Cracking down in Vancouver
A long-awaited report says that it is time to tame one of the world's most notorious stock exchanges
A tall oak display case tucked into the comer of the Visitors’ Centre at the Vancouver Stock Exchange (VSE) holds mementoes of the market’s colorful history. One item attracts particular attention: a rough chunk of dusty yellow rock the size of a child’s head, sitting near a miner’s lamp. A card next to the rock identifies it as Fool’s Gold—an ore that unscrupulous dealers passed off as the real thing. It is a reminder of the exchange’s shady past, but there is still plenty of dubious glitter about the country’s second-busiest securities market. The VSE, warns its own vicepresident of public affairs, a former journalist named David Laundy, “is not for widows and orphans.”
As recently as 1989, no less an authority on entrepreneurial risk and reward than Forbes magazine called Vancouver ‘The scam capital of the world.” Speaking to VSE investigators last September, author and securities analyst Adrian du Plessis described its dominant culture as “the white collar translation of omertà,” the Mafia code of loyalty and secrecy. The daily newspaper journalist who has examined it most intimately, financial columnist David Baines of The Vancouver Sun, repeatedly characterizes activity on the exchange as simply “institutionalized fraud.” Plainly, de spite posting a record trading volume of 5.75 billion shares in 1993, the Vancouver Stock Exchange has a problem.
As an arena for both risk and reward, in
fact, the B.C. securities market has few equals. For young ventures with promising ideas but little capital, speculative investors on the Vancouver exchange have often proven willing to msh in where more timid bankers have feared to lend. The resultant successes include companies recycling used oil filters and battling bladder cancer with new drugs, and many of Canada’s producing mines. The record of success, however, suffers from the continuing evidence of unchecked abuse. According to RCMP Supt. Ernest MacAuley, federal commercial crime sleuths have no fewer than 59 investigations under way into “allegations [of] securities fraud, fraud, theft from treasury, forgery and false prospectus” involving companies listed on the VSE. And exchange officials themselves acknowledge that they are adding to the list of possible abuses requiring further investigations at the rate of one case a week.
The lowest point in more than a decade of nearly continuous scandal for the VSE came in late 1992. In the wake of the collapse of yet another high-flying stock, Pineridge Capital Group, Vancouver city police revealed that someone (precisely who has never been determined) had issued an underworld contract for Baines’s murder. Seven months later, the British Columbia government hired James Matkin, an administrative law expert and former president of the B.C. Business Council, to conduct a wholesale inquiry into both the VSE and the B.C. Securities
Commission (BCSC), which is responsible for regulating the member-owned exchange. His report is due this week.
Matkin is expected to recommend sweeping changes in the way the 84-year-old Vancouver market oversees trading and the financing of resource and junior venture stocks. In private meetings, he has hinted that he will propose scrapping the Securities Commission, and giving its powers, along with many of those now exercised by the VSE itself, to a new agency, likely to be called the Securities Exchange Board.
But such radical surgery is certain to meet stiff resistance from both the exchange and its supervising commission. Neither agrees that the country’s most notorious securities market is broken—or that it needs fixing. VSE president Donald Hudson insists that whatever abuses may have occurred on the Vancouver exchange in the past were not much different from those that took place in other securities markets. In the past seven years, he says, the VSE has transformed itself into one of the most tightly regulated stock markets in the world. Its poor reputation, he says, is principally the fault of hostile media. As for the Securities Commission, its chairman, Douglas Hynd-
man, warned Matkin in a final submission that his proposals, far from cleaning up the troubled exchange, “would, in fact, detract from the fairness and efficiency of the market.”
At the heart of the VSE’s mission is an appealing idea: to raise money for promising but unproven business ventures. In the early decades of the exchange’s history, most of those were mines, and the VSE still attracts large numbers of young companies in search of funds to explore promising mineral stakes in Canada and abroad. But in the last decade and a half, a growing number of VSE-listed companies have sought capital for the development of new technologies or novel commercial ventures, ranging from hand-held gas detectors to a string of bars that serve only non-alcoholic beverages. With an eye on the burgeoning economies of the Pacific Rim, the VSE now declares that its goal is “to be recognized internationally as a leading Securities Exchange focusing on the listing of venture companies.” Unhappily for the exchange, it has often been identified with issues that briefly soar and then come crashing down amid allegations of stock-rigging, squandering of corporate funds and outright fraud. The same unproven mineral deposits and untested technologies that are most in need of venture capital, it appears, are also the most amenable to manipulation.
