Securities Fraud – New Threats from an Old Foe

November 23, 2011
Brenda Leong
To the Association of Certified Fraud Examiners, Vancouver Branch

Speech Summary:

Thank you, Marty, for your kind introduction and the invitation to speak to your organization tonight.

The British Columbia Securities Commission is the independent government agency responsible for regulating capital markets in BC. Our mission is to protect investors and the integrity of our markets. Risk number one to that mission– is securities fraud.

There’s nothing new about that, of course. Securities fraud has been around ever since they invented securities and has periodically wreaked varying degrees of havoc with investors and markets ever since. 
What’s new is this: securities fraud is on the rise; it is occurring in new ways; it is now easier for fraudsters to be successful; and it is harder to catch and punish them.

Traditional anti-fraud tools are still of some use, but if we, as regulators, and you, as anti-fraud professionals, are going to be successful in dealing with securities fraud, we have to invent and implement new tools to confront these new threats.

This evening I’m going to talk to you about what the BCSC is doing to combat securities fraud in today’s world – how we are dealing with new threats from an old foe.
What’s changed?
Let me start by giving you our perspective on what’s changed.

They say the most significant factor in real estate value is location, location, location.  Well, the most significant factor in the explosion in securities fraud is the internet, the internet, the internet.

Internet-based fraud is not restricted to the securities field of course, but the internet is tailor-made for it.  It is very useful for offering fraudulent schemes to thousands of investors at a click.  It is great as a dissemination tool for orchestrating “pump and dump” manipulation schemes, often replacing the cumbersome bricks and mortar boiler rooms of the past. 

It offers perpetrators anonymity and the opportunity to operate in multiple jurisdictions.  They can live in one jurisdiction (often with secrecy laws and weak law enforcement regimes) and prey on investors in another.  This confounds enforcement efforts.

The advent of social networking sites provides more opportunities.  Perpetrators can target specific groups and, through the electronic intimacy of social networking, commit electronic affinity fraud.
Perpetrating fraud electronically is also a way to steal money that is physically safer, more comfortable, and more efficient than most alternatives.

You would think, after years of regulating the markets that we are immune to surprise, but we continue to be amazed at the lengths people will go to defraud individuals.  I’m sure you all have stories to tell, too. 

All this means that more and more people are approached with fraudulent schemes, and indeed our research shows that just under half of British Columbians have been approached with a possibly fraudulent investment in their lifetime.

If there is any good news, it seems that many of us may be at least partially resistant to these approaches – those who have become victims of fraud amount to about 10% of us - Half were introduced to the fraud through an existing relationship of trust, such as a friend, family member or work colleague.

That is still an unacceptably high number and does not count those who do not report the fraud – only half of those who said they were approached with a possibly fraudulent investment reported it.

In terms of consequences, we also know from research that victims of securities fraud are just as devastated as victims of violent crime.  Apart from causing financial loss, securities fraud damages victims’ health, destroys marriages, and cripples relationships with friends, family and the community. 

Old tools still work
As I said earlier, we need new tools to confront new threats, but a lot of the old tools still work, and we still use them. 

One of these tools is compliance reviews – the use of audit and investigation skills to ensure registered dealer firms and issuers are complying with the rules. Our Capital Markets Regulation staff combines their audit skills with investigating skills, so that when they visit securities firms, they not only check to see if the firm is complying with securities rules, they also probe to see if there is evidence of deeper problems.

While in the midst of an audit of an exchange contracts dealer, we received a complaint from one of the firm’s clients. Our auditors teamed up with our investigators to uncover a particularly brash ponzi scheme by the principle of the firm. Mr. Kim promised investors that they would receive returns ranging from 26 to 60 percent a year. 

He even forged letters on BCSC letterhead falsely stating that we were actively engaged in the oversight of the business.  In the end, he took $15.7 million from 36 investors, many of whom attended Kim’s Baptist church.  A Commission panel banned Kim from our markets for life, ordered him to disgorge the $15.7 million he took from the investors, and fined him another $31.4 million.

