INSIDER TRADING and CANADIANS IN THE NEWS

July 21, 2010

 

Unlike many recent news events, this connection to Canada is a positive one because it showcases the efforts of Canadian researches, even if not involving Canadian statistics. From the Wall Street Journal Online, July 3, 2010, by Gregory Zuckerman, here, author of The Greatest Trade Ever, called Hedge-Fund Lending Draws Scrutiny, here, refers to a “coming publication in the Journal of Financial Economics” by 4 academics, Debarshi Nandy, Nadia Massoud and Keke Song, at York University’s Schulich School of Business in Toronto, and Anthony Saunders, at New York University’s Stern School of Business. The publication tracks the short-selling of U.S. company securities and compares such activity between companies that have borrowed money from a hedge fund and companies that have borrowed money from a bank. By studying over 350 companies and the short-selling activity in the five days leading up to the public announcement of company borrowing or loan agreement amendments,  and comparing it with the 60 day period before the deal, there is material difference between the companies that borrowed from banks and those that borrowed from hedge funds. The difference could suggest that the trading activity “raises questions about whether the very firms lending money are using nonpublic information to trade against their borrowers, or whether information is leaking out to others.

I look forward to reading the full study and to learning that securities regulators are acting on this information to identify and prosecute illegal insider trading and market manipulation.

The term insider trading is not by definition an illegal activity, but that is the way it is most commonly used. A 2005 article in CBC News, here, does a great job of explaining the term, and there are many more recent articles and publications to help update the legal and regulatory landscape.

The connection to insurance – illegal insider trading is commonly alleged within securities litigation. It can help motivate early settlement, but it can also increase the possibility of personal contribution out-of-pocket payment by directors and officers to this settlement. And YES I DO MEAN IN CANADA.

My concern is that many directors do not fully understand their insurance coverage, and may be misled into believing they need a Securities Claim Insuring Agreement in order to get coverage for a securities based lawsuit and for their defence against illegal insider trading allegations. This is simply not true. Most Directors’ and Officer’s Liability or Management Liability policies, even those without a Securities Claims Insuring Agreement, will respond to a securities claim and an insider trading allegation, subject to certain exclusions and terms which cannot be fully developed here, to individual directors and officers.

The Securities Claims Insuring Agreement, commonly referred to as ‘Side C’ may actually limit coverage, because it may extend the policy limit (and there is usually only one available) to the corporate entity, thereby increasing the possibility of exhausting limits otherwise available to the individual directors or officers, or it may apply exclusionary language that is not found in a standard Side A/B policy.

The protection of corporate assets is important, but directors are not obliged to do it out of their own pocket. The insurance agreement should be quoted, with full explanation and details made available for decision purposes, but that decision needs to be an educated one. It should include additional options of very high limits of liability, excess Insured Person’s coverage, excess independent director’s coverage, full explanation of severability, non-rescindable language, priority of payments (not just the CEO determined kind), etc., etc.

Subsequent to writing this Post, I enjoyed an exchange of emails with one of the Researchers, Mr. Nandy. He offered his permission to provide a link to the research paper, here, My comment and question for Mr. Nandy was “Cracking down on insider trading is necessary for Canada to promote its securities markets, but most good research material is U.S. focused. Your research in the study suggested your review of 360 US companies, did you attempt to gather the short-selling activity in Canadian company securities, and would a similar Canadian study even be possible based on publicly available information?

 His answer did nothing to improve my comfort in the Canadian Securities Regulator regime; “Unfortunately, we do not have similar data that is publicly available for the Canadian markets.”

Feel free to contact me for more information on identifying the needs of your ‘Insureds’ and structuring appropriate insurance coverage.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers,       416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Changes to Auto Insurance Effective Sept. 1st, 2010

July 14, 2010

 

In an attempt to stabilize auto insurance rates in Ontario, the Ontario Government has introduced changes to the coverage’s within the automobile insurance policy.  As a result of these new laws you now have more choice when it comes to selecting your auto insurance coverages to best meet your individual needs. 

These changes will affect drivers buying a new policy or renewing an existing auto policy beginning September 1, 2010.

As of September 1, 2010, drivers will be able to:

•  Choose the insurance coverage that best meets their protection needs and budget
•  Customize their level of income replacement, medical, rehabilitation,
   attendant care, caregiver, housekeeping, death benefits and home
   maintenance coverage; and
•  Better integrate their auto insurance with private disability insurance
   coverage, or individual or group health insurance coverage.

