OTTAWA — Embarrassment? Tragedy? Take your pick.
Those were among the mostly furious reactions to the decision by Ontario Superior Court that cleared a former vice chairman of Bre-X Minerals Ltd. on all charges leveled at him by the Ontario Securities Commission.
OTTAWA — Embarrassment? Tragedy? Take your pick.
Those were among the mostly furious reactions to the decision by Ontario Superior Court that cleared a former vice chairman of Bre-X Minerals Ltd. on all charges leveled at him by the Ontario Securities Commission.
That marked the end of a seven-year trial that involved the biggest fraud in Canadian business history, the collapse of the Toronto-based gold-mining company, which was part of Calgary, Alberta-based Bre-X Group of Companies.
The company told investors that about 8% of the world’s gold was in its Indonesian mine site. It turns out there was none. The fraud unraveled in late 1997, which was when Bre-X filed for bankruptcy.
On July 31, Justice Peter Hyrn found the executive, John Bernard Felderhof, not guilty of four counts of insider trading, and in addition, not guilty of four counts alleging that he authorized, permitted or acquiesced in Bre-X’s issuing press releases in violation of Ontario securities law.
“I think enforcement with respect to securities is an embarrassment internationally to Canada,” Canadian Finance Minister Jim Flaherty told Canadian Press last Tuesday, referring to the Bre-X case and that of Conrad Black, the Canadian-born newspaper tycoon convicted July 13 in Chicago of mail fraud and one count of obstruction of justice. Lord Black faces up to 35 years in prison for the offenses, plus a maximum penalty of $1 million (U.S.).
“We need to better protect investors against breaches of securities law and we need to do that in our own country and not rely on other countries to do it for us,” Mr. Flaherty said.
The Toronto-based OSC, naturally, is defensive. “These were serious charges and it was appropriate to bring them before the court. We will review the decision and consider our next steps,” chairman David Wilson said in press release.
Will the OSC appeal? “We have 30 days to review the decision,” said Laurie Gillett, the commission’s public affairs manager. “We are using the time to sift through [the] 650 pages of the verdict.”
Do businesspeople hold the OSC responsible?
“Yes and no,” said Conrad Winn, chief executive and founder of COMPAS Inc., a polling firm based in Toronto. “OSC is not the only focus. Some fault the [Toronto Stock Exchange] too, and lax enforcement of securities regulation.”
COMPAS surveyed a panel of CEOs and other business leaders Aug. 1-3, in conjunction with BDO Dunwoody LLP — the Canadian arm of Brussels, Belgium, based accounting firm BDO International — and the Toronto-based newspaper National Post.
“To an extraordinary degree, panelists feel that it was a ‘tragedy’ that banks and brokers profited from transactions and underwriting fees without having legal responsibility for ensuring that the advice they gave about the firm was well-founded,” the executive summary of the poll says.
Some verbatim transcripts of what businesspeople told the pollsters do fault the OSC’s legal strategy.
“OSC appears to have pursued wrong charges against Felderhof,” said one business leader. “The real offense was fraud, not insider trading, and if he wasn’t aware, then he should have been. He possessed reports warning of the presence of foreign gold in samples, yet apparently he did nothing.”
“I have no comment on that,” said Ms. Gillett, adding that the OSC has until November to decide whether to launch a civil action against Lord Black.
The Toronto Stock Exchange also comes under fire. One transcript says: “What is inexcusable — and has not been adequately addressed — is the fact that a highly speculative company with no production profile, and no history of earnings (let alone no current income) was included in the TSX 300 Index by the bright lights running the exchange and the OSC.”
Another transcript concludes “Canada has a reputation as a good place to be to commit white-collar crime. Bre-X is a good example of that.”
The Canadian securities regime does have it defenders, however. “The decade-long attack on Canadian regulators, the mining industry and others was never justified,” National Post columnist Terence Corcoran wrote on Aug. 1. “It is time to put an end to the game, which surfaced officially as recently as last October in the report of the Task Force to Modernize Securities Legislation in Canada. (InvestmentNews, Oct. 16, 2006). Using Bre-X as its sole piece of evidence, the task force said Canada was branded a risky country and suffered a ‘Canada discount’ among global investors. No evidence for this ‘discount’ exists, and now we have Justice Peter Hyrn’s judgment that there isn’t even evidence to support the theory that it should exist.”
Investor protection
But Mr. Flaherty doesn’t buy Mr. Corcoran’s argument, believing that Canada must establish a national regulator to protect investors.
“Sometimes people look at the issue of a common securities regulator as an issue of Bay Street,” he told CP, referring to Toronto’s financial community. “But the issue relates to every Canadian who has an interest in a pension fund, every Canadian who has any stocks.”
According to Mr. Winn, a recent COMPASS poll of business people “shows the business community is in agreement with Mr. Flaherty. An extraordinary 80% see the situation as harming the economy. An equal number see the situation as needing urgent remedy.”
