When the Ontario Securities Commission (OSC) launched its Whistleblower Program in July 2016, a cornerstone of the regime was the new provisions in the Securities Act protecting whistleblowers against reprisals. The whistleblower reprisal rules generally prohibit companies from taking measures against a whistleblowing employee, because of the employee's whistleblowing activity, that adversely affect his or her employment.
Although the OSC made several whistleblower bounty awards in the years following the enactment of the Whistleblower Program (totalling over $8 million), the scope of the broad reprisal protections in the Securities Act remained unclear.
In July 2020, the OSC brought its first ever enforcement action under the whistleblower reprisal rules against crypto asset trading platform Coinsquare Ltd. (Coinsquare) and its former CEO. The enforcement action stems from allegations that Coinsquare retaliated against an employee who raised concerns internally about the company's market manipulation. As the first enforcement action under the whistleblower reprisal rules, the case serves as an important reminder for companies about the steps they should take in relation to a whistleblower's employment in the wake of an internal report of potential misconduct.
What you need to know
- The OSC's recent enforcement action against crypto asset trading platform Coinsquare represents the first case brought by the OSC for reprisal against a whistleblower.
- The whistleblower reprisal rules generally prohibit companies from taking measures against a whistleblowing employee, because of the employee's whistleblowing activity, that adversely affect his or her employment. This includes threats, intimidation or coercion in relation to the employee's employment.
- Companies that receive a
whistleblower complaint should take care to not do or say anything
that the whistleblowing employee could perceive as meaning his or
her employment will be affected because of the report.
- If a company is considering terminating a whistleblowing employee for pre-existing reasons, the company should comprehensively document those reasons and seek expert legal advice about the risks of proceeding with the termination.
- Companies that receive an internal whistleblower complaint may also want to consult our practical step-by-step guide for handing such complaints.
Coinsquare is a crypto asset trading platform based out of Toronto that facilitates the trading of Bitcoin, Ethereum and other cryptocurrencies. Coinsquare launched its public trading platform in late 2014 and, as of December 2019, had approximately 235,000 client accounts.
From July 2018 to December 2019, at the direction of Coinsquare's former CEO, the company implemented an algorithm to artificially inflate the trading volumes reported on its own website and on third party crypto asset trading data aggregation websites. The algorithm inputted simultaneous matching buy and sell orders from an internal Coinsquare account into the trading platform. This created the appearance of legitimate trading activity on the platform where such activity did not exist (i.e., "wash trades"). The wash trades represented over 90 per cent of the reported trading volume on the platform.
In November 2018, several months after Coinsquare's market manipulation began, the company hired a new employee to work on its automated trading strategies team. After learning about the wash trading, the employee reported his concerns about the practice to senior management, including the former CEO. In spite of the employee's report, the practice continued.
In March 2019, after learning the OSC was planning to conduct a site visit to Coinsquare, the employee reported his concerns to the company's former President, who stopped the practice for a few days before the former CEO directed that it begin again. After continuing to report his concerns, the employee was told that the matter was not open for further discussion and if he continued to raise concerns his employment would be impacted.
Several months later, two Coinsquare staff members asked the employee questions in an open area of the company's office about wash trades appearing in records that the company was due to produce to the OSC. After this interaction, the employee continued to raise concerns to his new supervisor and senior management and requested that his team be left out of any discussions about the wash trading. The employee subsequently took a stress leave due to his concerns over the wash trading. Less than two months after going on leave, Coinsquare terminated his employment.
In the settlement agreement, the OSC staff concluded that Coinsquare's response to the employee constituted a prohibited reprisal under section 121.5 of the Securities Act. That section defines a reprisal to include any measure taken against an employee because of his or her whistleblowing activity that adversely affects his or her employment, including but not limited to, ending or threatening to end the employee's employment, disciplining or threatening to discipline the employee, or intimidating or coercing the employee in relation to his or her employment.
As part of the settlement, Coinsquare admitted that its response to the employee following his internal reporting of the wash trading adversely affected his employment and constituted a prohibited reprisal. However, Coinsquare noted that at the time it was in active litigation with the employee and specifically denied that its termination of the employee was a reprisal based on the employee's reports.
To resolve the reprisal allegations, as well as related allegations for market manipulation and misleading clients, Coinsquare agreed to pay $200,000 towards the costs of the Enforcement staff's investigation and the former CEO agreed to pay an administrative penalty of $1 million and $50,000 for costs. The former CEO also agreed to resign his position and to a three-year director and officer ban.
In addition, the company agreed to permanently maintain a whistleblower program reporting directly to an independent committee of the company's board that includes mechanisms for anonymous reporting, protections for reprisal, independent, broadly communicated and accessible reporting channels and external reporting to the OSC and other regulatory authorities where appropriate.
In its decision approving the settlement, the OSC suggested that the sanctions were less severe than they otherwise might have been due to the novel circumstances of the case.
The Coinsquare case signals that the OSC will not hesitate to bring an enforcement action under the whistleblower reprisal rules in cases where a company has not appropriately handled the employment situation of a whistleblower.1 In the Coinsquare settlement agreement, the OSC made clear that it viewed the reprisal as stemming from the "tone from the top" at Coinsquare.
In the wake of the Coinsquare settlement, a company that receives an internal whistleblower report should ensure that it does not do or say anything that the whistleblowing employee could perceive as meaning his or her employment will be affected because of the report. To the contrary, upon receiving a whistleblower report, the company should communicate to the employee that it has a zero-tolerance policy for any retaliation or reprisal against whistleblowers.
To that end, the company should instruct other employees who are already aware of the whistleblower report to treat the whistleblowing employee as if he or she had not made the report. The company should designate an individual within the company (typically in the legal or HR function) to actively supervise the employment situation of the employee going forward to ensure the instruction is being followed. If the whistleblower asks that the company maintain the confidentiality of his or her report, the designated individual should closely monitor that none of the employee's colleagues speculate about the identity of the whistleblower as such speculation could be perceived by the employee as intimidation.
Where a company has investigated an internal whistleblower report and concluded that it is without merit, the company should clearly document the basis for its conclusion and consider explaining the results of its investigation to the employee to provide him or her with comfort about the subject of the report. If the company is considering terminating the employee for reasons unrelated to the report, it is important that the company have extensive documentation about the pre-existing basis for termination and seek expert legal advice about the risks involved in terminating the employee before doing so.
Companies that receive an internal whistleblower complaint may also want to consult our practical step-by-step guide for handing such complaints.
1 In addition to the Securities Act rules, it is an offence under the Criminal Code to take an adverse employment measure against an external whistleblower in certain circumstances. Specifically, section 425.1 of the Criminal Code makes it an offence to take such action against an employee with the intent to prevent the employee from reporting externally to law enforcement or regulators, or with the intent to retaliate against an employee who has already done so.
Originally published by Borden Ladner, August 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.