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ALBERTA SECURITIES COMMISSION

DECISION

Citation: Kapusta, Re, 2011 ABASC 322 Date: 20110607

Stephen Kapusta, Neil Holmes, Mark Birchard, Dino Zelantini, Michael Doty and Indraneel Raychaudhuri

Panel: Stephen Murison Beverley Brennan, FCA Karen Prentice, QC

Appearing: Liam Oddie for Commission Staff

Edward Halt, QC

for Stephen Kapusta Lillian Pan and Michael Whiting

for Neil Holmes, Mark Birchard, Dino Zelantini, Michael Doty and Indraneel Raychaudhuri

Submissions Completed: 7 March 2011

Date of Decision: 7 June 2011

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Table of Contents

I.  INTRODUCTION ............................................................................................................ [1] 

II.  EVIDENTIARY MATTERS A.  General ...................................................................................................................... [6] B.  Expert Witnesses ..................................................................................................... [13] 

III.  FACTUAL BACKGROUND A.  Canext and the Respondents 

1.  The Company .............................................................................................. [22] 2.  Canext's Business ........................................................................................ [25] 3.  Certain Roles and Functions at Canext ....................................................... [27] 4.  Canext's Disclosure Policy .......................................................................... [33] 5.  Canext Share Trading Generally ................................................................. [41] 

B.  Events In and Around (or Pertinent to) the Relevant Period 1.  Activity on the Ground; Certain Management and Board Activity 

(a)  Before the Relevant Period ................................................................. [49] (b)  Plans for an Offset Well ...................................................................... [54] (c)  Drilling and Early Results of the 10-32 Well ..................................... [56] (d)  A Third Party's Reaction in Mid-January 2008 .................................. [67] (e)  Activity Continues in January 2008 .................................................... [75] (f)  The January Board Meeting ................................................................ [79] (g)  Events from Early to Mid-February 2008 ........................................... [90] (h)  The February Board Meeting ............................................................ [107] (i)  The February Release........................................................................ [120] (j)  Events in Early March 2008.............................................................. [130] (k)  Plans for Another News Release ....................................................... [133] (l)  The March Release............................................................................ [153] 

2.  10-32 Well Oil Production Overview ....................................................... [162] 3.  Analysts' Research Reports ....................................................................... [166] 

C.  The Respondents' Purchases and Sales of Canext Shares ..................................... [180] 1.  Kapusta ...................................................................................................... [181] 2.  Holmes ...................................................................................................... [188] 3.  Birchard ..................................................................................................... [194] 4.  Zelantini .................................................................................................... [198] 5.  Doty ........................................................................................................... [208] 6.  Raychaudhuri ............................................................................................ [215] 7.  Blackout Queries in March 2008: Kapusta's Recollection ....................... [223] 8.  Observations on the Respondents' Trading ............................................... [225] 

D.  Application of the Disclosure Policy .................................................................... [226] 

IV.  ANALYSIS A.  The Allegations ..................................................................................................... [231] B.  Applicable Provisions of the Act .......................................................................... [232] 

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C.  Issues for Determination ....................................................................................... [237] D.  Material Fact or Material Change? ....................................................................... [239] 

1.  Objective Test ........................................................................................... [240] 2.  Timing of Materiality ................................................................................ [241] 3.  Grounds Advanced by the Parties for their Positions on Materiality ........ [243] 4.  Analysis on Materiality 

(a)  Weaknesses in the Parties' Positions ................................................. [250] (b)  Use of Hindsight ............................................................................... [255] (c)  Accumulation of Information............................................................ [257] 

(i)  December 2007 ........................................................................ [262] (ii)  Early to Mid-January 2008 ....................................................... [264]  (iii)  Mid-January through February 2008 ........................................ [269] (iv)  Early March 2008 or Throughout the Relevant Period ............ [276] (v)  Findings on Materiality ............................................................ [279] 

E.  When Was the Material Information Generally Disclosed? 1.  Respondents Rely on the February Release .............................................. [282] 2.  Finding on the November 2007 News Release and Investor Presentation ............................................................................................... [288] 3.  Finding on the February Release Disclosure ............................................ [290] 4.  Reasons for Reticence of No Assistance ................................................... [295] 5.  First General Disclosure: The March Release .......................................... [297] 

F.  Corroboration of Materiality and General Disclosure 1.  Sources of Corroboration .......................................................................... [302] 2.  Content and Message of the March Release ............................................. [303] 3.  Capital Market Analysts' Responses to the March Release ...................... [304] 4.  Market Trading Response to the March Release ...................................... [310] 5.  Conclusion on Corroboration .................................................................... [315] 

G.  The Respondents' Respective States of Knowledge 1.  Knowledge of the Material Information ................................................... [316] 2.  Knowledge of the March Release ............................................................. [322] 

H.  Consequences of Findings on the Issues ............................................................... [327] 1.  Kapusta ...................................................................................................... [328] 2.  Holmes ...................................................................................................... [330] 3.  Birchard ..................................................................................................... [332] 4.  Zelantini .................................................................................................... [334] 5.  Doty ........................................................................................................... [337] 6.  Raychaudhuri ............................................................................................ [340] 7.  Conclusions on Respondents Summarized ............................................... [342] 

I.  Defences ................................................................................................................ [344] 1.  General ...................................................................................................... [345] 2.  Reasonable Mistake of Fact ...................................................................... [349] 

(a)  Raychaudhuri .................................................................................... [350] (b)  Doty ................................................................................................... [353] (c)  Zelantini ............................................................................................ [357] (d)  Kapusta.............................................................................................. [360] (e)  Conclusion on "Mistake of Fact" ...................................................... [366]

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3.  Due Diligence ........................................................................................... [367] (a)  Doty ................................................................................................... [370] (b)  Zelantini ............................................................................................ [376] (c)  Raychaudhuri .................................................................................... [382] (d)  Kapusta.............................................................................................. [389] (e)  Conclusion on "Due Diligence" ........................................................ [393] 

4.  Business Judgment Rule ........................................................................... [394] 5.  Conclusion on Defences ............................................................................ [398] 

J.  Conclusions on Contraventions Summarized ....................................................... [399] K.  Conduct Contrary to the Public Interest ................................................................ [400] L.  General Lessons .................................................................................................... [405] 

V.  CONCLUSIONS AND NEXT STEPS ........................................................................ [407] 

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I. INTRODUCTION [1] This is a case of alleged illegal insider trading. [2] It was asserted by staff ("Staff") of the Alberta Securities Commission (the "Commission") that several individuals (the "Respondents") – Stephen Kapusta ("Kapusta"), Neil Holmes ("Holmes"), Mark Birchard ("Birchard"), Dino Zelantini ("Zelantini"), Michael Doty ("Doty") and Indraneel Raychaudhuri ("Raychaudhuri") – while in a special relationship with Canext Energy Ltd. ("Canext"), purchased shares in Canext ("Canext Shares") with knowledge of an undisclosed material fact or material change, contrary to section 147(2) of the Securities Act, R.S.A. 2000, c. S-4 (the "Act") and the public interest. [3] Staff's allegations were set out in a notice of hearing dated 3 May 2010 (the "Notice of Hearing"). The hearing into the merits of the allegations (the "Merits Hearing") began in November 2010 and continued into December. We heard testimony from all of the Respondents and from others and received a considerable volume of documentary evidence, followed by a series of written and oral submissions on behalf of the parties. [4] For the reasons set out below, we find that four of the Respondents – Kapusta, Zelantini, Doty and Raychaudhuri – engaged in illegal insider trading, contrary to both section 147(2) of the Act and the public interest. The allegations against Holmes and Birchard are not sustained. [5] This proceeding will now move into a second phase, for the determination of whether, or what, orders ought to be made against Kapusta, Zelantini, Doty and Raychaudhuri. II. EVIDENTIARY MATTERS A. General [6] The task of the panel in this phase of the proceeding is to determine the merits of the allegations levelled in the Notice of Hearing – whether Staff have proved their allegations. Such proof requires evidence "sufficiently clear, convincing and cogent to satisfy the balance of probabilities test" (F.H. v. McDougall, 2008 SCC 53 at para. 46). That test is satisfied if, and only if, the existence or occurrence of an alleged fact required to be proved is more probable than its non-existence or non-occurrence. [7] In determining the merits of the allegations we consider, in respect of each piece of evidence received, both the content of that evidence (or what it appears to demonstrate) and the weight it should appropriately be given. [8] To illustrate the last point, the documentary evidence included (i) transcripts of interviews (the "Investigative Interviews") of each Respondent and of another individual, all conducted under oath or affirmation by Staff in the course of their investigation, and (ii) an undated Statement of Agreed Facts executed on behalf of Staff and all of the Respondents (the "Agreed Facts"). The Investigative Interviews and the Agreed Facts were admissible under sections 29(e) and (f) of the Act, which provide that the Commission "shall receive that evidence that is relevant to the matter being heard" and that "the laws of evidence applicable to judicial proceedings do not apply" to Commission enforcement proceedings. It remained to be determined what weight to give to each.

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[9] The Agreed Facts were put forward with the knowledge and informed consent of each party to this proceeding. We accept the statements contained in the Agreed Facts as true, and accord them great weight. [10] The nature of the Investigative Interviews leads us to handle them with caution. Such evidence will generally be given less weight than direct evidence in the form of sworn or affirmed hearing testimony. Unlike testimony, transcripts of interviews conducted outside a hearing do not enable a hearing panel to observe interviewees as they give their interview evidence, or allow for testing or clarification of the interviewees' evidence (such as seemingly inconsistent statements) through cross-examination by other parties or panel questioning. The circumstances of the interviews must also be considered. [11] In the case of the Investigative Interviews, the interviewees had each been sworn or affirmed – an indicator of seriousness that we consider would have been appreciated by the interviewees as they were interviewed. Further, each interviewee also testified at the Merits Hearing, offering an opportunity for the content of the Investigative Interviews to be put directly to the interviewees in the presence of the hearing panel. It transpired that there were some seeming inconsistencies between, on the one hand, what an interviewee had said during his Investigative Interview and, on the other hand, his testimony during the Merits Hearing, other evidence, or both. Staff tested some of these seeming inconsistencies during their cross-examination. However, in their submissions Staff also pointed, as part of their case, to other seeming inconsistencies as purported proof of certain facts or as a basis for challenging the credibility of interviewees who are also Respondents. Without the benefit of the testimony of the affected interviewees on these points, these aspects of the Investigative Interviews remained untested. For that reason – and mindful that respondents are entitled to natural justice and procedural fairness – we give little or no weight to untested portions of the Investigative Interviews that were inconsistent with other evidence. Moreover, we do not rely exclusively on any Investigative Interview content in reaching our conclusions or making our findings. In the circumstances, we see no need to address the potential application of Browne v. Dunn (1893), 6 R. 67 (H.L.). [12] Each of our conclusions and findings set out below reflects our determination that it is proved, on the balance of probabilities, by sufficiently clear, convincing and cogent evidence. B. Expert Witnesses [13] Among the individuals presented as witnesses at the Merits Hearing were two whom we were asked to qualify as "experts", such qualification enabling a witness to give evidence of not only facts but also opinions. Even if a witness is so qualified and gives opinion evidence, a panel is not bound to accept it. The ultimate decision on all issues is the panel's. [14] Staff asked that their proposed expert, John Richard Harris ("Harris"), be qualified "as an expert in commonly accepted industry practices and the assessment of oil and gas exploration and production activities so that he could provide an opinion in relation to materiality and disclosure in this matter". Kapusta, through his counsel, asked that his (or perhaps all of the Respondents') proposed expert, John Glenn Robinson ("Robinson"), be qualified "to give opinion evidence with respect to commonly accepted oil and gas industry practices and with respect to the evaluation of petroleum and natural gas reserves and resources, including the application of such evaluations to

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the issues of materiality and disclosure". These two proposed grounds of qualification, although superficially rather similar, embodied important differences – as did the two individuals' respective backgrounds and experience. [15] Staff's proposed expert Harris had many years of experience in the oil and gas industry. He had served as an officer or director (or both) of several reporting issuers, in which capacities he had frequent occasion to consider reporting-issuer disclosure obligations and, with that, the materiality of information within the meaning of the Act. This is not an inquiry into the quality of Canext's disclosure, including the manner in which its reserves and other resources were evaluated and then disclosed, but rather a hearing into whether any or all of the Respondents engaged illegally as insiders in trading while knowing an undisclosed material fact or material change. Even so, an assessment of materiality from the perspective of someone concerned with satisfying reporting-issuer disclosure obligations might reasonably assist – and is therefore relevant to – the determination of whether information was material in the sense of the allegations in this case. We found for the purposes of this proceeding that Harris "is an expert in oil and gas exploration and production activities and commonly accepted oil and gas industry practices, qualified as such to give opinion evidence in those areas, including evidence as to materiality in relation to disclosure", and he gave evidence as such. Ultimately, though, we give little weight to Harris's evidence, as we discuss below. [16] Kapusta's (or the Respondents') proposed expert Robinson similarly had many years of experience in the oil and gas industry. We were satisfied that Robinson was knowledgeable and able to give us expert opinion evidence about technical aspects of oil and gas exploration, development and production. We were also satisfied as to his expertise in, and ability to give expert opinion evidence about, the evaluation of oil and gas reserves and other resources, the application of the Canadian Oil and Gas Evaluation Handbook and the interaction between it and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). This expertise (while impressive) differed from, and in the context of this proceeding was somewhat narrower than, that of Harris. We were presented with nothing indicating that Robinson had experience from the perspective of a reporting issuer – for example, as an officer or director or as an adviser to a reporting issuer's management or directors – in making assessments and determinations concerning materiality generally (beyond the scope of NI 51-101), and resulting decisions concerning public disclosure generally (again, beyond the scope of NI 51-101). [17] Still, NI 51-101 is an important part of the broader legal framework dealing with information and disclosure concerning reporting issuers. Further, we were given to understand that the theory of one or all of the Respondents' cases might, to some extent, turn on decisions made in relation to NI 51-101. Robinson's expertise was not obviously irrelevant. [18] NI 51-101 mandates certain disclosure by reporting issuers, notably (but not exclusively) concerning estimates of their oil and gas reserves (volume estimates) and related future net revenue (an estimate expressed in monetary terms), and prescribes standards, requirements and restrictions for that mandatory disclosure and for certain other voluntary disclosure. NI 51-101 applies a materiality standard, and reflects a view by Canadian securities regulators that oil and gas reserves and the related monetary estimates are among the information likely to be important to investors in public oil and gas companies. That said, NI 51-101 does not fully occupy the field of materiality for public oil and gas companies: it does not deal with all types of information that

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might be material in connection with any particular reporting issuer. Nor should the attention given by NI 51-101 to the estimation and disclosure of reserves be taken to suggest that something that falls short of qualification as a reserve, or to which only a comparatively modest reserves volume or value is assigned, is necessarily unimportant from an investor's perspective or will have no significant effect on the capital market's pricing of a security. Put differently, information about reserves may often be material, and a comparatively large reserves volume, value or change very likely will be material, but it does not follow that information about something other than a reserve, or about a comparatively modest reserve, is not material. Other facts and circumstances may be of equal or greater importance in making that assessment. [19] It was therefore somewhat disconcerting to hear from Robinson that "the reserve[s] data in a company is basically the warehouse of the company's value" and that materiality is "just another function . . . that comes out of the evaluation". These comments seemed to suggest that Robinson operated from a somewhat narrow premise concerning one of the key issues to be determined in this proceeding – namely, whether certain information was material in the sense of the allegations – that might amount to a conclusion on that very point. [20] As stated, the purpose of this proceeding is to determine whether any or all of the Respondents engaged in illegal insider trading, not to inquire into the quality of Canext's disclosure. The issue here, in essence, is whether any of the Respondents, at the time of any of their impugned share purchases or sales, knew something that amounted to an undisclosed material fact or material change – terms denoting a reasonably expected capital-market consequence (a significant effect on the market price or value of securities). This, we recognized, might overlap to a degree with an exploration of Canext's disclosure under NI 51-101, but only to a degree. [21] For these reasons, and these reasons only – not any qualms as to Robinson's expertise noted above, including his undoubted expertise in the evaluation of oil and gas reserves and other resources and the application of evaluation practices, on which his opinions could be given – we declined to qualify Robinson "for the purpose of giving opinion evidence as to whether, when or how the general securities laws requirements governing materiality and disclosure are triggered or satisfied". We concluded: "We anticipate that [Robinson's] evidence in the areas on which he is clearly an expert may make mention of issues of materiality, even beyond the bounds of evaluations. We are prepared to give some latitude on that point, but the weight we assign to any such references beyond the evaluation context may be limited." In the result, Kapusta (or the Respondents collectively) decided not to call Robinson as a witness. III. FACTUAL BACKGROUND A. Canext and the Respondents

1. The Company [22] Canext was a Calgary-based oil and gas exploration, development and production company. It began operating in May 2006. Its shares were listed on the TSX Venture Exchange (the "TSXV"). [23] In June 2007 Canext combined with two other companies under a plan of arrangement, the resulting entity retaining the Canext name. Shareholders of each of the combining companies received new Canext Shares, which began trading on the TSXV under a new trading symbol.

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[24] In April 2010 – well after the 12 December 2007 to 13 March 2008 period directly relevant to this proceeding (the "Relevant Period") – Canext was acquired by another company and Canext Shares were delisted from the TSXV.

2. Canext's Business [25] Canext had oil and gas interests in various locations, the most important for purposes of this proceeding lying in northwest Alberta in a region referred to as the Peace River Arch. Within that region were two distinct areas of focus by Canext: "Pouce Coupe", also referred to as "Montney"; and, to the north of that, an area that we will refer to as "Clear Prairie", within which were sectors including two sometimes referred to as "Clear Prairie North" and "Sweeney". [26] Although Canext tended, in public communications and filings, to make disclosure in terms of barrels of oil equivalent (which we will express by the abbreviation "BOE"1), the company was in fact heavily weighted towards natural gas, certainly before the Relevant Period. According to Canext's annual NI 51-101 disclosure statement for the year ended 31 December 2006 (the "2006 NI 51-101 Statement"), natural gas (as distinct from oil or natural gas liquids) accounted, in the concluding seven months of 2006, for roughly 85% of Canext's 2006 average daily production of 206 BOE. As set out in a reconciliation table included in Canext's annual NI 51-101 disclosure statement for the year ended 31 December 2007 (the "2007 NI 51-101 Statement"), natural gas accounted for approximately 91% of Canext's year-end 2006 proved-plus-probable reserves of 847 "mboe". Production grew in 2007. According to an October 2007 "Investor Presentation", Canext was by then producing 1300 BOE/day, 90% of that being natural gas, and, as set out in the reconciliation table included in the 2007 NI 51-101 Statement, natural gas accounted for approximately 86% of Canext's year-end 2007 proved-plus-probable reserves of 3089 "mboe". The same Investor Presentation ascribed to Canext Shares a per-share net asset value (including proved-plus-probable reserves) of $0.89.

3. Certain Roles and Functions at Canext [27] Canext's offices were on a single floor of a Calgary building. Its personnel complement throughout the Relevant Period numbered approximately 14. The Respondents all interacted routinely in the course of their work. [28] Kapusta was the president and chief executive officer of Canext, and one of its directors (the only management director). [29] Holmes and Birchard were vice-presidents of Canext, Holmes (a landman) responsible for land management and Birchard (a geologist) for exploration. Both reported to Kapusta. Birchard testified that he and Holmes worked closely together. Their offices adjoined, and Kapusta's office was next to Birchard's.

1 While Canext and others whose work was in evidence presented information using a variety of measurements and related nomenclature and abbreviations, much of it used BOE, variously expressed. This is an approximate measure of volume expressed in a manner akin to that often used for oil alone, and derived using a ratio of notional equivalency between natural gas and oil. The ratio used by Canext is generally reflective of the "burner tip" energy content of the different product types, irrespective of – and not necessarily indicative or reflective of – actual end use or relative economic values. Such approximations, and any inconsistencies in the expression of measurements, do not affect our analysis or conclusions.

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[30] Reporting to Birchard were exploration group employees Zelantini (a geological technologist and the most junior member of the group), Doty (a geophysicist) and Raychaudhuri (a geologist who worked primarily on the Pouce Coupe area). Zelantini's, Doty's and Raychaudhuri's offices adjoined or were in close proximity, with Birchard's nearby around a corner. [31] Canext had weekly operations meetings, generally attended (subject to availability) by Kapusta, Holmes and all members of the exploration group (Birchard, Zelantini, Doty and Raychaudhuri) – that is, by all of the Respondents. Topics discussed at these meetings, according to Doty's testimony, included production (from individual areas and overall), wells and well logs, drilling progress and results, and (to an extent) estimation of pool sizes. [32] The Canext board of directors throughout the Relevant Period consisted of seven individuals whose backgrounds made them, collectively, knowledgeable about the upstream oil and gas industry, reporting issuers – public companies – and securities laws (a point that would be emphasized by the Respondents). The board relied to a degree on Canext's corporate secretary, Keith Templeton ("Templeton"). Kapusta indicated that Templeton was a practising oil and gas lawyer with a good working knowledge of securities laws.

4. Canext's Disclosure Policy [33] Canext had a formal written policy dealing with information disclosure and securities trading restrictions (the "Disclosure Policy", dated 5 July 2007). [34] On its face the Disclosure Policy had useful elements, but its application was less impressive (as will be discussed). [35] By its terms, the Disclosure Policy was "to be followed by" and "extend[ed] to all directors, officers, employees and consultants" of the company. Canext's president – Kapusta – and its chief financial officer (the "CFO") were the company's only "official spokespersons". Canext's disclosure practices were to be overseen by a committee (the "Disclosure Committee") established by the Canext board of directors. The Disclosure Committee consisted of just two officers (and no directors): the CFO and the corporate secretary. These positions were held throughout the Relevant Period by, respectively, Lesley Miller ("Miller", a chartered accountant) and Templeton. Neither Miller nor Templeton testified at the Merits Hearing. [36] We reproduce here parts of other provisions of the Disclosure Policy:

• On an ongoing basis the [Disclosure] Committee will assess potential disclosure items and whether public disclosure is required. When assessing whether any particular matter should be disclosed, the [Disclosure] Committee will look at a number of factors including the nature and materiality of the information itself.

• All news releases . . . will be approved by the board of directors prior to their release and

will be publicly released promptly following board approval. • [Canext] may have frequent periods where the [Disclosure] Committee is assessing

potential disclosure items as to whether public disclosure is required (e.g. a well exhibits significant production potential during testing or within the first few days of going on-stream, but it remains uncertain as to its long-term sustainability). During these periods

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directors, officers, employees or consultants with [Canext] must not purchase or sell securities of [Canext] . . . ("insider trading") . . . .

• Recognizing the frequency where the [Disclosure] Committee may be assessing potential

disclosure items as to whether public disclosure is required, all directors, officers, employees and consultants should advise the CFO of his or her intention to either buy or sell shares of [Canext] prior to doing so, and the CFO, in consultation with the other [Disclosure] Committee member, will determine whether there are trading blackout periods currently in effect.

• In order to avoid . . . selective disclosure . . . , [Canext] will observe a quarterly quiet

period, during which [Canext] will not initiate or participate in any meetings or telephone contacts with analysts and investors and no earnings guidance will be provided to anyone, other than responding to unsolicited inquiries concerning factual matters. The quiet period commences 21 days prior to the target release date of quarterly financials, reserve report or annual report and ends with the issuance of a news release disclosing the results.

[37] The Disclosure Policy seemed premised on the Disclosure Committee's being in a position to know about all information that might give rise to a disclosure issue. The evidence does not demonstrate that such was the case. To illustrate, the very example cited in the quoted extracts above – a well exhibiting significant production potential during testing or within the first few days of going on-stream – seemed clearly to be the sort of thing that those who attended operations meetings would quickly learn about, but it was not clear when or how Miller and Templeton would necessarily be informed (although Kapusta did testify to having informed Miller of at least one operational development, as discussed below). Given that, how the Disclosure Committee could realistically be expected to perform the task assigned to it is puzzling. [38] Canext director Randall Green ("Green"), who testified as a witness for Kapusta (Green's January 2010 Investigative Interview was also in evidence), spoke about the Disclosure Policy. He testified that, generally, Canext management was responsible for determining, in accordance with the Disclosure Policy, what information was material, and that Canext management "would provide input to the [D]isclosure [C]ommittee . . . and then the [Disclosure] [C]ommittee would make the decision as to appropriateness of blackouts and disclosure". Similarly, Green's Investigative Interview included the following exchange:

Q So it would generally be management that decides on materiality of information? A We would be relying on them. They're the ones that are knowledgeable on this stuff, and

we would be relying on them to make that judgement and tell us what we need to do it. They are also members of the [D]isclosure [C]ommittee, right, at that time. So they are the ones making that judgement.

[39] In his August 2008 Investigative Interview Kapusta said that all Canext employees were given a copy of the Disclosure Policy but were not required "to sign off or anything that they've read it". Holmes indicated that he had been aware of it and had looked at it. Birchard, too, had an awareness of it and of the Disclosure Committee (although he thought Kapusta was a member). However, the evidence was that, in the Relevant Period, Doty and Raychaudhuri knew of, but had not read, the Disclosure Policy and Zelantini could not recall having seen or read it. [40] Even to anyone who might have read it, the Disclosure Policy would not have been wholly informative. It made mention of, but did not adequately explain, the concept of insider trading, or

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precisely what conduct is prohibited under securities laws. While it did refer to company-imposed quarterly quiet periods and trading blackouts, it did not explain that although those can be useful aids, they are neither evidence of, nor a substitute for, compliance with securities laws.

