Insider trading fines. The co-founder of a Southwestern Ontario cannabis company was ordered to pay $350,000 for disclosing confidential information about the company’s expansion plan to a friend, who engaged in insider trading of its shares.
The Capital Markets Tribunal, an independent division of the Ontario Securities Commission, determined Michael Kraft, the then-chairperson of WeedMD’s board of directors, emailed friend and businesses associate Michael Stein copies of the draft agreements of the company’s plan to lease a Strathroy greenhouse on Oct. 23, 2017.
Stein, a business consultant and former banker who wasn’t working in any capacity for WeedMD, now known as Entourage Health, bought $68,525 worth of WeedMD shares a day before the greenhouse deal was disclosed — a move that significantly increased the company’s production capacity — and sold those shares over the next two days for a profit of $29,345.
Kraft was fined $200,000 and ordered to pay $150,000 in costs to the commission, according to a decision by the three-person panel released last week.
“Kraft’s tip to Stein was deliberate, and not done in error. Kraft did not turn his mind to whether the disclosure was in the necessary course of business,” the panel wrote in its decision.
“Kraft’s misconduct would have been less egregious had he considered whether sharing the information with Stein was in the necessary course of business and made an error rather than the circumstances before us.”
Stein was fined $150,000, ordered to pay $50,000 in costs and repay the $29,345 he made from trading WeedMD shares. Both men are also banned from being the director or officer of a company — Kraft for four years and Stein for three. They are also banned from trading securities for three and four years, respectively, with some exceptions.
The commission sought 10- and eight-year capital markets bans for Kraft, 60, and Stein, 64. Both men pushed for smaller fines and opposed the trading and director bans, arguing they would “disproportionately impact” them because of their employment in consulting and as company directors.
Stein also requested that materials he filed at the sanctions hearing be kept confidential because they included information about his health and personal circumstances, but the commission took issue with the scope of the proposed redactions.
“Consistent with the approach taken in other tribunal decisions, we decided to allow confidentiality redactions to Stein’s materials in the public record pertaining to specific symptoms, diagnoses and medical treatment,” the panel wrote. “This approach strikes the appropriate balance between preserving Stein’s dignity and the public interest in having open hearings.”
The tribunal considered Kraft and Stein’s co-operation with the commission’s investigation and that they accepted responsibility for their actions.
Kraft argued that he was “careless on a single occasion” and was acting within his authority at WeedMD, adding he expected Stein to keep information shared with him confidential. Stein argued that his breach was “isolated” and the commission’s allegation that Kraft tipped him off to the date and content of the expansion announcement was dismissed.
Stein testified at the 10-day hearing that he bought the WeedMD shares the day before the public disclosure because of progress in Bill C-45, the law legalizing recreational pot that came into effect Oct. 17, 2018. The tribunal found Stein’s evidence “unsatisfactory” and noted he didn’t buy any other pot stocks that day.
The tribunal ruled that the pair’s misconduct was serious but isolated and Stein’s $29,345 return wasn’t significant.
“We agree that Kraft’s misconduct was a single act of tipping and was not motivated by personal or professional advantage or a desire to permit Stein to profit through insider trading,” the panel wrote. “As such, his misconduct was qualitatively different than the misconduct in some other cases involving tipping where the respondents are motivated by personal or professional or other advantage.”
Lawyers for Kraft and Stein didn’t immediately respond to a request for comment Monday.
The OSC previously sanctioned three Southwestern Ontario men, one of them a former WeedMD production worker, in an unrelated case connected to the cannabis company’s Strathroy greenhouse deal.