From the National Post:

Add another to the list: Northern Securities Inc., a small boutique investment bank presided over by Vic Alboini. The Northern Securities case involves what looks to be serious securities-industry wrongdoing: attempted extortion, administrative bungling, retroactive back-dating to cover mistakes, mysterious shufflings of bureaucratic and legal responsibilities to dodge consequences. That's what the regulators did. As for Northern Securities, which boasts of being Canada's largest small-cap-focused investment bank, it's the victim of all this.

At Market Regulation Services, the 50%-owned enforcement arm of the Toronto Stock Exchange, and the Ontario Securities Commission, the dogged pursuit of petty enforcement has led them to reach and stretch to the point that they seem to see no boundaries between them and their objectives. Mr. Alboini is a rare market player who refuses to roll over in the face of such regulatory overkill.

Market Regulation Services descended on Northern last fall. In the course of a review of Northern's compliance with the TSX's Universal Market Integrity Rules (UMIR), the regulator found a number of what it considered to be breaches. Out of thousands of transactions, it found -- for example -- that on Dec. 22, 2003, Northern "conducted an improper off-marketplace trade" and "failed to comply with its best-price obligation." The company also allegedly failed to properly supervise trading activity. Fines of up to $1-million for each of a dozen contraventions were possible.

Now the TSX offered Northern Securities a deal -- pay $2 million and the problem never goes public. Some people call that a settlement; others would call it extortion. Interesting, when Albioni blew a raspberry at the offer, the TSX came back with a demand for $800,000, or else.

Again, no deal, and the TSX was forced to file a public notice of proceedings.

So what did Northern Technologies do wrong? I wasn't sure myself, and thanks to Corcoran, I now know that I'm not alone in being confused:

The main rule Northern supposedly broke is known as UMIR Rule 7.1, which is designed to set supervisory standards for the internal operation of trading practices. Mr. Alboini and his lawyers describe 7.1 as so "vague and subjective" that it is impossible for investment dealers to determine whether they are in compliance.

The rules and policies under 7.1 are certainly a dense soup of non-specific language. Here's a sample: "Each Participant shall adopt written policies and procedures to be followed by directors, officers, partners and employees that are adequate, taking into account the business and affairs of the participant, to ensure compliance with these rules and each policy." Elsewhere, the rule lays down the need for "appropriate supervision" of trading staff "as necessary to ensure compliance."

What does "adequate" mean? What does "appropriate" mean? What is "necessary"? What, in fact, is "compliance." The rules don't say, and 7.1 goes on for clause after clause deeper and deeper into a land where everything must be right and appropriate and in compliance, but nothing is defined. Most people who look at 7.1 find it a swamp, and calls for reform have been made since the rules were made public in 2002.

This is why we have legislators make laws in a public forum. We have committees that accept recommendations from interested parties on how these rules could be made better.

In any case, it turned out the rules weren't really rules at all:

In the course of taking on the regulator, Northern's legal team discovered that the 2002 Universal Market Integrity Rules had never been formally approved and sanctioned by the Ontario Securities Commission. The regulator, in effect, was administering rules, extorting fines and setting standards based on a structure that technically had no legal foundation.

In July this year, Northern filed a notice to Regulation Services staff telling them that the rules they were operating under had not been legally adopted by the OSC as required. The rules, therefore, cannot be enforced. A series of stalling events occurred. On Sept. 6, the regulatory staff said they needed more time to prepare a response.

That's when the TSX decided to cheat:

On Sept. 21, however, the TSX privately sent a letter to the OSC asking the commission to retroactively approve UMIR amendments. "TSX submits that the amendments should be considered effective April 1, 2002."

OK, so what does the OSC do? The organization that is supposed to make the capital markets a place where companies can trade in confidence? It agrees to change the rules retroactively in order to burn Northern Securities:

So here we have the TSX, a so-called self-regulating organization, asking the government regulator to retroactively approve rules to justify the TSX's regulatory subsidiary's three years of prosecutorial harassment of securities firms. Faced with such a claim, one would think a government regulator would hesitate.

On Sept. 29, however, the OSC published the new UMIR rules. In effect, the OSC, under the authority of the commission's director of capital markets, retroactively approved and published the TSX's bungled regime. The OSC, of course, may claim that these rules are merely internal operating things that have no great public import. But millions of dollars in fines have already been collected. And what are we to make of the precedent of unchecked retroactivity?

As indicated, millions in fines from other companies have been collected, or extorted, based on these non-rules. An ethical organization would have announced the screw-up and entered in negotiations on how to return the money. Better yet, that same organization would have also initiated an effort to put in place a process that would prevent this sort of thing from happening again. But that organization is not the OSC.

Instead, the OSC has made a bad situation worse:

All this blew up last week when a panel at Regulation Services took one look at the retroactive game played by TSX and OSC staff and promptly adjourned the proceedings against Northern. The case is now before the OSC's commissioners, who are being asked to review the story and declare the UMIR amendments to be invalid.

So there's the whole story. Now what is required here is for Minister Gerry Phillips to get involved. The OSC reports to him, and it is behaving in a rogue manner, out of control and quite possible with real malice. The OSC is not supposed to assume every trader and accountant is a crook. The OSC acts as if any means justifies the ends it has already decided must be reached.

That the OSC agreed to backdate the rules and did it in order to criminalize the behaviour of a defendent after the fact is unethical in the extreme. That lawyers on the Commission did not say anything is even more disturbing. They ought to know better, and they have a higher calling, their oaths as lawyers, that should have directed their decision-making and ought to have stopped the TSX request dead in its tracks.

These same commissioners are being asked to review the situation. But their job is to make sure this sort of thing doesn't happen in the first place.

Here is the list of OSC Commissioners:

• Paul K.Bates
• Robert W. Davis, FCA
• Harold P. Hands, LL.B.
• David L. Knight, FCA
• Hon. Patrick J. LeSage, Q.C.
• Paul M. Moore, Q.C.
• Carol S. Perry, MBA, P. Eng.
• Robert L. Shirriff, Q.C.
• Suresh Thakrar, FIBC
• Wendell S. Wigle, Q.C.
• W. David Wilson
• Susan Wolburgh Jenah, LL.B.

Of these, Hands, LeSage, Moore, Shirriff, Wigle, and Jenah are lawyers. LeSage is a former judge, and not just any judge. He's a former Chief Justice of the Superior Court of Justice in Ontario. He can't be too impressed with what has happened. But then why all these lawyers as commissioners in the first place, unless is it to impress upon people just how important the OSC takes the legal niceties? And how that respect for ethics and the law is built into the OSC already, so no need for the real courts to get involved?

But the Northern Securities story suggests that this is all window dressing. The OSC commissioners don't seem to be monitoring or questioning the actions of the OSC, at least not until something blows up in the OSC's face.

Maybe the IDA's recommendation for real judicial oversight needs to be acted on, no matter how much the OSC hates the idea, as illustrated in the Frank Dunn case. Maybe Minister Gerry Phillips needs to be subjected to some questions on this at Queen's Park. Or better yet, Attorney General Michael Bryant.

Clearly just having an ex-judge and a handful of lawyers on the OSC's Board of Commissioners is not sufficient to the task of making sure the OSC is not behaving in a way that is unethical, and quite possibly illegal.