was in play. In dealing with Miller, the Panel found that the detailed information passed on to Miller prevented a market registrant recipient, without further inquiry, from treating it as rumour. The Panel then considered Cheng, stating: "Cheng, too, relied on the same factual basis tipped to him by Miller…" Given that statement, it is apparent the Panel did not ignore Cheng's evidence that Miller passed on a rumour. It considered the "rumour" evidence advanced by Miller and Cheng and rejected it. Indeed, the Panel specifically found "there was no evidence of rumour in the marketplace that [Masonite] was a takeover target."

[97] The Divisional Court held the Panel failed to consider Cheng's explanation about why he did not inquire about the source of Miller's information. In his compelled interview, Cheng stated he could not recall the specifics of the Masonite conversation with Miller, but he "never would go and say where did you learn it from."

[98] Again, the Divisional Court attached different weight to this evidence than did the Panel. Cheng's explanation that he would "never" inquire about the source of the information was not accepted by the Panel as adequate conduct: "Cheng, too, as a registrant, failed to inquire of Miller the source of Miller's information." Earlier in its reasons, the Panel had stated "a higher standard of vigilance and inquiry must be expected from a registrant than from someone who is a retail investor." That approach was a reasonable one and clearly informed the Panel's rejection of the adequacy of Cheng's "never inquire" explanation.

[99] Finally, the Divisional Court quarreled with the Panel's finding that Cheng did not conduct due diligence on Masonite, undertook no research, and relied entirely on the information provided by Miller to purchase "precipitously" a "large position" for himself and family members, "a stock neither he nor they had owned previously." The Divisional Court stated the Panel ignored Cheng's evidence that upon receipt of a rumour, his usual practice would be to check the Newswire for a few months or weeks. As well, that court commented it was unclear on what basis the Panel concluded the purchases were precipitous.

[100] Again, the Divisional Court reweighed the evidence. In his compelled interview, Cheng admitted Masonite was not one of the stocks he was following at the time. Cheng stated he could not recall the specifics about what he did after receiving Miller's information about Masonite. He then talked about his normal practice, but unequivocally denied seeing any information that confirmed what Miller was telling him regarding Masonite. At the same time, the evidence showed that immediately upon his return from Asia on November 29, 2004, Cheng started buying Masonite shares for his wife, his brother in Hong Kong, and other family members. By the end of November, Masonite shares accounted for 98% of the value of Cheng's wife's portfolio. That evidence reasonably supported the Panel's findings that Cheng did not conduct due diligence on Masonite after receiving Miller's information and started "precipitously" to buy Masonite shares for family members upon receipt of the Masonite MNPI from Miller.

Conclusion

[101] The function of a reviewing court, such as the Divisional Court, is to determine whether the tribunal's decision contains an analysis that moves from the evidence before it to the conclusion that it reached, not whether the decision is the one the reviewing court would have reached: Ottawa Police Services, at para. 66. With due respect to the Divisional Court, it failed to do so in the case of the Panel's decision about Cheng. Instead, it impermissibly re-weighed the evidence and substituted inferences it would make for those reasonably available to the Panel. That was an error. The findings of fact made and inferences drawn by the Panel in respect of Cheng were reasonably supported by the record.

D. Analysis: Cheng's Cross-Appeal

[102] In his cross-appeal, Cheng argues that in the event the decision of the Divisional Court is set aside, nevertheless "additional errors and inconsistencies in the Panel's decisions … render them unreasonable." Cheng submits the finding of liability against him was flawed because the Panel made no finding that L.K. was a person in a special relationship. In paras. 77 and 78 above, I considered and rejected the identical argument advanced by Miller.

[103] Cheng further contends the Panel did not properly apply the "ought reasonably to have known" test to his particular circumstances. His argument amounts to nothing more than an invitation to this court to play fact-finder, by reweighing the evidence and making different findings of fact than did the Panel in order to reach a different result. As stated, that is not the function of a reviewing court.

