In late May 2022, in one of the first decisions of the new Ontario Capital Markets Tribunal, the Tribunal issued its decision in Kitmitto (Re), an insider tipping and trading case. In Kitmitto, Ontario Securities Commission (OSC) Staff alleged the existence of a tipping chain in which multiple individuals acquired material non public information (MNPI) from others in the chain relating to a plan by Amaya Gaming Group Inc. (Amaya) to acquire Oldford Group Limited, the owner of the PokerStars brand. Madj Kitmitto, an Aston Hill analyst, was alleged to have been at the top of the chain. OSC Staff alleged that he traded shares of Amaya after receiving the MNPI, and passed the MNPI along to other individuals in the chain, who in turn traded and passed along the information to others who engaged in the same conduct.
The Tribunal’s decision is significant for a number of reasons including the following:
- It is one of the first decisions of the new Ontario Capital Markets Tribunal, a division of the Ontario Securities Commission separate from its new board of directors and Staff;
- The panel of 3 Adjudicators split on when information about a potential transaction constitutes a material fact, and on the inferences that could be drawn from the circumstantial evidence relied upon by OSC Staff. Split decisions of Hearing Panels of the OSC were extremely rare; and
- Adjudicators Williamson and Hayman provided guidance on the circumstances in which it is appropriate for OSC Staff to make a “standalone” allegation that conduct was not in the public interest.
When Does Information about a Potential Transaction Become MNPI?
A key issue in the case was whether, and at what point, information about Amaya’s plan to acquire the PokerStars business constituted a material fact.
The Tribunal members were unanimous in agreeing that neither the information that Kitmitto received from a broker on April 25, 2014, that Kitmitto could meet Amaya management and be brought over the wall about a “potential transaction” if he signed a non-disclosure agreement (NDA), nor information that he received on April 28 that Amaya was “consider[ing] a strategic transaction” constituted a material fact and as such did not constitute MNPI. Information that there was a potential transaction or that Amaya was considering a strategic transaction could not reasonably be expected to have a material effect on Amaya’s share price because there was still uncertainty and a lack of specificity about the potential transaction.
However, in a rare split decision, the Adjudicators disagreed about whether information that Kitmitto received thereafter was material. They agreed that on April 29, 2014, Kitmitto met with Amaya management, learned that Amaya had negotiated the acquisition of PokerStars and the details of the Acquisition. At the meeting a slide deck was presented which included the details as to the identity of the target (PokerStars), the purchase price (US $4.3 billion), a breakdown of funding sources (cash, debt financing, offering of convertible preferred shares, equity offering), the involvement of Deutsche Bank, Barclays, Macquarie, Blackstone and GSO Capital Partners LP, US $150 million of indicated demand for the equity offering at $20 per share, a “green light” given by the New Jersey gaming regulator for PokerStars to operate there after the transaction and a timeline with an anticipated announcement date of May 12, 2014.
Adjudicators Williams and Hayman found that that information about Amaya’s acquisition of PokerStars (Acquisition) constituted a material fact :
“While some of these facts were not 100% certain at the time and the transaction was contingent on certain steps and financing being put in place and finalized…considering the players involved and the magnitude of the transaction, there was a considerable indicia of interest in this transaction at the time and information about the potential Acquisition was material.
As such the information about the Acquisition constituted MNPI. It was accepted that the information about the Acquisition had not been generally disclosed to the market.
Adjudicator Zordel disagreed. In her view, the information received at the April 29 meeting did not yet constitute MNPI:
“[…] there was still uncertainty with respect to the deal, including that Amaya did not have a firm deal, and the dealers had not confirmed enough subscriber support to raise the required funds. Because of this uncertainty, and the fact there were many conditions yet to be fulfilled and different sources of financing transactions that needed to be completed, and because there was the possibility that parties could walk away given there was no signed agreement for the deal and no shareholder voting support agreements, I find that this did not yet constitute MNPI.”
“A person trading on this information would be trading almost entirely on speculation. […] I find that the slide deck was “aspirational” of a potential deal; but there was nothing nailed down in it, except maybe some bank and principal shareholder conditional financing amounts, which were not confirmed and were subject to change.”
“[…] there was no agreement that Amaya could consider press-releasing at this point because they did not have the money lined up to do the deal. They didn’t even have a term sheet or subscription agreement with them. It wasn’t clear whether it was a private placement or prospectus offering that Amaya would do. It also was not clear what shareholder and regulatory approvals would have to be obtained by the parties. The purpose of the April 29 meeting was early “testing the waters”. Accordingly, this did not yet meet the threshold for materiality.”
Guidance on Standalone Public Interest Allegations
In their reasons, Adjudicators Williamson and Hayman provided guidance on the circumstances in which it is appropriate for OSC Staff to make a “standalone” allegation that conduct was not in the public interest, indicating that Staff ‘s Statement of Allegations must establish the basis for why the alleged conduct justifies a standalone finding, either because it “engages an animating principle of the Act and/or is abusive [of the capital markets].”
In this case, they found that Staff had established that the conduct of the respondent, Steven Vannatta, who was a portfolio manager at Aston Hill and registered with the OSC, warranted a standalone finding that his conduct was contrary to the public interest due to his breaches of the prohibitions on tipping and insider trading in the Act. Vannetta’s circumvention of his employer’s compliance function to conceal his trading in Amaya directly engaged fundamental principles of securities regulation that require the maintenance of high standards of fitness and business conduct by market participants. As a registrant, Vannatta was held to a higher standard of conduct. The fact that Vannatta hid his trading from his employer was also abusive of the capital markets.
Whether the split decision of the Adjudicators heralds a new approach to the adjudication of enforcement cases brought by OSC Staff remains to be seen.