Canadian securities regulators have a bad reputation when it comes to enforcement. Their efforts are perceived as weak and ineffectual. They would like to believe that the problem is more perception than reality and the semi-annual report on their enforcement results is supposed to illustrate just how much their efforts do accomplish. However, without a better record in court and on high-profile cases, the report is not likely to do much to burnish their reputation.

The latest version of the Canadian Securities Administrators’ enforcement report, covering the period from April 1 through to Sept. 30, 2007, shows that members of the CSA completed 58 administrative proceedings plus another 16 for which findings have been issued but a sanction decision is still pending, resulting in fines of more than $3.8 million in total, almost $2.6 million in disgorgement and another $1.7 million in costs orders.

Whether this amounts to a tough record or a weak one can be debated. The overall level of enforcement activity appears consistent with previous periods. In addition to the 58 cases completed, regulators began 56 new proceedings in the period, slightly less than the previous six-month span but consistent with the comparable period a year ago.

Although enforcement activity shouldn’t, in theory, be a cyclical phenomenon, it appears as though the overall activity tends to be somewhat lower in the April-to-September periods covered in the CSA reports, compared with the October-to-March intervals. This is probably because the former includes the summer months, which tend to be quiet for regulators.

But although there appears to be a bit less enforcement activity in April to September, the monetary penalties levied in these months have been notably higher in the past two years. It just happens that the odd large case has taken place during these months.

For the most recent period, two relatively costly cases — for the defendants — coincided: Nortel Networks Corp. paid $1 million in costs to settle a proceeding and former Biovail Corp. CEO Eugene Melnyk agreed to pay $250,000 in costs and a $750,000 administrative penalty in a case brought against him by the Ontario Securities Commission. Back in 2006, the regulators’ penalty total was inflated in the April-to-September period by a $7.5-million fine paid by a numbered Alberta company to settle an alleged insider-trading case.

The same trend isn’t evident for the self-regulatory organizations. The CSA report says the SROs collectively levied $3 million in fines in the most recent six-month period, a slight increase from the prior period and up significantly from the same period a year earlier. More than $2 million of the penalties brought by the SROs came from proceedings before the Investment Dealers Association of Canada. In addition to the fines, the SROs also levied more than $390,000 in costs but just $49,000 in disgorgement demands.

But while the regulators may be doing enough in their own hearings, the real criticism often focuses on their performance in court. Compared with the U.S., the perception is that a much smaller number of cases are prosecuted in Canada; that not many of those prosecutions are successful; and, that when they are, the penalties are much lighter. This current report won’t do much to change that perception.

POOR RECORD IN COURT

Although the CSA has been issuing these reports since 2004, only the last four versions have broken out the regulators’ record in court — and it is not stellar. In the latest period, the regulators managed to win convictions against 13 individuals and three companies; all of the convictions came in Quebec and Manitoba. And these convictions amounted to only about $400,000 in fines — far less than were levied in the regulators’ own hearings — and 15 months, 21 days of sentenced jail time (including a six-month sentence that was levied against one defendant in absentia).

The CSA report also says that the courts awarded another $1.2 million in restitution during the period. But that’s a bit misleading as $1.13 million of that actually involved a court ordering restitution to a financial institution that had stepped up and paid back investors who lost money in a scheme carried out by an individual using its services.

In a settlement with the OSC in 2005, TD Waterhouse Canada Inc. agreed to pay back investors (as well as submit to other sanctions) after it was found that it didn’t live up to its suitability obligations in facilitating transactions in which investors lost their money. Last year, the OSC sought restitution on behalf of the brokerage house from the individual and the company that carried out the scheme. The court found that a restitution order would be appropriate. It didn’t actually issue it, however, on the basis that the respondent in the case intends to appeal the findings against him.

@page_break@Assuming the OSC is ultimately successful in this case, this is hardly what investor advocates have in mind when they complain about the lack of access to affordable restitution. Indeed, the problem with several apparent successes in court is that the records require an asterisk. For example, in the October 2005 through March 2006 period, regulators reported that they won a total of 11 months of jail time for securities offenders; however, this included the six-month sentence handed down in the Rankin case, which has since been overturned and is being retried.

Similarly, the October 2006 through March 2007 period saw regulators secure more than $1.4 million in collective fines and more than seven years in jail time — far and away the highest penalties reported in either category. Yet, more than three of those years of jail time are attributable to a pair of defendants that were sentenced in absentia. The other big victory by the regulators during that period — a case that ended in a four-year jail sentence and a $1-million fine — while relatively impressive by Canadian standards, had been reduced on appeal from a $1.85-million fine; an additional four-year term imposed for failure to pay the fines was dropped.

Given these weak sanctions, it’s no wonder that — according to a CSA survey released this past fall — many Canadians don’t believe the justice system takes financial crime seriously. As a result, most don’t bother to report it when it happens to them.

And, if they felt that way before, it’s hard to imagine that this latest report from regulators will do much to change their minds. IE