5. Canext Share Trading Generally [41] We summarize here some of the overall TSXV trading activity in Canext Shares before, during and after the Relevant Period. The possible significance of some of the dates mentioned will become apparent in later discussion. [42] Canext Shares first closed on the TSXV (on 26 June 2007, following the mentioned plan of arrangement) at $0.90 per share. They then began a general sustained decline, ending 31 August 2007 at $0.51, 31 October 2007 at $0.465, and 11 December 2007 at $0.39. [43] Entering the Relevant Period, Canext Shares closed on 12 December 2007 at $0.45. In the remainder of that month they traded in the range of $0.36 to $0.44. There was a data anomaly late in December 2007, perhaps attributable to very light trading volumes: closing prices appear only for 24 December ($0.40) and 31 December ($0.44, which became the closing price for the year). [44] Canext Shares first closed in 2008 at $0.40 and went on to trade until and including 25 January 2008 in the range of $0.34 to $0.45. On the next trading day, 28 January, they closed at $0.40. They closed on 29 January at $0.42, then traded in the range of $0.40 to $0.46 until closing at $0.42 on 22 February. The closing price on the next two trading days, 25 and 26 February, was $0.45. Canext Shares then traded between $0.44 and $0.47 until closing at $0.45 on 4 March. The next day (5 March) they closed up $0.09 at $0.54, trading after that in the range of $0.48 to $0.55 until closing at $0.53 on 12 March. [45] On 13 March 2008 Canext Shares, having opened at $0.53, closed up $0.10 at $0.63. [46] On 14 March 2008 – just after the Relevant Period – Canext Shares rose more sharply, opening at $0.85, going as high as $1.15 and closing at $0.89, up $0.26 from the day before. From there they generally declined, trading in the range of $0.88 to $0.61 until closing at $0.66 on 30 April. [47] Daily trading volumes varied widely, but two volume spikes in or around the Relevant Period stand out: on 5 March 2008 4 429 375 Canext Shares traded (compared to 47 000 the day before and 316 185 the day after); and on 14 March 2 505 844 Canext Shares traded (compared to 33 000 and 442 691 on 12 and 13 March respectively and 260 151 on the trading day after). Daily trading volume exceeded 1 million Canext Shares on only three other occasions during the longer period just discussed. [48] Kapusta charted the trading in Canext Shares from 26 February to 30 June 2008, flagging for us four events (certain of which we will discuss below) with a view to showing what impact they may or may not have had on the market price of Canext Shares: "Mar 5 [Wellington (a capital market analyst)] initiates coverage, 4.4 mm shares trade, stock jumps 20%"; "Mar 14 Canext press release on oil discovery and Tristone [another capital market analyst] 'Full Montney Report'. Tristone moves Canext to top pick. Stock gaps up 41%"; "Mar 20 - after five days of trading the stock closes at $0.65 which is only $0.03 or 5% higher than the closing price prior to

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the press release"; and "Jun 24 – Canext mentioned on BNN Market Call by a fund manager, stock gaps up 30% on high volume". Kapusta testified about this chart as follows:

So the first most important event is March 5th. Huge volume on the stock, . . . and the stock moved up about 20 percent. You can see a general increasing after that or through this period from . . . the release of the reserve report up until March 13th. The stock again had moved about 50 percent through this time. I think it was previously testified that the volume had increased, and the volume is a good driver. Really, what it is, is you're taking the stock overhang from the [mentioned plan of arrangement], I think, is gone. And now, because you've got the volume, the stock can start to move. On March 14th, you see an initial spike there, and the stock closed higher. Again, this was a combination, what we refer to as a perfect storm, in that oil and gas prices continued to move up. We had [Wellington] initiating coverage, took the stock overhang out. [W]e released a promotional press release on the oil discovery at the same time that Tristone issued an industry-wide report and identified us as a top pick for [Montney] upside. It's worth noting that the next five days the stock continued to trade down, to the point on March 20th, after five days of trading, the stock was 65 cents, which is only 3 cents or 5 percent higher than the closing price prior to the press release. Also, it's worth noting that those two days, the 19th and the 20th, recall I am in Toronto and I'm meeting with institutional investors, any one of which could snap up all the company's shares if they desired. So it should be clear to everybody that I am not overselling this property, I'm not trying to be misleading to anybody. I'm telling, you know, it is what it is. So I think the market clearly understood that, and we went back to trading like a gas company. The other comment -- . . . there's a lot of volatility in small market cap companies. So huge jumps, you know, for really no news or no change. The most interesting one you can see at the back end of this chart. On June 24th, . . . the stock jumped up from, again, about a 75 cent range to nearly a dollar on high volume. And that's because some analyst went on BNN market call . . . and said, hey, they like this junior called Canext. And, . . . on volume, the stock moved up 30 percent. So was there a material event that caused that price to change? No.

B. Events In and Around (or Pertinent to) the Relevant Period

1. Activity on the Ground; Certain Management and Board Activity (a) Before the Relevant Period

[49] Part of the growth in Canext's production and reserves during 2007 was accounted for by Clear Prairie wells that Canext discussed in its 2006 NI 51-101 Statement as follows:

During 2006 [Canext] . . . purchased a suite of properties to the west of the existing Clear Hills acreage. In early 2007 two well[s] were drilled and cased. The gas well was put on production in March 2007. The oil well is presently waiting on equipping. Neither of these two locations is included in [Canext's independent reserves evaluator's report for the period]. . . .

[50] The gas well mentioned was located in the Sweeney sector at legal subdivision 1-5-90-12 W6; we refer to it as the "1-5 Well". Canext held a 60% working interest in this well, and a company called Canoil Inc. ("Canoil") held 40%.

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[51] Birchard testified that Canext had previously drilled wells into the Nordegg formation some distance to the north of the 1-5 Well, at Clear Prairie North. There Canext had encountered geology that he described as exhibiting "quite a bit of complexity[;] by moving -- less than a mile, mile and a half between wells, you could go from gas down to water and oil, and then below that you could get gas again. So it confirmed small pools, it confirmed very quick changes laterally in hydrocarbons and water." Birchard said that Canext had this history in mind when it began working further south, in the Sweeney sector. [52] Drilling of the 1-5 Well ended in January 2007, with gas being produced from a roughly five- to six-metre interval in the Nordegg formation beginning (as noted) in March 2007. [53] Other companies also had landholdings in the area. In August 2007 Birchard learned – and told all other Respondents but Raychaudhuri, who (as noted) worked primarily on the Pouce Coupe area – that a company called Paramount had "Sweeney/Clear Prairie" land available, including a "block offsetting our 1-5 [W]ell". We refer to this block as the "Paramount Land". Paramount's licence for the Paramount Land was set to expire in the summer of 2008 unless drilling was done, before expiry, either on that land or on some other land "grouped" with it. Given the 1-5 Well gas discovery, Birchard and others at Canext thought it worthwhile to try to gain an interest in the Paramount Land. In the fall of 2007 Canext made a grouping proposal to that effect, but at the time received no response.

(b) Plans for an Offset Well [54] Canext and Canoil planned to drill, again into the Nordegg formation, an "offset", "stepout" or "outpost" to the 1-5 Well less than one mile to the southwest, at 10-32-89-12 W6 (the "10-32 Well", in which they would have the same proportionate working interests as for the 1-5 Well), the reasoned hope or expectation being that the 10-32 Well would penetrate the same pool as the 1-5 Well and so be another gas well. Prior to its being drilled, the 10-32 Well was classified with the Energy Resources Conservation Board (the "ERCB") as "outpost confidential", meaning (according to Birchard) that, for one year, "most of the information [given to the ERCB about the well] . . . would have stayed out of the public knowledge". [55] There were constraints on when work could be conducted at the 10-32 Well site. This was in an area of muskeg, so winter was the most favourable working season, but wildlife-protection rules precluded "drilling, completions and any potential pipelining" from 15 January to 15 April.

(c) Drilling and Early Results of the 10-32 Well [56] Drilling on the 10-32 Well began with spudding on 12 December 2007 and ended on 20 December. A "geological strip log" report to 18 December 2007 indicated that Nordegg shale and sandstone had been encountered between 1195 and 1204 metres in depth, with "gas readings" and "no visible oil staining" – consistent with the theory that this would be a gas well. The data gave Birchard concerns about encountering water, so before Christmas he engaged Taggart Petrophysical Services Inc. ("Taggart") to prepare a petrophysical evaluation, to be delivered after the holidays. Kapusta explained that, generally whenever Canext "came across something complex", it would bring in Taggart to help, because "well evaluation is very key. Certainly early in a well's life, it's very important." While that was under way, completion operations on the 10-32 Well began on 27 December 2007, using casing appropriate to a gas well and somewhat narrower than what would typically be used for an oil well. In accordance with what Birchard

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(who, as noted, had concerns about encountering water) had recommended to Canoil, only a four-metre interval (1198 to 1202 metres) was perforated, and no fracturing of the rock was done. Two days later, on 29 December 2007, oil began flowing from the 10-32 Well. [57] Flow testing – using procedures designed for a gas well – was conducted for 38.5 hours (the "December Test"). The December Test and completion operations ended on 31 December 2007. Kapusta explained that the December Test was a "shortcut" designed "to test for deliverability and not for reservoir limits" or "initial reservoir pressure" because the 10-32 Well "looked like an offset to 1-5" and "[w]e had initial pressure on 1-5". Birchard testified that the December Test was fairly short in duration, motivated at least partly by "time restrictions", but that he had been involved with both longer and shorter tests on other gas wells. [58] Kapusta testified that his reaction to early reports from the December Test was: "We have low-rate gas and a little bit of oil. Possibly nothing economic here." He became more encouraged but also confused as the December Test continued – "after we opened the well up a little bit and we got higher flow rates" on 30 December 2007, Kapusta considered that "we've got a gassy oil well that may be able to flow" but wondered whether the oil and gas were coming from the same interval and whether either the oil or gas leg (or both) were limited. [59] That the 10-32 Well seemed to be an oil well (albeit also with some "free gas" flow) came as a surprise to Canext and Canoil. According to Birchard, this was the first oil discovered in the Nordegg formation in the Sweeney sector. The geology of the area was complex, and the thickness and aerial extent of the pool penetrated by the 10-32 Well were unknown. It was also unclear whether the 10-32 Well had penetrated the same pool as the 1-5 Well. Nonetheless, as Birchard testified when asked about Canext's reaction to oil having been found on or about 31 December 2007, "everyone was encouraged by the fact that we got hydrocarbons". He similarly said in his July 2008 Investigative Interview, "we were very encouraged by the fact that we got oil". [60] Kapusta testified about the 10-32 Well and its impact on Canext as at 31 December 2007 as follows:

. . . quite simply, that date . . . was very early on. It . . . would not have been prudent to issue any type of release. It, by no means, was material. I think Mr. Harris also agreed that the well by itself was not material. So now we need to step back and try and figure out what it is. So on December 31st, there was nothing to do.

[61] Taggart's report on the 10-32 Well, dated 8 January 2008 (the "Taggart Report"), commented on the "zone of interest" between 1197.8 and 1214 metres in depth. Taggart opined that a "water transition zone" was indicated "from 1204 metres to the base of the deposit", such that testing there "would most likely result in an intolerable inflow of water" and "[c]onsequently, the best completion plan . . . would be to restrict the perforated interval" to a less-than-four-metre zone from 1197.7 to 1201.5 metres in depth (effectively, what had already been done at Birchard's urging). Kapusta testified that the Taggart Report "was certainly helpful" – identifying "some areas of concern and water transitions" and "starting to build that geological model" – but had its limitations in that it "could not tell us what was gas and what was oil in that wellbore". [62] The minutes of Canext's 8 January 2008 operations meeting included the following:

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Clear Prairie 10-32-89-12 prepared supplemental with mob and demob costs are $262 K$ over budget. Completion flowing 100 bopd and 280 mscf/d (net 88 boepd). Pushing ahead with tie-in which needs to [be] completed by Jan 15 due to ungulate restriction.

[63] By 8 January 2008 (Birchard said on or about 11 January but, for the reasons stated, we accept the date given in the Agreed Facts) Canext decided to drill another Clear Prairie well, at 11-33-89-12 W6 (the "11-33 Well"), less than one mile to the east of the 10-32 Well. A drilling licence was obtained, and the 11-33 Well was expected to spud early in February, this location not being caught by the wildlife-protection work ban applicable to the 10-32 Well site. The 11-33 Well was expected to enhance understanding of the geology of the area and to help delineate the 10-32 Well oil discovery (the "Discovery"). [64] Meanwhile, the 10-32 Well was to be tied to the facilities of another company. Related documentation indicated that, as at 9 January 2008, the 10-32 Well was anticipated to produce (as translated by Birchard) roughly 65 BOE/day of oil and condensate and roughly 35 BOE/day of gas, Canext's working interest share being 60% of these volumes. [65] Around the same time, Holmes informed Paramount of Canext's intention to drill the 11-33 Well and reminded Paramount that this would give the latter only a few weeks to make a decision about grouping (the drilling company being required, according to Birchard, "to submit a grouping proposal within 30 days of the rig release of the well"), presumably on terms that would give Canext an interest in the Paramount Land. According to Birchard, Paramount's response "at this point is, well, we're having second thoughts". [66] Kapusta told us that, on 10 January 2008, Canext was "still mapping" the 10-32 Well – "we had an evolving theory" or "evolving analysis".

(d) A Third Party's Reaction in Mid-January 2008 [67] Gordon Trainor ("Trainor") was a geologist with Canoil, a private oil and gas company that partnered with Canext on some prospects. Canoil was smaller than Canext, with four core personnel (Trainor among them) supplemented by several consulting geophysicists and accountants over the years. Before the Discovery, Canoil "was 99 percent natural gas". Canoil, said Trainor, was "[m]ore than cautious", and did not always agree with Canext's recommendations for operations. Birchard testified that, given the differences in the two companies' landholdings (they did not partner on everything), "the sharing of information[,] especially in terms of maps, was usually very, very limited"; Doty said much the same. However, according to Birchard, they "shared some ideas as to technical" and, according to Doty, "we did have discussions about what our various interpretations are and how they might affect where we would want to drill wells". Nothing suggested that Canoil, or Trainor, had been misled or kept in the dark about the 10-32 Well or the Discovery. Trainor and Birchard both characterized the working relationship between the two companies as good. Trainor said that Canext would meet and discuss "opportunities, operations, whatever" with Canoil when asked, and he received daily data – strip log reports, drilling reports and completion reports – on the 10-32 Well. Trainor was in contact with (among others) Birchard, Doty and Zelantini.

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[68] Much of Trainor's testimony was consistent with what we heard from the Respondents. The 1-5 Well, a gas well, was considered the discovery well, with the 10-32 Well foreseen as its follow-up, a development rather than exploration well. That the 10-32 Well produced oil rather than gas was a surprise to both companies – "a great completion", said Trainor, who "was surprised in a positive way". Trainor testified that, "if this turned out to be an oil discovery, . . . it would be . . . good news for Canoil. Long-term good news". He said that "all of us at Canoil thought it was really good news". [69] Canext and Canoil met early in January 2008 to discuss operations, including (according to Trainor) the December Test results. Canext wished to conduct some seismic work, the sort of spending about which Canoil was cautious. On 11 January Trainor responded to a "Followup?" email from Birchard (which response Birchard forwarded to Kapusta, Doty and Zelantini on 14 January): "Thanks again for having us over. I reviewed this with [Canoil personnel] . . . . [There followed some cautious comments on next steps and spending.] I believe we are all trying not to get too excited (but I can make a case that this could be huge)". [70] Concerning Trainor's concluding comment, Birchard testified that he "really had no idea what [Trainor] was referring to", and Doty also told us he did not know to what Trainor was referring. This testimony of Birchard and Doty was surprising, and not credible. It should have been obvious – and we conclude that all who read his email, knowledgeable about the 10-32 Well flowing oil, would have understood – that Trainor was referring to the Discovery as something that "could be huge" in the context of his and his counterparts' respective junior oil and gas companies (albeit companies of different sizes). [71] Asked what impact he thought the Discovery would have on Canext Shares, Trainor testified ". . . I thought . . . [Canext] could double". [72] In testimony, Trainor expanded on some of his thinking at the time. The free-flowing early production from the 10-32 Well told him that "we're dealing with extremely good rock" and that "[t]his reservoir is really prolific". The December Test results suggested to Trainor either that this was a reservoir entirely separate from that of the 1-5 Well or, if not, that it must be "an extremely large pool" to be so little affected by the gas production from the older well. Trainor testified that Birchard did not question him about or disagree with Trainor's concluding comment in his 11 January 2008 email and that he could not recall Kapusta, Doty or Zelantini so questioning or disagreeing. [73] Under cross-examination Trainor acknowledged that, as a follower of Canext (he had bought Canext Shares in February 2007), he was aware that Canext had enjoyed other drilling successes in 2007, and was participating (without Canoil) in Montney ("one of the hottest plays"). Trainor agreed that the geology in the Clear Prairie area was complex, entailing "a great deal of uncertainty with respect to the thickness and consistency of [the] Nordegg zone throughout this entire region", and that the area might be divided into multiple small pools rather than one large one. Trainor also agreed that the December Test was limited and not, in any case, designed to test reservoir limits for an oil well. He confirmed that any reserves ascribed to the 10-32 Well would have been much less significant to Canext than to the smaller Canoil. Trainor also confirmed having seen the Taggart Report, with its warning of a water transition zone and consequent recommendation of a comparatively narrow (less than four-metre) perforation interval for the

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10-32 Well: "Yes, it's a thin -- thinner zone, yes. But compared to the 1-metre prospects Canoil was chasing, this -- this was nice". Nothing in his cross-examination displaced the evidence of Trainor's specific enthusiasm about the December Test results, or his view as to what the Discovery might indicate for the value of Canext Shares. [74] While we do not believe that any of the Respondents who knew Trainor's thinking failed to understand it, understanding need not mean agreement. Trainor himself acknowledged that nobody at Canext "jumped on the bandwagon" with his comment that the Discovery "could be huge". There were indications (including testimony of Doty and Kapusta) that Trainor's geological interpretation of the Nordegg formation in the area differed significantly from Canext's.

(e) Activity Continues in January 2008 [75] The minutes of Canext's 15 January 2008 operations meeting included the following:

Clear Prairie 10-32-89-12 most of the big stuff has been completed. Should be ready to flow by Friday. Pulling 10-32 recorders tomorrow. . . . Kicked off annual reserve report. Exploration meeting with Trimble set for Jan 22. Target Feb 25 reserve committee meeting.

"Trimble" was Trimble Engineering Associates Ltd., Canext's independent reserves evaluator. [76] Partly, it seems, with a view to sound production practice and conservation restrictions – which in this case favoured production of oil over gas – and partly to help determine whether the 1-5 and 10-32 Wells had penetrated the same pool, Canext shut in the 1-5 Well on 16 January 2008, before putting the 10-32 Well on production about one week later, on 22 January. While the 1-5 Well was shut in its bottom-hole pressure would be measured, which would help determine whether the 1-5 Well was "in communication" with the 10-32 Well. [77] The minutes of Canext's 22 January 2008 operations meeting included the comments: "Clear Prairie 10-32-89-12 bringing on this morning. Need to complete flow and build-up analysis."

[78] According to Birchard, in January 2008 the Discovery was still "closer to exploration risk than . . . to development risk".

(f) The January Board Meeting [79] The Canext board of directors would hold one of its periodic meetings on 28 January 2008 (the "January Board Meeting"). On 10 January Kapusta sent to his fellow Canext directors and Templeton an emailed reminder of the meeting, and included this statement:

Things appear to have picked up nicely for us. We've had some good success by the drill bit and with recompletions. Most notably we believe we've finally found a nice light oil pool which could have some legs to it. This would give us a second major property with extensive development potential. [Birchard] will present these results at the board meeting.

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[80] Under cover of a 24 January 2008 email, Kapusta sent a package of January Board Meeting materials to his fellow Canext directors and to Templeton, Miller and Birchard. Included was a single-page document (the "January Project Summary") summarizing status or results for various capital projects, including the 10-32 Well. [81] There were several topics on the January Board Meeting agenda. Birchard testified to discussion at the January Board Meeting about production, capital projects and spending (most of the budgeted spending at the time being directed to Pouce Coupe), and Canext's level of debt. Green also testified about this meeting. He said that "some concern [on the part of the Canext board of directors] about the ability of the company to execute on the capital program and the budget" and Canext's "cash constraints" led the board to decline approval of budgeted spending under discussion, and also to reject further spending on the normal course issuer bid (an arrangement under which an exchange-listed issuer can buy back some of its own shares on terms prescribed, in this case, by the TSXV) that Canext had implemented in October 2007. [82] Another meeting topic (as apparently was usual) was an "operations update", this one presented by Birchard (who attended only part of this meeting) and Kapusta. Birchard testified that the Canext directors were "brought . . . up to speed" about "the Sweeney play". He could recall no discussion about changing capital allocations in light of the 10-32 Well. The minutes of the January Board Meeting stated: "Corporation will wait for the results of the 11-33 [W]ell at Sweeney and revise its capital budget at that time." [83] Green's testimony, and his handwritten notes on his copy of the January Project Summary, tell us some of what was said about the 10-32 Well at the January Board Meeting. He recalled either Kapusta or Birchard informing the Canext directors of the early results from the 10-32 Well, including "original perf" daily production of about 100 barrels of oil and "potential resources" of 25 to 40 million barrels of oil in place and about 5 billion cubic feet of gas. Green testified to having understood resources to differ from reserves, and believing the former to have no economic value. [84] According to Green, that the 10-32 Well came in as an oil well was "a total shock to us" and "quite a surprise". He expressed his understanding of the concept of "flush production" – essentially, that a new well (he said that the 10-32 Well had at the time been producing for about six days) might generate "abnormally high production rates" in its first days or even months. Green testified that, given this, he was somewhat sceptical about the new well: "[w]e had no idea . . . what stabilized [production] rates would be". He recalled uncertainty, at the time, as to whether the 10-32 Well was "connected" to the 1-5 Well – whether they had penetrated the same pool, or different pools. [85] Kapusta's recollection was that the comments at the January Board Meeting about oil in place, potentially, of 25 to 40 million barrels "were very cautionary comments". He explained that "there was general encouragement", but that "[i]t was very early" and they needed to "get some production history". They "might have had four or five days of data" and the Canext board of directors understood that "a well's initial production rate is always its highest". Kapusta also testified that, as between reserves and resources, there is "clearly a higher level of uncertainty with resources" and, with that, less value – "So when we make our judgments on materiality, we place way less weighting on resources." By way of illustration, Kapusta pointed to Canext's sale for

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$500 000 in March 2008 of a 40% interest in other undeveloped land with an estimated resource of 49 million barrels of oil in place, based on their belief at the time that "there was no potential for profits from that resource". [86] It is not clear who first arrived at the estimate of 25 to 40 million barrels of oil in place, or when. Birchard could not recall exactly when in January 2008 Canext made what he termed "some rough calculations of potential upside oil in place". Clearly, both he and Kapusta knew of the estimate when one or both of them communicated it at the January Board Meeting. It is improbable that the estimate was made only then. We consider that one or both of them knew of it in the days prior. As for the other Respondents' knowledge of this estimate, they all (as noted) interacted routinely in the course of their work, and topics discussed at operations meetings (according to Doty's testimony) included, to an extent, estimation of pool sizes. Doty further testified that Canext's exploration group – consisting of Birchard, Zelantini, Doty and Raychaudhuri – had discussions about the sizes of pools, including the 10-32 Well pool, and Doty confirmed that the group had discussed numbers "in the ballpark" of 20 to 40 million barrels of oil in place. We infer, from the totality of the evidence, that all in Canext's exploration group knew of these numbers – 20 to 40 million barrels of oil in place – by or soon after 28 January 2008. However, we cannot find on the evidence before us that Holmes – Canext's landman and, from the evidence, not considered a member of Canext's exploration group – knew in the Relevant Period of these numbers or of the estimate communicated at the January Board Meeting. [87] Green, a geophysicist by profession, evinced interest in disclosure issues but distinguished that from materiality. Green had understood something to be material if it reached a 10% threshold of significance for the company, in terms of things like its reserves or production. In early 2008 he had not personally reviewed any securities laws regarding materiality. Green referred in testimony to two unnamed Canext directors who, he suggested, were more concerned with materiality than he was. In his Investigative Interview Green named one of these as Steve Dabner ("Dabner"), whom Green described as having a technical background. Consistent with his testimony before us, Green had said in his Investigative Interview:

. . . I wasn't [focused] so much on materiality as I was disclosure, and I didn't pay as much attention to the materiality issue as some of the other directors did. . . . And so my concern here [referring to a Canext board meeting in February 2008] was regardless of the materiality issue, let's make sure it's disclosed, and that was my focus.

[88] Green described Templeton as "an integral member [sic] of the board, in that, as secretary, he took minutes of all our meetings". Green noted that Templeton was also on the Disclosure Committee and "served as a resource certainly for myself, but I believe also for the other board members, with respect to [securities] issues, disclosure issues and other corporate matters". It was Green's testimony that no one at the January Board Meeting asked Templeton (i) for a legal opinion on whether the Discovery was a material event; (ii) what is meant by "material" in the context of securities laws; or (iii) whether it was permissible for Canext personnel to purchase Canext Shares at the time. Green did not recall any discussion about materiality or disclosure of the 10-32 Well at the January Board Meeting. Kapusta similarly recalled no discussion – or nothing in depth – at the January Board Meeting regarding materiality or an obligation to disclose the 10-32 Well results. Kapusta said: "I think everybody understood at this meeting that . . . it was relatively early".

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[89] The minutes of Canext's operations meeting on 29 January 2008 (the day after the January Board Meeting) included the following:

Clear Prairie 10-32-89-12 flowing 20-22 m3opd and 6 e3m3/d. (100 boepd net). . . . Reserve report started. Received most of the drafts except for Pouce Coupe. Feb 25 reserve committee meeting.

(g) Events from Early to Mid-February 2008

[90] On 4 February 2008, apparently invoking its Disclosure Policy, Canext imposed one of its quarterly quiet periods in anticipation of receiving and disseminating the results of its annual reserves evaluation report. [91] The minutes of Canext's 5 February 2008 operations meeting included the following:

Clear Prairie 10-32-89-12 flowing 20-22 m3opd and 6 e3m3/d. (100 boepd net). Evaluate hauling to Gordondale. Require GPP application on 10-32 to avoid GOR penalized allowable.

[92] Although the 29 January 2008 operations meeting minutes suggested that drafts of Trimble's evaluation report on Canext's reserves as at 31 December 2007 (the "Trimble Report") had been received by 29 January 2008, Kapusta testified to seeing the first of several drafts around 6 or 8 February 2008. [93] On 10 February 2008 Kapusta sent Green an email that included the following statements: "The 10-32 [W]ell is still flowing about 120 bbls/d clean oil. We're trying to keep it quiet while we tie up some offsetting lands". Kapusta confirmed that this reference was to the Paramount Land. [94] In his testimony, Kapusta acknowledged that, after about 20 days of production, the 10-32 Well, although "down from its initial rates", was "still doing 120 barrels a day". While he had acknowledged in his Investigative Interview that, at the time, he thought this could be "a good significant reserve add", in his testimony he told us that he was not concerned about materiality at this point because "we were in a blackout and quiet period, so there was really no need to address it" and also "there's nothing that's really changed from January 28th". [95] On 11 February 2008 the 11-33 Well – a directional or deviated well that (as noted) Canext and Canoil expected would enhance their understanding of the geology of the area and help delineate the Discovery – was spudded. [96] On the same day, the 10-32 Well stopped flowing. The minutes of Canext's operations meeting the next day (12 February 2008) stated:

Clear Prairie 10-32-89-12 stopped flowing, will check for wax and run pump and rods. O38 to be submitted shortly. Require GPP application on 10-32 to avoid GOR penalized allowable.

