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(Adam Dean/Adam Dean for The Globe and Mail)
(Adam Dean/Adam Dean for The Globe and Mail)

Barrie McKenna

Sino-Forest case cries out for justice Add to ...

The perp walk. Orange jump suits. Tycoons sharing jail cells with drug dealers.

It’s all very un-Canadian.

There’s a good reason the U.S. justice system treats its fallen business icons like common crooks. It’s about deterrence of white collar crime.

Conrad Black, Bernie Ebbers, Martha Stewart, Dennis Kozlowski and Jeffrey Skilling all paid a high price for being prosecuted in the United States – most notably, the loss of their freedom.

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These high-profile convictions sent a powerful message that ricocheted through financial markets. Chief executive officers who do the crime will also serve the time.

There’s no shortage of corporate fraud on this side of the border. There is, however, a troubling dearth of convictions.

Canada’s track record prosecuting cases, particularly criminal ones, unfortunately suggests the country is more tolerant of behaviour that undermines the integrity of public markets.

The Ontario Securities Commission’s fraud allegations, unveiled last week against former Sino-Forest Corp. chief Allen Chan and four of his lieutenants, is a watershed moment for Canada.

The Sino-Forest scandal cries out for justice.

The OSC alleges the company was built on phantom profits and assets, and billions in stock market value is gone. The RCMP is also investigating. No allegations have been proven.

If crimes took place, the Mounties owe it to investors to use all their resources to bring those responsible to justice.

The stakes couldn’t be higher. The Sino-Forest scandal has been called “the worst black eye” for Canada’s capital markets since Bre-X Minerals Ltd.

Wrong. Sino-Forest trumps Bre-X precisely because it happened after Bre-X.

Twice, Canada’s fragmented and undermanned regulatory regime failed. Twice, the country’s underwriting industry didn’t see through what were alleged to be enormous lies. And twice, auditors, lawyers, analysts and investors missed flashing warning signs.

The troubling absence of justice in the Bre-X case sent a message as powerful as those U.S. convictions. The only person charged (former Bre-X chief geologist John Felderhof) was acquitted.

A failure to secure convictions against whoever is at fault in the Sino-Forest case would be an invitation to see history repeated. The integrity of the system demands justice.

The OSC says it’s now investigating the so-called “gatekeepers” in the Sino-Forest case – its lawyers, auditors and underwriters.

That’s a good thing. But it may also be a tacit acknowledgment by regulators that pursuing Mr. Chan is fraught with challenges.

At last check Mr. Chan, who has said he did nothing wrong, was living in Hong Kong. During his time at Sino-Forest, he earned millions in salary and stock sales.

The OSC’s power is limited to fining violators and banning them from acting as directors or officers of an Ontario company. Even if found guilty, the punishment might seem like a slap on the wrist.

If the RCMP lays criminal charges and eventually secures a conviction, it might have to extradite foreigners – a process that can take years.

Canadians must not forget the lessons of Sino-Forest.

Unwarranted hype helped perpetuate the alleged Sino-Forest fiction. One major Canadian newspaper hailed Mr. Chan in 2007 as “China’s greatest lumber baron.” Analysts talked of vast untapped profits.

Regulators must also crack down on the kind of reverse takeover that allowed Sino-Forest a back-door listing on the TSX, with less scrutiny than an initial public offering.

Regulators need more resources to track the activities of companies that raise money in Canada, but operate largely offshore, under the direction of non-Canadians. Maybe Canadian stock markets shouldn’t welcome these listings.

And if prosecutors can’t secure prosecutions in stock fraud cases, perhaps they need new legal weapons.

Sino-Forest is likewise a reminder to Finance Minister Jim Flaherty that he shouldn’t give up on a national securities regulator. As OSC chairman Howard Wetston acknowledged in a 2011 interview with CBC Television, cases in two different countries “require significant commitment of resources and time.”

Surely, Canadian regulators would have more time and resources to pursue cases such as Sino-Forest if securities regulation wasn’t fragmented between the federal government and 13 provinces and territories.

Do nothing, and Canada will remain dangerously vulnerable to stock market fraud.

Follow on Twitter: @barriemckenna

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