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Cromwell Coulson, the CEO of New York-based stock trading platform OTC Markets Group, is getting sick and tired of trying to stomp out Canadian stock promotion scams.

OTC plays host to more than 10,000 early-stage speculative stocks and every day it publishes a list of companies it has identified as running misleading stock promotions. In 2019, 30 per cent of troubling campaigns were by Canadian companies.

But since the global outbreak of COVID-19 last winter, there has been a boom in pump and dump scams, in which shady promoters use any means necessary to push up the price of a company’s shares, then sell their stakes at huge profits just before the stock collapses. Those promoters often focus on a hot sector, be it mining, bitcoin, cannabis – and now, bogus coronavirus therapies.

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This year, 44 per cent of problematic promos on the OTC were spearheaded by Canadians. One day in September, they made up all 10 of the stocks the platform flags daily as the most suspect.

Mr. Coulson says vulnerabilities in Canadian securities laws, the country’s patchwork system of provincial securities regulation and the lack of teeth to go after scam artists allow promotion schemes to flourish.

“Our goal is not to run a dating site where everybody is beautiful, and smart and rich. Our goal is that the market price of securities represents the value,” he said. “There is this industry of promotion [in Canada] that is very opaque. I would like to see much more transparency.”

In the United States, national regulatory oversight by Washington’s Securities and Exchange Commission (SEC) is much tougher than in Canada. As a result, Canadians – operating here or in other countries – have been behind many penny stock promotion scams for decades. Among the worst offenders in recent years, John Babikian, a.k.a. “The Wolf of Montreal,” who reportedly earned US$100-million manipulating penny stocks.

The U.S. Securities and Exchange Commission building in Washington on Aug. 5, 2017.

Andrew Harnik/The Associated Press

“This is not a new phenomenon,” said Steven Peikin, co-director of enforcement with the SEC until August. “There has been outsize involvement of Canadian nationals and Canadian issuers in microcap schemes.”

While greater powers and technological advances have enhanced the ability of Canadian regulators to pursue aggressive investigations, their track record in enforcement remains abysmal. The few offenders who are sanctioned are generally subject to temporary provincial bans from capital markets and non-enforceable fines.

In the most recent fiscal year ended March 31, Canadian regulators concluded just two pump and dump cases, levying $105,000 in fines. Only a handful of cases are currently open.

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In the United States, since the beginning of the pandemic, the SEC has brought charges in six COVID-19 cases, in which companies or individuals allegedly made misleading statements about various treatments, tests and protective equipment, and issued 37 trading suspensions. Just this past summer, five Canadians were charged by the SEC in a US$160-million pump and dump swindle involving deceptive claims of therapies.

Canada’s four biggest regulatory bodies, by comparison, have brought only one enforcement case and issued two trading suspensions related to COVID-19. This despite a warning issued by regulators in April that they were seeing an uptick in pandemic-related investment scams. The Canadian Securities Administrators (CSA), an umbrella group that represents Canada’s 13 securities regulators, declined repeated requests for an interview.

“I have not seen much regulatory action in Canada,” said Joseph Groia, a former director of enforcement of the Ontario Securities Commission (OSC) and now one of Canada’s best-known securities litigators. “There’s a huge amount going on in the U.S.”

The doors to the Ontario Securities Commission hearing rooms in Toronto on Dec. 12, 2019.

Melissa Tait

Why isn’t more happening here?

Over the past six months, The Globe and Mail interviewed more than 60 senior figures in regulation, litigation and law enforcement in North America, companies targeted by pump and dumps, a prolific white-collar whistle-blower, CEOs of stock exchanges, recipients of pump and dump materials, and stock promoters. As part of its investigation, The Globe also reviewed thousands of pages of disclosures and regulatory actions going back to 1987.

The results are frustrating in many respects. While the breakneck pace of technological advancement means many fraudsters will likely stay one step ahead of regulators, plenty can be done to break the chain. The big question: Does Canada have the will to do it?

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Canada’s status as a haven for shady stock promotion is a function of market structure, history and culture. Our country has long had a heavy concentration of small resource companies that need to raise money early by going public – developing mines and oil reserves is capital intensive.

