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Canada's latest insider trading case in detail

Supplies are unloaded at the Baffinland Iron Mines' Mary River Camp on Baffin Island

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The latest insider trading and tipping case brought forward by the Ontario Securities Commission sent ripples through the mining world. Not only did it allege these actions took place in a cross-border M&A deal, but the two defendants, Jowdat Waheed and Bruce Walter, are big names in the mining industry. In addition to many other things, both used to be senior execs at Sherritt International Corp.

A brief overview of the case can found in the Globe's story here. But it's worthwhile to explain more of it in detail to get at the heart of what the OSC is alleging.

For some background, a company called Baffinland Iron Mines used to own the rights to the massive Mary River iron ore deposit on Baffin Island in northern Canada. As a small firm, it didn't have the funds necessary to develop the project, so it opened up its books in hope of luring a major corporation to either buy it out, or work as a joint venture partner.

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The wish came true in September 2010 when Nunavut Iron Ore Acquisition In.c, run by Mr. Waheed and Mr. Walter, launched a hostile takeover bid. However, Baffinland wasn't so happy because it was on the verge of striking a deal with European steel giant ArcelorMittal. Angry with Nunavut, Arcelor put in its own bid, and the two firms fought back and forth for a few months. In the end, they came together with a joint offer in which Arcelor agreed to buy 70 per cent of Baffinland, and Nunavut agreed to buy the other 30 per cent.

Now for the OSC's case. The allegations centre on Mr. Waheed's position as a consultant for Baffinland from Feb. 18, 2010, to April 30, 2010. During this time he was privy to a lot of private information and the OSC argues he acted contrary to the public interest by using it to both buy a toehold position of 20 million shares of Nunavut in September 2010, and then launch a takeover bid with Mr. Walter a few weeks later.

"The hostile take-over bid was launched by them knowing it would disrupt the joint venture negotiations between Baffinland and ArcelorMittal. Waheed and Walter knew that if the Nunavut bid was successful, Nunavut would have the opportunity to either sell the Mary River Project to ArcelorMittal outright or negotiate a joint venture with ArcelorMittal as Baffinland was attempting to do," the OSC said.

"Waheed and Walter also knew they had an effective hedge in the event that ArcelorMittal decided to enter into the auction process for Baffinland, as they knew that if ArcelorMittal made a competing bid for Baffinland that was successful, Nunavut could sell its toehold position into the successful ArcelorMittal bid and make itself a large profit."

The OSC also argues that Mr. Waheed acted contrary to the public interest when he told Mr. Walter about ArcelorMittal's intentions in the summer of 2010. "It was extremely important to ArcelorMittal, as known to Baffinland insiders and Waheed, that its identity as a potential strategic partner remain confidential," the OSC argues.

Plus, as a consultant Mr.Waheed had access to all of Baffinland's files and materials, such as exploration plans, permitting information and budgets. This information was used to launch his own takeover bid, which the OSC argues breaks the two-year confidentiality agreement he had signed with Baffinland.

These arguments could be contentious. Though the OSC says Arcelor's negotiations were private, in an interview with Mining Weekly on August 31, 2010, Baffinland chief executive officer Richard McCloskey said: "We are talking to large mining companies. We are also talking to European steel makers."

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Moreover, because Baffinland's books had been open to potential suitors, it is likely that many firms had access to at least some of the information that Mr. Waheed was privy to as a consultant. (The extent of what they had access to is not publicly known just yet.)

Yet the OSC laid out some specifics. As an insider, Mr. Waheed had access to the proposals and term sheets ArcelorMittal had put forward to Baffinland before Nunavut launched its hostile bid. The prices and details disclosed in these documents typically aren't publicly known. But because Mr. Waheed had seen them, the OSC argues that he had a better understanding of where to price his takeover bid.

The counter argument so far is that Mr. Waheed's consulting position had always been made public. In its very first takeover bid circular, Nunavut discloses the length of time that he was a consultant, and pointed out that "Mr. Waheed does not believe that he is in possession of any material information with respect to Baffinland that has not been publicly disclosed."

Whether or not that belief holds true appears to be to crux of the case right now.

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