Exploiting the risks inherent in any new venture, manipulators have typically seized on small VSE-listed companies with relatively few shareholders and assets of unknown quality. They have encouraged outsiders to invest in
the stock until the shares have risen appreciably in price—often aiding that process with rigged trades—and then sold off their stake before the other investors discovered the true value of the company’s assets.
Frequently, the money that the company received from the sale of new shares along the way also vanished, lent to untraceable borrowers or spent on so-called investor relations contracts with the same promoters who dreamed up the scheme.
In one infamous episode, promoters David Ward and Edward Carter stripped more than $14 million from a Texas-based mutual fund that held a dozen VSElisted companies before their activities came to light in 1984.
Both men were later jailed. In another, investors bid up the stock in a company that claimed to possess a revolutionary new computer from 17 cents to $125 a share, before discovering that no such machine existed. Estimates of how much such frauds have cost investors are imprecise, but a partial accounting of the losses from just five known manipulations totals a staggering $710 million. For his part, analyst du Plessis suggests that manipulators have siphoned as much as $2 billion from the B.C. securities market
Many unusual enterprises that might have trouble keeping a listing on other markets have found a home on the VSE. Still listed is a
One local business columnist received a death threat
David Baines of The Vancouver Sun
six-year-old venture called Current Technologies Corp., which developed a cone-shaped helmet that it claims can regenerate hair in bald men by administering mild electric shocks to the scalp. The company early last year reported an accumulated deficit of $14.4 million. Nonetheless it was able to raise $3.75 million last October from investors in Zurich, London, the Isle of Man and Bahrain, who bought 1.5 million shares (along with options to purchase an additional 1.5 million shares) for $2.50 each. According to records filed with the VSE, Current Technologies paid a commission of $243,750 on the stock sale to an agent in Lahore, Pakistan. Although conservative money managers might balk at such an investment, holders of Current Technologies’ stock seem untroubled: shares in the company traded last week at $2.90.
Low regard for the B.C. exchange extends well beyond such outspoken critics as Baines and du Plessis. “It is a rigged market,” former VSE vice-president of listings William Pidruchney bluntly told Matkin during a public hearing last August. Added BCSC chairman Hyndman in his own submission to Matkin: “The VSE has made only limited progress in eliminating fraudulent and manipulative schemes.” Evidence that Hyndman’s view is
The VSE’s greatest hits
A stock promoter’s glossary
The Vancouver Stock Exchange justifiably boasts of its ability to raise funds for risky new business ventures. Some of the more imaginative ideas that have floated on the market:
Plastic zip-on snow tires (1982: Syn-Track Tires Inc.).
2 A self-watering art deco plant pot (1983: Deco PlantMinder Ltd.).
J A super breed of rabbit with, according to its promoters, every part of its anatomy marketable in one form or another. (1985: International Rex Ventures Inc.).
4 A portable bidet equipped
with theft-proof toilet-paper dispenser (1984: NCN Exploration and Development Co.).
5 An archeological mission that claimed to have discovered the fabled King Solomon’s mines (1987: Vault Explorations Ltd.).
6 A spray-on treatment for killing the AIDS virus on toilet seats and telephones, later revealed to be liquid bleach (1987: Med-Tech Systems Inc.).
A self-chilling beer can (1992: ITP Thermal Packaging Inc.).
8 Cone-shaped metal headgear that produces an electric current, promoted as a cure for baldness (1993: Current Technologies Corp.).
What are ‘bottomfeeders?’ And why do they get accused of ‘painting the tape’ with a favorite stock? A guide to the jargon used in stock market circles:
Blowing Off: Selling stock to unsuspecting investors after promoting the price up.
Bottom-feeding: Buying a
new or inactive stock at a low price, in the anticipation that the insiders are going to begin promoting the stock, resulting in a higher stock price.
False underwriting: issuing
a new stock through corrupt brokers who ensure that only selected insiders are able to buy the majority of shares.