But a small public float and a cheap stock price also make these stocks vulnerable to manipulation. By the 1930s, Canada was already notorious for telephone boiler rooms that targeted investors across North America. The advent of the electronic information age in the 1990s made disseminating fraudulent information infinitely easier. The ease of remaining anonymous online also made it much harder to catch offenders.

And while misleading stock promotions used to be perpetrated mainly by company insiders, a growing number are now carried out by third-party shareholders.

This past June, the RCMP and two provincial securities regulators confirmed they were investigating a cross-country stock promotion scheme touting tiny B.C. mining company Crestview Exploration. Among the recipients of a nationally distributed pump and dump letter about Crestview was Cynthia Campbell, head of enforcement at the Alberta Securities Commission, as well as the author of this article and retired RCMP white-collar crime investigator Henry Tso.

“I have dealt with many of these files,” Mr. Tso said. “There’s tons of them. Stocks are being manipulated. There’s also lots of insider trading that never gets caught.”

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Crestview executives were frustrated, too. “We had no part of it. We want no part of it. It is a disgusting form of promotion,” CEO Glen Watson said.

One of the biggest structural weaknesses in Canadian enforcement identified by many sources is the lack of a single Canadian securities regulator. The U.S., with a population of 328 million, has one federal securities act and one federal regulator. Canada, a country of 37.6 million, has 13 provincial and territorial regulators, and 13 disparate securities acts. Budgets, staffing and powers of enforcement also vary.

British Columbia has tougher laws around stock promotion than other provinces, in part because the Vancouver Stock Exchange, which was merged into the Canadian Venture Exchange in 1999, was long known as grand central for penny stock scams. Alberta can lay quasi-criminal charges directly on offenders, but many other provinces can’t. Whistle-blower rewards offered by regulators also vary, with Ontario offering up to $5-million, but some other provinces offering nothing. Enforcement bans in one province aren’t recognized in others.

The different rules across Canada and the lack of co-ordination mean that “wrongdoers can triage where they’re committing their wrongdoing based on the enforcement of various provincial regulators,” said Stephen Cohen, former associate director of enforcement for the SEC.

Maureen Jensen, former chair of the Ontario Securities Commission, in Thornbury, Ont. on Oct. 8, 2020. Ms. Jensen is critical of the lack of a national securities regulator that could battle misleading stock promotions.

Carlos Osorio/The Globe and Mail

Maureen Jensen, chair of the Ontario Securities Commission until this past April, said Canada is a mess of bureaucracy, infighting between commissions and provincial politics. “The problem is you have 13 acts, 13 legislatures that decide whether what their securities commission is asking for is worth their effort and 13 different groups of advisers who have a different view on how easy it should be to prosecute people in the financial market,” she said.

“We should have a single securities regulator for Canada. It’s ludicrous that we don’t.”

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But repeated pushes for a national regulator have stalled when all provinces failed to agree, the most recent under then-prime minister Stephen Harper’s majority government, elected in 2011.

Basic laws are also looser in Canada. In the U.S., paid stock promotion and amounts must be disclosed. In Canada, apart from B.C., paid promotion only has to be disclosed if it’s for “investor relations” services. There are many loopholes where payments don’t have to be disclosed – incredibly including campaigns that can be characterized as just “raising awareness” about a company.

Even if paid promotion is disclosed, the amount doesn’t have to be specified. “No one knows who’s being paid for what,” Ms. Jensen said. “People can promote and not be visible.”

The loose laws are one reason criminals still turn to Canadians for shifty stock promotion. In 2017, an individual indicted for securities fraud around a planned pump and dump of cannabis company BioCube Inc. told the FBI he intended on using Canadians to promote the U.S.-listed stock because regulation was much lighter here. U.S. authorities stopped the scheme before it occurred, and the CEO of the company was sentenced to three years in prison.

Even if pump and dump offenders are caught in Canada, prison time is extremely rare. Fines and temporary provincial bans from running companies are much more common, but many offenders simply don’t comply with them.

“These are people who don’t care about regulatory orders. There’s a good chance they’re not in that jurisdiction. If an order is made, they probably wouldn’t comply with it, " Mr. Groia said. “The only way you can deal with [a pump and dump] is find out who did it, track them down, prosecute them and send them to jail. Nothing else makes any sense.”

