No-contest settlements still hot-button issue

Protecting harmed investors involves more than reimbursing them for financial losses.

Wronged clients can also benefit from speedier enforcement processes and, over the long term, more efficient markets, said two expert panels at an investor recovery conference hosted by Osgoode Hall Law School and the Canadian Foundation for Advancement of Investor Rights (FAIR).

Read: OSC Dialogue addresses market liquidity risk

In particular, the two panels discussed the benefits and challenges of both whistleblower programs and no-contest settlement schemes. The panels included experts such as Stephen Cohen, associate director for the U.S. Securities and Exchange Commission, and Kelly Gorman, deputy director for OSC, and several securities lawyers.

Whistleblower programs are widely supported, says Cohen, since they encourage people to report wrongdoing that regulators are unaware of. There were initial worries in the U.S. about such programs destroying corporate culture, he notes, but a recent survey finds only 8% of employees would report wrongdoing externally before approaching management for help.

Read:

• SEC filed 807 enforcement actions in FY2015
• SEC charges firm for whistleblower retaliation

When it comes to no-contest settlements, the benefits to investors aren’t as clear. Despite the SEC’s use of such settlements, Cohen says, “The question is often whether there’s enough accountability when you have no-contest settlements. Speed of enforcement [and settlement] is key, but that’s not the only thing that matters.”

Anita Anand, professor for University of Toronto’s Faculty of Law, agrees. In her view, even when advisors and firms neither admit to nor deny regulators’ findings, no-contest settlements “are defendant-friendly, and can make it harder for investors to recover.”

Read:

• OSC to approve no-contest settlement with TD Bank
• No need to admit guilt, says OSC

Still, both measures help speed enforcement, says Gorman. And, as a result, can lead to regulators spending more time on cases where investors need protecting.

For more on whistleblowing and no-contest settlements, see our live tweets below. Also, follow @advisorca for more news and events coverage.

Live tweets from Investor Recovery Conference

About whistleblower programs

In the U.S., whistleblower monies aren’t taken out of indemnity-style funds. Says Cohen, the funds come from penalties #ppse15 @SEC_News

Often, whistleblower cases are those that the SEC would not have found without internal tips from whistleblowers #ppse15

Jordan Thomas, partner at Labaton Sucharow LLP, cites a study that finds 22% of respondents know about instances at work where money is misappropriated #ppse15 @FAIRCanada

But when working large cases, says lawyer Dominic Auld, firms can be wary of reputational risk and of offering evidence. Whistleblowers help with this #ppse15

Cohen says that, often, whistleblowers bring forward very useful evidence, including sensitive documents #ppse15

About no-contest settlements

Similar to how whistleblowing helps speed cases, so too do no-contest settlements, says Mary Condon of Osgoode Hall Law School #ppse15 (For more on these settlements, read: Should you take a no-contest settlement?)

In Canada, only cases that don’t involve fraud and egregious investor harm are eligible for no-contest settlements #ppse15

.@SEC_News also doesn’t allow settlements to be no-contest now if cases involve large-scale fraud. So both Canada and the U.S. are moving toward middle ground, says Philip Anisman, barrister and solicitor.

But, says Anand, no-contest settlements are seen as counterintuitive to whistleblower programs and other protection efforts for investors #ppse15

Gorman responds: No-contest settlements are only one tool and are only granted sometimes. Plus, accountability is more than admission; it also involves sanctions and paying fines.

Gorman also says that where investors are harmed, no-contest settlements aren’t a main tool. Using them for other cases means important cases can get more time and effort #ppse15

Anisman says the process of reaching no-contest settlements should be made public, to clarify how deterrence is achieved through them #ppse15

Part of deterrence is also barring and suspending people sooner. Then, clients won’t work with them any longer. Getting no-contests sooner helps: Cohen #ppse15

In Canada, however, one issue is that no-contests raise a problem with reciprocal orders, says Anisman, because Ontario the only province that allows them #ppse15 (For more on reciprocal orders, read: Alberta to reciprocate sanctions automatically)