When it comes to protecting its citizens from white-collar crime and predatory practices within the investment industry, Canada resembles a third-world country.
Although most Canadians are oblivious to this situation, sophisticated players know all too well and are leery of investing here – while fraudsters and scam artists are drawn to Canada by the attraction of weak laws and virtually non-existent enforcement.
Regulatory Oversight
Canada is the only developed country without a national securities regulator: instead we have a patchwork of agencies which are not just ineffective but actually help the industry to cheat. These agencies hand out hundreds of ‘exemptions’ each year, secretly authorizing companies to ignore securities laws, for example by permitting them to dump toxic assets into their own mutual funds. Such legalized scams are often worth hundreds of millions of dollars to the firms concerned – all quietly taken from the pockets of investors.
In the USA the Securities Exchange Commission (SEC) has been harshly criticized for being ineffective. Yet Canada’s largest regulator, the Ontario Securities Commission (OSC), is apparently far worse. When scaled for stock market size, the OSC prosecutes ten times fewer securities law violations per firm, and twenty times fewer insider trading violations than the SEC. Moreover, the OSC levies fines that are seventeen times smaller per insider trading case.
Given such performance it’s hard to fathom why the head of the OSC is paid more than three times as much his counterpart at the SEC. In fact, more than 50 people at the OSC earn more than the SEC chairman, although the SEC is responsible for regulating the capital markets for all of the U.S., while the OSC only has to deal with Ontario. Perhaps there is a way to explain this: the OSC is funded by the industry, not by government, and perhaps its people are generously rewarded for their stellar work in protecting the industry.
Advisors vs. Salespeople
In Canada, nearly all so-called investment ‘advisors’ are actually salespeople on commission with little knowledge or training who can maximize their earnings in countless ways, mostly to the detriment of their clients. The most common practice is simply to steer clients to investments that pay the highest sales commissions. Whether or not they perform, these products tend to charge higher management fees of 2-3%. This may not sound like much, but such charges have a dramatic impact: a fee increase of 2% will halve the value of investor’s nest-egg by the time they are ready to retire.
More seriously, some brokers may ‘churn’ investments by buying and selling furiously to generate commissions, sometimes until the client’s money is all gone. Or they may move their clients’ investments from high-performing third-party funds into their employer’s under-performing funds, thus multiplying their own commission – perhaps tenfold. A few are even more straightforward: rather than making a pretence of investing clients’ money wisely, they simply steal it.
In Canada our so-called regulators rarely take any action against brokers or their employers, even after the most brazen frauds against investors. In the rare cases when brokers are fined the self-regulation bodies usually have no power to collect, and when they do collect they keep the money for themselves: the cheated investors almost never receive restitution. It’s like the police telling you they recovered your stolen car – but they are going to keep it.
Law Enforcement
As for the police, most of the time they seem to turn a blind eye, and at worst their inaction may help provide cover for wrongdoers. The RCMP’s white-collar crime unit, the Integrated Market Enforcement Team (IMET) has investment industry representation on the committee that advises what cases to investigate. Unsurprisingly, IMET almost never attempts to investigate complaints of companies defrauding investors.
Yet IMET acted quickly and decisively when a firm found itself a victim (rather than a beneficiary) of a scam: in March 2007 career fraudster Michael Lee Mitton pleaded guilty to two charges related to a stock manipulation scheme that harmed HSBC (as well as a host of investors). Astonishingly, this was IMET’s first and only success during its first five years of operation. During the same period the equivalent U.S. anti-fraud team secured more than 1,200 convictions – and not just of small-fry, but of top-ranking industry executives: Presidents, CEOs, vice-presidents, CFOs and corporate counsel.
While the RCMP fumbles, Ponzi scheme operators like Earl Jones are allowed to gouge investors for years while warnings are ignored: police make arrests only after the scheme has collapsed. Canadian fraudsters like Conrad Black are caught and prosecuted by the U.S. authorities, while the Canadian authorities lag behind, taking action belatedly or not at all. Even after Bre-X, the largest resource securities fraud in history and a huge blot on our international reputation, Canadian authorities did not manage to jail a single person.
Seeking Remedies In The Courts
When cheated investors get no help from regulators or police, some resort to taking the offending company to court. This rarely helps because the firms can use their vast wealth and legal muscle to crush the plaintiffs (whose finances have already been depleted by the fraud) – without regard for ethics or fairness. And they can stifle negative publicity about their actions by forcing the victims to sign gag orders in order to get back some of their money.
A prime example of such behaviour is the case of Mr. Markarian, an elderly retired businessman who was the victim of fraud committed by one of CIBC Wood Gundy’s brokers. This broker preyed on numerous investors while racking up millions in commissions for himself and his bosses. To help cover his trail he tricked Markarian into signing papers that guaranteed the losses of other investors. When the broker confessed these misdeeds to his bosses, they immediately exercised the fraudulent guarantee, emptying Markarian’s account and appropriating the proceeds.
Receiving no satisfaction from the regulators, Markarian and his wife (then in their late 70’s) sued CIBC Wood Gundy, but the company fought the case tooth and nail for years in an attempt to keep the money. In the end the judge ruled against CIBC, awarded double punitive damages of $1.5 million – the highest in Canadian history – and excoriated the company’s behaviour.
Neither the fine nor the scathing criticism had the slightest impact. The broker was fined but refused to pay, no-one was every prosecuted, everyone involved got to keep the huge commissions they had made from the fraud, and the senior CIBC manager responsible for this fiasco was promoted into the very top echelons of the company. The Markarian story is required reading for anyone who wants to understand how the industry typically responds when forced to choose between ethical behaviour and profits, between protecting its own customers and protecting executive bonuses.
The Bottom Line
It’s unfortunate that most Canadians are unaware of how vulnerable they are when they trustingly deposit their life savings in investment accounts, even with well-known institutions, or seek guidance from so-called advisors. But it is a national disgrace that successive governments, while fully aware of the problems, have turned their backs on small investors rather than risk ruffling the feathers of a powerful and predatory industry.
More information
Canada One Of Worst Countries For White-Collar Crime
The Incredible True Story of Mr. Markarian
Book review: No-One Would Listen. (About Bernie Madoff's Ponzi scheme.)
Book review: The Best Way To Rob A Bank Is To Own One