The Ontario Securities Commission is seeking federal rule changes to allow its investigators to be able to use wiretaps during investigations of illegal insider trading or tipping.
OSC chairman Howard Wetston said the Criminal Code specifies a list of offences that can be investigated with wiretaps, but insider trading and the related offence of tipping are not on the list. Amending the list would require federal legislative changes to the Criminal Code, he told reporters Thursday following a speech to the Toronto Region Board of Trade.
“This tool would give you direct evidence of intention to commit an offence – I don’t think there could be a more useful tool for that kind of an offence,” Mr. Wetston said.
While OSC staff members ordinarily do not have the powers to use wiretaps, the commission last year launched a new joint investigation unit with the RCMP and the Ontario Provincial Police that is using police powers such as search warrants to investigate criminal activities in the securities realm that will be prosecuted in court as criminal offences.
Some OSC staff on the new Joint Serious Offences Team have received special constable status, while other members of the team are already police offers from the participating forces. All could use wiretaps as a “key” investigative tool if insider trading were added to the permitted list, Mr. Wetston said.
Insider trading cases are notoriously difficult to prosecute as criminal offences because they require proof that individuals made trades based on undisclosed material information they discovered about a company. People accused of the crime typically argue they traded for other reasons – such as their own investment research – and not because of insider information.
The related crime of tipping, which refers to informing others of undisclosed insider information, can also be difficult to prove unless there is a record of a conversation in which tips are passed along.
OSC enforcement director Tom Atkinson said securities investigators in the United States can obtain wiretaps, and have found the information extremely useful in proving cases. The recent insider trading prosecution of officials from U.S. hedge fund Galleon Group relied heavily on wiretaps of telephone conversations to win convictions.
“If you look at the States, it’s been a highly effective tool because these cases are all highly circumstantial,” Mr. Atkinson said. “It comes down to what was the intent of the person.”
It can be hard for investigators to know when trading behaviour is nefarious, Mr. Atkinson said, but “what better way than by hearing the voice?”
Mr. Wetston said it is unlikely the wiretap rule could be amended quickly because it requires police forces to work through federal committees that make decisions about possible legal amendments, so there is a long process to follow.
The wiretap authority is especially important since the Supreme Court of Canada ruled last year that police need wiretap approval – and not just search warrants – to search cellphone text messages.
Also Thursday, Mr. Wetston said it is possible Canadian securities regulators will not be able to proceed with proposed new standards for the use of poison pills in hostile takeover bids.
Mr. Wetston said the provinces have so far been unable to negotiate a compromise that could lead to a harmonized set of standards across the country.
“While we are hoping for a harmonized policy across Canada, I can tell you the debate continues to rage on and I’m unclear whether a resolution is in sight,” he said in his luncheon speech remarks.
Many in Canada’s corporate community have urged securities regulators to design new rules to give boards of directors more ability to delay or reject takeover bids, which are seen as extremely difficult to stop once they have been launched under current rules.
Last year, securities regulators in most provinces issued proposed new guidelines for defensive tactics in hostile bids, but Quebec issued a tougher set of proposed guidelines that would make it far easier for boards to reject unwanted bids outright.
While some securities rules vary among provinces, Mr. Wetston told reporters after his remarks that he believes takeover bid rules need to be harmonized because it would be “very challenging” to operate with different standards covering different shareholders and companies in different parts of the country.
He said it may turn out that change will not be possible at this time, which would mean the status quo would prevail.
“It may be achievable, but I don’t think it will be achievable in the short term,” Mr. Wetston said. “The opinions around what that should be are still pretty far apart. ... I would think we are some distance away from resolving it.”