The OSC’s decision to reverse its previous order and allow RIM insiders to exercise 750,000 options while recent financial statements remain long overdue is a disservice to the investors it is mandated to protect.
There is a second chapter to yesterday’s posting about Research In Motion. You will recall that back in October RIM put out a media release to announce that it had voluntarily requested the Ontario Securities Commission issue a cease trade order against management and insiders because the company had failed to file its quarterly statements. The OSC should have done that without RIM’s requesting it, but you never know, as you will see when you read on. On November 7th the OSC issued the order stating:
…all trading in and acquisitions of securities of RIM, whether direct or indirect, by any of the Respondents cease until two business days following the receipt by the Commission of all filings RIM is required to make pursuant to Ontario securities laws.
The OSC had asserted in its statement of allegations:
It would be prejudicial to the public interest to allow the respondents to trade in the securities of RIM until such time as all disclosure required by Ontario securities law has been made by RIM.
But wait –they both got a do-over. Sometime after November 7th RIM executives applied to the OSC to have the ban lifted on co-CEOs Jim Balsillie and Mike Lazaridis, who, between them, had about 750,000 options on low-price RIM shares they wanted to exercise. They said they would suffer financially if they were prevented from exercising the options. So, less than 30 days after its original order, the OSC did a 180. Just leave your shares in escrow until things are sorted out, was the gist of its newest decision. And that little matter in the earlier decision about it being prejudicial to the public interest to allow RIM insiders to trade in the company’s securities until the proper financial statements had been filed –suddenly the OSC’s concern was all about the prejudice to RIM’s executives.
Thus Mr. Balsillie and Mr. Lazaridis, during a time when investors have been left in the dark about RIM’s recent financial numbers, made a tidy profit of about $120 million between them. Maybe if the OSC had stuck to its guns and said no to stock trading or acquisition of any kind as long as financial statements remained outstanding, RIM’s executives would have gotten the lead out and resolved this lingering options problem in a hurry. Oh, by the way, it seems more than a little ironic that it was a concern over stock options accounting, or worse, at RIM that caused the delay in filing in the first place. And even with that information, the OSC still permitted RIM’s top management to exercise more options.
Now, where this gets even more interesting is that you won’t find any mention of the about-face among RIM’s press releases, unlike the request they made back in October for the cease trade order. And on the OSC’s web page of press releases, which includes the earlier decision to issue a cease trade order, the recent order is nowhere to be found.
A skeptical person might think that there was a little close dancing between the OSC and RIM and that neither party really wanted the rest of the world to know what was going on. If you are a publicly traded company like RIM, that kind of two-step might look, well, just a touch hypocritical. There are plenty of companies that fall in that category. But if you are Canada’s premier securities regulator and making loud noises about the importance of timely disclosure and transparency, that approach to discharging your duties to the investing public is shameful.
A few years ago, in response to the Ontario Legislature’s review of that province’s securities laws, The Centre for Corporate & Public Governance did a major study of the OSC’s own governance practices and found them wanting. In many cases, it was not practicing what it was preaching about board governance and senior management compensation. Since it became a self-funding agency, which I have always maintained was a bad idea and contrary to the way regulators should be structured, the OSC has essentially had a free reign in managing its own operations. Its activities are governed by individuals who exercise several functions at once: overseeing the OSC as a board, deciding securities policies as a commission and adjudicating cases that come before them as a hearing panel. As we said in our submission at the time:
There are, in short, too many hats being worn by too many players. An excess of such functional haberdashery is always a concern when it comes to regulating and decision-making in the public interest.
While the OSC has many conscientious employees, as an institution it has far too much power and too little public accountability. Judging from its recent decision to allow RIM insiders to prosper without having to comply with relevant securities disclosure laws, this vital gatekeeper of the capital markets has forgotten its role as the guardian of investor confidence. All of which makes the actions of the Ontario Securities Commission the certified governance outrage of the week.