Insider Trading: Securities Commission to Think Twice About Excessive Sanctions and Speculation

In a rare appellate court decision, the Court of Appeal in Walton v. Alberta (Securities Commission), 2014 ABCA 273, has set aside a decision by the Alberta Securities Commission and has held that any monetary penalties levied must be proportionate to the circumstances of the offender and supported by reasons. The Court also held that findings cannot be based upon speculation and that the Commission had improperly interpreted the "recommending or encouraging" provisions of the Alberta Securities Act (the “Act”) in a decision that is certain to give pause to Securities Commissions across Canada.



At all material times, Eveready Inc. was listed as a reporting issuer on the Toronto Stock Exchange providing services to the industrial and oilfield sectors. In late 2008, Eveready’s unit price was depressed such that it attracted the attention of Clean Harbors Inc. as a potential takeover target. The Staff of the Alberta Securities Commission alleged that Holtby, a director of Eveready, was aware of the proposal by Clean Harbors to takeover Eveready and traded in shares of Eveready based upon this knowledge including passing knowledge of the impending takeover to the other appellants, Kowalchuck, Shepert, Burdeyney and Walton, who in turn traded, encouraged others to trade, and made improper use of this non-public information.

Decision Below

In the decision below, Re Holtby, 2013 ABASC 45, the Alberta Securities Commission found the appellants culpable of insider trading, including purchasing securities with knowledge of a material fact, informing others of a material fact and recommending/encouraging others to purchase shares of Eveready all contrary to s. 147 of the Act. Sanctions were imposed against the appellants in Re Holtby, 2013 ABASC 273 including bans from trading in securities, the disgorgement of profits and administrative monetary penalties (“AMPs”) ranging from $55,000 to $1,750,000.


The Court addressed the Commission’s interpretation of the requirements of “insider trading”, “tipping” and “recommending or encouraging” pursuant to s. 147 of the Act, acknowledging that the Commission’s interpretation of the Act is entitled to deference. The Court held that the Commission’s interpretation of the mens rea elements of “insider trading” and “tipping” requiring “knowledge of a material fact” and the “passing of information” respectively, were reasonable. However, the Court held that the Commission’s interpretation of the mens rea element of “recommending or encouraging” could not be sustained and required both knowledge of a material fact and the intention to convey information with the expectation that it be relied upon.

Demonstrating the difficulties inherent in proving insider trading cases, the Court reviewed findings of fact made by the Commission based upon circumstantial evidence and overturned numerous findings including findings of encouraging made against Holtby and Walton, the finding that Shepert engaged in insider trading, and tipping findings made against Holtby and Burdeyney. While acknowledging that the Commission is entitled to deference regarding findings of fact, the Court held that circumstantial evidence must be regarded as a whole, rather than individually, when determining whether a conclusion is supported. On this basis, the Court held that mere evidence of opportunity is insufficient to support the inference of encouraging. For example, the Court held that evidence that Holtby may have responded with generic positive comments about Eveready when asked publicly about its prospects could not support a finding that he encouraged the purchase of its shares. The Court also held that inferences should be drawn only where there is sufficient evidence to support the inference. For example, the inference that Shepert, a friend of Holtby’s brother, was aware that Holtby was a director of Eveready, as this information was publicly available, was unreasonable. In the result, findings of culpability against Shepert, Burdeyney and Walton were set aside.

Significantly, the Court set aside the sanctions imposed against the remaining appellants, Holtby and Kowalchuk, and remitted the issue of sanctions back to the Commission for further consideration. The Court held that the $1,750,000 AMP levied against Holtby was severe and extended well beyond what the public interest might require. The Court concluded that the reasons for the AMPs levied against Holtby and Kowalchuk lacked the “justification, transparency and intelligibility” required. The Court also held that an AMP imposed for general and specific deterrence should accomplish that end, and no more. Finally, the Court held that an AMP must be proportionate to the circumstances of the individual offender and that an AMP beyond the capacity of the individual offender cannot be justified on the basis of deterring those in a better financial position.

Potential Significance

It is a rare event for an appellate court to overturn a decision of a securities commission, which is typically recognized as having particular expertise that is afforded significant deference. This case speaks to the difficulty commissions may face going forward in proving cases based upon circumstantial evidence and sets the bar high in terms of requiring reasonable inferences, rather than speculation, to establish culpability. Further, while no prohibition against “encouraging” or “recommending” exists in Ontario, the Court’s interpretation of this provision is significant in Alberta and in other jurisdictions with similar provisions (i.e. s. 57.2(5) of the British Columbia Securities Act). Finally, in an era where monumental AMPs are increasingly levied, the Court’s holding that AMPs must be proportionate to the circumstances of the individual and be based upon reasons that are logical, transparent and intelligible will hopefully have a precedential effect diminishing the severity of AMPs levied.

Case Information

Watson v Alberta (Securities Commission), 2014 ABCA 273

Docket: 1301-0201-AC; 1301-0207-AC

Date of Decision: August 29, 2014

Alberta Court of Appeal Alberta Securities Act Alberta Securities Commission insider trading knowledge of material fact passing of information recommended or encouraging provision tipping



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