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.
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.
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."
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.
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.
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.
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
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
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
"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.
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.
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
In a separate
investigation, the OSC is also probing about 350 special-warrant
financings for evidence of illegal insider trading ahead of the deals
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.
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
professional said the encounters removed any notion he may have had about
"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
the regulator moves at a glacial pace are also likely to be exacerbated by
the OSC's recent heavy caseload.
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.
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.
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
PAGE FROM OSC'S
The OSC is looking for possible breaches of disclosure rules and is
working closely with the U.S. Securities and Exchange Commission.
- - -
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.
- - -
TECHNOLOGIES LTD. The OSC is looking at disclosure records, financial
affairs and trading in the shares of Royal. The RCMP is conducting a
- - -
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.
- - -
STORAGE INCOME TRUST The OSC has filed quasi-criminal charges against
former executives, alleging accounting fraud and misleading disclosure.