Re: 11/12/02 - Globe and Mail: Mobsters infiltrating markets
POSTED AT 9:12 PM EST Tuesday, November 12
Mobsters infiltrating markets
By KAREN HOWLETT and SINCLAIR STEWART
From Wednesday's Globe and Mail
Toronto — Organized crime groups have infiltrated Canadian and U.S. capital markets to launder money and manipulate stocks in what regulatory officials say is a "growing phenomenon."
Crime figures from Russia and other Eastern European countries are primarily using junior companies whose shares trade on the over-the-counter (OTC) bulletin board market in the United States and, to a lesser extent, the TSX Venture Exchange, Ontario Securities Commission enforcement officials said Tuesday.
"Organized crime is a growing phenomenon here and everywhere else in the world," OSC enforcement director Michael Watson told reporters Tuesday.
"It's money laundering, it's market manipulation," said George Gunn, manager of surveillance at the OSC. "Because they own some of these junior companies, there's insider trading going on. Just about everything you can imagine."
Mr. Watson said it is difficult to gauge the extent of organized criminal involvement in Canadian equity markets, but said regulators and police continue to find evidence of the problem.
The OSC said it is better equipped than regulators in other jurisdictions to identify mob activities because of a joint intelligence unit established with the RCMP two years ago. The OSC and the RCMP compare their databases to identify suspicious individuals and unusual movements in the markets.
"We've been engaged in fairly intensive activities, as have [the RCMP], in looking for this kind of stuff, and it keeps turning up . . .," he said in an interview Tuesday. "We think it's significant enough that we need to try to do something about it."
Michele Paradis, a spokeswoman for the RCMP in Toronto, said the level of organized crime in the markets has grown in recent years, mirroring the increasing number of Canadian investors who were lured to the stock markets by the promise of the high-tech boom. More than 20 Canadians were arrested this summer for money laundering and securities fraud following a three-year undercover sting operation conducted by the RCMP and the Federal Bureau of Investigation.
"Organized crime is insidious, and wherever there is money to be made you can see their tentacles reaching out," she said.
Gerry Halischuk, a vice-president at Market Regulation Services Inc., which monitors trading on Canada's stock exchanges, countered that he is not seeing any patterns that would suggest money laundering or illegal insider trading is taking place on the Venture Exchange.
"If you want to look for those types of activities that have been taking place for the past year, you'd go down and look at the OTC bulletin board in the United States," he said in an interview.
Steve Wilson, executive director of the British Columbia Securities Commission, also said he does not think organized crime is a big problem in Canadian markets.
"We at this point don't have that on our radar screen, but it doesn't mean it isn't happening," he said.
He pointed out that the Venture Exchange monitors private placement financings done by offshore companies and is required by law to refer any suspicious transactions to the RCMP.
Officials at the TSX Venture Exchange could not be reached for comment.
The OSC said it will take one to two years before it is ready to take formal enforcement action against these criminal players. In the meantime, the regulator is taking steps to stop some of the illicit activities. These actions include refusal to sign off on prospectuses, thus preventing companies with suspected mob ties from raising funds in the equity markets.
"We will use whatever resources are available to us to disrupt the activities of these groups as opposed to just sitting back and just doing a criminal investigation," said Mr. Gunn, the OSC surveillance manager.
Concerns that Eastern European crime figures were using Canadian companies for some of their illicit activities initially surfaced a few years ago. The most notorious example was YBM Magnex International Inc., a onetime stock market darling with a market value of close to $1-billion that collapsed in 1998 amid allegations it was a front for the Russian mob.
Mr. Watson said stiffer prison terms will help deter some of these illegal activities, although he admitted the OSC rarely prosecutes wrongdoers in the courts.
"There should be more jail sentences for misconduct in the marketplace. I don't think there's sufficient deterrence present right now."
The OSC often chooses not to pursue quasi-criminal charges, Mr. Watson said, in part because provincial courts are not always equipped to deal with the complexities of some securities cases, and in part because they have not always shown a willingness to mete out tough sanctions for securities violations.
He added that he is uncertain whether new securities legislation introduced by the Ontario government last month, including a recommendation that maximum prison sentences be increased to five years less a day from the current two-year ceiling, will make the OSC more willing to prosecute offenders in provincial court.
"If you go to provincial court on a complex securities matter [and] if you can't explain the case to them relatively quickly, you're in serious trouble," he said, noting that the OSC has encountered some of these difficulties in its case against Bre-X Minerals Ltd. The regulator had attempted to remove Mr. Justice Peter Hryn from the case, arguing that he made serious errors, but that request was denied late last month.
"With luck, perhaps with the increased penalties the courts will recognize that the legislature is treating securities act violations much more seriously . . . and may start imposing penalties that are more fitted to the misconduct."
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