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Mitchell Finkelstein, right, is shown at the Ontario Securities Commission in 2011.Brett Gundlock/The Globe and Mail

Bay Street lawyer Mitchell Finkelstein has launched an appeal of an Ontario Securities Commission ruling that he tipped a long-time friend about pending takeover deals, arguing the regulator made "impermissible inferences" in a ruling "based entirely on circumstantial evidence."

Lawyers for Mr. Finkelstein filed appeal arguments with the Ontario Divisional Court, asking it to overturn the OSC's findings from March 24, 2015, or to reduce the penalties it imposed in the case.

The appeal, dated Feb. 1, argues the OSC had no direct evidence to prove Mr. Finkelstein tipped long-time friend and Canadian Imperial Bank of Commerce investment adviser Paul Azeff about three takeover deals, saying the ruling relied entirely on circumstantial evidence that contained too many gaps to prove guilt.

"Making material findings of fact in the absence of the necessary evidence to support such findings constitutes a palpable and overriding error," the appeal says.

The OSC has not yet filed its response to the appeal arguments.

Mr. Finkelstein's case is the first appeal to be heard in Ontario in a tipping case involving circumstantial evidence since a widely watched Alberta appeal ruling in another insider trading and tipping case known as "Walton." That case involved allegations that a director of Eveready Inc. traded on information about a potential takeover of the company and tipped others about the deal.

The Alberta Court of Appeal overturned three of five convictions handed down by the Alberta Securities Commission in the case, and reduced sanctions for the other two, on the grounds that the ASC drew unsupported conclusions from the circumstantial evidence in the case. The decision was seen as a blow for the ASC in meeting the necessary burden of proof to secure convictions in future insider trading cases, where there is often no outright proof of what was said during an alleged tipping conversation.

Mr. Finkelstein's appeal is expected to be a similar test of the extent to which the OSC can piece together circumstantial evidence about the timing of phone calls with stock trading records to reasonably conclude Mr. Finkelstein tipped Mr. Azeff.

"The commission in this case, much like the Alberta commission in Walton, erred by drawing impermissible inferences, misapprehending the evidence, failing to take into account relevant material and exculpatory evidence, and dismissing testimony in the absence of clear (or any) credibility findings," the appeal argues.

The OSC ordered Mr. Finkelstein to pay a $450,000 administrative penalty and $125,000 to cover OSC costs. Mr. Finkelstein argues that if the decision is upheld in the case, then the penalty should at least be cut to $75,000 and the costs reduced to a maximum of $50,000, saying the OSC's penalty is "excessive and unnecessary."

Mr. Azeff and colleague Korin Bobrow are also both appealing the OSC rulings in their cases. The OSC ruled both men engaged in insider trading and tipping, but their appeal argues there was "no smoking gun" in the case to prove misconduct, and instead the OSC's case was "based on inferences."

The appeal alleges the OSC began with evidence of unusual trading patterns by other people "at the bottom of the chain" and "speculated" that their trading pattern proved that the information must have come from Mr. Azeff or Mr. Bobrow.

"To arrive at this finding (and all other findings of wrongful conduct), the commission was required to fill evidentiary gaps with speculation," they argue.

The men argue they offered "an equally plausible innocent explanation" for their trading activity that was "supported by clear and cogent evidence."

"Yet the commission ignored, misapprehended the significance of, or downplayed, all such evidence."

Mr. Azeff and Mr. Bobrow are also asking the court to reduce their penalties, saying the 10-year bans they received from working in the financial industry are "unreasonable" and amount to a "de facto lifetime ban."

Mr. Azeff was also ordered to pay a penalty of $750,000 on personal trading profit estimated at $49,996 in the case, while Mr. Bobrow was ordered to pay $300,000 despite allegedly earning a profit of $10,217 on his trading.

Their appeal calls the penalties "disproportionate and punitive" and says they are far higher than other insider trading cases, where penalties are typically between two and four times the profit earned.

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