A Recipe for Cleaning Up the Investment Industry
(The following opinion piece, by Duff Conacher, Coordinator of Democracy Watch, was published in slightly different form in Corporate Knights magazine on April 28, 2005)
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
Democracy Watch homepage
In the past several years, Canadians have had a front row seat in a classic corporate responsibility fight, this one between investors and the investment industry. And, as in all such fights, the key player is the referee, governments and regulatory agencies such as the Ontario Securities Commission (OSC) and the Toronto Stock Exchange.
Nortel, Bre-X, YBM, Hollinger, Royal Bank, CIBC, TD-Canada Trust AIM -- all these companies and many more in Canada's investment industry have been in the news, involved in insider trading, conflicts of interest, stock fraud, financial mismanagement, market timing by mutual fund companies and many other unethical, irresponsible business practices.
As many industries mired in scandal in the past have, the investment industry has countered these scandals by saying either "so there's a few bad apples, overall the industry is ethical" or "don't regulate us government, we'll clean things up ourselves."
And so Canadian governments and regulators find themselves once again faced with a familiar choice -- protect the industry from accountability, or protect individuals from the industry.
If this were a fair fight, the government/regulatory referee would have to:
be independent from both the industry and investors;
have full information about the practices of both;
have full powers to penalize both, and
have to follow clear rules.
However, as with all corporate responsibility battles in the past century, this is not a fair fight. The government is taking large donations from the industry; the industry gouges investors in part to pay for dozens of lobbyists to wine-and-dine politicians and regulators; the industry does not have to disclose key information; the regulator has inadequate resources and powers, and; the rules are full of loopholes.
Things are so bad that the industry actually is the referee for its own behavior in many areas through the Investment Dealers Association and the stock exchanges. On their own (although some have banded together in small, poorly funded groups), investors don't have a chance.
What is surprising is that anyone has found the scandalous behavior by the industry surprising ˆ the whole system is clearly designed to encourage repeated abuses.
The government/regulatory referee has so far responded in a typical way -- do as little as possible and hope investors will be fooled into thinking that they are protected.
Yes, there has been report after report (the Crawford Report, the Osborne Report, a Senate Committee Report, the Ontario Finance and Economic Affairs Committee Report) -- lots of words on lots of paper. Words on paper do not protect investors, however.
So what is needed to clean up the investment industry in Canada? The same things that are needed to clean up every industry in Canada:
strong laws (not voluntary guidelines) with no loopholes;
requirements that the details of every industry practice (including all violations) be publicly disclosed on searchable, government-maintained websites;
a fully independent, fully empowered, well-resourced enforcement agency (in other words, an end to self-regulation);
penalties that are high enough to discourage violations;
citizens empowered to hold the industry, the regulatory agencies, and;
governments accountable if they fail to enforce the laws.
True, the federal government has added a new offence of improper insider trading to the Criminal Code, and a rule that those who "blow the whistle" on wrongdoing can't be harmed (unfortunately without making it clear who will protect whistleblowers from harm), and increased the maximum sentences for financial fraud, and created special enforcement teams in the RCMP.
And true, the OSC has banned certain unethical practices, and Ontario Cabinet minister Gerry Phillips has promised to allow investors to sue in a class action for a broader range of violations.
However, all of these actions have been taken without any examination of three key questions: What was the chance of getting caught for investment frauds in the past? What will be the chance of getting caught after all of these changes? And, therefore, how high do penalties have to be in order to ensure that the effective penalty (the actual penalty x the chance of getting caught) will be high enough to discourage future violations?
These questions are consistently ignored by governments responding to corporate responsibility, as they pretend to clean-up problems and claim to protect individuals, communities, environments from abuse by corporations.
And so, beyond making penalties actually effective in the real world, empowering citizens is a key step for governments to take to clean up the investment and all other industries. Because the government/regulatory referee has shown time and again that they have to be watched as closely as the industry, the referee has a duty to help citizens build the capacity to watch closely.
A simple, no-cost method exists for building this capacity, and to their credit the Ontario Finance and Economic Affairs Committee recommended that this method be carefully considered by the Ontario government.
The method has been used successfully in U.S. states to create watchdog groups over utility companies (hydro, gas, water, telephone), and a national survey shows that a large majority of Canadians support using it here.
All the government has to do is require the investment industry (publicly traded companies and mutual fund companies) to enclose a one-page pamphlet in the same envelopes they use to mail their reports to investors. The pamphlet would describe and invite investors to join an investor association for an annual fee of about $40, an association run only by investors and dedicated to serving only investors.
