Putting the force in enforcement

As Canada’s leading market watchdog, the Ontario Securities Commission has been long criticized for its weak record in prosecuting serious securities crime. Will a new head of enforcement, working with new tools, under a new chair, be able to change that?
By Cooper Langford

Top gun: An amateur stunt pilot in his spare time, the OSC’s director of enforcement Jeff Kehoe brings a cool demeanour to an arena where the pace of change and complexity is “staggering”


Barring negotiated settlements, most of Canada’s securities enforcement community will be consumed this fall with the prosecution of several related high-profile cases alleging insider trading of shares in the former Montreal-based Amaya Inc., now Toronto-based The Stars Group Inc. (TSX:TSGI), in 2014.

The marquee event, scheduled for November, is the trial of former Amaya CEO David Baazov, in tandem with two other individuals—a company adviser and a childhood friend—in Quebec court. Baazov is accused of aiding in trades while possessing privileged information, influencing the market price of Amaya securities and communicating privileged information. According to Quebec’s securities regulator, the Autorité des marchés financiers (AMF), these acts occurred in the weeks leading up to the stunning announcement that Amaya, then a modest gambling technology vendor, had struck a US$4.9-billion deal to acquire Oldford Group Ltd., owner of the PokerStars and Full Tilt Poker brands. The charges were announced in March 2016, and all three of the accused have pleaded not guilty.

Before that trial, however, the Ontario Securities Commission (OSC) has a mid-September hearing scheduled for a case against three other individuals whom staff with Ontario’s securities regulator allege broke insider-trading rules in the run-up to the Amaya deal. The accusations—against former executives at Aston Hill Financial (ex-CEO and chair Eric Tremblay and former co-chief investment officer Benedict Cheng), subsidiary Aston Hill Financial Management (ex-national sales manager David Rothstein) and CIBC Wood Gundy (former investment adviser Frank Soave)—were announced in April (Rothstein has since settled). According to the OSC staff statement, Cheng first learned of Amaya’s ambitions in a spring 2014 meeting to discuss Aston Hill’s possible participation in financing the deal; then, one day before the deal was unveiled, he tipped Rothstein to the pending news and invited him to tell others. OSC staff allege that Rothstein then texted Soave and that each bought Amaya shares—Soave 5,000 and Rothstein 700—which they sold two days later.

While the allegations must still be proven, there is plenty at stake. In terms of penalties, the OSC hearing—a regulatory proceeding before a panel of commissioners—doesn’t carry the same weight as the Quebec criminal trial. A conviction in the latter could bring a jail sentence, whereas OSC sanctions are limited to fines, cease trading orders and bans from serving as company officers or directors. Yet, while this might lead some observers to treat the September hearing as a sideshow to the main act, the OSC itself has a lot riding on the outcome. In recent years, the commission—whose jurisdiction includes the TSX and TSX Venture exchanges, the country’s primary markets—has been working hard to shed its long-standing reputation as an ineffective securities law enforcer. Measures taken include the adoption of a “no-contest” settlement policy and the creation of the Joint Serious Offences Team (JSOT), which gives the OSC access to police investigative tools and expertise in quasi-criminal and criminal investigation via a partnership with the RCMP’s Integrated Market Enforcement Team (IMET) and the Ontario Provincial Police. Most recently, the OSC launched a whistleblower program that pays cash rewards—up to $5 million—to tipsters who provide actionable information while protecting them from reprisals.

No one at the OSC will comment specifically on the Amaya action, or any other active case for that matter. But it doesn’t take much of a leap to conclude that beefed-up enforcement measures only have value if they produce results. And results to date are, at best, mixed. On the plus side, the number of cases the OSC has taken to court increased to nine in 2015-2016 from three in 2013-2014, while the value of restitution payments more than doubled to $335 million in that same span. On the other hand, the total number of commission proceedings dropped to 26 in 2015-2016 from 31 and 40 in 2014-2015 and 2013-2014 respectively. Home-run commercial crime prosecutions—the ultimate benchmark in many critics’ eyes—remain elusive, but not entirely absent. In July, for example, an OSC panel ruled that four former executives from Sino-Forest Corp., including former chairman and CEO Allen Chan, fraudulently reported assets and revenue and misled investors. Sanctions were pending at press time. A similarly successful resolution to the Amaya-related insider trading charges would be another good one to get on the books.

