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(Reuters) - Lawyer John Mountain watched with frustration last year as the shares of Sino-Forest TRE.TO fell through the floor after short-seller Carson Block accused the China-focused forestry company of fraudulently exaggerating its assets.
It took six days before Canadian-listed Sino-Forest confirmed that regulators were probing the matter. But it was more than two months before the Ontario Securities Commission (OSC), Canada's chief regulator, halted trading in the stock.
"There is a profound sense of frustration around the Sino-Forest case," said Mountain, senior vice president of legal and chief compliance officer at NEI Investments, a firm that dumped some 500,000 shares of the forestry company last summer.
In a rare nod to its critics, the OSC admitted last week to a string of shortcomings surrounding emerging-market issuers such as Sino-Forest, including the process of listing on exchanges and the roles played by underwriters and auditors.
Sino-Forest remains cease-traded as authorities continue to investigate it. Criticism of Canada's biggest regulator goes well beyond the way it handles cases such as Sino-Forest, however.
Addressing the criticism, the OSC says it has upped the ante in its fight against insider trading, boiler room operations and other securities crimes. Indeed, securities experts notice a marked difference in the level of intensity in enforcement in the past year or so, but say it's too early to tell if the agency can reinvent itself as a no-nonsense, world-class enforcer.
"The OSC is genuinely committed to raising their game, but they've got a long way to go," said securities lawyer Edward Waitzer, a former OSC chairman. "You can't create an effective enforcement team overnight. It's people; but it's experience."
Canadian authorities have struggled for years to prosecute big fraud cases. An infamous example is the decade-long Bre-X Minerals gold-mining scandal that centered on a fake gold deposit in Indonesia. Only one executive ever came to trial, and he was eventually acquitted.
Tellingly, even though Canadian regulators alleged securities infractions on the part of Toronto-based media baron Conrad Black, it was U.S. authorities who won a conviction of fraud and obstruction of justice against him.
"Canada is a place for well-mannered people. It's not a confrontational society like in the United States," said Utpal Bhattacharya, a finance professor at the Indiana University Kelley School of Business and a contributing author of a broad 2006 report that compared enforcement by the OSC and the SEC.
His paper found the SEC prosecuted about 10 times more cases than the OSC when adjusted to account for the relative number of listed issuers they police.
Since that report came out, the OSC says it has beefed up its technology, hired more enforcement staff and broadened its investigations, aiming to root out suspect trades that may have taken place years before.
Last month, it unveiled a sweeping insider trading case centered on one Eda Marie Agueci, a former GMP Securities (GMP.TO) executive assistant. The OSC alleged Agueci's scheme directly involved nine people, ran for almost a year and netted nearly C$1 million.
The case drew headlines in part because the OSC alleged that Ian Telfer, chairman of Goldcorp (G.TO) - one of Canada's best-known mining companies - helped Agueci, a friend of 20 years.
Telfer is accused of helping her disguise ownership of some securities and circumvent her employer's compliance department. Telfer, who denies wrongdoing, is not accused of insider trading.
"We're looking at a much wider net. Now we're looking at lawyers who worked on deals, people in the capital markets; people at the issuers, printers, secretaries," said Tom Atkinson, the head of enforcement at the OSC since 2009, explaining the commission's new approach. "If you're insider trading, there's a lot better chance you'll be caught. If you think you've gotten away with it, we're working backwards and there's a good chance you haven't."
OSC enforcement activity has increased each year since Atkinson took over, thanks partly to the formation of specialized teams in which computer, market and trading analysts work closely with litigators and investigators.
"When they do an investigation, they're accountable for that investigation from tip to tail. If something goes wrong, everybody knows where the problem is now," said Atkinson, a former prosecuting attorney who looks a bit like hard-nosed comic strip detective Dick Tracy. "I feel sort of a buzz in the division. People are more confident."
The OSC says it has invested in technology that helps investigators sift through trading data to find odd patterns, and is beefing up coordination with other regulators to deal more quickly with problems that cross provincial and, especially, international boundaries. The agency has issued 86 "statement of allegations" in the last three years, nine of them alleging insider trading, and it says jail terms have been rising for prosecutions that it wins.
"It's certainly a much better deterrent that you send fraudsters to jail than to simply give them a slap on the wrist, and then they drive away in their Mercedes-Benz," said Ermanno Pascutto, executive director of investor advocacy group the Canadian Foundation for Advancement of Investor Rights, and a former regulator in Canada and Hong Kong.
The changes in Ontario mirror tactics used in the United States, where regulators have trumpeted new technology to streamline a database of tips to improve investigations.
In a sense the Canadian initiative parallels recent efforts by U.S. authorities to beef up their fight against white collar crime. The FBI recently enlisted Hollywood movie star Michael Douglas, who played the infamous Gordon Gekko in the 1987 movie "Wall Street", for a TV spot to combat financial crimes.
Last May, a court convicted Raj Rajaratnam, a self-made hedge fund tycoon, in the biggest Wall Street trading scandal in a generation. He was ordered to serve 11 years in prison, the longest sentence ever handed down in an insider trading case.
While the OSC isn't shy these days about trumpeting its get-tough intentions, it also isn't giving much away.
It said it has commissioned a global consulting firm to compare the "best practices" of other regulators, but it neither named the consultants nor provided details on the findings.
Also, in a three-year strategic plan that it released in February, the regulator gave few details of what exactly it planned to do differently, or how a new regulatory regime would work.
And even if authorities in Ontario - home of the financial hub of Toronto - do get tougher on securities crime, Canada's fragmented regulatory system will remain a vexing issue. Critics question whether a single province, even one with the heft of Ontario, can affect meaningful change on its own.
The OSC is Canada's biggest securities regulator, overseeing about 40 percent of companies listed on the TMX Group's (X.TO) exchanges, which include the Toronto Stock Exchange and the small-cap TSX Venture Exchange. But each Canadian province has a separate regulator, and many guard their independence jealously.
The patchwork system can make doing business cumbersome. For example, a Canadian consortium's offer to buy the owner of TMX Group needs the approval of four provincial regulators.
The fractured system may discourage prosecutions and creates a trading environment that allows fraudsters to operate safely, critics say.
"Many cases never get investigated or prosecuted because it requires agreement, resources and coordination among several regulators," Pascutto said.
"It's not the cases that you see; it's the cases that you don't see." Pascutto said the lack of a national regulator makes it hard to deal with enforcement issues involving other countries, especially emerging economies in Asia, difficulties that were apparent in the recent OSC probe of emerging-market issuers.
The jurisdictional issue is not likely to change anytime soon.
The Supreme Court of Canada last year derailed government efforts to set up a single regulator, arguing that a federal proposal rode roughshod over provincial rights.
In the United States, the SEC oversees an equity market that has a market capitalization nine times larger than Canada's. It launched a record 735 enforcement actions in its 2011 fiscal year, while Canada's 13 provincial and territorial regulators initiated a total of 126 cases last year. "That's the quantitative part of it," said Joseph Groia, a securities lawyer, who won the 2007 acquittal for Bre-X executive John Felderhof. "The qualitative part of it is, what's the perception on the Street? It's that perception that is going to influence whether the next person takes a chance and breaks the law or not."
Editing by Janet Guttsman and Frank McGurty