An explosive insider trading case unveiled this week by Ontario’s financial watchdog has barely caused the titans of Bay Street to blink.
The case made headlines across Canada, particularly because Goldcorp chairman Ian Telfer is wrapped into the alleged trading scandal. But in the financial sector, where rumours and whispers are themselves an important commodity, many bankers and traders reacted with little more than a shrug.
The Ontario Securities Commission’s probe centres on Eda Marie Agueci, an executive assistant at GMP Securities LP, who is alleged to have traded on and told others about information she obtained when her firm acted as a takeover adviser. The OSC says Mr. Telfer is not connected to the alleged insider trading, but it has accused him of acting contrary to the public interest for helping Ms. Agueci hide her investment in a private placement. None of the allegations have been proved.
Many top deal makers acknowledge Ms. Agueci will have crossed legal boundaries if the OSC’s case against her proves to be true. But they also pointed out that stock rumours will always fly around Bay Street because in most cases they can’t be traced to their original source.
Indeed, the personal trading accounts of many bankers and traders are chock full of small-capitalization companies that are rumoured to be the next big takeover target, or are sure to find the next big oil deposit. Rarely do people ask where these rumours come from. As one banker put it: “I don’t know how many times I’ve traded on inside information and not known [where it came from]”
The case is also being criticized because there is a perception that Mr. Telfer has been unfairly made a target in an effort to grab headlines for the OSC, which has made a very public effort to crack down on illegal insider trading. Most deal makers believe he did little more than help a friend buy some stock.
Outside Bay Street’s clubby circles, however, there is a concern that the public could quickly lose their trust in the market if people are allowed to profit from their access to non-public information. “It’s a bad culture,” said Ed Waitzer, senior partner at Stikeman Elliott LLP and a former chair of the OSC. Illegal insider trading “not only undermines confidence in the integrity of the regulatory system, it undermines confidence in the integrity of our capital markets.”
“What’s the point of talking about good corporate governance or fair capital markets if you don’t take it seriously?” he added.
Having good faith in capital markets isn’t just important for mom-and-pop investors who operate outside of Bay Street’s office towers. “The charges aren’t intended to protect the retail investor any more than they are to protect the institutional investor,” said Jay Naster, a lawyer who now specializes in white-collar crime, but was formerly a senior litigator with the OSC. “They’re intended to protect the market in general.”
As for GMP’s reputation, many people on the Street say they do not associate the allegations against Ms. Agueci with the entire firm. The investment bank can also take solace in the fact that the OSC did not level any accusations of wrongdoing, nor did the it criticize compliance policies or try to pursue GMP for what is known as “failure to supervise,” something regulators can hit a firm with when an employee goes astray.
GMP’s investors clearly buy that message. Though the stock dropped in the wake of the allegations, shareholders seem to have come to the conclusion that there won’t be much effect on the bottom line because the shares are now trading close to where they were before the OSC levied its charges.
Still, many people think this case is about more than just GMP. Illegal insider trading “is definitely widespread,” said investor rights advocate Ermanno Pascutto, executive director of FAIR Canada, an organization that represents the interests of shareholders. “What’s infrequent is detection and prosecution.” Mr. Pascutto is particularly troubled by irregular trading activity before mergers and acquisitions are announced – which is precisely what Ms. Agueci is alleged to have participated in.
Regardless of whether or not the latest allegations hold up, there is a sense in law circles that the OSC feels the same way and is sending a message to Bay Street.
“While we are all in pursuit of the latest piece of information that might give us an advantage in our ability to pick winners, you’d better beware,” Mr. Naster said.
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