So far, Kim has not paid any of this money.  This might have something to do with his foolishness in involving South Korean citizens in his scheme.  As a result, when he fled Canada to escape the consequences he was promptly arrested in Korea.  He is currently in jail there and there he will remain for a long time yet.

As the Kim case shows, we still investigate fraud and bring administrative cases to the Commission.  These responses to fraud still have their place, and sometimes the administrative enforcement process yields effective results.  It has, however, two weaknesses. 

First, it does the victims little good – they proceed after the fraud has occurred, and in most cases the perpetrator and the money are both long gone.  Second, the sanctions available to Commission panels to impose are not, as a practical matter, a significant deterrent to many would-be fraudsters, especially those who operate from offshore jurisdictions.
Another traditional tool is rule-making. We already have rules that make it illegal to commit fraud. But sometimes we can make rules that take away what fraudsters need to be successful.

For example, a few years ago we had a serious problem with people in BC defrauding investors in the US and elsewhere through shady companies listed on the US OTC Bulletin Board market.  We changed the rules so that it was no longer possible for these fraudsters to create these companies in BC without following BC rules, or to sell their shares into the OTCBB market through BC dealers.  We then stepped up compliance activity to ensure the new rules were being followed.  We have been successful in our efforts as this activity has now slowed to a trickle in BC.

New tools are needed, too
Although the traditional anti-fraud activities of complance, investigation, prosecution, adjudication, and rule-making still have their place, new tools are needed.  We now employ an array of new initiatives, all designed around the question, “What do fraudsters need to be successful?”

We think the answer is that to be successful:

  • fraudsters need access to a fairly large pool of potential victims, preferably ones who are uninformed or who will have a predisposition to trust the fraudster
  • they need anonymity
  • they need a low risk of meaningful consequences
  • they need a safe jurisdiction

Our new tools focus on these elements and are therefore less about action after the fact (the old tools work for that) and more about the prevention of fraud and the disruption of frauds in progress.

 1. One thing fraudsters need is access to a fairly large pool of uninformed or trusting victims. 

The best defence against fraud is a savvy and sceptical investor.  We want to create as many of these people as possible.  And we have several programs designed to do just that.

We have a comprehensive program of investor education strategically targeted to groups vulnerable to fraud.  We have a program that is taught to grade 10 students as part of a mandatory Planning 10 course that includes fraud awareness.

We host seminars all over British Columbia for those about to retire and seniors.

We have a consumer website dedicated to investor education called  It contains a wide range of investor education information available to the investing public, but fraud awareness information is some of its most important and the most frequently visited content.

We also use to issue alerts to investors when we are aware of a probable fraudulent scheme.

For example, we used social media to warn investors about Genius Funds, one of many “high yield investment” scams that are perpetrated on the internet. Through a series of blogs on InvestRight. we took on Genius Funds in their own space.  Subsequently, a Commission panel issued a cease trade order that permanently banned the Cyprus-based operator from the market in BC.

We also use targeted campaigns to raise awareness of the warning signs of investment fraud among all British Columbians.  This fall we launched an aggressive three-year television, print and radio “Be Fraud Aware” campaign.  This campaign, in several languages, is the first of its kind in Canada.  It provides valuable information for investors about how to spot a potential fraud.

We have a police outreach program in which we educate police officers about the signs of securities fraud and when a case should be referred to us.

 2. Fraudsters also need anonymity.

 We have an intelligence unit that looks for signs of a fraud in progress, using internal research, public complaints, and other sources. 

A most valuable source for this type of information is those of you who work for banks, credit unions, or trust companies and who report to us anything that seems suspicious.  (Of course, when you do that, your information is kept in confidence.)

For example, a warning sign is someone withdrawing all their savings and directing it to an investment that is questionable.  When you report it to us, it gives us the opportunity to stop a potential fraud before it happens, and to take other action that we call “real time enforcement”.  This is enforcement activity that cannot only stop a fraud in its tracks, but even preserve and restore funds to the victims.

