Malversation d'entreprise: une perspective canadienne (document en anglais)

CORPORATE MALFEASANCE

A CANADIAN PERSPECTIVE

ABSTRACT

Canada is criticized for not being rigorous with corporate malfeasance and is known to be a safe haven for white-collar crimes. This is seen through the analysis of the $150 million pump-and-dump YBM Magnex scheme where the President received a life time ban from becoming a director or officer of any issuer in Ontario only; the CEO received 5 year ban plus $250,000 fine and former chairman received a 3 year ban plus $ 75,000 fine. Total fines amounted to $1.2 million CAD. In comparison to the U.S and the Enron scandal, the CFO received 10 years imprisonment with no chance of parole, CEO received 24 years and fined $45 million, and the chairman received 45 years. Canada is a breeding ground for fraud because of its fragmented provincial regulatory system, ineffective enforcement and flaws within the legal system, thus leaving the door wide open for corporate malfeasance hence moral hazard. The legal system in Canada restricts the extent of evidence that can be obtained (ability to obtain sworn testimony from witnesses), and the severity of sentencing (only 1/6 of the sentence must be served before asking for parole). When compared to the U.S., the convicted must serve 85% of the sentencing term. With these flaws in the Canadian system, foreign investors are not attracted to Canada. In order for Canada to gain investors confidence in the Canadian securities market and attract foreign investors they must adopt a National Securities Regulator Board, revise the legal system and improve enforcement.

INTRODUCTION

Canada is criticized for not being rigorous with corporate malfeasance and is known to be a safe haven for white-collar crimes. Is it due to our provincial securities regulatory system? How has Canada earned this reputation if each province/territory has regulators, rules and laws? Is it because white-collar crimes are considered to be “non-violent crimes”? Is it due to the fact that Canada is represented by thirteen small voices rather than one main voice, so it is seen as less powerful? Or maybe the problem doesn’t lie with the provincial regulators, maybe it is Canada’s law enforcements inability to undergo an investigation due to law restrictions? Where does Canada stand as compared to the United States in regards to punishment of corporate malfeasance? A lot of people have lost their life savings because of white-collar crimes and investors are losing confidence in the Canadian economy. What should be done to reduce corporate malfeasance? Should changes be made in the legal processes, the regulatory system, or statute? YBM Magnex International Inc., Bre-X Minerals, Philip Services Corp. and Livent Inc. scandals have been a complete embarrassment to the Canadian Stock Exchange costing $9 billion.

We will begin with a brief discussion on the outcome of YBM Magnex compared with Enron followed by an explanation on how the Canadian regulatory system failed to prevent fraud arising from information asymmetry. We will then analyze the current regulatory and legal system on how the two systems contributed to corporate malfeasance. Finally, we will end the paper with our recommendation on how to improve the current regulatory system.

YBM MAGNEX

YBM Magnex International Inc., a Pennsylvania-based company, was incorporated in Alberta in 1994. In a U.S. courtroom, YBM executives admitted that the existence of YBM was to commit securities fraud and to launder money for the Russian mafia. Canada was chosen for the scam because YBM executives believed Canadian securities regulations were lenient.

YBM traded as a penny stock for less than $ 1.00/share in the Alberta Stock Exchange (ASE). Penny stocks have minimum listing requirements. Listing was easier in ASE, allowing easy entry into the Canadian capital market, compared to the Toronto Stock Exchange (TSE) or the Montreal Stock Exchange (MSE). Listing on the Vancouver Stock Exchange (VSE) was not a viable option because new registrants were subject to stringent registration evaluations, after the VSE suffered a terrible blow to its image from unprecedented fraud and market manipulation activities in the 1990s. Did the ASE conduct a criminal and credit check on the executives of the listing company? Is it required? Why would ASE list YBM? One possible reason: stock exchanges compete for listings because they make money from trading fees, listing fees, and live market data. Would ASE risk losing its reputation and investors’ confidence? Unlikely. Perhaps ASE did not conduct a thorough investigation of the players because the cost of conducting an investigation exceeded the benefits. If that being the case, better screening processes are needed to weed out the bad from the good.

YBM prepared for the day when it would graduate from a penny stock in the ASE to equity in the TSE. The TSE registration form required declaration of criminal allegations or convictions. Failure to do so meant automatic refusal. The TSE is the largest Canadian capital market. YBM needed to list with TSE so that YBM could legitimize their money laundering activities. The mastermind behind the whole scheme was Semion Mogilevich, a Ukrainian born mobster, who operated from his home in Budapest. To circumvent the criminal check, he bribed lawyers and accountants to set up shell companies. Lack of corporate transparency makes it difficult for law enforcements to pinpoint the perpetrator, so they usually give up pursuing.

Within two years, YBM Magnex graduated from the ASE and listed on the TSE (Drohan, 2005). To add credibility to the firm and gain investor confidence, former Ontario Premier, David Peterson, was hired to sit on the Board. Former Vice President of First Marathon Securities, Owen Mitchell, was appointed director, facilitating YBM’s entry into the TSE. Reputable accounting firm, Coopers & Lybrand, was hired as the auditor only to be replaced by Deloitte & Touche. Red flag? YBM reported hundreds of millions of dollars in revenue from manufacturing and selling magnets to fictitious clients by creating fake invoices to launder illegal money. To stimulate market demand for YBM shares, press releases and investor conferences were held boasting its profitability. To drive the share price further, YBM executives and collaborators bought and sold shares. Investors

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