The perils of trading after the whistle has been blown
Can you trade with knowledge of a whistleblower complaint? A recent US lawsuit is a helpful reminder for insiders that they need to carefully consider the materiality of known facts in the light of whistleblower allegations before engaging in trading.
Insiders should be cautious before trading in the company’s securities following receipt of a whistleblower complaint. It can be difficult to assess the merits and materiality of allegations in a whistleblower complaint without an appropriate investigation. Even then, there is no due diligence defence to insider trading, although the extent of diligence performed to determine the merits and materiality of allegations in a whistleblower complaint could be relevant when a court or tribunal is assessing the appropriate sanctions against an insider found to have committed insider trading. Insiders should also be mindful of prohibitions in the company’s trading blackout policy, which will be a relevant consideration for regulators looking at events in hindsight.
A Meta Platforms Inc. (Meta) shareholder recently filed litigation in California federal court alleging, among other things, that Meta’s founder engaged in more than $2.5 billion of insider trading while in possession of material non-public information that subsequently became public and negatively impacted the company’s share price in the secondary market. The plaintiff alleges that the founder knew that representations made in Meta’s public disclosure were false as a result of several whistleblower complaints on the same issues, and his trading occurred when Meta’s share prices were higher than after the issues became public.
Recently, former officers and directors of CannTrust Holdings Inc. were charged with various offences under the Securities Act (Ontario) that include insider trading. Based on media reporting, two of the accused traded CannTrust shares after receiving an email from an employee identifying certain alleged misconduct. It is unclear from media reporting whether the employee was acting as a whistleblower.
We offer no comment on the merits of any allegations, but both matters raise an important consideration for insiders who become aware of alleged misconduct.
Trading following a complaint
An insider such as a director or officer must always consider whether s/he knows any material non-public information (material facts or material changes) before engaging in any trading. A material fact is a fact that would reasonably be expected to have a significant effect on the market price or value of the issuer’s securities. A material change is a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the issuer’s securities.
An insider who wants to trade in the company’s securities must assess whether s/he has material non-public information about the company as a result of being privy to the whistleblower complaint and the company’s response. An insider could trade after receiving a whistleblower complaint if (a) the complaint’s allegations are known to be false, or (b) the complaint raises immaterial issues to the company. But, what if the insider trades with a genuine belief that the alleged misconduct is untrue, only to be proven wrong? Would such an insider need to conduct due diligence to support such a belief? Would it matter that the insider’s good faith reliance was based on findings from an internal investigation that was ultimately determined to be wrong? The responses to such questions are not straightforward and require fact-specific analysis.
Even if an insider does not trade while in possession of material non-public information, the insider should consider a securities regulator’s expectations, which will be informed by all of the circumstances in hindsight and can also be influenced by the wording of any trading blackout policy adopted by the issuer of the securities. As we have noted in a blog post some years ago, the OSC has historically relied on its discretionary public interest power to make enforcement orders in circumstances where no actual breach of securities laws has been proven and no egregious violation of recognized conduct standards is necessarily involved.