Tuesday, August 14, 2007

Beware of Canada

All scam artists and fraudsters are learning to love Canada. Never mind about Sarbanes Oxley being onerous because in the end the Canadian court system will let you off.

Here is the scam. Not that long ago there was a company called BRE-X. It was touted to be one of the largest if not the largest gold discovery in the history of mining. The market piled in and ran the capitalization up into nose bleed levels. Yes you guessed it the stock crashed. It turns out the only gold on the property was in the wedding rings of the few married explorers.

The chief geologist Felderhof was charged with numerous securities infractions. You see regulators wanted to know how you drive the reserve estimates from being so large to non existent. The chief Geologist surely was culpable in some fashion. After ten long years of investigations and prosecution the courts found Felderhof not guilty. The Chief geologist could not tell the difference between the largest gold find and a busted play with no gold. Apparently that’s OK. To date no one is legally responsible although several key figures that surely would have been charged are dead.

There are calls for a national securities regulator in Canada. But if the court system does not back up the regulator then the regulator is a paper tiger. Investors are truly at risk in the event of malfeasance.

If that is not enough for you, take the case of recently convicted Conrad Black. He has not passed the smell test for some time. The Ontario Securities Commission (OSC) has been accused of practically letting Lord Black go. The story is that the SEC flew in from Washington and read the riot act to their Canadian counterparts.
The recent prosecution and conviction of Conrad Black is the result of vigorous SEC action at the outset. Much of Conrad Black’s dealings were based in Canada but with US based counter parties.

Business and investor sophistication is very high in Canada. The legal system that backs them has several surprising blind spots. Investors are at risk. Therefore there needs to be a Canadian risk premium to compensate for the lack of legal jurisprudence that is usually afforded to the investing community.