Under BCSC rules, all publicly traded companies that privately sell shares or issue options must file a form – known as a Form 20 – listing the names and addresses of all purchasers and optionees. Until April 2003, those forms were publicly available, either in hard copy at the commission office or electronically on the BCSC website.
April 24, 2003 might very well rank as the most ignominious day in the 20-year history of the B.C. Securities Commission (BCSC). There was no major stock scandal that highlighted the regulatory deficiencies of the commission, no stinging article in a major media outlet that reinforced Vancouver’s image as a haven for penny-stock hustlers, no disciplinary decision that made a mockery of securities rules. It was, rather, the day that BCSC chair Doug Hyndman and his fellow commissioners made a simple policy change that forever hindered the capacity of reporters, analysts and investors to delve into the murky world of offshore stock dealings and other nefarious practices that underpin much of the deceit and treachery that characterizes the junior securities market. Under BCSC rules, all publicly traded companies that privately sell shares or issue options must file a form – known as a Form 20 – listing the names and addresses of all purchasers and optionees. Until April 2003, those forms were publicly available, either in hard copy at the commission office or electronically on the BCSC website. But after that date, they became hidden from view. The private sale of shares and the granting of options, orchestrated by insiders, are two of the key ways that unscrupulous promoters of penny stocks stack the deck to their advantage – and to the disadvantage of public investors. Large blocks of relatively cheap shares and options are parcelled out to insiders or their associates, often through nominee accounts (accounts in the names of people who act as fronts for insiders). Then the promotion is ramped up, the insiders flood shares onto the market and the stock sinks. Typically, the promoters end up drinking Dom Pérignon while public investors end up crying in their beer. A prime example is Arakis Energy Corp., a publicly traded company run by Vancouver promoter Terry Alexander in the mid-1990s. Reviewing the Form 20s at the time, I discovered that while the promotion was still in the formative stages, Arakis sold large blocks of cheap stock to unknown companies in Jersey, a well-known tax and secrecy haven in the Channel Islands. Arakis’s share price soared, then plunged. In the ensuing post mortem, I asked Alexander whether he had sold any shares. “Well, I haven’t because I believe in this project,” he told me. I didn’t believe him. The pattern was becoming much too familiar. I raised hell with Hyndman and his enforcement staff. For the first time in commission history, they sent investigators offshore. With the co-operation of Jersey authorities, they determined that Alexander was, in fact, the beneficial owner of several of those companies. They also found that Alexander, contrary to his earlier assertion, had dumped millions of dollars worth of Arakis shares without filing insider-trading reports. He was fined $1.2 million and booted from the B.C. securities market for 20 years. In a curious twist that showed this was not a one-off occurrence, commission investigators discovered that Alexander’s lawyer, Michael Seifert of Vancouver, was also secretly trading through Channel Island accounts. So was Howe Street promoter Doug Mason, then president of Vancouver-based Clearly Canadian Beverage Corp. They were both suspended from the market. Lost in the flurry of regulatory backslapping was the fact that none of these frauds would have been detected without Form 20 disclosure and the ensuing media exposure. Despite this example and dozens like it, the BCSC, under pressure from issuing companies, decided in the spring of 2003 it would no longer make these forms available to the public. All Form 20s – past, present and future – were removed from public view, eliminating or at least grossly diminishing the ability of reporters, analysts and investors to conduct one of the market’s most basic and critical due-diligence procedures. “Nobody can ever charge that I should have known who or what was behind a company that I covered, because now I can’t know,” says John Kaiser, a San Francisco analyst who closely watches Vancouver junior companies. More than four years have passed since Form 20s were removed from public view, and, despite numerous appeals to the commission, the BCSC has refused to revoke the policy change. Hyndman cites numerous reasons for the change, but none of them – in my view and the views of Kaiser and other critics – justifies what amounts to a major subordination of consumer interests to producer interests. With scandals buried in commission filing cabinets, promoters, brokers, exchange officials and other industry participants have been able to claim that our stock market has entered a new era of fair dealing. This, however, belies a universal truth of junior equity markets: it is far easier to make money by promoting stock than by building a business. It is the height of naïveté to suggest that illicit practices that tilt the table in favour of corporate insiders and against public investors have gone by the wayside. On the contrary, they are most likely flourishing behind the wall of secrecy that the commission