[97] Kapusta testified that Canext had not expected the 10-32 Well to continue flowing unassisted, attributing the first few weeks of unassisted production to "gas lift". Some form of

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pump was apparently put into use in the succeeding days. Later in the month a pumpjack was installed – not an unusual step, according to Kapusta: "A pumping oil well is, by far, the most common . . . in Alberta". [98] Until 16 February 2008, according to Kapusta, "[a]ll indications were" that the 10-32 Well was an offset to the 1-5 Well – both "in the same pool", the former having penetrated "an oil leg to a gas cap". However, on 16 February 2008 Canext received bottom-hole pressure data from the shut-in 1-5 Well. Kapusta commented on the results in an email of the same date to Birchard, copied to Miller and others (we italicize a portion for emphasis):

Good news bad news. Pressure is definitely way different than the 10-32 pool. I'm ok putting 1-5 back on production. This also means 10-32 discovered a new pool . . . . What I don't like is the pool likely isn't a large pool it could be more broken up making development and water flooding more difficult. Looking forward to 11-33 info. Will it be oil or gas? Will it be in the same pool as 1-5 or 10-32 or a different pool[?]

[99] In a 15 February 2008 email to his fellow Canext directors and to Templeton and Miller, Kapusta indicated that the Trimble Report was essentially finalized – "locked down" (which Green understood meant that Canext management was "comfortable" with it) – and information from it was being provided to Canext's reserves committee. [100] Production – apparently pumped – resumed from the 10-32 Well on 17 February 2008. [101] On 18 February 2008 Canext received preliminary core information from the 11-33 Well. The next day Birchard, having viewed the core, shared notes he had made about it with Zelantini, Doty, Raychaudhuri and Kapusta, including that the core showed, at 1252.8 to 1247.7 metres, "[s]trong HC [hydrocarbon] staining and live oil present in fractured rocks". Around the same time Canext received well logs for the 11-33 Well that, according to Birchard, showed a Nordegg zone both thinner and lower (hence closer to the troubling water transition zone) than at the 10-32 Well and with porosity "not as well developed" – "So, very simply, it was not as good as 10-32." Kapusta testified that there was "no question it [the 11-33 Well] was not as good as 10-32" but that they believed, "based on the log and the core data [available on or about 19 February 2008], that we had drilled another oil well". [102] The minutes of Canext's 19 February 2008 operations meeting include the following:

Clear Prairie 1-5 Separate pool. 10-32 boundaries ?? Amending letter to the board O-38 6 Swabbed in on the weekend. Now flowing.

[103] Canext finished drilling the 11-33 Well that same day. [104] On 21 February 2008 Birchard sent a reminder to Paramount about Canext's earlier grouping proposal. Communications between the companies ensued.

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[105] The final Trimble Report was dated 22 February 2008. Kapusta and Birchard received it for their review. The Trimble Report "Executive Summary" included a table summarizing Canext's total estimated reserves in certain categories and for various product types, as at 31 December 2007 (but obviously taking into account some later-arising data known to Trimble when it made its evaluation). This table reported total proved-plus-probable oil reserves (all references that follow are to Canext's 60% working-interest share) of 431 200 barrels and total proved-plus-probable reserves of all product types of 3 088 200 BOE. For the 10-32 Well specifically, the Trimble Report recorded proved-plus-probable reserves of 101 438 barrels of oil, based on a 6% recovery factor applied to an estimated 2 817 723 barrels of oil in place. Trimble also recorded for the 10-32 Well proved-plus-probable reserves of 182.6 MMcf of gas and 2.7 Mstb of natural gas liquids – in our calculation, all-product (using the 6:1 ratio) proved-plus-probable reserves for the 10-32 Well of 134 571 BOE. Trimble had also estimated, for the 11-33 Well, probable reserves of 73 965 barrels of oil (based on a 5% recovery factor applied to an estimated 2 465 507 barrels of oil in place), 133.1 MMcf of gas and 2.0 Mstb of natural gas liquids – for an all-product total of 98 148 BOE. Simple arithmetic indicates that the oil reserves (leaving aside gas and natural gas liquids) attributed to the 10-32 Well accounted for roughly 23.5% of Canext's total proved-plus-probable oil reserves, and under 3.3% of its total (all-product) proved-plus-probable reserves. The all-product reserves attributed to the 10-32 Well accounted for roughly 4.4% of the company's total proved-plus-probable reserves. Coupling the estimates for the 10-32 Well with those for the 11-33 Well, the new find (oil alone) accounted for 40.6% of Canext's total proved-plus-probable oil reserves and 5.6% of its total (all-product) proved-plus-probable reserves; the combined all-product reserves attributed to the two wells represented roughly 7.5% of the company total. [106] Canext began completion operations on the 11-33 Well on 24 February 2008, but encountered difficulties.

(h) The February Board Meeting [107] Under cover of a 22 February 2008 email, Kapusta sent a package of materials to his fellow Canext directors and to Templeton, Miller and Birchard, in anticipation of the next Canext board meeting scheduled for 25 February 2008 (the "February Board Meeting"). Two topics for discussion would be bonuses and stock options to Canext personnel, and the Trimble Report. [108] On 24 February 2008 Green sent Kapusta an email, saying (among other things): "I am targeting to get Board approval for the option grants tomorrow (provided we do not have any issues with respect to the play at Clear Prairie)." Green explained to us that the caveat reflected concern about "disclosure of all the appropriate information" about the Discovery, "regardless of materiality", in "anything we press released", including reserves evaluation results. Kapusta testified that he understood Green "wanted to make sure there was nothing material undisclosed, which is what you need to do prior to granting any options". [109] Canext board committees met on the day of the February Board Meeting. The minutes for the compensation committee meeting noted, in relation to Kapusta's performance evaluation, a need for "managing public/investor expectations (talking publicly about achievable goals not stretch goals)". Kapusta testified to being advised in his "performance appraisal" that "it was important for the company" that he "start to meet with . . . institutional investors". Kapusta

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indicated to us that, at the time and for some time before, he considered Canext Shares to have been undervalued. [110] According to the Agreed Facts, Trimble "provided" the Trimble Report to Canext on 25 February 2008. That perhaps meant that it was formally presented to the Canext reserves committee at its meeting that day. [111] At the February Board Meeting the Canext directors considered and approved the Trimble Report (as recommended earlier that day by Canext's reserves committee) and a news release summarizing, among other things, the reserves evaluation results (the "February Release", issued later that day). The directors also approved the granting of bonuses and stock options to various Canext personnel including each of the Respondents. [112] Kapusta and Birchard also provided a verbal operations update. This, Kapusta told us, included information about Canext's continued interest in the Paramount Land, the difficulties being encountered with the 11-33 Well and the following information about the 10-32 Well: that it had stopped flowing, after which a pump had been installed; its current production numbers; and that it and the 1-5 Well were not in the same pool (the latter, according to Kapusta, being perceived by at least some of the Canext directors as indicating "more uncertainty" and "higher risk"). [113] There was evidence that the materiality, or otherwise, of the Discovery was discussed at the February Board Meeting. Kapusta testified to "a lengthy discussion on the whole pool and the play and what it meant to the company with respect to materiality". Kapusta told us that, in response to questions by certain Canext directors, he "felt" and apparently conveyed that "it was not material" – "It was . . . a relatively minor reserve add and relatively minor production adds. You know, it certainly had potential." Kapusta recalled that Dabner had strongly agreed, saying "one well does not a pool make". Kapusta also recalled that some of the directors, including Green, questioned whether, regardless of the directors' thinking on materiality, there would be proper disclosure with the issuance of the February Release. Kapusta further recalled that Templeton, to whom at least some of Green's questions were directed, "had no concerns" and that Miller (the other member of the Disclosure Committee) "did not voice concern". [114] Kapusta did not believe that he had discussed this topic with Templeton prior to the February Board Meeting, but Kapusta said that it should have been absolutely clear to Templeton that the issue of material undisclosed information was under discussion at the meeting. [115] Green's recollections of the Canext board of directors' discussions about materiality and disclosure at the February Board Meeting were similar to Kapusta's. Green testified:

A . . . Through the course of the meeting, I was concerned about disclosure, making sure we had disclosed all the factual information that we had to, and so making sure that the information was in the press release that had to be in there, and then also posing questions to our corporate secretary with respect to the information as to it being sufficient to fully fulfill our disclosure requirements.

Q And to what extent did that discussion include a discussion regarding the 10-32 and 11-33

[W]ells?

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A There would have been a fair bit of discussion around that because those were the main

disclosure issues. . . . Q And was there an exchange which included the corporate secretary, concerning disclosure? A Yes, there would have been. I asked . . . [Templeton] a question. I don't specifically recall

the question, but I certainly asked him along the lines of, Keith, you've seen our press release. We know what information's in here with respect to 10-32 and 11-33. Is there anything else we have to disclose?

I was obviously sensitive to the fact that we weren't putting in the specific location, so had concern making sure the information we had in the press release was adequate for our disclosure and to be able to issue the options.

Q And what type of response did you receive? A I don't recall [Templeton's] specific response, but the fact that the board did proceed,

approve the option allocation, [Templeton] would not have posed any concern over what we had included, and would not have suggested anything in addition to what we needed to include.

. . . Q Now, if I could just take you to any specific discussion that the board may have had

regarding materiality, as distinct from disclosure. Can you tell the [p]anel what recollections you have concerning such discussions?

A Yes, I can. I . . . don't recall a lot of specific detail, simply because I was more focused on

the disclosure side of it, but there was a general discussion around materiality and what the volume of . . . 10-32 and 11-33 represented relative to our total corporate reserves. Also, . . . what the value of those two wells represented relative to our total value, and also, what the production percentage was that related to our total production.

Q And what do you recall of the outcome of those discussions? A The . . . gentlemen on the board who were concerned about materiality seemed to be

reasonably comfortable that those numbers fell below a materiality measure. [116] On the same topic Canext's "non-management directors" asserted, through counsel (in a 23 February 2009 letter to Staff – the "2009 Directors' Submission" – apparently issued in response to questions or concerns raised by Staff at the time), that the Canext directors had "put their minds to" the materiality of the Discovery at the February Board Meeting and concluded that "at that point [it] was not material in view of ongoing uncertainty as to the nature of the discovery", uncertainty not assuaged by the 11-33 Well which, at the time, was encountering "operational problems". The 2009 Directors' Submission pointed to the Trimble Report having shown, as at year-end 2007, a 265% increase in total proved-plus-probable reserves, to 3 087 700 BOE, of which just 4.3% (134 000 BOE) was attributed to the 10-32 Well alone and a total of 7.5% (232 000 BOE) to the 10-32 and 11-33 Wells together (some of these numbers were slightly different from those we derived above by applying simple arithmetic to data from the Trimble Report in evidence, but they are generally comparable). The 2009 Directors' Submission stated

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that "the only factual information" at the time were the estimated reserves for the 10-32 and 11-33 Wells and "the production volumes which the 10-32 [W]ell had so far demonstrated". [117] Kapusta conveyed views similar to those in the 2009 Directors' Submission, in a 23 February 2009 letter to Staff from his counsel. [118] It was Green's testimony that (as at the January Board Meeting) no one at the February Board Meeting asked Templeton (i) for a legal opinion on whether the Discovery was a material event; (ii) what is meant by "material" in the context of securities laws; or (iii) whether it was permissible for Canext personnel to purchase Canext Shares at the time. [119] As for the February Release itself, Kapusta called it a "fairly comprehensive summary of the reserve report", similar in format to other news releases issued by Canext every February. Kapusta said that ultimately the directors unanimously agreed that, with the issuance of the February Release "summarizing the reserve report, there were no worries, it was full disclosure". He also said:

. . . on that date [25 February 2008], our [February] [B]oard [M]eeting -- you know, the collective wisdom of all these individuals, we discussed the issue with legal counsel; and . . . the unanimous conclusion was that . . . we could rely on NI 51-101 disclosure. [It is not clear what Kapusta meant by this last reference; Canext did not file its 2007 NI 51-101 Statement until April 2008. Perhaps he was thinking of the February Release.] You're disclosing the reserves, the production, the change in your reserves year over year, . . . the number of oil wells you drilled. I mean . . . this was adequate. So . . . how could there be any problems with issuing options or buying shares? The . . . value . . . of the resource was small compared to the other opportunities in the company. And the fact that the company's trading at a fraction of its net asset value, you know, obviously the market isn't paying for resources at this point in time.

(i) The February Release

[120] Portions of the February Release follow (we italicize certain statements for emphasis):

Feb 25, 2008 18:56 ET Canext Announces Year End Reserves and Provides Operational Update CALGARY, ALBERTA--(Marketwire - Feb. 25, 2008) - Canext Energy Ltd. ("Canext" or "the Company") (TSX VENTURE:CXZ) is pleased to announce the results of its independent reserve report as at December 31, 2007. Highlights: - Proven reserves have increased 300% to 1,821,900 boe, - Proven and Probable (P+P) reserves have increased 265% to 3,087,700 boe, - Proven and P+P reserves per common share have increased 44% and 31% respectively, - P + P reserve replacement was 894%,

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- Finding and Development costs (F&D) including revisions and changes to future capital were $18.21/boe Proven and $14.45/boe P + P ($17.10 and $11.69/boe without future capital) based on un-audited capital spending of 15.6 MM$, - Sold non core properties for proceeds of $4,253,000 or $33.20/boe, - F&D including acquisitions and dispositions was $35.80/boe Proven and $24.96/boe P + P on un-audited capital spending of 56 MM$, - A 234% increase in NPV 10% (forecasted price before income taxes) (P+P) to $51,124,000, - A 20% per share increase in the NPV 10% P+P to $0.67/share, - Undeveloped land increased 252% to 105,783 net acres, - Drilled 20 (9.3 net) wells resulting in 3.2 net oil wells, 4.4 net gas wells and 1.7 net dry holes for an 82% success rate. The Company was very active in its first full year, operating 97% of its drilling program on a net basis. Drilling was heavily weighted (70%) to exploration including two New Field Wildcats and three New Pool Wildcats. Despite taking on additional risk with exploration drilling, the Company enjoyed a high success rate and good finding and development costs of $14.45/boe for Proven and Probable additions including future capital. During the year the Company also completed a major transaction with the merger of Trimox Energy Inc. ("Trimox") and Tasman Exploration Ltd. ("Tasman"). The transaction was accounted for as a reverse takeover of Tasman and Trimox with Canext issuing shares at a deemed price of $0.88/share. The transaction was strategic and allowed Canext to expand its exploration and development program. The acquired properties experienced high production declines resulting in negative revisions which increased the cost of the acquisition per boe. The Company's reserve information has been prepared in accordance with National Instrument "NI" 51-101 by [Trimble] ("Trimble Report"). The Trimble Report contains several cautionary statements that are required by NI 51-101. Additional information on the Company's reserves as required by NI 51-101 will be filed prior to April 30, 2008 on SEDAR (www.sedar.com). . . . Pouce Coupe Montney/Doig Update Canext has been actively exploring and developing its Montney/Doig tight gas play at Pouce Coupe. In 2007 Canext drilled and completed three (1.8 net) vertical wells. Two of the wells were exploration targets. The Company completed and successfully tested six zones (4 net) in the three wells. In addition, the Company recompleted three zones in two older wells which resulted in two (0.55 net) successful gas tests. The Company continues to monitor activity in the area. A competitor has recently announced successful horizontal wells offsetting Canext's acreage with initial production rates over 3,000 mcf/d (500 boepd). In addition, a senior producer has announced its intention to down space to eight wells per section offsetting Canext after paying over $1,500,000 for two sections of land in November 2007. Assuming all of Canext's land is prospective there are 43 net locations based on four wells per section. The Company has 4.2 net undeveloped locations or recompletions in its proven plus probable reserve report leaving room for continued reserve growth assuming success on its step out and recompletion program. The Company is targeting initial production rates for vertical wells of

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400 - 600 mcf/d and reserves of 400 - 500 mmcf per zone. Canext's business plan is to continue to prove up as many additional sections as possible prior to implementing a large scale development program. The Company will evaluate the merits of horizontal wells versus multiple vertical wells. The decision will ultimately be based on expected costs, estimated recovery, impacts of the new Alberta royalty regime, and number of zones per well. Operations Update The Company's production continues to lag behind management's expectations. Higher than expected declines combined with poor production additions on the Company's Worsley Devonian prospects and a fire at a third party facility at Clear Hills [have] restricted production growth in the first quarter. The Company estimates current field production is about 1115 boepd. The plant fire has taken approximately 75 boepd off line and affected certain first quarter recompletion and tie-in projects. The Company has been advised the plant will be offline until early April. Additionally, Canext has approximately 200 boepd behind pipe which is expected to be online by March 31, 2008. Updates to Share Structure Canext commenced a normal course issuer bid on October 5, 2007. To date the Company has purchased and cancelled 1,171,923 shares at an average price of $0.40/share. The issuer bid expires on October 4, 2008. At present, Canext has 76,227,893 common shares issued and outstanding. Business Plan Canext intends to sell up to 400 boepd of non core properties and sell or farm-out several of its exploration prospects. The proceeds will be used to expand the development drilling and completion program targeting the Triassic Montney/Doig at Pouce Coupe and shallower Triassic targets in the greater Clear Hills/Clear Prairie area. The Company is focusing on lower risk development drilling opportunities following up several new pool discoveries in 2007. This is a significant change from the heavy exploration component of the 2007 capital program. . . .

[121] The February Release also reported (in a reserves reconciliation table) 335 "mstb" of "Additions / Extensions" to Canext's oil and natural gas liquids reserves. Kapusta said that this was more than half accounted for by the 10-32 and 11-33 Wells. [122] According to the 2009 Directors' Submission, the Canext directors at the February Board Meeting – weighing the reserves addition attributable to the 10-32 and 11-33 Wells and the current production from the former against the considerable uncertainties associated with the well – appropriately concluded that the February Release disclosure of the Trimble Report results was sufficient and, indeed, that any more disclosure "would have involved speculation, requiring amplification of the attendant uncertainties". [123] Whatever the Canext directors' view as to the sufficiency of the February Release, it was not very – if at all – explicit about the 10-32 Well or that one of Canext's "new pool discoveries" was an oil discovery in the Clear Prairie area. [124] Asked to explain the nature of the disclosure made in the February Release with respect to reserves, including the 10-32 and 11-33 Wells, Green told us:

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The proven reserves from 10-32 were in our total corporate reserves of 1.8 million. Both the probable reserves assigned to 10-32 and 11-33 were in our total of 3.1 million boe. The value of those reserves [was] incorporated into our net asset value of the corporation. In the "drilled 20 wells", there would have been 1.2 wells drilled -- net wells drilled in Clear Prairie, so it's included in that number as well. The . . . press release goes on to discuss our reserve base, and certainly under additions, the reserves from the 10-32 and 11-33 were incorporated into those numbers, as well. And in our production information, the 1115 boe/d included the production from the 10-32 [W]ell. Under our business plan, we talked about following up some discoveries in 2007 with lower risk development drilling opportunities. And if you read between the lines, you can see above, . . . our shallow or Triassic targets in the greater Clear Hills-Clear Prairie area. So we're telling people there that those are the general areas where we're going to follow up with some lower development drilling. So that would have been indicative of the Clear Prairie area and the 10-32 results and that sort of thing.

[125] Kapusta indicated that Canext's continued interest in the Paramount Land had "some minor impact" on the wording of the February Release. He explained: "I mean, . . . we certainly didn't highlight in [the] February [R]elease an oil discovery at Clear Prairie." Kapusta similarly acknowledged in his Investigative Interview that there was no specific mention of "a new oil pool" in the February Release because Canext was "trying to keep it quiet until we tie[d] up offsetting lands"; he elaborated:

. . . The 11-33 was in as probable reserves and 10-32 was in as proven reserves. . . . . . . . . . we released the reserve[s] information . . . as part of . . . what our corporate reserves were. But . . . we didn't put a magnifying glass on the fact that there was a new oil pool. That . . . was a conscious decision . . . we made.

[126] Green had made similar comments in his Investigative Interview:

Management clearly indicated that they did not want to include any more information [than] we already had to specifically identify where our oil pool discovery was. It was noted in our press release that we had an oil pool discovery. [However, we observe in the February Release no reference to an "oil pool discovery", as such.] We had three of them in the year, and Clear Prairie was obviously one of them, but . . . there [were] ongoing negotiations with respect to this land [the Paramount Land], and therefore there was confidential information that had to be preserved, specifically being exactly where this [the oil pool discovery] is. . . . Obviously we couldn't come out [in] a press release on February 25th and say, This is exactly where it is, but we're trying to acquire additional land, and that's where part of the discussion with [Templeton] is, Are we appropriately disclosing this? Have we got all the factual information in here that we need to have in here?

[127] As to the concern about the Paramount Land negotiations, however, Kapusta acknowledged that Paramount might in any event – "if they're on the ball" – already have known about the 10-32 Well and oil production from it. As he explained, Paramount field operators in the area would have known from observation, and Paramount had access to the ERCB registry of monthly production data.

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[128] Canext issued another news release on 26 February 2008, correcting certain finding-and-development-cost figures in the February Release and announcing stock option grants to employees, management and directors. [129] The minutes of Canext's 26 February 2008 operations meeting included the following:

Clear Prairie 10-32-89-12 ran pump and rods, setting the PJ [presumably "pumpjack"] today . . . Reserve report completed. Press release [the February Release] issued summarizing results. F&D below $15.00/boe results in a 10% bonus for employees. . . . Set April 15th for audit and board meeting on year end financial statements. Next black out will start March 25th.

(j) Events in Early March 2008

[130] The minutes of Canext's 4 March 2008 operations meeting stated that the 10-32 Well was "on pump, slowly increasing rate". There was also a reminder that "[n]ext black out will start March 25th". [131] Wellington West Capital Markets Inc. ("Wellington") – which while preparing a research report in early February 2008 had made inquiries of Canext that could not be answered because Canext was in a quiet period – "initiated coverage" of Canext with a Canext-specific research report issued on 5 March 2008 (the "5 March Wellington Report"). [132] "[W]ithin an hour of market open" on 5 March 2008, a Wellington analyst called Kapusta, urging that Canext meet with interested institutional investors in Toronto. Kapusta, thinking it was "worth us making the effort to go to Toronto and meet with these buyers", set aside 19 and 20 March for this roadshow.

(k) Plans for Another News Release [133] In an email on 5 March 2008 Kapusta updated his fellow Canext directors and Templeton, Miller and Birchard about various matters. These included the status of casing for the 11-33 Well and his hope that testing could soon begin; his expectation that a deal for "key offset land" (presumably the Paramount Land) would soon be reached; and a proposed acquisition at Pouce Coupe. He concluded with the following (having attached the 5 March Wellington Report, about which we elaborate below):

Am planning a road trip with [Wellington] to market the story. Looks like March 19-20 in Toronto. [Birchard] is finalizing the presentation. The plan is to issue a press release March 13-14 highlighting the oil discovery and announce a new presentation has been placed on our website.

[134] Asked why the plan was to issue a news release relating to the Discovery on 13 or 14 March 2008 as opposed to in the context of the February Board Meeting, Kapusta testified that the expected imminent resolution, "one way or another", of the Paramount Land issue "certainly was a factor" and that Canext would be going into another quiet period around 25 or 26 March,

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during which Canext could not talk to any institutional investors. Further, "the real thinking here was I wanted to make sure there was going to be no selective disclosure of this". He elaborated:

And it was my understanding at this point in time that . . . you had to avoid, at all costs, any selective disclosure. My understanding was if I didn't disclose this oil discovery, I wouldn't be allowed to talk about it. Subsequent to this, now I've learned that that is not necessarily the case. You only need to discuss the specifics if it's material. So there may not have been a need to issue that press release. I could have gone to Toronto and talked about it without issuing that press release.

[135] On 6 March 2008 Birchard, preparing to go on holiday the next afternoon, emailed Kapusta a draft set of PowerPoint slides titled "[Canext] Investor Presentation – March 2008" for use at the coming Toronto roadshow. Two of the slides dealing with "Clear Prairie South" included the comments: "Light oil discovery drilled December 2007 tested unstimulated at ~150 boepd"; "Successful step out drilled February 2008"; and "10-32 oil well suggests upside of ~10MMBbls OOIP [original oil in place] per prospective section". Birchard explained that he calculated that last volume – expecting that Kapusta might revise it – by multiplying by four the Trimble Report's estimate of oil in place at the quarter-section area around the 10-32 Well, to reflect a square-mile block. Birchard said that, at the time he was preparing the draft slides, he knew there were some problems casing the 11-33 Well but assumed the well would be completed and be a success. [136] On 7 March 2008 Birchard sent Raychaudhuri an email (copied to Kapusta) telling Raychaudhuri that he would be "Acting VP Ex" during Birchard's holiday absence and setting out several matters to be handled or monitored, among them follow-ups on pending 11-33 Well analyses. A few hours later Birchard emailed Doty and Zelantini (copying Raychaudhuri and Holmes), advising that Raychaudhuri would be in charge (but for Kapusta) while Birchard was away, setting out another task list, and concluding with the bold-fonted comment "PS. Keep [Kapusta reined] in please!!" Birchard explained that the concluding comment was written because Kapusta was "the ultimate optimist and cheerleader for the company" and Birchard was "just much more conservative than" Kapusta – "And this PS here -- [Kapusta], at the time, was . . . preparing to do a road show to communicate some new information, to give our story, and he was just generally pumped up. And I was just communicating to those gentleman that, you know, I said, 'Keep [Kapusta] reined in'." [137] That same day, a half-hour or so before his holiday departure, Birchard received from Kapusta a draft – "the skeleton" – of a news release, with "XXs" where various numbers would eventually appear, among them the range of volumes for an estimated pool. Birchard, wanting "to make sure that some of the uncertainties with regard to the technical understanding were expressed", urged Kapusta that the news release estimate a pool size of "up to" an upper limit, but not state a lower limit. [138] Paramount and Canext reached a deal, apparently on 7 March 2008, the gist of which was that the 11-33 Well land would be grouped with the Paramount Land (averting the expiry of Paramount's licence), for which Canext would earn a 30% working interest in the Paramount Land and Canoil 20%, leaving Paramount with 50%.

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[139] The minutes of Canext's 11 March 2008 operations meeting noted 10-32 Well production ("15 m3opd, 4.5 e3m3/d" and, again, "[n]ext black out will start March 25th". [140] That same day – on 11 March 2008, a Tuesday – Kapusta emailed his fellow Canext directors and Templeton, Miller and Birchard (to the latter's home email address) another, 10-paragraph, draft news release and a revised draft set of PowerPoint investor presentation slides, commenting:

We're planning on issuing the attached press release and presentation after market close on Thursday. I don't think we need board approval because there's no financial info or guidance. I have [set up] four analyst meetings on Monday following the release. I will be in Toronto marketing with [Wellington] on March 19 + 20th. The press release is promotional to try and breathe a little more support into our stock. The timing of the release is critical due to the pre set meeting dates. We need this information in the public so we can talk about it. The main reason we're taking a more aggressive approach is the potential to do a . . . deal [apparently the contemplated acquisition at Pouce Coupe]. . . . We'll ask our banker about the loan carrying value of these assets. If we get some strength we'll have the opportunity to finance and complete a major transaction. . . .

