Is ASC on witch hunt?

From Canadian Business

Alberta Securities Commission says it had just cause to fire employee
April 22, 2005
By DARCY HENTON

EDMONTON (CP) - The Alberta Securities Commission said Friday it can't be accused of firing a whistle-blower because it doesn't know who complained that there were improprieties at the provincial agency. Commission lawyer Brett Code said Grahame Newton was fired Thursday for cause and not for raising concerns about enforcement practices and the working environment at the offices of the securities regulator.

Code said Newton was dismissed because he tried to block a KPMG computer systems audit and later admitted that he had intercepted e-mails and passed them on to part-time commissioners who adjudicate Alberta Securities Act violations.

"Mr. Newton responded unco-operatively and . . . somewhat belligerently," Newton said. "His responsibility as a director was to assist KPMG in undertaking the investigation into the security and the confidentiality of the information system.

"I'm told that rather than do that he did the opposite," Code said. "He tried to stop the investigation and so basically refused to fulfil his duties."

Code denied allegations by Opposition Liberal Leader Kevin Taft that the ASC management was on a witch hunt to find out who had complained anonymously that their bosses were interfering with securities investigations.

"Whatever Mr. Taft is saying, we don't have the information to make that connection," Code said. "This person is not known to me or anyone else involved as a whistle-blower. He didn't admit to that. He didn't tell them: 'Listen, I am one of the whistle-blowers. You can't touch me.' "

A recent amendment to the Criminal Code makes it an offence - punishable by up to five years in prison - to try to muzzle or retaliate against whistle-blowers.

Code said the ASC can't be accused of doing that.

"If the violation requires that we're punishing or penalizing someone for whistle-blowing, I don't think that's what the commissioners have done."

Newton said Thursday he received a letter from the ASC advising him that he had been terminated. He has not said why he was let go.

He said he will seek legal advice before taking any action.

Investor advocate Diane Urquhart said Friday that the firing of Newton in the midst of the turmoil at the securities commission will not go over well with the investing public.

"If in fact someone has had a remedial termination because of an allegation of providing information . . . it's unacceptable and the investing public should be very concerned," she said.
Urquhart was skeptical of the timing of the KPMG audit.

"It's entirely reasonable for a forensic audit to occur . . . but right in the middle of a human-resources fiasco makes no sense from a management point of view. It's oil on a fire."

Newton was fired the same day Alberta Finance Minister Shirley McClellan told the legislature there was no witch hunt underway.

The firing appeared to surprise McClellan.

"The minister is very concerned about what happened and she is currently considering her options," said Tracy Balash, McClellan's communications director.

Balash said the minister would offer no further comment on the issue until she had a chance to talk with officials at the commission.

Taft reiterated his call Friday for the government to immediately launch an independent investigation into the matter to protect other ASC employees from losing their jobs.

"This witch hunt has already claimed its first victim and I fear it is not going to be the last," he said.

He said the commission's decision to hire KPMG to go through employees' computer hard drives is not protecting investors.

"If public confidence is lost in the Alberta Securities Commission, we'll see the value of companies decline and the economy of Alberta permanently damaged. In the end, that's my greatest fear."

Code said no more dismissals are expected.

The Alberta Securities Commission is still responsible for the Alberta Securities Act even though the Alberta Stock Exchange merged with the Vancouver Stock Exchange six years ago.

It is responsible for regulating all publicly traded companies registered in Alberta, including most of Canada's biggest oil and gas companies along with WestJet Airlines and CP Rail.

Last week, McClellan directed the provincial auditor general to investigate the ASC after a number of public complaints were made about the commission's enforcement of securities violations, and to issue a report by July.

McClellan said Wednesday that although an earlier probe by Calgary lawyer Perry Mack had cleared commission officials of any wrongdoing, the auditor general's review was needed to clear the air and help restore confidence in the agency.

Auditor general Fred Dunn said he will go back through the ASC case files as least three years and that he will look at management decisions.

In Mack's confidential probe, which McClellan has refused to release, commission staff reportedly complained that officials interfered with investigations, played favourites, and condoned a sexist and demeaning work atmosphere.

McClellan said that while Mack discovered some personnel issues, he found no evidence of regulatory interference.

AG PROBE - Alberta Securities Commission

FROM THE EDMONTON JOURNAL

EDMONTON JOURNAL

Minister asks auditor general to probe ASC
Allegations of misconduct cited by complainants

By DARCY HENTON
The Canadian Press - Wednesday, April 20, 2005

EDMONTON (CP) - In the face of a flood of complaints, Alberta's finance minister has asked the provincial auditor general to investigate the embattled Alberta Securities Commission.Shirley McClellan sent a letter to auditor general Fred Dunn to request the investigation last week, finance department spokeswoman Tracy Balash revealed Tuesday. She said McClellan asked Dunn to report back as soon as possible.

"We would be looking at the process that occurs when there is an enforcement issue and how it is investigated and ensure those processes are being followed and whether or not improvements are required," Balash said.

McClellan had invited Albertans with "actual examples of enforcement issues" to come forward after Liberal leader Kevin Taft earlier this month called for an independent inquiry into the commission.The probe comes in the wake of allegations of misconduct and improprieties in the commission hierarchy.

Stan Buell, president of the Small Investors Protection Association, applauded the decision."I think it is fundamentally important nationally because the ASC is one of the largest security commissions in the country," he said.

Although the Alberta Stock Exchange merged with Vancouver Stock Exchange in March 1999 to form the CDNX Canadian Venture Exchange, the Alberta Securities Commission is still responsible for enforcing the Alberta Securities Act.

Edmonton businessman Jason Cowan, who is suing the commission for its handling of an alleged fraud, had called for the probe in a letter he sent to the minister Tuesday. He was excited by the news that an investigation is already underway.

"If they proceed the way they should proceed, I think everything will come to the surface," he said. "It will end eight years of fighting with a multitude of lawyers when the evidence has always been there."

Cowan claims he and his business partner were swindled out of $2.4 million on the defunct Alberta Stock Exchange in 1997 and are still waiting for action to be taken. Cowan, 68, and business partner Barb Trosin lost the money when they signed over their shares in Northside Minerals International, a company they set up to develop a piece of oilfield equipment.