“I think Ontario is doing a lot of work,” says Larry Ritchie, a partner in litigation and securities regulation at Osler LLP and former vice-chair (2007-2014) of the OSC. “The downside in enforcement is that a lot of what is being done goes on below the surface. It’s seven-eighths of an iceberg. You just don’t see it until actions are commenced or settlements are filed.”

Norm Keith, senior litigation partner and white-collar crime expert at Fasken Martineau, says the OSC has essentially reached a point where the markets are saying: show me. While the OSC’s actions indicate “a higher level of commitment to securities law enforcement,” the larger issue is: “Will they be assertive? Will they be aggressive? Will there be some clear statement that there’s a high standard of enforcement, not just a high standard of the laws themselves?”

THE JOB OF DELIVERING the right answers to those questions rests with Jeff Kehoe, hired last October as the OSC’s new director of enforcement. Kehoe, a cheerful man who cuts a slender figure, doesn’t come across as the sort of “new sheriff” one might order up from central casting, let alone an amateur stunt pilot who spends his off-hours upside down in airplanes—something Kehoe has described as “a form of meditation…You really have to be in the moment.”

But appearances can be deceiving, which becomes clear as Kehoe settles in for an interview in an OSC boardroom in downtown Toronto. Kehoe comes to the job with a diverse background as a criminal prosecutor for Ontario’s Attorney General, senior litigation counsel at the federal Department of Justice, vice-president of enforcement for the Investment Industry Regulatory Organization of Canada, and managing partner and general counsel at Difference Capital Financial Inc. Add in a passion for lazy eights and barrel rolls, and the resulting picture is one of a nimble thinker who brings a unique blend of professional experience to the multifaceted—and rapidly evolving—job of market enforcement.

“The pace of change in capital markets is staggering. That really is an understatement,” Kehoe says. Credit a confluence of forces, globalization among them. Twenty years ago, strong relationships with international authorities were important but not automatic, he says. “Now, it’s absolutely critical.”

Likewise, financial innovation—increasingly sophisticated structured products, derivatives, swaps and so on—has brought new levels of complexity of offerings available to investors. And then there’s technology and its impact on every aspect of the business. “Whether it’s front office or back office, technology is changing everything,” Kehoe says. “Five years ago, when dealing with registrants, you were dealing with another person. Now we’ve got robo-advisers. How do you prosecute an algorithm? Who’s responsible for it?”

Top priority: As OSC chair, Maureen Jensen launched the whistleblower program and brought on enforcement director Jeff Kehoe

It’s in this environment that Kehoe has been tasked with overseeing a suite of new enforcement policies and tools designed not only to improve the OSC’s ability to detect and investigate misconduct, but also to do so in an increasingly dynamic context. “The tried and true enforcement techniques of a traditional investigation had limitations. I call it the one-size-fits-all,” he says. “You need different tools to tackle different problems.”

In this respect, the job ahead for Kehoe can be viewed as shepherding the legacy of Howard Wetston, chair of the OSC between 2010 and 2015, and current chair Maureen Jensen, who was previously the regulator’s executive director.

During Wetston’s tenure, the pair put a particular focus on making the enforcement regime more efficient and robust. At the time, the commission faced serious criticisms for significantly trailing other regulators, such as the Securities Exchange Commission in the U.S., in the prosecution of major market violations. And with the pain of the financial crisis still fresh, negative perceptions were especially difficult to answer.

Mindful of the criticisms and eager to turn them around, Wetston and Jensen went to work. In 2013, they created the JSOT to focus on fraud and other major market misconduct and increase collaboration between the agencies. Soon after that, they introduced no-contest settlements, a program that allows companies and other registrants to self-report and resolve issues without admitting guilt. (Several of the Big Six banks have used this process to address overcharged fees for investment products, most recently the Royal Bank of Canada (TSX:RY), which agreed in June to a settlement of $22 million to repay clients and cover the OSC’s costs.)

