Securities fraud is much more likely to be detected and prosecuted in the United States, compared with Canada and Britian, according to new a research paper.
The paper, which was authored by Douglas Cumming, professor and Ontario Research Chair at the Schulich School of Business at York University, and Sofia Johan, sessional lecturer in Entrepreneurial Studies at the Schulich School, examines fraud cases in Canada, the U.S. and the UK, and finds that fraud litigation is much more common in the U.S.
According to the paper, yearly fraud cases involving TSX-listed companies represent just 0.3 % of TSX listings, on average, and just 0.1 % of TSX Venture Exchange listings. Yet, in the U.S., fraud litigation cases involving New York Stock Exchange companies represent 1.9% of NYSE listings, 4.5% of NASDAQ listings and over 5% of Pink Sheets or OTC Markets listings. Meanwhile, in the UK, fraud cases involving London Stock Exchange companies represent 0.4% of LSE listings and 0.1% of LSE’s AIM listings, the paper reports.
The relatively low incidence of fraud in Canada may be due to enforcement problems stemming from the lack of a national regulator, the paper suggests. “When you compare Canada and the UK to the United States, the results are quite shocking, with about 10 times less reporting or litigating of corporate fraud or fraud involving corporate shares in Canada,” says Cumming. “Yet it is unlikely that the incidence of corporate fraud in Canada is that much different than in the United States.”
“The very low level of detected fraud in Canada is perhaps best attributable to lower levels of enforcement in Canada, particularly with the separate provincial securities commissions,” the paper suggests. At the same time, it concludes that the low level of fraud in the UK may also be due to low enforcement levels, however it also suggests that the requirement for brokerage firms to screen companies that want to list on the AIM (so-called nominated advisors, or NOMADs) may also help mitigate fraud.
The paper concludes that there’s a need for better reporting of securities fraud to allow investors to compare fraud risk between exchanges and jurisdictions. It calls for reporting of securities fraud, by companies and investors, on an exchange-by-exchange basis. It also says that regulators should disclose the extent of their surveillance efforts to detect fraud. And, that exchanges should consider imposing NOMAD requirements, similar to the LSE’s AIM.