Can the OSC sharpen its teeth and take a bite out of enforcement, or lack thereof?

The enforcement efforts of the Ontario Securities Commission (OSC), the regulator that administers and enforces compliance with the provisions of the Securities Act (Ontario) and the Commodity Futures Act (Ontario), have had mixed success— at best. With a mandate to protect investors and ensure fair and efficient capital markets through monitoring compliance and enforcement measures in the securities industry in Ontario, the regulatory body has been struggling to be taken seriously. Having taken a chapter from the playbook of the American national Securities Exchange Commission (SEC), prosecuting individuals for Insider trading, tipping, and securities fraud, the initial results, which are highlighted below, were underwhelming. Now, in a renewed effort to assert its presence in the capital markets as a regulator with teeth, the OSC is taking new approaches, with more promising results.

Who can forget the infamous Bre-X gold mining fraud of the 1990’s? The Toronto Stock Exchange (TSX) lists more mining companies than any other exchange in the world. In 2015, approximately 1,485 mining companies were listed on the TSX. In the early 1990’s, one of those was Bre-X. That company bragged, in press releases issued under the authorities of John Bernard Felderhof, of huge gold deposits in Borneo, perhaps the largest gold find in history. When the whole story blew up and was shown to be massive fraud, and after a local geologist “:fell” to his death from a helicopter, and the stock price collapsed, Felderhof was prosecuted by the OSC for misleading press releases and insider trading. The trial took on a life of its own and on July 31, 2007, over eight years after the charges were laid, Felderhof was acquitted.

The OSC also found itself on the short end of another prosecutorial stick when it tried to convict David Bruce Fingold for illegal insider trading of shares listed on the TSX of Cineplex Odeon. Fingold, a then business partner with Garth Drabinsky, was the subject of a complaint made by Drabinsky to the OSC about Fingold’s sale of shares of Cineplex Odeon on the TSX, in a blackout period, arising from insider knowledge of poor financial results. Fingold successfully argued a mistake of fact defence, more frequently used in environmental and occupational health and safety prosecutions. In the result, Fingold was acquitted at trial , and then again when the OSC appealed.

Although the SEC was collecting an impressive number of convictions for insider trading, tipping, and securities fraud in the 1990’s and 2000’s, much to the credit of Preet Bharara, the OSC was not. Coupled with the legal and political setback of leading an unsuccessful attempt to establish a national securities regulator , the effectiveness of the OSC’s enforcement efforts was openly and publicly questioned. The OSC needed a new approach to regain the respect of the capital markets and the public.

The OSC’s lack of success in obtaining convictions in court resulted in a change of direction for enforcement. Leadership at the OSC adopted Administrative Monetary Penalties (AMPs). AMPs are used in a number of regulatory regimes, have significant procedural advantages for regulators, and have been approved by the Supreme Court even when the financial penalties are extremely high.

The advantages of AMPs for the OSC are, of course, disadvantages for those under investigation, because they include:

  • no presumption of innocence
  • less procedural process rights
  • no clear entitlement to Section 11 rights under the Charter, since an AMP is not held in law to be an “offence”

In addition to AMPs, the OSC is also imposing trading bans and disgorgement orders. This relatively new power of the OSC is not burdened with the presumption of innocence, due process, and Charter safeguards for the accused. One recent example of such an investigation and the OSC’s administrative, rather than prosecutorial success, involves a former Bay Street lawyer, Michael Finklestein and his alleged co-conspirators Korain Bobro, Howard Jeffrey Miller, and Francis Cheng, who were all brought before the OSC, rather than the courts, for an alleged insider trading and tipping scheme (PDF). After a hearing, they were given a total of $2,859,698 in AMPs, costs, and disgorgement orders (see OSC reasons for decision). Welcome to the new era of OSC enforcement.

This case is a cautionary tale that the OSC’s previous reputation of an ineffective securities regulator is changing. Having largely, but not exclusively, abandoned an American-styled prosecutorial model of regulatory enforcement, the OSC is clearly making headway to establish itself as a respected and more effective securities regulator. Further, the OSC is still prosecuting alleged offenders under the Securities Act. In fact, the OSC website tracks every court appearance of every accused, publicly on their website, which amounts to unnecessary detail and transparency, but is unequalled by any other regulator in Canada.

The OSC is also using its statutory authority to compel investigations of publicly traded companies when allegations of bribery or corruption, even outside of Canada, come to their attention. I have been involved in recent inquiries from both the OSC and the TSX about media reports of corruption of local representatives at a Canadian-listed mining company abroad. The allegations may not only offend locals, according to the Corruption of Foreign Public Officials Act . Further, the OSC is in the midst of a consultation process to implement a new whistleblower program. These developments give corporations, boards, senior management, and their legal advisors even more reasons to have an effective and meaningful corporate governance and legal compliance program and structure in place.

In conclusion, the importance of the OSC’s role in setting, communicating and enforcing standards in the financial and securities markets is greater than ever. Volatile stock markets in Canada and around the globe make investors and their advisors more vulnerable to exploitation, abuse and illegal activities. With the improved accountability and enforcement initiatives of the OSC, and its attendant respect, Ontarians and Canadians are better served.