A recent string of large fines from the British Columbia Securities Commission makes it official: The old Wild West on Howe Street is long gone.
The B.C. securities regulator says it is cracking down on fraud cases to send a message to wrongdoers, especially those operating in the booming “exempt” market for unregistered securities. The evidence is clear in a string of record-high fines imposed by BCSC hearing panels.
In December, the BCSC ordered investment dealer Sung Wan (Sean) Kim to pay $47-million in penalties after ruling he defrauded 36 investors from a Korean church in Vancouver. The fine set a new record for the commission, topping the $42-million in total penalties imposed in late 2009 in the so-called Manna case, where four people were accused of fraudulently distributing securities through Manna Trading Corp. Ltd. and related entities.
Earlier this week, the BCSC imposed penalties totalling $7.3-million against Luc Castiglioni after concluding he falsely represented a company’s registration status to investors, helping him raise a total of $8.2-million from 60 people.
“The stakes have been going up, and it’s part of an approach we’ve taken here to be very aggressive in terms of frauds and misrepresentations,” BCSC executive director Paul Bourque said.
In past decades, B.C. was criticized as fertile territory for dodgy securities schemes, and suffered from a reputation for lax regulation of Howe Street wheeler-dealers, many of them operating in the murky waters of penny stock companies.
But tougher regulation under the TSX Venture Exchange – created in 1999 with the merger of the Vancouver and Alberta stock exchanges – helped drive many schemers to the less-regulated over-the-counter market in the United States.
“I think the landscape has changed pretty significantly here,” Mr. Bourque said. “A lot of the Howe Street promoters and investor relations types and corporate types that operated on the Vancouver Stock Exchange and were sort of the bane of the B.C. commission have, though enforcement and policy changes, sort of fled.”
Nonetheless, B.C. still attracts a significant number of securities frauds compared with other jurisdictions in Canada. Mr. Bourque said many frauds are found in the “exempt” market where promoters do not need registration to sell securities without prospectus approvals from the BCSC.
“We have a local issue here around theft and fraud in the exempt market, and that’s partly what the commission is responding to,” he said.
Mr. Bourque said the increasing penalties stem from legislative changes in 2006 that raised penalties to a maximum of $1-million per offence, up from the $250,000 set in 2002. Until 2002, the maximum total penalty for all offences combined had been a flat $100,000.
The BCSC says it is also getting more aggressive on criminal prosecutions, dedicating a team of investigators to prepare cases for court. The commission has referred 73 cases to Crown prosecutors in the past two years, and charges have been laid in all of them, Mr. Bourque said.
In major cases, the RCMP can also handle investigations and lay charges. Former financial adviser Ian Thow faced both criminal charges and BCSC sanctions after he was accused of misappropriating funds from clients – many of them senior citizens.
The commission fined Mr. Thow $6-million in 2007, but the fine was reduced by a court on appeal because Mr. Thow’s lawyers argued the penalty should have been based on guidelines in place at the time of the offences rather than current standards.
While fines are big, the collections are typically far lower. In most cases, the people do not pay – they leave the province or plead poverty, and the commission can rarely find money to seize. Nothing has been recovered for investors bilked by Mr. Kim, who is serving a 10-year prison term in South Korea.
Mr. Bourque said the BCSC tries to “aggressively” collect on penalties, and hires lawyers to search for assets that can be seized.