Bre-X Revisited - Justice System & Enforcement Failings

Several years ago two small investors took BMO Nesbitt Burns to court over Bre-X. Bre-X was billed as "Scam of the Century" and I predicted the trial would be media event of the century. The first day of the trial two Ottawa evening papers covered the trial. Fascinating reading.

The next day nothing appeared in the Toronto papers and then nothing further appeared in the Ottawa papers. The trial continued unreported. Who was responsible for the cover-up?

Most Canadians suffered some degree of loss from Bre-X through direct ownership or mutual funds, yet the media was strangely silent.

Eventually an out of court settlement was reached and the caper covered up.

A decade late the trial of Felderhof is getting more coverage. He is small fry. The banks however are not small fry. When RBC pays $2.6 billion to settle with U.S. regulators to cover up their wrongdoing, one can only wonder.

Now the OSC is concluding its case against Felderhoff. The charge is insider trading. Big Deal.

The Bre-X caper is fraud. This is criminal. The chief geologist doesn't know? He loots $90 million and investors are left holding the bag. Just who is providing investor protection. Ah yes, the Investment Dealers Association.

Canada's justice system and securities enforcement are a joke!

Felderhof faces a maximum of two years in jail and a fine that will pale in significance to the millions he made from this fraud.

At least they could do would be hand him a severe sentence a la Coffin. They could pair him with Coffin as a duo on a speaking tour to talk about ethics to business students. That would certainly teach them a lesson and encourage the next generation of financial predators.

We need to speak out about our inadequate enforcement that fails to deter crime, and our justice system that seems to reward white collar criminals by allowing them "to pay their debt to society" and enjoy the proceeds of their crimes while the victims are left to try to pick up the pieces of their shattered hopes and dreams.

These white collar predators are destroying the wealth and lives of small investors.

Bring back capital punishment and hang them.

Portus Bankruptcy?

Wojtek Dabrowski writes Portus "allegedly used $95.4-million of investors' money to pay its expense, referral fees to brokers and to fund the redemptions of other investors - similar to the notorious schemes operated by Charles Ponzi."

Portus had some 30,000 client accounts with over $800 million invested.

The regulators shut Portus down in February 2005. The RCMP is investigating and KPMG are reporting. KPMG suggests that bankruptcy should be declared.

It seems that our regulatory system is unable to prevent widespread wrongdoing and fraud from happening. The problem investors face is that there is no Authority that provides investor protection. Investors are left at the mercy of an industry that is robbing many investors of their life savings.

Victims only recourse is civil litigation, but that does not help if there are no resources to recover. There must be an investment fund to protect investors that is administered by an Authority with a mandate for investor protection.

At the same time, it seems that the investment industry has been able to get limitation periods reduced in several provinces, including Ontario, from six years to two years. This means that if victims are unable to start a civil action within two years of the action that caused the loss they will be statute barred from taking action.

Victims of Portus will have to move quickly if they plan to take civil action.

Crime and Punishment?

In the U.S. :

Justice Michael Obus sentenced former Tyco Chief Executive Dennis Kozlowski to 25 years in prison for larceny and defrauding investors.

Former WorldCom chairman Bernie Ebbers was sentenced to 25 years in prison for accounting fraud.

Adelphi Communications founder John Rigas was sentenced to 15 years in federal prison for fraud at the age of 80.

In Canada:

Paul Coffin, the first person charged in the $250 million federal sponsorship scandal pleaded guilty to 15 fraud counts and was sentenced to speak on ethics to business students!

What message are we trying to give to the next generation of business leaders?

You can be dishonest, live high by defrauding others, and the worst that can happen is you can be sent on speaking engagements!

As long as white collar crime pays in Canada it will continue unabated.