An Act to Amend the Criminal Code (capital markets fraud and evidence-gathering)

HRinfodesk---Canadian Payroll and Employment Law, April 2004

Amendments to the Criminal Code which impose criminal liability for corporate wrongdoing received Royal Assent by the Senate on March 29, 2004. When the new legislation comes into force, it will expose organizations and their employees to criminal liability for insider trading, tipping and whistleblower retaliation.

Bill C-13, An Act to amend the Criminal Code (capital markets fraud and evidence-gathering), introduces new Criminal Code offences for insider trading and employment-related threats or retaliation, new sentencing provisions for capital markets fraud, and production orders to assist investigators. Bill C-13 was introduced in legislature February 12, 2004 to replace Bill C-46 which was passed in the House of Commons last November 5, 2003 before the change in government leadership. Bill C-13 is awaiting a date to come into force by Orders in Council.

There are mainly three Criminal Code offences under Bill C-13 in addition to existing prohibitions against insider trading under provincial securities laws and the Canada Business Corporations Act, but they differ substantially from insider trading prohibitions under these legislations.

1) Insider Trading

Under the new offence, a person would be guilty of an offence if he/she directly or indirectly buys or sells a security while knowingly using "inside information" that they:

* possess by virtue of being a shareholder of the issuer of that security;
* possess by virtue of or obtained in the course of a business or professional relationship with the issuer of that security;
* possess by virtue of or obtained in the course of a proposed take-over, reorganization, amalgamation, merger or similar business combination with that issuer;
* possess by virtue of or obtained in the course of their employment, office, duties or occupation with the issuer or a person referred to in (a) to (c) above; or
* obtained from a person who possesses or obtained the information in a manner referred to in (a) to (d) above.

"Inside information" is defined as information relating to or affecting the issuer of a security or a security of the issuer that has not generally been disclosed and could reasonably be expected to significantly affect the market price or value of a security of the issuer.

The Criminal Code offence takes a much broader approach than provincial or territorial securities legislation and the Canada Business Corporations Act. The offence will apply throughout Canada, without regard to which province or territory in which the trade occurred, the issuer’s jurisdiction of organization, and where and whether the issuer’s securities are listed for trading on a stock exchange or are privately held. The definition of "inside information" include more information than those covered under securities law prohibitions against trading with knowledge of undisclosed material information, which includes "material fact" and "material change".

Under the new criminal offence, the onus is on the Crown to prove that the person possessed insider information and knowingly used and exploited such information in executing the trade in question.

2) Tipping

Bill C-13 makes it an offence for those who possess or obtain inside information in the manner described in the Insider Trading section, to knowingly convey that information, while also knowing there is a risk that the recipient will use the information to buy or sell, directly or indirectly, a security to which the information relates or convey the information to someone else who may do so.

The Crown is required to prove that the person knowingly conveyed the information with the knowledge that there was a risk that the recipient would use the information to trade in the security, or would convey the information to another person who might trade in the security. However, the scope of the requirement that the person know that there is such a risk remains unclear.

3) Whistleblowing

A new offence under Bill C-13 prohibits an employer (or a person acting on behalf of an employer or in a position of authority in respect of an employee) from taking any disciplinary measure against or adversely affecting in any way the employment of an employee, or threatening to do so, with the intent to:

Compel the employee to abstain from providing information to a law enforcement authority about an offence that the employee believes has been or is being committed by the employer, an officer, director or employee of the employer; or

Retaliate against the employee because the employee has provided information to a law enforcement authority.

This offence is broadly phrased and does not provide any exceptions to the meaning of "information" nor the manner in which the information is obtained. Specifically, this "information" could include privileged information and the employer could potentially be liable for retaliating against an employee who unlawfully steals such information and discloses it to law enforcement officials.

Enforcement

Under Bill C-13, production orders would be added to the Criminal Code, allowing investigators to obtain pertinent documents or data from third parties (those not under investigation) within a specified time period. These orders would be similar to search warrants but more efficient during investigations and less disruptive for the holder of the documents or data.

Maximum sentences would be raised from 10 to 14 years’ imprisonment for current Criminal Code offences of fraud and fraud affecting the public market. The maximum prison term for fraudulent manipulation of stock exchange transactions would be raised from five to 10 years. The new insider trading offence would carry a maximum imprisonment sentence of 10 years, and the new employment related threats or retaliation offence would carry a five years’ imprisonment maximum. However, Courts would have discretion and authorization to impose harsher penalties for more serious offences in the presence of specified aggravating factors.

The Courts will consider aggravating circumstances as being:

a) the value of the fraud committed exceeded one million dollars;
b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a financial market;
c) the offence involved a large number of victims; and
d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community

What employers should do

The criminal liability of organizations is increasing rapidly, and you and your organizations are cautioned to review or establish policies, standards and procedures that are actually effective to reduce the likelihood of the organization and its representatives committing an offence under these new liabilities. Ensure that all employees including management follow the rules.

For more information on Bill C-13:

BILL C-13 (As passed by the House of Commons)

By Yosie Saint-Cyr, Editor at HRinfodesk

Published on HRinfodesk---Canadian Payroll and Employment Law

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