Enforcement stacked against accused, expert says

By Staff | February 21, 2005 | Last updated on February 21, 2005
2 min read

(February 21, 2005) Regulatory enforcement proceedings in the financial services industry are largely unfair to those under investigation, according to Steven Sofer, a partner at law firm Gowlings Lafleur Henderson.

Speaking to the Canadian Institute’s Securities Superconference in Toronto last week, Sofer said many who find themselves under investigation end up settling with regulators simply to avoid the excessive costs and risks of defending themselves. While settling may appear as an admission of guilt, it can be far less expensive.

When settling with regulators, the defendants accept whatever fine is imposed. But if they try to defend themselves and lose, the fine will likely be higher and they will face not only their own legal fees (Sofer admits he does not come cheap) but also the regulatory costs of the investigation.

The formula used to calculate these costs remains murky, even to Sofer. In the past, he says regulators refused to itemize the bill of costs, leaving the defendant wondering how the amount was arrived at. Sofer says both divisional courts and the Supreme Court have ruled this practice unfair, recommending regulators show an itemized bill to justify their claim of costs.

And the accused is not the only one to suffer the costs of an investigation. Third-party firms which receive production orders from a regulator must bear the cost of tracking down and verifying all documents requested by enforcement staff, with no provision for reimbursement. Since a production order is a command of the court, these firms have little option but to comply.

Those who are investigated can expect leniency in the “sentencing” phase only if they have been fully cooperative. Sofer recommends those who are involved in an enforcement action maintain a detailed list of ways in which they have co-operated with regulators, which will make it easier to claim this credit.

Sofer says firms who use their in-house council to defend in these investigations are making a mistake, since third party council will bring more objectivity in judging the relevance and privilege of documents. Unfortunately for lawyers involved in the defence, claiming privilege often negates any credit they receive for cooperation.

There have even been cases where lawyers have been sanctioned for nothing more than doing their job, according to Sofer. Their duty of care requires them to do this, so long as they do not mislead investigators. In two separate cases, though, council agreed to sanction settlements even though they had not misled investigators.

Advisor.ca staff


The staff of Advisor.ca have been covering news for financial advisors since 1998.