Approximately 10 million investors would receive the pamphlet, and even if only 5% responded, a group with 500,000 members and a $20 million annual budget would be formed. The creation of such a group would make the corporate responsibility fight in the investment industry more equal, balancing the marketplace by giving investors an easy way to band together, combine their resources, and advocate their concerns.
There would be no cost to the investment industry, as they are mailing out the envelopes anyway. And the government would have no costs either.
If Ontario minister Gerry Phillips, OSC Chair David Brown, and federal Finance Minister Ralph Goodale do not act on this no-cost proposal, they will be making it very clear that they do not really care about the rampant abuse of millions of investors, and that they are quite happy to allow the investment industry off the hook, as so many politicians have let so many industries off the hook in the past.
Canadians deserve better.
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
Wednesday, May 04, 2005
Jon Chereau Covers Investment Industry "Cover-ups"
Grievances never see the light of day
Banks, brokerages use confidentiality pacts to great effect
Jonathan Chevreau
Financial Post
June 25, 2004
CREDIT: Yvonne Berg, CanWest News Service
Stan Buell, founded the Small Investor Protection Association after settling a dispute with a big bank several years ago: "The [financial] industry covers up this huge problem of investors losing due to industry wrongdoing."
Quietly, behind the scenes, investors who lost money the last few years are receiving settlements from Canadian financial institutions.
But you won't hear about them in the press because one of the stipulations made is to adhere to the terms of so-called "gag orders."
In return for financial compensation, these investors are put in a position where they would violate legal contracts if they tell the world specifics of their arrangements.
Several large banks or their brokerage arms are involved, including several cases once prominent in the press.
Some got nowhere going to industry ombudspersons, associations or regulators. Legal action and the threat of airing their grievances publicly seems to have been what motivated institutions to settle.
As they pay their hush money, high-priced lawyers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though it's hard to draw any other conclusion.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got."
Even with the promise of anonymity, this source would not divulge the terms of the settlement. "We are not being made whole. It's just a cessation of hostilities."
But I was given a sample of the legalese in the gag order. He/she "will not disclose terms and conditions of the settlement offer to any third party except financial advisors or lawyers, except as required by law and excepting any communication with securities regulatory or other enforcement authorities and self regulatory organizations."
In other words, plenty of professional people know about these cases -- just not the press and the general public.
A confidentiality agreement for another case which reached the Ontario Supreme Court reads in part: "is not to be, and will not be disseminated or disclosed to anyone, whether individual, corporation or other entity, public or private ... the Undersigned covenant & agree that they will only state to any third party that they can not speak about the Action."
The only exceptions are for disclosures made to lawyers or accountants for tax purposes.
The agreement makes explicit reference to the payment made to the investor: "In consideration of the within settlement, this Release, and the payment of the said consideration, the Releasors shall not make a claim or take proceedings against any other person or corporation ...."
Investment Dealers Association vice-president of enforcement Alex Popovic says the latter agreement contravenes Member Regulation Notice 076, issued May 22, 2001.
That notice clearly states agreements "shall not contain language which would prevent the client from disclosing to securities regulatory authorities, self-regulatory organizations or other enforcement authorities the facts or terms of the settlement."
Popovic appends his personal view that "anything that chills a client from coming forward is not in keeping with the intent of this notice."
The Mutual Fund Dealers Association also prohibits confidentiality restrictions on settlements between IDA members and clients, says MFDA president Larry Waite. Any settlement above $25,000, and in some cases $15,000, must be reported, he says. However, he adds, these disclosure requirements do not extend to the press.
Investor advocate Joe Killoran (www.investorism.com) suggests settlements are being wrapped up in advance of the election because "the banks are hoping the Liberals get back in and allow amalgamation."
Another investor advocate who fought and won his own case before taking on others is Jim Roache. He says there was a "flurry" of settlements two months ago, when it looked like a re-elected Liberal majority was a slam dunk. Bay Street wanted to clear the decks for a new round of bank mergers and didn't want the dirty laundry of abused investor cases upsetting their cosy relationships with the ruling party.
Seldom do these investors recoup their losses, Roache says. Most are lucky to get 50 cents on the dollar five years after the fact. "Many get nothing. The vast majority decide to write it off to experience."
Settlements save both sides the costs of dragging litigation through the courts. The rule of thumb is it's not worth pursuing unless the amount involved is at least $250,000 and you have another $250,000 to chase it down, Roache says.
The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Killoran says. Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being, Killoran believes.
Stan Buell created the Small Investor Protection Association after settling a dispute with a big bank several years ago. Since then, a number of SIPA members have quietly settled out of court.
