OSC panel dismisses insider trading allegations against former ATI Technologies CEO

On October 14, 2005 , a three-member panel of the Ontario Securities Commission dismissed the charges of insider trading brought by OSC staff against Kwok Yuen Ho, a former CEO of ATI Technologies Inc., and his wife, Betty. In its reasons dismissing the allegations, the OSC panel highlighted the serious shortcomings in the evidence adduced by OSC staff in support of their serious allegations against Mr. and Mrs. Ho.

The insider trading charges stemmed from decisions by Mr. and Mrs. Ho to sell and donate to charity almost 500,000 ATI shares worth more than $7 million a month before ATI’s May 24, 2000 announcement of a shortfall in its forecasted revenue and earnings for the third quarter of 2000. ATI shares promptly lost 52% of their value after that announcement. The OSC staff alleged insider trading against Mr. and Mrs. Ho under s. 76(1) of the Ontario Securities Act claiming that, as ATI insiders, they improperly sold or donated their ATI shares at a time when they possessed a material fact not available to the public, namely, knowledge of a shortfall in ATI’s projected revenue for Q3-2000. OSC staff claimed that even the donation of ATI shares to charity ran afoul of the Securities Act due to the improper tax benefit Mr. Ho enjoyed in getting rid of his shares before their value dropped.[1]

An allegation of insider trading is a serious one that, if proven, can have serious consequences for its target. Its seriousness is highlighted by the fact that the regulatory prohibition under s. 76(1) now co-exists with new Criminal Code provisions making illegal insider trading a criminal offence carrying a maximum penalty of 10 years in prison. The case against Mr. and Mrs. Ho was not a criminal proceeding. However, the OSC panel was alive to the seriousness of the allegations and, as such, applied a standard of proof requiring OSC staff to adduce “clear and convincing proof based on cogent evidence” of their allegations of insider trading. This standard applied to both of the key elements of the allegation: 1) that a material fact not known to the public existed at the time of the sale; and 2) that Mr. and Mrs. Ho each had actual knowledge of that fact when they sold their shares.

Despite its high burden of adducing “clear and convincing proof” of its allegations, OSC staff called no witnesses with direct knowledge of the facts at issue such as, for example, persons who were actually employed by ATI during the relevant period. Instead, OSC staff’s only witnesses were an OSC investigator, an expert on the income tax treatment of charitable donations, and a market analyst who followed technology stocks. In contrast, Mr. and Mrs. Ho both testified and called several other ATI employees as witnesses.

To prove its case, OSC staff filed and attempted to rely upon large books containing emails and other documents, many of which were authored by ATI staff who were not called to testify. Normally it contravenes the rule against hearsay evidence to simply file a document without calling its author as a witness. However, OSC staff submitted that legislation relaxing the rules of evidence in regulatory and administrative proceedings[2] allowed them to simply file documents without calling witnesses to prove their contents. While the tribunal admitted the documents into evidence, it made it clear in its decision that basic rules of natural justice and the right to a fair hearing required that little weight be given to documents authored by persons not called as witnesses.

The OSC panel also rejected OSC staff’s attempt in its closing submissions to argue a new theory regarding what Mr. and Mrs. Ho knew, or must be inferred to have known, at the time they sold their shares. The OSC panel found that it was not open to the OSC staff to attempt to diverge from the 2003 Statement of Allegations that OSC staff had put forward and steadfastly relied upon until the evidence at the hearing was completed. The OSC panel went on to state that, in any event, the new theory advanced by OSC staff was not supported by the evidence.

The OSC panel accepted the evidence of Mr. and Mrs. Ho regarding their rationale for the disposition of their ATI shares and accepted that they did not know of the shortfall in ATI’s projected revenue at the time. OSC staff put forward no evidence to rebut that testimony. Likewise, OSC staff’s evidentiary record did nothing to rebut the testimony of the witnesses called on behalf of Mr. and Mrs. Ho that the revised revenue projection for Q3-2000 was not even a fact in existence when they sold their ATI shares.

The OSC panel found that OSC staff had proven neither of the two key elements of insider trading and, as such, there was little doubt the allegations of insider trading against Mr. and Mrs. Ho had to be dismissed.

Published December 9, 2005