Canadian Insider Trading – Time to Send a Message

March 8, 2015

By: Ari Shulman

Insider Trading in Canada is not a topic you often hear discussed in the news.  This could be for several reasons.  Perhaps this is because insider trading does not happen here at the level it does in the United States.  Unfortunately, this is likely not the case.  The reason you do not hear about insider trading in Canada is that regulators are painfully out matched.

The speed of information in today’s global markets is unlike anything we have experienced before.  Today you have the ability to trade instantaneously on the TSX, while sitting safely in your living room in Jakarta.   The economic benefit that one can achieve in form insider trading is extensive.  To illustrate this point, consider John Felderhof, a former Geologist at Bre-x.  Felderhof was accused of using insider trading to gather an additional 83.9 million dollars of profit.   This amount of money would be considered ‘generational’, meaning you would never have to work again.

The current system Canada has in place to track down and punish traders using insider information is not enough of a deterrent.   Canada has only convicted one person of insider trading in its history and that person only received a 39 month sentence.  Going back to the Bre-x case, Mr. Felderhof was eventually acquitted of the charges 7-years later.  However, even if he had been convicted he was already living in a non-extradition treaty country. The Ontario Securities Commission (OSC) is the largest insider trading enforcement office in Canada and within its jurisdiction is the TMX group, the largest stock exchange in Canada and the eighth largest in the world.  In 2008, the OSC brought zero new cases to trail, and in 2009, the OSC brought only two new cases to trial.
Consider the following two quotes:

“The most embarrassing moment for the OSC was when a) abandoning the Mclaughlin Case, and b) the comment to media which was: ‘what we’ve learned from this? We’ve learned that maybe we shouldn’t take on these cases”
Edward Waitzer, former chairmen of the OSC

“Canada’s securities enforcement is an international embarrassment.”
Barbara Stymiest, chief operating officer at Royal Bank of Canada and former CEO of the Toronto Stock Exchange

“Outside our borders, international investors are known to apply a “Canadian discount” on equities here to account for lax enforcement. Indeed, in many financial circles, Canada is considered an “enforcement-free zone” where people don’t just get away with white-collar crime, they profit dearly from it.”
Tyler Hamilton, Toronto Star

There are some steps Canada can take to start correcting this problem.   For example, Canada can amalgamate the provincial regulators into on federal regulator.  This would eliminate redundancies and help speed up tracking.  Canada could also stiffen it’s penalties, large fines are simply not enough to deter illegal trading when potentially billions of dollars are on the line.   Lastly, Canada needs to catch an offender and put them on display, i.e. make them suffer through the proverbial ‘perp walk’.

Canada has a choice to make.  Start to get ahead of this problem or lose the trust of investors.

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