Are Canadian Regulators Ignoring Fraud?

Last week, Conrad Black was told by a Chicago judge that he couldn’t delay his March 3rd jail date. He plied his trade out of the historic 10 Toronto Street address, but Canadian enforcement officals never found Lord Black wanting - even though Canadian equity research analysts had long figured out that most of Hollinger’s profit wound up in the hands of Ravelston shareholders.

One doesn’t even need to raise the name Garth Drabinsky, who never caught the Ontario Securities Commission’s eye until the FBI came calling, to get a sense that we do things differently in Canada.

In one needs any confirmation of this indifference, the recent billions of lost shareholder wealth at the hands of Canadian bankers hasn’t raised a single gumshoes' eyebrows. That’s not to say they aren’t keen to fry the small fish: Debbie Weinstein, Brian Costello and Jo-Anne Chang. But if the sums are massive, or the defendents well-heeled, the situations invariably seem to generate a free pass from the OSC and RCMP.

France’s Societe Generale (SCGLY.PK) called police authorities as soon as it discovered that Jerome Kerviel had cost them $7.1 billion. Societe Generale CEO Daniel Bouton called the unauthorized trading “a fraud” on the bank. Mr. Kerviel was preliminarily charged with “breach of trust'’ by Paris prosecutors. Time will tell if supervisors were unaware of the activities of their junior trader, who claims his book was up $1.5 billion on December 31st. His true crime? He wanted to earn a bigger bonus and get a promotion, which is something that goes on every single day in the financial community.

In Canada, the blame game has had a familiar ring. Last April, the Bank of Montreal (BMO) announced that it had suffered its largest writedown in its 190 year history. One quiet hurricane season resulted in massive trading losses in natural gas options, and two employees were quickly fired. Shareholder losses already exceed C$850 million. Bay Street skuttlebut is that the situation is being explained away internally as a “fraud," which is the same description used by “Shock Gen”, above.

Strangely, Canada’s Integrated Market Enforcement Team trucks have not rolled up to Toronto’s First Canadian Place to investigate this alleged crime, even though the Canadian Criminal Code has an entire section devoted to monetary fraud. Did BMO call the RCMP and get a busy signal?

In New York City, the recent multi-billion dollar subprime losses have become the aggressive focus of the Securities and Exchange Commission, and the U.S. attorney in New York’s Eastern District in Brooklyn. Firms with international stature are being asked to explain how they priced their subprime portfolios last year. UBS AG (UBS) and Merril Lynch (MER) are both feeling the heat, according to The Wall Street Journal. The investigatory focus surrounds how these international financial behemoths priced their subprime portfolios, which is something that Canadian banks have also been bedeviled by.

For their part, the F.B.I. is looking into the origination component of the subprime meltdown, through active investigations of 14 different firms. The question here is: Did the folks doing the originating, packaging and selling of mortgage-related products cut corners and break the law?

At CIBC (CM), shareholders recently suffered a C$3.5 billion kiss as the bank wrote off a pile of subprime investments, a portion of which came unglued as a portion of its position had been hedged with flakey U.S. insurance outfits.

The C$3.5 billion figure is in stark contrast to the “$330 million exposure” that CIBC told Barron’s it had last summer (”It’s all about ‘alchemy’” July 21, 2007). In a July article, Barron’s put CIBC’s subprime risk at C$2 billion, which elicited a srong denial from a CIBC spokesperson. “Only $330 million.” A few months later, and CIBC’s saying the figure was now $1.7 billion (see prior post “When $330 million of subprime becomes $1.7 billion at CIBC” November 13, 2007). That revised amount doubled soon, forcing CIBC to raise C$2.5 billion of new equity, which was a 12% dilution to those shareholders, who believed CIBC’s story about the $330 million subprime figure, and didn’t sell last summer.

Even though every arm of American law and oversight (SEC, FBI, California and N.Y. District Attornies) has their teeth into the issue, we haven’t heard an investigatory peep out of Canada’s regulators and white collar crime enforcement teams. Despite seeing the pain that comes from “fraud,” “untimely disclosure,” and business decisions that have ravaged shareholders for more than C$5 billion of losses between BMO, CIBC and Royal Bank of Canada (RY) over the past 12 months.

The pattern shouldn’t come as a surprise, however. It may well be that Canada, at the end of the day, is just more of a free market than our southern neighbor, where the phrase “buyer beware” really means something.

In the United States, if smart people do stupid things, the U.S. culture of winning doesn’t allow the alleged wrong-doers to go untouched. If you screw up in a big way, then expect a suponea.

In Canada, Lord Black, Garth Drabinsky, BMO’s natural gas trader and the other alleged fraudsters saunter freely through our marketplace, enjoying the spoils of their activities. Until, that is, a man or a woman with a U.S. badge shows up with some tricky questions. Only then does the rubber hits the road with our enforcement teams, except that they have to stay their prosecutions until the FBI is finished with their Canadian quarry.

As for the poor shareholder sods that suffered by the alleged bad behavior, our regulators can only say that “you’re on your own.” What else can we assume? C$5 billion of losses after shareholders had been told not to fuss about subprime. Massive trading frauds have been alleged against specific individuals, and not a single Canadian investigation has begun. The Americans, however, are working overtime to find out if charges are warranted. And, in the process are making sure that investors are aware of what they’re up to.

Has no one learned a single lesson from the regulatory ostrich approach that was so embarrassing in the end at Hollinger and Livent? One gets the impression that some Canadian scalps remain off limits to those that are charged with protecting our capital markets.

Comments

[GKM]

While I agree with the general premise of the article, I can't agree that US regulators/law enforcement are really digging their teeth into the whole of the corruption inherent in that marketplace. Perhaps its just the amount of the malfeasance that goes on that they have to limit their investigations to the highest profile cases. However, there is further evidence to indicate illegal activities that goes unnoticed/unpunished.

Case in point - the trading around Countrywide shares right before the BOA deal was announced. It was pretty obvious that someone with insider knowledge stepped in and bought a bunch of stock and $7 calls (while selling the higher calls). Do you suppose that there will ever be charges laid in that case? This kind of activity goes on on a regular basis but I suppose it too much small-fry for the regulators to even sniff at.

[sasian]

Q.Are Can. Reg. Ignrng. Fraud ?
A.No,they are Regulating it.

[victim offraud]

Interesting story; Bank defrauds family--CIBC and PC Bank / President's choice Financial bank defrauds family of home and all their belongings! Bank used bogus lawyer to cover the fraud. The Canadian family was deeply involved in the Brampton Ontario's City councilor's position when the bank stole their home. Family was unaware and shocked to find a judgment on their home many months later. They were toss out of home with only the clothing on their backs!!
Bank took all their belongings (furniture and valuables) passports, legal/ personal papers/ documents and stored them in another person's name at AMJ CAMPBELL VANLINES & KMS ROYAL VANLINES.
Someone should remind Canada that the Charter of Rights and Freedom exist to protect people!!!!

[victim offraud]

Watch how CIBC and PC financial bank robbed Canada of it's fantastic talent--they stole Angela's songs
youtube.com/watch?v=s2...
Angela composed over 60 songs and it is now at AMJ CAMPBELL VANLINES AND KMS ROYAL stored by CIBC and PC bank in another person's name. Hideous banks!