In the face of continuing criticism about its enforcement capability, the Ontario Securities Commission (OSC) and other provincial securities regulators seem determined to toughen their approach by publicizing more aggressively the steps they are taking and resorting to remedies or interpretations of securities law that are likely to be perceived as more muscular than traditional approaches.
One innovation has been to be more direct about measures that are being considered to strengthen enforcement. During a speech delivered in February, the new Chair of the OSC increased the transparency of its enforcement philosophy by floating new ideas including settlements without admissions of liability and clarifying the credit for cooperation process.1
In June and July of this year, in the wake of market turbulence triggered by a short seller who published very negative research concerning a particular issuer (Sino-Forest), the OSC, in another example of increased transparency, not only publicly confirmed that it had quickly commenced an investigation of that issuer but issued an unusual follow-up notice warning other issuers that it would be extending its investigation to others with substantial assets in emerging markets.
In an even more aggressive step, late in August the OSC removed various Sino-Forest officers in connection with a temporary cease trade order. In an embarrassing development for the OSC, the action in relation to the officers had to be withdrawn the same day. Nonetheless, the issuer voluntarily took steps almost immediately to achieve the same result the OSC’s defective order would have accomplished.
The OSC emerging markets investigation extends beyond Sino-Forest and similarly placed issuers to the role played by parties it describes as "gatekeepers": auditors, underwriters and authors of research in relation to such issuers. The risk assessment of certain issuers has been raised in at least one recent investment dealer research update after visiting the properties and checking for related party transactions.
Though perhaps not immediately apparent, this focus on a cross-section of similarly situated public issuers represents an extension of Commission practice in recent years to raise best practice levels by drawing public attention in compliance notices to continuous reporting practices of public companies that regulators, and the OSC in particular, consider deficient.
In an effort to demonstrate that existing provincial securities regulators are becoming more aggressive in pursuing securities violations, the Canadian Securities Administrators (CSA) 2010 Enforcement Report announced the CSA’s intentions to use courts and prosecutions to enforce the securities law instead of relying mainly on public interest proceedings which are perceived to be more lenient and less punitive and to have less deterrent value than prosecutions. Prosecutions can result in criminal records and prison sentences.
In the Western provinces and more recently in New Brunswick, securities commissions are behaving more aggressively through a combination of proceedings and public education against tax and pension related scams and ponzi schemes that are aimed at retail investors and have produced large losses to vulnerable individuals.
The schemes under attack are more sophisticated than offerings of valueless "moose pasture" securities. These more sophisticated scams are not easy to fit within the reach of the securities law. Yet, by characterizing such schemes as "investment contracts" and making that concept more elastic, securities enforcement officials have been able to launch and successfully settle proceedings. The regulators have had success using this approach in cases against self-represented defendants who have not mounted strong attacks on the legal theory being advanced. In such proceedings, commissions have also slammed dubious uses of prospectus and registration exemptions. This has brought more and more activities into the category of egregious securities non compliance.
A few cases illustrate this trend. In the Synergy Group2 decision, affirmed by the Alberta Court of Appeal, the Alberta Securities Commission found that the concept of "profits" includes "financial benefits" in order to determine that the agreements by which investors entered into a tax reduction/rebate scheme would meet the requirements of an investment contract (an investment of money in a common enterprise with expected profits arising significantly from the efforts of others). Gold-Quest 3 was found to be both a ponzi scheme and a pyramid scheme that illegally traded and distributed securities and made misrepresentations to investors. The regulator found in Kustom Design4 that because the money loaned by investors was secured by a promissory note and letters of assignment, it fell within the definition of a security under the Securities Act (Alberta). The Commission also found that the agreements entered into by investors constituted investment contracts.
Other relatively recent trends include:
- increasing reliance on the power in the Securities Act (Ontario) to prosecute frauds (Sextant5, Grmovsek6);
- more frequently initiating criminal proceedings even after a settlement has been reached under securities law with respect to the same conduct (Agnico Eagle7, Grmovsek8);
- pursuing negligence by registrants (especially as regards a want of due diligence in investigating the products they sell) that puts investors at risk (Portus9, Norshield10);
- declaring conduct that is technically lawful to be contrary to the public interest if it violates fundamental securities law principles even if the conduct is not so abusive that it damages any identifiable class (Eugene Melnyk11); and
- more findings that Securities Act (Ontario) breaches by registrants equate to breaches of fiduciary duties owed by those registrants (Sextant12, Norshield13).