OSC Enforcement Activity in 2012

TORONTO, Feb. 28, 2013 /CNW/ - The Ontario Securities Commission (OSC) reported today on its enforcement activity in 2012, with details on how the OSC delivered a vigorous and timely enforcement program to protect investors and promote fair and efficient capital markets in the province.

"Robust and effective enforcement is essential to investor protection and to foster confidence in our capital markets," said Howard Wetston, Q.C., Chair and CEO of the OSC. "The OSC continues to intensify its enforcement program and explore other ways to protect investors and support their trust and confidence in the fairness and integrity of Ontario's capital markets."

In 2012, the OSC focused on protecting investors by addressing the most serious harm, including fraudulent activity and the failure to provide investors with full and complete information, both of which have a significant impact on investors. The OSC also continued to deal effectively with the challenges raised by increasingly complex enforcement files involving multiple respondents.

Staff commenced a total of 30 proceedings involving 107 individual and corporate respondents, compared to 25 proceedings against 96 respondents in 2011. Proceedings were concluded against a total of 63 individuals and 37 companies in 2012, compared to 107 individual and 53 corporate respondents in the year before.

HIGHLIGHTS

Targeting Fraud

In 2012, the OSC concluded proceedings involving allegations of fraud against a total of 25 individual respondents and 23 corporate respondents, or 48 per cent of all respondents in concluded proceedings. OSC staff also commenced proceedings involving fraud allegations against a total of 35 individual respondents and 21 corporate respondents in 2012, or just over half of all of the respondents in commenced proceedings.

"We made it a priority to go after fraudulent schemes aimed at investors and we did just that in 2012," said Tom Atkinson, Director of Enforcement. "The OSC has established solid momentum in protecting investors by targeting fraud and sanctioning perpetrators."

The OSC continues to strengthen its partnerships with police services and the provincial Ministry of the Attorney General in areas of shared enforcement interest. These relationships are supported by the specialized skills of OSC staff in areas such as forensic accounting, litigation and cross-border investigations.

Court Proceedings

The OSC continues to bring cases to the Ontario Court of Justice, especially proceedings involving fraud allegations, recidivists and respondents who do not comply with Commission orders. At December 31, 2012, there were seven matters in litigation before the court, and six of those matters involved allegations of fraud.  In 2012, two defendants received jail sentences totalling 21 months for breaches of the Ontario Securities Act and Commission orders.

International Investigations

An increasing share of OSC enforcement actions involve activity beyond the borders of Ontario, resulting in challenging and complex investigations.

On May 22, 2012, OSC staff issued a statement of allegations, including fraud, against Sino-Forest Corporation and six individual respondents. The proceeding is ongoing before a tribunal.

One major focus of the Sino-Forest investigation was whether gatekeepers such as auditors and other corporate advisors properly performed their role in protecting investors. In December 2012, OSC Staff issued allegations against Ernst & Young LLP, former auditors of Sino-Forest Corporation. Staff alleged that Ernst & Young breached the Ontario Securities Act by failing to conduct their audits in accordance with relevant industry standards.

International Enforcement Co-operation

The interconnectedness of the global capital markets requires a sustained focus on and commitment to information sharing and collaboration among regulators to combat cross-border misconduct.

The largest number of requests for assistance from the OSC come from U.S. regulators, specifically the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC),  but an increasing number of requests are made between the OSC and regulators in Asia and Europe, such as Hong Kong and Germany. The number of international (non-U.S.) requests for assistance received by the OSC increased from 10 in 2011 to 19 in 2012. The OSC made 35 requests to international regulators in 2012, up from 33 in 2011 (see table below).

Requests to the OSC often involve assistance with access to broker and banking records for investigations, locating people of interest to investigators and compelling testimony from individuals in interviews. Assistance requests can alert OSC Enforcement staff to possible misconduct in Ontario which requires prompt action to protect investors and markets here. The rising level of assistance is being driven by the effectiveness and timeliness of the OSC's co-operation and the significant increase in the number of non-U.S. regulators who are compliant with the International Organization of Securities Commissions' (IOSCO) Multilateral Memorandum of Understanding for information sharing.

"The OSC often has common enforcement interests with other regulators and Ontario's investors and markets benefit from our efforts to share information and provide assistance on a timely basis," said Tom Atkinson, Director of Enforcement.

In August 2012, the SEC acknowledged the OSC's assistance in an investigation that shut down ZeekRewards.com, a USD$600 million Ponzi scheme in the U.S. The CFTC also acknowledged the work of the OSC in assisting the CFTC in its investigation into a USD$7 million foreign currency fraud.

Enforcement and Compliance

For many investors, their main point of contact with the securities industry is through registered advisers or dealers, who are expected to comply with the high standards of conduct and disclosure in Ontario.