[141] The attached revised draft set of PowerPoint slides included two dealing with "Clear Prairie South" with the comments: "Light oil discovery flowing unstimulated at ~150 boepd in January 2008"; "Successful step out drilled February 2008"; and "Pool size 20 [-] 40 mmstb original oil in place (based on the Compan[y's] internal evaluation of mapping, 2D seismic, old well log data, and core data)". [142] Birchard testified that, being out of the country at the time and having email trouble, he did not see this email (or, at least, the attachments – he seemed to say two different things in testimony) until 13 March 2008. He and Kapusta were trading other emails on 11 March – Birchard complaining that he could not access his work email but telling Kapusta that he (Birchard) could access his home email, and asking what was going on; and Kapusta responding with several "Updates", among them:

1. Still f@#$king around with 11-33. [Elaboration about difficulties and strategy followed.] . . . 9. Press release going out Thursday without 11-33 completion info, 10. I've [set up] four meetings with analysts to review in more detail 11. Toronto on the 19th and 20th.

[143] Meanwhile, Raychaudhuri – a keen follower of the stock market – emailed Kapusta some charts comparing market returns on various oil and gas issuers by name and category, with a specific comment on one issuer whose favourable results, he thought, could be attributed to its "basically" exclusive focus on Montney. Raychaudhuri testified that he "viewed this as being quite bullish . . . for Canext". [144] Around the same time on 11 March 2008 Kapusta sent an email to Canoil (copied to Raychaudhuri), the subject of which was "Canext Draft Release" and which stated: "We plan on issuing a press release later this week. Also, our presentation will include some Clear Prairie slides. I'm shipping them to you as a courtesy. Please keep them confidential until we issue our release." It concluded with the text of a draft news release consisting of the first four paragraphs

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of the mentioned 10-paragraph draft sent earlier the same day to Canext personnel (with one revision, noted below):

. . . [Canext] is pleased to announce it has discovered a new light oil pool in the Clear Prairie area of Northwest Alberta. The discovery well (Canext 60% interest) was a 1,300 m Triassic test. The well flow tested 41 API light oil without stimulation for a three week period at an average daily rate of 125 bopd and 200 mscf/d (95 boepd net) with a 1% water cut. Field netbacks were in excess of XX $/boe for January. The well has recently been equipped with a pumping unit. Canext subsequently drilled a successful step-out well (60% interest) based on high resolution proprietary 2D seismic and geological mapping. The pay zone was encountered as predicted and a full diameter core was cut to gain additional geological information for reservoir modeling. The Company experienced some operational problems with casing the well which required a smaller diameter liner be run to total depth. Completion and tie-in operations are currently [under way]. Canext has twelve (8.2 net) sections of prospective lands with options to increase its working interest. The Company is planning to shoot a 12 square mile 3D program to delineate the extent of the pool. Based on current mapping, which integrated several older wells that penetrated the pay zone, Canext management estimates a pool size of 20 - 40 million barrels of oil in place and 8 [-] 16 Bcf of natural gas. Clear Prairie is [predominantly] a winter access area however, Canext has begun to upgrade several roads and plans to drill 2-3 [the draft sent earlier the same day to Canext directors, Templeton, Miller and Birchard said 1-2] delineation wells this summer. The Company anticipates only minor production additions this year with the potential to drill several more wells and install a central oil treating facility next winter. Based on results of these wells, 3D seismic and available capital, the Company will plan for a development program spanning 3-4 years.

[145] Raychaudhuri testified that he did not "recall receiving or reviewing" Kapusta's 11 March 2008 "Canext Draft Release" email and said essentially the same thing in his July 2008 Investigative Interview. Under cross-examination by Staff, Raychaudhuri seemed to reverse course, saying "I believe I read this". Raychaudhuri also claimed not to know "specifically" why he was copied with this email, but conceded ". . . I suspect that [Kapusta] . . . may have cc'd me because [Birchard] wasn't there". His equivocation concerning this email diminished Raychaudhuri's credibility and left us with the impression that he was less than frank and reliable when testifying. Birchard having deputized Raychaudhuri to act in Birchard's stead, as explained in the emails already mentioned, Raychaudhuri would have known why he was receiving emails that he might not otherwise. [146] We are in no doubt, and thus find, that, having been so deputized, Raychaudhuri did read, on receipt or soon thereafter, Kapusta's 11 March 2008 "Canext Draft Release" email, including the draft news release text. Having so found, we simply do not believe Raychaudhuri's testimony that, while he "knew that there was probably going to be a press release coming out in March", he was unaware of either its anticipated timing or what it was expected to say. [147] It does not appear that the draft news release sent to the Canext directors was approved by them. Perhaps the directors accepted Kapusta's explanation (expressed in his 11 March 2008 email to them, quoted above) that such approval was unnecessary. It is unclear how, or whether, this squared with the Disclosure Policy.

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[148] That said, some Canext directors did respond to Kapusta. Kapusta told Birchard (in an email the evening of 13 March 2008, the absent Birchard having apparently seen the news release only after it was issued and, surprised at its oil-in-place reference, having queried Kapusta as to the directors' comments) that "[a]ll board members were supportive", noting that "Dabner had a qualifier about his concern on the [original oil in place] number but he deferred to our judgment". [149] Green had responded to Kapusta, in a 12 March 2008 email, offering "a couple of suggested minor changes" (shown in a blacklined copy) to the draft news release that Kapusta had sent to his fellow Canext directors, and some comments on the draft investor presentation. Two of Green's changes to the draft news release were merely grammatical or typographical. Another altered the heading by adding the word "pool", so it would read "Canext announces light oil pool discovery". He also deleted the proposed sentence mentioning "some operational problems" with the 11-33 Well. In the body of his email to Kapusta, Green stated: "With respect to your bold estimate of reserves at Clear Prairie South, I am comfortable given the range of the estimate and the fact that you have not estimated recoverables. You need numbers to have some impact and talk about with the investors." [150] The draft news release marked up by Green did not use the word "reserves", so the "bold estimate" to which he referred had to have been the "20 - 40 million barrels of oil in place and 8 [-] 16 Bcf of natural gas". In all, Green proposed emboldening Kapusta's already exuberant draft. [151] The drafts of the planned news release were prepared by Kapusta. The evidence was, or we have found, that Birchard and Raychaudhuri each received and reviewed a draft prior to the finalized version (the "March Release") being issued, the one reviewed by Birchard proposing a range of volumes for an estimated pool and the one reviewed by Raychaudhuri consisting of, essentially, the first four paragraphs of the March Release as later issued. Also, as noted, Birchard had been informed by a 5 March 2008 email from Kapusta that the plan was "to issue a press release March 13-14 highlighting the oil discovery", and Raychaudhuri had been informed, in the 11 March 2008 email from Kapusta providing the draft news release Raychaudhuri reviewed, that "[w]e plan on issuing a press release later this week". We find that these three Respondents knew in advance the planned timing of the March Release and that it would discuss the Discovery. [152] While there was no similar evidence concerning the other Respondents, all but Zelantini certainly knew that something was coming:

• In his Investigative Interview Birchard said that he did not know "what information other people may have had with regard to the press release specifically", noting that "most people in the company, in my group, were attending operations meetings and were aware of the prospects and upside and land deals and pressures and things like that" but that "not everybody would . . . have information that . . . I had, working on . . . presentations or discussing with [Kapusta] about upside, things like that". This, essentially, was confirmed by Birchard in testimony.

• Holmes said that he first saw the March Release after it was issued and had not seen a draft of it. However, according to Holmes, he knew before, from Kapusta, that a news release would be issued and that it would "talk about Clear Prairie",

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although he did not know when it would be issued or that it would talk "specifically" about "the oil discovery".

• Doty denied having been privy to drafts of the March Release or knowing its specific timing or contents, but said that he assumed part of the news release would be about completion results of the 11-33 Well which, at 12 or 13 March 2008, was still in difficulty. He testified: "I was aware that there would be a press release. I believe that it had been mentioned in one of our operation[s] meetings." In his July 2008 Investigative Interview he similarly said that ". . . I think it was discussed in an operation[s] meeting, that there would be a news release that week. . . . So March the 11th was probably the [operations] meeting. . . . [A]nd it was mentioned that there would be a press release, although I didn't know when that was going to occur". We note that Kapusta, in his Investigative Interview, said that news releases would not have been discussed at operations meetings, and that he did not believe it was mentioned at such a meeting that a news release would be held up pending the Paramount Land being tied up. The evidence of Doty and Kapusta on this is difficult to reconcile. However, it seems to us unlikely that Doty would invent knowledge he did not possess, particularly when (as here) it is potentially adverse to his own interest. We also note that the individuals who participated in operations meetings worked in close proximity and had routine interaction, such that information circulated among them both within and outside operations meetings. We conclude, on the totality of the evidence, that Doty learned, at or about the time of the 11 March 2008 operations meeting (either inside or outside the meeting), enough about the forthcoming March Release to at least infer that it would discuss the Discovery, and to know that its issuance was imminent.

• Zelantini testified that he saw the March Release only after it was issued, on an investor website he followed, and had not seen a draft of it. He also claimed not to have been aware that a news release was going to be issued. If indeed the forthcoming March Release was discussed at the 11 March 2008 operations meeting, then Zelantini would have learned enough about it then to draw the same inference as Doty and to know that its issuance was imminent. However, as discussed above, there is conflicting evidence on that. Having regard to the totality of the evidence, including Zelantini's testimony, there is not sufficiently clear, convincing and cogent evidence that Zelantini had advance knowledge of the March Release's timing or content. We therefore do not find that he had such advance knowledge.

(l) The March Release

[153] On 13 March 2008 at, according to the time notation on a newswire copy in evidence, "16:48 ET" – 14:48 Calgary time – the March Release was issued. Given the focus placed on it, we reproduce it here in its entirety:

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Canext Announces Light Oil Pool Discovery CALGARY, ALBERTA--(Marketwire - March 13, 2008) - Canext Energy Ltd. ("Canext" or "the Company") (TSX VENTURE:CXZ) is pleased to announce it has discovered a new light oil pool in the Clear Prairie area of Northwest Alberta. The discovery well (Canext 60% interest) was a 1,300 m Triassic test. The well flow tested 41 degree API light oil without stimulation for a three week period at an average daily rate of 125 bopd and 200 mscf/d (95 boepd net) with a 1% water cut. Field netbacks were in excess of $45/boe for January. The well has recently been equipped with a pumping unit. Canext subsequently drilled a successful step-out well (60% interest) based on high resolution proprietary 2D seismic and geological mapping. The pay zone was encountered as predicted and a full diameter core was cut to gain additional geological information for reservoir modeling. Completion and tie-in operations are currently [under way]. Canext has twelve (8.2 net) sections of prospective lands with options to increase its working interest. The Company is planning to shoot a 12 square mile 3D program to delineate the extent of the pool. Based on current mapping, which integrated several older wells that penetrated the pay zone, Canext management estimates a pool size of 20 - 40 million barrels of oil in place and 8 - 16 Bcf of natural gas. Although Clear Prairie is [predominantly] a winter access area, Canext has begun to upgrade several roads and plans to drill 1-2 delineation wells this summer. The Company anticipates only minor production additions this year with the potential to drill several more wells and install a central oil treating facility next winter. Based on results of these wells, 3D seismic and available capital, the Company will plan for a development program spanning 3-4 years. The light oil pool with development upside potential is complementary to the Company's Pouce Coupe Montney/Doig natural gas resource play. Canext has 11,460 net acres at Pouce Coupe with the potential to drill 43 net wells, assuming four vertical wells per section. The Company is currently evaluating a competitor's recently drilled horizontal wells offsetting Canext's land base. The ultimate development strategy for Pouce Coupe will be based on the evaluation of horizontal wells versus vertical wells and impacts from the Alberta new royalty framework. Canext has engaged Canaccord Enermarket to assist in the sale of certain non core properties with production of approximately 500 boepd. The property packages include Retlaw, Niton, Birch, Hines Creek/Dixonville, and Saskatchewan ORR's. They will be available shortly with bids due mid April and closing(s) targeted for the end [of] May. The proceeds from the sale of these properties will be used to accelerate the development opportunities at Pouce Coupe and Clear Prairie. Canext is also pleased to announce it has placed an updated corporate presentation on its website. The Company is targeting release of its audited financial statements for the year ended December 31, 2007 on or about April 15, 2008. Reader advisory: The term "BOE" may be misleading, particularly if used in isolation. In accordance with NI 51-101, a BOE conversion ratio for natural gas of 6 mscf: 1bbl has been used which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Investors are cautioned that the preceding statement of the Company may include certain estimates, assumptions and other forward-looking information. The actual future performance, developments and/or results of the Company may differ materially from any or all of the forward-looking statements, which include current expectations, estimates and projections, in all or part attributable

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to general economic conditions and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including natural gas/oil prices, reserve estimates, drilling risks, future production of gas and oil, rates of inflation, changes in future costs and expenses related to the activities involving the exploration, development and production of gas and oil hedging, financing availability and other risks related to financial activities. The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release. For more information, please contact Canext Energy Ltd. Stephen Kapusta President & CEO (403) 263·3232 Email: info@canextenergy.com

[154] There is perhaps much to criticize in the March Release. It is promotional in tone, and not the sort of balanced presentation of facts with risks that NI 51-101 was meant to encourage. However, as stated, this is not an inquiry into the quality of Canext's disclosure. [155] Despite that, it is relevant and appropriate to look to the March Release for insight into the information available to the investing public. We think worth repeating two of the comments in the March Release: Canext "is pleased to announce it has discovered a new light oil pool"; and ". . . Canext management estimates a pool size of 20 - 40 million barrels of oil in place". We were reminded during the Merits Hearing that a bare reference to a volume of "oil in place" tells the investing public nothing about the portion of such volume – if any – that might constitute a reserve or be profitably produced. The March Release did not include – even in the "Reader advisory" portion near the end – a similar reminder, admonition or caution. Kapusta sought to justify the disclosure made on the ground that Canext "had a geological interpretation that that was a reasonable range of estimates" and that "it was flavour of the year" for public oil and gas companies to disclose "resource potential". He also told us that, in the spring of 2008, the disclosure of inherently-riskier resources, as opposed to reserves, was optional, and there was limited guidance provided about such disclosure. [156] Be that as it may, Kapusta also told us that concern expressed by the trading oversight agency Market Regulation Services prompted Canext to issue another news release, on 17 March 2008. Stated to be "clarifying the new light oil pool discovery in the Clear Prairie area of northwest Alberta", this news release noted that the "light oil discovery with original oil in place of up to 40 million" barrels disclosed in the March Release "would be classified [under NI 51-101] as a discovered resource", and gave some explanation of that term. [157] The March Release comments about "Canext subsequently drill[ing] a successful step-out well" clearly referred to the troublesome 11-33 Well. As issued, the comments omitted the cautionary mention (in earlier drafts) of "operational problems with casing". Despite the unresolved problems with the 11-33 Well at the time, Kapusta told us that he believed NI 51-101 permitted the use of the descriptor "successful". [158] Completion operations on the 11-33 Well ended soon after 13 March 2008. The result (according to Raychaudhuri) was "water and no hydrocarbons". Trainor called it a failure "[b]ig

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time". Birchard confirmed that it was a mechanical failure, and Green testified that "we were never able to get economic production out of it" and "were never able to validate the existence of . . . oil reserves in the wellbore". [159] As noted, on 14 March 2008 – the day after the March Release – Canext Shares traded on the TSXV as high as $1.15 per share and closed at $0.89. This closing price represented an approximate gain of 41% from the previous close, and an approximate 123% increase from the beginning of the year (and, in Staff's submission, the Canext Share price not having closed above $0.55 in "basically" – perhaps an allusion to a small number of exceptions – the seven months preceding the March Release, an approximate 60% increase over that period). [160] The next week, on 19 March 2008, Raychaudhuri – now about to leave on his own holiday – emailed Birchard some status updates, concluding with the chatty comment:

[T]ry as we might, we were unable to [rein Kapusta] in. [H]e wanted to press release Clear Prairie before he went on the road. [W]e all erroneously thought he'd be in T.O. the Monday after the release, but he only went yesterday. [S]o in hindsight, we shoulda' tried to keep him [reined] in for an extra day or two. [C]oulda' woulda' shoulda'.

[161] Clearly a reference to Birchard's urging that Raychaudhuri and others keep Kapusta reined in during Birchard's holiday absence, Raychaudhuri testified that he was specifically thinking of the failure of the 11-33 Well, for which (as noted) completion operations ended only after 13 March 2008 – "had we had that information, you know, the release would have probably been different".

2. 10-32 Well Oil Production Overview [162] Field production data and other evidence enable us to summarize the oil production from the 10-32 Well in and for a time after the Relevant Period:

• With the well put on production on 22 January 2008, there was "high production" (in Kapusta's words) for the next two days (23 and 24 January) – 190.8 and 139.5 barrels of oil per day respectively.

• For the next 18 days, from 25 January through 11 February 2008, production

ranged from a high of 146.3 barrels of oil per day to a low of 61.3, averaging about 116 barrels of oil per day.

• There followed a period when very little oil was produced. The well stopped

flowing unassisted on 11 February 2008, but production (apparently pumped) resumed on 17 February and continued until it was again interrupted on 20 or 21 February. Production did not resume until 27 February. (Field production data for the period 12 to 26 February 2008 showed four days of production – 17 through 20 February – averaging about 80 barrels of oil per day. Kapusta testified that "the well stopped flowing . . . in February. We tried again to get it flowing for a couple days . . . . This was pumping, and then we had some problems, and we got it pumping again at the end of February." The 26 February operations meeting minutes mentioned "setting" what we take to be a pumpjack that day.

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• For the 16 days beginning 27 February and ending 13 March 2008, production

ranged from a high of 126.6 barrels of oil per day to a low of 54.2 and averaged almost 86 barrels of oil per day.

• For the next 17 days ending 30 March 2008, production ranged from a high of

113.4 barrels of oil per day to a low of 23.9 and averaged about 81.5 barrels of oil per day.

• Then, until late June 2008, there was no production while the well was shut in. • When the well came back on line on 25 June 2008, its production was 125.9 barrels

of oil, with daily production in the following months never again reaching that level and (generally) gradually declining.

[163] Kapusta testified that, while the original estimate of "recoverable" oil from the 10-32 Well, using a 6% recovery factor, was 169 000 barrels (Canext's working interest share of which, we note, would correspond to the 101 438 barrels proved-plus-probable reserves estimate in the Trimble Report), the field production data summarized above and his related charts "now would suggest about 50 000 barrels, Canext's share at 30 000 [barrels]". How the field production data led to this change in the estimated volume was not made clear to us. [164] Kapusta told us that the results from the December Test – "the 41 API number", indicative of whether the production was light oil – were not achieved in any subsequent testing, the first such subsequent testing occurring in May 2008. [165] Kapusta also testified that, of the five wells subsequently drilled in the area, only one of them was economically successful. That well, according to Kapusta, was less than 400 metres from the 10-32 Well and "started stealing some of . . . 10-32's oil". Kapusta explained it as "the nature of the risk with the play. It got more complicated through time".

3. Analysts' Research Reports [166] In evidence were several research reports by capital market analysts. [167] The earliest of these was by Wellington, dated 6 February 2008. Titled "Energy Strategy – The Full Montney Story", this report commented favourably on prospects for companies involved in the Montney area, pointing to such factors as technological advancements, its "large gas in-place reserves" and "the thickness and lateral extent of the deposit". This report named several companies (explorers, or in the drilling and oilfield service sectors) with what Wellington suggested was favourable exposure to Montney, Canext not among them. [168] On 11 February 2008 Raymond James Ltd. published a report on what it called "Monumental Montney". This report's theme and broad conclusions were similar to those of the Wellington report five days earlier, and like it this report named various explorers and drilling and service companies, not including Canext, considered to be favourably exposed.

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[169] Another two days along, on 13 February 2008, Thomas Weisel Partners Canada Inc. ("Weisel") issued a report titled "Energy Sector: The Macro, The Method and The Montney" (the "Weisel Report"). It included discussions of the gas market generally and technological developments helpful at Montney, and named some exploration companies that Weisel considered would benefit. Canext – "CXZ Pouce" – was mentioned at "Exhibit 29: Regional Montney Map and Players". [170] Canext's February Release, issued on 25 February 2008, prompted a small flurry of analysts' research reports about Canext specifically. [171] Tristone Capital Inc. ("Tristone") published a Canext-specific "Producer Update" on 26 February 2008, essentially a response to and assessment of the information in the February Release. It commented on what Tristone saw as reserves numbers in line with its expectations, disappointing "FD&A" costs and lagging and disappointing production, as well as on Montney, which Tristone termed a "Diamond in the Rough for Canext". In sum, Tristone made no change to either its assessment of net asset value per Canext Share ($0.76) or its 12-month target Canext Share price ($0.60). This report referred to an earlier – 10 December 2007 – Canext-specific report by Tristone that highlighted Canext's "significant land position along the Montney/Doig tight gas play at Pouce Coupe". [172] Acumen Capital Finance Partners Limited ("Acumen") also issued a Canext-specific report on 26 February 2008. This commented briefly on some of the reserves and other data disclosed in the February Release – including that "Canext plans to focus primarily on development drilling targeting the Triassic/Doig and Montney formations at Pouce Coupe and shallower Triassic targets at Clear Prairie" – and set out a table that reflected increased production expectations over the course of 2008 for natural gas, oil and natural gas liquids. Acumen cited three bases for maintaining its "buy" recommendation, with a 12-month target Canext Share price of $0.65: Canext's "large undeveloped land base"; proved-plus-probable reserves "valued at $0.67 per [Canext Share]"; and "the potential upside of the Montney resource play". Kapusta said that this report showed growth in oil, not just gas, unlike the Tristone report of the same date. He attributed this to Acumen "picking up the oil that we've drilled". [173] In its Canext-specific 26 February 2008 report, Northern Securities Inc. ("Northern") commented briefly on some of the reserves and other data set out in the February Release, noting "current field production . . . significantly below our expectations". Citing "the reduction in our FY08 average production and cash flow estimates", Northern moved from a previous "Strong Buy" to "Buy" recommendation and lowered its 12-month target Canext Share price from $0.85 to $0.55. Neither Montney nor Clear Prairie was expressly mentioned in this report. [174] The 5 March Wellington Report was (as noted) a Canext-specific report. Headlined "A+ Montney Potential at Pouce Coupe: Initiating Coverage with Strong Buy", it (among other things) commented on the information in the February Release. Citing "the significant reserve and production growth potential expected from delineation and development of [Canext's] Montney project at Pouce Coupe", Wellington informed readers that it was "initiating coverage" on Canext and assigning it a "Strong Buy" recommendation, with a 12-month target Canext Share price of $0.75. The first of the listed "Investment Highlights" was titled "A Small Company with BIG Montney Exposure". Further on, under a subtitle "Room to More than Double Reserves",

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Wellington continued: "The Montney/Doig play in the Pouce Coupe area has the potential to more than double [Canext's] reserves". There was, in addition, some mention of other "Development Properties", including Clear Prairie ("interests in five shallower . . . Triassic light oil and gas pools identified to date"). The discussion of identified Clear Prairie pools or targets and of production did not explicitly mention the Discovery. Overall, the story of the 5 March Wellington Report was Montney. [175] It is obvious from a perusal of these analysts' research reports – as was acknowledged by Raychaudhuri in relation to those he had seen (all but the Weisel Report) – that their focus was Montney, whether from Canext's or the oil and gas industry's perspective. This was about to change. [176] Tristone issued an "Industry Update" on 14 March 2008 – the day after the March Release was issued. A fairly lengthy document, its title told the story: "Montney Python – The Holy Grail of Canadian Tight Gas". Along with general discussions of technologies and economic factors, the report analyzed recent and anticipated activity at Montney, including brief commentaries on each of a number of oil and gas companies, among them Canext. The Canext-specific commentary, which provided an enumeration of "Montney Activities" (in keeping with the story of the report), concluded with the following: "We . . . are increasing our target to $1.40/sh, which layers in base-case Montney upside . . . and yesterday's oil discovery on top of our core NAV of $0.76/sh." Kapusta told us that this remark should be understood in context – Canext's Pouce Coupe asset "dwarfs anything . . . at Sweeney on the resource side". [177] A reader wondering what oil discovery was meant by Tristone needed to look no further than a Tristone "Producer Update" specifically about Canext, also dated 14 March 2008. In this report, titled "Montney Upside and Light Oil Discovery Provide Needed Momentum", Tristone upgraded its rating of Canext to "Top Pick" from "Outperform", and increased its 12-month target Canext Share price by $0.80 to $1.40. As suggested by its title, this report focused on Montney and the Discovery. The front-page highlight concerning the latter, subtitled "Light Oil Provides Much-Needed Diversity", began "Canext press-released a light oil discovery yesterday, at Clear Prairie", noted that "[t]he discovery well flowed at ~150 boe/d (41 EAPI light oil)" and "a successful follow-up has already been drilled", and concluded with Canext's estimate of 20 to 40 million barrels of oil in place. Expanded commentary on the 10-32 Well, titled "Light Oil Floats Hope for Clear Prairie", included: "Given Canext's limited exposure to light oil . . . , this is a material discovery for the company. . . . Our low-case recoverable estimate of 2.5 mmb, valued at $14.00/b in the ground translates to $0.40/sh in upside for Canext." Ultimately, Tristone attributed its increased 12-month target Canext Share price to layering in "base case Montney upside . . . and initial light oil success at Clear Prairie on top of our base NAV of $0.76/sh." Nevertheless, Kapusta told us that, given the numbers used in this report, it was, in his opinion, "the gas story", not the news-released Discovery, that "moved us to top pick" and "increased our target as much". [178] Wellington also published a Canext-specific report on 14 March 2008. Its title, " 'Company Changer' Light Oil Discovery: Raising Target to $1.50 from $0.75", told the story: this report, although it discussed Montney, was about the Discovery. The first of four front-page highlights began "Clear Prairie discovery estimated at 20mm to 40mm bbls OOIP". In a discussion under the heading "Investment Summary and Outlook", the same estimate appeared again – in bold font – followed by the conclusion: "In view of this significant Triassic light oil

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discovery . . . , and the potential for this asset to add anywhere from $0.77 to $1.54 per share once fully developed, we are increasing our target to $1.50 from $0.75 pre discovery, and re-iterate our Strong Buy rating." Further on, under the subheading "Massive Oil Discovery Changes Face of Company", the estimate was repeated. Yet further into this report was the statement: "The discovery of a Triassic age light oil discovery in the Clear Prairie area is expected to transform the growth profile of the company over the next 3 to 4 years." A few pages later, this report acknowledged the need for "further delineation and development of the Clear Prairie discovery and the Montney gas trend to confirm reserve additions", but noted that "the impact these two resources is likely to have is of keen interest". Kapusta testified that he considered this report to be "very promotional" and "quite a bit of a stretch to what we were doing at the time and what we were capable of achieving". [179] Also in evidence – an exhibit to Kapusta's Investigative Interview – was a Canext-specific report issued by Acumen on 17 March 2008, an update to its "previous February 26, 2008 research report to reflect a recent press release". This report included the comment: "Canext has announced a major new-pool oil discovery at Clear Prairie which, combined with its Pouce Coupe Montney play, gives the Company significant running room to grow reserves, production and cash flow at relatively low risk for several years to come." It noted management's estimate of 20 to 40 million barrels of original oil in place. It concluded by maintaining Acumen's buy recommendation, with a 12-month target Canext Share price of $1.50 – "Our target implies a 68.5% increase in value from the closing March 14, 2008 share price of $0.89." This recommendation was based on "the new pool at Clear Prairie providing potentially significant upside to reserves and asset value, notwithstanding risks associated with early-stage production and delineation efforts, and the significant Montney resource potential of Pouce Coupe". C. The Respondents' Purchases and Sales of Canext Shares [180] We summarize here the Respondents' respective purchases and sales of Canext Shares, categorized (for the most part) according to whether they occurred before, during or after the Relevant Period. Where nothing to the contrary is indicated, we infer that each was an open-market transaction effected over the TSXV. According to the Agreed Facts, all purchases between 1 January and 13 March 2008 were "unsolicited" (which we take to mean effected at the instance of the respective Respondent, rather than at the urging or on the recommendation of his broker) and two pre-Relevant Period purchases were recorded as "solicited". We infer from this, nothing to the contrary being indicated, that all other purchases (we were not informed of any post-Relevant Period purchases) were unsolicited. Stated prices are per Canext Share.