Another Northside Minerals investor, Moe Siemieniuk, had also urged the minister in an April 7 letter to "investigate this outrageous situation." Siemieniuk, a chartered accountant in Thunder Bay, Ont., said many of his friends and relatives lost everything they invested in the project and neither the provincial regulator nor the police are doing anything about it.

A prototype of a blowout preventer was developed in Thunder Bay and still sits crated in an industrial yard ensnarled in legal tape. Siemieniuk said he found out only recently that Northside Minerals never did have legal possession of the technology."We've all got our money tied up in a company that was trading with no assets and we don't know how that happened and we want it investigated," he said.

James Denzine, of Thorp, Wis., who also invested in Northside, called the Alberta Securities investigation a "sham" and a "coverup" in a letter he sent McClellan last week. He said he and his son lost $35,000 US in Northside when it was the subject of a 1999 cease trading order. "When you get into the securities market you would expect the public would at least be given some protection - that to be allowed to trade on the Alberta Stock Exchange that company would have to go through some type of scrutiny," he said.

McClellan hired Calgary lawyer Perry Mack last January to investigate allegations from current and former securities commission employees that senior officials were interfering with enforcement activities, but his report dismissed the allegations.

Investor advocate Diane Urquhart has criticized that process and called for an independent investigation by a forensic accountant. Urquhart, who also wrote to McClellan April 11, said the situation cries out for creation of a national securities commission with a separate adjudication branch. She said provincial security commissions should be stripped of investigation powers and the RCMP should be given that role.

Urquhart said provincial security commissions as they now function are accountable to no one except the chairman and the finance minister. "When the public makes a complaint, it goes into a black hole."

Former broker Larry Elford, of Lethbridge, Alta., called the Alberta Securities Commission "a dysfunctional organization." He is urging the finance minister to go one step further and immediately call a public inquiry.

Has corruption permeated the Regulators?

April 10, 2005 by e-mail to: drumheller.stettler@assemble.ab.ca

The Hon. Shirley McClellan
Minister of Finance Alberta
#224 Legislative Building
10800 – 97 Avenue
Edmonton, AB, T5K 2B6

Dear Minister McClellan,

Further to our letter dated March 25, 2005, we are writing today to advise you that we fully support the concerns expressed by Diane Urquhart regarding the ASC Commissioners Report in her e-mail to you dated April 10, 2005.

While we would like to have confidence in our provincial securities regulators, recent revelations including the Auditor General's Report, the Gomery Inquiry evidence and the recent allegations against the Alberta Securities Commission do little to inspire trust in the established authorities.

It seems that Elliot Spitzer using a fresh approach to investor protection, with his bureau for investment protection, has blown the lid off widespread wrongdoing and corruption. He was aided by TruthTellers to expose the wrongdoing.

In Canada we are fortunate to have individuals like the Hon. Sheila Fraser and Justice Gomery who are able to pursue the truth. We also have heroines like Ms. Bedard who are prepared to tell the truth despite attempts to intimidate her and destroy her credibility.

Now we have Mr. Jean Brault. Although we do not respect him for his participation in the wrongdoing, we do believe that he is showing courage to come forward and testify when so many others have appeared unwilling to tell the truth and even attempted to make a mockery of the inquiry.

Ms. Urquhart is a very capable and competent young lady who is dedicated to helping to make Canada a better place in which to live and invest. She has taken the time to investigate and expose some of the issues that are the root cause of many of the problems that investors face.

There is need for objective independent oversight of the investment industry and the regulators. Ms. Urquhart has provided knowledgeable comment. We fully support her views on this topic.

Further, we believe it is time that there is an inquiry into our regulatory system. It is no longer acceptable that we simply fiddle with the rules or the existing regulatory structure. There are industry accepted practices of wrongdoing that are costing Canadian taxpayers billions of dollars every year in lost savings.

There is cover-up so the public does not know. It is time to expose what is happening, and to make appropriate changes before Canada becomes entrenched as a nation that harbours corruption.

We trust that you will give Ms. Urquhart's submission your serious consideration and take appropriate action.

Yours truly

Stan I. Buell, P.Eng.President


cc. Hon Ralph Goodale – by e-mail to: goodar@parl.gc.ca
Hon Tony Ianno – by e-mail to: Ianno.T@parl.gc.ca
Hon David L. Emerson – by e-mail to: Minister.Industry@ic.gc.ca
Ms. Diane Urquhart – by e-mail to: urquhart@rogers.com

Gomery Inquiry - Jean Brault

While we do not respect Jean Brault for his past actions we must respect that he has come before Justice Gomery with startling revelations. No real surprise except that someone is speaking out without the usual evasive tactics, refusal to co-operate and mockery that has been displayed by others.

In a letter to the Star on April 9, 2005, Anne Mitchell of Toronto said it very well:
"Come on , Canada. We can do better. Politicians, business people and criminals should not be allowed to grow rich at the expense of the Canadian taxpayer."

Edmonton MP David Kilgour is "disgusted at Gomery findings" according to the Star and "says he may quit". While it is disgusting to see that corruption is rampant in the investment investing and permeating the regulators and now revelations suggest even our Government. There is no surprise. We cannot quit. We must fight for right.

Finally, corruption is beginning to be exposed. Is it because of Spitzer's efforts? Is it because of the new communication via the Internet? Or is it because our morality is beginning to awake?

It really doesn't matter why it's happening, but it is. More and more people are becoming aware and they are disgusted. Next, they need to become enraged. They need to unite and work together to make things change.

We need to change our systems. We need to stop accepting the things we inherently know are wrong. We need to exercise our right to vote. We need to punish those who do wrong. Leaders must be held accountable.

Industry leaders who condone or allow wrongdoing must be punished along with the so-called "rogues". The perpetrators must not be allowed to benefit and escape unscathed. The same applies to our politicians. We must demand leaders who know what is right and what is wrong. We must accept nothing less than the best.

There are more good people than bad people. It is time for the good people to unite and fight for what is right. Voices must be heard. Votes must be counted.

Gomery Inquiry - Cover-Up

Is our Government guilty of cover-up?

Why does it take our friends in the United States to inform us of what is wrong in Canada?

At least some of our journalists try to keep us informed.

The following appeared today.

