Got a hot stock tip? Figure no one will notice your illegal insider trading? Don't be too sure. The Ontario Securities Commission is watching you - or its computers may be.
After years of facing complaints about rampant trading spikes before major corporate deals are announced, Ontario's securities regulator is cracking down with a team of specialized investigators dedicated to insider trading cases. They are aided by a software program developed in-house by OSC staff to help them hunt for suspicious trading patterns amid mountains of data.
The goal is to find more of the people who are the source of insider trading in advance of major corporate deals and announcements, OSC enforcement director Tom Atkinson says.
They are rarely executives of a company, but are most often a "second tier" of outsiders involved in deals, such as employees at law firms, investment banks, accounting firms, geology consulting firms and even printers.
"We've been widening the net on who we're looking at," Mr. Atkinson said in a recent interview.
The OSC revealed one of its largest ever insider trading investigations in November, accusing prominent Bay Street lawyer Mitchell Finkelstein of tipping a friend who worked at brokerage firm CIBC World Markets about pending corporate deals he was working on as a mergers and acquisitions specialist. Four others have been named in the case, accused of allegedly profiting from Mr. Finkelstein's tips.
OSC staffers won't discuss specific cases, but Mr. Atkinson said part of the commission's success on a number of recent cases is owed to its new OSC Trade Nexus software, which staff developed to help identify unusual trading that warrants investigation.
The software allows the OSC to search trading data and look for patterns using numerous variables. It can also be used to identify webs of connections as investigators check to see whether more than one person is involved in a case.
OSC deputy enforcement director Kathryn Daniels said cases may not pop out if someone trades one time in a small number of shares. But they are more likely to be detected if there are repeated instances of profitable purchases before major news is revealed.
"You almost need four or five or seven patterns before you can see all of this," Ms. Daniels said. "You're building a more complex case with the people who are supporting the reporting issuers."
Similar patterns could have been spotted before such software was created, says Karen Manarin, deputy director of intelligence and investigations at the OSC, but it was less likely because it required slower manual searching.
"It helps organize the data into a pattern that would not otherwise be visible to the naked eye," Ms. Manarin said.
Some insider trading cases in recent years have involved lower-level company employees who have lucked into confidential information about a pending deal - including employees working in the information technology department who see confidential e-mails. Many of those cases have been easier to investigate, Ms. Daniels said, because the employees are not sophisticated and their trading sends up a series of classic red flags.
For example, some people have traded in large numbers of put or call options just before a deal is announced, and the market volume spikes so much higher than normal that it is flagged easily. People also often set up a new brokerage account for their trading, which is another classic red flag for investigators. Some have been people who have never bought shares before.
"It's so out of scope with their usual trading that it actually gets picked up fairly easily by market regulators," Ms. Daniels said.
Trickier cases are wily repeat offenders who are more sophisticated, trading small amounts frequently and flying well below the radar screen. Many are people who do not work for a company involved in a deal, but instead work for an outside service provider, so their links to the companies are less obvious.
But it is getting easier to spot them using technology to sort through the data, the commission says. The OSC has accused 13 people of insider trading in the past two years, up from five people in the prior two years.
What's less clear is whether the OSC will have more success prosecuting difficult insider trading cases.
The OSC still must prove someone had the undisclosed information and used it to do their trading. And that still requires significant proof to combat the classic defence that the trading was spurred by rumours in the market or on Internet chat rooms, and not by insider information.
Mr. Atkinson said the OSC has begun combining investigators and litigators on investigative teams so that cases will be better organized to succeed at hearings. The combined teams can be held accountable for the outcome from beginning to end, he said.
The insider trading team has 14 members, including investigators, litigators, forensic accountants and trading analysts, making it the largest of the commission's three specialized investigation units. The other teams are a boiler-room team and a new team focused on infractions by people who are registered to work in the market, such as traders.
The commission has decided to devote more resources to insider trading cases because it is a crime that has been especially troubling for investors, Mr. Atkinson said.
"It makes them feel like it is a rigged game, so it's very bad for business over all in the markets - it's bad for everyone. So that's why we've given it priority."
Janet McFarland