Ontario Securities Commission chairman Howard Wetston says he wants more U.S.-style enforcement out of his regulators.
At first blush, it sounds like a fine idea. The U.S. Securities and Exchange Commission has admirable regulatory vigour by Canadian standards.
But one of Mr. Wetston’s specific suggestions is a greater use of settlements in which the defendants need not admit any of the allegations against them. The SEC’s language in nearly all settlements is that defendants “neither admit nor deny” the charges, a mushy “out” clause that can cause more problems than it solves.
Embracing this policy, Mr. Wetston says, will “increase our effectiveness” – which is true so long as we measure regulators by the number of cases cleared, not by the harder-to-come-by goal of meting out justice.
Certainly, the language speeds settlements. Were the defendants to actually admit the charges, the SEC actions would easily be used in the inevitable, parallel civil litigation that occurs when the scent of securities fraud is in the air. “I’m not sure how well the system could work without it,” says former SEC commissioner Harvey Goldschmid, who admits he doesn’t particularly like the settlement language. “Companies don’t want to be in a position where, in settling with the SEC, they in effect indicate there’s no defence to the private action.”
But beware, Canada: Do not think this particular regulatory tool will be used sparingly. It has become nearly universal in SEC settlements, to often comical effect. Joseph Collins, an attorney representing the failed futures-trading firm Refco Inc., settled with the SEC in June of last year, neither admitting nor denying the facts of the case – even though, at the time, he was in a federal prison serving time for the very same charges.
Mr. Wetston says these types of settlements “would allow us to aggressively discipline individuals and companies” – but it’s worth noting that the SEC was unable to extract any monetary penalty from Mr. Collins in what was ultimately a $2.4-billion (U.S.) fraud.
Such settlements allow defendants entrée into other positions of responsibility because they’ve never admitted guilt. Charles Keating Jr., who ultimately served prison time for his role in the savings and loan scandal of the late 1980s, had entered into a settlement with the SEC way back in 1979 after it accused him of securities fraud related to the proxy filings of a public company. Had the SEC obtained an admission of guilt, one assumes federal regulators would have prevented him from going on to run a savings and loan.
There is something to be said about the latter half of the SEC’s boilerplate settlement language, however. The defendants can’t go around denying they’ve committed securities fraud.
Goldman Case
One high-profile case where this matters: Last year’s SEC fraud action against Goldman Sachs for its role in selling a collateralized debt obligation that was built to fail. “Rather than fighting to defend its good name and exonerate itself, Goldman settled and agreed to let the SEC’s claims remain uncontested,” Bloomberg News columnist Jonathan Weil noted. “Whether you think the SEC won, there’s no doubt Goldman lost.”
One hopes the OSC will block future defendants from denying the charges even as they’re allowed not to admit them. But Mr. Wetston’s language creates doubt about just how “aggressive” the OSC will be. As part of his speech, he said the OSC wants to “retain regulatory neutrality” toward litigation such as class-action suits – in other words, show no favour between the plaintiffs and defendants.
Bill Black, a former bank regulator and an associate professor of economics and law at the University of Missouri-Kansas City, says that concept “is an oxymoron. The OSC should not be ‘neutral’ about private actions that are truly parallel to OSC enforcement actions that it believes to be meritorious. The reason the law permits private rights of actions is to vindicate the rights of investors – the OSC's mission.”
Mr. Black complains that the current regulatory fashion is to have easily quantifiable performance goals, where a pile of settled cases is a mark of success. That results in regulators targeting small fish who would rather settle than fight.
Whether investors are avenged, or miscreants prevented from another fraud down the road, cannot be counted, or counted on, when soft settlements are viewed as the measure of effectiveness.
Special to The Globe and Mail
