By Stanley Tromp, National Post, 06 Feb 2012
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Canadian investors suffer more from market fraud that occurs on
other nations' stock exchanges
than in Canadian ones.
These were the findings of Project
Stockholder, a June 2011 internal report by the RCMP criminal intelligence
branch that was obtained by the Financial
Post under the Access to Information Act, although some sections were withheld
for security reasons.
It is the first and only
intelligence overview of capital market fraud in Canada since the RCMP
Integrated Market Enforcement Team, or IMET, was created in 2003.
Despite the recent attention directed
at foreign companies who
reportedly list on Canadian
exchanges to take improper
advantage of this country's capital markets, it is foreign exchanges
where Canada's home-grown schemers prefer
to make and launder their ill-gotten gains, the report said.
The majority of criminal securities
transactions involving Canadian-based
companies and criminals take place on loosely regulated exchanges in the United States and Germany.
While illicit activity has been
commonly observed on the Over the Counter bulletin boards and Pink Sheets in
the past, there seems to be a recent move towards the Frankfurt Stock Exchange. As an example, the
report cited the case of former Toronto stockbroker George Georgiou, who was
sentenced to 25 years in prison for securities fraud by a Philadelphia judge in
2010 for his role in a multi-million-dollar stock scam.
The court found Georgiou had
manipulated the stock values of Hydrogen Hybrid Technologies Inc., incorporated
in Nevada with its headquarters in Ontario, and which was listed on
international OTC markets, Pink Sheets and the Frankfurt Exchange.
More companies are seeking
quotations on the Frankfurt exchange
because of its lack of oversight and reporting requirements.
This exchange, which lists 300 admitted trading member
firms, is divided into four tiers. The report focuses on the First Quotation
Board (FQB) segment of the exchange
because it has no transparency rules.
The Frankfurt website candidly
states: "Investors must be aware that there is less information available
and that there are high risks." Here, there is "free trading,"
meaning no restrictions on the sale of securities, not even for insiders.
The RCMP noted that companies that
conduct business in Canada, but incorporate themselves in Nevada and Delaware (and
to a less extent Florida and Wyoming) are at higher risk, due to their secrecy
and lesser regulation, especially for shell companies.
It also warned of the potential for
fraud in Canada's new carbon credit trading market.
"Of the occurrences in which
the citizenship of victims was identified, Canadians were affected by 90% of occurrences,"
the report said. In contrast, likely because of stricter regulation and
reporting rules, only about one-third of the occurrences the RMCP studied
related to Canadian exchanges, namely the TSX, TSX-V,
Canadian National Stock Exchange (CNSX), and the Montreal
Exchange. The senior
capital market in Canada, the TSX, was linked to just 14% of these cases.
On the CNSX, however, the RCMP
warned that its streamlined reporting and listing requirements "can create
a vulnerability to manipulation and illicit market activity," and false
information has been used to defraud investors of a CNSX-listed company.
Regarding the Canadian victims of market
offenses, their number ranged from a few individual investors up to 3,000
people and entire corporations, and losses ranged from $11,000 to $180-million,
with an average of $29-million.
Vancouver securities lawyer Jonathan
Reilly told the Post he is not surprised by the RCMP findings. He said that
cross-border fraud might be combated by enforcement under the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act.
MP Scott Brison,
Liberal party finance critic, said "When we sign trade agreements, those
can be opportunities to create transnational standards in capital market
regulation and enforcement, which are key to fighting that kind of fraud."
Both Mr. Reilly and Mr. Brison said the creation of a national securities regulator
might reduce fraud by making it more attractive for Canadians to invest at home rather than in riskier foreign exchanges.
The RCMP also warned Canada needs to
toughen its laws to regulative the OTC derivatives markets to prevent harm to
the Canadian economy, of
the sort that helped trigger the 2008 American financial meltdown.
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