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Canada - A Good Place for Swindlers
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December 28, 2010

Al Rosen, author of 'Swindlers' says Canada worse than US for protecting investor rights.

Bio: Al Rosen is a forensic accountant, principal at Rosen & Associates Ltd. He has given expert accounting testimony in Canada's highest courts, a certified fraud examiner, and a specialist in investigative and forensic accounting. For 15 years, he served as a technical adviser to three Auditors' General of Canada. Dr. Rosen has taught accounting at universities across North America. He graduated from the University of British Columbia in 1957 and later earned his M.B.A. degree from the University of Washington. In 1966, he obtained his Ph.D. from the University of Washington. He founded Rosen & Associates Ltd. in 1990. Al is the co-author of Swindlers: Cons and Cheats and How To Protect Your Investments From Them, Published Oct 20 2010.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Toronto. Canada is supposed to be one of the world's safest places to do business: well-regulated, honest, transparency. Well, not according to Al Rosen, one of Canada's leading investigative and forensic accountants. He's recently written a book called Swindlers. And he says Canada's a great place for con artists. Here's three reasons why. First is the lack of a national securities regulator. Second, Canada's accountants and auditors regulate themselves. And third, auditors have washed their hands of responsibility to individual investors in Canada, and the nation's highest court has supported them in doing it. Now joining us is Dr. Al Rosen. As I said, he's a specialist in investigative and forensic accounting. He founded Rosen & Associates in 1990 and for 15 years he served as a technical advisor to three auditors general of Canada. He's the current chairman of the Canadian Justice Review Board. Thanks for joining us, Al.


JAY: So elaborate on those three issues. Why are you saying Canada's a good place for swindlers?

ROSEN: Well, we know, from our own practice over 25-plus years, of Canada attracting people outside of the country and the type of situations they get involved with. So we have the evidence. We know that it's not hypothetical, that it's actually happening. And the big problem is we don't prosecute, we don't then pursue some of this with sufficient detail to get a conviction. And so there's very, very few convictions in Canada.

JAY: But you point out in your book, the last three or four big front-page convictions of Canadian "swindlers", quote-unquote, were actually prosecuted in the US; they weren't prosecuted here.

ROSEN: For sure.

JAY: And I guess Conrad Black is one of the better-known ones.

ROSEN: It is. But you also have the Nortel and so forth. One of the problems are these business income trusts, which were--I'd say over half were Ponzi frauds, and they were not prosecuted, with one exception that I can think of.

JAY: And classical Ponzi fraud, you point out your book, where people are getting paid off by other investors' money and you keep shuffling it around.

ROSEN: Yeah. And what you're doing, to get them started, you take in $100,000 from somebody. You say, I'm going to give you 15 percent return on investment. So that 15 percent comes out of $100,000 that somebody put in. And you can do this for 6-2/3 years times 15 to get to a 100. And so people then say, wow, I've had 3 years now of 15 percent return, and they tell all their friends, and suddenly all their friends are caught up in this mess.

JAY: Now, in the US there is a national securities regulator, the SEC, which is a supposedly government-independent body. I say supposedly 'cause it depends who gets nominated as chair just how effective that is.

ROSEN: Exactly.

JAY: But at least there is one. You're saying there isn't one in Canada.

ROSEN: There isn't one in Canada. But I'm more concerned about the prosecution side than the regulation side.

JAY: Why?

ROSEN: So the regulation side, if you look at most of the provincial securities commissions in Canada, what you have is a situation where they have the business side of it, which is to get money through quickly for companies who want to use it to create jobs, etc. Their other mandate, though, is to protect investors. And what they don't do is spend much time on that mandate of protecting investors. And so if you spend 90 percent plus of your time on the business side of simplifying financing for these businesses, then you just don't have the time left over to protect investors. So what I would really like to see is a separate branch that actually protects investors by looking at what's happening.

JAY: Give us an example of where you think there should have been a prosecution, or where there was and the punishment was relatively light. Like, make this real for people.

ROSEN: Virtually all of the civil litigation that we get involved in, there isn't a criminal side. And so when you--.

JAY: "We" being your firm.

