The violence of white-collar crime
Date: Wednesday, August 29 @ 00:00:00 EDT
Topic: Investor Education
“.. Mr. Diekmeyer, 73, says he lost $800,000 - his life's savings - when Bre-X collapsed. He also saw his personal friend and stock broker kill himself in 1997, riddled with guilt about his clients' losses."I survived with great difficulty and a friend of mine committed suicide over it," says Mr. Diekmeyer, who lives in a modest apartment in Beaconsfield, west of Montreal. "I only know this story. I'm fairly certain there are others that are equally disastrous…"
Source: J. McFarland, No winners in this case, Globe and Mail, Aug. 2, 2007
[John Felderhof, the former vice chairman and Chief geologist of Bre-X, the gold company rocked by a scandal that wiped out billions of investor dollars almost 10 years ago, had been accused by the Commission of selling $84 million worth of stock between April and October 1996, while having material information not disclosed to investors. Felderhof was acquitted on July on 8 counts of illegal insider trading and authorizing misleading news releases 7 years after his lengthy trial began. During the trial, the court heard extensive testimony that Felderhof ignored nearly two dozen signs that the amount of gold at Busang, Indonesia was insignificant. The OSC will not appeal the ruling, so in the end no one will be held accountable but small investors pain will continue for decades ]
White-collar crime is a generic term for crimes involving commercial fraud, cheating investors and consumers, insider trading, embezzlement and other forms of dishonest business schemes. The term comes from the perception that these fraudsters wear white shirts and don’t use physical force in effecting their devastating schemes. Someone who mugs a victim on the street by threatening to knife them, and steals $300, might very likely be punished with a more severe sentence than a Bre-X executive who cheats shareholders out of billions of dollars. There is an impression that white-collar crime in Canada is rare. We've all heard of Enron but how often is Nortel cited as an example of thousands of innocent people losing a large share of their life savings? The last few years, thanks to the media, Canadians are now hearing about home grown penny stock scams, Hollinger, YBM Magnex, Atlas Cold Storage (accounting fraud) and of course the infamous mutual fund market timing scandal. Lately, we've all witnessed the tail end of the Bre-X fraud that cost hapless investors $6 billion with no one held accountable.
Many more examples could be cited including the numerous business income trust implosions like FMF, the Portus hedge fund fiasco and the infamous Norbourg funds disaster. About 9,200 investors in mutual funds managed by Quebec based Norbourg Asset Management Ltd lost their money due to management malfeasance Allegedly, $130 million was misappropriated. Retail investor’s lives were turned upside down.
There were huge losses but was violence involved? We’re always hearing that white-collar crime is non-violent, no one is actually hurt-it’s “only” money. Punishments should be minimal; it’s not as if someone was beaten or knifed. Well, we use the term financial assault to describe the unsavoury actions of fraudsters, scam artists, devilish corporate executives, stock promoters and greedy salespersons who knowingly put investors at huge financial and personal risk for economic gain. The toxic combination of financial loss coupled with the corresponding psychological and physiological impact often makes the assault an unbearable experience.
We've become conditioned to reading about the billions of retail investor dollars unduly vaporizing each year in Canada. Unfortunately we’ve also grown accustomed to a lack of enforcement by regulators and the success stories of perpetrators who walk away “Not guilty” Well, we think, at least nobody was killed or required 20 stitches. It is “only “ white-collar crimes. So even if this culprits are caught, they should get wrist slap penalties, easy bail and maybe short jail terms. These are not thugs that should be incarcerated. No real harm done, right?
Think again. White-collar crime is a devastating form of financial assault
Take these two examples:
1. A woman in her early seventies had been sold some internet infrastructure and e-business technology funds in 1999. The salesman had befriended her while she was recovering in hospital from heart attack. Within the year, the funds were down 85% and most of her life's savings with them. When she found out, she had a relapse. She was dead within a month.
2.An engineer in his fifties was on a five-year assignment in Africa assisting local authorities develop a mine. His trusted adviser back in Montréal was sent the tax-free earnings and given the authority to invest in conservative securities. When he returned, his $1.5 million had been melted down to $146,000. He ended up getting divorced and suffered from depression for the rest of his life. He was never able to trust anyone again. He died a broken man existing month –to-month in a tiny one-room apartment.
