Trends in Canadian Securities Enforcement Actions
The Canadian Securities Administrators or CSA published their annual report recapping results for 2012 for securities enforcement actions. The CSA is the council of 10 provincial and three territorial securities regulators in Canada. The mission of the organization “is to facilitate Canada’s securities regulatory system, providing protection to investors from unfair, improper or fraudulent practices and to promote fair, efficient and transparent capital markets, through the development of harmonized securities regulation, policy and practices.” Its annual report reviews the results of Canadian securities regulators, actions brought under the criminal code and by self-regulatory organizations.
Proceedings commenced: In 2012 there were 145 enforcement actions commenced targeting securities violations. This is an increase over the 126 actions initiated in 2011 but down from the 178 reported in 2010. Over the last five years the most actions were brought in 2010 when 172 were filed with 2008 second with 172 2009. The low was 124 in 2009.
The Report divides the actions into various categories such as illegal distributions, misconduct by registrants, insider trading and manipulation. Year to year comparisons are difficult, however, since in 2012 the Report introduced a new “fraud” category which is composed of cases previously grouped in other areas, although apparently most of the cases in this new group were previously included under the label of illegal distributions.
One category which appears to have been unaffected by the new groupings is insider trading. Statistics are provided for the number of cases and the number of persons involved in the case. Here the statistics show a decline in the number of actions brought as well as in the number of persons involved. In 2012 there were 4 actions were brought which involved 19 persons. In contrast in 2011 9 insider trading cases filed involving 31 persons compared to 2010 when 12 were brought also involving 31 persons. This trend contrast with U.S. where insider trading is an enforcement priority which continues to result in increasing numbers of cases.
The trend in naming either individuals or business organizations over the last three years in enforcement actions has remained essentially the same. Last year 242 individuals were named as respondents while 146 corporations were named. In 2011 the split was roughly the same with 231 individuals named as respondents while 121 business organizations named. Similarly, in 2010 301 individuals were named while 183 entities were named as respondents.
Concluded cases: The trend regarding the number of cases concluded last year does not mirror the one for bringing actions. In 2012 the Report states that 135 cases were concluded, up from 124 in the prior year. At the same time, the number of cases resolved last year is far below that of 2010 when 174 cases were concluded. The lowest number of cases resolved in one year over the last five years is 123 in 2008. In 2009 141 were concluded.
In contrast, to the U.S. were most securities enforcement actions are settled, the Report notes that over half of the cases in 2012 were concluded at a contested hearing before a tribunal. Another 25% were resolved through settlement while 20% were resolved through a court proceeding under securities legislation.
The split between the number of individuals and corporations named as respondents has remained essentially constant over the last three years. In 2012 206 individuals and 116 business organizations were respondents in concluded actions. In 2011 there were 237 individuals and 128 corporations as respondents in resolved actions while in 2010 there were 207 individuals and100 corporations.
The statistics for categories of resolved cases were altered in the same manner as those for the filing of actions, that is, by adding a new fraud category. Again, the trend for concluded insider trading cases appears to have been unaffected by the change. Last year 16 insider trading cases were concluded equaling the number in 2011 and down by just one case from 2010.
The trend regarding the imposition of fines and administrative penalties in concluded cases is not consistent with the one for resolving the actions. Over the last three years the amount of fines and administrative penalties imposed has steadily declined in contrast to the trend for concluded actions. In 2012 about $36.6 million in fines and administrative penalties were imposed while in 2011 it was $52.1 million and $63.9 million in 2010.
The decline in the amount of fines and administrative penalties may reflect the fact that the amount of restitution, compensation and disgorgement over the last three years has significantly increased. In 2012 those amounts totaled about $120.5 million, up significantly from the $49.5 million ordered the year before and the $58.5 million in 2010.
Agency cooperation: The Report emphasizes the cooperation of Canadian securities regulators among the provinces and with other regulators such as the U.S. Securities and Exchange Commission. One example cited involved an insider trading case involving the husband and wife team of Shane Suman, who resided in Ontario, and Monie Rahman who lived in the U.S. Mr. Suman worked for a subsidiary of NASD traded Molecular Devices Corporation. He learned the firm would be acquired in a friendly tender and tipped his wife. The couple purchased stock and options through the wife’s E-trade Canada account. Following the deal announcement they had profits of over $1 million. The SEC brought an insider trading action in which it obtained judgments ordering the payment of disgorgement and a civil penalty by the husband of $2 million and $1 million by the wife. SEC v. Suman, Case No. 07 Civ. 6625 (S.D.N.Y. ). The Ontario Securities Commission brought an action even though Molecular Devices is not a reporting issuer in Ontario on the theory that the conduct of the couple “was deemed to be contrary to the underlying policy objectives of the Ontario Securities Act’s insider trading provisions.” The OSC ordered the husband to pay disgorgement and an administrative penalty of $250,000. The couple was also ordered to pay administrative costs of $250,000. Permanent cease trading and director and officer bars were also imposed.
A second action cited involved the Arbour Energy Ponzi scheme. There the Alberta securities Commission obtained and shared information with other Canadian securities authorities and the SEC and Washington State Department of Financial Institutions, Division of Securities. A criminal action was also brought in Alberta.