Two Plus Two = Insider Trading

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New York, NY – A few weeks ago, a case involving a Canadian investment banker who figured out about an upcoming merger on his own and profitably traded on this information, has settled his case with both the SEC and the Ontario Securities Commission.  While the two regulators agreed that the banker acted illegally, they came to different conclusions about whether he misappropriated and profited from inside information.


Background of the Case

The two cases, filed separately by the Securities and Exchange Commission and Canada’s Ontario Securities Commission were against Richard Bruce Moore.  Mr. Moore worked at Canadian Imperial Bank of Commerce in several capacities during his 20 years at the bank, before moving to UBS Securities Canada in 2012.

These cases involved trading in Tomkins plc, a British maker of auto parts, before it received a takeover offer from the Canadian Pension Plan Investment Board (CPPIB) and a private equity firm, Onex Corp., in July 2010.  The takeover offer led the share price of Tomkins to rise 27%, from $13.87 to $17.67 a share.

At the time, one of Mr. Moore’s investment banking clients was the CPPIB.  Unbeknownst to Moore, the CPPIB was planning to make an offer for Tomkins in conjunction with Onex Corp.  In dealing with one of the CPPIB’s senior
representatives, Mr. Moore learned that the pension board was considering a significant transaction, but that Moore’s employer, CIBC, would not be involved in the deal.

Although there were rumors that Tomkins would be taken over, Moore learned a number of general facts from the CPPIB’s representative that enabled him to determine who the merger target was.  For example, Mr. Moore learned from his contact at the CPPIB that the pension board was looking for US$2 billion in financing involving a company in Europe and the U.S.

The “final piece of information” behind Mr. Moore’s investment in Tomkins, was after he saw the pension board representative speaking with someone at a charity event.  The pension board representative refused to introduce them or even identify who he was speaking with.  In a separate conversation, a third party identified the unknown person as the chief executive of Tomkins.  Mr. Moore concluded that the CPPIB was planning to make a merger offer to Tomkins.

Based on this assessment, Mr. Moore started buying Tomkins stock through an offshore account, ultimately buying 212,000 shares, valued at £508,249.90.  His trades included buying American depositary receipts in the company that were traded on the New York Stock Exchange.  This gave the S.E.C. jurisdiction over the case.


The Ontario Securities Commission’s Ruling

The Ontario Securities Commission (OSC) concluded that Mr. Moore traded improperly in Tomkins shares. In its settlement with Mr. Moore, it stated that at no time did the pension board representative “ever provide Moore with any material, generally undisclosed information.”

Instead, the regulator said he “ought not to have made use of information obtained in part by virtue of his position as an employee of a registrant prior to its general disclosure to the public.” In doing so, the commission said, Mr. Moore acted “contrary to the public interest.”

The OSC said in its complaint that Mr. Moore’s conduct “fell below the standard of behaviour expected from someone in Moore’s position and given his extensive experience in the capital markets industry.”

The regulator explained that Mr. Moore purchased the shares of Tomkins in two brokerage accounts in Jersey, a Channel island, and did not disclose the offshore accounts to CIBC “as required by its compliance policies.”

The OSC did not find that Moore engaged in insider trading with regards to Tomkins, but only that he acted inappropriately given his position in the securities industry.  This is partially a result of the fact that in Section 76 of the Ontario Securities Act, a defendant is required to be “in a special relationship with a reporting issuer” when trading in its securities to be guilty of engaging in insider trading.

The OSC fined Moore $300,000 and barred him from future involvement in the securities industry.  Click here for more information about the OSC’s settlement with Mr. Moore.


The SEC’s Ruling

The SEC, however, concluded that Mr. Moore’s actions were in fact, insider trading.  The SEC argued that Moore either knew, or was reckless in not knowing, that the information that he traded on regarding the Tomkins merger was both material and non-public.  Click here for more details about the SEC’s complaint.

In addition, the SEC argued that this information had been acquired in the course of his employment with CIBC, and that Moore had knowingly or recklessly misappropriated this information about the merger from CIBC for his personal benefit by purchasing Tomkins ADRs ahead of the announcement that Tomkins had received an acquisition offer.

In other words, the SEC claimed that by pulling together different strands of information about the impending deal from a client, Mr. Moore had “misappropriated that information from his employer by purchasing Tomkins securities.”

The complaint alleges that, purely through his purchase of the ADRs, Moore realized illicit gains of more than $163,000.  As a result, the SEC ordered Moore to pay over $340,000 in disgorgement of profits, penalties, and interest.  Moore also agreed to a ban from associating with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and from participating in any penny stock offering.

Click here for more details about the settlement the SEC reached with Mr. Moore in this case.


Consequences of these Settlements

Clearly, the actions taken by Mr. Moore appear to be fishy.  After all, he made a large investment in the stock of Tomkins plc shortly after gaining information that was not public, resulting in a quick profit.  In addition, he hid his investment in Tomkins by opening up and trading through secret brokerage accounts that he did not inform his employer about.  Moore also made a huge bet involving almost one-third of his net worth showing that he believed the information he had obtained was extremely valuable.  Finally, Mr. Moore was employed in the securities industry.  All of these facts seem to indicate that Mr. Moore’s activity had to be questionable, if not insider trading.

Despite these facts, it doesn’t appear that Moore crossed any of the traditional lines which indicate that insider trading has occurred.  First, Moore did not obtain confidential information from any source at the pension board about the Tomkins merger, as was made clear by the OSC.  Moore merely put together a number of disparate facts and rightly came to the conclusion that the CPPIB was planning to acquire Tomkins.

In addition, Moore did not glean any information from CIBC in this case, because the bank was not involved in the transaction in any way.  Regardless of this, the SEC concluded that Moore misappropriated the information he collected from his employer because he was able to get that information only due to his position as a banker for CIBC.

Ultimately, in this case the SEC seems to be saying that the mosaic theory doesn’t always apply.  This is particularly if you get information as a result of your job which enables you to deduce something going on at another company who happens to be your client (a little convoluted don’t you think?).  If you profit from information gathered in this manner, you can be seen to violate the insider trading prohibition.

In our opinion, the SEC’s case against Mr. Moore shows that it is continuing to take an extremely aggressive approach to bringing insider trading cases by pushing the limits of what constitutes illegal activity.  The lesson we think market participants should learn from this case is that you should be extremely careful if you learn something about a public company, even if you do so by reaching the conclusion as a result of putting together a number of clues, if that information enables you to generate a quick profit.  Clearly the regulators are trying to make the case that profiting in this way must have resulted from some type of illicit activity.

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