1. Kapusta [181] According to the Agreed Facts, Kapusta bought 1 664 832 Canext Shares and sold none, as detailed below.

Pre-Relevant Period Kapusta's purchases (direct and indirect) before the Relevant Period totalled 1 114 832 Canext Shares: • 6 June 2006: 455 000 "flow-through" shares at $1, in a private placement;

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• 16 June 2006: 50 000 shares at $1, on exercise of warrants received in the plan of arrangement;

• 14 September 2006: 26 332 flow-through shares at $1.70, in a private placement; • 23 and 24 April 2007: shares in Trimox Energy Inc. that were later converted into

210 000 Canext Shares under the plan of arrangement; • 6 July 2007: 37 500 shares at $0.69; • 19 July 2007: 31 000 shares at $0.69; • 20 July 2007: 5000 shares at $0.69; • 23 July 2007: 7500 shares at $0.69; • 24 July 2007: 42 500 shares at $0.69; • 7 August 2007: 28 500 shares at $0.60; • 8 August 2007: 21 500 shares at $0.60; • 29 August 2007: 86 500 shares at $0.48; and • 4 September 2007: 113 500 shares at $0.52. Relevant Period Kapusta bought a further 550 000 Canext Shares in the Relevant Period: • 27 February 2008: 400 000 shares at $0.45 (buy orders he placed that day, with

"good-till" dates as far off as 10 March 2008, were all filled that day); and • 3 March 2008: 150 000 shares, some at $0.445 and some at $0.45 (buy orders he

placed that day had a "good-till" date of 7 March 2008).

[182] The pre-Relevant Period purchases summarized above might understate Kapusta's total investments in Canext. He told us that "when we started Canext" he rolled all of his shares in a predecessor entity into Canext and exercised all warrants and options to which he was entitled – "That was probably somewhere around [a] 4 or $500,000 investment." It is unclear whether or to what extent this was included in the purchases enumerated in the Agreed Facts. Regardless, Kapusta clearly made significant investments in Canext, and had a substantial shareholding, long before the Relevant Period. Kapusta testified that, after his initial purchases (as set out in the Agreed Facts), he engaged in a "steady purchase of shares, basically following the share price down". He further testified that, "every year since 2002, I bought more shares and reinvested more capital in the company than I ever took out, in terms of salary or bonus. And that came through 'til 2009."

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[183] We understand from Kapusta's testimony that the normal course issuer bid kept him from purchasing or attempting to purchase Canext Shares, which he considered to be undervalued, from 5 September 2007 until after the January Board Meeting. On 29 January 2008 he placed buy orders for 300 000 Canext Shares at $0.38 with a "good-till" date of 4 February 2008; these orders expired unfilled.

[184] As to what motivated his purchases on 27 February and 3 March 2008, Kapusta testified: "The company was trading at a fraction of its net asset value. As per the press release on February 25th, we'd come out of our blackout. We'd just issued options on the 26th. There was no reason, in my mind, why I couldn't be buying. And -- I did so." He also referred to what he termed the "unanimous conclusion" at the February Board Meeting that Canext could rely on its disclosure of 2007 reserves evaluation results: "So I was quite comfortable. I thought I did the due diligence . . . and went to purchase shares. I mean, I don't think I made a mistake." Kapusta said that he had sold other securities and had a lot of available cash. He also said that, while he may have mentioned these purchases to Miller, "we just got an e-mail the blackout's been lifted, so this was okay" and "at this point in time, . . . there [were] no concrete plans as to any road shows" and the 5 March Wellington Report "hadn't come out yet". Kapusta testified that he made the requisite public filings on the System for Electronic Disclosure by Insiders ("SEDI") with respect to these purchases of Canext Shares.

[185] Kapusta believed that the other Respondents were "generally aware" that he had bought Canext Shares because "everybody knows I buy shares every year" and there are ways, including reviewing SEDI reports, to get updates on insider buying. In his Investigative Interview he acknowledged that, in casual conversation, he might have talked about his trading with "other employees". Kapusta told us that, if asked by any of the other Respondents, he would have acknowledged that he had bought Canext Shares, but he would not have sent out an email or any other communication to that effect.

[186] Kapusta testified that "there was a general bull market that started the gas side in November [2007], and stocks had certainly started to move". He believed that this was one of the reasons for the Respondents' purchases of Canext Shares, and he said: "I know for sure it's why I bought". In his Investigative Interview he similarly said that he was buying "on the gas story". In evidence was a chart tracking the 10-day average closing prices of Canext Shares and benchmark Alberta natural gas prices from November 2007 through June 2008, about which Kapusta said: "There appears to be a very strong correlation. Canext traded during this period of time like a gas company". Referring to charts in evidence concerning forward-selling of gas and oil, Kapusta noted that in January 2008 "the collective wisdom of the market is that the oil prices are at a peak, and they will fall through time", but conversely, with gas, "the future prices will continue to rise through a big spike next winter, drop a little bit, and then continue to rise again for the next winter's cycle", with little change in February or March 2008. Also in evidence were charts tracking, from November 2007 through June 2008, percentage changes in the price of Canext Shares and the price of shares of four other companies involved in the Pouce Coupe area. About these, Kapusta said that "we're just trying to show . . . correlations where . . . industry reports can affect companies' stock price . . . particularly when you're smaller market cap". Referring to two additional charts in evidence, Kapusta also testified to the possible effect of a 15 July 2008 Tristone "Industry Update" (titled "Shell $5.9 Bn All-cash Bid Shines Spotlight on Montney

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Valuations", also in evidence) on the Canext Share price, concluding that, by mid to late July 2008, which Kapusta described as "basically . . . the peak . . . of the gas bull run, especially for [Montney] players", Canext was "in line with our peers".

[187] Kapusta testified that "at no point in time did I ever try to bid up the stock". He also said that he never sold any of his Canext Shares but that, after Canext was acquired by another company and his Canext Shares were converted to shares in that company, he began selling the converted shares in or around August 2010 "at the equivalent of 41 cents per share to lock in my loss".

2. Holmes

[188] According to the Agreed Facts, Holmes bought 550 000 Canext Shares and sold none: Pre-Relevant Period • 6 June 2006: 350 000 flow-through shares at $1, in a private placement. Relevant Period • 5 March 2008: 200 000 shares, some at $0.45 and some at $0.445.

[189] Holmes testified that the main, or a major, motivator for his March 2008 purchase of Canext Shares was his knowledge that Kapusta had just bought. Asked how he became aware of this, Holmes responded:

. . . Raychaudhuri . . . always put the insider trading numbers on his wall of people that had bought shares, so I . . . knew [Kapusta] had purchased some shares. He always had a listing of that in his office. And I had talked to [Kapusta]. I knew he had purchased shares.

[190] Holmes testified that, to make his March 2008 purchase, "I sold [other] stock to buy that. I sold it, I believe, in February". In his August 2008 Investigative Interview Holmes had said that he had some money available because he had sold that stock in, he guessed, late February.

[191] Holmes testified to having been aware of, and having looked at, the Disclosure Policy, and thus to being aware of blackout periods during which "[w]e can't buy our stock". Asked about the steps he took to assure himself that it was okay to buy Canext Shares on 5 March 2008, Holmes testified: "Just talking to [Kapusta]. He acknowledged . . . it was okay to buy, before I bought, . . . and I did. . . . [T]here was no blackout. He had just bought a day or two before me, . . . so I felt it was fine to buy". The following, not inconsistent, exchange occurred in Holmes's Investigative Interview:

Q Was there any conversation by yourself with legal counsel or employees or [Kapusta] with

respect to your own purchase on March the 5th, 2008, whether it would have been appropriate under insider trading guidelines within the company?

A Not legal counsel, but . . . with [Kapusta], sure. I mean, he was buying. He said it's fine,

yeah.

Q And what was the content of that conversation?

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A I don't think there [were] any specifics other than he was buying. It was okay, so I bought. It was that simple.

Q Now, did you ask him or --

A Not specifically, no. Not that question. We would have asked legal counsel that question

but . . .

Q So you felt it was implied that it was okay because [Kapusta] was buying?

A Yeah. We always send out e-mails. I mean, there's one out right now from our CFO, you know, it's a blackout period. [Kapusta's] always careful about that. He sends out an e-mail. Blackout period . . . can't buy during this period of time. So it wasn't anything like that. So . . . we know . . . for sure . . . it was those periods when we can't buy. He's very specific about that stuff.

[192] Holmes testified that he likely told Kapusta, Birchard, Zelantini and Raychaudhuri of his March 2008 purchase, afterward, but added "certainly they would have known after I purchased, yes".

[193] Kapusta told us that he was aware Holmes had purchased Canext Shares in early March 2008 and that he recalled "a discussion around that fact". Kapusta also noted that Holmes "would have SEDI filed" which, Holmes told us, he did.

3. Birchard

[194] According to the Agreed Facts, Birchard bought 512 500 Canext Shares (47 500 of those in the Relevant Period) and sold none:

Pre-Relevant Period • 6 June 2006: 465 000 flow-through shares at $1, in a private placement. Relevant Period • 25 January 2008: 10 000 shares at $0.43; • 28 January 2008: 3000 shares at $0.40; • 30 January 2008: 7000 shares at $0.40; • 31 January 2008: 20 000 shares at $0.42; and • 1 February 2008: 7500 shares at $0.42.

[195] Birchard testified, consistent with the Agreed Facts, that all of his Relevant Period purchases followed instructions he gave to his broker, on 24 January 2008, to buy $26 000 in Canext Shares for his RRSP – for which he had $20 000 contribution room – and his wife's RRSP. Birchard testified to his awareness of the Disclosure Policy and the Disclosure Committee (although he thought Kapusta was a member). He told us that he knew there was no trading blackout in effect and that, the morning of 24 January, he checked with Kapusta "to see if it was okay for me to purchase shares". He elaborated:

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And the reason to check with [Kapusta] was that the CFO had sent out an e-mail in November, I believe, of 2007 stating that the company has a normal course issuer bid in place, and any transactions regarding Canext should be discussed with [Kapusta] first. . . . I had talked to [Kapusta] that morning and said, I'm interested in purchasing shares probably for my RRSP. Is that okay? And I think that the response was, yes, that's no problem. The company is buying shares.

[196] Birchard testified that he used cash in his margin account to make his Relevant Period purchases, and that he made the requisite SEDI filings with respect to them.

[197] Kapusta told us that he knew Birchard was purchasing Canext Shares "because he was buying around the NCIB [normal course issuer bid] time. And as per our policy, officers were to advise if they were buying when we had an NCIB in place. So we adjust the NCIB back".

4. Zelantini

[198] According to the Agreed Facts, Zelantini bought a total of 119 800 Canext Shares (25 000 of those in the Relevant Period), and sold a total of 54 000 Canext Shares in the two weeks (starting immediately) after the Relevant Period:

Pre-Relevant Period • 6 June 2006: bought 90 000 flow-through shares at $1, in a private placement; • 27 June 2006: bought 1600 shares at $1.10; and • 29 August 2007: bought 3200 shares at $0.483. Relevant Period • 21 January 2008: bought 6500 shares at $0.39; • 30 January 2008: bought 5000 shares at $0.42; • 31 January 2008: bought 1000 shares at $0.42; • 29 February 2008: bought 5000 shares at $0.45; • 10 March 2008: bought 4500 shares at $0.50; and • 13 March 2008: bought 3000 shares at $0.54, on a buy order placed at 11:14

Calgary time. Post-Relevant Period • 14 March 2008: sold 16 000 shares at $0.88; • 20 March 2008: sold 30 000 shares, some at $0.70 and some at $0.71; and

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• 28 March 2008: sold 8000 shares at $0.80.

[199] Zelantini, also a keen follower of the stock market (to the extent that the homepage on his office computer was apparently an exchange or investor website), testified that he made his pre-Relevant Period purchases because he "believed in the company and in the management team" and "oil and gas companies in general were just favourable investments at the time".

[200] He testified that the motivations for his January 2008 purchases included Canext Shares "trading really low compared to where we started"; research reports (which, Zelantini said, Kapusta passed along "to the entire company") indicating a net asset value and price targets for Canext Shares of or above $0.80 based on interest in Pouce Coupe, specifically Montney; Canext's normal course issuer bid indicating that the company believed Canext Shares to be undervalued; and his knowledge from an online insider trading report service that his boss, Birchard, was buying.

[201] Zelantini also testified as to what motivated his February and March 2008 purchases. He told us that there was a trading blackout for much of February – in advance of release of the reserves evaluation results – which was lifted on 26 February. Zelantini said that he and other employees then received bonuses and, it being February, he decided to contribute to his RRSP. He also said that natural gas prices were increasing; more research reports were commenting on Canext, Pouce Coupe and Montney; Canext's competitors were showing good results; he believed "the company was still purchasing shares"; and "at this particular time, other insiders were buying, as I noticed on [an online insider trading report service], which is [Holmes] and [Kapusta], and that's always a good sign . . . . So I purchased shares based on that". Zelantini testified to having observed, in his website perusals, "a lot of volume" in Canext Shares on 13 March – for some reason that he could not specifically recall but which he thought might have been a 5 March research report or "something happening on that day". (The trading data showed the total trading volume for Canext Shares on 13 March to have risen from the trading day before.) He indicated that he inferred from this volume that investors had "started to catch up that we were under-valued" and "that's why I decided to purchase then".

[202] Zelantini could not recall having seen or read the Disclosure Policy. However, he understood that Canext directors and management made decisions as to what was and was not material, and he testified:

My understanding of what a blackout was, was the board of directors and management basically decided . . . that if there was some important information within the company, that we could not trade. So if it was in place, . . . we could not trade, employees could not trade. And if it was lifted, that meant we could trade.

[203] Asked about the steps he took to assure himself that it was okay to buy Canext Shares in the Relevant Period, Zelantini told us that, before his Relevant Period purchases, "I would have looked for the e-mail . . . if we were in a blackout or weren't in a blackout." He also asked Kapusta if there was a blackout in place and was told "no", which he took "as having permission to purchase shares". However, it was Zelantini's testimony that he so inquired of Kapusta only once, prior to his February 2008 purchase, and then assumed that was the case, "[u]ntil . . . an e-mail would have notified us" otherwise.

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[204] We note that Zelantini gave a different impression in his August 2008 Investigative Interview, indicating then, to Staff, that he could not recall asking management whether it was "okay" to trade in the Relevant Period. While one might imagine that Zelantini's factual recollection would have been clearer then (closer to the Relevant Period) than later (at the Merits Hearing), this seeming discrepancy was not raised in the Merits Hearing. In the circumstances, we are prepared to accept that Zelantini had, as he testified, queried Kapusta in February 2008.

[205] Concerning his March 2008 sales of Canext Shares, Zelantini explained that, with the trading price then above the research reports' "target price" (at or near $0.80) and nearing $1 (the price he had paid for his flow-through shares "which had been underwater for the longest time"), he "just felt like I should take some off the table".

[206] Zelantini told us that in early 2008 he was also buying and selling shares in another oil and gas company active in another country.

[207] Zelantini testified that he spoke with Raychaudhuri "[t]he odd time" regarding investments, but not with other coworkers.

5. Doty

[208] According to the Agreed Facts, Doty bought a total of 100 000 Canext Shares (34 000 of those in the Relevant Period), and sold a total of 9000 Canext Shares soon after the Relevant Period:

Pre-Relevant Period • 6 June 2006: bought 60 000 flow-through shares at $1, in a private placement; • 1 March 2007: bought 5000 shares at $1.09; and • 29 August 2007: bought 1000 shares at $0.54. Relevant Period • 15 January 2008: bought 20 000 shares at $0.42; • 5 March 2008: bought 5000 shares at $0.45; and • 13 March 2008: bought 9000 shares at $0.54, on a buy order placed at 11:13

Calgary time. Post-Relevant Period • 18 March 2008: sold 5000 shares at $0.76; and • 20 March 2008: sold 4000 shares at $0.71.

[209] Doty testified that his January 2008 purchase was motivated by his belief that Canext Shares were undervalued – below the net asset value in the $0.70 range indicated in company

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presentations – and "it was also a time when oil and gas prices were quite strong". Doty made this purchase using some of the cash available in one of his trading accounts.

[210] Doty told us that his March 2008 purchases were again motivated by his belief that Canext Shares were undervalued – below the $0.70 to $0.80 range indicated in research reports and taking into account the February Release. He had also received a bonus on 29 February, and chose to use that money to buy Canext Shares.

[211] In the Relevant Period Doty knew of, but had not read, the Disclosure Policy. He testified that he knew "the company would institute a blackout when we were not to trade in shares, and . . . we were notified by e-mail of those times". He recalled having received an email from Miller in late 2007 suggesting that "if were planning to buy shares in the company, . . . we should talk to . . . [Kapusta] prior to doing that". So, Doty told us, he spoke to Kapusta before making his January 2008 purchase, and Kapusta "indicated that it was okay to buy the shares". However, it was Doty's testimony that he did not speak to Kapusta before making either of his March 2008 purchases. The following exchange occurred in relation to Doty's 5 March purchase:

Q So what where the circumstances, in terms of whether or not there was any blackout at the

time you bought the shares. A Well, . . . there had been a blackout in February, leading up to the release of our year-end

reserve numbers. That blackout had been lifted, and I had had no indication from the company that there was any reason why employees would not be able to buy shares at that time.

Q Would you have discussed with anyone at Canext your intention to buy shares -- A No, I did not. And, in hindsight, that was a mistake. I should have spoken to [Kapusta]

prior to buying these shares -- or the CFO. I think . . . I had just forgotten . . . about the order that was back in late 2007 that I should speak to somebody before buying the shares.

[212] Doty denied having any discussions with Zelantini before buying Canext Shares on 13 March 2008 (when Zelantini also made a purchase), stating "I didn't typically discuss share purchases with other employees of the company".

[213] Doty's March 2008 sales – 9000 of his 100 000 Canext Shares – he explained by referring to "a short-term liquidity issue" and a belief that "the 70 cent range was a fair value for our stock at that time".

[214] Doty indicated that he also bought shares in other companies from time to time in 2007 and 2008.

6. Raychaudhuri

[215] According to the Agreed Facts and his testimony, Raychaudhuri bought – directly and for his wife's account – a total of 343 000 Canext Shares (35 000 of those in the Relevant Period), and sold 5000 Canext Shares after the Relevant Period:

Pre-Relevant Period • 9 June 2006: bought 205 000 flow-through shares at $1, in a private placement;

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• 14 September 2006: bought 25 000 flow-through shares at $1.70, in a private

placement; • 25 September 2007: bought 45 000 shares at $0.40, "solicited"; and • 18 December 2007: bought 33 000 shares, some at $0.35 and some at $0.37,

"solicited". Relevant Period • 12 March 2008: bought 20 000 shares at $0.53, on a buy order placed at 12:32

Calgary time; and • 13 March 2008: bought 15 000 shares, some at $0.57 and some at $0.62, on buy

orders placed at 11:33 and 12:02 Calgary time, respectively, both (according to his testimony) following a single request to his broker, with an intervening telephone call from the latter to confirm the making of the second purchase.

Post-Relevant Period • June 2008: sold 5000 shares, at an unknown price.

[216] Raychaudhuri was on distribution lists for, or obtained from Kapusta, capital market research reports. In early March 2008, he bought shares in companies other than Canext, including the oil and gas company named by Zelantini. Raychaudhuri testified that he followed stocks "very closely"– "[i]t's kind of a hobby". He "regularly trolled the SEDI filings", or went to a website apparently providing similar information, "just to see . . . if insiders are buying or selling stocks in various companies". Indeed, we heard – from Holmes – that Raychaudhuri "always" posted on his office wall "insider trading numbers" – although when asked about this in the Merits Hearing, Raychaudhuri's initial response was: "I may have. I -- I don't know". (This initial evasiveness – Raychaudhuri seemed subsequently to acknowledge his posting practice – was disquieting. There would have been nothing illegal about his having posted such public information, but it seems an unusual enough thing to have done as to be readily recalled. Although this was not a particularly important point, it was something (not, as discussed above, the only thing) that impaired Raychaudhuri's credibility.)

[217] As to what motivated his September 2007 purchase, Raychaudhuri testified that he thought Canext Shares were "probably undervalued and a good long-term investment", and it was "an opportunity to basically average down my cost". He testified to the same motivations for his December 2007 purchase. His testimony concerning what prompted his March 2008 purchases was similar – "first and foremost" Canext Shares were "still undervalued", despite the February Release. As well, there had been "a lot of research reports" and "a lot of positive reports . . . in the investment community", such that "[t]here was increasing awareness of Canext's position in [the] play at Pouce Coupe".

[218] Raychaudhuri told us:

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And I was aware, at the time of my [March 2008] purchase[s], that members of the executive, including [Kapusta], [Birchard] and [Holmes], had been previously purchasing securities in Canext. And, as well, the February [Release] reminded me that the company had the NCIB in place . . . and was executing on that. . . . So I think that was a great indication again that . . . many people, including the company and the board who issued the NCIB, felt that the shares were really undervalued.

[219] Raychaudhuri also said that Canext Share trading volume surged on 5 March 2008 with the release of the 5 March Wellington Report – which he characterized as "a huge indication that momentum was going to be running in favour of Canext at that time period" – and that there was "quite a bit of volume" around 12 and 13 March, again indicating momentum.

[220] Asked why he bought specifically on 12 and 13 March 2008, Raychaudhuri told us that he had "a very limited time period" in which to buy Canext Shares – "probably a window of . . . 15 to 16 trading days" between the lifting of the February trading blackout and his holiday departure on 20 March. As well, he again mentioned the Canext Share trading volume surge with the release of the 5 March Wellington Report, the continuing volume through 12 and 13 March, and the continuing below-net-asset-value trading of Canext Shares.

[221] In the Relevant Period Raychaudhuri knew of the Disclosure Policy but had not read it. However, he understood that decisions about materiality and disclosure were made by "our senior management at Canext" or Miller and Kapusta "in concert with some members of the board of directors". He also understood that a blackout was "a quiet period or a period imposed by our management, during which time we were not allowed, as employees, to either buy or sell securities of [Canext]", about which periods he was made aware by emails sent by Miller.

[222] Raychaudhuri testified that, before he made his March 2008 purchases, he "saw [Kapusta] in the hallway, and in passing, I asked him if we were in a blackout period, and he responded, no" (which, Raychaudhuri acknowledged, he did not mention when interviewed by Staff). Apart from that, Raychaudhuri said that he typically did not discuss his investment decisions with other people and he did not discuss his "decision" to buy with anybody. On the other hand, he said that "I followed the SEDI thing, so I knew that there [were] some people . . . that were buying in that time frame", although he claimed not to recall anyone directly telling him that.

7. Blackout Queries in March 2008: Kapusta's Recollection [223] Kapusta testified, in respect of whether he recalled any employees asking him about a trading blackout in March 2008, that "it was less formal. Again, . . . the policy was to check with the CFO. But . . . I do recall some . . . sort of hallway discussions around that period there, March 11th kind of dates. . . . [I]t was sort of a general thing, is it okay to buy? And I would have said, well, I just bought shares. We're not in a blackout". Kapusta did not recall whether Miller informed him that Zelantini, Doty and Raychaudhuri had advised her they were buying. Further, Kapusta did not recall any of Zelantini, Doty and Raychaudhuri telling him about purchases after the fact.

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[224] However, concerning Zelantini's, Doty's and Raychaudhuri's purchases of Canext Shares in early March 2008, Kapusta testified that he recalled "basically . . . some hallway discussions. And it was like, well, you know, maybe I should buy, kind of thing".

8. Observations on the Respondents' Trading [225] Several general observations can be made about these trading histories:

• All of the Respondents invested on multiple occasions in Canext Shares, and all had considerable sums so invested.

• Each of the Respondents acquired most of their Canext Shares before the Relevant

Period, with each obtaining a significant shareholding in a June 2006 private placement, at $1 per share.

• In the Relevant Period, no Respondent bought Canext Shares during the company-

imposed blackout period from 4 to 26 February 2008. • Kapusta's, Holmes's and Birchard's last purchases in the Relevant Period preceded

the March Release by considerable intervals – 10 days, eight days and almost six weeks, respectively. The other Respondents made purchases as late as 13 March, on buy orders remarkably close in time to one another and mere hours before the March Release was issued. In their testimony before us and in their Investigative Interviews, Zelantini, Doty and Raychaudhuri denied or did not acknowledge having discussed with each another, beforehand, their buying of Canext Shares in March 2008.

• Zelantini and Doty sold some – a minority – of their Canext Shares shortly after the

Relevant Period (that is, in the days following the March Release), and Raychaudhuri sold a minority of his Canext Shares in June 2008.

