“Welcome to La-La Land,” cries the Sept. 24, 2007, cover of Canadian Business. The greeting is aimed at white-collar criminals seeking carte blanche for their menu of nefarious activities directed at the country's capital markets.

Apart from a few juicy lines from white-collar felons disparaging the Canadian justice system, however, the article doesn't tell anyone interested in this topic anything they didn't already know. Which is too bad, because the story has fueled the misunderstandings that permeate the now-pervasive notion that Canada, in the words of Columbia University law professor John Coffee, is “a securities market enforcement-free zone compared to the U.S. and other countries.”

Comments of this kind land squarely in the laps of the country's securities
regulators, who are under attack for being some combination of soft, inefficient
and incompetent.

To be fair, Canada's 13 provincial securities regulators, operating under the Canadian Securities Administrators (CSA) umbrella, have not been dormant. In the year ending March 30, 2007, CSA pursued 122 new enforcement matters and concluded 128 cases that produced sanctioning orders or settlements, many of which involved more than one respondent. And these figures don't take into account the activities of self-regulating organizations such as the Investment Dealers Association.

What the regulators haven't done, however, is institute a single legal proceeding related to stock-option backdating.

Bombshell Research
To U.S. investors in Canada and to Canadians inundated by media reports of rampant backdating in the U.S., the regulators' failure to act seems but another nail in the coffin of their enforcement reputations, particularly the reputation of the Ontario Securities Commission (OSC), the country's most important regulator.

“I'd have thought that the broad sweep of backdating cases in the U.S. would have awakened securities regulators everywhere,” says Philip Anisman, a Toronto securities lawyer and former director of corporate research in the Department of Consumer and Corporate Affairs.

Until recently, however, no one really knew whether and to what extent stock- option backdating had made its way across the border. Then came the bombshell research.
In September 2007 law firms Siskind Cromarty Ivey & Dowler and Cavalluzzo Hayes Shilton McIntyre & Cornish alleged that many Canadian-listed companies had engaged in stock-option backdating or were flouting related Toronto Stock Exchange (TSX) rules.

“Our analysis of reports filed by insiders of TSX-listed companies and of the Canadian academic literature strongly suggests options manipulation is a serious problem in Canada, and the current regulatory regime is inadequate to deter it,” says Dimitri Lascaris, a partner in the firm's class actions department.

Siskinds' work, which includes a review of insider reports from 950 TSX-listed companies, concludes there is a greater than 95 percent probability that many TSX-listed companies manipulated their option grants to senior executives between 1987 and 2006. Fifty percent of the companies are in oil, gas and mining, while approximately 25 percent come from the technology sector. The remainder represent a wide range of industries.

The study also found that many senior executives of major public companies who received options were late in filing insiders' reports. When they were filed, they revealed that hundreds of option grants were made in violation of the corporate stock-option plans governing them.

Statistical research of this kind has been the catalyst for option manipulation enforcement procedures and civil lawsuits in the U.S. A 2006 study conducted by Erik Lie at the University of Iowa and Randall Heron at Indiana University was a primary source for the Canadian research. The U.S. study found that 29.2 percent of U.S. firms manipulated grants to top executives at some point between 1996 and 2005.
Confident in its own research, Siskinds then put its money where its mouth was.

Under Investigation
In January 2007 Siskinds and Cavalluzzo Hayes together sued RIM, maker of the Blackberry, on behalf of the Ironworkers Ontario Pension Fund, which owned 13,200 shares of the company. The result justified the research. Before the end of the year, Schoenfeld RIM agreed to settle. The company will improve its corporate governance practices, such as enacting a ban on stock options for independent directors.

The firm also has contacted numerous suspect companies asking them to conduct an independent investigation into their stock-option practices. “To our knowledge the boards of most of these companies have commenced such investigations, and where investigations reveal wrongdoing, our clients will insist on payment of appropriate compensation and the implementation of appropriate corporate governance measures,” Lascaris says. “We will continue to make these demands and will commence litigation against all companies who do not comply.”

Meanwhile, the OSC had announced it was “reviewing” the option practices of precisely one Canadian company–RIM, the very company Siskinds had sued.
By November the commission advised that the number of companies under investigation had risen to 15.

“I'm anticipating that you might hear more from us reasonably early in the New Year,” says Michael Watson, director of enforcement at the OSC. And according to Watson, Canadian option-practices enforcement should not be measured against the American experience.

Different Beast
“Our accounting rules are different, and things that might present a problem in the U.S. do not raise the same issues here,” Watson says. “Unlike the U.S., stock-
option backdating does not have a financial statement impact in Canada, where the somewhat narrower question is whether companies have complied with the option policies that they disclosed.”

Indeed, as far back as September 2006 the CSA published a “staff notice” highlighting the “historically different regulatory requirement in Canada that may reduce the opportunity for Canadian companies to backdate or time option grants.”

Lascaris doesn't buy it. “If the intention of the September 2006 notice was to mitigate concerns about the extent of option manipulation in Canada, that intention was misplaced,” he says.