GOMERY INQUIRY
On-line journal provokes a firestorm

By JANE TABER
Tuesday, April 5, 2005
SENIOR POLITICAL WRITER

OTTAWA -- An unassuming 42-year-old call-centre manager and Star Trek fan from Minneapolis, Minn., has provoked a political firestorm in Canada.
Ed Morrissey -- Captain Ed to his friends -- published on the weekend what no Canadian is allowed to print or broadcast. On his Internet blog, he posted testimony before the Gomery commission that is subject to a publication ban.
Yesterday, after the story of his blogging exploits broke in the Canadian media, Mr. Morrissey saw the traffic on his website increase tenfold as Canadians clicked on to read the testimony from Quebec ad executive Jean Brault.
By midday, 131,000 people had visited the site. In just one hour before lunchtime, he had 26,000 hits and by the end of the day he estimated he was on track for about 300,000 hits, many from Canadians. He averages 22,000 visits a day.
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"There's a lot of people coming to me through Google Canada," Mr. Morrissey said.
"Just taking a quick look here at the last 100 people who were on the site, which at this rate was in the last 10 seconds, there's a lot of Canadian servers on there."
As an American, Mr. Morrissey is not subject to the ban, and his publication of the details of the testimony has made the story accessible to all Canadians.
And he says he didn't go looking for the story. It found his right-wing blog, and he was happy to publish it. Mr. Morrissey, who describes himself as a libertarian, believes strongly in freedom of the press.
"Somebody contacted me through somebody I knew. I read a little bit more about it and then when I got the information I was able to fit it together and write the post."
He wouldn't say who his contact "may or may not be" but it is his understanding that there is someone in the Montreal room where the hearings are taking place who is giving the information to his contact, who is then passing it along to Mr. Morrissey.
Mr. Morrissey is not paying his contact for the information.
His contact could be anyone as the commission hearings are open to the public. Indeed, the Brault testimony is an open secret in political Ottawa. Ask any political staffer or MP and they seem to know some, if not all, of the details of the testimony. The television feed from the commission can be picked up in some Ottawa newsrooms, and other information is being passed through e-mails, transcripts and phone calls.
Political leaders are being kept abreast of the story, with the exception of Bloc Québécois Leader Gilles Duceppe who asked his staff not to tell him anything for fear he will divulge information and run afoul of the ban.
Last week, the NDP dispatched their man, Pierre Ducasse, to the hearings when the publication ban was imposed. He reports the testimony back to the senior staff. Party leader Jack Layton, however, is briefed only on the "gist" of the information, his spokesman, Karl Bélanger, says. Again, it is to ensure that he doesn't let details slip.
Mr. Morrissey is a California native who has lived in Minnesota for nearly eight years. He started the blog 18 months ago when he found himself close to home after his wife, Marsha, suffered from a serious kidney ailment.
The Captain Ed nickname comes as a result of a gift from an old girlfriend. Twenty years ago, Mr. Morrissey was a huge Star Trek fan. So his girlfriend bought him a personalized licence plate that said "Captain Ed."
Living just a few hours from the Canadian border, Mr. Morrissey says he follows Canadian politics but has always been hesitant to write about Canada.
"I know Canadians are sensitive about Americans being arrogant about their politics. So I don't write a lot about Canadian politics."
But he is continuing to follow and post articles about the inquiry.
"It's an interesting story. It's a fascinating story," he said. "The one thing that was concerning was that the Liberal Party could call a snap election before this came out."

Town Hall Meeting for Investors

The Ontario Securities Commission is planning a Town Hall Meeting in Toronto at the CBC Atrium for May 31st, 2005. It will be held in the evening at a time to be established.

This will be an opportunity for investors to ask questions to a panel of the top regulators in Ontario including the Ontario Securities commission (OSC), Investment Dealers Association (IDA) and the Ombudsman for Banking Services and Investments (OBSI).

Investors who have a beef with the way the regulatory system functions, or with the way they have been treated by the industry or regulators should speak up.

It will be a four person panel with a moderator yet to be named. The panel mambers will be:

• David A. Brown, Q.C., ChairOSC
• Joseph J. Oliver, President & CEO IDA
• Michael Lauber, FCA, Ombudsman & CEO OBSI
• Stan I. Buell, P.Eng., President SIPA

Investors who are unable to attend the meeting may submit their questions to the Small Investor Protection Association by e-mail to sipa@sipa.to. Please indicate Town Hall Meeting as the subject.

Will Canada provide justice for Bre-X's Felderhof?

Well, it looks like Felderhof was convinced by two events to return to Canada "to clear his family name".

In the U.S. Ebbers was found guilty on all counts within weeks, and faces up to 85 years in prison. Not the kind of justice white collar criminals like to see. It just could have some impact on corporate governance and industry culture ... in the U.S. The financial predators who have a choice will certainly opt for Canadian justice.

Here in Canada we see the Air Canada 20 year investigation and trial resulting in the accused being declared innocent. This has raised an outcry from ordinary citizens. The TV media coverage causes one to suspect our justice system.

Our white collar criminals who simply rob people of their savings are seldom imprisoned, unless they are small fry, and then rarely for more than a year. They may be sentenced to longer terms and be required to spend some time in minimum security facilities like the Gravenhurst Country Club for white collar criminals, but they are soon released because they are considered non-violent and no longer a risk to society.

It is not unusual for the perpetrators to resume their old practices when they realize that the worst that can happen is they have a years holiday with all expense paid. They can catch up on their reading, improve their strategies for defrauding Canadians and at the same time polish up their tennis game.

Does anyone know how many seniors and widows have lost their savings when they trusted their advisors who put them into Bre-X?

Does anyone remember that our Toronto media failed to carry any coverage when two small investors took Nesbitt to court over Bre-X?

Does anyone remember that the two Ottawa evening papers provided coverage the first day of the trial and then fell strangely silent?

Does the media really think that Canadians were not interested in the "scam of the century" that effected almost every investor? When Diane Francis wrote her column six months before the trial it seemed that there would be interest across Canada.

Is the investment industry so strong and powerful that they are able to muzzle Canada's media?

Yet, we allow extremists freedom of speech that threatens many in our society.

Maybe Canada will summon some courage to cover the Bre-X situation with some detail now that Felderhof has returned to "clear his name", and we are once again embarrassed by U.S. Justice showing how white collar criminals should be treated.

