FAIR Canada today issued a report entitled “A Decade of Financial Scandals” calling for government and regulatory action to improve prevention, detection and prosecution of financial fraud and to better compensate victims of investment frauds.
“The Canadian regulatory system is complex and fragmented. There are thirteen provincial and territorial securities regulators and two national SROs. In addition, there are many other provincial and federal regulators involved,” said Ermanno Pascutto, Executive Director of FAIR Canada. “When it comes to investigation and prosecution of financial fraud, the complexity and fragmentation is far worse. With this bewildering array of regulators, investigation agencies and prosecutors, no one agency has ultimate responsibility for combating investment fraud.”
“We make wide-ranging recommendations calling on the Federal and Provincial Governments and regulators to take coordinated action to combat financial fraud” said Mr. Pascutto. “Financial fraud has affected some 10% of Canadians and the system is simply not effective at protecting consumers, punishing fraudsters, or compensating victims.”
FAIR Canada studied a cross-section of fifteen cases of financial fraud selected from across the country based on the high profile coverage they garnered, the number of investors affected and the significant amount of losses incurred. Findings from the review of the fifteen financial scams include:
- Approximately 78% of the losses in the fifteen cases involved firms or individuals registered with securities regulators.
- Some 17% of the losses were with registered firms that were also members of an SRO (IIROC or MFDA) which were also backed by a compensation fund.
- Approximately 61% of the losses were with registered firms directly regulated by a securities regulator but that were not members of an SRO. Non-SRO registrants are not backed by a compensation fund in the event of insolvency. Investors with non-SRO registrants sustained higher losses and were not likely to recover most of their money.
- Some 22% of the losses were a result of dealing with persons who were not registered with a securities regulator and investors often lost all of their money.
- Even though there are two compensation funds (CIPF and IPC) in Canada that compensate investors in event of insolvency of investment firms and mutual fund dealers, the funds only compensated 2% of the financial losses because most of the investment scams involved firms that were not members of the compensation fund and related SRO and of the four that were, three fell outside the scope of coverage.
- The registrants that appear to be the highest risk to retail investors are not members of an SRO and have no compensation fund.
Key recommendations in the report address fraud prevention, earlier detection of fraud, more effective prosecution and better compensation for victims.
- Fraud prevention – We recommend that Government and regulators launch a national education campaign to educate consumers on avoiding financial fraud and that regulators provide a comprehensive national database to check registration, disciplinary history, SRO membership, etc. We also recommend that investment firms be made responsible for misconduct by rogue advisors even when they sell non firm products, that registrants have a professional duty to report misconduct by other registrants, and that financial incentives be considered to encourage reporting of fraud to regulators and police.
- Earlier detection of fraud – FAIR Canada recommends that regulators have more resources dedicated to fraud detection. We recommend that securities regulators engage in more proactive measures to detect and prevent fraud including reviewing print and other media advertising of investment services by unregistered persons and advertising of unrealistic returns by registered persons. We also recommend that regulators reform the “exempt offerings” and “accredited investor” exemptions in securities law, and audit high-risk exempt offer filings.
- Prosecution – Canada needs a new expert national agency under the Attorney General of Canada dedicated to combating financial fraud.
- Compensation – FAIR Canada recommends that all registrants be required to be members of an SRO with an existing compensation fund. Regulators should have consistent statutory powers to order compensation for victims of financial fraud, and also have a clear mandate to seek compensation for victims of fraud.
FAIR Canada reviewed some of the largest and most high profile securities-related scandals from 1999 through the end of 2009. Cases were included from British Columbia, Alberta, Ontario and Québec. The cases reviewed included scandals that ranged from Ponzi-type schemes, misleading or partial investor information and the outright misappropriation or mismanagement of assets and funds.
|Brost, Sorenson et al. (AB)
|Earl Jones (QC)
||Andrew Lech (ON)
||Weizhen Tang (ON)
||Ian Thow (BC)
|Farm Mutual (ON)
Click here for the full FAIR Canada Report – A Decade of Financial Scandals.