Stan Buell, president of the Small Investor Protection Association likes to refer to financial assault cases as adverse life- altering events. The loss of one's nest egg is a shock that leaves many small investors stunned and immobilized. For seniors and retirees the loss is irrecoverable as time is not on their side. The real negative impact is the physical and emotional collateral damage that white collar crime causes.
Some examples from a variety of interviews, media reports and victim impact statements:
One man, who lost $400,000, had to return to work at age 72 to a physically demanding job working the night shift.
"I believe my first reactions were shock, disbelief and denial, followed by rage, resentment, guilt and then utter depression," one elderly woman observed.
"To know these people used our hard-earned money - they even took money so far back as when I was 10 years old on a paper route. The pain and hurt and always thinking of what was done to you just doesn't go away. I have nightmares"
One man and his wife were using the $2,500 interest paid out monthly on their investment to make a special vaccine from his wife's blood to fight her leukemia. But soon the payments dried up and the investment was gone. "We tried for as long as our finances would allow the treatment. It was impossible to keep up financially". His wife has since died.
“ We have been honest and trustworthy people and expected the same from others," one couple wrote. "We have many sleepless nights thinking about how we would not be able to retire as soon as we wanted."
One man, who lost his life savings of $175,000, said his golden years are shattered. "It hurts to look at your wife and tell her that we cannot afford to do much but sit around and wait for the end of our lives."
Several experienced nervous breakdowns and chronic illness since losing their nest eggs
On July 6, 2006 Madam Justice Petra Newton sentenced the 63-year-old swindler, Earl Crackower, a former financial planner at Toronto-based Worldsource Financial Management Inc., to a 5-year term behind bars and ordered him to pay $3.4 million in restitution to 43 former clients and their families. "Your conduct deprived these people of dignity and respect and the ability to care for their families and themselves in their sunset years." Crown attorney Donna Gillespie told the court that the veteran financial planner artfully manipulated and plotted "the financial, emotional and physical destruction" of his clients, including many elderly women, from 1989 to 2003, Newton told a packed courtroom filled with seniors. Besides losing their life’s savings, how were the victims affected by this life-altering event?
Adversely impacted their health and accelerated their ageing
Eliminated their capacity to trust other people
Destroyed their sense of self- respect and their dignity
Created a sense of hopelessness -an abyss of shame and self-doubt
Paved the road for many of them to near destitution.
Caused terrible stress within families
Caused them to have to get part-time jobs to help make up for the losses, despite their ill-health
Made it impossible to ever buy any gifts for their grandchildren –living with a broken heart
Destroyed any hope of leaving a legacy to family members
In other cases we’ve also heard of marital breakdown, severe emotional distress, nervous breakdowns, heart attacks, drug over-dose and even suicide.
Former Enron employees who thought they'd be well off have abandoned retirement visions that included taking pleasure trips and financing philanthropic projects. Some, at the end of their careers, have started over again in new jobs - but working harder to keep up with younger co-workers. They've turned to churches and food banks to eat, sold homes they could no longer pay for, and endured financial stresses that frayed and ultimately destroyed their marriages. One Enron employee lost it all: his job, the money in the stock and his pension plan that held Enron stock. He was laid off, and he and his wife got by on $1,200 a month in unemployment until that ran out after six months. His wife, a hairdresser, was disabled and couldn't work. He was out of work for more than two years. The family house was put into foreclosure, a home they had owned for 25 years. He remains a bitter man. A number of cases have been documented involving suicide resulting directly from the Enron collapse.
The pain is amplified should a determined investor seek to obtain restitution.
"I don't know if I'll ever be able to recover my life after losing $800,000. I feel I have been living in hell for the last few years. The determined defense of the firm’s ombudsman wore me down emotionally. After 3 years I decided to back out but it has taken a terrible toll on me. I’m now on a permanent pill popping regime to keep me from depression After losing my home and my wife, I now live in a tough neighbourhood and fear for my safety ”
The journey to a successful complaint conclusion can be aggravating, time consuming and add stress to an already stressful situation. Restitution claims require diligence, persistence, determination and a thick skin. You’ll be made to look stupid or greedy by the financial institution. The case will be drawn out with carefully crafted letters that make you look unreasonable. If the firm drags out the proceedings long enough you could lose your right to civil litigation thanks to shortened statute of limitation periods introduced in 2004.