In the U.S. even Martha Stewart was sentenced to six months and her offence was nothing like what we see in Canada on a regular basis, without any incarceration. Why do we accept that the perpetrators are let off by agreeing to pay insignificant fines with other peoples money?

Are we really still the wild west as some Europeans think?

How many investors have lost their savings?

Just today (March 15, 2005), we received a letter from a member saying:

I have a friend who I have known for several years.
I was discussing SIPA with her and she said they are just now "recovering" from bad advice. He still works (70 years old).
I never knew this! How many more are there out there that don't discuss their losses?

We have heard from hundreds of investors who have lost significant portions of their life savings, and sometimes more than all. They trusted their advisors completely. Busy with their own professions and family responsibilities they relied upon their advisor for the management of their investments. They followed the advice provided.

There are widespread practices in the industry that often result in the depletion of investors' savings. Many have lost their savings investing in mutual funds. These investors believed mutual funds offered diversification and safety for their savings.

Some mutual fund dealers offer leveraged investment with a 2 for 1 plan or other leveraging scheme. The plan is fine for the dealer - it results in double the amount of assets under management, and for the registered representative - he earns double the commissions. The friendly bank who provides the loan is happy - more loans at high rates and guaranteed by the investor's assets with the dealer authorized to sell out the investor before there is any risk to the bank.

For investors it is a different story. It's fine if the market goes up strongly and generates a return greater than the cost of borrowing. If the market goes down, it's a different story.

To illustrate the point, one of our members, a widow in her sixties, living modestly and still working with a modest income, inherited $100,000. Her only investments had been bonds and GICs, and her savings were modest enough not to attract financial predators. She was encouraged to invest her newfound wealth. She invested in mutual funds with an advisor. At first she accepted to invest only in money market funds. Over a period of six months her advisor gained her confidence and he persuaded her to invbest in equity funds, and also arranged a loan from the friendly bank as approved in the account opening form. The widow says she was not awareof this clause when she signed.

Now she has $200,000 invested and a loan of $100,000. Over the next few months the account grows (negatively) to $170,000. She realizes she still must repay the bank - they are taking monthly payments - and she is down $30,000. This is more than her annual salary and more than she could save the rest of her life. She does not want to risk losing more of her nestegg and asks her advisor to get her out of these mutual funds.

Her advisor, who receives trailer fees for holding clients in, then tells her if she wants out there is a 7% redemption fee that applies not only to her initial $100,000 or the current amount of $170,000 but to the total of $200,000. This means a redemption fee of $14,000.

The widow is then faced with escaping from her mutual fund experience with $56,000. In less than two years her loss is 44% when she has placed her trust in her advisor and the mutual fund industry.

Is this fair?

How many more widows and seniors have received the same treatment?

Will Government create a federal regulator?

SIPA Inc Five Year Review ~ the Small Investors' Perspective of Investor Protection in Canada

Executive Summary

Until recently the public perception was that the investment industry is well regulated and the regulators provide investor protection that will protect the small investor from wrongdoing. More recently the public is becoming aware of widespread industry practices of wrongdoing that are creating a negative impact on all investors.

The small investor voices included in this report are excerpts from the many communications received since SIPA was founded in mid 1998. These voices are representative of the hundreds of voices that have been heard and come from all walks of life including doctors, lawyers, health care workers, teachers, widows, and seniors. From all these voices a composite small investor perception of the investment industry has evolved.

Regulators are challenged to balance the needs of investor protection with the need to promote market efficiency, but the Canadian public does not understand how the regulatory system works. There is great disparity across the country and amongst the dealers, mutual fund companies, insurance companies and banks. There is pervasive non-compliance with the rules. Regulators appear largely ineffective in dealing with those engaged in wrongdoing. Investors do not know where to turn. The Wise Persons Committee Report issued in December 2003 calls for a Canadian Securities Commission to provide consistent regulation for all Canadians and a united Canadian voice in the global marketplace.

The lack of investor awareness is acknowledged. Attempts at investor education will not resolve the underlying problem, of investor losses due to industry wrongdoing, faced by small investors. The small investor needs to become more aware of how the industry operates and is regulated. However, Canadians are busy with earning a living and participating in family life. The investor trusts his advisor and trusts our Government to provide industry regulation and control. Government has a responsibility to protect small investors as consumers and that responsibility can no longer be deferred.

The investment industry tends to follow widespread practices that are contrary to the rules and regulations and not in the best interests of small investors. Some of these practices are being exposed in the United States. Canadian investors are becoming aware that these same issues are prevalent in Canada. There is an appalling abuse of small investors who are financially uneducated. The leaders of the industry should have at least some knowledge of the cavalier attitude towards small investor life savings. It is irresponsible to ignore this situation or worse to condone it. Our Canadian society is based on trust and that trust is being betrayed by the investment industry.

The primary complaint of the small investor is that he is encouraged to place his trust in his advisor but his advisor often seems more motivated by commission generation than providing a capable professional service to the clients depending on him. Fiduciary duty is breached on an alarmingly regular basis and sometimes fraud is an issue. This results in the serious degradation of small investor savings with the resultant negative impact on lifestyle. The regulators receive large numbers of complaints but are reluctant to reveal information. The public has a right to know when this information could help them to ward off destruction of their life savings.

Investors have found it takes time to determine how complaints are dealt with, and it is difficult to get an appropriate response from industry participants. Industry sponsored dispute resolution mechanisms do not provide appropriate means for small investors to have their disputes resolved. Investors who make a complaint are stalled and encounter delaying tactics. Ultimately, they find that civil litigation is the only viable alternative and often this is not an option possible for the small investor who has lost everything. Most seniors do not have the requisite resources of money, physical and mental stamina, and time to pursue lengthy legal battles.

Investor losses are estimated to amount to billions of dollars. The BCSC alone estimates $100 million annually in ‘reported losses’ in British Columbia. Many small investors are not even aware when they have had a negative experience as a direct result of industry wrongdoing. Industry has failed to provide all investors with meaningful statements on a timely basis. Many that are aware of a problem are reluctant to proceed with a complaint. Often, they are misled when industry participants provide false or misleading information.