We encourage clients of Mitchell Sandham Insurance Brokers to speak to their dedicated insurance advisor to review these changes and to select the coverages that meet your specific needs.  Speaking with a licenced insurance broker will help you make an informed decision regarding your auto insurance coverage.

Mitchell Sandham Insurance Brokers has created a checklist resource for our existing and new clients.  This checklist outlines the new limits of coverages that your auto insurance policy will have when it renews after September 1st, 2010.  The checklist also outlines the new options that are available to you.  Please call our office to speak with a dedicated insurance advisor at Mitchell Sandham to discuss these options.  We encourage you to make informed decisions and we are here to help you do just that!

To learn more about the auto insurance reforms, click on one of the links below for further references:

Dominion of Canada Insurance Company

Financial Securities Commission of Ontario

For further information regarding the changes to auto insurance and to speak to an independent broker, please feel free to call me directly.

Ryan Mitchell
(416)862-1750
Mitchell Sandham Group

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to rmitchell@mitchellsandham.com.


Crime / Fidelity / Bond / 3D / Employee Theft / Financial Institution Bond / Fraud Insurance

July 9, 2010

Denial of Crime Coverage for Misrepresentation

Like most types of insurance coverage there can be many names within the same family of insurance policies. I will use them indiscriminately in this post, because it helps with Search Engine Optimization.

There are also a number of terms directly associated with the Bond, including but not limited to, ‘material non-disclosure’,  omission, concealment, misrepresentation, ‘incorrect statement of material fact’, and ‘false information’, and these terms are used with respect to the application for insurance that forms part of the 3D policy (Dishonesty, Disappearance, Destruction), and for the grounds for rescission of the Fidelity policy.

Denial of coverage by way of Cancellation ab initio (from the beginning) based on alleged misrepresentation in the application for Fraud insurance is far too common in Canada. There are many precedent setting cases and many more unknown situations not determined in court. The result can be catastrophic for the insured corporation, and for the individual directors and officers who had no knowledge of or involvement in the alleged misrepresentation.

Most Crime insurance applications require the signature of the Chairman and the CEO, or next highest person if the Chm and CEO are the same person. The concern here is that alleged misrep by the highest executives of the firm will at minimum fall within American jurisprudence which follows the “sole representative” doctrine, and therefore the knowledge of such will be imputed to the principal.

However, if the board of a corporation adopted the policy to select an independent committee to review the insurance application and have a fully independent director sign the application (in addition to the executive , because the underwriter might not accept an application signed only by a non-employee of the firm), it could improve the chances that a misrep by any of the signers would fall within the exception to the principal / agent rule because the fraud would have been perpetrated on the principal not on the Insurer (see. Bowstead on The Law of Agency, 15th ed. (Toronto: Carswell, 1985), p. 414, states that the presumption that knowledge will be passed on to the principal may be nullified by proof that the agent was defrauding the principal in that transaction.) They can assert that misrep by the executive in the application was the intent to further their fraud against the principal, especially in a regulated industry where the purchase of a bond is mandatory, not optional, and therefore more difficult for the insurer to suggest the misrep in the application for the FIB by the allegedly fraudulent executive was an obvious attempt to induce the insurer to provide a policy and perpetrate a fraud against the insurer.

There is also inconsistency between insurers with respect to the questions in their applications. Some applications do not specifically ask “are you aware of any claims or potential claims”,  but they will rely on the representations regarding ‘past losses’ (whether or not there was reimbursement), or previous cancellation of a Bond or denial of coverage. Therefore, the policy improvements or limitations may be found in the application.

Risk of rescission, cancellation, non-renewal or claim denial is present within any policy renewal, even if staying with the same insurer, because the application is completed each year. This risk increases if the buyer does not cover all their bases when changing insurance carriers, or when increasing the limits of liability. Some insurers will ask for an ‘increased limits warranty statement’ asking if the buyer knows of any situation which could lead to a claim under the proposed policy. Others will rely on the representations made in the renewal or new business application.

Current regulatory changes in Canada will significantly increase this risk because the Canadian Securities Administrators’ National Instrument 31-103 has come into effect, requiring many financial institutions (investment dealers, investment advisors and investment funds) to register or re-register, demanding new bond coverage in addition to working capital and other requirements. The result is companies buying new policies, where they never had before, or buying substantial increases in their limit (in some cases the $200,000 limit needs to be $10 million.)

The big concern is that poor explanation or negotiation of the new policies or new limits will not be known until a loss is discovered and a claim is made. Only at this point will you realize that your $5,000 premium savings cost you $5 million in insurance coverage.

For risk management techniques, loss control tools, and coverage enhancements, please feel free to call me directly.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.