Patchwork problem
John Gray
Canadian Business Online, July 29, 2008
One of the frequent arguments against adopting a national securities regulator in Canada is that the current patchwork of provincial and self-regulating organizations encourages regulatory competition that should lead to better securities laws and enforcement. But the recent case of disgraced stockbroker Stephen Taub shows that’s not happening.
Taub began his career in the securities industry in 1995 and worked for numerous brokerage houses before eventually joining Research Capital Corp. in 2001. He left the Toronto-based brokerage house in 2004 and was charged a year later by the Investment Dealers’ Association (the precursor to the new Investment Industry Regulatory Organization of Canada or IIROC) with helping many of his clients engage in stock trades that were “consistent with market manipulation or deception,” according to IIROC’s statement of allegations.
Taub has never responded to the charges. Instead, his lawyer maintains that since Taub had quit his job as a stockbroker IIROC has no jurisdiction over him. IIROC dismissed that motion in 2006 and the Ontario Securities Commission backed up that decision in 2007. But last month an Ontario court ruled that Taub was right and IIROC has no right to regulate members who have left the industry.
The ruling is kind of like the courts saying you can rip off your employer and get away with it as long as you quit your job once you’re caught. The decision is even more galling since securities laws in Alberta and Saskatchewan allow IIROC to go after brokers who break the rules — even after they leave the industry. However, the rules in Ontario are not so clear-cut, the court has ruled. So much for that regulatory competition letting the best rules rise to the top.
According to IIROC’s allegations, Taub’s client list was a virtual rogues’ gallery of international fraudsters, many of whom had histories of criminal or securities law violations. A simple Google search of the client list produces a treasure trove of illegal and questionable behaviours. Taub’s clients included:
Rakesh Saxena: The Thai banker currently under house arrest in British Columbia awaiting extradition to face charges he allegedly embezzled more than US$88 million for the Bangkok Bank of Commerce. Even while under house arrest, Saxena has been accused of selling worthless stock through offshore boiler rooms.
Harvey Rubenstein: A former Canadian stockbroker who, according to IIROC, “has served multiple prison sentences in Canada and the U.S. for fraud.”
Regis Possino: A former California lawyer who was disbarred and eventually convicted of trying to sell 350 pounds of marijuana to an undercover police officer. In 1995, Possino pleaded guilty to participating in a scheme to over-inflate the value of stocks to pump up the balance sheet of an insurance company.
Rafi Khan: An American who was accused by the SEC of manipulating stock prices in 2000. Khan agreed to not trade stocks or work with any brokers for five years – a promise the SEC claim he has violated.
Iain Brown and Iain Brown Sr.: Two Americans who were charged by the SEC for their involvement in a broker bribery scheme. And that’s just the highlights — or the lowlights — of Taub’s list of questionable clients.
When it came to questionable securities trading, Taub had his own ignoble past. In 1997 he was fined $50,000 and suspended for a month after helping a stock promoter open four separate brokerage accounts that were used to pump up the value of shares in Ultra Pure Water Systems Inc. — a tiny company that was de-listed from the Alberta Stock Exchange.
IIROC is appealing the decision by the panel of three judges that has — at least temporarily — let Taub wriggle free from their grasp — though not all of the judges agreed that Taub was beyond their reach. Mr. Justice James Carnwath dissented from the opinion of Madam Justice Helen Pierce and Mr. Justice Charles Hackland. “Allowing a member to resign and therefore escape sanction for improper acts committed while a member of [a self-regulatory organization] can hardly be said to protect investors,” Carnwath wrote in a minority opinion. “Certainly the public would have less confidence in capital markets where sanctions for misconduct could be avoided by a simple letter of resignation.”
Even if the courts eventually force Taub to face an IIROC disciplinary panel, the victory may be bittersweet. The worst IIROC can do is ban the broker from working in the investment industry and impose a hefty fine. But Taub has already left the industry and many of the fines levied by the regulator are either ignored or go uncollected. In 2007 a little more than $1.9 million in fines, penalties, costs and disgorgements were collected by IIROC, according the organization’s annual report. But that represents just over 54% of the total penalties that were assessed during the same period. So far, a total of $23 million in total fines and penalties imposed by the IIROC remain uncollected.
In the meantime, the only people who should be cheering this latest example of Canada’s fractured securities enforcement regime are the crooked stockbrokers who have just been given a new lease on life. Let’s hope it’s a temporary one and Canadian regulators will close the loophole. Or better yet, fix the problem entirely and move to a national system of securities regulation. |