The OSC increased its focus on compliance with Know Your Product (KYP) and Know Your Client (KYC) requirements and other suitability obligations for registrants in 2012. The concluded proceeding against Trapeze Asset Management Inc. is an example of a registered firm failing to ensure that certain investments were suitable for all of its clients. Under terms of a settlement agreement, the OSC ordered the respondents to pay an administrative penalty, and Trapeze agreed to submit to a review of its practices and to conduct account reviews.

In addition, staff in the Compliance and Registrant Regulation Branch referred four scholarship plan dealer firms to the Enforcement Branch after identifying serious concerns with sales practices during compliance reviews. Each dealer agreed to retain a compliance consultant to develop and implement a compliance plan and to monitor to ensure that all sales are suitable.

Enforcement Efficiency

The OSC continually looks for ways to be more efficient in the processes it uses for enforcing securities law in Ontario. The OSC is investing in new technology, including E-Discovery tools, data analytics and forensic services, to assist staff with complex investigations and also in the litigation process.

The OSC started holding electronic hearings in 2012 to provide easier access to all documents and reduce the time, effort, and space required to manage documents throughout the hearing life-cycle. Leveraging technology in electronic hearings is improving the quality of searching results and analyzing evidence during the tribunal review and decision processes.

Investor Warnings and Fraud Awareness

The OSC issues Investor Alerts and maintains an Investor Warning List on its website to warn the public about individuals and companies that may be involved in harmful activity. In 2012, the OSC issued five Investor Alerts, the same number as in 2011, and added 24 companies and four individuals to its Investor Warning List, compared to 31 companies in 2011. 

Staff from Enforcement and the Office of the Investor are participating in "OSC in the Community" provincial roadshow events in early 2013. The first event was in Thunder Bay on February 27. Staff gave presentations to investors about fraud prevention and how to identify the warning signs of fraudulent investment schemes.

ENFORCEMENT PROCEEDINGS

Proceedings Commenced

A total of 30 proceedings were commenced in 2012, involving 71 individuals and 36 companies. Fifteen of those proceedings included allegations of fraud, involving 56 of the total of 107 respondents.

Category of Alleged Wrongdoing Cases Respondents   
    Individuals      Companies
       
Fraud* 15 35 21
Illegal distributions 6 16 9
Misconduct by registrants 2 4 4
Insider Trading 2 12 1
Miscellaneous 5 4 1
Total 30 71 36

* 2012 is the first year in which fraud is featured as a standalone category. Previously, fraud matters were included among other categories.

Interim Orders

Interim orders protect investors by prohibiting or inhibiting potentially illegal activity while an investigation is underway. A total of eight orders were issued by the Commission in 2012, involving seven individuals and 13 companies.

Concluded Proceedings

A proceeding is concluded when the Commission or the courts make a decision and any sanctions are ordered. In 2012, proceedings were concluded against a total of 63 individuals and 37 companies.

Category of Wrongdoing Respondents
  Individuals  Companies
Fraud* 25 23
Illegal distributions 20 6
Misconduct by registrants 8 7
Illegal insider trading 2 -
Disclosure violations 1 -
Miscellaneous 7 1
Total 63 37

* 2012 is the first year in which fraud is featured as a standalone category. Previously, fraud matters were included among other categories.

How Matters were Concluded  2012
Contested Hearings before a Tribunal 60
Settlement Agreement  36
Court Proceeding (under securities legislation) 4
Total 100

Sanctions - Protective

The Commission can impose bans on future activity, such as trading in securities (cease trade orders), acting as a director or officer of a public company, and acting as or becoming a registrant. The Commission can also remove prospectus and registration exemptions available under the Act.

Category 2012
Cease Trade Orders 80
Director and Officer Bans 49
Exemption Removals 72
Registration Restrictions 58

Sanctions - Monetary

The Commission can impose monetary sanctions and bans on individuals and companies for violations of securities law or conduct that is contrary to the public interest. Adjudicative tribunals can also order a respondent to pay the costs of an investigation and/or hearing. The courts have the authority to impose fines and jail terms.

Monetary sanctions include penalties, settlements and disgorgement. Disgorgement requires the respondent to pay the OSC the amount the respondent obtained as a result of the illegal activity.   In 2012, the Commission ordered a total of more than $78 million in sanctions and costs.

While the OSC has experienced challenges in collecting on monetary sanctions and cost orders, it continues to work to improve its collections practices.  Additional information on the OSC's collection experience is available on its website (osc.gov.on.ca).

Type Amount
Administrative Penalties/ Settlements $13,648,572
Disgorgement $61,503,163
Costs $2,980,121
Total $78,131,856

Enforcement Co-operation

Requests for assistance received by the OSC 2012
International
United States
Canada
Total
19
30
10
59
Requests for assistance made by the OSC
International
United States
Canada
Total

35
14
8
57
Assistance files open as at Dec. 31, 2012
International
United States
Canada
Total

15
25
19
59

The 2011 OSC Report on its Enforcement Activity is available on the OSC website.

The OSC is responsible for enforcing securities law in Ontario, and works actively to protect investors and the capital markets.

 

 

 

SOURCE: Ontario Securities Commission

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