Juice: Under-the-table commissions paid out by stock promoters to brokers.
Jitney: A stock purchase arranged by one broker through another in order to disguise the buyer’s identity.
Laying out: Loading up a broker’s clientele with worthless stock being bought from the stock promoter or his family.
Match trading: A
conspiracy between two or more manipulators to trade stock at a pre-arranged price.
Painting the tape (also
known as high closing): Buying or selling stock at the end of the trading day at an artificially high price in order
widely shared emerged in Matkin’s interim report, released in October. It said that a poll that Matkin commissioned of 300 current and former VSE investors found that 80 per cent of them agreed that “VSE-listed companies are more a product of promotion than substance.”
But, remarkably, that belief has not stopped many of them from putting their money into VSE-listed shares. Most of the investors who stopped by to check the performance of their stocks on computer terminals at the exchange’s Visitors’ Centre on one recent morning were frankly unconcerned about whether their shares represented legitimate enterprises. “Out of a hundred companies, there are only five that are legit,” estimated one man, who declined to give his name. “I don’t really care. You can make money with crooks if you can get in at the right time. The timing is the secret, nothing else.”
Another skeptical, but determined, investor is Pasha Wiefli, a self-described “professional stock-picker” who claims to have “lost a lot of money and won a lot of money” on the Vancouver exchange. “People love to gamble,” said Wiefli. “If you take the gambling spirit out of [the VSE], it will be dead.” In fact, she asserted, “they’re trying to kill it with this commission.”
One of the most flamboyant and controversial figures ever associated with the B.C. securities market heartily agrees with that assessment. Among the stocks that promoter Harry Moll urged on investors during his two decades of activity on the VSE was Lionheart Resources Ltd.: its shares soared from 30 cents to $12.63 before regulators halted trading in May, 1986. The persuasive stock proto inflate the stock’s value in the next day’s newspaper listings.
Reverse takeover (RTO): Acquiring an
the shares of an inactive company, and then starting it up again, often in a field unrelated to its previous activities. This legal manoeuvre is favored by manipulators because it tends to attract less regulatory scrutiny than launching a new listed company.
Rollback (aka reverse split): A
procedure in which several old shares in a company are exchanged for one new share. Controlling shareholders often engineer rollbacks after reverse takeovers, to force out smaller shareholders.
Warehousing (aka parking): Holding
stock on behalf of an undisclosed manipulator in return for favors such as secret commissions.
Wash trading Trading stock back and forth among several brokerage accounts in order to push up the share price.
SARAH DAVISON in Vancouver
The VSE dubious achievement awards
Vancouver Stock Exchange officials insist that they have cracked down on abuses. Some of the low points from the past decade:
1984: Carter and Ward
Stock promoters Edward Carter and David Ward conspired to inflate the price of shares in more than a dozen VSE-listed companies, siphoning an estimated $14.5 million into their personal accounts before the scheme collapsed. Both earned jail sentences.
1984: CHoPP Computer
Promoters falsely claimed that CHoPP Computer was putting the finishing touches on a superfast computer, named the Columbia Homogeneous Parallel Processor. No such machine existed. Naive investors, spurred by their brokers, drove the company’s share price from 17 cents to $125 before the scam was exposed and the stock collapsed. An investigation ensued but no criminal charges have been laid.
1986: Technigen Platinum Corp.
Technigen claimed to have the rights to a computerized golf driving range. After promoters announced sales worth $116 million to a Swiss-based company, Technigen’s share price soared from $1.50 to $16 before collapsing. The “Swiss” company was eventually exposed as a Panamanian shell company run by a convicted stock swindler.
controlling shareholder. Pineridge’s managers had also lent $5.9 million to two untraceable Panamanian companies. Among the investors who lost an estimated $100 million in the collapse of Pineridge stock was a British pension fund. The VSE suspended trading in the company in late 1992, but it remains active and is seeking a new listing based on its only remaining asset, a distillery.
1992: Lessonware Inc.