In 2015, the RCMP even moved its financial crime investigators into the OSC headquarters—a move with both symbolic and practical value, intended to promote even closer sharing of expertise, although its officers still operate independently of the commission. Lastly, they set in motion the process to create the whistleblower program, which launched last summer and, according to Kehoe, has already generated more than 70 tips.

For Kehoe, these initiatives have given the OSC a larger palette when it comes to enforcement, one that allows it to apply different processes to different types of violations. With no-contest settlements, it is able to resolve lesser violations—and return money to investors—with greater speed. JSOT gives the commission a greater stake in seeing major investigations of quasi-criminal matters make it to the courts. And expectations are high for the whistleblower program when it comes to detecting misconduct and identifying the most effective way to proceed; in a speech to the Toronto Board of Trade last fall, Kehoe’s boss, chair Maureen Jensen, called it “a game-changer in Canada.”

WHEN THE RCMP MOVED its Integrated Market Enforcement Team into the OSC’s downtown Toronto headquarters in March 2015, it marked the occasion with a joint news conference. Much of the briefing focused on the aspirations of both organizations and their expectation that closer collaboration will lead to a greater capability to combat white-collar crime. “This is complex stuff, that’s why we need to work together,” Howard Wetston said at the time.

The idea of the two agencies working under the same roof conjures up dramatic images of securities investigators and police huddled together over computers, working stakeouts and executing search warrants to bring down unscrupulous offenders. And no doubt that’s sometimes the way it works—unfortunately, Listed’s request to observe investigators in action on the promise of not divulging any details of their files was declined.

In lieu of that, we asked senior enforcement leaders within the operation to talk about their working relationship. Staff Sgt. Ken Derakhshan, acting officer-in-charge for IMET, says a key benefit of the proximity is the opportunity to routinely assess complaints from both the regulatory and criminal perspectives. “When you assess a case [from the criminal perspective], you are already thinking ahead to how it would be presented in court,” Derakhshan says. “If we determine there is not a prospect of conviction in court, we will consult with the OSC on the most effective way to [deal] with that particular violation.”

Consequences: OSC sanctions can be “devastating” for C-suite execs, says Hugh Craig, acting head of JSOT

Indeed, the OSC has powers that give its processes for investigations and hearings certain advantages. For starters, its tribunals have a lesser standard than the “reasonable doubt” of criminal proceedings when it comes to making findings of misconduct. OSC investigators also have the power to compel evidence via mechanisms such as production orders, which require individuals or companies to turn over relevant documents. Such options are not available in criminal investigations due to Charter rights that protect individuals from self-incrimination. And although the OSC administrative process takes the prospect of jail time off the table, sanctions for misconduct can be substantial—among them financial penalties, the return of money to investors and bans on participating in financial markets.

In the current Amaya case, Rothstein’s settlement (for purchasing 700 shares on an insider tip) consisted of an $11,000 payment in surrendered profits and administrative penalties, resignation from his job at Aston Hill and two-year bans on trading and acting as a director or officer of an issuing company or fund. “If you are a resident of the C-suite and you get sanctioned by the commission, it can be a devastating career blow,” notes Hugh Craig, acting head of the Joint Serious Offences Team.

In the case of collaborative investigations through JSOT, there are additional benefits, with the OSC’s expertise in forensic accounting, litigation and computer forensics enhanced by the RCMP’s ability to execute search warrants, do undercover work and surveillance, make arrests and coordinate with international law-enforcement agencies. IMET officers also bring a visceral presence to investigations—“RCMP officers with handcuffs and the full regalia,” Craig says. “Someone who is not thinking straight may say to an OSC investigator, ‘I’m not going to allow you to open that filing cabinet, even with a search warrant.’ That really doesn’t come out when you have a police officer there.”

As the OSC and IMET target larger crimes, however, they face new challenges—including simply navigating the volume and complexity of evidence they generate. On this front, the OSC’s whistleblower program can help steer investigators to precise locations of evidence. “We designed the program to target a certain type of individual,” says whistleblower program chief Heidi Franken, “someone who has original knowledge of misconduct that’s highly credible, detailed and can really point in the direction of where the misconduct is.”