The impact on victims of investor losses due to wrongdoing can be devastating. It is not only the financial loss; it is the sense of betrayal the victim feels when his trusted advisor has caused the loss of life savings. The victims lose their money, their hope, and their future. Many suffer from Post Traumatic Stress Disorder. They experience depression, difficulty sleeping, stress on relationships, loss of trust in others, loss of hope, and too often thoughts of suicide.
Small investors need regulators to provide investor protection that is fair and available to all Canadians. History shows that self-regulation has failed to provide adequate investor protection. Industry sponsored agencies or agencies that employ mainly industry staff will not provide fair and objective investor protection. The Government must now act to afford consumer protection for the small investor. Government should heed the call for a Canadian Securities Commission and a Canada Securities Act; and enact legislation for a national authority to provide investor protection for all Canadians. As the Wise Persons Committee Report states and is so aptly named “It’s Time”.

GOVERNMENT MUST ACT!

On January 26, 2004, the following e-mail was sent to Prime Minister Martin:

Dear Prime Minister

The investment industry, the regulators, and the government have failed the small investor.
Small investors have placed their trust in the industry and that trust has been betrayed. Many small investors have lost all of their life savings. They have also lost their hope for the future and their trust in our society.

Is Canada no longer a just society?

There are fundamental issues that have not been acted upon. There have been numerous studies, task forces and reports. Yet investor protection is lacking.

The Industry Canada sponsored 1998 Stromberg Report “Investment Funds in Canada and Consumer Protection” identified issues and proposed solutions. Industry and regulators failed to act.

The Wise Persons Committee Report of December 2003 “It’s Time” reviews securities regulation and strongly recommends action. IT IS TIME for government to act because industry and regulators have failed to respond. Canadians need investor protection. The present regulatory system fails to protect the small investor.

An article in the New York Post January 25th, 2004 has captured the situation in the United States and this applies equally to Canada:
Spitzer's great concern, he said, is the fundamental effectiveness of how Wall Street polices itself for the benefit of investors.
"The major failure has been at the SRO (self-regulatory organization) level," Spitzer told The Post.
"Whether you are talking about research or mutual funds or specialists, there has been a failure to properly question behavior that they know about before anyone else. Everyone of those issues was understood by the industry and not responded to."
Spitzer, 43, a graduate of Princeton University and Harvard Law School, where he was editor of the Law review, sees the solution in leadership.
"I don't pretend to have any answers beyond the platitudinous observation that those who are in charge of the SROs have to be willing to rock the boat and have to be willing to play the role of prosecutor or the system will fail," he said.

This is a message our leaders in Canada need to hear.

Will regulators follow Quebec's lead?

On February 1, 2004, Quebec unveiled a new Authority that reports to the Minister of Finance and is responsible for investment regulation in Quebec. The CVMQ (Quebec Securities Commission) is integrated into this new authority. The authority has a Claims Section to which investors can submit claims. They also have a Fund, Fonds d’indemnisation des services financiers (FISF), that enables restitution to be paid to small investors with certain limitations.

These two initiatives are of primary importance for small investors and these changes are consistent with what SIPA has been requesting from our regulatory system. Investor protection by the SROs does not work and the initiative by the Quebec government in establishing this new authority should propel the rest of Canada to take similar action.

What is covered by the Fonds d’indemnisation des services financiers (FISF)?

The FISF covers three specific acts in eight specific sectors. It is important to carefully distinguish acts that qualify for indemnification by the FISF from those that are not.

The role of the Fonds d’indemnisation des services financiers is to provide financial compensation to any person who is the victim of fraudulent acts, deceptive practices, or embezzlement. FISF compensation is designed to cover these three categories of acts within the scope of the eight sectors regulated by the Act respecting the distribution of financial products and services:
1. Insurance of persons (life, health, disability, etc.)
2. Group insurance of persons (insurance offered in the workplace)
3. Damage insurance (liability, auto, home insurance, etc.)
4. Claims adjustment
5. Financial planning
6. Group savings plan brokerage (mutual funds)
7. Investment contract brokerage
8. Scholarship plan brokerage.

In order for claims to be eligible, the person to whom sums of money are remitted and who committed the fraud must also hold a valid right of practice at the time of this action.

For additional information, contact the Information and Referral Centre:
Tel: 1 866 338-FOND (3663) e-mail: info@fisf.qc.ca

Does the financial services industry need fixing?

Jonathan Chevreau wrote in the Financial Post on October 1, 2003, about a book entitled “The Professional Financial Advisor” that suggests you ask about funds that pay no trailer fees. He quotes the author Advisor John De Goey as saying “The financial services industry is largely broken and desperately needs a fix. Regulatory reform is clearly required.”

Jonathan writes that the book is the biggest exposé of Canada’s mutual fund industry since Daniel Stoffman’s The Money Machine. It’s the book Glorianne Stromberg might have written if she’d been an advisor instead of a lawyer and regulator.

Jonathan comments that De Goey suggests you can make your supposedly independent advisor “squirm” by asking them about ETFs or fund families such as Chou Funds or Phillips Hager & North. Advisors will do “everything they can to dissuade clients from buying these types of funds because they offer no embedded compensation.”

He says other products your friendly fund salesperson may avoid include individual stocks, income trusts and Canada Savings Bonds.

Whistleblowers - Truthsayers - TruthTellers

The press reported that Coca-Cola settled a suit with a whistleblower. A former finance director claimed he was fired because he blew the whistle on accounting fraud at the company. His accusations led to the U.S. attorney’s office and the Securities and Exchange Commission launching investigations. It is reported that Coca-Cola is paying a half million to their former finance director to settle.

It is unfortunate that corporate leaders are intent on covering up wrongdoing and fire those who stand up for what is right.

The regulatory system is simply unable to police the securities industry if it is intent on breaching the rules and doing wrong. If our society has a sense of right and wrong then individuals have a responsibility of reporting the wrongs to management. If management acts responsibly they should take immediate corrective action. Unfortunately top management often condones the activities when these same activities lead to increased perks.

John Reynold’s book Free Rider exposed another case where the “Whistleblower” was fired. He writes about the compliance officer who reported to management about the broker’s activities and suggested that management take appropriate action. Unfortunately management decided to fire the compliance officer because the broker was generating huge amounts of commission. Eventually the broker was jailed for fraud.

A current case in Canada involves a lady who was a director of a publicly owned company. She believed it was her responsibility as a director to bring to management’s attention activities which she believes are wrong. She was promptly excluded from board meetings and management took no appropriate action. She believed the allegations were sufficiently serious that she should report to the regulators to fulfill her responsibility as director. The regulators declined to investigate and suggested she take civil action.