E. Summary on the Issue of Cheng's Liability

[104] The Panel offered justification, transparency, and intelligibility in its decision-making process finding Cheng liable for breaches of the Act. Its decision regarding Cheng's liability fell within a range of possible, acceptable outcomes defensible in respect of the facts and law: Dunsmuir, at para. 47. Accordingly, I would allow the OSC's appeal on the issue of Cheng's liability, dismiss Cheng's cross-appeal on liability, set aside the order of the Divisional Court, and restore the liability order of the Panel against Cheng.

IX. FOURTH ISSUE: THE REASONABLENESS OF THE PANEL'S SANCTIONS AGAINST CHENG

A. The Issue Stated

[105] In its Sanctions Decision, the Panel imposed on Cheng (i) a 10-year trading ban, with carve-outs, (ii) a 10-year ban on acting as a director or officer of a reporting issuer, (iii) a 10-year ban on registration, (iv) $200,000 in administrative penalties, or $100,000 per breach, and (v) costs of $25,000. The Panel rejected OSC Staff's request for an order that Cheng disgorge the profits made by his family members on their Masonite purchases.

[106] Cheng submits the sanction orders against him are unreasonable. However, he does not argue that the orders are excessive or punitive, or lack appropriate proportionality to the circumstances relevant to him: M.C.J.C. Holdings (Re). Instead, Cheng argues differences in the language used by the Panel to describe his state of mind in the Merits Decision and Sanctions Decision amount to a conflict in the Panel's findings that "goes to the heart of the allegations against Cheng" and renders the sanctions unreasonable.

B. Analysis

[107] In its Merits Decision, the Panel stated: "We find that neither Miller nor Cheng knew that the MNPI Miller received from LK and that Cheng received from Miller came from a knowledgeable person." In its Sanctions Decision, the Panel stated: "As registrants, [Miller and Cheng] knew that they were utilizing MNPI…" Cheng submits these statements conflict and render the sanctions against him unreasonable.

[108] The OSC submits the statements are not inconsistent – the statement in the Merits Decision refers to Cheng's knowledge about where the material information came from, whereas that in the Sanctions Decision refers to Cheng's knowledge that the information was material and non-public.

[109] I accept the OSC's submission. It accords with the plain language of the Panel's decisions. Consequently, I would not accept Cheng's argument that the sanctions are unreasonable.

X. DISPOSITION

[110] For the reasons set out above, I would dismiss Miller's appeal.

[111] I would grant the appeal of the OSC in respect of Cheng, dismiss the cross-appeal of Cheng, set aside para. 2 of the order of the Divisional Court, and restore the Panel's findings of liability and sanctions against Cheng.

[112] I would award the OSC partial indemnity costs of $15,000 against Miller and $18,000 against Cheng, inclusive of disbursements and applicable taxes.

Released: January 25, 2018

"David Brown J.A." "I agree. Janet Simmons J.A." "I agree. Paul Rouleau J.A."

Footnotes

[1] Azeff and Bobrow further appealed to the Supreme Court of Canada, which dismissed their applications for leave to appeal with costs on December 14, 2017: Paul Azeff v. Ontario Securities Commission, leave to appeal to ONCA refused, M47316 (March 10, 2017), leave to appeal to SCC refused, 37699 (December 14, 2017).

[2] The French version of s. 76(5)(e) reads:

76(5) Les définitions qui suivent s'appliquent au présent article:

"personne ou compagnie ayant des rapports particuliers avec un émetteur"

(e) d'une personne ou d'une compagnie qui est mise au courant d'un fait important ou d'un changement important concernant l'émetteur par une autre personne ou compagnie visée au present paragraphe, y compris une personne ou une compagnie visée au present alinéa, et qui sait ou aurait raisonnablement dû savoir que cette autre personne ou compagnie entretentait de tels rapports.

[3] See Danuke (Re) (1981), 2 O.S.C.B. 31 C for a case where it was found tippees knew the information came from an insider, thereby constituting conduct contrary to the public interest. The Panel used the term "knowledgeable person" as a short hand form of the statutory phrase, "person in a special relationship with an issuer": Merits Decision, para. 62.