Personal Finance

Potential whistleblowers should read the fine print.
By Steven G. Kelman | 11/10/16

In late September in a speech titled "The Status Quo Is Not an Option", Ontario Securities Commission Chair and Chief Executive Officer Maureen Jensen stated that the OSC's whistleblower program launched during the summer "has been fruitful right out of the gate" and already received more than 30 tips.

About the Author
Steven G. Kelman is president of Steven G. Kelman & Associates Limited. His company provides specialty publications and training for the mutual fund industries. Steven is the author of several personal finance books and is author or co-author of courses offered by the Investment Funds Institute of Canada, including the Ethical Conduct and Behaviour continuing education course and the Labour-Sponsored Investment Funds course. He received a B.Sc. from McMaster University, an MBA from York University and holds a Chartered Financial Analyst designation.

Thirty responses to a program that promises up to $5 million for the right tip doesn't seem like a lot. However, once the OSC starts announcing rewards paid, business in my opinion, should pick up. Indeed, the U.S. Securities and Exchange Commission introduced its whistleblower program in 2011 and since then has paid out US$111 million to 34 whistleblowers. In fact, from 2011 to August 2016 the SEC received about 14,000 tips including more than 200 from Canada. Successful enforcement actions resulted in sanctions exceeding $500 million.

The OSC's Office of the Whistleblower website asks, "Are you a whistleblower? Do you have inside knowledge of, or suspect, a possible violation of Ontario securities law that could harm investors? We want to hear from you."

It goes on to say that the OSC wants "high quality information that contains timely, specific and credible facts regarding potential misconduct."

While this may seem like a recruitment ad for some country's Ministry of State Security, the OSC is hoping that by offering compensation people will provide information about insider trading, market manipulation and serious accounting and disclosure violations.

Whistleblowers whose information leads to an OSC proceeding which results in sanctions or voluntary payments of $1 million, or more, may be eligible for a reward of up to $5 million.

The OSC whistleblower website also states that the OSC "will make all reasonable efforts to protect the identity of whistleblowers. Under the Ontario Securities Act, the OSC may take enforcement action against employers who take reprisals against whistleblowers. Whistleblowers can choose to report anonymously if they are represented by a lawyer."

I suggest that anyone contemplating blowing their whistle should first determine whether their likelihood of getting a reward is somewhat greater than the probability of the Toronto Maple Leafs winning the Stanley Cup this season. They should also consider whether they will be viewed by former colleagues and potential employers as outcasts if the efforts to protect their identity fail.

Reading the fine print of the Whistleblower Program OSC Policy 15-601 should be a good start. It says that tips related to criminal or quasi-criminal matters are excluded, so if you have knowledge of these and inform the OSC you won't get a monetary reward for your efforts and you will be whistling Dixie.

The policy statement also says that nothing will be paid unless the $1 million threshold for sanctions or voluntary payments has been met. That suggests that for reporting something minor, a whistleblower expecting a reward also will be whistling Dixie.

Also, anyone contemplating the receipt of the maximum $5 million bounty and living the life of luxury on some Caribbean beach should recognize that there are conditions. Key is that for an award greater than $1.5 million to a maximum of $5 million, the OSC has to collect the sanction or voluntary payment. Good luck with that. Historically regulators have had a dismal record of collecting such moneys, as I explained in this column a few years ago.

Payments to whistleblowers will be between 5% and 15% of the sanction or voluntary payment amount. Whether a whistleblower gets 5% or 15% or any amount in between depends on a number of factors and is discretionary. These factors include the timeliness of the whistleblower's initial report, the significance of the information, the whistleblower's assistance in interpreting evidence and whether the whistleblower "appropriately encouraged or authorized others who might not otherwise have participated in the investigation to assist Commission Staff." The SEC, by the way, pays 10% to 30% of the money collected when sanctions are greater than $1 million.

The number of initial tips in Ontario may seem significant, but tips don't necessarily mean actions. An OSC news release on enforcement in 2015 states that the OSC's Contact Centre referred more than 360 complaints to Enforcement for further investigation. However, the OSC commenced only 31 cases last year, of which 18 were before the OSC Tribunal and 13 were criminal and quasi-criminal in nature and were before the courts. It's too early to predict how successful the whistleblower program will be.

Not everyone can be a whistleblower. For instance, lawyers providing legal services to a company could not provide a whistleblower submission about that client. The same would apply to auditors as well as officers, directors and chief compliance officers of a company. Of course anyone "who knowingly makes statements or submits information that is misleading or untrue or does not state a fact that is required to be stated to make the statement not misleading” would be ineligible. The exceptions are when a whistleblower believes that blowing his whistle "will prevent the subject of the whistleblower submission from engaging conduct that is likely to cause or continue to cause substantial injury to the financial interest or property of the entity or investors."

Of course I have no knowledge of the whistleblower submissions already received, but I would bet some of those are from spouses in divorce litigation who have detailed knowledge of insider trading of their spouses using nominee names and practices of creative income splitting. Income splitting may or may not be, depending on specifics, in the purview of the OSC, But, it would certainly be of interest to the Canada Revenue Agency.

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