created on April 24, 2003. It was January 1996. Vancouver Sun reporter Jeff Lee and I were chasing the so-called Hydrogate scandal. IPC International Power Corp., a private subsidiary of BC Hydro that was developing a power project in Pakistan, had filed a Form 20 revealing that it had privately sold several hundred thousand shares to three mysterious companies in the British Virgin Islands (B.V.I.). The registered agent for the B.V.I. companies was Michael Sampson, director of Integro Trust Ltd., one of dozens of firms that help people set up companies in offshore secrecy havens. (Integro was also the trustee that helped Alexander set up his Jersey accounts.) When I asked Sampson who was behind the B.V.I. companies, he refused to say. “I have a banker’s duty of confidentiality,” he said in a telephone interview from the B.V.I. “Why would the three British Virgin Islands investors want to keep their stock purchases secret?” I mused in a February 1996 article in the Sun. “The simple answer could be that they are reclusive and want their business to remain confidential. But there could be more nefarious reasons. Are they trying to evade Canadian taxes? Are they hiding assets from an estranged spouse or a dissatisfied creditor? Or are they hiding a potentially embarrassing conflict?” Under questioning by Lee, John Laxton, chair of BC Hydro at the time, claimed he didn’t know who was behind the companies. I was skeptical. Laxton was directing the share sale, and he had hired his son-in-law, Richard Coglon, to act as IPC’s filing solicitor. They were intimately involved in every facet of the company’s affairs. How could they not know? Sure enough, after the Sun ran several probing articles, Laxton delivered a confession to the Sun newsroom. He admitted that he and his son-in-law were behind the B.V.I. companies. His explanation was that the share offering was foundering. To rescue it, he decided to buy shares on his own account. But because then-B.C. premier Glen Clark had expressly prohibited him from buying shares due to conflict-of-interest concerns, they had disguised their share purchases through offshore accounts. Laxton claims he did this for altruistic reasons, but was forced to resign as BC Hydro chairman, and the Law Society of B.C. slapped both him and his son-in-law with practice suspensions for making false statements to the press. Given the high incidence of illicit offshore trading activity, I asked Hyndman in March of 1996, right after the scandal broke, what he was going to do about it. “Well, I wish there were a simple answer to the problem,” he replied at the time. “I think we have the same problem dealing with it that all those other authorities have.” Well, not quite. Vancouver is the penny-stock capital of North America. It is axiomatic that the sort of tightly held, asset-poor junior companies that populate our market are much more likely to be manipulated, and there is no better way to manipulate stock than through offshore accounts. This makes Form 20 disclosure more critical for B.C. than any other jurisdiction in Canada. Nobody knows this better than the BCSC enforcement department. “The enforcement division disagrees with the change,” senior investigator Romolo Di Fonzo stated in an April 29, 2004 memo to then-executive director Steve Wilson. “By having a member of the public, such as Mr. Baines, review the exempt distribution reports [Form 20s], it allows important matters to be brought to our attention that may otherwise be overlooked.” In the end, however, Di Fonzo’s admonitions were ignored. So why did the BCSC withdraw Form 20s from public view? Hyndman has offered several reasons:
- “Disclosure of this information through the website is probably inconsistent with privacy legislation,” he wrote in a July 2004 letter to me. Privacy legislation, however, has been in effect in B.C. for more than a decade, and there was never any suggestion from the privacy commissioner that Form 20 disclosure violated the spirit or letter of the act. Nor did the BCSC solicit an opinion or ruling from the privacy commissioner before he changed the policy.
- Disclosure of names and addresses had “invited abuse of personal information,” Hyndman added, referring to reports that promoters were using the lists to cold-call prospective investors for other deals. To support this point, Hyndman provided letters from two companies, Creo Inc. and Endeavour Financial, complaining that brokers had used the Form 20s to solicit employee option holders as clients. Neither of these companies provided any particulars, and, in any event, two complaints hardly seems sufficient to dismantle an entire disclosure regime. The affected employees could presumably have said “no thanks,” and if the commission still felt it was necessary, it could simply make a rule prohibiting the use of Form 20s for marketing purposes.
- “No similar disclosure is provided for purchasers in public offerings or the secondary market,” Hyndman continued in his letter. This is true. Issuers do not have to report who buys stock from initial public offerings or through open-market purchases. But this is an apples-and-oranges type of argument. IPOs and open-market transactions must be conducted through registered brokers who have know-your-client and gatekeeper responsibilities. Private placements do not. This makes it doubly important that these transactions be as transparent as possible.