Misconduct cases increase year over year: CSA report

A measure of regulatory action against misconduct increased last year, after exhibiting a downward trend.

Overall, CSA’s latest enforcement report (fiscal 2017-2018) reveals that regulators concluded 102 cases involving 225 respondents. There’s no breakdown of individuals versus firms.

Registrant misconduct was the fourth largest category of enforcement, with 14 respondents. While that’s a relatively small absolute number, it represents a yearly increase after significant drops: in 2014, 2015 and 2016, there were 41, 20 and 8 misconduct respondents, respectively. (Note that previous enforcement reports cover the calendar year, not the fiscal year.)

Likewise, financial penalties for misconduct increased for fiscal 2017-2018. Misconduct accounted for more than $15 million in fines, administrative penalties and other payments, compared to about $104,000 the previous year.

The total of 102 concluded cases last year resulted in more than $65 million in fines, administrative penalties and other payments, and more than $59 million in restitution, compensation and disgorgement.

For 2016 those figures were, respectively, about $62 million and $350 million—the latter includes compensation from four OSC no-contest settlements, one of which was for roughly $156 million.

Similar to the previous report, the largest category of respondents, with 132, was illegal distribution violations (compared to 140 in 2016). The next two largest respondent categories are:

• fraud (21 respondents; down from 50 in 2016) and
• market manipulation (20 respondents; up from seven in 2016, perhaps because of technological advances).

Insider trading comprised nine respondents, down from 17 in 2016.

There were seven no-contest cases concluded, resulting in about $1.5 million in fines, administrative penalties and other payments, and more than $37 million in restitution, compensation and disgorgement.

For 2016 those figures were, respectively, about $15 million and $300 million from the four OSC cases.

Criminal proceedings and jail time

Comparable between reports is jail time for Securities Act violations. The report says 19 people received a total of more than 29 years of jail time, with sentences ranging from 30 days to five years less one day. That compares, in 2016,* to 15 people receiving a total of 23 years.

Criminal Code violations were also similar between reports. For 2017-2018, 11 people received guilty verdicts from criminal proceedings—one in B.C., one in Manitoba, three in Ontario and six in Quebec. Eight of these received jail time totalling 14 years, with sentences ranging from six months to almost four years.

In 2016, 13 people were found guilty under the Criminal Code, with nine sent to jail for a total of more than 16 years (jail figures are as of Dec. 31, 2016).

Number of new cases increases

The report shows that CSA commenced 70 cases involving 161 respondents (both individuals and firms), compared to 56 in 2016, and 108 in 2015. The low number in 2016 is potentially a result of several regulatory appointments and the subsequent need to get up to speed.

Read: CSA commenced almost half as many proceedings in 2016

For new cases, the largest category of respondents was, again, illegal distribution (53 respondents), followed by fraud (33 respondents), misconduct (21 respondents) and “other” cases (15 respondents). Market manipulation comprised 7 respondents.

Only eight Criminal Code cases were started, compared to 10 in 2016. No-contest settlements accounted for seven cases commenced.

More to regulation than the numbers

In the report, CSA chair Louis Morisset notes the difficulty of drawing conclusions from the numbers, pointing to myriad regulatory actions not reflected by case statistics, such as market bans, stoppage of unauthorized solicitations, account freezes and cease-trade orders.

The report further discusses the pace of technological change and the borderless nature of business—a challenge for regulators, requiring new tools and enforcement techniques. Despite the challenges, CSA says it aims to avoid adversely affecting innovative business.

Regulators’ jobs increasingly include partnering with regulators of other jurisdictions, and with SROs, law authorities and investors, the report says.

In an interview, Morisset says CSA’s enforcement report reflects regulators’ innovative approach. “The markets are innovating, and regulators are as well […] to intervene,” he says.

For example, the past fiscal year included regulatory action on binary options fraud, including a ban on binary options and a collaborative investor education campaign, described in the report.

Read: CSA bans binary options

To accelerate action on binary options, CSA partnered with financial, social media and tech firms. The outreach was “powerful to prevent fraudsters from reaching their targets,” says Morisset. “Now it’s not possible to settle a binary options transaction through Visa or MasterCard, for instance.”

He adds that CSA will likely continue to work with outside firms as needed to protect investors.

Read: IIROC warns about fraudsters illegally selling binary options

Also this past year, CSA created a fraud task force for cryptocurrency, and coordinated with global digital platforms to ban advertising of cryptocurrencies and initial coin offerings.

Harnessing tech was on CSA’s agenda, with a data analytics conference to share best practices, and a summit on pump-and-dump schemes (the artificial price inflation of a stock).

For more details, read the 2017-2018 CSA enforcement report.

*A previous version of this story erroneously specified “fiscal” 2016. Return to the corrected sentence.

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