D. Application of the Disclosure Policy [226] On 30 November 2007 Miller had sent a group email to the Respondents, all but one of the Canext directors and others, reminding them that Canext's normal course issuer bid was "ongoing" and of the need "to be very careful not to go offside" TSXV rules, and ending with: "Please check with [Kapusta] PRIOR [capitalization and bold font in original] to doing any transactions involving Canext [S]hares." [227] As noted, the Disclosure Policy contemplated regular (quarterly) quiet periods and occasional trading blackouts. Asked to provide an example of the latter, Kapusta pointed to Canext's drilling of the deepest well it had ever drilled – 3100 metres – in the winter of 2006 into 2007. Kapusta recalled that, "in the middle of the drilling operations", he and Miller determined that Canext "should enter into a blackout period until the results of this became known, because it had the potential to be material to the company". [228] Kapusta did not recall any trading blackout related to the 1-5 Well, which was drilled in January 2007 and put in production and news-released in March 2007. However, he noted that, because the 1-5 Well was drilled around the same time as the 3100-metre well, "there may have

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been one due to overlap". In relation to the 1-5 Well Kapusta said that, "prior to that, we were maybe about 200 boe/d of production, and then we moved to about 300. So, . . . as far as production and that, it was certainly . . . more relevant". He also said that the associated news release would not have referred to the location of the 1-5 Well but would, he believed, have talked about a gas discovery, an oil discovery and the cumulative production test and said that the well was coming on production. [229] Kapusta did not perceive that Canext's practice in relation to the 10-32 Well differed. He elaborated:

. . . it was a small amount of production relative to where we were, so we were less concerned about it. . . . I believe the number was about 90 boe/d, but we were shutting in about 50 boe/d because of it, so the net gain was a really small number. The company, at this point in time, was more in the order of 1200 boe/d, so . . . there . . . certainly wasn't a need to specifically highlight it, in our opinion.

[230] Asked why Canext did not consider issuing a news release on 16 February 2008 – the earliest date (with the receipt that day of pressure-test results) on which the 10-32 Well was known at Canext to have discovered a new pool – Kapusta responded that Canext was already "in a blackout and quiet period, and we were going to issue a press release, basically, nine days later". (We note that a company-imposed quiet period would not, of course, be a legal bar to the company's making Act-mandated prompt disclosure of a material change, were there one.) Asked who among Canext personnel would have known that the 10-32 Well could be classified as a new pool, Kapusta said that he would have emailed Miller about it, it would have been discussed at the weekly operations meeting on 19 February and "we're making sure the information is flowing around the office. So there certainly should have been a general knowledge at that point in time". IV. ANALYSIS A. The Allegations [231] Staff alleged that each of the Respondents, while in a "special relationship" with Canext, purchased Canext Shares with knowledge of a material fact or material change – the Discovery – that had not been generally disclosed. This, Staff further alleged, was contrary to section 147(2) of the Act and to the public interest. B. Applicable Provisions of the Act [232] Section 147(2) of the Act states:

No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.

[233] Under section 9 of the Act, those in a special relationship with a reporting issuer include its directors, officers and employees and others engaged with it in business or professional activity. [234] A "material fact" is "a fact that would reasonably be expected to have a significant effect on the market price or value of" particular securities (section 1(gg) of the Act). A "material change" (defined in section 1(ff)) includes:

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. . . a change in the business, operations or capital of [a particular] issuer that would reasonably be expected to have a significant effect on the market price or value of a security of the issuer . . .

[235] The phrase "generally disclosed", being undefined in the Act, bears its ordinary meaning. In our view, taking into account the context in which it is used, this connotes information being disseminated so as to reach a general audience not limited to the particular reporting issuer and those in a special relationship with it, but including the market (if any) for the particular securities. [236] Even if the basic elements of a contravention of section 147(2) of the Act are established, section 147(6) provides a "reasonable mistake of fact" defence. Staff also posited the existence of two common law defences – "reasonable mistake of fact" (not identical to the statutory defence) and "due diligence". The burden of demonstrating any available defence rests on a respondent. C. Issues for Determination [237] There was no dispute that, throughout the Relevant Period, Canext was a reporting issuer with which each of the Respondents was in a special relationship. Nor was it disputed that Respondents bought Canext Shares at various times in the Relevant Period as summarized above. Three elements of the prohibition in section 147(2) of the Act are established. [238] The issues for determination – which we discuss in turn below – are:

• Was the Discovery material, in the sense of a material fact, a material change, or both? If so, when did it become so?

• If the Discovery was material:

• When was it generally disclosed? • Did any of the Respondents buy Canext Shares with knowledge of the

material fact or material change between the time the Discovery became material and the time (if at all) when it was generally disclosed?

• If, for any Respondent, the answer to the last-noted question is "yes", has that

Respondent established a defence?

• If not, was any such contravention also conduct contrary to the public interest? D. Material Fact or Material Change? [239] Staff contended that the Discovery constituted either a "material fact" or a "material change".

1. Objective Test [240] The parties appeared to agree – correctly, in our view, given the clear wording of the Act's definitions of "material fact" and "material change" – that materiality is to be determined objectively, "from the perspective of a reasonable investor" (as Staff put it), and that this calls for the exercise of judgement and common sense.

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2. Timing of Materiality

[241] One aspect of this issue is the time at which the alleged materiality arose. The Notice of Hearing was not explicit about timing. Staff asserted that the "oil discovery made by Canext at the end of 2007 was material", implying a view that materiality had arisen by the end of 2007. Staff cited Harris's opinion evidence that the Discovery (taking into account the size of Canext, the December Test results and Canext's interest in what Harris termed "offset acreage") "was a material event that ought to have been immediately disclosed to the public", implying a similar view. That said, given the allegation that all of the Respondents' purchases of Canext Shares from 15 January 2008 to 13 March 2008 were illegal, it is apparent that Staff considered materiality to have arisen by not later than 15 January 2008. [242] None of this precludes consideration of whether materiality might have arisen – if at all – only later in the Relevant Period. The allegations dealt with multiple share purchases, by various Respondents on various dates. It is incumbent on us to consider the circumstances surrounding each impugned purchase to determine whether there existed a material fact or material change at the time of each. Having regard to the evidence adduced by the Respondents and the submissions made by them, it is clear that they were alive to this.

3. Grounds Advanced by the Parties for their Positions on Materiality [243] In support of their contention that the Discovery was material, Staff pointed to (among other things) the testimony of their expert witness Harris, the reaction of Trainor to information about the 10-32 Well at the time, and the responses (on and after 14 March 2008) of capital market analysts and of the market generally to the March Release. [244] The Respondents contended that the Discovery was not material. [245] It was the common position of the Respondents (conveyed in submissions, testimony and Investigative Interviews) that the Discovery was too small and uncertain, and the information about it too contingent and speculative, to have been material; and that evidence of capital-market interest in Canext Shares after 13 March 2008 represented, in essence, a correction of a previous undervaluation, the correction prompted by a variety of factors. As Doty expressed it in his Investigative Interview, he "didn't really consider . . . this new discovery [to have] a significant impact on the company as a whole" – "I didn't really consider it to be that big of a deal" – but rather "just kind of a thing in addition to" a trend of rising natural gas and oil prices and "huge interest" in Montney, where he thought Canext well-positioned. Kapusta testified that "the company [had been] trading at about half its net asset value". As to market trading in Canext Shares after issuance of the March Release, he told us:

. . . [Wellington] had a big impact on the trading of our stock, and with that and the volume they generate, and the follow-up, you know, basically drove the stock from 45 to 63 cents, so that was certainly a key. And the Paramount [L]and, we got it verbal on the 7th of March. We closed the deal on the 13th. I think that was good news for the oil play at Clear Prairie. I don't think that . . . another 600 net acres out of 109,000 was material, even though it had some mapped hydrocarbon on it. You know, it certainly did not meet . . . the characteristics of any proved or probable reserves.

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[246] The Respondents submitted that materiality turns on both probability and magnitude. Kapusta cited, in particular, Re Sheridan (1993), 16 O.S.C.B. 6345. The other Respondents pointed to Re Donnini (2002), 25 O.S.C.B. 6225 (which in turn also cited Sheridan), for the proposition that the assessment of materiality requires "a balancing of both the indicated probability . . . and the anticipated magnitude of [an] event in light of the totality of the company's activities". The Respondents other than Kapusta suggested that we must consider these latter points in addition to determining whether the Discovery was a material fact or material change that would reasonably be expected to have a significant effect on the market price of Canext Shares – all in light of the facts and circumstances known to Canext in late December 2007, making certain not to use hindsight. [247] The Respondents urged that we bear in mind (and, by implication, not lightly depart from) the materiality judgements of Canext management and directors. In that vein counsel for Kapusta argued that the Canext directors, at the January Board Meeting, considered the 10-32 Well "fairly routine", with no one present suggesting that the results were material, and that the consensus at the February Board Meeting was similarly that the 10-32 and 11-33 Wells were not material. Similar arguments were made by the other Respondents and had been expressed in the 23 February 2009 letter to Staff from counsel for Kapusta and in the 2009 Directors' Submission. [248] Kapusta contended that the evidence concerning Trainor was "of little or no consequence" to the issue of materiality, and the other Respondents similarly contended. The Respondents also urged us to accord little to no weight to Harris's evidence. [249] The Respondents were united in arguing that market activity (and, in Kapusta's case, analyst activity) after 13 March 2008 demonstrated little or nothing about materiality. For example, Kapusta characterized the evidence of market activity as mere "raw trading information", about which only he testified (Staff having adduced no evidence to explain or opine on it).

4. Analysis on Materiality (a) Weaknesses in the Parties' Positions

[250] We find none of the parties' positions on materiality wholly persuasive. [251] For example, we disagree with the Respondents other than Kapusta that an assessment of probability and magnitude must be layered onto the determination of whether there was a material fact or material change as defined in the Act. This is not a mere question of semantics. The proposition enunciated in Donnini and Sheridan is sensible and perhaps obvious: probability and magnitude are both germane to materiality, and therefore both are considered in determining whether something is material. This does not mean that a material fact or material change, once established by analysis, can then cease to be such by reason of a further assessment or reassessment of its probability or magnitude. [252] We also note a theme, recurrent in the Respondents' submissions and evidence, that materiality is driven by relative impact on a company as a whole. That might well be a factor both relevant and important to assessing materiality, but it does not constitute the definition of material fact or material change. Exclusive focus on that factor without attention to the correct test under the Act (reasonably expected significant effect on the market price or value of a security) could unduly narrow the analysis and risk an erroneous conclusion.

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[253] We turn now to the weight to be accorded assessments made by Canext directors and management. For present purposes – we address claimed defences, and the "business judgment rule", separately – the assessment of materiality is the panel's to make. We must make that assessment in light of all relevant evidence. Although the facts and circumstances we consider had also, in many cases, apparently (or demonstrably) been considered by Canext directors and management in the Relevant Period, our analysis and findings on materiality are neither determined nor constrained by whatever conclusions were or may have been reached by Canext directors or management (or, indeed, by any Respondent), whatever the extent and quality of their deliberations. [254] Something similar can be said concerning the conclusions of Staff's expert witness, Harris. He expressed his opinion on the basis of his understanding of the facts and his experience as a member of management and boards of directors of other reporting issuers presented on other occasions with decisions about materiality and disclosure. He concluded that in his opinion the Discovery amounted to a material fact that ought to have been disclosed to the public "immediately" – on or about, or shortly after, 31 December 2007. We respect that opinion. From the perspective of a reporting issuer, it might suggest a sensible approach to public disclosure (and one that could avoid later difficulties). We consider his testimony helpful to the extent it indicated factors that might be relevant to our assessment of materiality. But the conclusions Harris reached do not bind us, nor in any way relieve us of our obligation to make our own reasoned assessment of materiality. For that reason (coupled with indications that, in reaching the conclusions he did, Harris did not have, or fully appreciate, all the facts presented to us) – but not out of any doubt as to his abilities as an officer and director of reporting issuers or his knowledge and experience in assessing the materiality and appropriate disclosure of information pertaining to the companies with which he has been associated – we ultimately accord little weight to Harris's conclusions.

(b) Use of Hindsight [255] Materiality, for present purposes, is (as noted) an objective concept, the assessment to be made in light of the effect "that would reasonably be expected" from a fact or change. The test for materiality, therefore, is not what eventually did happen, but rather what, beforehand, would reasonably have been expected to transpire. When that assessment is made after the fact, as here, the assessor must not confuse outcome with expectation. In this important sense, hindsight is to be avoided, as the Respondents contended. That said, it does not follow that one must disregard any occurrence after the time as at which a materiality assessment is to be made. In particular, an after-occurring fact or circumstance might have corroborative value – for example, as to the reasonableness (or otherwise) of a posited earlier expectation. [256] We treat after-occurring events with caution. For example, we consider evidence or suggestions as to what became of the 10-32 Well, or what befell Canext as a whole, in the months and years after mid-2008 essentially irrelevant, and in any event assign them no weight. On the other hand, we do not disregard the evidence of analyst and market activity in the few days (not weeks, too many unknown events foreseeably arising in such an interval) directly following issuance of the March Release. That evidence would not determine the issue of materiality, but could corroborate a finding made on other grounds.

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(c) Accumulation of Information [257] The voluminous evidence demonstrated that oil and gas exploration and development – Canext's business – is in large measure an exercise in information-gathering and analysis, in which trained individuals must daily interpret intangible and imperfect or incomplete data, and from those interpretations make professional and business judgements inevitably fraught with risks and uncertainties. The Respondents made a compelling case that the local geology, and much key technical data, for the 10-32 Well and its associated reservoir were complex, and that the results were initially surprising to the Respondents. Some of the available technical data were such (as the Respondents asserted) that reasonable people might draw different conclusions from it. At no point in the Relevant Period was the available information ever complete, or perfect, or free of uncertainty. That said, weaknesses in information and persistent uncertainties do not, of themselves, necessarily preclude something from "reasonably [being] expected to have a significant effect on the market price or value of a security" if made known to market participants. [258] In the circumstances demonstrated here, determining whether and, if so, precisely when the accumulating data about the Discovery constituted a material fact or material change was – and is – no simple task. That said, it was not and is not an impossible task. Complexities and uncertainties do not equate to an absence of facts (some seemingly contrary suggestions we heard notwithstanding). Particular data might be superseded, and interpretations might prove wrong but, until superseded or disproved, the existence of each can constitute a "fact" no less than can a tangible, physical object. Indeed, these are precisely the sorts of fact that form the basis for spending – and investment – decisions in Canext's industry. [259] We therefore consider incorrect the statement in the 2009 Directors' Submission that Canext possessed only two pieces of factual information about the 10-32 Well – the reserves attributed to it and the 11-33 Well in the Trimble Report and the 10-32 Well's production volumes "so far demonstrated". The accuracy and quality of the 10-32 Well (and 11-33 Well) reserves estimates were not in dispute, but together they still constituted an interpretation, a reflection of professional judgement, and a prediction – not a guarantee – based (presumably) on reasonable assumptions sensibly applied to the data then available to Trimble. We agree that this prediction was a fact during the Relevant Period, as were the observed 10-32 Well production volumes, but they were far from the only facts in existence in that period. Much technical data pertaining to the 10-32 Well and the reservoir it had penetrated were generated during the Relevant Period. Interpretations of the evolving data were made – and revised – during the same period.

[260] These interpretations included Canext management's estimate that Canext had discovered a resource in place of up to 40 million barrels of oil (we refer to this as the "In-Place Resource Estimate"). As Kapusta testified, both reserves and resources are "factual data" with "different levels of certainty". A reserve is but a subset of a resource that satisfies, to the appropriate probability, various technical and economic criteria. Although the criteria for evaluating the volume of a resource-in-place are less stringent than for a reserve, that does not make either type of estimate non-factual or (contrary to Green's understanding) necessarily mean that a resource has no economic value. Nor is the extent to which a resource can be characterized as a reserve determinative of its materiality. It is probably correct to surmise (as did the 2009 Directors' Submission) that, without accompanying explanation and "amplification of the attendant uncertainties", an estimate of an in-place resource could mislead. Nevertheless, the In-Place

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Resource Estimate was (like the Trimble Report reserve estimate) among the facts that came into existence in the Relevant Period. [261] It is our task to determine whether the evolving accumulation of information relating to the Discovery – facts, despite their inherent uncertainties – rendered the Discovery material in the sense of a material fact or material change during the Relevant Period and, if so (given the multiple impugned purchases), when. In making this determination we look to the data as they unfolded over the course of the Relevant Period, and the evidence as to what those who knew of the data made of them at the time.

(i) December 2007 [262] The initial results from the 10-32 Well at the end of December 2007 were dramatic and surprising. A natural gas-weighted company drilling what it thought of as an offset to an earlier gas well had instead struck oil. The oil was flowing unassisted in good volume. Canext had land around the 10-32 Well site, which might be useful in expanding on what it had found. There were grounds to conclude – as did the expert witness Harris – that there was, from the outset, a material fact or material change (or both). Prudence might have suggested that the Discovery be treated as such, from both disclosure and insider-trading perspectives. [263] That said, the strong evidence of limited information and great uncertainty at this early point in the Relevant Period (late in December 2007) leaves us unconvinced – on the balance of probabilities – that, at the time, it would have been reasonable to expect the then-available information (if disclosed) to have a significant effect on the market price or value of Canext Shares. The existence of a material fact or material change has not been demonstrated as at that time.

(ii) Early to Mid-January 2008 [264] Information continued to accumulate in the new year. [265] With the 10-32 Well still at an early stage of observation and testing, there was evidence of what a third party – Canoil geologist Trainor – thought by early to mid-January 2008. We found Trainor to be a credible witness, and the evidence of his thinking at the time relevant to assessing what market effect might reasonably have been expected, then, from the Discovery (if disclosed). [266] As noted, it was Trainor's evidence that by early to mid-January 2008 "all of us at Canoil" considered the Discovery "really good news" about which "we [at Canoil] are all trying not to get too excited (but I can make a case that this could be huge)". Moreover, he gave thought to something directly pertinent to the present issue: that Canext (clearly, in context, meaning the market price or value of Canext Shares) "could double" – a significant effect, by any standard. [267] Trainor's geological interpretation was apparently not shared at the time by any of the Respondents. However, the pertinent factor here is not Trainor's skill as a geologist, but rather his expectation, at the time, of what the facts then known about the 10-32 Well might portend. The facts known in the first half of January 2008 led Trainor to posit that the Discovery could have a significant effect – including on the market price or value of Canext Shares. His thinking was, we find, sufficiently conveyed to all who received Trainor's 11 January email, namely Birchard (on that date) and Kapusta, Doty and Zelantini (on 14 January).

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[268] It might follow that there existed, by mid-January 2008, a sufficient basis for concluding that the Discovery amounted to a material fact or material change. However, the evidence disclosed too many then-remaining uncertainties and informational limitations to persuade us on the balance of probabilities that it would, at that time, have been reasonable to expect disclosure of the Discovery to have a significant effect on the market price or value of Canext Shares. Thus, we do not find a material fact or material change to have come into existence by mid-January 2008.

(iii) Mid-January through February 2008 [269] Experience with the 10-32 Well grew, and a good deal of new information was generated, in the latter half of January through February 2008, including the determination that the 10-32 Well had penetrated a different pool than the 1-5 Well. [270] Put on production on 22 January 2008, the 10-32 Well represented a notable addition to Canext's oil production, but a much less substantial change to its total gas and oil production. The well did not produce consistently. Production declined from original volumes, consistent with assertions we heard that the initial results were merely flush production. On occasion in this timeframe, production ceased entirely. On the other hand, there was no permanent production failure and no sense that one was anticipated. [271] The In-Place Resource Estimate's inception can be traced to the latter half of January 2008. [272] Certain of the Respondents downplayed the importance of the In-Place Resource Estimate. They indicated, correctly, that this was only an estimate, and one that by its very nature should not be seen as indicative of any particular economically producable volume or economic value. As noted, Trimble applied only a 6% recovery factor to its recorded estimate of oil in place to come up with its proved-plus-probable reserves estimate for the 10-32 Well – a recovery factor much lower than, for example, the 70% rate Trimble applied to some of Canext's gas wells. We also noted above Kapusta's recollection of another resource with a broadly comparable estimated volume of oil in place, which Canext apparently sold at a modest price because it considered the resource unlikely to be profitable. [273] While the In-Place Resource Estimate was, of course, only an estimate – one about whose quality or accuracy we make no assessment, and which says nothing about likely or expected profitability – it was, nonetheless, a piece of information, and its existence a fact. We agree that, properly understood, an estimate of a volume-in-place alone may be a poor, and perhaps useless, basis for an investment decision. A prudent and well-informed investor might therefore handle such information with great caution. That is good reason for reporting issuers to take care in how they disclose such estimates. It does not, however, demonstrate that such an estimate (itself or in conjunction with other information) is not material. The test for materiality, to reiterate, is the reasonably expected effect of information on the market price or value of a security. For listed securities like Canext Shares, this dictates consideration of the reasonably expected response to information, on the part of investors or the capital market generally – not merely the wise response of that subset of investors well-versed in oil and gas resource classifications and reserves evaluation.

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[274] Trimble was working on its evaluation of Canext's reserves in late January and February 2008, and draft information was shared with the company – Kapusta and Birchard at least. The Trimble Report was essentially finalized ("locked down") by 15 February. The reserves it attributed to the 10-32 Well were (in this we concur with the tenor of the Respondents' suggestion) quite modest, even if the reserves attributed to the 10-32 and 11-33 Wells are combined (considerably below the 10% threshold mentioned in testimony as a sort of rule of thumb – not, we observe, the measure of materiality at law) – if, that is, the comparison is made to Canext's total all-product (gas, oil and natural gas liquids) reserves at the time. It was not, however, demonstrated that this is the only valid comparison. As noted, the Discovery represented a substantial accretion to Canext's reserves of oil (approximately 23.5% – or 40.6%, in conjunction with the reserves attributed to the 11-33 Well). [275] More fundamentally, as discussed above in other contexts, the concept of materiality for purposes of section 147(2) is not confined to reserves, and the reserves estimates (however analyzed) are therefore not determinative of the present issue. The most that can be said in this context about the reserves attributed to the Discovery is that they represented a substantial portion of Canext's total oil reserves, and a modest portion of its total (all-product) reserves.

(iv) Early March 2008 or Throughout the Relevant Period [276] In presenting their case, Staff gave some attention to Canext's pursuit of an interest in the Paramount Land, an effort that would not reach a conclusion until late in the Relevant Period. So did certain of the Respondents, largely with a view to explaining Canext's seeming initial reticence about the 10-32 Well. In the circumstances, we are not persuaded that Canext's efforts, or its success, in acquiring an interest in the Paramount Land were in any way determinative of whether or when the Discovery became a material fact or material change. [277] We accept, from the evidence, that Canext had an apparently solid position at Pouce Coupe/Montney, and that the capital market in the Relevant Period held a favourable view of natural gas generally and Montney specifically. That in no way precluded an oil discovery elsewhere from being material. [278] Kapusta testified to constraints that, he suggested, argued against the Discovery being material in economic terms. He noted, specifically, a royalty regime with adverse implications for such discoveries: "So our problem in January and February and March of 2008 is, you have this perverse royalty system where it's very difficult to invest when 50 percent of the revenue off the top goes back to the Crown." Also, he acknowledged that significant expenditure might have increased recovery from the Discovery, but said that such significant expenditure was not an option for Canext in January 2008 and, at that time, it was "fairly premature to speculate on . . . enhanced recovery". These points were not seriously disputed. We accept that they indicated caution in assessing the near-term profitability of the Discovery or in making related spending decisions. None of this, however, demonstrates that the Discovery could not still have constituted a material fact or material change.

(v) Findings on Materiality [279] We conclude, on evidence we consider clear, convincing and cogent, that the Discovery became material in the Relevant Period. That is, we find that the accumulation of certain information about the Discovery rendered it, at a date certain in the Relevant Period, material both

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in the sense of a "material fact" (the Discovery, about which this certain information had accumulated, would reasonably have been expected to have a significant effect on the market price or value of Canext's securities) and a "material change" (it amounted to a change in Canext's business or operations that would reasonably have been expected to have such effect). [280] We summarize here the key elements of the accumulation of information about the Discovery that rendered it material and (without ruling out the possibility that materiality arose earlier in the Relevant Period) identify the date by which the Discovery clearly became material:

• The 10-32 Well, expected to be a natural gas well, "[o]n 29 December 2007 . . . started flowing oil" (as the Agreed Facts phrased it). It remained an oil well throughout the remainder of the Relevant Period and beyond, uncertainties and production hiccoughs notwithstanding (we discuss these further, below).

• On 28 January 2008, at the January Board Meeting, discussion of the 10-32 Well

included reference to the In-Place Resource Estimate. This quantity estimate eventually made its way, prominently, into the March Release. As discussed, such an estimate indicates little or nothing about economic value, but it does indicate Canext management's view that there was something physically there, in the discovered pool, the volume of which they felt able to estimate.

• On 16 February 2008 pressure-test results confirmed that the 10-32 Well had

penetrated a different pool than the 1-5 Well. In other words, a new pool – an oil pool – had been discovered, another piece of information that eventually made its way, prominently, into the March Release. We do not overlook the evidence – including Kapusta's "Good news bad news" comment at the time – that the test results suggested the new pool might be smaller and more complicated. We accept that this introduced new (or exacerbated existing) uncertainty, but we note also that it did not appear to prompt any revision to the In-Place Resource Estimate that eventually made its way into the March Release, nor preclude Trimble from ascribing reserves to the 10-32 Well (and, indeed, to the 11-33 Well).

• While this information was accumulating, the 10-32 Well was producing oil. True,

the initial flush of unassisted production did not last long, unassisted production was interrupted on 11 February 2008, and the well was still not flowing on 16 February when the pressure-test results came in. In fairness to the Respondents, we think that up to this time Canext and its personnel might have lacked confidence that the 10-32 Well could actually produce oil on a sustained basis. However, during that interruption (according to 12 February operations meeting minutes) Canext decided to "run [a] pump". Production resumed, apparently pumped, on 17 February. As of that date, the 10-32 Well was a producing oil well. While we know from the evidence that something else went wrong a few days later, and production was again interrupted from 20 or 21 to 27 February, that later interruption does not appear to have led any of the Respondents (or anyone else) to

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consider the 10-32 Well technically a failure, incapable of sustained production. That later interruption straddled 22 February (the date of the Trimble Report) and 25 February (when at the February Board Meeting that reserves report was considered and accepted and the February Release was approved and issued), yet it prompted no amendment to the Trimble Report, nor adjustment or cautionary statement in the February Release. The problem was sorted out and the 10-32 Well resumed production on 27 February. It went on to produce through to the end of the Relevant Period and beyond. In short, the late-February production hiccough did not alter the facts as they stood at 17 February 2008. We conclude that, by no later than 17 February 2008, the 10-32 Well was, and would have been considered by those aware of the facts to be, capable of producing – and actually producing – oil.

