In a settlement reached with the OSC last week, Anand Hariharan agreed to make a voluntary payment of $35,000 —half of his realized profits — and pay $5,000 in costs. He also agreed to a 10-year ban from trading, except for trading in a retirement account, and a 10-year registration ban.
Rene Sorell, a partner with McCarthy Tétrault LLP, says the Hariharan case is like a series of recent cases where, but for technical reasons, there’s not a violation of the insider trading rules. In the Hariharan hearing, it had to do with the fact the entity traded was not a public company in Ontario, but his conduct was deemed by the OSC to be contrary to the public interest and “impugned the integrity and fairness of the capital markets because of the misuse of material, confidential information obtained from [Satish] Talawdekar.
“It’s a situation where everybody knows that what they are doing is insider trading, but when you apply the law it fails for that reason to be an offence, for that technical reason,” says Sorell.
In June 2012, Hariharan received a tip from a close friend Talawdekar, and bought options on stock of Loral Space & Communications Inc., based on information of a pending acquisition of a Loral subsidiary by MacDonald Dettwiler & Associates Ltd., where Talawdekar worked.
The day after the announcement of the acquisition, Hariharan sold all of the 220 Loral option contracts, realizing a profit of US$68,683 — a 623-per-cent return in one day.
As Sorell points out in a commentary last week, other cases provide examples where the OSC has decided the “letter of the insider trading” law doesn’t apply for one technical reason or another. In those cases it will settle with the individuals because they are market participants and they think it is a standard of behaviour that falls below the expectation.
“Public interest is a provision in the Securities Act that gives the OSC tribunal the right to impose penalties, as was done [with] Hariharan. It establishes that an individual doesn’t actually have to break the law — a public interest remedy can be awarded against you. The proceeding starts not on the basis that you violated the law but that the conduct falls below the public interest standard and the person still deserves to receive penalties.”
Sorell says the OSC will try to go after people who violate the underlying purpose of the rules, and settlements work because they don’t result from a long and contested hearing.
“They are trying to use settlements more. Quite a number of the decisions we cite are settlements,” he says. “The ones we see being contested are ones where either the people accused have substantial resources or, they think that on the facts they can defeat the securities commission because the commission’s interpretation of facts can’t really be proven. There might be another explanation that is believable and takes the facts out of the insider trading realm.”
Cristian Blidariu, an associate at McCarthys, says: “Even in contested hearings the OSC hasn’t hesitated to use the public interest power to establish liability even when one of the statutorily required elements of an insider trader offence was absent.”
There have been a number of cases where using the public interest to punish is used following a contested proceeding. One involved Baffinland Iron Mines Corp., and Waheed and more recently in the Finklestein hearing.
What’s interesting, adds Sorell, is that Hariharan wasn’t ordered to pay back all that he made.
“Instead of giving back the profit, he was ordered to give back part of it. He got a lot of penalties against him including trading restrictions. On payment of the money, they ease a little,” he says.
Clarification: While both Waheed and Finklestein cases involved allegations by OSC staff of conduct contrary to the public interest, findings of such conduct were only made by the OSC in Finklestein.