In 1992, the Texas-based company announced plans to produce and market a series of home-study motivational videos, with the help of endorsements from sports stars Wayne Gretzky, Magic Johnson and Joe Montana. An initial public offering of : stock raised $1.5 million. Although the : videos were slow to appear and failed to ; find a market, the company’s share price rose from $1.50 to $2.05 after a muchpublicized investment in the company by Texas financier T. Boone Pickens. Lessonware’s stock price finally tumbled to 52 cents, and the company went into receivership, after its president admitted to a prior drug conviction. Later, investors discovered that Lessonware had guaranteed Pickens’s investment in return for his support.
1992: V-Tech Diagnostics (Canada) Inc.
1987: International lillex Enterprises Inc.
Promoter Sam Ford, who was convicted in the early 1980s of stock fraud in the United States, masterminded the reverse takeover of an inactive mining company, then transformed it into an insurance firm. Glowing press releases and falsified revenue claims caused the stock price to climb from 20 cents a share to $77. Eventually, the company’s lack of adequate cash reserves attracted the attention of regulators and the RCMP. Tillex’s collapse cost investors millions of dollars. An investigation ended abruptly when the company’s accounting records went missing.
1989-1992: Pineridge Capital Group
Pineridge’s five subsidiaries were involved in a number of bizarre activities, including the supposed development of a 15-lb. freshwater pearl. The value of its shares tumbled when investors learned that most of its assets had been pledged as security for loans to the company’s Swiss
Setting a VSE record for trading volume in a single year, 89 million shares in V-Tech changed hands in 1992, rising from three cents to 44 cents on claims that the company had developed a cheap and reliable test for AIDS. Regulators halted trading when the company failed to file financial statements, which would have revealed that it was insolvent. After VTech’s collapse, investors learned that its founder, James Parker, had lied when he claimed to have a Yale University medical degree.
1992: Axagon Resources Ltd.
Company founders Steven and Jay Greenwald claimed to have discovered a formula for a nontoxic, noncorrosive salt substitute to melt snow and ice. Within nine months, Axagon shares rose from 70 cents to more than $7.50. Regulators then questioned financial statements suggesting that customers owed the company more than $8 million. An audit showed that less than $8,000 worth of the claimed sales were legitimate. The company collapsed.
moter was also a key figure in the history of Pineridge Capital Group, a holding company that collapsed in 1992, contributing to British Columbia’s decision to order Matkin’s inquiry.
Speaking to Maclean’s from poolside in Palm Springs,
Calif., early this month, Moll insisted that criticism of his role in those and other deals is unfair. “What I tried to do,”
Moll said, “was find a property we thought was worth financing, put up my own money and my friends’ money, build it into a successful company and then sell it.” Explaining the failure of many companies that he promoted, Moll declared:
“Deals have gone awry not because anybody tried to steal money, but because it’s the nature of the world. It was a reward-to-risk ratio.” Indeed,
Moll is sharply critical of the current attempt to tighten supervision of the B.C. securities market. “The VSE is trying to regulate itself out of business,” the promoter said. “They’re doing away with the competitive market that made things go.”
British Columbia’s securities market was clearly not alone in providing scope for abuse in the freewheeling 1980s. Improper dealings on the Toronto Stock Exchange led regulators there to impose lifetime bans on securities trading against three partners in Osier Inc., after the Ontario firm failed in 1987. In that same year, high-flying American dealmaker Ivan Boesky was jailed for three years after admitting he made $100 million from illegal trades on the New York Stock Exchange.
At the same time, no fewer than three major overhauls of the British Columbia securities market over the past seven years have been aimed at making abuse more difficult. Chief among those is the establishment of the B.C. Securities Commission in 1987. The BCSC now spends a quarter of its $8.7-million annual budget investigating complaints against listed companies and erring stockbrokers.
On its own, the VSE has dramatically stiffened requirements for companies seeking listing on its board. “Of companies that listed in 1984,” asserts Hudson, “many would not be listed in 1994. We try to cull out the absurd, the stock play, the ridiculous.” Exchange officials now search through public data bases for any evidence of past misbehavior by those involved in companies seeking a listing on the VSE. Notes manager of surveillance Alfred Stewart: ‘We have turned down listings as a result of the people involved.” As well, reverse takeovers, in
which entrepreneurs trade assets for controlling shares in exchange-listed but inactive companies—a quite legal technique favored by dubious investors trying to secure listings on the exchange—now receive the same scrutiny as initial public offerings.
