Why white-collar crime team fizzled

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Madhavi Acharya-Tom Yew – Dec 2, 2007

Launched four years ago to clean up markets, police squad is now best known for its failures.

It was designed for show, an in-your-face warning in the heart of Canada's financial centre. Two dozen police, followed by a swarm of reporters and television crews, swept into the Bank of Nova Scotia at King and Bay armed with a search warrant. The bank itself was not under suspicion. It had been caught up in a probe surrounding another company, Royal Group Technologies Ltd.

It was the first operation of IMET – the Integrated Market Enforcement Team – set up 14 months earlier to tackle white collar crime in Canada. The idea was to make headlines.

"They're sending a message to investors ... `We're going to clean up the markets and you can depend on us,'" Richard Powers, professor at the University of Toronto's Rotman School of Management, said at the time.

Yet after four years of operation, only five charges have been laid – one in Vancouver and four in Toronto. In the Vancouver case, broker Kevin Steele was jailed six years for bilking investors out of $10.3 million.

The four Toronto cases – accounting fraud, stock market manipulation, theft and fraud over $5,000 – are still working their way through the courts. IMET's investigation into Royal Group is continuing. To date, no charges have been filed.

Today when the enforcement team makes the news, it's usually because of its dismal track record. Instead of reaping glory, the vaunted police squad is becoming a public whipping boy in the debate about Canada's perceived tendency to let white-collar crime go unpunished.

Even the man in charge admits to shortcomings.

"There's a lot of stakeholders unhappy and I think justifiably so," said John Sliter, the head of IMET in Ottawa.

But he's quick to deflect blame: "Yes, justice is taking a long time, but I don't want to put the full responsibility for that on [IMET's] shoulders. In that sense, it's the Canadian system."

Interviews with former officers and other observers show IMET started with much hope, but soon felt the burden of a weighty RCMP bureaucracy and territorial bickering.

Former team leaders in Toronto and Vancouver talk of their frustration and "disappointment across all boundaries." Investigators complain of legal roadblocks in increasingly complicated cases, leading to delays in investigations and charges being laid.

The federal government commissioned a report last May to look into IMET's failings. It's recommendations are expected to be released this week.

The Integrated Market Enforcement Team was formed in 2003, when stock markets and regulators around the world were still smarting from the effects of U.S. scandals like Enron and WorldCom.

Canada's own high-profile debacles – Bre-X Minerals Ltd. and YBM Magnex Ltd.– were still fresh, and the federal government wanted to set investors' minds at ease. For the first time, an elite team of regulators, police and legal experts was being brought together to investigate and prosecute big stock market crimes.

"Helping protect Canadian capital markets, that's what this announcement is all about," Canada's solicitor-general, Wayne Easter, told reporters at the time.

Ottawa dedicated $120 million over five years to set up nine units across Canada, in Vancouver, Calgary, Toronto and Montreal.

The Toronto units were to be led by Detective Inspector Craig Hannaford. A veteran white-collar crime officer, Hannaford headed up the RCMP's probe of Livent, the Toronto theatre company that imploded under charges that Garth Drabinsky and other former principals had falsified corporate statements. A trial is expected to begin in the spring.

Setting up the teams took upwards of a year, a complex process that involved getting secure sites and staff. Territorial issues emerged early on.

Prosecutors from the federal department of justice were deemed essential to help guide the complex investigations.

According to an internal planning document, obtained by Canadian Press in March, 2006, federal lawyers were needed to give "advice and assistance regarding aspects such as wiretap applications, search warrants and disclosure advice to the IMETS during the course of investigations."

The justice department had been given $17 million to make the lawyers available, but it initially failed to do so.

"We are at a point in our implementation where we are in dire need of legal advisers to work alongside of our investigators. They were to form an integral part of our integrated teams," Sliter wrote to the department almost a year after the launch. Delays, as well as the lingering feeling that neither provincial nor federal prosecutors were willing to step up, hurt morale, said Bill Majcher, former head of IMET's Vancouver team.

