Small Investor Protection Association comments

The Holoday Story certainly illustrates most of the problems investors face today. John Reynold’s book Free Rider is well researched and discloses detail that should alert the public to the attitudes of industry that are the major risk that investors face. It may read like fiction but it is full of facts. I had the opportunity to attend the book opening November 26, 2001, and meet some of the people mentioned in the book including Albert Robinson.

Holoday’s misdeeds were not those of a “rogue” broker. His actions were known to management. When Midland Walwyn’s compliance officer, Albert Robinson, had the temerity to suggest that Holoday be fired for his actions because this would create problems for the firm, he was rewarded by being fired. He was also unable to find further employment in the investment industry. This is the problem those in the industry face if they are brave enough to come forward.

Kent Shirley came forward in February 2004 and reported to the Saskatchewan Securities Commission, the Ontario Securities Commission and others. The regulators failed to act and Assante exacted revenge by precipitating an Anton Pillar order to prevent Kent from speaking out. Joe Killoran (he came forward years ago to tell the truth much the same as Kent Shirley and that resulted in his career as a mutual fund salesman being destroyed) is valiantly carrying the torch passed to him by Kent Shirley and is now fighting a civil action launched by Assante. Have the regulators done anything yet?

Now several staff members have come forward with allegations of wrongdoing in the ASC. The ASC has responded by firing Grahame Newton who seems to be one of the “cowards” who made anonymous allegations. The Alberta Finance Minister is “concerned” and ordered an investigation. This type of industry response illustrates that corruption permeates industry and even the regulators. It illustrates that TruthTellers are intimidated and persecuted to discourage others to come forward.

We need TruthTeller legislation that protects all Canadians … particularly those in the investment industry and the regulatory system.

When will Government and the public recognize that financial services dishonesty and corruption is one of the biggest issues that Canadians face. Countless numbers are losing their life savings at the hands of a callous, dishonest investment industry.

Canadians are deceived by the industry and the regulators into believing they can trust the industry to look after their investment, and the regulators to ensure their investments are protected. The reality is that it is really an Investor Beware situation.

When investors lose their money they are faced with the response that they should have looked after their investments and that they should, have taken action to mitigate the losses.

If the regulators and the government accept that the investor is responsible in this manner then government and regulators have a responsibility to alert the public that it is indeed a Buyer Beware industry.

We are becoming alarmed by recent revelations and developments.
In December 2004 it was revealed that eight of our largest investment institutions were found to engage in mutual fund market timing that took from small investors and lined the pockets of industry. This reveals the investment industry’s widespread wrongdoing and a cavalier attitude towards the small investor.
Earlier this year the Gomery Commission testimony began to reveal that corruption is rife and extends into our Government. The former prime minister tried to stifle Justice Gomery and make a mockery of the inquiry.
Recently the Alberta Minister of Finance, the Hon. Shirley McClellan, has ordered an independent inquiry to investigate allegations of Alberta Securities Commission wrongdoing brought forward by ASC staff. The ASC has fired Grahame Newton, and he is believed to be one of those who dared to come forward.
Last year the Ontario government quietly reduced the Statute of Limitation from six years to two years. We are continuing to seek clarification on this issue.

In 1999 Robert Goldin wrote a book entitled “Investor Beware”. Maybe he is right.

Still there are some who believe it should not be an “Investor Beware” situation. Gerry Phillips said our financial services industry regulatory system should focus on investor protection and that a national regulator can best serve all Canadians. We fully support his opinion. We also believe that investor protection can only be provided by an independent investor protection agency, as recommended in the CARP/SIPA Report of September 2004.

However, we are concerned that investor protection is being eroded by an industry that lacks honesty and integrity and seems to have no sense of what is right and what is wrong.

Regulators confide that industry tries to justify all of their actions by saying “show me a rule that says it is wrong.” The industry maintains that market timing is legal. They do not see that robbing the poor to pay the rich is fundamentally wrong.

We are also concerned that the government is failing to realize that white collar crime is not a victimless crime. The seniors, widows and others, who spent a lifetime accumulating savings that are destroyed in a heartbeat by a callous investment industry, suffer in untold ways without hope of recovery.

