Re: Regulators consult on paying out disgorged money, Investment Executive, November 2024
These draft disgorgement provisions would allow the Ontario Securities Commission (OSC) to collect and distribute money to investors who have suffered a direct loss due to fraud or misconduct by a market participant. But the proposed provisions are unfair, inadequate and mostly illusory. We have a better idea.
The draft provisions would allow only harmed investors who have suffered a direct financial loss from a specific contravention of Ontario securities law to apply for and receive disgorged funds. Yet, the OSC is sitting on over $120 million according to its annual financial reporting, collected from market participants over the past several years. The problem is that the OSC proposes that the funds eligible for distribution to investors must come directly from the contravention giving rise to the payment. The OSC’s proposal has failed to explain how this is in the public interest. If the bad actor does not, or cannot, pay the amounts ordered to be disgorged, those investors will get nothing.
These draft provisions also restrict the amount that investors can recover from a fraudster in situations where multiple parties were wronged by the same person. The proposal calls for amounts collected to be prorated among eligible investors. This provision will significantly lower the amount received by any given investor.
We believe the solution to this problem is to start an investor compensation fund for those who fall victim to fraudsters in the capital markets. The fund can start with the $120 million.
Similar compensation funds have been successfully operated by the Law Society of Ontario (LSO), which deposits dues paid by lawyers and paralegals into a fund and distributes the money to clients who have suffered a financial loss due to the dishonesty of a lawyer or paralegal. The capital markets fund would be available whether the OSC collects money from a particular fraudster or not. There need not be any administration fees applied to investors; there should be more than enough money in the fund to cover its expenses.
As a former chairman of the LSO Compensation Fund, I offer to volunteer my time to chair the new compensation fund. As an advisor with no direct control of OSC funds, I would help establish an infrastructure to facilitate the distribution of funds to harmed investors.
The real problem lies with the limited use of funds held by the OSC. The 2(b) Fund holds all the money the OSC collects from settlement and sanction orders, which are separate from disgorgement orders. Why is the OSC not pooling this money for the benefit of all harmed investors? Why should those investors who are swindled by smart fraudsters who hide all their money or disappear receive nothing, while those who are swindled by less smart fraudsters get some or all their money back?
In the 2023–2024 fiscal year, the OSC’s collection rate of settlement and sanction orders was just 4.5%. Out of the $81.6 million assessed by the OSC this past year, $77.6 million of it was deemed immediately uncollectible. This is the same agency that harmed investors are supposed to rely on to help them collect their disgorged funds?
The proposed provisions note that the OSC often collects amounts on an incremental basis, and based on the regulator’s experience, it may take up to three years to fully assess the likelihood of potential recovery. With that in mind, the provisions require the OSC to hold any disgorged funds collected for up to three years, or until sufficient funds are collected to carry out a distribution. If the funds collected are too small to justify the cost of distribution, the OSC will instead use the funds received for other purposes, as authorized by the Securities Commission Act, and the investors get nothing. If these disgorged funds were pooled with the 2(b) Fund, that would not be a problem.
We believe the proposed new disgorgement provisions to be little more than window dressing by the OSC, to distract from its continued failure to adequately help harmed investors receive meaningful compensation. They would also allow the OSC to continue to hold on to $120 million. The OSC seems to be rubbing salt in investors’ wounds with these new provisions. We see the opportunity to do a better job of providing meaningful compensation to harmed investors.
Joseph Groia is a securities lawyer and principal of Groia & Company in Toronto. He is also a former head of enforcement with the Ontario Securities Commission and a former bencher of the Law Society of Ontario.
Sabrina Heaman is an associate with Groia & Company who helped research and write this article.