Ontario securities regulators and law-enforcement authorities are failing in their mission to protect investors.
A series of articles in the Toronto Star this week catalogued a quagmire of issues, from ill-equipped prosecutors and inexplicable delays to an overarching defeatist mentality that is sapping confidence from a fragmented system perceived as weak.
The failures touch virtually everyone in the country, including retail stock traders, families heavily invested in mutual funds, and the employees of companies that have been financially devastated by corporate fraud. Internationally, Canada's financial and investment credibility continues to be eroded.
Here's a breakdown of six inherent problems in the system and possible solutions:
Problem: Legal talent.
Unlike the U.S., where white-collar crime cases can be major career builders for prosecutors, law students and lawyers here don't have securities regulation on their radar, says Marilyn Pilkington, a professor of law and former dean at Osgoode Hall Law School. There's no incentive for law professionals to specialize in white-collar crime.
Solution: Create a team of expert prosecutors focused on market crimes, to work in a special court.
A separate "capital markets" court could handle all cases involving securities offences, regardless of jurisdiction, says Pilkington. The National Judicial Institute – which provides continuing education for judges in all levels of government – could provide special training programs to help judges handle complex securities cases.
On Thursday, the McGuinty government announced the hiring of 40 new Crown prosecutors, mostly focused on cases involving gangs and guns. None specialize in securities law. Attorney General Chris Bentley told the Star that Ontario has prosecutors dedicated more broadly to white-collar fraud, but experts say securities cases are a more complex, specialized beast.
Bentley acknowledged there is room for improvement. "The recent series of comments (in the Star) contain information that we need to follow up on," he said.
The Ontario Legislature has never really held the Ontario Securities Commission to account, although the securities watchdog has occasionally appeared before the Senate Standing Committee on Banking, Trade and Commerce, says former OSC chair Ed Waitzer.
Technically, the provincial finance ministry oversees the OSC but observers say a lack of staff limits this to rubber-stamping. "The oversight they supply is very little, and the politicians really don't take any interest," says law professor Jeffrey MacIntosh, who holds the Toronto Stock Exchange chair for capital markets law at the U of T.
In practice, the OSC answers only to itself. It has the power to investigate, make rules, adjudicate and establish policy. Every five years it is subject to a review, but recommendations are often ignored. "Any rules the OSC creates must actually be approved by the finance minister, but in most cases that's a formality," adds MacIntosh.
Solution: The Ontario Legislature should take on a more proactive role.
In the U.S., the Securities Exchange Commission is regularly hauled before congressional committees to report on its batting average, Waitzer points out.
The media, he says, act as an important watchdog but it's not enough. "What happens is the regulators say `we're doing something, we're doing something,' and then everybody forgets about it."
Problem: Deterrence.There's a perception within the courts that illegal insider trading, selling fake stock and misleading investors doesn't cause much harm relative to other wrongdoings. White-collar crooks in Canada know they're likely to get a hand slap, and often the perception of light punishment makes regulatory breaches and certain frauds worth committing.
"Used to dealing with crimes of violence, judges look at well-dressed people and think, this is someone who's employed, looks like a decent person, and it's not the most egregious crime," says Osgoode's Pilkington.
A defeatist mindset also seeps into the system. Prosecutors faced with murky evidence and unqualified judges will shy away from cases perceived as too difficult to win, says Douglas Hyndman, chair of the B.C. Securities Commission. "Then the police, because the prosecutors don't want the cases, they get discouraged."
Solution: "Shift the mindset" says Pilkington, and send a message.
New York did it. Between 1983 and 1989, when Rudolph Giuliani was U.S. attorney for the state's Southern District, an aggressive crackdown on insider trading and other white-collar crimes led to a flood of cases that rocked Wall Street and, among others, brought down "junk bond king" Michael Milken.
Those cases were corralled to a specific court, where judges over time gained an expertise in handling complex securities cases and gained an appreciation for the seriousness of securities crimes. White-collar offenders, used to having their wrists slapped, also faced new laws requiring judges to hand down mandatory sentences.
The reforms inspired confidence in the system, gave momentum to the investigators and prosecutors pursuing cases, and sent a clear message aimed at deterring market abuses. Canada, while it shouldn't necessarily copy the American system, could sharpen its teeth a bit.
Problem: Revolving doors.
Nick Le Pan, a federal adviser who reported recently on the RCMP's Integrated Market Enforcement Teams, recognized high turnover rates as a big problem. Since IMET began four years ago, about a third of the team's officers have moved on, mostly to other RCMP posts.
The result is discontinuity, which can cause delays, and a dearth of senior officers equipped to supervise and push through investigations.
Tedd Avey, one of Canada's most experienced forensic accountants, says officers assigned to investigate white-collar crimes, particularly complex securities cases, often don't want it as a career path. They tend, after a short stint often marked by failures, to transfer to other posts when they can.
Solution: Pay incentives and better training.
Le Pan recommended the Mounties offer retention pay to promising enforcement team officers who commit to staying with the program, particularly if an investigator is entering a crucial stage of a case.
He also urged the Mounties to set better priorities for training and be more aggressive in identifying officers who could benefit from experience and fit into leadership roles.
Problem: Legislative handcuffs.
This isn't as much an issue for regulators, which have broad investigative powers and could go after high-profile cases in a more timely and aggressive fashion. Criminal authorities, on the other hand, face legal hurdles that can cripple investigations and tilt the power in favour of the accused.
Criminal law professor Michael Code, an expert in securities crimes who teaches at the University of Toronto, says the biggest roadblock to market and other criminal enforcement efforts is that investigators can't force witnesses to testify. And witnesses usually don't, for fear of being caught up in civil liabilities later on. "They're afraid the evidence is going to be used against them," says Code.
Solution: Change the law to allow investigative subpoenas.
Then police could compel witnesses to co-operate while protecting them from self-incrimination, says Code and others who follow securities issues. The OSC has this power. The SEC has this power, and so do U.S. criminal authorities under the grand jury system.
Without giving authorities such as enforcement teams similar powers, criminal investigators say it's unfair to compare Canada's track record against the U.S., which obtains more convictions, dishes out higher fines and does so much faster.
But Code cautions subpoenas must be used judiciously. If, for example, they're used during an investigation to compel testimony from someone who, it turns out later, emerges as a chief suspect, it can jeopardize a case. Under the Constitution, "you can't compel the accused," says Code.
Market enforcement problems in Canada are not new. In the last two years alone, at least three major reports have studied the issue and offered recommendations on how to improve it.
So far, it's been mostly talk and little action.
"I think it's 95 per cent political will and leadership," says Mohammad Fadel, a professor of securities law at the University of Toronto and an American citizen who has experienced enforcement systems on both sides of the border
As more Canadians become invested and involved in the capital markets, governments will be overwhelmed with pressure to act, Fadel predicts. "That's what happened in the United States."
Solution: Someone must take the lead.
When critics complain about a leadership vacuum, they often point to New York Governor Eliot Spitzer, who in his previous role as attorney general led an aggressive crackdown on securities fraud and other market crimes, Will Ontario Finance Minister Dwight Duncan tackle the issue? Or Attorney General Bentley? Is there some other white knight poised to become Ontario's Eliot Spitzer?
"It would take a very strong personality, and a lot of support from the Ontario government," says U of T's MacIntosh.
It's an issue, however, begging for ownership.
Original article on Toronto Star website