The insider trading scandal continues to fester this week as none of the normal agencies that would have jurisdiction have yet to announce any sort of investigation. The Medisys trades may only have been the tip of the iceberg, according to a CQ reader with knowledge of Canadian financial markets, and a check on the winners from the run on income trusts on November 23rd might demonstrate why Canadians may not get an investigation at all -- at least until the Americans decide to check into the action.

On Tuesday, Ontario House member Michael Prue (NDP - Beaches/East York) stood to query the Minister of Government Service, Gerry Philips, on why he had not initiated an independent investigation into the series of trades on income trusts that took place just hours before Goodale announced an end to taxation on these investment products, boosting their value considerably. Philips replied that the Ontario Securities Commission has the responsibility to perform oversight on any such trades, and that the new chief of the OSC, W. David Wilson, had to make that decision. Prue replied:

Minister, W. David Wilson, your new chair of the Ontario Securities Commission, has been silent to date on this matter. One only has to take a quick scan of the Elections Canada Web site to show that Mr. Wilson is an avid financial supporter of the Liberal Party of Canada, the only party to which he donates money. Mr. Wilson has already been forced to recuse himself from investigations into the Royal Group due to a potential conflict. You agreed with that. Today, Judy Wasylycia-Leis, the federal NDP critic, has asked Mr. Wilson to recuse himself again. I am asking you this question: Will you support the effort and will you order Mr. Wilson to recuse himself in this situation?

It turns out, however, that David Wilson has more reason to recuse himself than just his party affiliation. Wilson received his appointment as chairman of the OSC after working as CEO of Scotia Capital Markets until his official appointment to the OSC on November 1, 2005, just twenty-two days before this event. Why is this important? One of the revelations to come out in the last couple of days is a previously undisclosed meeting that Finance Minister Ralph Goodale held with Investment Dealers Association earlier on the 23rd. Shortly after this meeting ended, unusual volumes began trading in income trusts such as Yellow Pages, Aeroplan, Superior Plus, and BCE (a dividend equity).

A look at the trades for November 23rd shows that Scotia Capital played a large role in moving the shares of these products. Look at Yellow Pages as an example; in the PDF, Scotia Capital is broker #85. SC starts off by selling large chunks of Yellow Pages at $14.12 right from the opening bell. Through 10:30, they're still primarily selling even though the price has moved up to $14.36. Beginning at 11 am, they suddenly begin buying in small amounts, and then at 11:26 start buying in higher volumes -- almost 20,000 between 11:26 and 11:29, even though the price had moved up to $14.50. SC sells off a couple of thousand shares later in the hour at $14.65, and then nibbles most of the next couple of hours. At 14:22, SC suddenly starts selling again at $14.60, dumping several thousand shares while the price drops a few cents. Starting at 14:57 and continuing through the end of the session at 16:00, the stock explodes in volume, with a number of players pushing the stock price over $15.00 by the closing bell.

Or, for that matter, take a look at the trading pattern and volume for equity product BCE. The following large-volume trades took place with the major investment brokers on the Toronto Stock Exchange:

10:15:35 50,000 shares Scotia Capital
10:36:48 100,000 shares Scotia Capital
10:39:21 50,000 shares Desjardins
11:43:45 98,400 shares TD Securities
14:53:08 100,000 shares CIBC World Markets
15:42:59 50,000 shares Blackmont
15:56:36 50,000 shares CIBC World Markets

After the day was over, SC parent Bank of Nova Scotia shares rose to their highest level all year, $47.10, the next day. The stock peaked at $1 per share on the 24th, better than a dollar an hour higher than the stock price on the 22nd, a day before Goodale's meeting. Scotia Capital played a major role in moving large transactions for all four trusts on November 23rd.

All of this could just be a coincidence, of course, but the notion of coincidence keeps getting brought up as a possible defense, one that sounds weaker with each invocation. But unless the OSC decides to pursue an investigation, no defense will be necessary. And it appears that despite Wilson's words that "[d]eterrence is achieved when everyone knows with certainty that the enforcement of regulations will be impartial, swift and uncompromising", the ties to his former company have put the OSC chief in a position where he wants to take as much time as possible deciding whether he wants this investigated at all, let alone independently.

The Conservatives and the NDP should continue to press for a federal, independent investigation into the November 23rd trading activity. However, if they don't get it, the Americans may wind up riding to the rescue. BCE also trades on the NYSE, as does Bank of Nova Scotia. The SEC and its far more independent management might well choose to start looking into any unusual trading patterns inside the American exchanges. That could let Wilson off the hook -- or perhaps make his life a lot more complicated than it already is.

UPDATE AND BUMP: I'll let this one ride on top today. The key part to remember is that either the OSC or the RCMP would have to investigate this if anyone does at all, and unfortunately David Wilson gets to make that call for the time being. Eventually it will fall to the Ontario provincial government if Wilson punts, who will likely not have too much enthusiasm for exploring yet another Liberal Party financial scandal.

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