There appears to be a distinct lack of support for those who will go out on a limb to report wrongdoing. We continue to see reports of corporate culture that supports activities that are contrary to law, and which cause irreparable harm to small investors.

Joe Killoran talks about “Truthsayers” as opposed to “Whistleblowers” which often is used with negative connotations. Joe was a mutual fund salesman who felt compelled to “blow the whistle” and ended up being without a job in the industry.

It is time that our society recognizes those people who have the courage to say something is wrong. We need to demand that corrective action be taken, and that those who expose the wrongs be protected from punitive action.

Should brokerage firms be required to warn clients about rogue brokers?

Tell Clients About Rogue Brokers, Ontario Judge Rules

In April 2003 Stuart Weinberg of DOW JONES NEWSWIRES wrote " A recent Ontario court decision found that brokerage firms should warn clients about brokers who engage in improper conduct." He reports that "Ontario Superior Court justice Donald Gordon ruled that Midland Walwyn Capital Inc. and Levesque Securities Inc. were obligated to warn clients about the misconduct of George Georgiou, a former stockbroker who worked at Midland and Levesque between 1988-1995."
He also reported that Justice Gordon wrote in his decision "Despite...knowledge of improper conduct which placed clients at risk, Midland and Levesque made a deliberate decision not to inform their clients and the regulatory bodies".

This is an important decision for investors. Many have suffered losses when the industry has covered up improper conduct and exposed investors to the risk of dealing with bad brokers. Now there is legal precedent.

Is Fund Market-timing a Serious Issue?

In December 2004 the press reported on regulatory action on market-timing.

Toronto, Dec 16, 2004 - A panel of Commissioners of the Ontario Securities Commission (OSC) approved four settlement agreements today that will result in $156.5 million being distributed to mutual fund unit holders who suffered harm from market timing activities in those funds. The settlement agreements, approved in the public interest, were reached earlier this week by OSC Staff with CI Mutual Funds Inc., AGF Funds Inc., I.G. Investment Management, Ltd. and AIC Limited. The text of the agreements is available on the OSC website.

Toronto, Dec 16, 2004 – The Mutual Fund Dealers Association announced a settlement agreement with Investors Group Financial Services regarding market timing. IG has agreed to compensate investors effected by their conduct by making a payment of $2.65 million, and will also pay a fine of $2.65 million to the MFDA as well as costs of the MFDA investigation of $50,000. The text of the settlement agreement is available on the MFDA website.

Toronto, Dec 16, 2004 – The Investment Dealers Association penalizes TD Waterhouse $20,698,713.38, RBC Dominion Securities $16,975,302.08 and BMO Nesbitt Burns $3,693,139.20 regarding market timing. The text of the settlement agreements is available on the IDA website.

The well coordinated news releases by the regulators exposed the involvement in market-timing of eight of Canada's largest investment firms, but did not expose other firms that were also involved. While the regulators justify closing their investigation saying the regulatory action should put a stop to the practice, they are covering up information that should be made available to the public.

How can investors do their due diligence when the regulators fail to disclose information regarding malfeasance?

The regulatory approach to providing investor protection that is preventative in nature is failing investors ... and that means most Canadians. The investment industry is continuing to develop new products and new initiatives that result in investors losing their savings when they place their trust in the industry. Unfortunately the regulators do not prevent wrongdoing from happening. They are aware of the dangers of new industry initiatives involving foreign exchange and futures products but can't prevent it from happening. They may hope to prevent it from continuing but meanwhile thousands of small investors are at risk of losing their savings.

Why don't the regulators focus on remedial regulation and make clients whole when they suffer loss due to wrongdoing? Why doesn't industry take iniatives to do what is right? Why does industry defend vigorously actions that from a moral and ethical point of view appear indefensible? How can they justify their actions when the result is major loss for widows and seniors? How can a government that represents the people stand idly by and allow this financial predation to continue?

The fund market-timing scandal exposed in December 2004 clearly illustrates

• the investment industry's cavalier attitude towards small investors
• wrongdoing permeates the investment industry and is indeed widespread

It's time that our government acts to provide investor protection by establishing an authority with responsibility for investor protection that is remedial. The regulatory approach that is preventative has failed investors.

Do TruthTellers enable Regulators?

SIPA says that whistleblowers or TruthTellers might be more effective than the regulators. The Telegraph in the U.K. published an article that relates how a TruthTeller alerted Eliot Spitzer to the widespread wrongdoing in the mutual fund industry. Some excerpts from that article follow:

Wall Street's whistle-blower Noreen Harrington exposed widespread corruption in America's mutual funds. In her first UK interview, she tells Abigail Hofman why she made her fateful call to the New York state attorney-general. Noreen Harrington is the woman you were never meant to know about. Eliot Spitzer, the New York state attorney general, said he would take her name to his grave.
It was Harrington's anonymous call to the attorney general's office last May, which led to the unveiling of widespread corruption at the heart of the US mutual fund industry. In an exclusive interview with The Telegraph, Harrington explains how she discovered the wrongdoing and why she made that call. Spitzer has praised the 47-year-old Harrington on prime time American television as "a spectacular individual who did an amazing job for all investors in this nation". Spitzer and his colleagues took Harrington's tip-off seriously because of her background: she had 20 years' experience in the financial industry, including an 11-year stint at the leading investment bank Goldman Sachs (where she achieved managing director status) and had worked both on Wall Street and in London (initially for Goldman and then for Barclays Capital). She started asking questions because she believes "that's your responsibility as a senior person in the business".
Harrington talks about "one crowning moment" that pushed her over the edge - when she was asked to review her elder sister's evaporating 401(k) pension pot. Most pension monies are invested in mutual funds.
"My sister is one of the hardest workers I know," Harrington says. "Suddenly I saw her as a victim of this crime. Up until then, I hadn't really thought about the human toll: all those Americans whose only liquid asset is their 401(k). And after I looked at it from the bottom up, then I couldn't sleep at night. I knew I had to call somebody." And that's what she did.
In May 2003, Harrington contacted Spitzer's office. Initially, she just left an anonymous voice-mail. Then, realizing that her original message had been too vague, she called again and spoke to an executive who persuaded her to go into the office for several meetings. "The basis for that was they would investigate and no-one would ever know who I was," she says. She told none of her friends or family about her dealings with the attorney general's office. "I truly hoped my name would never come out. And so the right number of people to tell in those circumstances is zero."

