



COURT OF APPEAL FOR ONTARIO

CITATION: Finkelstein v. Ontario Securities Commission, 2018
    ONCA 61

DATE: 20180125

DOCKET: C63514 & C63502

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
)

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

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.

Brown J.A.:


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 Acts 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 Chengs appeal. Miller sought and obtained leave to appeal
    to this court, as did the OSC in respect of Cheng. This court dismissed Azeff
    and Bobrows 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 Panels
    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 Millers 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 Masonites
    shares. Finkelstein was Masonites 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 Masonites 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 Millers 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: ill take your tip. youve 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[.] Im
    long[.]

DW: whats 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 Chengs evidence at paras. 144 to
    148 of its reasons:

Francis Cheng, Millers 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 Chengs 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 Chengs investments on her behalf: Im back in town and would
    like to talk to you about your account. Kindly contact me at your convenience.
    Im buying MHM on Toronto Exchange for clients and 20% return is expected
    before Christmas. Im 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. Its a takeover target and I was told that itll be done at Cdn$40.00
    before Christmas. Its currently trading at Cdn$34.00 and I dont 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 closerthan with other
    IAs.

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, 2
nd

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 31C, at p. 40C. Any
    information about an issuer that likely would affect the market value of the
    issuers 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 Panels 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 commissions 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 OSCs 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
    OSCs 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
    Commissions interpretation of the statutory provision.

[36]

Miller
    and Cheng submit this court should adopt
Poonians
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 Panels 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 OSCs 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 Panels interpretation of the Act is the deferential standard of
    reasonableness. That standard also governs the review of the Panels 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 Panels interpretation of s. 76(5)(e) of the Act;

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

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

(iv)     In
    the event the Divisional Courts reversal of the Panels finding of liability
    against Cheng is set aside, the reasonableness of the Panels sanctions against
    Cheng.

VI.

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

A.

The Panels interpretation of s. 76(5)(e)

[42]

The
    parties agree on much of the Panels 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 Panels 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 Panels 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 Panels 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 Panels 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 Panels interpretation of the person connection

[46]

The
    dispute on these appeals concerns the Panels 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 Panels 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 Panels general
    articulation of the objective knowledge test in para. 63 of the Merits
    Decision. As well, they acknowledge as reasonable the Panels 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/tippers 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 tippers relationship with the issuer is a
    critical error, rendering unreasonable the Panels interpretation of the
    person connection element of s. 76(5)(e).

[52]

Chengs
    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 tippees 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 tippees
    knowledge of his tippers 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 tippees 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 persons 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 Millers 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 tippers 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,
Watts 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 drivers 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 tippers 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 tippers 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 tippees 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
    tippees state of knowledge about the tippers 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 tippees
    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 issuers 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 tippees 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 tippees state of knowledge about the tippers source of
    the information, as Cheng argues. I accept the Panels 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 PANELS FINDING OF LIABILITY AGAINST MILLER

A.

The issue stated

[75]

Miller
    submits the Panels 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 Courts 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 Associatio
n,
    2011 SCC 61, [2011] 3 S.C.R. 654, at para. 50. The Panels 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 others 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 Millers 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 Millers appeal.

VIII.

THIRD ISSUE: THE REASONABLENESS OF THE PANELS 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 Chengs 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 Panels decision
    against him. However, if this court sets aside the Divisional Courts order,
    Cheng cross-appeals arguing there are additional errors and inconsistencies in
    the Panels decision that render it unreasonable.

B.

The Divisional Courts reasons

[84]

The
    Divisional Court began its reasons by recognizing the restraint with which an
    appellate court must approach a tribunals factual findings:

(i)

A high threshold must be met before an appellate court may interfere
    with a tribunals 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 Panels 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. Chengs 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 Millers 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 Panels 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
    Chengs 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
    Chengs 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 Panels factual findings led the Divisional Court
    to conclude, at para. 146:

The cumulative effect of these errors renders the Panels
    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 OSCs 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 Panels 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 tribunals 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 Panels 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 Chengs 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 Panels
    ultimate conclusion that his family members had purchased a large position
    based on the information he had received from Miller. While the Panels 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 Chengs
    mentor/supervisor when in fact there was no such close relationship at the
    material times: at para. 144. With respect, the Divisional Courts conclusion
    does not accord with the record before the Panel. In her closing submissions
    before the Panel at the Merits hearing, Chengs 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 Chengs 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 Chengs 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 Panels inference
    as one of the factual errors and suggested the Panels 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 Chengs 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 Chengs explanation about
    why he did not inquire about the source of Millers 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. Chengs 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 Millers
    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 Panels rejection of the adequacy of Chengs never inquire
    explanation.

[99]

Finally,
    the Divisional Court quarreled with the Panels 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 Chengs 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
    Millers 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 Chengs wifes portfolio. That evidence reasonably supported the Panels
    findings that Cheng did not conduct due diligence on Masonite after receiving
    Millers 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
    tribunals 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
    Panels 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: Chengs 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
    Panels 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 Chengs 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
    Chengs 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 OSCs appeal on the issue of Chengs liability,
    dismiss Chengs 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 PANELS 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 Staffs 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 Panels 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 Chengs knowledge about where the material information came from,
    whereas that in the Sanctions Decision refers to Chengs knowledge that the
    information was material and non-public.

[109]

I accept the
    OSCs submission. It accords with the plain language of the Panels decisions.
    Consequently, I would not accept Chengs argument that the sanctions are
    unreasonable.


X.

DISPOSITION

[110]

For the reasons
    set out above, I would dismiss Millers 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 Panels
    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: PR JAN 25 2018

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





[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 sappliquent au présent article:



personne ou compagnie ayant des rapports particuliers avec un
    émetteur

(e) dune personne ou dune compagnie qui est mise au courant dun
    fait important ou dun changement important concernant lémetteur 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. 31C for a case where it was found
    tippees knew the information came from an insider, thereby constituting conduct
    contrary to the public interest.

3
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.


