SECURITIES REGULATORS ARE UNFAIRLY CRITICIZED
RCMP should face greater scrutiny, says David Baines.
The Vancouver Sun and the Globe and Mail have been highly critical of securities regulators for collecting only a small fraction of the massive amount of fines they impose on securities offenders.
The Globe has also criticized regulators for what it views as a disturbingly large number of offenders who ignore their fines and suspensions and go on to commit more securities offences.
While the criticism has helped alert the public to some of the shortcomings of securities enforcement, it needs careful explanation and qualification.
In a series of articles published in December (with followup stories as recently as last week), the Globe has been pounding away at its sudden discovery that Canadian securities regulators have failed to collect more than $1 billion in fines.
The Sun reported that the B.C. Securities Commission, in particular, has collected only two per cent of the $510 million it assessed in the last decade.
Both papers characterized these figures as investigative discoveries, which deliberate or not, gives the impression that regulators are trying to hide something from the public. This is not true.
The B.C. figures were lifted, almost verbatim, from the BCSC’s last annual report. All the other provincial commissions similarly report their collection rates in their annual reports. Most provinces — including B.C., Ontario and Alberta — also publish lists of individual offenders and how much they owe.
So the poor collection record is not exactly a state secret.
Both papers also gave the impression that regulators could collect many of these fines, if only they would get off their butts.
I agree that regulators could step up their collection efforts, but seizing and selling assets is not an easy process. There are all sorts of legal obstacles, and by the time regulators arrive on the scene, the assets are usually either fully encumbered or long gone. Regulators are also reluctant to collect fines at the expense of investor recoveries. And in any event, proceeds from these sorts of assets amount to crumbs in the overall picture and hardly move the collection needle.
Which brings us to the main reason why the collection record is so poor: most of the fines are purely notional in nature.
Consider the case of the Freedom Investment Club. A BCSC hearing panel found the two principals, Michael Lathigee and Earl Pasquill, took $21.7 million of investors’ money and invested it in Alberta real estate projects without mentioning that the projects were insolvent.
The panel found they had defrauded these investors and ordered them to disgorge the full $21.7 million. That money was not spirited away into some offshore account. It was invested and lost. It no longer exists.
Then the panel fined them an additional $15 million each, which, again, is money that never existed in the first place. So the grand total of $51.7 million consists of money that no longer exists or never existed in the first place. In fact, the vast majority of unpaid fines ( by dollar value) fall into this category. Is there any wonder these fines remain unpaid?
But that begs the question: Why do regulators assess large fines they will never collect? There are four reasons, none of which were reported.
The first is that case law has established that ability to pay is not a determinative factor in assessing fines. The mandate of securities regulators is to protect the market. It cannot, by law, punish offenders. Its focus, as confirmed by the Supreme Court of Canada, must be on deterrence.
There are two kinds of deterrence: specific and general. If a particular offence calls for a $10-million fine, but the offender is bankrupt, a fine of that magnitude doesn’t mean much in terms of specific deterrence. But in terms of general deterrence, a $10-million fine signals to all other would-be offenders that this is what you are facing if you commit a similar offence.
The second reason is that victims would be outraged if fines were reduced or waved simply because the offender is unable to pay. Victims want the perpetrators on the hook for the rest of their lives.
The third reason is that offenders may eventually come into money, either through a new business venture, an inheritance, or maybe even a lottery winning.
The fourth and most significant reason is that no matter how long an offender has been suspended from the market, he will remain suspended as long as the fine remains unpaid.
Both papers noted that regulators routinely issue news releases announcing huge fines without mentioning that the likelihood of collection is often slim to none. The suggestion here is that regulators are more interested in sensational headlines than actual collections.
While it’s true that these releases make good headlines, it’s not fair to blame the regulators.
No commission is going to say, “We have fined Mr. Smith $10 million, but we don’t expect him to pay.” The official position must always be that he is expected to pay.
If reporters take the time and trouble to ask, commission officials will often acknowledge that the likelihood of payment is remote. And even if they decline comment, reporters can make their own assessments. Many media outlets, however, cannot resist bright shiny objects.
The Globe, for example, published a very sensational headline based on the $33-million fine assessed against former Vancouver notary Rashida Samji without noting that she is bankrupt and inundated with lawsuits from her victims. In those cases, I say it’s the paper that’s misleading the public, not the regulators.
The Globe additionally reported that 11 per cent of securities offenders are repeat offenders, which we are supposed to accept as evidence that commission enforcement is not working. However, the paper made no attempt to relate this figure to any other form of recidivism. Its only support was a York University professor who said, “That’s a lot.”
In my opinion, it’s a remarkably low figure. Compare it to, say, an Aboriginal recidivism rate as high as 66 per cent within three years of completion of community supervision. That’s what I would call a lot.
Although I have concerns about many of their policies and practices, I think that, on balance, the securities commissions are doing their job, especially considering their rather narrow mandate and the limited tools they have at their disposal.
It’s true that securities offenders can easily ignore their suspensions and fines, but the commissions can’t do much about it. The only effective answer is jail, but regulators don’t have the authority to put people in jail. Only the police and the Crown and the courts can do that, which begs the question, where are they?
Every year, securities regulators ban and fine dozens of securities fraudsters, but as The Sun reported, the RCMP has taken very few of these cases forward for criminal prosecution.
They have lots of excuses, but in my view, the real reason is disinterest and incompetence.
This is not a new problem. It has existed for decades. Instead of focusing on the regulators, our provincial politicians need to square off with the RCMP and tell them to shape up. That’s where the investment buck stops.
The only effective answer is jail, but regulators don’t have the authority to put people in jail. Only the police and the Crown and the courts can do that, which begs the question, where are they?