By Stanley Tromp, National Post, 06 Feb 2012
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.