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,

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


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