When it comes to insider trading, regulators in Canada and the United States operate in different universes.
Prosecutors in New York are in the middle of yet another high-octane case, alleging that hedge fund titan Raj Rajaratnam and his firm, Galleon Group, owe some of their investment luck to inside information. At last count, the Galleon probe has spawned charges against 26 people, 19 of whom have entered guilty pleas.
Canada's top securities regulator, the Ontario Securities Commission, regularly vows to step up enforcement of insider trading, but its efforts have produced only a trickle of activity compared with the U.S. Last year, the OSC took only four cases to the courts, for all types of security law violations, including insider trading. In 2009, it mounted only two cases and, in 2008, it didn't mount any new court cases at all.
Canada's far quieter approach to the policing of insider trading raises questions about whether investors in this country are being shortchanged. Trading on the basis of inside information is illegal because, among other things, it allows some investors to swindle others by buying or selling stocks using non-public news that moves share prices when it is released.
Theories abound on why the U.S. and Canada have a prosecution gap. One explanation: The U.S. Securities and Exchange Commission (SEC) is a national regulator. When charges are laid in the U.S., regulators work in close co-operation with the U.S. Justice Department and the Federal Bureau of Investigation.
That co-operation doesn't happen as easily in Canada, which has a fragmented system of provincial oversight and law enforcement. "At the Ontario Securities Commission, I can certainly recall circumstances where we had cases that we were eager to have the police take on, and they were too busy," says Emily Cole, a lawyer and former senior litigation counsel in the enforcement branch at the OSC.
Another view is that Canada is soft on crime, at least of the financial variety.
"There is no harsh punishment" in Canada, observes Utpal Bhattacharya, a finance professor at Indiana University. "Instead of a hard stick, it's a soft stick and I do not think the soft stick works for financial crimes."
Mr. Bhattacharya performed a detailed comparison of the enforcement activities of the OSC and the SEC, and found a wide gap. When scaled for the respective size of the different stock markets, U.S. authorities prosecute 20 times more insider trading violations than their Canadian counterparts. Fines in the U.S. exact more pain too, by a factor of 17.
Mr. Bhattacharya wrote up his damning findings as part of an investment industry study regarding the modernization of Canada's securities laws four years ago. But his report is gathering dust. "Nothing seems to have happened. It just went under the carpet," he said.
Legal experts say the Canada-U.S. prosecution gap can't be explained by differences in securities rules. "The law is not significantly different," says Edward Waitzer, a lawyer who served as a chairman of the OSC in the 1990s.
Mr. Waitzer says one reason for more aggressive enforcement is that U.S. regulators have priorities not shared by their Canadian counterparts. In the U.S, prosecutors not only want to catch individual criminals, but signal to market players in general that illegality isn't tolerated.
Canada is "a kinder, gentler place," Mr. Waitzer says. "There is more of a willingness to go after big fish in the United States than there is in Canada because the mission is sending out a message."
Reflecting this priority, U.S. cases are speedily dispatched. In the Galleon prosecution, for instance, the SEC made its allegations in October of 2009. The trial began last week.
Mr. Waitzer says Canadian cases are often allowed to drag on to the detriment of all parties. He pointed to a decision by the OSC in September to settle a civil lawsuit filed back in 1986. The settlement, on behalf of minority shareholders of real estate firm Mascan Corp. over allegations that company founder Bruce McLaughlin diverted $35-million from the company for his own use, has left shareholders with no payout. Mr. McLaughlin has strongly denied the allegations.
"For me, the most embarrassing moment for the OSC – and there have been a lot of embarrassing moments – was a) abandoning the McLaughlin case, and then b) the comment to the media which was: 'What have we learned from this? We've learned that maybe we shouldn't take on these cases.' That's appalling," said Mr. Waitzer, who in the 1980s represented Mascan minority shareholders.
(During the lengthy time the case dragged on, witnesses passed away and Mr. McLaughlin became disabled and could not testify. His lawyer declined to comment. The OSC also declined to comment, but referred questions to legal documents issued as part of the proceedings and settlement.)
While U.S. prosecutors regularly seek jail time for offenders, that step is seldom taken in Canada.
The OSC has generally preferred to submit cases to an administrative tribunal, which doesn't require as high a burden of proof. Rather than the "beyond a reasonable doubt" hurdle for allegations to be proven in criminal cases, a tribunal weighs only a balance of probabilities in reaching its conclusions. But while a tribunal can mete out trading sanctions and financial penalties, it cannot order jail time.
Authorities in Canada also don't orchestrate the so-called perp walks, a highly visible signal to the market. In the United States, those accused of securities crimes are often handcuffed and taken from their work places, while being taped for television newscasts by media outlets tipped about the charges.
"We don't have the perp parade here. As Canadians we're traditionally more polite," Ms. Cole says.
The enforcement gap: How the OSC stacks up against the SEC
Total amount of penalties levied and disgorgements ordered last year by the Ontario Securities Commission (OSC), Canada's main securities regulator
Total amount of penalties levied and disgorgements ordered last year in U.S. dollars by the Securities and Exchange Commission (SEC), the United States' main securities regulator
Total number of proceedings over securities laws violations launched last year by the OSC
Number of proceedings the OSC took before the courts
Total number of enforcement actions launched last year by the SEC Martin Mittelstaedt