• We take full cognizance of the complexities and uncertainties of the Discovery as

at 17 February 2008. Its magnitude was uncertain, and the reserves attributed to it would be modest in comparison to Canext's total all-product reserves (although substantial as a portion of Canext's oil-only reserves). That said, as at 17 February 2008 the probability of oil was not remote or marginal – there was something there, it was newly discovered and it was in production.

• In sum, we are satisfied, and we find, that by not later than 17 February 2008

enough information – facts – had accumulated to demonstrate that the 10-32 Well was an oil well capable of producing, and actually producing, from a new pool for which Canext management estimated a resource in place of up to 40 million barrels. Notwithstanding the then-prevailing market interest in natural gas and attention to activity at Montney, we are in no doubt that this accumulated information about the Discovery rendered the Discovery both a "material fact" and a "material change" for purposes of section 147(2) of the Act not later than 17 February 2008 – that is, the Discovery (if disclosed) would reasonably have been expected to have a significant effect on the market price or value of Canext securities.

[281] We have concluded that the Discovery became material not later than 17 February 2008. Nothing, on the evidence before us, having intervened after that date to supersede or disprove the accumulated information that rendered the Discovery material, the Discovery would remain material to the end of the Relevant Period. E. When Was the Material Information Generally Disclosed?

1. Respondents Rely on the February Release [282] The Respondents argued, in essence, that if the Discovery was material (or in any event), all relevant and material information pertaining to it was generally (or "adequately") disclosed before the impugned purchases. [283] Some evidence suggested that some of the Respondents thought disclosure had been effected via the Trimble Report. NI 51-101 obliges reporting issuers like Canext, engaged in oil and gas activities, to obtain an independent reserves evaluation report. There was no suggestion

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that Canext had misled or concealed anything from Trimble, nor that Trimble had made any error or acted in any way improperly. Trimble clearly had information about the Discovery as it prepared the Trimble Report, it reached conclusions about the Discovery and reported them in the Trimble Report. [284] However, that was not general disclosure for purposes of section 147(2) of the Act. There was no evidence that Canext publicly released the Trimble Report, and NI 51-101 did not require it to do so. [285] Rather, NI 51-101 requires a reporting issuer to include certain results of its independent reserves evaluation in an annual NI 51-101 disclosure statement. Canext did this, preparing and filing publicly its 2007 NI 51-101 Statement based (in part) on the Trimble Report. The statement included the following:

. . . In 2007 [Canext] drilled and completed three (1.8 net) wells. A gas well (0.6 net) was put on production in March 2007. A new light oil discovery (60% working interest) was completed in December 2007 which flowed oil at rates of 125 bopd and 200 mscf/d. The well was placed on production in January with the solution gas conserved and the oil production being trucked out. In April the well was shut-in for spring break-up and is expected to resume production in late May. . . .

[286] While that might (we make no finding) be considered to have effected general disclosure of the Discovery, it is irrelevant: Canext did not file its 2007 NI 51-101 Statement until 15 April 2008, after all of the impugned purchases. [287] The Respondents relied instead on the February Release of 25 February 2008, with the Respondents other than Kapusta also pointing to a November 2007 Canext news release and a November 2007 Canext investor presentation.

2. Finding on the November 2007 News Release and Investor Presentation [288] The Respondents other than Kapusta pointed to the following (the "November Disclosures") as evidence of general disclosure of all relevant and material information pertaining to the Discovery prior to their impugned purchases:

(a) in a press release issued on November 27, 2007, Canext disclosed information to the public concerning its plans for the Clear Prairie area, including its plan to restart drilling on the Clear Prairie exploration lands . . .;

(b) the November 27, 2007 press release also disclosed that Canext planned to drill an

additional three wells (1.7 net) prior to the end of 2007; the wells would be brought on-stream early in 2008 if they were successful . . .;

(c) Clear Prairie area activities were disclosed in the November 2007 Investor Presentation

detailing Canext's undeveloped [landholdings] in the area, contemplated wells; . . . [289] Given that the 10-32 Well did not start flowing oil until 29 December 2007, the earlier November Disclosures cannot constitute general disclosure of the Discovery.

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3. Finding on the February Release Disclosure [290] We next consider whether the February Release generally disclosed the material information about the Discovery. [291] We note, in particular, the statements in the February Release that we italicized for emphasis. These included the following:

- Drilled 20 (9.3) net wells resulting in 3.2 net oil wells, 4.4 net gas wells and 1.7 net dry holes for an 82% success rate. . . . . . . The proceeds will be used to expand the development drilling and completion program targeting the Triassic Montney/Doig at Pouce Coupe and shallower Triassic targets in the greater Clear Hills/Clear Prairie area. The Company is focusing on lower risk development drilling opportunities following up several new pool discoveries in 2007.

[292] In one of the several tables included in the February Release – a reconciliation to the prior-year's reserves estimates – Canext reported 335 mstb of "Additions / Extensions" to its oil and natural gas liquids reserves, which figure (as noted) we were told was more than half accounted for by the 10-32 and 11-33 Wells. [293] As also noted, the February Release was not very – if at all – explicit about the 10-32 Well or that one of Canext's "new pool discoveries" was an oil discovery in the Clear Prairie area, and Kapusta himself testified: "I mean, . . . we certainly didn't highlight in [the] February [R]elease an oil discovery at Clear Prairie". [294] We find that the February Release fell short – far short – of effecting general disclosure of the material information about the Discovery. We make the same finding in relation to the February Release read in conjunction with the November Disclosures.

4. Reasons for Reticence of No Assistance [295] There was evidence of a business reason for reticence about the Discovery. In his mentioned 10 February 2008 email Kapusta told Green (and confirmed in his Investigative Interview) that Canext was "trying to keep it quiet" lest it impair Canext's negotiating position for the nearby Paramount Land (for which a deal had not yet been concluded by the date of the February Release). This was perfectly understandable from a purely business perspective. [296] That might explain non-disclosure or non-specific disclosure; it does not turn it into general disclosure. Nor – for reasons similar to those discussed above in our analysis on materiality – does Green's or his fellow directors' apparent satisfaction that the February Release disclosure that was made sufficed to permit the issuance of Canext stock options tell us anything about its sufficiency as general disclosure of the Discovery for purposes of section 147(2) of the Act.

5. First General Disclosure: The March Release [297] The first evidence we find of general disclosure of the Discovery is in the March Release.

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[298] The March Release was an unfortunate document. It was overtly promotional and in places probably misleading (the incomplete, problem-plagued and soon-to-be-abandoned 11-33 Well was called "successful") and, as noted, the In-Place Resource Estimate was presented without reader cautions. Nonetheless, it did present the material information about the Discovery: (i) the finding of oil; (ii) from a new pool; (iii) containing, in Canext management's estimation, up to 40 million barrels of oil in place – all of this through a well that was capable of (and in fact was) producing oil. [299] The focus of the March Release was clearly the Discovery. That, and only that, was referred to in the heading ("Canext Announces Light Oil Pool Discovery") and the first two paragraphs. The only other topics addressed later in the body of the March Release were the drilling of a "step-out well", Montney, some planned miscellaneous "non core" land dispositions and mention of an update to the company website and the target date for release of audited financial information. Concerning Montney, that topic was introduced with the words "The light oil pool with development upside potential is complementary to the Company's [Montney activities]". In short, the March Release was presented as the announcement of a new oil discovery from a new pool, for which production numbers and a quantitative estimate including a substantial-looking number (the In-Place Resource Estimate) were supplied, along with some other information suggesting subsequent related drilling success, some handily "prospective lands" and overall complementarity to Canext's known engagement at Montney. [300] That this constituted the first such dissemination of the information to market participants in general – what we consider implicit in the phrase "generally disclosed" – is corroborated (as discussed below) by the excited responses of Wellington, Tristone and Acumen and the market trading response to the March Release. Followers and analysts of information about Canext both perceived the Discovery disclosure in the March Release as news. [301] The evidence is clear, and we find, that the material information about the Discovery was first generally disclosed on 13 March 2008, in the March Release. F. Corroboration of Materiality and General Disclosure

1. Sources of Corroboration [302] We find in the evidence clear corroboration of our findings on materiality and general disclosure. Specifically, we find corroboration of the reasonableness of an expectation that, from at least 17 February 2008, the Discovery (if disclosed) would have a significant effect on the market price or value of Canext Shares, and that the material information was first generally disclosed in the March Release.

2. Content and Message of the March Release [303] As mentioned, the focus of the March Release was clearly the Discovery. Doty, while acknowledging that some people would read the March Release and get excited about it, made a distinction between people who know what is meant by "oil in place" and those who do not. We take from this that Doty thought "excited" readers may have misunderstood the true nature of the In-Place Resource Estimate disclosed in the March Release, reading into it more (in economic terms) than was warranted. If that is what he meant, he may have been correct; we commented above that accompanying explanation might be necessary for in-place resource estimates not to mislead. It does not, however, dispel the obvious inference that the In-Place Resource Estimate

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was one of a combination of facts about the Discovery that would reasonably have been expected to have a significant effect on the market price or value of Canext Shares.

3. Capital Market Analysts' Responses to the March Release [304] Although, as discussed, hindsight must be used with caution, the 14 and 17 March 2008 analyst reports are sufficiently timely – and, given their source, supposedly sufficiently informed about the oil and gas industry and the capital market – to constitute useful (relevant) evidence as to the perceptions of readers of the March Release, and therefore something that might tend to corroborate or rebut our earlier findings on reasonable expectation and on general disclosure. [305] We cited above the almost immediate responses of some analysts to the March Release, as set out in various research reports on and soon after 14 March 2008. The responses were very different in tone and in their conclusions (for example, in their new targets for the Canext Share price) from the same analysts' reactions to the February Release. [306] Wellington's report dated 14 March 2008 (cited earlier) – issued the day after the March Release – bore the front-page headline " 'Company Changer' Light Oil Discovery: Raising Target to $1.50 from $0.75", followed by a specific reference to the Clear Prairie discovery, also later described by the subheading "Massive Oil Discovery Changes Face of Company". Following only nine days after the 5 March Wellington Report, the change in emphasis was profound, as was the strikingly different Canext Share price target. The earlier of these two reports – even though written in light of Canext's then-recent announcement of its reserves for 2007, which did take into account the 10-32 Well – was very much focused on Montney, and targeted a Canext Share price of $0.75. [307] Wellington had clearly read the March Release, and got the message intended: that Canext had made an important oil discovery at Clear Prairie, with an estimated 20 to 40 million barrels in place – news reiterated by Wellington right after its "Company Changer" headline. And from this news, Wellington envisaged Canext Shares doubling in value. [308] Tristone was less single-mindedly swayed by the oil discovery discussed in the March Release – but only by comparison to Wellington. As noted, Tristone's Canext-specific report of 14 March 2008 (coincident with a separate Montney-focused "Industry Update") headlined "Montney Upside and Light Oil Discovery" with equal prominence, with both topics getting front-page mention – including specific reference to the 20 to 40 million barrels of oil in place estimate. Later in the report Tristone stated that "this is a material oil discovery for the company" which, in Tristone's estimation, "translates to $0.40/sh in upside for Canext" – obviously a big contributor to an overall $0.80 increase in Tristone's target price for Canext Shares, to $1.40. Striking is the contrast to Tristone's 26 February 2008 response to the February Release which, as discussed, spoke of some disappointments, found the reserves numbers merely to be in line with expectations, and concluded with no change to Tristone's assessment of net asset value or its target price for Canext Shares. As with Wellington, Tristone clearly saw the information in the March Release relating to the 10-32 Well to be news significantly affecting the value of Canext Shares. [309] Acumen, too, responded enthusiastically to the March Release. As noted, in a 26 February 2008 research report following the February Release Acumen had presented a 12-month target price for Canext Shares of $0.65. On 17 March 2008 Acumen issued an update to

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its earlier report "to reflect a recent press release". The update noted that "Canext has announced a major new-pool oil discovery at Clear Prairie" and presented a new, more-than-doubled 12-month target price for Canext Shares – $1.50. Like Wellington and Tristone, Acumen also perceived the March Release disclosure about the Discovery as news – news significantly affecting the value to be assigned to Canext Shares.

4. Market Trading Response to the March Release [310] Market trading activity in Canext Shares after the March Release was noted above. The plain facts are that, on 13 March 2008, Canext Shares opened at $0.53 and closed at $0.63. They had traded in the preceding eight-and-one-half months in the range of $0.90 to $0.33 (the high was recorded on 26 June 2007, following the plan of arrangement; months of general sustained price decline ensued). The March Release was issued at 14:48 Calgary time on 13 March 2008. Canext Shares opened the next morning (14 March) at $0.85 and reached a high that day of $1.15. Trading on 14 March was hectic by comparison with the preceding eight-and-one-half months – over 2.5 million shares traded that day, one of less than a handful of occasions when trading had exceeded 1 million shares per day – and Canext Shares ended the day at $0.89. There was no long interval between the March Release and the market events the day after. There was no evidence of any news apart from the March Release and, perhaps, responses to it such as Wellington's, Tristone's and Acumen's, to account for the distinct change in market behaviour towards Canext Shares. [311] Some of the Respondents suggested that the surge in Canext Share trading and prices after the March Release was not clearly shown as attributable to disclosure of the Discovery, and that other factors may have been involved. Kapusta pointed to market interest in natural gas and Montney – topics mentioned in the March Release – and to a general industry-wide market appreciation. [312] We are not persuaded. The evidence demonstrates an immediate and dramatic post-March Release market trading response to Canext specifically, not to an industry or industry segment. Moreover, the evidence, and common sense, tell us that the market responded to the Discovery – specifically, public disclosure in the March Release of the material information about it – by assigning a significantly higher price or value to Canext Shares than before the disclosure (higher, indeed, than at any time since the commencement of trading after the June 2007 plan of arrangement). Whether or to what extent this was a direct effect (the result of investors acting spontaneously after reading the March Release) or indirect effect (the result of investors acting wholly or in part on the basis of how others, including capital market analysts, responded to the March Release) is unimportant. The market thought the news conveyed by the March Release was material. This was consistent with, and corroborative of, our findings on materiality, and on the March Release as the first general discourse of the material information. [313] We note Kapusta's claim that the March Release was issued out of concern to avoid improper selective disclosure in the course of his then-planned Toronto roadshow. He was presumably alluding to National Policy 51-201 Disclosure Standards and its guidance on avoiding disclosure of material information in a way that favours some market participants over others. Kapusta indicated he believed at the time, mistakenly, that this policy applied to all information, material or not, and therefore (by implication) that Canext's issuance of the March Release had nothing to do with disclosure of material information.

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[314] We do not believe this. The purpose of the March 2008 Toronto roadshow was to drum up interest – investor interest – in Canext and, concomitant with that, to generate a significant share price increase such that the market price better reflected what Kapusta thought the company story warranted. Achieving that would require the communication of information that would prompt investors to assign a higher value to Canext Shares. While part of that communication would be done face-to-face on the roadshow, part of it would be done via the earlier March Release, with its focus on the Discovery. It follows, and we find, that Kapusta intended the March Release to disclose material information, and believed that it would do so, in the sense that it would reasonably be expected to have a significant effect on the market price or value of Canext Shares. Kapusta's claims on this point do not dislodge our finding of the existence of material information, or the corroboration we find (in the responses to the March Release) of our findings on materiality and general disclosure.

5. Conclusion on Corroboration [315] Given the clear focus and message of the March Release and the absence of compelling evidence that something else was at play, we find in the excited and immediate responses of capital market analysts and market traders to the disclosure in the March Release strong corroboration of our findings on materiality – that it was reasonable to have expected that, from at least 17 February 2008, the Discovery (if disclosed) would have had a significant effect on the market price or value of Canext Shares – and that the March Release effected the first general disclosure of the material information. G. The Respondents' Respective States of Knowledge

1. Knowledge of the Material Information [316] We have found that accumulated information about the Discovery rendered it material within the meaning of section 147(2) of the Act not later than 17 February 2008. [317] The evidence persuades us that all but one of the Respondents learned the key elements of this accumulated information in the Relevant Period. [318] All key elements, but for the In-Place Reserve Estimate, were the sorts of things that would be, and were (having regard to the operations meeting minutes in evidence), discussed in a timely fashion at Canext operations meetings, generally attended (subject to availability) by all of the Respondents. The more recent of these elements – the 16 February 2008 pressure-test results demonstrating that the 10-32 Well had penetrated a new pool, and the resumption of production on 17 February using a pump – would likely have been known to some of the Respondents almost immediately, and we are in no doubt that they were mentioned at the operations meeting that shortly followed these events, on 19 February. Nor do we doubt that, had any of the Respondents missed that meeting (none claimed to have done), they would rapidly thereafter have learned the news from one or other of the attendees, given the Respondents' routine interaction in the course of their work. [319] As for the In-Place Reserve Estimate, we have found that Kapusta and Birchard clearly knew of it when one or both of them communicated it at the January Board Meeting, and consider that one or both of them knew of it in the days prior. We have also inferred that Zelantini, Doty and Raychaudhuri knew of this estimate by or soon after 28 January 2008. However, we have

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been unable to find on the evidence before us that Holmes knew of this estimate in the Relevant Period. [320] On the balance of probabilities, therefore, we find that the key elements of the accumulated information about the Discovery that rendered it material not later than 17 February 2008 were known by all Respondents but Holmes by 19 February at the latest. For the reasons stated, we do not find that Holmes knew all key elements in the Relevant Period. [321] Given that state of knowledge, our finding that the Discovery remained material to the end of the Relevant Period, and our finding that it was not generally disclosed until the March Release was issued, it follows that all purchases of Canext Shares made by each Respondent other than Holmes after 19 February 2008 and before the issuance of the March Release were purchases prohibited by section 147(2) of the Act.

2. Knowledge of the March Release [322] We consider also the Respondents' respective states of knowledge of another piece of information, namely the fact that Canext was planning to issue a news release – what would become the March Release. We do so only with a view to assessing whether it was a factor motivating any of the impugned trading. [323] We have found that Raychaudhuri knew in advance the planned timing of the March Release and that it would discuss the Discovery. We have also concluded that Doty learned, at or about the time of the 11 March 2008 operations meeting (either inside or outside the meeting), enough about the forthcoming March Release to at least infer that it would discuss the Discovery, and to know that its issuance was imminent. [324] We conclude that Raychaudhuri and Doty made their 12 and 13 March 2008 purchases when they did precisely because they expected that the Discovery would be first generally disclosed in the imminent March Release, they expected that disclosure to move the market price of Canext Shares significantly upwards, and they saw an opportunity to profit. They were right in so believing, but it was wrong for them to have acted on their beliefs as they did. [325] As discussed, we did not find Zelantini to have had advance knowledge of the timing or content of the March Release, so we do not reach the same conclusions about his purchase of Canext Shares on 13 March 2008. [326] None of Kapusta's or Birchard's purchases of Canext Shares fell as close in time to the issuance of the March Release as those (or certain of those) of Zelantini, Doty and Raychaudhuri. One might suspect that Kapusta, at least – he having believed Canext Shares to be valued at less than the company story warranted – might have pondered some upbeat disclosure, not least concerning the Discovery. But that would be mere speculation. The evidence was that the idea for the March Release began to crystallize only after Wellington approached Kapusta on 5 March 2008 about doing a roadshow. We are not persuaded, as a probability, that Kapusta or Birchard knew what the March Release would say, or even that it would be issued, when they made any of their respective purchases in the Relevant Period. (This, of course, does not render any of their otherwise-prohibited purchases permissible.)

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H. Consequences of Findings on the Issues [327] We now summarize the consequences of our findings thus far, for each Respondent.

1. Kapusta [328] Kapusta purchased a total of 550 000 Canext Shares on 27 February and 3 March 2008 with knowledge of the material information about the Discovery and before its general disclosure. [329] We find that the elements of the illegal insider trading alleged against Kapusta are established.

2. Holmes [330] We did not find that Holmes knew in the Relevant Period all key elements of the accumulated information that rendered the Discovery material. As a result, we do not find Holmes's purchase of Canext Shares on 5 March 2008 to have been made with knowledge of the material information about the Discovery. [331] The allegation of illegal insider trading against Holmes is therefore not sustained.

3. Birchard [332] Birchard's purchases of Canext Shares in the Relevant Period occurred on or before 1 February 2008, pursuant to instructions given to his broker on 24 January. His purchases thus predated 17 February 2008, the date by which we have found the Discovery to have become material. It follows that an essential element of the illegal insider trading alleged against Birchard has not been proved. [333] The allegations of illegal insider trading against Birchard are therefore not sustained.

4. Zelantini [334] Zelantini purchased a total of 12 500 Canext Shares on 29 February and 10 and 13 March 2008 with knowledge of the material information about the Discovery and before its general disclosure. [335] We find that the elements of the illegal insider trading alleged against Zelantini in respect of these three purchases are established. [336] In respect of three earlier purchases in the Relevant Period (purchases that predated the date by which we have found the Discovery to have become material), the illegal insider trading allegations against Zelantini are not sustained.

5. Doty [337] Doty purchased a total of 14 000 Canext Shares on 5 and 13 March 2008 with knowledge of the material information about the Discovery and before its general disclosure. [338] We find that the elements of the illegal insider trading alleged against Doty in respect of these two purchases are established. Our finding that the timing of Doty's 13 March 2008 purchase was triggered by his anticipation of the issuance of the March Release was not necessary for our finding just stated. It is, however, in our view a serious aggravating factor.

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[339] In respect of an earlier purchase in the Relevant Period (a purchase that predated the date by which we have found the Discovery to have become material), the illegal insider trading allegation against Doty is not sustained.

6. Raychaudhuri [340] Raychaudhuri purchased a total of 35 000 Canext Shares on 12 and 13 March 2008 with knowledge of the material information about the Discovery and before its general disclosure. [341] We find that the elements of the illegal insider trading alleged against Raychaudhuri are established. As with Doty, our finding that the timing of these purchases by Raychaudhuri was triggered by his anticipation of the issuance of the March Release was not necessary for our finding just stated but it is, in our view, a serious aggravating factor.

7. Conclusions on Respondents Summarized [342] To summarize, the illegal insider trading allegations against Holmes and Birchard are not sustained. [343] Staff have established the elements of the illegal insider trading allegations on the part of each of Kapusta, Raychaudhuri and (in respect of some but not all of their purchases of Canext Shares in the Relevant Period) Doty and Zelantini – which four individuals we refer to as the "Remaining Respondents". We further find an aggravating factor in the case of Doty and Raychaudhuri, namely their having made prohibited purchases in anticipation of the then-imminent March Release. I. Defences [344] We turn to our analysis and findings on the defences advanced.

1. General [345] Section 147(6) of the Act explicitly sets out a defence – a "reasonable mistake of fact" defence – to culpability for a contravention of section 147(2), where the contravener "proves that [he] reasonably believed that the material fact or material change had been generally disclosed" even if it had not. [346] The parties were united in positing two other potential common law defences. The first – another "reasonable mistake of fact" defence – would require that the contravener prove that he reasonably but mistakenly believed that the Discovery was not material. The second – a "due diligence" defence – would require that the contravener prove that he took all steps a reasonable person in the circumstances would have taken to avoid contravening the insider trading prohibition. [347] The potential availability of the two common law defences was not argued before us. Rather, the parties argued as to whether the circumstances did or did not support the three mentioned defences. It is not, in fact, clear to us that the two common law defences are apposite; there is authority suggesting the contrary: Re Sabourin (2009), 32 O.S.C.B. 2707 at paras. 64-71. That said, given that all parties proceeded on the basis of the two common law defences being

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potentially available, we think it would constitute an unfairness and denial of natural justice to the Respondents were we to proceed other than on the same basis. [348] Proceeding on that basis, we now consider whether any of the Remaining Respondents (given our findings above, Holmes and Birchard need no defence) has established any of the three mentioned defences.

2. Reasonable Mistake of Fact [349] To successfully invoke either of the two posited "reasonable mistake of fact" defences, a Remaining Respondent must prove that he reasonably but mistakenly believed that the Discovery either (i) was not material, or (ii) had been generally disclosed.

(a) Raychaudhuri [350] We have found that Raychaudhuri read, on receipt or soon thereafter, Kapusta's 11 March 2008 "Canext Draft Release" email. We are in no doubt, and we find, that Raychaudhuri thus knew Kapusta was going to announce the Discovery to the investing public later that week. The timing of Raychaudhuri's 12 and 13 March 2008 purchases tells us that he scrambled to buy Canext Shares before the anticipated March Release was issued. More to the point, Raychaudhuri's knowledge of the timing and 10-32 Well-related content of the March Release and his 12 and 13 March 2008 Canext Share purchases tell us, as we have found, that he so bought precisely because he believed: (i) the Discovery would be first generally disclosed in the March Release; and (ii) the Discovery was material in the sense that it would reasonably have been expected, when announced, to affect significantly the market price or value of Canext Shares, which in fact it did. [351] In making this finding we were not entirely convinced that Raychaudhuri had (as he testified) inquired of Kapusta "in passing" about a trading blackout before making his March 2008 purchases. However, even were we to accept that such an inquiry was made, in our view it could not suffice as a basis for reasonably believing that the Discovery was not material. Being privy to the information in Kapusta's 11 March 2008 "Canext Draft Release" email while acting (in Birchard's absence) in a quasi-management capacity, Raychaudhuri would have had to do more than make an inquiry of Kapusta "in passing". This in our view disposes of the arguments that Raychaudhuri reasonably believed, when making his March 2008 purchases, that the Discovery was not material or had previously been generally disclosed. [352] The defence of reasonable mistake of fact is not established by Raychaudhuri.

