Case histories don’t instill confidence

Even as the Ontario Securities Commission tries to position itself as the default national regulatory authority with greater powers to compel witnesses to testify, questions are being raised around its enforcement competence and strategy.

In a speech to the Economic Club of Toronto last month OSC chairman David Wilson came out with tough words in a call to action for securities enforcement across Canada.
“I want to talk about strengthening enforcement in Canada,” he said. “Because we know that has to be done. We know how to do it. It’s time for action.”

Wilson urged the creation of a common securities regulator to strengthen enforcement, the power to issue investigative summons to third-party witnesses, more sharing of information, streamlining case management to eliminate overlap and duplication, and creating a team of special prosecutors to handle securities cases while also leveraging proceeds of crime legislation to help victims recover their losses.

Brave words, but in practice the OSC has come up short in some notable cases, criticized for being overly aggressive with weak or non-existent cases and dropping the ball in others, leading to some discomfort in giving the agency more powers.

Among those who have felt the unwarranted sting of the OSC is Ottawa lawyer Deborah Weinstein, whose case was branded by National Post columnist Terence Corcoran a “regulatory jihad.”
Last Jan. 14 an OSC panel cleared Weinstein, a former AiT Corp. director and lawyer, of failing to make a timely disclosure of 2002 discussions to merge with 3M Corp. The panel overruled staff who also alleged her interpretation of the law was in error.

Further complicating things was that it took the OSC five years to bring the allegations forward.
“It was six years of hell,” says Weinstein. “They first came to us around the time of the talks with an inquiry about irregular trading. We’d answer them and they’d go away for months and come back with more questions. It was very erratic, almost like the answers went into a deep hole somewhere.”

The threat to Weinstein was overwhelming, her livelihood was jeopardized, and she says there was no evidence to fight against.
“They kept saying we’ve got evidence but you’ll have to go to court to see it,” she says. “I know it cost me hundreds of thousands of dollars to defend this and the OSC spent hundreds of thousands of dollars as well, for what? Where is the accountability?”

The company and chief executive Jude Ashe settled out of court in February 2007, paying a total of $100,000.
Weinstein battled on, however, and was vindicated when the OSC could not bring any evidence in a month-long trial.

Weinstein questions the motives, saying the OSC is trying to hold lawyers sitting on boards to a higher standard. She notes the OSC opened its case pointing out it was impugning no “bad faith” on Weinstein’s part.
“If there was no bad faith, then what?” she asks. “That I made a mistake but they know better than me?

It’s as though post-Enron they want to leap over in-house counsel and hold lawyers on boards to a higher standard, then mining engineers on mining companies and so on, just the kind of people you want on your board. Pretty soon you won’t be able to get qualified people on to boards.”

She also questions the OSC’s endgame: “Is it to force settlements? Because that’s what so many people do. They’re not liable for costs if they lose, but I would have been liable for substantial costs if I had lost.”
The experience has marked her but she’s picked up her practice and moved on.

“I’m over it, really,” she says, though there’s still a tinge of anger in her voice. “The support I had was wonderful. I never had as many lawyer friends as I did when I went through this, and the independent OSC panel did their job. Still, when I read in the papers now about someone going through this, a little guy, not even anything to do with the OSC, I’m really sympathetic.”

But in his speech last month Wilson claimed the front end of the enforcement process, compliance, is working well.

“Across Canada, Canadian Securities Association members completed 325 continuous disclosure reviews of public issuers in the six months up to September of 2007,” he said. “Only four per cent of the issuers examined needed to be referred to enforcement. The OSC has also conducted full and special compliance reviews of portfolio managers over the past three years and just two per cent of the portfolio managers reviewed needed to be referred to enforcement.”

Still, there’s room for improvement, Wilson said, noting the current system is a “patchwork of 13 members of the CSA each accountable to its own provincial or territorial government, each with its own priorities, depth of resources and level of expertise in an imperfect mosaic. Can this complex - Byzantine - structure be changed or organized to function better? Yes. But, for now, this mosaic is the system we have to work with. It’s the hand we’ve been dealt.”

The Ontario attorney general responded shortly after the speech, announcing it would work closer with the OSC and may in fact take over prosecution of some cases many interpret as a move to bring some order to the enforcement side.

The Weinstein case was one of two which ended this year which have left a sour taste in the profession’s collective palate and which critics point to as a need to separate functions. Many in the securities arena also point to Ontario Securities Commission v. Rankin as an example of prosecution gone amuck.

Andrew Rankin was working M&A with RBC and was often away from home. His childhood chum Dan Duic, whom he’d met at Upper Canada College, had access to his home and violated Rankin’s trust by logging onto his computer and reading through files containing sensitive information about pending deals.
Duic essentially “stole” the information and used it to make stock trades which netted him up to $7 million from 1999 to 2001, about $4.5 million from Rankin’s “tips.”

When the OSC caught up to Duic he rolled over and pleaded out, agreeing to pay a $2-million fine in 2004. In their settlement with Duic it was clear the OSC was after Rankin as an alleged bigger fish.
The wording in the settlement alleged Rankin “told” or “passed on” information, though the evidence suggests he was a victim in the scheme.

Rankin, who made no money and lost his job, was convicted at trial of tipping Duic, but that conviction was overturned and a new trial was ordered. In January Rankin settled, agreeing to pay $250,000 in costs, a lifetime ban from working in the securities industry, and a 10-year prohibition on trading securities.

“It’s ironic because it’s all about governance and the charges against me really constituted bad governance on their part. It’s a glass house,” says Weinstein, adding to call for a separation of enforcement from adjudication.

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