"For the better part of the time I was there, we didn't have either the provincial or federal Crown (prosecutor) willing to take responsibility for dealing with us. We were already running, and then things start falling apart ..." Today, lawyers from the department are assigned to IMET teams in Toronto, Vancouver, Calgary and Montreal.

Despite the program's well-funded start, it could be difficult to get beyond established RCMP procedures when it came to hiring and pay, former insiders say.

In Toronto, Hannaford wanted a stock market expert on the team, a career Bay Streeter who knew the big players, the market mechanics, and what was ordinary trading activity and what was not – credentials, he knew, would command a six-figure salary. The government's standard checklist for qualifications, however, put the pay scale in the middle five digits.

"We just couldn't get the classification process in the government to recognize that this person had to be paid fairly well," Hannaford said.

Another frustration was the RCMP's habit of pulling officers off projects when it was short-staffed in other areas. Need more security for visiting world leaders? Get an officer from IMET. A big drug or immigration case needs more manpower? IMET.

IMET officers also complain that the Canadian legal system is too easily bogged down by procedural sideshows such as stringent disclosure requirements – the prosecutor's legal responsibility to give the defence access to all evidence it has gathered during an investigation.

In a complicated stock market fraud or investment scam, disclosure can amount to hundreds of thousands of documents that have to be gathered, sorted, organized, and copied so they can be given over to the defendant and his lawyers as soon as charges are laid in a case.

By some estimates, 30 per cent of the cost of an investigation goes to cataloguing, tracking, and duplicating information to make sure copies will be available for the defence.

Even so, prosecutors may only rely on 100 documents or so to present their case; the defence, about the same when putting alternate theories forward. "The rest is just sort of filler," says Majcher, "but if somehow one box of nothing didn't get stored properly, in many cases that's the basis for having a case tossed."

Another hurdle, they say, is the issue of compelling witnesses to speak to investigators.

In the U.S., prosecutors can issue subpoenas, forcing witnesses to provide testimony before a grand jury once charges are laid.

Under Canadian law, members of the public are under no obligation to speak to law enforcement officers. When trying to piece together a securities fraud case, the accountants, consultants, and other office staff who may have information invariably consult their lawyers, then tell investigators they don't want to give a statement.

If officers can convince a witness to talk to them, it's strictly voluntary. "It's basically, we're totally open to their schedule and their lawyer's schedule," Hannaford said.

To add insult to injury, under the Mutual Legal Assistance Treaty, authorities from other countries who come to Canada to conduct investigations can legally compel witnesses to provide statements. "So you have a funny situation where foreign law enforcement have more power to collect evidence from witnesses in Canada than our own domestic police," Hannaford said.

All this leads to investigations dragging on, and on. Add historically light sentences into the mix, and it's a recipe for plummeting morale.

In the meantime, white collar crime in Canada festers – along with a growing reputation for being soft on stock market and financial crime. Majcher saw the devastating effect Canada's disclosure law can have on international investigations first-hand in 2002 when he went undercover as part of a joint RCMP-FBI sting that nabbed two corrupt Canadian lawyers.

The sting included Jack Purdy, a Canadian stock promoter who was charged, but later acquitted of money laundering.

Even though the charges were filed in Florida, Purdy's lawyer was able to convince a judge that the RCMP should be forced to turn over all its documents in the case, including those that actually came from the FBI.

"The defence lawyer says he's a Canadian citizen and protected by the Charter,'" Majcher recalled. " `He's entitled to everything in that (RCMP) file, including FBI intelligence reports, their operational plans, and other notes.'"

The judge agreed, and the FBI officers involved were completely furious, threatening to cut Canadian law enforcement out of subsequent investigations.

Majcher says that now he's on the investment side, he's a managing director with Hong Kong-based investment bank Baron Group, he sees the impact on Canada's reputation in a new light.

"I remember meeting a fellow in New York. He said, `Bill, what's your area code. I said 604. He said, `Oh, that's one of the area codes that I don't answer.'"

Original article on Toronto Star website