Regulators will refer you to the MFDA and IDA. They in turn will advise you that they may be able to fine or sanction those involved but they can’t get you your money back. If you attempt civil litigation, expect to spend thousands of dollars in legal bills with an uncertain result. You can try industry-sponsored OBSI but don’t expect a quick answer or a high probability of ever seeing your hard earned money back. Assuming all has gone well, a rare event, you'll have to sign a settlement release order in order to receive compensation. Part of this may be a “ gag” order preventing you from discussing the case or the terms of settlement with anyone else including others damaged by the scam. The entire process is designed to deter claims and frustrate resolution .It thus adds further to the pain and amplifies the anger and despair. No wonder so few bother to complain.
Insurance fraud, a variant of financial fraud, can have a devastating effect in that a persons life can be disrupted, expected insurance is not there when needed or when seriously ill people who purchased phony health insurance find their credit ruined when they couldn’t pay large medical bills after their policy refused to pay.
http://www.insurancefraud.org/impact_statmnt.htm. The effects can be traumatic.
The horrific Eron Mortgage fraud is encapsulated in a classic study of the impact on victims-it’s a must read
http://www.bcsc.bc.ca/uploadedFiles/Ero ... _Study.pdf
Let’s examine the role of securities commissions in dealing with white-collar crime. The provincial securities Acts are regulatory in nature and not penal. The focus of regulatory law is the protection of societal interests, not punishment of an individual's moral faults. The Portus hedge fund, Norburg mutual fund and the infamous mutual fund market timing cases demonstrates just how ineffective Canadian regulators are in dealing with white collar crime As the Supreme Court has stated: "While criminal offences are usually designed to condemn and punish past inherently wrongful conduct, regulatory measures are generally directed to the prevention of future harm through the enforcement of minimum standards of conduct and care." Basically this leaves victims of white-collar crime unprotected. Securities regulators typically deal with "capital market" offences such as insider trading, misrepresentations in public documents and illegal trading in securities. Their usual sanctions involve fines or orders restricting future activity, such as cease-trade orders or orders prohibiting an individual from serving as a director or officer. Big deal, if you’ve suffered huge financial losses and your life has been turned upside down.
White-collar crime, such as corporate fraud, typically spawns complex, time-consuming and document-intensive cases. Unfortunately, most prosecutors and judges (especially at the Provincial Court level) have little experience with such kinds of cases. Police forces and Crown prosecutors need to allocate the resources to pursue commercial crime with the same effort as violent crime. Parliament needs to adopt stricter sentencing guidelines so that judges can treat commercial crime with the same degree of seriousness as violent crime. A National regulator may make some minor improvements but that is not the real solution for retail investors. Until there is an appropriate response to criminal misconduct in Canada's capital markets i.e. for the federal and provincial governments to treat it as a criminal rather than a regulatory problem and assign to it the high priority and necessary resources which it requires, financial assault will remain unpunished and investors uncompensated. That’s the sad reality in Canada today. John Reynold’s book the Naked Investor makes this abundantly clear, so choose your investments and advisers as carefully as you would any other important element of your life. You are all alone and naked if things go wrong.
To learn more about the issue visit
http://www.scamvictimsunited.com/ and read the Fraud Victims Manual at
http://www.fraudaid.com/How-To-Deal-Wit ... /index.htm A U.K. Report worth a read is Research of impact of mass marketed scams (A summary of research into the impact of scams on UK consumers). December 2006; 83 pgs
http://www.oft.gov.uk/shared_oft/report ... oft883.pdf.
And what makes robbers bold but too much lenity?[ leniency]
- William Shakespeare, Henry VI, part III
White-collar crime really does prove that the pen is mightier than the sword and its swath just as lethal. Hopefully, our broken justice system will soon catch up with this reality.
Ken Kivenko
kenkiv@sympatico.ca
Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.
This article comes from Canadian Fund Watch
http://www.canadianfundwatch.com
The URL for this story is:
http://www.canadianfundwatch.com/module ... cle&sid=52
