OSC out to make its mark with supersized penalty

Seven years ago, a wealthy executive from Finnish cellphone maker Nokia made international headlines with a speeding ticket. The man was caught doing 75 kilometres an hour on his Harley Davidson in a 50 km/h zone - then was penalized the equivalent of $103,000 (U.S.), because of the peculiar Finnish system of levying traffic fines according to income.

Canada's securities regulators operate with a similar ethos. What matters is not so much the seriousness of the offence, nor the harm it causes to the public, but the size of the offender's wallet. Serial stock promoters peddling questionable investments with even more questionable sales practices to elderly women can expect to settle for a million or two, when they get caught at all.

But for the sin of playing games with the timing of stock options - a financial-markets version of running a red light - the Ontario Securities Commission is believed to be seeking nearly $100-million from Canada's cellphone kings.

Plainly, the OSC needed a big win after a series of high-profile defeats. The commission's insider tipping case against former investment banker Andrew Rankin, which it pursued for seven years, largely turned to dust last year, and it withdrew criminal charges. Its similarly protracted case against John Felderhof of Bre-X Minerals, an insider trading prosecution, also ended in acquittal. And for many of the OSC's critics, Nortel's financial distress is another reminder of the regulator's ineffectiveness at clamping down on accounting shenanigans.

Prying a major settlement out of Jim Balsillie and Michael Lazaridis, the brains behind Research in Motion and the BlackBerry smartphone, might salve those wounds a bit. What it won't do is enhance the OSC's reputation for evenhandedness. This isn't about investor confidence; it's about showing toughness at a time when the commission stands to lose power to Finance Minister Jim Flaherty's proposed national securities regulator.

That's not to say that stock options backdating - granting options to employees based on an earlier low point in the stock price, thus increasing their value - is a victimless crime that the regulators should ignore. It isn't and they shouldn't. It involves a transfer of wealth from shareholders to executives and other staff.

It's dishonest, no matter that it was a common practice in the tech industry, or that some zealous U.S. prosecutors have brought forth criminal fraud charges in some of the more egregious cases.

But there are scandals and there are scandals, and in 2009 options backdating isn't exactly Bernard Madoff's $50-billion Ponzi scheme, is it? And in RIM's case, there are mitigating circumstances. The company went to the regulator first. It conducted its own investigation, which led to a $250-million (U.S.) accounting restatement two years ago.

Heads rolled. Dennis Kavelman, RIM's chief financial officer and thus the man directly responsible for flubbing the financial statements, was shuffled off to another position. Two directors left and were replaced with blue-chip outsiders from Royal Bank and IBM to bring some adult oversight to the boardroom. Mr. Balsillie stepped aside as chairman, which was probably necessary anyway, given that he is far too busy trying to crush RIM's competitors and buy a National Hockey League franchise to worry about the details of modern corporate governance.

That was in March, 2007.

And then RIM moved on. The options scandal became a sideshow, noise in the background - and, once the biggest financial crisis of past 75 years hit, it was virtually forgotten by investors, though not by the OSC. A source said last night that the OSC is pushing Mr. Balsillie to step down from the board, at least temporarily. That's not a disaster, either. As long as he continues to run the business, that's what the shareholders will care about.

If getting its pound of flesh makes the OSC feel better about itself, fine. It is a meaningful amount of money, even to two men whose brilliant invention has made them worth billions of dollars, so the fine will be useful for sending a message to other superwealthy CEOs that they, too, should mind the rules. But although the punishment may be excessive, it's probably worth it for Mr. Balsillie and Mr. Lazaridis just to pay up and get on with life.

One hundred million dollars is a lot of cash. But in this market, they routinely make or lose that much on their RIM shares in a single day. And if that weren't true - if they weren't two of Canada's richest men - the OSC, like the Finnish traffic cops, would never be handing out such an expensive ticket. The regulator is just doing what everyone else on Bay Street does. It's going where the money is.