SIPA recognizes Noreen Harrington for her courage as a TruthTeller.

Will the WPC Report have an impact?

The Wise Persons Committee Report "It's Time" was issued December 13th, 2004. It was prepared in response to the MacKay Report calling for a review of the securities industry. There was intense industry input but very little input to present the small investor’s view. SIPA made a submission as did a couple of SIPA members and a couple of investor advocates.
The WPC Report recommends a single Canadian Securities Regulator. This is a position that SIPA supports; however there is sufficient opposition that it is unlikely this would happen in the near future. The Summary of the WPC Report follows:

7. It’s Time

It’s time for Canada to have a single securities regulator. Capital markets around the world are continuing to integrate and become more competitive and important to economic growth and prosperity. Canada is now at a crossroads. Others have moved faster in adapting their regulatory structures in response to these trends. Either we can continue with a fragmented regulatory structure that has served Canada adequately in the past but that is ill suited to current realities, or we can choose to create a regulatory structure that helps Canadian capital markets become a source of comparative advantage in the increasingly competitive global marketplace.

”Canadians should not settle for anything but the best they can achieve.”
Canadian Bankers Association

We believe the choice is clear. Canada cannot afford to stand still. We therefore call on the federal and provincial governments to participate in the creation of the Canadian Securities Commission. Canadians are seeking increased federal-provincial cooperation in addressing important public policy priorities. Both levels of government now have an opportunity to come together and act in the national interest.

Other countries have already done this. In Australia, a federal state with regional diversity and shared constitutional authority over securities regulation, the federal and state governments worked together to create the ASIC, a single securities and market conduct regulator, in recognition of the fact that a single regulator was in Australia’s national interest. We believe the same spirit of collaboration can, and should, animate the creation of the Canadian Securities Commission.

We believe the federal and provincial governments should implement our recommendation without delay.

There is a remarkable momentum for change, shared by capital market participants, governments and regulators. There is an unprecedented opportunity to improve Canada’s securities regulatory structure.

It’s time to act.

... That was December 13th, 2004.

What happened Fair Dealing?

In 2004 the OSC issued a Press release on the Fair Dealing Model. Initial reports suggest the proposal is watered down due to industry input. Although the iniative appears well intended, it is impossible to pass judgment until details are released. The Press release follows:

OSC Chair David Brown unveils "Fair Dealing Model" to regulate relationship between the financial services industry and investors
TORONTO - The Ontario Securities Commission is considering significant changes to the way it regulates the relationship between the financial services industry and individual investors. OSC staff, in consultation with a group of investment industry leaders, has developed an outline of a new "fair dealing model".
The new framework would, among other things, seek to better define the rights and responsibilities of each party, reduce conflicts of interest in the provision of advice, and ensure greater transparency of adviser services, qualifications, compensation and other fees.
"A fair dealing model can result in a stronger financial services industry, enhanced competition around quality of advice, and clarity in provider-client relationships," OSC Chair David Brown said in a speech to kick-off Investor Education Month. "And it would cut unnecessary compliance costs, ensuring that providers and investors receive maximum regulatory value for every dollar spent."The OSC and its advisory group have studied business models in the financial services industry and recognized that the current regulatory model has become outdated. For example, securities regulations assume that advisers are compensated based on trading activity, yet most firms now take a wealth management approach where trading and advising are no longer viewed as separate activities. The proposed regulatory model is more flexible and would better reflect market realities.Changes being considered include the following:
requiring more complete information on how service providers are compensated, including clear disclosure of whether they receive payments or incentives from product issuers;
replacing existing account opening documentation with a new form that clarifies the nature of the provider-client relationship and seeks to improve clients' understanding and acceptance of investment risk;
placing clearer responsibility on firms, including liability for losses, for any improper activities of their officers, employees and agents;
replacing current registration categories with a single service provider license which makes no distinction between trading and advising; and
reducing certain regulatory requirements to improve small investors' access to a variety of investment opportunities and increase market access for new types of service providers.
Staff plan to expose the new "fair dealing model" to a wider group of stakeholders later this spring, and publish detailed proposals by the summer.

Have you heard a Margaret’s Story?

“The main reason I considered investing in 1989 was because retirement was just seven years down the road. I had raised my children as a single parent and was reminded that I needed to have enough money to provide a reasonable lifestyle for my 'golden years'. I had worked for 40 years at that time.

I approached a large brokerage firm. Mutual funds were being promoted and at that time the banks were not involved in the investment industry.

My first investment was $10,000.00.

Over the next seven years I invested further monies as funds became available. I saw my investments as an extension of my 'bank - savings account'; and that monies were safe and secure, and of course would grow. On the advice of my broker, I also transferred my RRIF account from my local bank to the brokerage firm.

During this time period I saw my investment advisor only three times. He would call me on the phone three of four times a year. I felt my money was in good hands and certainly under the roof of a reputable organization. I certainly had nothing to fear.

In 1995, I contacted the broker with the purpose of discussing the purchase of a condominium. I was renting accommodation and felt it would be advantageous to buy a property that would at least carry for what I was paying in rent. My rent had increased that year 7.6%. I told the broker that I had $100,000.00 as a down payment. He dissuaded me from buying, and added that I had insufficient funds to carry the mortgage.

I took his advice, that 'I would do better by giving the money to him to invest and that it would grow and "we would make money”'! Today, I would hear this response very differently. I decided to start saving earnestly. I was now working part-time, so I had to sacrifice certain projects, like traveling to England to see family, who sadly have since died.

In 1996, the year I retired, on the advice of an elderly friend, I approached a mutual fund advisor of another investment company. I was eligible to investment money in my RRIF account and decided that maybe it was time to create 'another basket' so to speak. The advisor asked me to bring in my current monthly statement so that she could see how to best invest my money. Whilst reviewing the document she asked permission to make a copy so she could review the contents with her manager. We made arrangements to meet later on that week.