ROSEN: The firm, yeah. But the prosecutions of a criminal would have to be done by a prosecution branch, which Canada doesn't really have. And so it's scattered around, so it really doesn't matter. You can look at the Alberta bank failures; you can look at Confederation Life; you can look at this Castor Holdings case, where we're still awaiting a decision. There are just dozens of these. It's not a matter of us not being able to give the examples. It's somebody with money is able to be a plaintiff in a case to sue these people who are so-called swindlers, and then they get whatever money is there. These people don't go to jail, because there just has never been a criminal case, or if the criminal case is there, it's dropped very quickly.

JAY: Well, it should be the attorney generals of the various provinces, one would think, would file criminal charges. So you're saying they just don't do it.

ROSEN: They don't do it. And then there's the buck passing [that] goes on as to who should be doing it, who should be giving what to whom. And if you don't have within the law and the branches to prosecute it, most of these cases don't even get started. Like, we will pick them up maybe as a class-action, or it's a civil case. But criminal prosecution in Canada, you can probably count on one hand--.

JAY: Well, if you're an investor, I guess on the one hand you should be concerned that swindlers are not being prosecuted. But then you've always got the auditors to rely on, at least one thinks. So what's the auditors' story in Canada? As I mentioned earlier, you point out they regulate themselves.

ROSEN: You have a major case in Canada--it went to the Supreme Court of Canada. It's called Hercules Managements. And in that situation--and it just startles me and it startles the US lawyers that we deal with, where the Supreme Court of Canada said annual audited financial statements are not to be used for investment decisions. And you sit there and say, okay, what are they supposed to be used for?

JAY: Or what is supposed to inform an investor, then?

ROSEN: Exactly. And so with that as a major leading case in Canada, then much of the prosecution doesn't take place, 'cause they know they're defeated already by the decision in this particular case.

JAY: So, in other words, if an investor relies on an auditor's report and it turns out the auditor is being nicely and increasingly kind to the people that are paying for the audit, sometimes you can negotiate with your auditor how to make the language as conducive to your story as you would like.

ROSEN: I'm not too sure "sometimes" is the right description.

JAY: I mean, auditors go--I mean, their bread is buttered by their client, not by some hypothetical investor.

ROSEN: In a sense it's unfair, but when you're sitting there saying here's who pays me, here's what they want, you can't really sue if I overstep where I should, what else are you going to do? Like, the system is set up to make life very difficult for the auditors in one sense, but very easy in another sense, that they can go along with some fairly curious type of reporting.

JAY: And the Supreme Court decision gets them off the hook. Now as long as their client's happy and they're--more or less got their numbers right--'cause it's not always in the numbers the auditors report. A lot of it's in the notes where you get the context.

ROSEN: Exactly. Yeah.

JAY: And if you make the notes contextually favorable to your client, then outside people don't really know what's going on.

ROSEN: No. And it's interesting you're saying this, 'cause I just was asked to write a practice case for one of the big universities in Canada, and I wrote an example where it was fairly clear three different sets of auditors over 11 years had come up with this same sort of favorable response in a situation where the landlord did well and the tenants didn't.

JAY: So how does the Canadian situation compare to the American situation? 'Cause especially since the Wall Street shenanigans, the United States has the reputation of being one of the least regulated, most Wild West financial business environments in the world. You're saying Canada's worse than that?

ROSEN: Much worse. Much, much worse. We have, most Canadians--like, I gave quite a few speeches in the last month or so to different group, like seniors groups, financial analysts, bankers, lawyers, and so on, and virtually nobody knows what the Canadian rules are, with just a few specialists here and there. The vast, vast majority of Canadians who are investing in the market just have no idea. Even a lot of the professionals have no idea. So we have looser rules. And therefore, when you go into court in Canada, you have a hard time pointing out that, look, here's a rule that was violated that led to these people losing this amount of money. US has these tighter rules, and on that basis you can point to more of them.

JAY: Which means civil litigation's likely more successful because of that.

ROSEN: For sure. And then on top of it, though, you have the state attorneys and so on in the US, you have the Securities and Exchange Commission in the US. They're going to be looking at some of these growing problem situations and just sort of cut them off. We don't have that situation in Canada, and that's why in our business we just get endless requests from people who are bankrupt asking us to take a case on.

JAY: And then none of these people go to jail.

ROSEN: Exactly.

JAY: Thanks for joining us. Thank you for joining us on The Real News Network.

End of Transcript

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