"The industry covers up this huge problem of investors losing due to industry wrongdoing."
Ironically, Buell suggests it may be better that these cases are covered up. "If everyone knew the truth there would be many fewer small investors."
He concludes regulators have failed to protect investors and it's "time for the government to step in." Buell has contacted leaders of all major federal parties and hopes investor protection legislation will be introduced after the election.
© National Post 2004
Banks, brokerages use confidentiality pacts to great effect
Jonathan Chevreau
Financial Post
June 25, 2004
CREDIT: Yvonne Berg, CanWest News Service
Stan Buell, founded the Small Investor Protection Association after settling a dispute with a big bank several years ago: "The [financial] industry covers up this huge problem of investors losing due to industry wrongdoing."
Quietly, behind the scenes, investors who lost money the last few years are receiving settlements from Canadian financial institutions.
But you won't hear about them in the press because one of the stipulations made is to adhere to the terms of so-called "gag orders."
In return for financial compensation, these investors are put in a position where they would violate legal contracts if they tell the world specifics of their arrangements.
Several large banks or their brokerage arms are involved, including several cases once prominent in the press.
Some got nowhere going to industry ombudspersons, associations or regulators. Legal action and the threat of airing their grievances publicly seems to have been what motivated institutions to settle.
As they pay their hush money, high-priced lawyers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though it's hard to draw any other conclusion.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got."
Even with the promise of anonymity, this source would not divulge the terms of the settlement. "We are not being made whole. It's just a cessation of hostilities."
But I was given a sample of the legalese in the gag order. He/she "will not disclose terms and conditions of the settlement offer to any third party except financial advisors or lawyers, except as required by law and excepting any communication with securities regulatory or other enforcement authorities and self regulatory organizations."
In other words, plenty of professional people know about these cases -- just not the press and the general public.
A confidentiality agreement for another case which reached the Ontario Supreme Court reads in part: "is not to be, and will not be disseminated or disclosed to anyone, whether individual, corporation or other entity, public or private ... the Undersigned covenant & agree that they will only state to any third party that they can not speak about the Action."
The only exceptions are for disclosures made to lawyers or accountants for tax purposes.
The agreement makes explicit reference to the payment made to the investor: "In consideration of the within settlement, this Release, and the payment of the said consideration, the Releasors shall not make a claim or take proceedings against any other person or corporation ...."
Investment Dealers Association vice-president of enforcement Alex Popovic says the latter agreement contravenes Member Regulation Notice 076, issued May 22, 2001.
That notice clearly states agreements "shall not contain language which would prevent the client from disclosing to securities regulatory authorities, self-regulatory organizations or other enforcement authorities the facts or terms of the settlement."
Popovic appends his personal view that "anything that chills a client from coming forward is not in keeping with the intent of this notice."
The Mutual Fund Dealers Association also prohibits confidentiality restrictions on settlements between IDA members and clients, says MFDA president Larry Waite. Any settlement above $25,000, and in some cases $15,000, must be reported, he says. However, he adds, these disclosure requirements do not extend to the press.
Investor advocate Joe Killoran (www.investorism.com) suggests settlements are being wrapped up in advance of the election because "the banks are hoping the Liberals get back in and allow amalgamation."
Another investor advocate who fought and won his own case before taking on others is Jim Roache. He says there was a "flurry" of settlements two months ago, when it looked like a re-elected Liberal majority was a slam dunk. Bay Street wanted to clear the decks for a new round of bank mergers and didn't want the dirty laundry of abused investor cases upsetting their cosy relationships with the ruling party.
Seldom do these investors recoup their losses, Roache says. Most are lucky to get 50 cents on the dollar five years after the fact. "Many get nothing. The vast majority decide to write it off to experience."
Settlements save both sides the costs of dragging litigation through the courts. The rule of thumb is it's not worth pursuing unless the amount involved is at least $250,000 and you have another $250,000 to chase it down, Roache says.
The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Killoran says. Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being, Killoran believes.
Stan Buell created the Small Investor Protection Association after settling a dispute with a big bank several years ago. Since then, a number of SIPA members have quietly settled out of court.
"The industry covers up this huge problem of investors losing due to industry wrongdoing."
Ironically, Buell suggests it may be better that these cases are covered up. "If everyone knew the truth there would be many fewer small investors."
He concludes regulators have failed to protect investors and it's "time for the government to step in." Buell has contacted leaders of all major federal parties and hopes investor protection legislation will be introduced after the election.
© National Post 2004
Subscribe to:
Posts (Atom)