The outcome of our meeting was shocking. The month and year I retired was the month and year that my account was at -104% leverage!!! In other words my account had been 'wiped out'! After a visit to my home and a brief audit by this new advisor, it was discovered that my investment had been set up as a 'leverage account'; and that during 1995-1999, 1.4 million dollars of investments had been turned over in my investment and RRIF accounts.

I had signed nothing. Even after I discovered what had happened and sent a letter to the broker stating that nothing was to be done in my accounts without my knowledge or signature, monies were still turned over to the tune of $85,000.00! The broker had made at least $60,000.00 in commission!

Who had supervised these transactions; but further more, who had provided the transitionary signature for these investments and other leveraged investments - some 150 in total!

The branch manager was contacted and confessed that something was wrong with my account and said that 'things could be changed'!

I wrote to the Ontario Securities commission who forwarded my complaint and evidence on to the compliance department of the brokerage firm. That was 1999.

It is now 2004, and five years have passed. With legal fees and loss of interest, apart from what the monies invested would be worth today had they been suitably invested, my total losses amount to $325,000.00. The compliance department has made an offer of 20% of the losses. It appears that they are unwilling to investigate the behaviour of the broker or supervisor.

In the meantime the broker has been disciplined - for the second time; and the IDA is investigating at least two other brokers, in the same branch. It appears that I am not 'being heard'.

On a personal level - tempus fugit - time is passing. My apartment is on the second floor of a small building and there is no elevator, my reason for purchasing alternate accommodation was legitimate, I drive a car that is 17 years old. Although it has served me well, it too is aging!

I am totally disgusted with the way I have been treated by the brokerage firm in question; and am sorry to say that as I have shared my story with others, I have been further shocked to find that I am not alone.

I am now with my 'fourth lawyer'. The first one created a conflict of interest, the second one placed me on the 'backburner' for five months, and the third one failed to read my mail and did nothing for two and a half years!

So not only do I have to deal with the investment arena, but my experiences have caused me to question the behaviour of 'the legal beagles’!

My message to those 'out there'. I am not going away. I will see this 'project' through to the end and it will be resolved to my satisfaction. There are those in the industry that need to be exposed and made to put right what was done wrong. The alternative is that we will all pay a heavy price.

We are very much aware of what has happened to Enron and other large corporations. It just doesn't pay to lie and cheat. Didn't these guys learn anything in 'Sunday school'! Or maybe their parents did not insist that they return 'that candy bar' that they stole, as they were leaving the drug store. A philosophy eventually develops that if you don't get caught, it's O.K. or 'that is the way it is done'.

Sad to say, even as I am writing this, the broker in question is being allowed to do what he has been doing the last 18 years; and that is, abuse investors and use their money to make money for himself!”

Margaret – Jan 2004

NOTE: Margaret is a pseudonym to protect the individual's identity

What are the issues for Small Investors?

“Giving Small Investors a Fair Chance: Reforming the Mutual Fund Industry” is a report prepared by a team of CARP and SIPA representatives. The report started as a mutual fund report drawing upon the expertise of Ken Kivenko, Chair of SIPA’s Advisory Committee. At an early meeting of the project team of Judy Cutler, Bill Gleberzon, Ken Kivenko, Robert Kyle and Stan Buell, it was decided to incorporate a concept proposal for an Investor Protection Agency.

Glorianne Stromberg had examined the mutual fund industry and wrote a report for Industry Canada entitled “Investment Funds in Canada and Consumer Protection” and released in 1998. This report outlined the weaknesses in the regulatory system and made detailed recommendations for improvement. The report did not sit well with industry, as they preferred the status quo.

There were subsequent reviews and studies culminating in a Wise Persons Committee that produced another report “It’s Time” in December 2003. These wise people reviewed most all of the previous studies and reports and reached the conclusion that it was time for Canada to have a single national regulator. This was the recommendation of Ms. Stromberg in 1998.

Elliot Spitzer, the New York State Attorney General set the U.S. investment industry on its ear with his Bureau of Investment Protection headed by David Brown (not the OSC Chair), former assistant attorney general. The Bureau was enabled to act on the basis of the New York State Securities Law, commonly known as the Martin Act, and the Sarbanes/Oxley law, formally titled The Public Company Accounting Reform and Investor Protection Act.

Spitzer pursued a strategy based on investment protection rather than regulation. The Bureau was alerted to wrongdoing by whistleblowers because they are protected in the U.S. by legislation. Spitzer’s office accomplished what the mighty Securities and Exchange Commission could not. Wall Street brokerage firms and mutual fund companies lined up to pay fines and avoid extended litigation that would have destroyed their firms. Some of the firms suffered considerable damage just from the publicity. Here in Canada the OSC is still investigating market timing, which is really a non-issue as far as extreme investor loss is concerned.

The CARP Report outlines many of the problems with the mutual fund industry and concludes that if investors are to be adequately protected there must be an independent agency with the authority to provide investor protection.

At present the provincial regulators have delegated investor protection to the SROs that represent the industry. This conflict of interest situation does not provide fair treatment for investors. The IDA was quick to criticize the CARP/SIPA report. Although they say they are responsible for investor protection, their attack on investor advocates indicates their interests lie solely with the industry.

The industry will employ tactics to discredit investor advocates and attempt to justify the way the industry operates … they have a lack of transparency, a laissez faire policy and a flagrant disregard of rules and regulations.

Eliot Spitzer has now exposed how the investment industry operates in the United States. First the brokerage houses on Wall Street, then the mutual fund companies coughed up hundreds of millions of dollars in fines to try to keep a lid on a deteriorating situation for the investment industry.

Canadians would be naïve to think our investment industry is any different. SIPA has documentation on file that corroborates the statements that have been made and illustrate industry’s attempts to defend situations that are morally and ethically indefensible.

How many times have I heard or read that a mutual fund company or an investment dealer attempts to justify that all of their actions were appropriate when seniors have lost 50% and more of their life savings?

The issues for small investors are not so much the refinement of rules, a new set of recommended best practices, mutual fund market timing or late trading.

The most important issue for small investors is the extreme loss being suffered by those who have been victimized by widespread industry practices of wrongdoing. Many of the victims have no opportunity to replace the loss and their futures are compromised.

An Investor Protection Agency, coupled with TruthTeller protection, and a means of dispute resolution that is affordable and timely is what is needed to save our seniors from financial hardship caused by industry wrongdoing.