Thursday, February 21, 2008

Haven for Crooks

Canada's Shame; National regulator would be better than a cacophony of agencies

By Alex Roslin
Business Observer
The Montreal Gazette
Thursday, February 21, 2008

When Norbourg fraud mastermind Vincent Lacroix was sentenced to 12 years less a day and fined $255,000 by a Quebec Court judge in January, a packed courtroom burst into applause. One woman was quoted in The Gazette as shouting: "We need more judges like you!"

The consensus was that a great victory had been scored for the little guy who is so often pick-pocketed in boiler room scams. Here, finally, was a white-collar crook who didn't get away.

But Lacroix is just one guy, however bad. A recent study found more than one million Canadians have lost money to some kind of investment fraud. How many of them do you think will ever see some justice?

We Canadians like to think of ourselves as a kindly, polite sort of people, much less beholden to the predatory, unrestrained capitalism of the United States.

Remember the book American Psycho, about a Wall St. investment banker-turned-serial killer who axes one victim while listening to Huey Lewis & the News? I think that neatly sums up how a good number of people feel about U.S.-style capitalism.

A fascinating investigation in the January issue of Canadian Lawyer magazine shows how our more genteel Canadian-style market is actually a haven for criminals.

Bruce Livesey, a former associate producer at the CBC's the fifth estate, unearthed a 2006 U.S. academic study that compared records at the leading securities watchdogs in both countries - the Ontario Securities Commission and the U.S. Securities and Exchange Commission.

Turns out the SEC prosecutes 10 times more cases for securities violations and 20 times more insider trading violations than the OSC, when adjusted for the size of the stock market.

"If Bernie Ebbers had started WorldCom in Alberta, where he grew up, instead of Mississippi, he would likely be living in quiet retirement instead of wearing an orange jumpsuit courtesy of the U.S. prison system," Livesey writes.

The SEC resolves cases faster than the OSC. Meanwhile, its insider trading fines are 17 times higher. The study found the OSC didn't file even one case for insider trading between 1997 and 2000. The SEC filed 110.

A second investigation into the OSC by the Toronto Star in January found more reason for alarm. The series cited a study that found 33 of 52 large Canadian mergers last year showed signs of aberrant trading just before the mergers were publicly announced.

I can see it now. Bret Easton Ellis writes an even more horrifying sequel called Canadian Psycho, in which the lead character bludgeons his victims with a hockey stick in his Toronto Harbourfront condo while eating a Tim Horton's doughnut and listening to Luba. Quick, get my agent.

What's behind this Canadian white-collar crime spree? Do our regulators lack resources to go after these bozos? Not really. When adjusted for GDP and population, Canadian regulators have higher-than-average budgets compared with international norms.

Which system would work better? One that has a) a single national securities regulator, or b) 13 separate regulators for each province and territory. Give yourself a star if you chose A.

Canada's nutbar cacophony of agencies overseeing markets includes not only regulators for the likes of P.E.I. and the Yukon, but 17 market watchdogs like the RCMP and Financial Consumer Agency of Canada. Think of the greenhouse gas emissions when they all show up at international conferences.

No wonder federal Finance Minister Jim Flaherty calls our market regulatory system an "embarrassment." His solution is reviving a decades-only dream of creating a single national securities regulator, like the u.s. SEC.

Not a bad plan, but, as Livesey points out, the success of any new body is entirely dependent on a level of political will that is presently lacking across the board. Why? A big reason is the revolving door for personnel between the regulatory agencies and the firms they oversee.

"They're all part of the same milieu. There's just no way they're going to be tough," Livesey says. One lawyer cited in his story says: "It's easy to go after people in the boiler room who are ripping off retirees, but they don't have any power."

There's a more fundamental question. Look at what's happening in the U.S. these days. They've got a tougher securities regulator, but that

didn't help prevent the fraud behind the $400-billion subprime disaster.

The FBI is investigating, but it's only been a few years since the last cycle of dot-com-era market fraud, after which the SEC was supposed to have cleaned up Wall St. The fact is this is how markets work - fuelled by alternating

cycles of fraud and penitence, riches and ruin.

As financial companies mount their annual push for you to load up on RRSPs, spare a thought for Vincent Lacroix and his victims. But also remember, your financial adviser need not be a fraud artist for you to lose your shirt.

Alex Roslin is a journalist and active trader. His market blog is at