There exists in the international community the perception that Canada, in the words of Columbia University Law Professor John Coffee, is “a securities market enforcement-free zone compared to the U.S. and other countries.”
Comments of this kind land squarely in the laps of the country’s securities regulators, currently under broad attack for being some combination of soft, inefficient, and incompetent.
Unfortunately, much of the criticism fails to distinguish between criminal and regulatory enforcement.
The point is that Canada’s 13 provincial securities regulators, operating under the Canadian Securities Administrators umbrella, have hardly been dormant.
In the year ending March 30, 2007, the CSA pursued 122 new enforcement matters and concluded 128 cases that produced sanctioning orders or settlements, many of which involved more than one respondent. And these figures don’t take into account the activities of self-regulating organizations like the Investment Dealers Association.
That doesn’t change the fact that individuals who break securities laws may at the same time be contravening the Criminal Code. But it’s the job of provincial regulators like the Ontario Securities Commission and the British Columbia Securities Commission to enforce securities laws, and the duty of Crown prosecutors and police to enforce the criminal law as it relates to all kinds of white-collar crime. Admittedly, it’s everyone’s job to work together efficiently when there’s a jurisdictional overlap.
Still, the reason that the distinction between securities and regulatory enforcement is so important in evaluating Canada’s securities regulatory regime and the performance of the various securities commissions is that the evaluation - as evidenced by Prof. Coffee’s assessment - is almost always made in comparative terms, with the U.S. as the main comparator.
By contrast, Canadian enforcement figures compare favourably with those from the U.K. But it is proximity that governs.
“We’re close to the U.S., who zealously investigate and prosecute white-collar crime,” says Bill Braithwaite of Stikeman Elliott LLP. “Because we’re seen to be doing a lot less, we suffer from the comparison. On the other hand, we don’t question whether the Americans have got it right and we therefore assume that we’ve got it wrong.”
There are also inherent differences, cultural and otherwise, between the Canadian and American regimes. For example, Americans tend to take white-collar crime much more seriously than Canadians do, and Canadian courts generally impose lighter sentences than does the U.S. for all types of crime. Critics also frequently misinterpret, or at least obscure, the underlying statistics.
Add to this the tendency of media and politicians to confuse the debate over the need for a national securities regulator with the debate over provincial regulators’ enforcement record, and you come up with a large margin for distorting regulators’ performance.
That said, the existence of the perception that Canada’s securities law enforcement is wanting is well nigh incontrovertible.
“There’s a universal perception that our system is absurd and inefficient for a country and market of our size,” says Clay Horner of Osler Hoskin & Harcourt LLP, who was counsel to the Wise Persons’ committee established by the federal minister of finance to investigate Canada’s securities regulatory structure.
More specifically, a 2006 study, authored by former Supreme Court justice Peter Cory and former Osgoode Hall Law School dean Marilyn Pilkington for the IDA’s Task Force to Modernize Securities Legislation in Canada, found it “widely perceived that securities enforcement processes in Canada are inadequate.”
The study, however, lumps together regulatory and criminal deficiencies. This is understandable from the perspective of the research, which examines Canadian securities-related law enforcement as a whole. At the same time, it adds grist to the mill that blames the regulators, who are the entities most commonly regarded by the media and the public as the watchdogs of our capital markets.
Most U.S. cases cited as examples of tough enforcement are not regulatory matters at all, but criminal cases prosecuted in court by the U.S. Justice Department or state attorneys general. Still, there’s an extraordinary amount of co-operation between the U.S Securities & Exchange Commission and the DOJ, a cooperation said to be lacking in Canada between securities regulators and police, particularly the RCMP.
That’s not to say that Cory or Pilkington absolved regulators of blame. The specific perceptions of regulatory inadequacy that they cite include the beliefs that regulators have failed to pursue too many high-profile cases; that insider trading is not deterred; that some prosecutions are unfair; that there are delays in taking action to prevent losses to investors; that investigations are not managed effectively; and that integrating adjudication with the other functions of regulators creates an appearance of bias.
So it was with the Bre-X gold scandal. Lengthy and expensive OSC investigations produced action against only one individual, John Felderhof, the former chief geologist of Bre-X Minerals.
After winding their way through the investigation process and court system for 11 years, the charges of insider trading and misrepresentation against Felderhof resulted in the man’s acquittal, leaving many Canadians and Americans aghast that no one had been held accountable for the $6 billion lost by Bre-X investors.
The OSC has also been lambasted for the $1-million fine, covering only the commission’s cost of investigation, it imposed on Nortel for the company’s profit-inflating activities. Critics went so far as to say that the penalty had all the impact of “a wet noodle,” and noted the U.S. SEC was considering a fine of up to US$100 million for the same accounting frauds.
In the same vein, critics have heaped scorn on the $1-million fine (including $250,000 in costs) paid by Biovail Corp. founder Eugene Melnyk to settle allegations that he failed to report trading in various Cayman Island trusts.
The OSC’s detractors, however, haven’t confined themselves to censure of the OSC’s investigatory and sentencing practices. They have been just as vocal about what they regard as the OSC’s poor choice of prosecution targets.
Particularly scathing have been those who opposed the decision to prosecute former RBC Dominion Securities investment banker Andrew Rankin on charges of stock tipping. The OSC based its case on the evidence of Daniel Duic, the childhood friend to whom Rankin allegedly gave the information. The OSC’s settlement with Duic allowed him to keep $4 million of the illegal profits he made by using the tips.
The trial judge convicted Rankin, but Superior Court Justice Ian Nordheimer sent the case back for a new trial, ruling that the trial judge had erred in his reliance on Duic’s evidence. The OSC has decided to proceed with that trial despite the fact that Duic remains central to the prosecution.
Equally embarrassing for the commission was the dismissal of insider-trading charges against ATI Technologies Inc. chairman K.Y. Hoe and his wife Betty in 2005.
There is, as usual, another side to all this.
“Point us to one case that we should have prosecuted but we didn’t,” says Michael Watson, the OSC’s director of enforcement. “The fact that we haven’t had an Enron or a WorldCom or a Parmalat in Canada is testimony to our compliance system.”
Watson’s view is that the OSC got a bad rap over Bre-X. “This was a company whose head office was in Alberta, whose operations were in Indonesia, and whose shares traded in Canada and the U.S., which presented opportunities for all these jurisdictions to take action,” he says.
Other than the OSC, no one did. Both the SEC and the RCMP investigated the matter, but decided action wasn’t warranted - or maybe that the case was too tough to prove.
“It’s interesting that the U.S., which has had no hesitation about stepping into Canadian cases like Nortel and Hollinger, chose not to pursue the Bre-X matter,” says Ed Waitzer of Stikeman Elliott LLP and a former OSC chair.
Waitzer notes that company founder David Walsh died before the OSC completed its investigation. Michael de Guzman, the company’s exploration manager in Indonesia, who many consider the central figure in the case, allegedly threw himself from a helicopter and has not been heard from since. “In my view, the criticisms of the OSC as they relate to Bre-X are unjustified,” Waitzer says.
What’s also lost in the discussion surrounding Felderhof’s acquittal is that it represents the first acquittal on insider-trading charges laid in Ontario’s courts in the last 10 years. It is true that the regulatory charges against the Hoes in the ATI case were dismissed, but again, Watson says that’s only part of the picture.
“It’s odd that the ATI case is so widely regarded as a failure, despite the fact that we got sanctions against five of the seven individuals and entities against whom we took proceedings,” he says. “Being aggressive means taking tough cases, like Felderhof and Hoe. We have a higher success rate than the overall success rate in the country’s criminal courts. On that basis, maybe we should be even more aggressive.”