(b) Doty [353] The topic of the February Release – on which the Respondents relied as prior general disclosure of the Discovery – was raised at the 26 February 2008 operations meeting, which Doty, it seems, would have attended. Any reading of the February Release – and we have no reason to believe Doty did not peruse it at or about the time of its issuance – would have revealed no specific mention of the Discovery. Further, Doty testified that he knew there had been no specific announcement of the Discovery before 13 March 2008, and the timing of Doty's 5 and 13 March 2008 purchases tells us that he moved with some haste to buy Canext Shares before there was such a specific announcement. We have concluded that Doty learned, at or about the same time as the 11 March 2008 operations meeting, enough about the forthcoming March Release to at least infer

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that it would discuss the Discovery, and to know that its issuance was imminent. All of this leads us to conclude, and we find, that Doty did not believe that the Discovery had been previously generally disclosed when he made his March 2008 purchases. Indeed, we have found that Doty made his 13 March 2008 purchase when he did precisely because he expected the Discovery to be first generally disclosed in the imminent March Release. [354] Doty acknowledged – both in the Merits Hearing and in his earlier Investigative Interview – that some people might get excited about the Discovery and some who read the March Release would get excited about it. Further, although Kapusta told Doty before he made his 15 January 2008 Canext Share purchase that "it was okay to buy the shares", Doty did not speak to Kapusta before making either of his March 2008 purchases. In our view, Kapusta's January advice was given too far in advance of Doty's March 2008 purchases to form a basis for a reasonable belief that the Discovery was not material at the time of Doty's March 2008 purchases. [355] All of this tells us, and we find, (i) that when Doty made his March 2008 purchases, he believed that the Discovery was material in the sense that it (when disclosed) would reasonably be expected to have a significant effect on the market price or value of Canext Shares, and (ii) in any event, that he had no basis for reasonably believing that the Discovery was not material. Indeed, we have found that Doty made his 13 March 2008 purchase when he did precisely because he expected that the Discovery (when disclosed via the imminent March Release) would move the market price of Canext Shares significantly upwards. [356] These findings in our view dispose of the arguments that Doty operated under a reasonable mistake of fact in relation to his March 2008 Canext Share purchases. Doty has not established that defence for those purchases.

(c) Zelantini [357] We did not find Zelantini to have had advance knowledge of the timing or content of the March Release. However, as noted, the topic of the February Release – on which the Respondents relied as prior general disclosure of the Discovery – was raised at the 26 February 2008 operations meeting, which it seems Zelantini, like Doty, would have attended. Further, any reading of the February Release would have revealed no specific mention of the Discovery, and we have no reason to doubt that Zelantini perused it at or about the time of its issuance. As a keen follower of the stock market, we think it highly probable that he would have read Canext news releases soon after they were issued, and so should have been aware that there had been no prior specific news release mention of the Discovery. All of this tells us, and we find, that when Zelantini bought Canext Shares on 29 February and 10 and 13 March 2008, he had no basis for reasonably believing that the Discovery had previously been generally disclosed. [358] In his Investigative Interview Zelantini stated that "basically what I knew from the Clear Prairie well, I didn't know that was going to have a huge impact on . . . the stock price". Although he testified to having understood that Canext directors and management made decisions as to what was and was not material, the evidence was that he could not recall having seen or read the Disclosure Policy and inquired (as we have accepted) of Kapusta about a trading blackout only once, prior to his 29 February 2008 purchase. From this and having regard to Zelantini's junior position at Canext, we are prepared to accept that, when Zelantini bought Canext Shares in February 2008 soon after inquiring about a blackout, he had a reasonable but mistaken belief that

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the Discovery was not material. That said, we consider that inquiry to have been made too far in advance of his March 2008 purchases to form a basis for the claimed reasonable belief of no materiality at the time of those purchases. [359] In sum, we find that Zelantini had a basis for reasonably believing, when making his February 2008 purchase, that the Discovery was not material. He has established the defence of reasonable mistake of fact for that purchase. However, in relation to his two March 2008 purchases, we find that Zelantini lacked a basis for reasonably believing either that the Discovery was not material or that it had been previously disclosed. He has not established the defence of reasonable mistake of fact for those two purchases.

(d) Kapusta [360] As for Kapusta, he argued that, when he made his 27 February and 3 March 2008 Canext Share purchases, he reasonably believed the Discovery was not material or in any event had been "adequately disclosed" in the February Release. In so arguing, he pointed to the views held, decisions made or actions taken by the Canext board of directors at the January and February Board Meetings. [361] To the extent that Kapusta in these arguments invokes the "business judgment rule", we question, on the evidence before us, whether the Canext board of directors demonstrated appropriate prudence and diligence in assessing the materiality of the Discovery or in deciding disclosure issues relating thereto. In any event, we do not consider that rule relevant here, as discussed below. [362] Nor are we convinced that Kapusta genuinely believed the Discovery not to be material when he made his February and March 2008 purchases. We have found that Kapusta intended the March Release to disclose material information (the Discovery), believing that such disclosure would reasonably be expected to have a significant effect on the market price or value of Canext Shares. The genesis of this intention can be traced to 5 March 2008, with Wellington's approach concerning a roadshow, but the material information intended to be disclosed had accumulated not later than 17 February 2008. [363] If Kapusta truly believed the Discovery not to be material earlier (from 17 or 19 February 2008), this would not, in our view, have been a reasonably-held belief. As discussed in our analysis on materiality, the concept is an objective one of reasonably expected effect. The basis of his claimed mistaken belief on this point, as we understand his submissions and evidence, would be a general reliance on the conclusions of the Canext board of directors, at the February Board Meeting, about the sufficiency of the February Release. (We note that the issue of materiality had not been discussed in depth, or at all, at the January Board Meeting.) The evidence pointed to a good deal of reliance by those who testified on the supposed thinking of others in attendance, but no clear and convincing sense that anyone present specifically addressed their minds to the definitions of material fact and material change, applied the definitions to what was then known about the Discovery, and then expressly communicated that no one present knew material information about the Discovery and therefore that all were free to trade in Canext Shares. Having been present and therefore knowing the focus of the discussion at the February Board Meeting, we do not believe that Kapusta could properly rely on that sort of generalized consideration of materiality in the context of corporate disclosure as a sufficient basis for a reasonable belief that

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the information he knew was not material and, therefore, that he was free to buy Canext Shares. As such, it does not found a basis for a reasonable mistake of fact. [364] We consider now Kapusta's claimed belief that the February Release adequately disclosed the Discovery – which we take to mean that it was by that means generally disclosed within the meaning of section 147(2) of the Act. We do not believe that Kapusta, when making his February and March 2008 purchases, was of the impression that the Discovery had been "generally disclosed". Kapusta's 11 March 2008 email to all other Canext directors, Templeton, Miller and Birchard (to which a draft of the March Release was attached), in which Kapusta indicated a "need" to get "this information" – the announcement of the Discovery – "in the public", confirms the obvious: the March Release was, as Kapusta knew or should have known, necessary to effect general disclosure to the investing public of the Discovery. [365] The defence of reasonable mistake of fact is not established by Kapusta.

(e) Conclusion on "Mistake of Fact" [366] In sum, Zelantini has established a "reasonable mistake of fact" defence in relation to his February 2008 purchase of Canext Shares. However, the two "reasonable mistake of fact" defences do not assist Raychaudhuri, Doty or Zelantini in relation to their respective March 2008 purchases, or Kapusta in relation to his February and March 2008 purchases.

3. Due Diligence [367] The Remaining Respondents asserted (in evidence, submissions or both) that, even if any alleged breaches were demonstrated, they had acted with "due diligence" – and thus (explicitly or by implication) had established the defence so named. That is, each contended that, as a result of due diligence or reasonable investigation by him (the nature of that diligence or investigation varying among the Remaining Respondents), he had acted in the reasonable but mistaken belief that what he was doing was permitted and therefore excusable. [368] Considering the application of the "due diligence" defence in Re YBM Magnex International Inc. (2003), O.S.C.B. 5285, an Ontario Securities Commission panel reasoned (at paras. 178-79):

Public interest proceedings under section 127 prescribe no specific standard of due diligence or reasonable investigation. In [Soper v. Canada, [1998] 1 F.C. 124 (C.A.)] at para. 34, Robertson J. defined diligence as follows: "Upon reflection, it seems arguable to me that the term 'diligence' is synonymous with the term 'care'. That is, diligence is simply the degree of attention or care expected of a person in a given situation." However, this means that the determination of due diligence should differ depending on one's function; [George R.D. Goulet, Public Share Offerings and Stock Exchange Listings in Canada: Going Public, Staying Public, Getting Listed, Staying Listed (Toronto: CCH Canadian, 1994)] at 236. We think it best to consider the reasonableness of the respondents' diligence and their belief from the perspective of a prudent person in the circumstances. This necessarily entails both objective and subjective considerations including their degree of participation, access to the information and skill.

[369] We take guidance from this reasoning in applying the "due diligence" defence here.

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(a) Doty [370] In the Relevant Period Doty knew of, but had not read, the Disclosure Policy. He testified that he knew "the company would institute a blackout when we were not to trade in shares, and . . . we were notified by e-mail of those times". He recalled having received an email from Miller in late 2007 suggesting that "if were planning to buy shares in the company, . . . we should talk to . . . [Kapusta] prior to doing that". Doty accordingly spoke to Kapusta before making his 15 January 2008 Canext Share purchase, and Kapusta "indicated that it was okay to buy the shares". However, it was Doty's testimony that he did not speak to Kapusta before making either of his March 2008 purchases. [371] This evidence does not suffice to avail Doty of a "due diligence" defence in relation to his March 2008 Canext Share purchases. [372] We do think it plausible that Canext personnel who read the Disclosure Policy could have been left with the mistaken impression that respecting the mentioned company-imposed quarterly quiet periods and trading blackouts would suffice to ensure compliance with the securities laws applicable to insider information and trading. However, (as noted) the evidence was that Doty had not read the Disclosure Policy. [373] Overlooking that the imposition or otherwise of a quiet period or trading blackout under the Disclosure Policy was not necessarily a reliable indicator of whether trading was legally allowable, it is difficult to dispute that, as a general proposition, an employee, having asked the chief executive officer of his company whether something is prohibited under a company policy and being told in reply that it is not prohibited, may feel justified in relying and acting on that information. This might be all the more true the more junior the employee is. And it might be that such an exchange could lead the employee to conclude – even though it was neither expressly asked nor stated – that the absence of such a policy prohibition (or the permission to buy) meant also the absence of a legal prohibition (or legally-compliant purchasing). There was an exchange of this sort between Doty and Kapusta (Canext's chief executive officer) prior to Doty's 15 January 2008 purchase of Canext Shares. However, this exchange was not sufficiently proximate in time to Doty's March 2008 purchases, almost two months later, to support the claimed "due diligence" defence in relation to these purchases. Indeed, in testimony Doty conceded as much, saying that his failure to make further inquiry of Kapusta or Miller, prior to making his 5 March 2008 purchase (and presumably his 13 March 2008 purchase), was "a mistake". [374] We considered a possibility not expressly raised by Doty: that his March 2008 Canext Share purchases might have been made and prompted in the knowledge that Zelantini or Raychaudhuri, or both, were buying at or around the same time. Might the fact that fellow employees were buying have been taken as an indication that it must be allowed? We reject this as a basis for a due diligence defence, requiring as it would an unwarranted assumption that the fellow employees had made all necessary investigation. [375] In sum, a defence of due diligence is not established by Doty in relation to his March 2008 purchases.

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(b) Zelantini [376] As noted, we think it plausible that Canext personnel who read the Disclosure Policy could have been left with the mistaken impression that respecting the mentioned quiet periods and trading blackouts would suffice to ensure compliance with the securities laws applicable to insider information and trading. However, the evidence was that Zelantini could not recall having seen, let alone read, the Disclosure Policy. There was no due diligence in this regard. [377] Still, Zelantini testified as to his understanding of company-imposed trading blackouts, and he told us that there was a trading blackout for much of February which was lifted on 26 February 2008. Asked about the steps he took to assure himself that it was permissible to buy Canext Shares in the Relevant Period, Zelantini told us that, before his Relevant Period purchases, "I would have looked for the e-mail . . . if we were in a blackout or weren't in a blackout". He also asked Kapusta if there was a blackout in place and was told "no", which he took "as having permission to purchase shares" (which testimony we have accepted). However, it was Zelantini's testimony that he so inquired of Kapusta only once, prior to his 29 February 2008 purchase, and then assumed that was the case, "[u]ntil . . . an e-mail would have notified us" otherwise. When testifying as to what motivated his Relevant Period purchases, Zelantini said, among other things, that "at this particular time, other insiders were buying, as I noticed on [an online insider trading report service], which is [Holmes] and [Kapusta], and that's always a good sign . . . . So I purchased shares based on that". He also testified, in relation to his February and March 2008 purchases, that he believed "the company was still purchasing shares". [378] In our view, mere reliance on the apparent absence of an email announcing a trading blackout cannot constitute due diligence or reasonable investigation, generally or specifically in relation to Zelantini. However, we accept in the circumstances, and we find, that the trading-blackout exchange between Zelantini (a Canext employee) and Kapusta (Canext's chief executive officer) prior to Zelantini's 29 February 2008 Canext Share purchase, whether in conjunction with looking for an email or by itself, suffices to avail Zelantini of the "due diligence" defence in relation to this purchase. That said, we do not find this exchange to be sufficiently proximate in time to Zelantini's March 2008 purchases, almost two weeks later, to support the claimed "due diligence" defence in relation to these purchases. In other words, it was not duly diligent of Zelantini to have assumed that the response on one day would remain valid indefinitely. The exchange cited, we find, does avail Zelantini of a "due diligence" defence in relation to his February 2008 purchase of Canext Shares. It does not suffice to avail him of such a defence in relation to his March 2008 purchases. [379] Zelantini suggested, as a further indication of due diligence, his having observed from an online insider trading report service that Canext management (Kapusta and Holmes) had bought Canext Shares. For the purpose of this analysis we assume – but do not decide – that observation of management actions in the absence of inquiry of management so acting could suffice to found a "due diligence" defence. While an employee might hope – and even believe – that everything his superiors do is done properly, in the circumstances we do not think reliance on the reported trades of these others qualifies as "due diligence" in relation to Zelantini's March 2008 Canext Share purchases: the reported trades (the first of which occurred on 27 February 2008 and the last of which occurred on 5 March 2008) were not sufficiently proximate in time to Zelantini's March 2008 purchases. Further, a bald assertion of a belief that Canext was "still" purchasing shares under the normal course issuer bid, without more, does not establish due diligence.

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[380] While not expressly mentioned by Zelantini, it may be that he was prompted to make his March 2008 Canext Share purchases in the knowledge that Doty or Raychaudhuri (or both) –more senior coworkers but not clearly his superiors – were buying at or around the same time. As the most junior among the Respondents, it might have been more likely for Zelantini than for his coworkers to have imagined that, if others were buying, it must be allowed. That, though, would require an assumption that the fellow employees had made all necessary investigation. Such a belief, based on assumption, cannot be considered a reasonably-founded belief sufficient to found a due diligence defence. [381] Zelantini has established a defence of due diligence only in respect of his February 2008 purchase of Canext Shares. He has not established such defence in relation to his March 2008 purchases.

(c) Raychaudhuri [382] In the Relevant Period Raychaudhuri knew of, but had not read, the Disclosure Policy. However, he understood that a trading blackout was "a quiet period or a period imposed by our management, during which time we were not allowed, as employees, to either buy or sell securities of [Canext]", about which periods he was made aware by emails sent by Miller. Raychaudhuri testified that, before he made his March 2008 purchases, he "saw [Kapusta] in the hallway, and in passing, I asked him if we were in a blackout period, and he responded, no" (which, Raychaudhuri acknowledged, he did not mention when interviewed by Staff). Raychaudhuri said that "I followed the SEDI thing, so I knew that there [were] some people . . . that were buying in that time frame". Specifically, he said, he was aware, "at the time of my [March 2008] purchase[s], that members of the executive, including [Kapusta], [Birchard] and [Holmes], had been previously purchasing securities in Canext. And, as well, the February [Release] reminded me that the company had the NCIB in place . . . and was executing on that". [383] This evidence does not suffice to avail Raychaudhuri of a "due diligence" defence in relation to his March 2008 Canext Share purchases. [384] As noted, we do think it plausible that Canext personnel who read the Disclosure Policy could have been left with the mistaken impression that respecting the mentioned trading blackouts would suffice to ensure compliance with the securities laws applicable to insider trading. However, (as noted) the evidence was that Raychaudhuri had not read the Disclosure Policy. [385] We reiterate that we are not entirely convinced that, before making his March 2008 Canext Share purchases, Raychaudhuri inquired of Kapusta "in passing" about a trading blackout. However, even accepting that such an inquiry was made, it could not suffice as reasonable inquiry or investigation supportive of a "due diligence" defence in the circumstances. That is because, being privy to the information in Kapusta's 11 March 2008 "Canext Draft Release" email while acting (in Birchard's temporary absence) in a quasi-management capacity, Raychaudhuri would have had to do more than make an inquiry of Kapusta "in passing". [386] Raychaudhuri alluded, as a further indication of due diligence, to his having observed that Canext management (Kapusta, Birchard and Holmes) bought Canext Shares, and that the February Release included a status update on Canext's normal course issuer bid purchases (purchases at

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unspecified times to that date). Even were mere observation of management actions without inquiry of management so acting sufficient to found a "due diligence" defence – we make no such finding – in the circumstances we do not think reliance on the reported trades of these others would qualify for even such a liberal interpretation of "due diligence". In relation to Raychaudhuri's March 2008 Canext Share purchases, the trades he observed (the first of which occurred on 1 February 2008 and the last on 5 March 2008) were not sufficiently proximate in time to Raychaudhuri's March 2008 purchases. The claimed observation of the distinctly unspecific February Release reference to the normal course issuer bid is even less capable of demonstrating due diligence. [387] For Raychaudhuri, too, we considered a possibility not expressly raised by him: that his March 2008 Canext Share purchases might have been made and prompted in the knowledge that Zelantini or Doty (or both) were buying at or around the same time. For the reasons expressed in our similar analysis for those individuals, we reject this as a basis for a due diligence defence. [388] Raychaudhuri has not established a defence of due diligence.

(d) Kapusta [389] Kapusta suggested that the absence of a blackout period (one having just been lifted), his own and others' (Canext directors' and Templeton's) claimed serious consideration of the Discovery at the January and February Board Meetings, the disclosure made in the February Release and the absence of any concrete plans to do any roadshows together led him – reasonably and diligently – to conclude that there was no legal bar to his buying Canext Shares on 27 February and 3 March 2008. [390] To the extent that these arguments are an invocation of the "business judgment rule", we do not consider that rule relevant here, as discussed below. [391] As to whether the defence of due diligence is established, we note first our finding above (in connection with the claimed mistake of fact defence) that we are unconvinced that Kapusta, on and after 19 February 2008, truly believed the Discovery not to be material and that, even if he had, such would not have been a reasonably-held belief. It could not, therefore, suffice to found a defence of due diligence – all the more so given his role as the chief executive officer of a reporting issuer. Second, we do not believe that Kapusta, when making his February and March 2008 Canext Share purchases, was of the impression that the Discovery had been "generally disclosed", for the reasons stated above in connection with the defence of mistake of fact. [392] Kapusta has not established a defence of due diligence.

(e) Conclusion on "Due Diligence" [393] In sum, Zelantini has established a "due diligence" defence in relation to his February 2008 purchase of Canext Shares. However, the defence does not assist him in relation to his March 2008 purchases, nor Doty, Raychaudhuri or Kapusta in relation to their February or March 2008 purchases.

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4. Business Judgment Rule [394] The "business judgment rule", as described in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para. 40, "accords deference to a business decision, so long as it lies within a range of reasonable alternatives", reflecting "the reality that directors . . . are often better suited to determine what is in the best interests of the corporation". While courts and other adjudicators "should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, . . . they are capable . . . of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made": Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 at para. 67. [395] We question, on the evidence before us, whether the Canext board of directors or Canext management applied an appropriate measure of prudence and diligence in assessing the materiality of the Discovery or in deciding disclosure issues relating thereto. Be that as it may, we do not consider the business judgment rule to be relevant here. [396] Stated simply, the allegations involve not challenges to business decisions made in the operation of a business, but rather breaches of the law governing a regulated sector, by individuals (Kapusta alone among them a member of Canext management and its board of directors) acting as investors rather than in a managerial or directorial capacity. As such, even had this been (it is not) an inquiry into Canext's compliance with its disclosure obligations under securities laws, the business judgment rule would have been inapplicable: as stated in Kerr v. Danier Leather Inc., 2007 SCC 44 (at paras. 54-55):

. . . disclosure is a matter of legal obligation. The Business Judgment Rule is a concept well-developed in the context of business decisions but should not be used to qualify or undermine the duty of disclosure. . . . . . . the disclosure requirements under the Act are not to be subordinated to the exercise of business judgment. . . . It is for the legislature and the courts, not business management, to set the legal disclosure requirements. [Emphasis in original.]

[397] It is all the more clear that the Act's prohibitions of capital-market trading misconduct – specifically, here, its ban on the misuse of certain information in trading by individuals in a privileged relationship with a company – cannot be subordinated to the materiality assessments and disclosure decisions made by the company's directors or management. It is for the legislature and adjudicators, not a company's directors or managers, to give meaning to the elements of prohibited insider trading, including the meaning to be accorded "material fact" and "material change" in that context and the adequacy of any purported disclosure of such. While evidence of what a company's directors or managers did, or of experts as to the reasonableness of those actions, may be relevant and useful in giving such meaning, it is not determinative. The materiality assessments and disclosure decisions of Canext directors and management cannot override the dictates of section 147 of the Act.

5. Conclusion on Defences [398] We therefore conclude that, of the Remaining Respondents, Zelantini alone has demonstrated defences – reasonable mistake of fact and due diligence – in respect of his February 2008 purchase of Canext Shares. However, in respect of his March 2008 purchases, and

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in respect of all February and March 2008 purchases by Kapusta, Doty and Raychaudhuri, no defences have been established. J. Conclusions on Contraventions Summarized [399] For the reasons given, we conclude that the allegations of illegal insider trading, contrary to section 147(2) of the Act, were not proved against Holmes and Birchard, but that the allegations (or certain of them) of illegal insider trading were proved against each of the Remaining Respondents. K. Conduct Contrary to the Public Interest [400] Section 147 of the Act reflects an overarching theme of Canadian securities regulation: that capital market fairness and efficiency require that all market participants have access – and that none can profit from privileged access – to timely and reliable information of material importance to investment decisions. The provision complements other elements of securities laws, notably the obligation of reporting issuers to make public disclosure through both periodic (annual and interim) filings and episodically, through mandatory prompt announcements of material changes. In unusual circumstances where public disclosure could be more detrimental than beneficial, the Act contemplates non-public regulatory filings – the concept of "confidential" material change reporting. [401] Section 147 of the Act is aimed specifically at ensuring that those whose relationship with a reporting issuer puts them in possession of material information before it is made public (irrespective of the reason for its not having been made public) cannot profit from that knowledge, at the expense of market participants outside the informed inner circle, by buying or selling the issuer's securities before the information is made public. [402] Breaches of section 147 of the Act undermine fundamental regulatory objectives, putting investors, generally, at risk; jeopardizing investor confidence in the fairness of the capital market; and, in turn, adversely affecting the ability of businesses to raise capital economically. [403] The illegal insider trading by the Remaining Respondents saw them purchase Canext Shares with knowledge of material information not generally disclosed, and therefore not known to the capital market as a whole or to the unidentified and probably unidentifiable (these having been trades over a public exchange, not privately-negotiated trades) sellers of the relevant securities. The material information was such that it would reasonably have been expected, if disclosed, to prompt a significant rise in the market price or value of Canext Shares. Once it was publicly disclosed, that is exactly what happened. Those uninformed vendors thus received less for their shares, and the Remaining Respondents paid less for them, than would have been the case had the purchases followed rather than preceded disclosure. In this way the Remaining Respondents profited from their misconduct, and the unknown vendors lost. The Remaining Respondents' contraventions of that provision thus directly harmed some investors. At the same time, these contraventions undermined the fairness and efficiency of the capital market. That has broader ramifications: it puts investor confidence in jeopardy, which in turn puts at risk the interests of others in the capital market, both investors and issuers.

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[404] For all of these reasons, we find that the Remaining Respondents' contraventions of the Act were also contrary to the public interest. The allegations of conduct contrary to the public interest against Holmes and Birchard are not sustained. L. General Lessons [405] It is reasonable to surmise that many investors other than those whose Canext Shares were the ones bought illegally by the Remaining Respondents had also made investment decisions (to buy, sell or hold Canext Shares) in the period between the crystallization of material information about the Discovery (by at least 17 February 2008) and the issuance of the March Release on 13 March 2008. They may consider themselves to have suffered harm as a result. Even so, such harm could not, in our view, be ascribed to illegal insider trading. Rather, the issue would be the quality of Canext's disclosure as a reporting issuer. As stated, this was not an inquiry into that topic, and we made no findings as to Canext's compliance with its disclosure obligations. Readers should therefore not infer that the panel, in this decision, is issuing any instruction as to what sort, extent or frequency of disclosure is required or appropriate for a reporting issuer in a business like Canext's, or any other. [406] We are, however, hopeful that this case will serve as a lesson in the care that must be taken, by everyone associated in any capacity with a reporting issuer, to ensure that they do not, improperly and illegally, profit from material information that they come to know through their connection to the issuer, by buying or selling its securities before the material information has been made public. No company disclosure policy can be a substitute for individual responsibility and attention to this issue. The most advisable course of action for anyone in the position just described is the cautious one: refrain from buying or selling securities of that issuer until certain that the material information has been public disseminated. If in any doubt, do not trade. There is nothing punitive, unfair or unduly constraining in this – it demands nothing more of those who may have heightened access to material information than that they recognize participation in the capital market as a privilege, and behave responsibly in the exercise of that privilege. V. CONCLUSIONS AND NEXT STEPS [407] To summarize our findings, the four Remaining Respondents – Kapusta, Zelantini, Doty and Raychaudhuri – engaged in illegal insider trading, contrary to both section 147(2) of the Act and the public interest. The allegations against Holmes and Birchard are dismissed. [408] It remains to be determined what, if any, orders for sanctions and costs ought to be made against the Remaining Respondents. This proceeding will thus move to a second phase for that purpose. [409] We direct that Staff provide to the panel (through the Commission Registrar) and to the Remaining Respondents any written submissions that Staff wish to make on the issue of appropriate orders by 16:00 on Thursday 30 June 2011. [410] The Remaining Respondents may each reply in writing to Staff's submissions. Any such written submissions must be provided to the panel (through the Registrar), to Staff and to each other Remaining Respondent by 16:00 on Tuesday 26 July 2011.

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[411] Staff may reply in writing to any such written submissions by the Remaining Respondents, such reply to be provided to the panel (through the Registrar) and to each of the Remaining Respondents by 16:00 on Wednesday 3 August 2011. [412] If any party wishes to make supplementary oral submissions or to adduce evidence on the issue of appropriate orders, that party must so inform the Registrar by noon on Friday 5 August 2011, indicating: (i) whether that party proposes to call witnesses; (ii) the amount of hearing time that party expects to require; and (iii) that party's preferred date or dates in the period 16 to 18 August 2011 for an in-person hearing session for that purpose. Even if no party requests such an in-person hearing session, one may be required by the panel. The Registrar will inform the parties as to whether an in-person hearing session will be held and, if so, when. 7 June 2011 For the Commission:

"original signed by" Stephen Murison

"original signed by" Beverley Brennan, FCA

"original signed by" Karen Prentice, QC