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But that is much easier said than done.


An RCMP officer pulls cases into the offices of Scotiabank in Toronto's financial district on Feb. 1, 2005 after a search warrant was executed in the investigation into Royal Group Technologies Inc.

FRANK GUNN/The Canadian Press

Set up in 2003 to be the equivalent of the FBI’s white-collar crime unit, the RCMP’s Integrated Market Enforcement Team (IMET) was supposed to send more offenders to jail. Just two years later, the team staged a dramatic raid on Scotiabank’s headquarters on Bay Street, with a trailer-length van emblazoned with IMET’s logo and about a dozen police cars pulling up, and agents hauling out documents in connection with an investigation into one of the bank’s client companies.

The idea was to turn RCMP officers into specialized financial market cops by bringing in Bay Street experts, such as forensic accountants, to help IMET. Yet when The Globe asked the RCMP for examples of notable pump and dumps that resulted in convictions, the force only cited one in the past 17 years.

“The expectations and the hope that we would have a meaningful criminal enforcement program at the federal level have not come to pass,” Mr. Groia said. “IMET’s been a huge disappointment.”

Seattle-based whistle-blower Yolanda Holtzee has spent almost two decades reporting pump and dumps to U.S. and Canadian regulators. In her dealings with IMET, she has been frustrated by the turnover in staff. “Junior members are never there long enough to be proficient,” she said.

Vance Morgan, head of the biggest IMET team in Canada, says officers usually stay a minimum of three years, but many move afterward – some because they are promoted. One reason IMET’s record isn’t great, he says, is the lack of some extraordinary powers U.S. authorities have, including their ability to tap the federal terrorist act to obtain documents.

Other experts say Canadian exchanges could also do a lot more to cut down on shady stock promotion and could look to the U.S. for guidance.

If OTC Markets believes a company may be complicit in a promotion, or isn’t co-operating in disclosing additional information, it routinely slaps a “Caveat Emptor” label on the company and places a skull and crossbones icon beside its stock symbol on OTC’s website.

“We don’t want to fix things in the back room, " Mr. Coulson said. “We want to put it out for investors to see. All the positives and negatives. That’s an approach which, short term, is painful and others will knock, but over the long term [it] builds more efficient markets.”

Canada’s TSX Venture Exchange and Canadian Securities Exchange list many companies that also trade on OTC. But neither exchange comes anywhere close to shining such a harsh public spotlight on companies.

Senior figures in North American regulation also point to basic structural holes at Canada’s junior stock exchanges: low fees and lax rules that make it easy for promoters to game the system and virtually guarantee huge returns from taking tiny untested companies public.

The formula was established decades ago: Promoters identify a hot sector, acquire a dormant publicly traded shell company, change its name, issue “seed stock” to founders, do a few financing rounds at increasingly higher share prices, come up with a great “story” to sell to retail investors and, finally, take the company public. That gives the promoters the liquidity they need to sell at an enormous profit.

“[For] the people who kind of run these things as scams, it’s all about getting it listed, getting the share price up and getting off your stock,” said Jamie Keech, a mining engineer and resources financier.

how stock promoters get rich fast

“[For] the people who kind of run these things as scams,

it’s all about getting it listed, getting the share price up

and getting off your stock,” said Jamie Keech, a mining

engineer and resources financier.

2

3

1

Acquire shell

company,

Pot Power Corp.

Change name

to COVID

Therapies Inc.

Identify a hot

sector, e.g.

COVID-19

5

4

Issue $0.001 “seed”

stock to founders

Private placement financing

at$0.02 with stock granted to

promoters, bankers, etc.

6

7

Start promoting the “story”

on social media, newsletters,

stock promo websites

Company goes

public at $0.07

9

8

Stock closes at

$0.10 on day one

Paper profit

on seeds stock

9,900 per cent

Note: Names of companies and share prices are

fictional and for illustrative purposes only

how stock promoters get rich fast

“[For] the people who kind of run these things as scams,

it’s all about getting it listed, getting the share price up and

getting off your stock,” said Jamie Keech, a mining

engineer and resources financier.

2

3

1

Acquire shell

company,

Pot Power Corp.