Trading irregularities became easier to spot in January, 1990, when the VSE became the first exchange in North America to abandon its traditional trading floor and switch to computers. The expanse where floor traders once shouted out their clients’ bids has since been leased to the Holt Renfrew clothing store downstairs. Meanwhile, brokers execute purchases of stock electronically on computers programmed to detect suspicious trading patterns—and to record the identities of active accounts for possible further investigation. As Stewart puts it: We have an audit trail.”
Hudson, for his part, insists that the exchange has sharply raised the standards of performance that it demands from brokers. He points to the VSE’s record of sanctions against member firms and their employees found guilty of breaching securities regulations. Between 1989 and 1992, the Vancouver exchange imposed fines of $989,250 against violators, more than any other Canadian exchange during the same period. A further re form, which takes effect this month, will require brokers who sponsor new listings on the exchange to monitor the affairs of those companies for a year and to alert regulators to
Stock plays can be as creative as their backers’ imaginations. Consider the history of Lionheart Resources Ltd., which flashed, crashed and revived on the Vancouver exchange in the mid-1980s:
Acquire a listing.
Stockbroker brothers David and Daniel Hunter, associated with promoter Harry Moll, acquire control of the unlisted shell company Lionheart Resources Ltd. On Oct. 8,1985, they secure a listing on the VSE.
Sell stock cheaply to family and friends.
Moll, his wife, the Hunter brothers, their mother
‘We try to cull out the absurd, the stock play, the ridiculous’
VSE president Donald Hudson
any signs of impropriety during that period.
Exchange officials complain that their critics have been slow to acknowledge the VSE’s accomplishments—and too quick to blame it for failing to detect manipulations. Objects Hudson: ‘There are some things that could not be discovered in advance. But have we gotten credit for the reforms that have taken place? No, we have not.” Referring to the listings on his exchange, Hudson adds: “Nobody asks us about the good ones.”
They do exist. One company that gives credit to the Vancouver exchange for its success is Kelowna, B.C.-based DiaMet Minerals Ltd. The company’s prospects seemed slight when it raised more than $1 million on the VSE in the early 1980s through shares initially offered for less than $1. It took another decade for DiaMet to find the diamonds that its geologists believed lay beneath the permafrost of the Northwest Territories, but the company is now developing a mine in the Lac de Gras area, northeast of Yellowknife, where it expects to begin production by 1997. DiaMet stock closed last week at $543/8 a share. Says DiaMet president James Eccott:
and father and two friends acquire 70 per cent of Lionheart’s initial share offering at 30 cents a share. The rest of the stock is offered to outsiders, trading initially at 64 cents a share.
Inflate the stock’s value.
In 1986, Lionheart announces plans to generate electricity by burning garbage in
“If it were not for the Vancouver Stock Echange, I don’t think we’d be here.”
Still, even Eccott has encountered evidence of a deeply entrenched penchant for shady deals on the B.C. securities market. “We got offers,” he recalls. “One was that if we would assist a certain company, stock of that company would be put in our names in the Bahamas.” When DiaMet later sought financing from stock exchanges in Toronto and the United States, Eccott adds, he discovered that “certain brokerage houses have a firm policy that they will not finance companies that are listed only on the Vancouver Stock Exchange.” Another person who supports the VSE’s mission of raising money for daring new business ventures is Tom Kierans, president of the Toronto-based C. D. Howe Institute and chairman of First Marathon Securities. The Vancouver exchange, Kierans says, is “strategically placed on the Pacific Rim” to become the leading venture capital market for that region’s burgeoning economies. But if the vse is to reach its goal, he warns, “its acceptability has to be restored. It has to be free of washing of money, of criminalization. It has to have unfettered integrity.”
At the very least, British Columbia’s New Democratic government remains unconvinced that the province’s securities market has been purged of its profiteers and manipulators. In announcing Matkin’s assignment last year, then-Finance Minister Glen Clark observed: “We continue to have problems that lead to the belief that this is a haven for unscrupulous operators, and we continue to deal with death threats and other problems that impact on our international reputation.”
