OSC Catch Small Fish Lose Big Fish

Richer rogues not on radar TheStar.com - Business - Richer rogues not on radar

New study on corporate crime suggests system is stacked in favour of influential industry insiders

December 05, 2007

Tyler Hamilton
Business Reporter

Regulators charged with pursuing insider traders and other market scammers tend to target small-time crooks and shy away from high-profile figures with deep pockets and powerful lawyers, according to a new study out of Queen's University.

"What happens is that they bifurcate the population of rogues," says study author Laureen Snider, a professor of sociology who has spent 25 years researching corporate crime and the role of regulatory agencies.

"They try to concentrate their resources on where they're more likely to get action."

As part of her latest research, Snider conducted a number of anonymous interviews with enforcement officials at the Ontario Securities Commission and the British Columbia Securities Commission, as well as some RCMP officers within the force's four-year-old Integrated Market Enforcement Team.

She discovered immense frustration and a sense that the system, the way it's designed, is stacked against enforcement officials and in favour of industry "stakeholders" who help determine the rules that oversee them.

"You're dealing with very powerful actors, and these actors are referred to by and large as stakeholders, so they get the chance to shape legislation," Snider explains.

The OSC, for example, routinely holds consultation meetings with those in the financial industry, giving the perception that the regulator's primary role isn't to protect investors.

Snider says it's a model that gives unusual power to those in the financial sector who are regulated, pointing out that such an approach doesn't happen, and would never be accepted, with traditional criminal enforcement. "The police don't habitually consult prospective burglars on Criminal Code changes, but regulatory agencies must negotiate with those they are charged with regulating."

It's a major problem, she adds, "if you believe in equality. Our system is theoretically premised on equality."

During her interviews she also discovered that lawyers representing powerful clients routinely flood regulators and investigators with paperwork, resulting in major case delays as staff pore over a seemingly endless stream of documents and data.

"One of the officials I interviewed called it death by 53 cartons and boxes," she recalls.

OSC enforcement director Michael Watson, speaking at an investors gathering last month in Toronto, said it isn't unusual on specific cases to have to sift through hundreds of thousands of document pages. "It's just a function of the electronic age," he said.

"Right now we have four cases we're working on that have more than three million pages of documents. So the cases are getting bigger from that point of view."

Claude Lamoureux, the recently retired president and chief executive officer of the Ontario Teachers' Pension Plan, characterizes it as a battle "between a peewee hockey team and an NHL hockey club."

"Those being investigated or charged will understandably bring substantial high-quality resources to bear to defend themselves," wrote Nick Le Pan, a special adviser to the federal government, in a report released on Monday that examines how to make the RCMP's enforcement team program more effective.

"The program is `playing in the big leagues' and needs to act that way."

Snider, however, says it's challenging playing in the big leagues if the way the system is designed has major imbalances and other flaws.

"There's no way I defend it, but in order to understand why regulators make the decisions they do and why their hands are tied as they are, you have to look at that context."

Without leadership, enforcers become enablers TheStar.com - columnists - Without leadership, enforcers become enablers

December 05, 2007

Jennifer Wells

Here's my favourite bit from Nick Le Pan's report on Enhancing Integrated Market Enforcement Teams, released on Monday.

"In meeting with persons involved in capital markets enforcement in the U.S. and those in Canada ... I am struck by very significant differences in tone and the assertiveness of approach."

Le Pan, the former federal superintendent of financial institutions, offers a nod to those who critique the U.S. smackdown of white-collar criminals as overly zealous, and in no way recommends an emulation of an American-style justice system. But – and this is a big but in my view – Le Pan posits this: "I do believe that more of that tone of results focus, and assertiveness, is essential in Canada in order to get the results that most Canadians want."

So here we are in the virgin north of capital markets crime enforcement and we can't claim convictions to any meaningful degree and we can't claim investigative might and now we know we can't even claim assertiveness.

Like, can we possibly be any more Canadian?

Le Pan's task was to develop and guide a new plan to improve the effectiveness of IMETs, which, for a start, could use a new name for the enforcement teams.

But that's beside the point.

With rigour and insight, he examined the architecture and day-to-day management of the teams and found much wanting. "There are problems of leadership, accountability, oversight, management, timely focus, timely support for investigations, internal and external communications, and human resources that must be addressed."

