Cheng bought no Masonite shares: Court

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“It affirms our decision to prosecute cases that are complex and notoriously hard to detect.”

Yet the Divisional Court ruling also sets aside the OSC panel decision against Cheng, who was arguably a bit player in the Finkelstein saga. The court said the regulator’s hearing panel made several errors that led it to improperly conclude that Cheng knew or ought to have known he had received improper, inside information. The Divisional Court decision reverses the $200,000 penalty and $25,000 in costs that had been imposed against Cheng.

“The evidence put before the OSC demonstrated that Mr. Cheng was an outsider who traded on a rumour,” said lawyer Janice Wright, who with Greg Temelini represented Cheng. “Mr. Cheng is extremely pleased with the result and the fact that after so many years of living with these allegations, he has been fully vindicated.”

The OSC ruled in March 2015 that in 2004, Finkelstein accessed his former law firm’s computer system and learned of an upcoming transaction in which building products company Masonite would be bought by a private equity firm. Finkelstein, the panel found, did not trade on the information himself, but passed a tip to his friend, Azeff. Azeff, in turn, passed the tip to Bobrow and to another individual not charged in the case. This uncharged individual provided the information to Miller, who then passed the tip to Cheng.

The court said the OSC panel failed to connect enough dots to establish that Cheng violated Ontario’s Securities Act.

During a compelled interview with OSC investigators, Cheng said Miller — a “funny guy” he knew through work — had passed to him “rumours” that Masonite might be in play. Yet the panel erred in concluding that Cheng did not conduct his own due diligence with respect to the rumoured transaction, the appellate court found. Rather, the court held, his standard practice was to check Newswire reports, review the stock chart, and speak to others about the company.

Cheng told OSC investigators that he weighed the pros and cons and concluded there would be “no downside risk” to an investment in Masonite, even if the buyout deal fell through. “That statement hardly constitutes a ringing endorsement of the reliability of the information,” writes Justice Ian Nordheimer in the Divisional Court ruling.

The court also said that the panel erred in finding that after hearing the Masonite rumour, Cheng “precipitously bought a large position for himself and family members.” The court found that Cheng actually bought no Masonite shares for himself. He did recommend the company to family members. They bought the Masonite shares in small amounts that were consistent with their previous trading patterns.

“The cumulative effect of these errors renders the panel’s conclusion regarding Cheng both an unsafe, and an unreasonable, one,” Nordheimer concludes.