CSA Report Highlights 2011 Enforcement Activity

Date: Thursday, February 23, 2012
Author: James Langton

Fines and administrative penalties of more than $52 million; Illegal distributions remain the biggest source of enforcement activity

Overall securities enforcement activity dropped a bit in 2011, according to a report released Wednesday by the Canadian Securities Administrators.

The CSA's latest enforcement report shows that the number of proceedings commenced and concluded last year were down from 2010, and sanction activity dropped as well. A total of 126 total proceedings were initiated in 2011, involving 231 individuals and 121 companies. This was down from 178 total proceedings commenced in 2010, which included 301 individuals and 183 companies.

And, the report shows that CSA members concluded a total of 124 cases in 2011, involving 237 individuals and 128 companies. This also represents a dip from the 174 cases concluded in 2010, involving 207 individuals and 100 companies.

Illegal distributions remain the biggest source of enforcement activity, accounting for over half of the cases concluded in 2011 (66), although this is down from 115 such cases in 2010. The number of cases involving other issues, such as registrant misconduct and illegal insider trading were more or less unchanged from the previous year.

With the drop in cases concluded, the number of cases resolved by settlement and court proceedings also dipped year over year (from 71 to 53, and from 64 to 24, respectively), but the number of contested hearings rose from 39 in 2010 to 47 in 2011. The 24 cases that were concluded in court proceedings resulted in jail sentences against eight individuals.

Despite the drop in the number of cases resolved in court, Tom Atkinson, director of enforcement at the Ontario Securities Commission, points out that the length of the jail terms it is winning has gone up dramatically. In 2009, the OSC secured jail sentences amounting to just 45 days. Last year, that rose to six and half months, and in 2011, it won 14 years and seven months in jail time.

Atkinson says that the OSC has been pushing for longer jail terms in an effort to increase the deterrent effect that regulators are having, particularly against repeat offenders who haven't been put off by monetary penalties that the regulators often can't collect.

The fact that the OSC is seeking more jail time has raised the stakes for the accused violators, and has also made for more complex cases, which is one of the reasons for the drop in overall volume of cases completed, Atkinson suggests.

That said, he notes that the courts are becoming more receptive to handing down jail terms for white collar crimes. In the past, these sorts of non-violent offences may not have been viewed that seriously, but Atkinson says that it's trying to present evidence that demonstrates the sort of damage that is done to victims of these crimes. "We're spending a lot of time thinking about what sort of evidence we want to present in criminal matters — what's most effective, what's going to tell the right story," he says. And as the courts see more of this, they are becoming increasingly "fed up" with these sorts of offenders, he suggests.

Although jail time is up, overall fines and administrative penalties levied in enforcement cases also fell year over year to $52.1 million from $63.8 million in 2010; which is well down from 2009's total of $153.7 million (although more than $100 million of this related to the asset-backed commercial paper settlements). Restitution, compensation and disgorgement amounts also dropped to $49.6 million in 2011 from $58.6 million in 2010 and $92.2 million in 2009.

In addition to these monetary sanctions, CSA members also handed down 63 interim orders and asset freeze orders in 2011, which put trading restrictions on 109 individuals and 108 companies. This is one area where the volume of enforcement activity rose from the previous year. In 2010, there were 41 interim orders and asset freeze orders, and trading restrictions were placed on 98 individuals and 89 companies. Also, in 2011, CSA members froze assets relating to 11 individuals and 16 companies, representing a total of $7.9 million.

The report also shows that the number of cases concluded by the self-regulatory organizations rose in 2011, with the SROs completing 133 enforcement cases in 2011, compared with 115 in 2010.

"CSA members work to deter wrongdoing and to protect investors through both enforcement efforts and investor education," said Bill Rice, CSA chair and CEO and chair of the Alberta Securities Commission. "This report focuses on the actions our enforcement teams take to respond to violations ranging from illegal insider trading to market manipulation."
   
The CSA notes that the report is being released in advance of Fraud Prevention Month (March), which will highlight tools and resources Canadian investors can use to recognize and avoid investment fraud.

The 2011 Enforcement Report is now available at http://er-ral.csa-acvm.ca/.