Perhaps the coffee is bad, too.

Why, precisely, should we be paying such close attention to these revelations? Because, as Le Pan reminds, enforcement teams are one of the few truly national elements of capital markets regulation that exist in this country.

Of course that needs changing: a national securities regulator is a must. But the Le Pan report does much to issue a useful warning that just because a national body is created and just because a bunch of money is thrown at it, doesn't mean it actually works.

The IMETs idea, co-ordinating RCMP officers with external experts in white-collar crime, is sound, Le Pan says. But the architecture? Not so much.

Le Pan noted frictions and "surprises" between RCMP divisions and enforcement teams divisions, and between RCMP HQ and its own divisions. Here's a gem: "The HQ director of the IMET program had limited authority to actually direct or co-ordinate the program, which was essentially run as four semi-independent units under the guidance of four criminal operations managers."

What's missing: consistency, clarity, accountability. "The program cannot succeed if this is not rectified," Le Pan writes. (Those are my italics.)

What's particularly cheering is the way in which Le Pan rejects the notion that legislative differences between Canada and the U.S. fully explain the lack of results here in Canada measured against the abundant results there, south of the border. This is one of the puffy, warm blankets that Canadian enforcers have been snuggled under for far too long a time.

"Credibility comes from results," writes Le Pan, who later adds, "A high per cent of investigations that are started should result in charges, on average. (Otherwise, original case selection or conduct of investigations is questionable.)"

Rigorous oversight to ensure "appropriate pace and direction" of investigations is one proposed remedy. Fixing targeted times between the start of investigations and decisions taken on a case (to charge or not to charge) is another. Balanced scorecard recording to link goals and results is a third.

Leadership. Lots comes down to leadership. Assertive leadership. In the absence of that, Canada's cops, its regulators, its crime fighters aren't enforcers. They're enablers.

Ontario reveals ABCP writedown TheStar.com - Business - Ontario reveals ABCP writedown

Finance Minister says $100 million charge won't affect province's bottom line

December 04, 2007

David Friend
THE CANADIAN PRESS

Some of Canada's provinces are feeling the sting of exposure to asset-backed commercial paper, the short-term investment vehicles that have saddled corporations around the world with unexpected losses.

Others, however, remain high and dry after refusing to put their money into the investments, considering them too risky.

On Tuesday, the Ontario government disclosed that it would take an estimated writedown of less than $100 million linked to ABCP.

But Finance Minister Dwight Duncan said the writedown wouldn't affect the province's bottom line "in a significant way."

"When the writedown occurs – and it's a small portion – it doesn't impact the income statement at all," he said at Queen's Park, the provincial legislature.

ABCP is a type of short-term security representing packages of mortgages, credit-card receivables and other debts.

The notes normally roll over uneventfully as they mature, but buyers disappeared in August amid worries about the underlying credits as fear deepened about the U.S. subprime mortgage collapse.

Since then, banks and corporations around the world have begun to disclose multi-million-dollar writedowns that have cut into profits.

Ontario's Ministry of Finance said the provincial government holds about $719.5-million worth of ABCP, representing less than 10 per cent of the $9-billion cash reserve – or about 1 per cent of the annual budget.

"It hurts, but it hurts in the balance sheet," Duncan said.

"It was spent in years past and already accounted for. The investments were done, as I understand it, last year and these are holdings that are on the statement."

Last month Alberta's Crown corporation ATB Financial – once known as the Alberta Treasury Branches – said it would take a $79.6-million charge for potential losses and restructuring costs due to ABCP.

And last week, the head of Quebec's Caisse de depot et placement pension fund said it could lose up to $500 million – or about 0.3 per cent of its assets – due to ABCP woes.

Yukon Territory's government faces potential losses related to $36.5 million it chose to tie up in the investments earlier this year, while its neighbouring territories have longtime regulations that forbid them from putting money into the vehicle.

In Nunavut, Treasury Analyst David Hrynkow said local investment regulations don't allow the territory to put its money into ABCP.

"We based our regulations on the amount of risk that we wanted to take. Our primary concern was safety of capital," Hrynkow said in phone interview.

"I think we're just more conservative."

An attempt to shift short-term commercial paper into longer-term investments has been set for an event called the Montreal Accord. On Dec. 14, several key capital market investors will meet to discuss solutions to ease liquidity worries.