BUSINESS/ECONOMY

Tougher trading laws

ANN WALMSLEY December 22 1986
BUSINESS/ECONOMY

Tougher trading laws

ANN WALMSLEY December 22 1986

Tougher trading laws

BUSINESS/ECONOMY

It is a sophisticated and illegal form of investing, and stock market regulators say that it takes place in Canada. A company insider—an officer, lawyer or accountant—buys or sells company stock for a profit by taking advantage of information that has not been disclosed to the public. Under current laws in Ontario, which is Canada’s major trading market, an individual who trades unlawfully faces a maximum $2,000 fine, a oneyear jail sentence or both. But last week Monte Kwinter, Ontario’s minister of financial institutions, introduced legislation to toughen penalties and widen the definition of who is an insider.

The proposed changes would increase fines to a maximum of $1 million or up to three times the illegal profit, whichever is greater, and provide for jail terms of up to two years. As well, people outside the company who receive tips from insiders could be subject to insider trading penalties. Said Stanley Beck, chairman of the Ontario Securities Commission (OSC), which argued for the legislation: “The main thing is to catch them and impose a penalty that ruins them personally.” Kwinter acted in response to last month’s sensational U.S. trading scandal involving Ivan Boesky, a powerful Wall Street speculator who specialized in takeovers. The U.S. Securities and Exchange Commission (SEC) stunned the international securities community when it revealed that Boesky had illegally used information on a number of imminent takeovers to earn $69.3 million. The SEC also revealed that Boesky had implicated at least 10 other top investment figures.

Boesky pleaded guilty to security fraud and the SEC fined him $138.5 million and barred him for life from securities trading in the United States. Still, Canadian securities officials said that they were concerned that the Boesky affair could erode investor confidence in Canada. Following a major scandal, said John Abell, a vice-chairman at the Toronto-based brokerage firm of Wood Gundy Inc., “the small

investor confirms his worst suspicions about the safety of the market.” Beck and Kwinter’s deputy minister, Bryan Davies, immediately held discussions about updating the legislation. The minister agreed to move quickly to demonstrate that the OSC was an effective regulator. Said Beck: “It was an opportune time to clean up insider trading legislation.”

Beck added that he expects that the proposals will go into effect on Jan. 31, leading legislators in the other provinces to take similar action. Securities officials in British Columbia, Alberta, Manitoba and Quebec said last week that they would consider stiffening their laws.

Still, the most critical issue facing securities 8 regulators is whether % even with tougher rules z they will be successful 5 at identifying and charging determined insiders. The OSC has pursued six major investigations into alleged cases of insider trading in the past 10 years. But they resulted in only minor convictions, in some cases because of difficulties in tracing investments made from outside Canada. Said OSC director Ermanno Pascutto: “It is very difficult to track down anyone who is sophisticated enough to cover their trail and trade through a number of offshore institutions.” As a result, the commission has requested funding to add five employees to its 25-member enforcement branch. And it is working with the Toronto Stock Exchange on a computer program that would identify unusual stock activity and help track specific investors.

According to Beck, the new measures will only be successful if the commission receives more information about illegal trading. The commission plans to hold meetings with dealers to encourage them to spot suspiciously lucky clients. Even with that help, said Pascutto, “where insider trading is concerned, no regulator will capture more than the tip of the iceberg.”

ANN WALMSLEY in Toronto