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Proactive vs Reactive Regulators 

 

David Franklin has recommendations on how regulators need to fulfill their government mandate to protect the public. 

 

The securities regulators including the Ontario Securities Commission (OSC), and the mortgage regulators, ie Financial Services Regulatory Authority (FSRA), which replaced the Financial Services Commission of Ontario (FSCO) and the law societies including the Law Society of Ontario (LSO) only take action after investors have lost money. 

 

Current Complaints Based System

These regulators complaints based, and despite knowing that a lot of investors, including wealthy individuals, do not read documents and are financially illiterate, take the position that because there is disclosure, they have protected the public. Under this system, once the investors have lost their money, if they have any money left, they have to sue to be compensated. The court process is costly, and lengthy, and there is no certainty for these investors that they will win. I have been told by investors that using the legal system is thought to be “throwing good money after bad”. In addition, most defrauded investors of the Fortress fiasco, (14,000 investors) have not taken action.

 

Proposed Proactive System-Undercover Agents & Experts

Securities regulators and mortgage regulators should share the same staff to act as undercover agents to learn what is being offered in the marketplace. These experts would attend investment seminars, industry association conferences, continuing education seminars, read advertisements, listen to radio and tv infomercials, and other promotional materials, search the internet and YouTube, and as well local and ethnic newspapers. They 'bait' the promoters of these products and act as interested investors. When they are presented with opportunities, they would need the expertise to determine if they were fraudulent or being misrepresented. Once they determined the investment is fraudulent, they would file their report with the regulator, who would the have knowledgeable inspectors or examiners who would go to the promoters to obtain all the documents related to the investment.  

 

These parties would not only be looking for the compliance with the respective legislation, but also with the Criminal Code. If they determined there was non-compliance, they would then take action, including contacting the police. 

 

Each province should have specially trained staff who have the skills and expertise to investigate and take action. These police forces should have either staff or retain experts in forensic accounting and law. Perhaps the regulators and police could have the same staff or retain the same forensic accountants and lawyers. Funding for this should come from fees charged to those regulated and not from the government/public. 

 

Tougher Laws to ensure Conviction

Laws should be ammended/created in order to facilitate this and as well to ensure that the perpetrators can be convicted. The parties involved in exempt market securities, real estate and mortgage investments, usually need lawyer’s assistance in facilitating their frauds. 

Enablers with Benefits

  • ‘Enablers’ in the form of lawyers, accountants, and officials in key ‘access’ positions not only facilitate corporate crimes but are also often the beneficiaries.

  • These facilitators are not always merely ‘hired’ experts but may be the creators and drivers of the international schemes and set-up and head the criminal corporate operations. 

 

The law societies should have rules that restrict lawyers from facilitating frauds. Lawyers are required to know who their client is and not assist them in committing illegal acts, which includes fraud. Any seasoned lawyer, after discussions with their client, would know if their client was retaining them to facilitate a fraud and should be obligated to refuse to act. If that lawyer acted, then the lawyer and his firm, should be responsible for all of the losses. For example, what seasoned lawyer after learning that Jawad Rathore had been banned by the Mutual Fund Dealers Association (MFDA) in 2005 and both Jawad Rathore and Vince Petrozza had been sanctioned by the OSC, would agree to act for them in their syndicated equity development mortgage investment proposal, especially since the returns offered to investors was below market rate?

 

Black Bear Homes Fraud

Unseasoned lawyers may be attracted to the high volume deals. The law societies should have rules that require and limit lawyers who specialize in areas of commercial real estate investing.  The lawyer who acted for the 120 Chinese Black Bear syndicated mortgage investors who lost $9 million should not have been allowed to act given the operator of Black bear Homes, Gary Fraser, was a seasoned criminal. 

https://www.cbc.ca/news/canada/toronto/syndicated-mortages-1.4078124

  

Compensation Fund

In addition to these recommendations, the provinces should create compensation funds, funded by the regulators, to compensate victims when “a deal falls through the cracks”. These funds could have limits so that the regulators are not insurers of these failed investments. Perhaps a limit of $100,000 per investor as is the case with the Canadian Deposit Insurance Corporation. 

 

What do you think about these recommendations?