Lawyers say securities regulation system is working

The court process that acquitted geologist John Felderhof of insider trading and authorizing misleading press releases in the Bre-X scandal shows the system works, says former OSC chairman Edward Waitzer.

But the case is raising important questions about securities regulation in Canada.
“People may not be happy with the Bre-X decision, but it’s a well-reasoned decision and the system worked the way it’s supposed to do,” says Waitzer, a partner at Stikeman Elliott LLP in Toronto.

“There are questions about why it took 11 years to get to a decision, and that’s something we should be focusing on right now, because 11 years is a generation in real time. Investors in Bre-X may not be around anymore.”

Waitzer stresses he has no inside knowledge about how this particular case was handled, but says this is certainly not the first drawn out securities case in Canada. For instance, one of the first securities cases he brought in 1982 still hasn’t come to trial 25 years later.

“There’s no reason why it can’t happen sooner.”
He blames the problems surrounding securities regulation and enforcement in Canada on a lack of co-ordinated resources, problems with accountability, and bureaucratic inertia.

After the not-guilty verdict in the Felderhof case, many commentators argued the burden of proof is too high to get a conviction by bringing quasi-criminal charges in court, so the OSC should bring these cases before the commission.

There may be reasons for choosing to bring certain cases before the commission, but one of these should not be because obtaining a conviction in court is too tough, says Waitzer.
“The burden of proof is right. It’s set by the legislature. If you don’t agree with the burden of proof, then you should change the law, not decide to bring cases elsewhere,” he says.

Securities lawyer Philip Anisman agrees that the decision was a carefully considered and well-reasoned judgment, and says too much has been made of the burden of proof issue since the verdict.
Based on the judge’s findings, it’s clear that the OSC would not have satisfied the regulatory burden of proof either, he says.

 “So it becomes a bit of a red herring to suggest that the commission should bring regulatory proceedings rather than criminal proceedings. Both have a role. The choice of which way to go should turn on factors other than the likelihood of success. And remember, they can bring both.”

Anisman points out that, although the Felderhof case was lengthy, the 11-year time frame is not quite as dramatic as it sounds because there were factors slowing down the prosecution.

Four of the 11 years were taken up with the OSC’s unsuccessful bias application to remove the judge. It also took a year for the judge to write his 594-page decision, and charges were not laid for about two years after the events. The actual trial lasted approximately 160 days over several years.

In hindsight, a more important question in this particular case is what process the commission went through when determining whether to lay charges against Felderhof, says Anisman.

The RCMP determined it didn’t have enough evidence to lay criminal charges (likely fraud charges). And the U.S. Securities and Exchange Commission, which also investigated because Bre-X traded on Nasdaq, decided not to lay charges or bring civil proceedings.

“One might speculate that the SEC was engaged in a tighter analysis up front that might have led them not to bring charges because the case was difficult to prove, time-consuming, expensive, and the results were far from clear,” he says.

“If that were true, then it would mean that before the commission lays charges, they should do a careful analysis that takes into account the manner in which they would defend against their own charges.”

Waitzer says one of the biggest issues leading to cynicism about securities regulation in Canada is that announcements and recommendations about improving the system repeatedly fail to get off the ground or fall into a black hole.

It’s so bad that many people, within the commission and within the government at the bureaucratic level, have lost hope that anything will ever change, says Waitzer.
“There’s a premium on announcing things and there’s no accountability for actually getting them finished,” he says. “There’s a lack of execution.”

For instance, experts have called for a national securities regulator for more than 30 years, but Canada still doesn’t have one.

“The reality is that securities regulation doesn’t have enough political currency to make it worthwhile for politicians to make decisions that might be unpopular with some,” says Waitzer. “At the political level, these issues make headlines for a couple of days, but they are not issues that lose votes. It’s not like child tax credits.”

But instead of simply waiting for a national regulator, which is not a cure-all for Canada’s enforcement issues anyway, it’s more helpful to focus on other steps that might improve the system in the meantime, says Waitzer.

Former Supreme Court of Canada justice Peter Cory and Osgoode Hall law professor Marilyn Pilkington pinpointed a host of incremental reforms that would make a real difference in their critical issues in enforcement report for the Task Force to Modernize Securities Legislation in Canada, he says.

And Waitzer is optimistic about the federal government’s appointment of Canada’s former superintendent of financial institutions, Nicholas LePan, who will look at how to improve commercial crime enforcement at the federal level.

“He’s got a lot of credibility in Ottawa and he’s a sensible guy. There’s no question in my mind that he will come up with some very practical suggestions. And hopefully, because of who he is, the suggestions will be taken seriously and acted on.”

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