Late last year, the Supreme Court of Canada rendered a decision that was legally correct, yet grievously wrong for investors. It also did nothing for Canada's international reputation.
Crooks and con artists, on the other hand, loved it.
The federal Conservative government had asked the Supreme Court to rule on whether its proposed Securities Act was constitutional. More specifically, it wanted to know whether the federal government had constitutional authority to create a national securities regulator. The court unanimously said no.
Currently, each of the 10 provinces and three territories has its own security commission or equivalent agency to regulate public sale of corporate shares and other investments. Historically, the provinces and territories have always regulated equity offerings as part of their jurisdiction over property and civil rights.
That's why we've got more -- way more -- security commissions than any other developed nation. And globally, only Canada and Bosnia-Herzegovina aren't governed by a single national securities regulator.
In his new book, Thieves of Bay Street, Toronto journalist Bruce Livesey underlines how amateurish and ineffective this makes us look internationally. Writing about the 100-plus-member International Organization of Securities Commissions, he quotes former Ontario Securities Commission chair James Baillie:
"It's deeply embarrassing to go the IOSCO meetings and see representatives of the regulatory commissions for France, the United Kingdom and the U.S., and then you see one from Ontario, Quebec, B.C., Alberta and all of the other provinces. It suggests we can't get our act together."
The Harper government knew its proposed law possibly encroached on provincial jurisdiction. So rather than use its parliamentary majority to pass it into law, and thereafter be met with a flock of litigation from aggrieved provinces and territories, it punted the question to our highest court from the get-go, via what's known as a constitutional reference.
Ottawa tried to claim jurisdiction over the securities business by invoking its constitutional right to legislate matters of trade and commerce. But three days before Christmas last year, the court delivered its closely reasoned rebuff. The Supreme Court declared itself bound by the legacy of prior decided cases, which have steadfastly declined to interpret the trade and commerce power so elastically as to allow federal oversight of the investment industry.
Not all provinces objected to the proposed legislation. Ontario supported it. Quebec and Alberta opposed it outright. Manitoba, Saskatchewan, British Columbia and New Brunswick opposed it, but in varying degrees and ways.
Canada's lack of an integrated national regulatory scheme is a boon to white-collar crime.
Ponzi or pyramid schemes, in which a constant stream of money from newly duped investors is used to keep afloat the inflated returns promised to earlier investors, flourish where a lack of shared information allows fraudsters to move from province to province.
Pump-'n'-dump schemes are likewise notoriously portable. In a pump-'n'-dump, the operators of the scheme inflate share values by falsely talking up company fortunes so they're bought at overvalued prices by unsuspecting investors (the "pump"). The operators then promptly sell their own now grossly overvalued shares (the "dump"), leaving bona-fide investors holding worthless stock.
Too often by the time local regulators get around to issuing a warning to the public about hatched schemes, con artists have set up shop in another part of the country. Consumers in another province don't get wind of the scam until they're already numbered among its victims.
Last month, the latest in a string of studies decrying the patchwork nature of securities oversight in Canada surfaced. Authored by consulting firm Compliance Strategy Group, it was commissioned by the federal Public Safety Department. It contained few surprises and was yet another uncomplimentary take on our weak, Balkanized regulatory regime.
It cited, however, high-pressure online and telemarketing sales of supposedly low-risk but high-yield securities that are actually worthless as a growth area for investment fraud. Allied to that scam is the burgeoning illicit online sale of offshore investments that exist solely to bilk investors. The study suggested both scams merit a co-ordinated national strategy from justice and law-enforcement officials.
The Supreme Court's decision effectively put an end to the federal government's two-year-long push for a unified national body to oversee capital markets. Unless the provinces and feds can work out a constitutional arrangement to share watchdog and enforcement responsibilities over securities markets, Canada remains an easy target for illegal securities marketing and market manipulation.
Worse, the sophisticated criminals who run these scams know the court's rejection of a national securities regulator is a huge setback for successful enforcement of securities laws and prosecution of securities fraud. And so Canada remains vulnerable to ever more criminal infiltration and criminal manipulation of capital markets for the foreseeable future.
Canada remains the planet's only First-World country with a Third-World regulatory regime.
Douglas J. Johnston is
a Winnipeg lawyer.