Insider Trading Isn’t Just a Public Markets Problem

For most people, the concept of insider trading likely conjures up thoughts of public companies and famous U.S. cases. For instance, Jeff Skilling, the CEO of Enron, being sentenced to 24 years in prison and fined $45 million for insider trading and other crimes relating to the Enron fraud. Or Martha Stewart getting tipped off by her broker and selling $230,000 of stock in ImClone the day before the company publicly disclosed that it failed to get FDA approval for its new drug.

In Canada, we have securities regulators who regularly prosecute insider trading cases – check it out, they are easy to find on the enforcement pages on the websites of securities commissions across the country. Those prosecutions are done under securities legislation and generally involve an “insider” buying or selling securities on an exchange with information that has not been disclosed to the public and that is material to the price of the security. What many people don’t realize is that insider trading occurs in private companies too and you can absolutely sue or be sued for it.

Private companies are not subject to the same disclosure rules that public companies are required to follow. They are not required to share confidential information with the public and, usually, the only people that have the type of information that could be material to the value of the company’s securities are employees of the company and, in some cases, voting shareholders. The people with that type of information are generally the “insiders”. The people without it are the “outsiders”. 

Under provincial and territorial business corporations acts, an insider may be liable where they have sold or purchased securities while making use of specific confidential information that, if generally known, might reasonably be expected to materially affect the value of the security for their own benefit or advantage. In those circumstances, the insider may be liable to the outsider, company, or any other person who suffers direct loss because of the transaction. The exception to this is where the information was known or, in the exercise of reasonable diligence, should have been known by the person who suffered the loss at the time of the transaction.

The insider trading provision under the Canada Business Corporations Act is a bit different. There is no requirement that the confidential information be specific and the insider doesn’t need to make use of that information. Further, the insider is only liable to the outsider and not to the company or other people that may have suffered direct loss because of the transaction.

So, before you buy or sell securities in a private company, think about whether you might be an insider or outsider in relation to your counterparty. If you are the insider, then consider whether you have information that might be relevant to the value of the securities that your counterparty might not have or be able to reasonably obtain. If you are the outsider, the onus is on you to undertake reasonable due diligence so don’t just rely on the insider to voluntarily disclose information to you. And help is there if you want it — professionals like business valuators and legal counsel can help you reduce the risk of being liable or, even worse, getting ripped off and left without a remedy.

  • Kelly  Hannan

    Kelly practices commercial litigation with a focus on energy, securities, and tax litigation. Kelly has argued cases at all levels of court in Alberta, the Tax Court of Canada, and the Alberta Securities Commission. Kelly has ...

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