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In a stunning setback for Quebec’s securities watchdog, a judge has dismissed the insider trading case against online gambling mogul David Baazov and two associates mid-trial because of mistakes by the regulator.

Justice Salvatore Mascia of the Quebec Court on Wednesday in an oral ruling stayed insider trading and market manipulation charges against Mr. Baazov, the founder and former chief executive of Amaya Inc., over repeated failures by the regulator to properly disclose documentation to the defence. Charges were also stayed against Yoel Altman, Benjamin Ahdoot and three Ontario companies controlled by Mr. Altman.

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David Baazov, founder and former CEO of Amaya Inc. (now The Stars Group) is seen at the company’s annual general meeting in Montreal, on June 22, 2015. Mr. Baazov had been facing charges of aiding with trades while in possession of privileged information, influencing or attempting to influence the market price of Amaya securities and communicating privileged information.Christinne Muschi/Reuters

Lawyers for the accused had filed a motion calling for a stay after the latest misstep by the Autorité des marchés financiers (AMF), in which it accidentally shared with the defence more than 300,000 documents that were supposed to remain confidential and asked it to return them and pretend they were not seen. Sophie Melchers, a lawyer for Mr. Baazov, likened the request to an attempt to unscramble an egg, saying it can’t be done. Another defence lawyer, Stephanie Lapierre, said the AMF is asking “to quarantine my brain.”

It was the third request for a stay in the case, which started in late April and had begun hearing testimony. The first two requests were denied, but the judge had put the regulator on notice that he expected better disclosure.

Related: OSC weighs charges in another Amaya insider-trading case

Quebec judge refuses to stay trial for former Amaya CEO charged with insider trading

The accused said in a statement they were happy with the decision. AMF spokesman Sylvain Théberge said the regulator was disappointed and would weigh an appeal.

“The defence doesn’t expect the right to a perfect trial, but rather, the right to a fair trial,” Ms. Melchers told the court last month, citing repeated errors and sloppiness by the regulator in sharing information. “There comes a point where enough is enough.”

The regulator loses for now a major opportunity to prove its mettle. All eyes were on the institution to see if it could bring three alleged white-collar criminals to justice in what had been one of Canada’s biggest insider-trading cases.

The AFM’s failure exposes the difficulties of investigating and prosecuting this type of corporate crime. It might also raise new questions about the limits of a fragmented provincial securities regulatory system with a poor record of policing suspicious price runups in Canadian stocks before deals are announced.

The AMF says it has prosecuted about 15 insider-trading cases over the past five years, winning most of them. But it struggled early in this one, finding itself being lambasted by the judge for shoddy work.

A separate AMF investigation continues into other aspects of Mr. Baazov’s activities while he was CEO of Amaya. AMF officials say that probe is larger in scope, looking into information Mr. Baazov allegedly passed on about several impending takeover deals. It could also result in charges.

The court case centred on the takeover by Montreal-based Amaya Inc. – now known as Stars Group Inc. – of popular internet cardroom PokerStars for US$4.9-billion. The deal was made possible with the backing of Wall Street institutional investor Blackstone Group LP.

Trading in Amaya stock was frenzied in the weeks before the deal was announced in June, 2014, amid industry rumours of an impending tie-up between the two companies. The AMF had alleged Mr. Baazov, Amaya’s founder and then-CEO, and two associates, Mr. Ahdoot and Mr. Altman, conspired to try to pump up the price of Amaya stock before the takeover. It alleged the former CEO provided secret information to both men about the progress of takeover talks and that the recipients acted on the tips and traded in Amaya shares.

The Ontario Securities Commission is pursuing a probe into the actions of a group of Bay Street investment executives before Amaya’s takeover of PokerStars, including a former national sales manager with Aston Hill Asset Management Inc. who admitted he broke securities law by trading on a tip about the impending deal and tipped off someone else.

Justice Mascia delivered his ruling on Wednesday at the Montreal courthouse after the trial had been suspended for several days.

Things have not gone smoothly for the regulator since it charged Mr. Baazov and the others in March, 2016. Defence lawyers have repeatedly said the AMF charged their clients without doing sufficient legwork to gather and analyze evidence.

Defence lawyers filed a first motion to stay the charges last October after the AMF released 16 million items of data to them just three months before the trial’s previously scheduled start date of Dec. 11, admitting later some of the documents were released in error. It filed another this year, arguing a lack of timely disclosure of evidence. In a separate but related development, a Montreal rabbi sued the regulator for infringing on his family’s rights in a raid on their home linked to the investigations.

Mr. Baazov had been facing charges of aiding with trades while in possession of privileged information, influencing or attempting to influence the market price of Amaya securities and communicating privileged information. Mr. Ahdoot, a childhood friend of Mr. Baazov’s, and Mr. Altman, a consultant who advised Amaya on deals, were charged with insider trading and attempting to influence the market price of Amaya securities. The companies were also charged with similar offences.

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