In his interim report last October, Matkin made clear his intention to recommend “major structural changes to the regulatory sys-
tem.” In a private briefing for officials of the BCSC a month later, he explained that his proposed Securities Exchange Board would comprise 12 people chosen from various groups with an interest in the securities market. The board would hire staff who would take over the current duties of the BCSC, as well as the VSE’s responsibility for disciplining brokers, regulating the market and approving new financings on the exchange.
Even a new regulatory structure, however, may do little more than challenge the inventive minds behind previous manipulations on the B.C. securities market. “For the most part, we’ve got a good [securities] act,” argues Hyndman, for one. “It requires a cultural change for people in the industry to realize that business practices that were acceptable in the past have to change.”
There is a more radical solution, one that Matkin heard in a private meeting with one of Vancouver’s most respected money managers, who asked to remain anonymous. He advised Matkin not to recommend any changes to the Vancouver Stock Exchange. Instead, he suggested that the province establish a competing exchange, one of clear and unquestionable integrity. “Then, let the two of them fight it out,” the investor later said during an interview with Maclean’s. “Let the market decide.” It is a solution that Adam Smith, at least, would certainly endorse. But as BCSC chairman Hyndman mused in an interview with the Sun’s Baines in December, 1992: “Is there enough business for a legitimate exchange? I guess we won’t know until we try.”
On the evidence, that has yet to happen. Then again, at least some of the investors who operate there are quite happy with the Vancouver Stock Exchange just the way it has been, Fool’s Gold and all. □
Along with the small investors who walk in off Howe Street to put a few dollars down on stocks that sell for as little as a penny apiece, the Vancouver Stock Exchange has attracted its share of international high-rollers, some of them controversial:
§ Arms dealer Adnan Khashoggi came to the
1 B.C. securities market in 1986, promoting
2 three companies, one of which claimed to I have discovered King Solomon’s mines in 35 Africa. Its stock slumped after a U.S. court
accused Khashoggi of using another VSElisted company, Skyhigh Resources, to shield his assets from creditors in the United States.
In the late 1980s, the U.S. Securities and Exchange Commission told Canadian regulators that a close friend and business partner of former Philippine dictator Ferdinand Marcos was using a VSE-based brokerage to launder funds stolen from his homeland. Regulators revoked the brokerage’s licence in 1989.
California. The deal never materializes. At the same time, insiders trade shares among themselves and the stock price moves upward.
Sell, sell, sell.
When the market price hits $4, Moll, the Hunter brothers and other insiders quietly begin to unload their shares. By issuing news releases about a computerized model-making system, they keep the price buoyant; it tops out at $12.63.
Let the roof fall in.
Regulators, alerted by the stock’s meteoric rise, halt trading in Lionheart on May 5,1986, and demand an explanation. The Hunter brothers are fined a total of $30,000 and suspended from the exchange for 60 days for rigged trading, but no action is taken against
Moll—it is determined that, at the outset, he was distant from the deal.
Regulators allow trading in Lionheart to resume in August, 1986. Soon after, the company announces a change in direction, focusing on plans to acquire a company that has developed a computerized system for producing three-dimensional models. Its share price rises from $3.10 to $6.50 within a year.
Postscript: A Happy Ending?
In 1988, Moll and the other Lionheart shareholders accept a takeover bid from a subsidiary of Swiss pharmaceutical giant Ciba-Geigy, which is interested in Lionheart’s model-making project. Moll makes $7.5 million in the takeover.
That same year, one of the hottest companies on the VSE was Zurfund International Ltd., a firm involved in a mining venture in Chile. But enthusiasm for the stock waned when a key director turned out to be Juan Carlos Schidlowski, a stock promoter who had fled the United States after pleading guilty to 20 counts of tax and securities fraud. Schidlowski subsequently resigned from the firm’s board.
Among the few investors to escape unhurt from the 1991 collapse of Pineridge Capital’s VSE-listed stock was prominent Zurich financier Werner Rey. The company promised him a healthy profit on his $3.6-million investment—six months later it bought the stock back from him at an $800,000 premium. Rey now lives in the Bahamas and is fighting extradition to Switzerland, where he faces charges over the $1.2-billion failure of his Omni Holdings AG.