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OSC struggles under load

Ranks stretched thin: Casework includes Nortel, Hollinger, Royal Group, Atlas

 

Wojtek Dabrowski

Financial Post

Saturday, August 28, 2004

A heavy load of new investigations at the Ontario Securities Commission in recent months has left the ranks of its enforcement staff stretched thin with no easy way to relieve the pressure.

From scrutiny of such companies as Nortel Networks Corp., Hollinger Inc. and Royal Group Technologies Ltd. to quasi-criminal court proceedings against former executives of Atlas Cold Storage Income Trust and the OSC's probe of trading abuses in the mutual fund industry, the past year has been a hectic one for the enforcement staff at the country's largest regulator.

Even though the department has doubled in size from 40 to 80 people over the past five years, its employees find themselves working hard to manage the caseload, which began to grow rapidly after Atlas revealed accounting irregularities late last summer.

"Right now, there's no doubt people are very busy," Michael Watson, the OSC's enforcement chief, said in an interview. "We have an unusual number of investigations on the go."

However, Mr. Watson doubts the workload can be lightened by simply adding more staff. Dedicating a larger number of investigators to a case "isn't really going to speed up the process" because most probes in their later stages can be handled by two or three investigators, he said.

Also, "the trouble is the work tends to ebb and flow," he said. "You'd have to be careful about bulking up on staff to meet an anomaly in work because then you're going to wind up ... with staff not necessarily fully utilized" during slower periods.

Instead of hiring new people, the enforcement department is more likely to take staff off less-pressing cases and reallocate them "if something big falls out of the sky," Mr. Watson said.

The OSC enforcement department is broken up into four areas: case assessment, which handles initial complaints; surveillance, which watches for trading abuses; investigation, which handles major case work; and litigation, which brings court or disciplinary proceedings against offenders.

There are 12 litigators with about seven support staffers, about 30 investigators and roughly 30 people in the case assessment and surveillance areas.

It appears the expanded ranks still haven't solved all the enforcement department's problems. For instance, even though there are 12 litigators -- compared with five in 1999 -- they are "having trouble keeping up," Mr. Watson said.

The department is also much smaller than the U.S. Securities and Exchange Commission's level of 935. However, it is proportionally appropriate using the widely accepted measure of U.S. capital markets being 10 times the size of Canada's.

Philip Anisman, a veteran Toronto securities lawyer, said the OSC's enforcement department could bulk up by establishing a dedicated group of lawyers to seek civil redress for harmed investors.

Michael Watson of the OSC: He says the speed of investigations is dictated by judges and commissioners.

"It's my view that the commission should make greater use of the authority it has to bring cases to the court to obtain civil remedies for investors," he said.

Meanwhile, the mounting caseload over the past 12 months is expected to persist. The Atlas case, as well as quasi-criminal charges against Discovery Biotech Inc., promise to keep enforcement litigators busy. Also, the OSC said last month the probe of market timing and late trading in the mutual fund industry will result in the commencement of proceedings within weeks. That probe, which began with 105 fund companies and has since narrowed to a handful, has kept the regulator busier than the majority of its other investigations, Mr. Watson said.

However, the OSC is not reducing the number of investigators on the case as the probe's scope narrows. Instead, new investigators have been added "within the last couple of weeks," Mr. Watson said, even though the probe is in its final stages.

In a separate investigation, the OSC is also probing about 350 special-warrant financings for evidence of illegal insider trading ahead of the deals becoming public.

Generally, the cases handled by Mr. Watson's department are larger and more complex than in the past, he said: "There's more reliance on [self-regulatory organizations] now to do the smaller things that involve broker misconduct in relation to individual investors and things of that sort."

Busy as it has been, the OSC's enforcement department has also been criticized by market participants as slow, toothless and unknowledgeable.

In a report last December, a three-person Regulatory Burden Task Force said OSC staff are seen as having difficulty comprehending issues "due to a lack of industry knowledge or expertise."

One Bay Street professional who provided witness testimony in a case was taken aback by some of the questions asked of him by a team of three OSC investigators.

"I didn't know if they were playing dumb or just trying to get all the facts," he said, adding a considerable amount of time was spent "educating" the regulators on relevant issues.

His first meeting with an OSC investigator took place two months earlier, when he received an unexpected call from the receptionist at his office, requesting him to come to the lobby. When he arrived, he was approached by a man who "flashed his badge," told him he was with the OSC and demanded a meeting.

However, the professional said the encounters removed any notion he may have had about OSC's toothlessness.

"I would sure as hell ... not want to be in trouble [with the OSC] based on how I felt being a witness. It was pretty intense," he said, likening the investigators' countenance to that of police detectives on the cop drama Dragnet.

Complaints that the regulator moves at a glacial pace are also likely to be exacerbated by the OSC's recent heavy caseload.

For instance, the SEC has exacted millions of dollars in fines from mutual fund firms caught in market-timing and late-trading scandals in the U.S. Fund market timing is also believed to be taking place in Canada, but critics point out the OSC still has not concluded its work.

The comparisons with the SEC have long been a thorn in the OSC's side. Some have charged the SEC is quicker in pursuing suspected wrongdoers at interlisted Canadian companies. For instance, the OSC appears to have lagged the SEC in launching an investigation of Nortel.

The regulator has responded by saying it will not have its agenda set by regulators in other jurisdictions. As for the speed at which complaints are brought before an OSC panel or the courts, Mr. Watson reiterated the question is not one of resources.

He said once proceedings of any kind are announced, enforcement staff lose control of the timeline as judges or commissioners determine when hearings will take place.

PAGE FROM OSC'S DOCKET:

HOLLINGER INC. The OSC is looking for possible breaches of disclosure rules and is working closely with the U.S. Securities and Exchange Commission.

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NORTEL NETWORKS CORP. The commission is looking at Nortel's financial statements and disclosure to investors. It has conducted joint interviews with the SEC in Toronto and Washington. The RCMP is conducting a criminal investigation.

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ROYAL GROUP TECHNOLOGIES LTD. The OSC is looking at disclosure records, financial affairs and trading in the shares of Royal. The RCMP is conducting a criminal investigation.

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BIOVAIL CORP. As a result of a Financial Post story, the OSC confirmed it is investigating suspicious trading activity, as well as conducting a full review of disclosure records.

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ATLAS COLD STORAGE INCOME TRUST The OSC has filed quasi-criminal charges against former executives, alleging accounting fraud and misleading disclosure.