Lax securities rules at root of $ 50- million Freedom Investment Club calamity
Honestly, I don’t know how B. C. Finance Minister Kevin Falcon can continue to ignore the carnage that the B. C. Securities Commission enables promoters to wreak on investors. Talk about fiddling while Rome burns.
The problem, as I have pointed out so many times before, is centred on provisions in the B. C. Securities Act that permit unlicensed, uneducated and often unethical people to sell risky and illiquid securities to B. C. residents. It is a recipe for disaster.
These disasters occur with mindnumbing regularity — causing immense financial damage, destroying retirement plans, ruining marriages, and infusing their victims with bitterness and distrust.
The B. C. government is ultimately responsible for what’s in the Securities Act, but in most cases it acts on the advice and recommendations of the commission. To date, the commission has not recommended any substantive changes to the rules and the government has not intervened. In my view, they are equally culpable.
The latest exempt- market fiasco to hit the news is the Freedom Investment Club. On Monday, BCSC enforcement staff issued a notice of hearing alleging that the two key promoters, Michael Lathigee and Earle Pasquill, committed fraud by raising $ 21.7 million from 698 investors without telling them that the club was on the verge of insolvency.
This is a familiar pattern: BCSC officials, with government acquiescence, open the door for promoters to flog dodgy securities to mom- and- pop investors, then call on their enforcement people to clean up the inevitable mess.
FIC is a classic example. In December 2002, I reported that Lathigee and Pasquill were promoting the club at financial motivational speaker T. Harv Eker’s so- called Millionaire School.
At that point, the club had about 200 members who had invested just over $ 600,000. Lathigee and Pasquill — who are not licensed to sell or advise in securities — invested the money in sketchy deals such as payroll loans, coloured diamonds and junior stocks.
The business grew rapidly through marketing seminars and word- ofmouth referrals. By mid- 2007, it had grown to 2,500 members and $ 10 million in assets.
BCSC enforcement staff were clearly worried about this gathering storm. They intervened on several occasions and at one point ordered FIC to offer investor refunds.
“If I was an investor, I would take my money and run,” I wrote in July 2007. But very few investors did so. Most were incapable of properly analyzing financial risk and reward. And by that time, the club had become a kind of cult, with many people investing on faith rather than reason.
By March 2008, the club had grown to 5,000 members and $ 100 million in assets, mostly Alberta development properties. I noted that the properties were highly levered and the market was softening. “A drop in value could be devastating for shareholders,” I reported, which was simply stating the obvious.
In August 2008, I reiterated the structural problem: “FIC looks and acts like a conventional mutual fund, but it has none of the usual consumer safeguards. Neither the fund nor its principals are registered with the securities commission, and they operate outside the purview of the Mutual Fund Dealers Association.”
In September 2008, BCSC enforcement staff issued a cease- trade order against one of the FIC companies ( WBIC Canada Inc.) for alleged disclosure breaches.
“B. C. regulators are clearly nervous of FIC and its related companies, and rightly so,” I reported at the time. “In my view, it is a disaster in progress.”
This provoked an indignant response from Lathigee: “Mr. Baines does not seem to grasp the fact that FIC is a contrarian investment club,” he said in letter to shareholders in October 2008. “We don’t invest in traditional financial products, which given the recent tumult in the markets, has proven to be a prudent strategy.”
He continued: “We respect our shareholders, which is why I take exception to Mr. Baines subtly slanted style, which evokes a perception that FIC is somehow doing harm or misleading our members.”
But according to the BCSC enforcement staff, that’s exactly what Lathigee and Pasquill were doing — misleading investors.
The BCSC’S notice of hearing alleges that, from February to November 2008 — when I was trying to warn consumers about FIC’S dodgy investments and the regulatory vacuum in which it was operating — Lathigee and Pasquill raised $ 21.7 million from 698 members for investment in FIC- related companies without telling them the companies were “close to insolvency.”
On the contrary, the notice alleges, the pair told members the investment was a “spectacular opportunity” that would enable FIC to help them “to acquire enormous wealth.”
Then the inevitable happened. The investment collapsed, redemptions were suspended, and the FIC group of companies went into receivership.
The $ 21.7 million that investors lost during this period understates the overall damage. In total, FIC raised about $ 50 million from investors. After satisfying secured creditors, it doesn’t look like there will be any money left over for them.
Last week, BCSC chair Brenda Leong told reporters that, according to a survey undertaken for the commission, one in five Canadians over 50 are vulnerable to highly risky investment offerings. She said the main reasons for this are fear of not having enough money for retirement and lack of understanding of the relationship between risk and reward.
“It’s the perfect storm for con artists,” she said.
I gagged when I read that. For sure, investors have certain vulnerabilities, but it’s our legislators and regulators who are creating the perfect storm — by allowing unlicensed promoters to sell their shoddy wares to trusting and naive investors, without regard for their age or financial circumstances.
The sad irony is that Premier Christy Clark claims to be focusing on families, yet her government’s securities policies continue to wreck entire families, year in and year out.