The expectations are not unfounded. The OSC’s program is modeled substantially on the whistleblower system developed by the U.S. Securities Exchange Commission. Introduced in 2010 with the signing into law of the Dodd-Frank Act, it has to date awarded more than US$150 million to 43 whistleblowers, with the single largest award topping out at US$30 million. If a similar program proves successful for the OSC, it’s easy to see how it feeds into the collaborative process between the OSC and police forces for assessing the best method to proceed with investigation and the broad range of tools that Kehoe speaks of for settling matters.

Credibility key: OSC whistleblower program chief Heidi Franken says the initiative is geared to informants who have “original knowledge of misconduct”

That said, when pressed for concrete examples that show how the whistleblower program is yielding results, both Kehoe and Franken say it’s too early and, like observing investigators in action, too sensitive. The rules also shield all whistleblowers’ identities and their links to specific cases, even after they’re settled. In that sense, we have to take the OSC’s word for it.

IT IS POSSIBLE TO glimpse what the OSC has been working on—and to take a measure of its results to date—on the commission’s website, where it posts notices of completed proceedings, settlements and rulings. Reviewing that list, it confirms the perception that many of the JSOT-related investigations are for lower-level offences—smaller frauds, people selling securities without a licence or proper registration, and so forth.

Fasken Martineau’s Keith and Joe Groia, principal at Groia & Co. and a former head of enforcement at the OSC (1987-1990), both characterize these cases as “low hanging fruit.”

While Groia says the OSC has taken some recent steps worthy of applause—notably the launch of the whistleblower program—he is concerned by the JSOT results and wonders about its effectiveness. “Given the size of the investment and the serious financial crimes they ought to be investigating, we have not seen a significant return,” says Groia. “I question whether the resources going into that could be better used in other areas.”

Put these doubts to Kehoe and he acknowledges the criticism, and then reaffirms his commitment to tackle bigger violations. “My goal is to build on the enforcement partnerships we’ve established through JSOT and pursue new types of cases that will send strong signals to those who refuse to play by the rules in our capital markets.”

He also rightly notes that there have been important wins—most notably, four-year jail terms handed down in Ontario court last December to William Wallace and Robert Heward, founders of Londoni Gold Corp. The two were convicted for fraudulently selling shares in Londoni, falsely claiming that they held gold mining licences in Tanzania, bilking approximately 105 investors out $6.7 million between 2009 and 2013. They were also sentenced a further 18 months, to be served concurrently, for illegal distribution and unregistered trading of securities.

Groia raises other nuanced points about some of the OSC’s enforcement practices. Why, for example, does the commission issue financial penalties to companies that self-report honest errors and repay money to investors? “It makes no sense to me,” he says. “It sends exactly the wrong message. It says…if you are going to come forward voluntarily it’s still going to cost you.”

Osler’s Ritchie takes a more supportive view, giving credit to the OSC—and other provincial regulators—for efforts to build more collaborative relationship with police agencies. Enforcement is a complex task that requires skill sets from both criminal and compliance points of view, “like a traditional joint venture between people who have the capital markets skill set and traditional policing, but not one without the other.”

The larger issue, Ritchie continues, is the fragmented nature of securities regulation in Canada and, as exists in U.S. among other countries, a nationally accountable enforcement regime. “I think our system has suffered from the lack of that coordination and the lack of that accountability,” he says, adding that creation of a national enforcement system is not contingent on the creation of a national regulator, a point also raised by Groia. “If you can’t knock it off by getting the golden apple, then this is still something that would have a meaningful impact on the capital markets culture.”

However the national framework evolves, all agree that good enforcement is central to fair and efficient markets. Says Ritchie: “Our system isn’t really ad hoc, but tending toward ad hoc creates confusion in the eyes of the market. The more coherent the system is, the more market participants are better able to understand what’s expected of their behaviour and adjust themselves accordingly.”

Kehoe, for his part, vows to press on, further developing investigative techniques that leverage the value of analytics and other technologies—measures designed to integrate with the changes already in place to raise the integrity and level of enforcement in Canada’s largest securities market. “Regulators have to adapt,” he says. “Or else.”

Photography (Kehoe, Craig, Franken): Jeff Kirk; (Jensen) OSC

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