A couple of examples demonstrate the power of real time enforcement.

Uncovering the Genius Funds fraud began with a tip from a BC bank manager that Genius Funds had solicited two of his clients.  With that tip, we were able to shut down this scheme, which was taking thousands of dollars daily from investors.

In 2008, we worked with the London Police and the Financial Services Authority to stop an investment scam involving a Panamanian company that had illegally sold shares in a mining company to about 160 UK investors. 

High pressure tactics were used to sell these securities from a Spanish boiler room operation.  With a tip from a Toronto bank, we were able to freeze these funds before the scammers could take off with the money and recovered over $2.4 million, about 90% of the money paid out by the unwitting victims.

The Securities Act gives us very powerful tools to act in these situations.  One of the most powerful is the authority to make freeze orders to tie up assets related to suspected contraventions of the Act. 

Currently we have about $9.5 million in assets subject to freeze orders. 

Freeze orders preserve assets for ultimate distribution to investors or payment of Commission administrative penalties.  We returned over $6.75 million to receivers and bankruptcy trustees acting for investors or the Civil Forfeiture Office over the last 2 years. Approximately 1/2 of that was, as a result of tips we received from the industry.

3. Fraudsters need to be confident, not only that they are unlikely to be caught, but that if caught, the consequences will not be severe.

Until quite recently, fraudsters could rest easy about that in British Columbia.  That is because for far too long we did not have a credible criminal deterrent here. 

I am pleased to say that that has now changed. 

With the active support of Mike Van Klaveren, Deputy Director of the Criminal Justice Branch and his team of prosecutors, we are now successfully bringing criminal prosecutions of Securities Act offences, as well as Criminal Code fraud offences.

This year alone, charges against six individuals have been laid with a total of 36 Criminal Code charges and 177 Securities Act offences for misconduct related to fraud and illegal distributions.

4. Fraudsters need a safe jurisdiction

Fraudsters like to use the secrecy laws and weak enforcement regimes of some foreign jurisdictions to perpetrate their frauds.  Often, to do this, they need the help of BC dealers who, wittingly or not, transact their fraudulent trades.

To be honest, we do not know how much illegal trading actually occurs by this means, but we do know that even a small amount can have a disproportionate negative impact on the integrity of our markets.

This year we have started an initiative to identify the scope of this problem and to consider possible solutions, if necessary.  We are not inclined to condone the use of our jurisdiction by fraudsters to perpetrate frauds from foreign jurisdictions, whether their victims be here or elsewhere.

I’ve talked about the new tools we are using to combat modern-day fraud:

  • We “fraud proof” investors through a host of investor education initiatives.
  • We educate police forces so that they know to refer securities fraud cases to us.
  • We educate people from financial institutions to alert us to suspicious activity.
  • We alert the public about potential frauds in progress.
  • When we suspect fraudulent activity, we look for assets and freeze them.
  • We conduct criminal investigations and work with BC Crown Counsel to prosecute cases in the Court.
  • And we are working to plug the holes through which fraudsters, in offshore jurisdictions, use BC dealers to commit fraud on investors in BC or elsewhere.

What can you do?
Most important is to let us know fast when you see the signs of a fraud in progress.  Many of you know what those are.  For those who would like more information, we would be happy to provide a seminar (along the lines of what we do with the police and RCMP).  Or simply call us up and we can discuss any issues or information you require directly and in confidence.

Let me conclude by saying that no responsible regulator will hold out hope that fraud can be eliminated.  But we at the BCSC believe that its occurrence and its terrible consequences can be minimized by innovative thinking, engagement with investors, investment and other professionals (like yourselves) and law enforcement officials, and the determination to follow through with solutions.

On good day, we are able to disrupt an ongoing fraudulent investment scheme and save future investors from a sad fate, we might even retrieve some or all of the money that was stolen from investors.

On a really good day, we prevent people from falling for investment fraud in the first place, because they know the warning signs and recognize it for what it is. 

Thank you.