Change name

to COVID

Therapies Inc.

Identify a hot

sector, e.g.

COVID-19

4

5

Issue $0.001 “seed”

stock to founders

Private placement financing

at $0.02 with stock granted to

promoters, bankers, etc.

6

7

Start promoting the “story”

on social media, newsletters,

stock promo websites

Company goes

public at $0.07

9

8

Stock closes at

$0.10 on day one

Paper profit

on seed stock

9,900 per cent

Note: Names of companies and share prices are

fictional and for illustrative purposes only

NIALL McGEE AND JOHN SOPINSKI/THE GLOBE AND MAIL

how stock promoters get rich fast

“[For] the people who kind of run these things as scams, it’s all about getting it listed, getting

the share price up and getting off your stock,” said Jamie Keech, a mining engineer and

resources financier.

4

2

3

5

1

Acquire shell

company,

Pot Power Corp.

Change name

to COVID

Therapies Inc.

Issue $0.001 “seed”

stock to founders

Identify a hot

sector, e.g.

COVID-19

Private placement finan-

cing at $0.02 with stock

granted to promoters,

bankers, etc.

6

9

8

7

Start promoting the “story”

on social media, newsletters,

stock promo websites

Company goes

public at $0.07

Paper profit

on seed stock

9,900 per cent

Stock closes at

$0.10 on day one

Note: Names of

companies and

share prices are

fictional and for

illustrative pur-

poses only

NIALL McGEE AND JOHN SOPINSKI/THE GLOBE AND MAIL

Then there’s the matter – all perfectly legal – of testing the limits on how low companies can go when issuing seed stock. Founder shares have been issued at a cent a share, a tenth of a cent or even much less. Vancouver-based junior mining exploration company Fosterville South Exploration Ltd. issued 12.75 million shares for a total capital raise of $9. The cost for the founders was $0.00000705882 a share. When the company went public earlier this year, it closed its first day of trading on the TSX Venture Exchange at $1.08 a share, giving founders a paper return of 15,299,908 per cent.

“They’re using legal means to hoodwink the public” Ms. Jensen said of the ease of going public in Canada. “Is it wrong? Absolutely it’s wrong.” Yet, like too many weaknesses of Canadian markets, it endures.


So what can be done to stop the rot?

Ms. Jensen says, even under existing provincial laws, it needs to be easier for regulators to move on suspected fraudsters. That includes speeding up the timeline for obtaining court dates, the power to compel people to testify like the U.S. Department of Justice does, and possibly banning the use of shell companies to go public.

“It can’t be so difficult to prosecute people who are intentionally abusing the market, " Ms. Jensen said.

The whistle-blower, Ms. Holtzee, says that many pump and dumps are now perpetrated by computer geeks in their 20s who are proficient in spreading fraudulent information over the web, and then disappearing by using encryption. Canadian regulators, she says, need to hire young STEM (science, technology, engineering and mathematics) graduates – “dot connectors” – who can track scams as they’re being perpetrated and stop them right away.

Mr. Groia also believes much more money should be spent on detection rather than prosecution. He says by investing as little as $1-million a year in computer-savvy investigators, Canada could cut pump and dumps by 60 per cent to 70 per cent.

Some observers claim that stupid or ignorant investors are as much to blame as fraudsters for pump and dumps. If only they would vet an outlandish claim in a newsletter or on a stock promotion website against public filings, it would be obvious that a miracle COVID-19 cure is a con.

But that’s not easy. SEDAR, the website that houses public filings by Canadian companies, is terribly designed. Only sophisticated investors are likely to know where to find critical information and then make sense of it. Canadian regulators need to push companies to make it far easier for average citizens to find what they’re looking for, and for filings to be written in language that can be easily understood.

The past decade has seen pump and dump campaigns move from junior gold stocks, to marijuana, to bitcoin and back to gold recently with bullion prices soaring. And now there’s COVID-19.

Ms. Jensen said the latest trend involves crooks manipulating the share prices of illiquid companies by “hijacking” the trading accounts of investors, allowing scammers to use other people’s money directly to commit crimes.

The technology for those thefts exists. So does the technology to stop them. Unfortunately, it appears scammers and proponents of reform don’t think that will happen any time soon.

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