The top securities reg-ulator in British Columbia has detailed a five-point plan to combat made-in-B.C. stock scams that trade on the loosely regulated U.S. over-the-counter markets.

“A subculture of individuals in this province is harming B.C.’s capital markets,” B.C. Securities Commission chairman Doug Hyndman told a recent Vancouver Board of Trade luncheon.

There now are about 500 companies with B.C. connections that trade on the OTC Bulletin Board, he says, and a further 200 trade on the Pink Sheets, for which issuers don’t have to file financial statements.

“These markets are legal and are home to legitimate businesses, but they are vulnerable to abuse because of the low level of regulatory scrutiny,” Hyndman says. “Unfortunately, a disproportionate number of these promoters operate from B.C.”

The BCSC’s five-point plan is designed to neutralize abusive practices, not only by stock promoters but also by brokers who trade OTC stocks and the professionals — such as lawyers and accountants — who facilitate the deals.

“We’re getting the message out that the BCSC is taking an active role regulating this part of the market, that staff will interfere and disrupt local participation in abusive schemes, and participants will be penalized,” Hyndman adds.

He describes how OTC scams work. Unscrupulous promoters, through deceptive means, gain control of a public company, then promote it by making misleading disclosure.

“After the stock price rises, the promoters sell their shares into the market to unsuspecting inves-tors,” he says. “Because the company has no legitimate business or prospects, the stock soon becomes worthless.”

Hyndman says that in some cases, local promoters simply create shell companies that are sold to promoters in the U.S., Germany and elsewhere to be used as vehicles for stock manipulation.

Some B.C. securities dealers have been aiding the process by allowing anonymous offshore individuals to open accounts and trade OTC stocks through their firms.

“The brokers usually have no idea who owns the securities,” he says. “Last, and definitely not least, some B.C. accountants, lawyers and geologists are directly involved in facilitating these activities.”

To date, the problem has largely been beyond the reach of the BCSC. Promoters usually raise money through an exemption in the Securities Act that permits them to sell stocks to close friends and family without becoming a reporting issuer in B.C.


In many cases, the purchasers are nominees for insiders. When the stock is registered for trading in the U.S., the nominees sell their shares back to the insiders, giving them control of the stock and the ability to manipulate the share price.

The fact that the deals are created in Canada but trade in the U.S. raises logistical problems for investigators and prosecutors. It creates a regulatory gap that, to date, B.C. promoters have exploited.

Under the five-point program, the BCSC proposes to:

> require OTC companies in B.C. to comply with continuous disclosure requirements, which means they will be subject to the same disclosure rules as reporting issuers in B.C.

Also, their directors and officers will have to file personal information forms, which will enable the BCSC to screen out undesirable people.

> issue “cease trade” orders against OTC companies that do not comply with disclosure requirements. The action would include companies that do not disclose the identity of investor-relations personnel or miners that announce mineral reserves without filing technical reports.

> disrupt the manufacture and sale of shell companies by conducting early investigations and enforcement. Companies will be required to provide shareholder lists, and seed stock will be subject to stringent resale rules.

“Shares will only be able to be sold through a dealer, from accounts in their own name and into the public market,” Hyndman says.

> impose registration conditions for brokers that trade OTC stock. Brokers will have to identify the stock’s beneficial owner, the owner’s relationship to the issuer and how the owner acquired the stock.

> work with professional groups for B.C. accountants, lawyers and geologists to build awareness of the abuses of the OTC markets, and refer cases of misconduct to the appropriate disciplinary bodies.

Hyndman expects the proposals to be in force by yearend, but it remains to be seen whether they are window dressing. To date, the BCSC has initiated few regulatory actions against OTC companies. .

The BCSC’s proposals will also require many hands, but Hyndman is not hiring more enforcement staff. And enforcement staff will have to deal with the BCSC’s erratic and slow hearing panels, which, because of the Securities Act’s limitations, impose sanctions with no real deterrence.

@page_break@Hyndman says the BCSC is working with Crown counsel and the RCMP to get more cases into the courts that will result in more meaningful sanctions. But it’s unclear how that will be accomplished. Previous efforts have stumbled badly. The Vancouver RCMP market integrated enforcement team, for example, has secured just one conviction since it was formed three-and-a-half years ago.

Hyndman’s proposal to refer cases of misconduct to self-regulatory organizations may have no impact. The BCSC has suspended a half-dozen lawyers from the securities market, but none have even missed a day of work on account of the B.C. Law Society.

Hyndman proposes to hold investment dealers more responsible for trading in OTC stocks: they must have a grip on what they are trading and for whom. But there has always been a know-your-client rule, which has never been strictly enforced.

And the plan does not attack the OTC markets themselves. With so many dirty deals, there seems little justification for the markets to exist, but there’s no indication Hyndman is pushing the U.S. government to shut them down or impose more stringent regulations.

Until that happens, for every crook the BCSC shuts down, many more will pop up. IE