An Ontario Securities Commission panel says that failed investment bank Coventree Inc. and a couple of its top executives deserved significant sanctions for their multiple disclosure failures. However, in its reasons for the decision on sanctions released today, the panel explained why it declined to levy the hefty costs award that its staff sought.
Earlier this year, the OSC found that Coventree and a couple of its key executives, Geoffrey Cornish and Dean Tai, violated disclosure rules when they failed to inform the market about material changes in the asset-backed commercial paper market before that market ultimately failed in August 2007. The commission levied $2.25 million in financial penalties against them, along with other sanctions.
The OSC panel says that the violations “require significant sanctions as a matter of specific and general deterrence”. It notes that there were multiple violations, which contributed to the case’s severity. And, it says that it also considered the size of the firm. “A nominal financial sanction relative to the size and financial resources of an issuer does not accomplish our goal of specific and general deterrence,” it notes.
The panel also considered various mitigating factors, including: there was no evidence that the executives intentionally breached securities law, or attempted to intentionally mislead shareholders; and that it did discuss some of the important issues that the commission thought should be publicly disclosed in its shareholder letters, and in its management’s discussion & analysis. Moreover, the panel notes that the disclosure decisions facing Coventree “raised difficult and relatively complex issues in the face of the unprecedented market impact of the credit crisis that occurred in August 2007.”
It also says that their disclosure failures were less egregious than a number of other recent incidents, including cases involving YBM Magnex International and Biovail Corp. And, not only did Cornish and Tai not profit from Coventree’s breaches, but, the panel notes, “as controlling shareholders of Coventree, they suffered substantial financial losses as a result of the events that gave rise to this proceeding.”
Finally, the panel says that there was “a very high level of co-operation” by each of the accused with the investigation; the firm’s board didn’t object to the executives’ decisions; and, Coventree and its board acted responsibly in appointing a special committee of independent directors to investigate the allegations.
Ultimately, it decided to impose a $1.0 million administrative penalty on the firm, and a cumulative $1.0 million penalty on the two executives. It also imposed $250,000 in costs, far less than the $1.5 million that OSC staff sought.
The panel says that the reduced cost award does not imply any criticism of OSC staff, but that it decided to impose lower costs for several reasons. For one, the accused and their counsel were helpful and “did not waste our time at the hearing”; OSC staff wasn’t successful on all of its allegations against Coventree; the case raised complex legal issues that hadn’t been addressed by the OSC before; and it was also concerned about being unduly punitive in costs awards.
It also found that a one-year prohibition on Cornish and Tai acting as an officer or director of a reporting issuer was sufficient as a deterrent. “We did not consider it necessary in the circumstances to impose any other market conduct prohibitions on Cornish or Tai. That was not necessary in order to protect investors or our capital markets from their future conduct,” it says.
The decision also notes that OSC staff requested that the panel issue an order preventing Cornish or Tai from acceptingany indemnification from Coventree for their administrative penalties. However, the panel ruled that the defendants weren’t notified that it would seek such an order, and so, “In our view, staff cannot now seek to do so.” Moreover, it said that it doesn’t have the authority to make that sort of order; but that OSC staff could negotiate this sort of provision in a settlement agreement.