InsideCounsel » February 2008
Northern Exposure
Law firms uncover widespread backdating violations among Canadian companies.
“Welcome to La-La Land,” cries the Sept. 24, 2007, cover of Canadian Business. The greeting is aimed at white-collar criminals seeking carte blanche for their menu of nefarious activities directed at the country’s capital markets.
Apart from a few juicy lines from white-collar felons disparaging the Canadian justice system, however, the article doesn’t tell anyone interested in this topic anything they didn’t already know. Which is too bad, because the story has fueled the misunderstandings that permeate the now-pervasive notion that Canada, in the words of Columbia University law professor John Coffee, is “a securities market enforcement-free zone compared to the U.S. and other countries.”
Comments of this kind land squarely in the laps of the country’s securities
regulators, who are under attack for being some combination of soft, inefficient
and incompetent.
To be fair, Canada’s 13 provincial securities regulators, operating under the Canadian Securities Administrators (CSA) umbrella, have not been dormant. In the year ending March 30, 2007, CSA pursued 122 new enforcement matters and concluded 128 cases that produced sanctioning orders or settlements, many of which involved more than one respondent. And these figures don’t take into account the activities of self-regulating organizations such as the Investment Dealers Association.
What the regulators haven’t done, however, is institute a single legal proceeding related to stock-option backdating.
Bombshell Research
To U.S. investors in Canada and to Canadians inundated by media reports of rampant backdating in the U.S., the regulators’ failure to act seems but another nail in the coffin of their enforcement reputations, particularly the reputation of the Ontario Securities Commission (OSC), the country’s most important regulator.
“I’d have thought that the broad sweep of backdating cases in the U.S. would have awakened securities regulators everywhere,” says Philip Anisman, a Toronto securities lawyer and former director of corporate research in the Department of Consumer and Corporate Affairs.
Until recently, however, no one really knew whether and to what extent stock- option backdating had made its way across the border. Then came the bombshell research.
In September 2007 law firms Siskind Cromarty Ivey & Dowler and Cavalluzzo Hayes Shilton McIntyre & Cornish alleged that many Canadian-listed companies had engaged in stock-option backdating or were flouting related Toronto Stock Exchange (TSX) rules.
“Our analysis of reports filed by insiders of TSX-listed companies and of the Canadian academic literature strongly suggests options manipulation is a serious problem in Canada, and the current regulatory regime is inadequate to deter it,” says Dimitri Lascaris, a partner in the firm’s class actions department.
Siskinds’ work, which includes a review of insider reports from 950 TSX-listed companies, concludes there is a greater than 95 percent probability that many TSX-listed companies manipulated their option grants to senior executives between 1987 and 2006. Fifty percent of the companies are in oil, gas and mining, while approximately 25 percent come from the technology sector. The remainder represent a wide range of industries.