On February 14th 2005, we made a submission to the Senate committee. Our submission concludes:
Government must take action to enable Canadians to trust. Canadians need:
· One national Financial Services Regulator
· A national Investor Protection Agency
· A national register of representatives accessible to the public

SIPA asks that the Senate call for an inquiry into this problem of investors losing their life savings due to investment industry widespread practices of wrongdoing.

In light of the market-timing scandal, Adscam, and the ASC scandal, Ontario should lead the way by ordering an independent inquiry into the provincial financial services regulatory system. A simple review of the findings of the regulators themselves would confirm the need for an inquiry.

The ASC scandal illustrates that there must be independent oversight of the activities of the regulators and that government must legislate TruthTeller protection immediately. We have already witnessed the death of Kent Shirley who came forward with allegations of wrongdoing yet the regulators are strangely silent on this issue. Now Grahame Newton has been fired. Government must act to provide protection.

With regard to the limitations period, most victims of financial predators take several years to realize that the reasons for their loss are more related to industry wrongdoing than market risks. Canadians tend to believe they can trust the investment industry and believe the hype they hear, and that they can trust our government to provide a regulatory system that provides investor protection. Indeed the hype suggests that investor protection is central to regulation.

With the fractured and complex regulatory system that exists today it takes small investors time to determine what the procedures are. Industry is slow to respond and most victims spend several years following industry and regulatory advised procedures before realizing that civil litigation is the only recourse. To reduce the limitation period to two years is prejudicial to the investor’s rights and this must be corrected.

We are particularly concerned that investors are not receiving fair treatment and that enforcement is either unwilling or unable to act to provide appropriate protection. SROs should not carry the mandate for investor protection.

We believe the most important issues include:
The lack of non-industry sponsored dispute resolution mechanisms
The lack of quantification of the extent of complaints and investor losses to enable this issue to be placed in proper perspective. Lack of transparency, industry cover-up and gag orders prevent the public from knowing.
The need for a regular audit of the enforcement regime by a government agency. The regulators investigating themselves leads to whitewashing and failure to disclose problems in a timely fashion.
The lack of TruthTeller protection that discourages those who would come forward to expose widespread wrongdoing. Witness: the ASC treatment of Grahame Newton, Assante’s treatment of Kent Shirley, and Joe Killoran’s treatment for coming forward years ago.
The reduction of the Limitation period for abused investors. Two years is ridiculous when most aggrieved small investors take several years to realize that their losses are due to industry wrongdoing and not just market risk, and that the industry and regulators do not provide fair an timely treatment.

We believe there are sufficient studies go back to the mid nineties when Ms. Stromberg, a securities lawyer and former OSC Commissioner produced two reports that not only defined the problems but recommended solutions that are still being discussed ten years later.

The Wise Persons Committee Report on December 2003 reviewed all of the studies to date and said “It’s Time” to establish a national regulator. Now there is talk of harmonization and Uniform Securities Law. In the meantime small investors continue to be robbed of their life savings to the tune of several billion dollars per year.

Reviewing regulations and recommending guidelines and practices is like Nero fiddling while Rome burns.

We need to focus on getting action that will effect change that does indeed provide investor protection that includes not only [preventative investor protection but also timely and fair restitution of investor’s disputes.

Making clients whole again should not be interpreted in giving them 10%, 30% or even 70% of their money back. When investors are robbed of their savings, whether by incompetence or deliberate wrongdoing by the financial services industry, there should be an authority with the power to order restitution.

The judge’s order that Holoday pay restitution of half the amount of the fraud is not good enough. Midland Walwyn and First Marathon should be held accountable for full restitution and required to make defrauded clients whole again. The Regulators should be required to ensure that the firms provide this restitution. If not, the regulators should be compelled to punish these companies and establish a fund to pay victims of industry wrongdoing.

At least that is my opinion.

Stan I. Buell, P.Eng.Small Investor Protection Association (SIPA Inc)P.O.Box 325Markham, ON, L3P 3J8e-mail: stanbuell@sipa.towebsite: www.sipa.to