In the case of a cannabis company co-founder who disclosed inside information to a friend, Ontario’s Capital Markets Tribunal handed down less severe sanctions than the Ontario Securities Commission (OSC) sought.
Last October a regulatory panel found that Michael Paul Kraft, the former chairman and director of WeedMD Inc., violated securities law when he passed along information about his company’s planned transaction — a greenhouse lease deal that would enable WeedMD to expand production — to his friend and business associate Michael Brian Stein. The panel also found that Stein violated securities law when he traded on the information.
The tribunal banned Kraft from serving as a director and officer for four years and from trading for three years, imposed a $200,000 penalty and ordered $150,000 in costs against him.
Stein, who made less than $30,000 from the illegal trading, was banned from trading for four years and from being a director and officer for three years, and was fined $150,000. He was also ordered to disgorge his trading profits and pay $50,000 in costs.
While the tribunal ordered monetary sanctions in line with what the OSC sought in the case, the market bans were much shorter. The regulator sought 10-year bans against Kraft and eight years for Stein.
According to the tribunal’s decision, Stein consented to the disgorgement and costs orders but asked for a $50,000 penalty and shorter market restrictions; Kraft sought a $25,000 penalty and no market bans.
Ultimately, the tribunal ruled that shorter market prohibitions were justified, given that the tipping and trading was not part of an intentional scheme to abuse markets. Instead, the panel found this was a case of Kraft carelessly sharing information with Stein to get his feedback on the proposed transaction.
“We conclude above that Kraft’s misconduct was not motivated by personal or professional advantage or a desire to permit Stein to profit through insider trading,” the tribunal said in its reasons.
“While this does not diminish the seriousness of his misconduct, we consider it to be a mitigating factor that we have considered in determining the length of market participation bans,” the panel said.
The OSC had alleged that Kraft tipped Stein about the details of the transaction and when the deal would be announced.
The tribunal ruled that, while Kraft did tip Stein by providing him with draft documents regarding the transaction, he didn’t tip Stein to the announcement date.
The panel determined that shorter bans than the OSC requested appropriately balance the seriousness of the misconduct with the fact it didn’t involve intentional insider trading and tipping. Further, longer market prohibitions would potentially represent a disproportionate impact on the pair, who are active traders and market participants.
“We find that trading bans, director and officer bans, registrant and promoter bans are warranted … but for shorter time periods than those proposed by the commission,” the tribunal said. It cited “the limited market impact of the breach, the circumstances of the respondents, including their ages, the significant effect such bans would have on Kraft’s and Stein’s livelihoods, and the fact that Kraft’s misconduct was not inherently unethical or based on moral turpitude.”
In the merits hearing, “Kraft argued that his selective disclosure of the draft documents to Stein was made in the ‘necessary course of business,’ an exception to the prohibition against illegal tipping,” the tribunal noted. However, it found he couldn’t rely on that exception.
In its sanctions decision, the tribunal said the penalties imposed in the case send an important signal to the industry about the need to be careful when handling and disclosing material non-public information (MNPI), even if it’s not part of an insider trading scheme.
“The fact that the tribunal will not tolerate directors’ and officers’ careless mishandling of MNPI, and the fact that such misconduct is serious, is an important message for the Street,” it said in its decision.
In the merits hearing, Kraft also attempted to challenge the provision in securities law against tipping, claiming it violated his right to freedom of expression under the Charter of Rights.
The tribunal concluded that, while the provision does violate that freedom, the infringement is justified under the Charter, and it dismissed Kraft’s constitutional challenge.