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Follow the money, distantly

Regulators emphasize innovation and deterrence as financial sanctions fail

by Greg Klein

It was a momentous week for Canadian regulators, seemingly. In a ruling on “one of the largest corporate frauds in Canadian history,” the Ontario Securities Commission slammed Sino-Forest scamsters with over $81 million in sanctions. One day later the Canadian Securities Administrators announced a nationwide total last year of nearly $70 million in penalties and a roughly equal amount in payback orders. All that sounds impressive, but a troubling question remains: How much—or, more accurately, how little—will ever be collected?
Regulators emphasize innovation and deterrence as financial sanctions fail

TSX-listed Sino-Forest’s 2012 crash wiped out $6 billion of investors’ money. Six years of OSC reviews expanded on short seller Muddy Waters’ exposé to conclude that “the complexity, scale and duration of the fraud are simply stunning.” This week the commission imposed disgorgements, penalties and costs on a quartet of Chinese executives totalling $81.4 million, with Gang of Four ringleader Allen Chan responsible for $67.3 million.

In a sense, the OSC showed leniency. “We do not generally apply our penalties to each misstatement or instance of fraudulent conduct occurring even over an extended period of time, as here,” the commission stated. “If that approach were taken, the sanctions sought by staff would be multiplied many times.”

But whether the amounts could be higher would seem a moot point without collection. In an e-mailed response to ResourceClips.com inquiries, OSC public affairs manager Kristen Rose stated: “In addition to the challenges inherent in collecting sanctions generally, there is added difficulty in matters where respondents are outside of North America, and there is uncertainty as to whether there are recoverable assets. That said, as with any such matter, the OSC will make every effort to identify recoverable assets.”

In addition to the challenges inherent in collecting sanctions generally, there is added difficulty in matters where respondents are outside of North America, and there is uncertainty as to whether there are recoverable assets. That said, as with any such matter, the OSC will make every effort to identify recoverable assets.
—Kristen Rose,
OSC public affairs manager

She added that Chan faces a civil judgement of US$2.6 billion, as well as a class action suit. Wronged investors would get priority over OSC penalties.

This week’s annual enforcement report from the CSA—the umbrella group for securities commissions in 13 jurisdictions—shows $69.4 million in penalties imposed nationwide during the last calendar year, along with another $68.6 million in restitution, compensation and disgorgement orders. The report doesn’t say how much was collected. CSA chairperson Louis Morisset doesn’t have the figures either, not even for previous years. But he emphasizes that collection efforts continue.

“Those sanctions don’t always align with a person or company’s ability to pay,” he tells ResourceClips.com. “I can certainly assure you that we’re deploying all efforts to collect those monetary sanctions.”

Among the barriers to collection are bankruptcy, competing claims, lack of recoverable assets or offshore residence.

Nevertheless the performance of securities commissions, especially in British Columbia and Ontario, has come under media scrutiny. Beginning late last year, a series of Postmedia stories by Gordon Hoekstra detailed several cases of B.C. Securities Commission sanctions remaining unenforced, despite offenders holding significant assets. Over the last decade the BCSC collected less than 2% of $510 million in fines and payback orders, while the OSC enforced about 18% of its penalties, Hoekstra found.

In December Globe and Mail reporters Grant Robertson and Tom Cardoso released their study of 30 years of regulatory records, finding scams with higher dollar values than the resulting penalties, which often went unenforced anyway.

Morisset declined to comment on the stories, referring only to a December CSA statement that took issue with some aspects of the G&M reports and emphasized the role of police in financial crime investigations.

Still, media coverage seemed to make an impact.

“Immediately after the Postmedia investigation, the BCSC filed at least 10 writs of seizure and sale in B.C. Supreme Court for financial fraudsters owing nearly $70 million in penalties, and renewed three enforcement orders,” Hoekstra reported last month. “Also following the investigation, B.C. Finance Minister Carole James ordered the BCSC to improve its collection record and called for new tools and modernization of the Securities Act to improve collection.”
Regulators emphasize innovation and deterrence as financial sanctions fail

CSA chairperson Louis Morisset:
“There is an array of means and we’re deploying
everything available in the circumstances
to ensure deterrence.” (Photo: CSA)

As the CSA report shows, regulators don’t just go after money. Last year courts handed out prison terms totalling 33 years for offences under provincial securities legislation, with sentences for the 17 individuals ranging from 30 days to five years. Criminal Code cases handled by regulators brought eight sentences totalling 14 years.

Six of the jailbirds were repeat offenders. But a low overall recidivism rate of about 4% shows the power of deterrence, Morisset says. And, regardless of whether it’s responding to media criticism about enforcement, the CSA emphasizes the importance of deterrence.

It’s “also achieved by other means like revoking, suspending or imposing restrictions on registration, imposing bans, freezing accounts,” explains Morisset. “There is an array of means and we’re deploying everything available in the circumstances to ensure deterrence.”

Last month the OSC stated its two-year-old whistleblower program brought 11 no-contest settlements, returning more than $368 million to investors.

Beyond that the CSA plays up its “innovative” approaches, to binary options for example. In addition to a public awareness campaign, the group approached Twitter, Facebook, Google, Apple, Visa and MasterCard. “We made them aware of the issues surrounding binary options and that they were used to a certain extent to facilitate fraud, and I think our approach was very innovative and effective in preventing fraudsters from reaching their targets,” says Morisset.

Also innovative was an outright ban on binary options. “It was the first time in Canada that we banned a product, giving a very strong message that these are toxic products.”

He says new approaches to fraud could expand the pool of potential victims, drawing in millennials with little or no investment experience. CSA publicity campaigns encourage awareness of the cryptocurrency world.

Through its Regulatory Sandbox, the CSA tries to streamline the entry of innovative fintech firms into the regulatory world. The CSA’s new Market Analysis Platform will use updated surveillance technology to monitor manipulation and insider trading. Canada’s first Pump and Dump Summit, held in Calgary last September, brought together four Canadian securities commissions and the RCMP, along with the U.S. SEC and FBI. Across Canada and abroad, inter-jurisdictional collaboration helps regulators join forces, says Morisset.

“We are innovative and we have to be, because the markets are innovative.”

But when the regulators fail, others might step in—with fraudsters on one side and, on the other, maybe opportunistic vigilantes like Muddy Waters.

http://resourceclips.com/2018/07/13/follow-the-money-distantly/