– by Larry Elford –
What if those we most trust were doing the most harm?
I worked inside the financial industry for two decades and found that investment firms worked at a special “altitude”– one that police and prosecutors were not allowed to enter. Financial firms operated above ordinary laws that involved police cars, lights and sirens, but I didn’t know why until long after I left the industry.
It made sense when I learned that trusted financial firms paid hundreds of millions of dollars to regulators, and that because they funded and chose those hired to “police” them, they could obtain permission to violate rules or laws, without telling the public. “Decisions for Exemptive Relief” is the label for the permissions used by thirteen securities commissions in Canada. Today it is involved in using “public-entrusted power for private gain”…and public harm.
For example, if a bank needed to unload a pig, (a bad-selling new share offering), what faster way than dump it into the bank’s own mutual funds. This removes the junk from being a problem for the bank, by putting it into bank clients’ mutual fund holdings. Who will ever know? Simply apply for “Exemptive Relief” from rules intended to protect the public from exactly this kind of self-dealing, and what was a multi-million dollar problem for the bank, is quietly shifted inside the investment funds owned by bank clients. No public notice, no public hearing and not a word of warning to thousands of customers. Repeat as often as you need – just pay a few thousands of dollars to the regulators each time.
Or consider the example of the 2008-era collapse of Mortgage Backed Commercial paper, when Wall Street got bailed out while homeowners were getting kicked out.
Some Canadian financial firms found they needed to “get rid of” billions worth of non-rated (junk) mortgage backed securities. All the industry needed to do was apply for a back-door regulatory exemption, and the illegality of selling un-rated products to the public becomes “exempt” from the law.
Thousands of people, including the pension plan for Canadian Judges and the RCMP (PPSP) lost money. One woman took her own life, and countless other lives were put into distress, some destroyed. Thirty two billion dollars was the financial damage for one inexpensive regulator exemption, and although some of that money was recovered due to public outcry, what about the other several hundred exemptions done that year? How would other victims even know that their investments were “exempted” from laws? Compared to “street crime”, $32 billion is roughly equivalent to six million “average”, “street” or “property” crimes.
It is a secret process, where our most trusted financial firms have private access to a side-door into our trusted government regulators, and purchase something 100 times more effective than a deferred prosecution agreement “in advance” of the violation they wish to commit. Paying a few thousands of dollars to regulators saves the all the trouble of breaking the law, getting caught, hiring lawyers to negotiate deferred prosecution agreements, lobbying the Prime Minister, and maybe appearing on the news. Simply get an exemption in advance and there is no crime, right?
Wrong. It is two crimes on both society and our economy. The financial crime on society gets hidden beneath a well-hidden social crime of corruption, the use of public-entrusted power for private gain. But no police or prosecutors are allowed to enter the picture, because the financial industry has their “own” police, right? Yes, that part is right.
Exempting laws is done hundreds of times each year, and ignoring laws is done as well. Cheating tens of billions of dollars from society then becomes as easy as taking candy from children. Pain trickles down.
Over the years I have testified in four legislative financial inquiries, and each time I witnessed a “pantomime” of government activity – a stage performance. After my fourth experience I cried when I suddenly realized how well that performance of deception was being played upon the public.
Financial crimes – which are not measured, reported, or prosecuted – dwarf the cost of all measured crimes in the land combined.
Example number three is an exemption to the law issued to Kinder Morgan (Trans Mountain pipeline), in the year prior to it being sold to Canadian taxpayers for billions of dollars.
The March 20, 2018, “decision” by Provincial Securities Commissions said that this company was Exempt from requirements to disclose financial and related information. Later in 2018, the Trans Mountain pipeline was sold to the federal government for $4.5 billion, when it was presumably sold based on concealment of crucial information.
Or, to be clearer yet: an exemption from requirements to include documents in any prospectus. In broker-lingo “We’re dressing this pig for market, and we need some lipstick.”
Further to Trans Mountain Pipeline, The Kinder Morgan Canada Limited Exemption decision NI 51 102 NI 44 101 AB decision PDF can be found online.
Western Investor Feb, 2020, about Trans Mountain cost increases: “Twinning the Trans Mountain pipeline, which Canadians now own, will cost $5 billion more than the last capital cost estimate, Trans Mountain president Ian Anderson confirmed Friday February 7.”
The number of decisions to grant “exemptive relief” to financial industry players varies between 300 to 500 each year – give or take – without any public notice. Most exemptions contain the same boilerplate statement which in the past has looked like this: “Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision”. This allows private parties to pilfer tens or hundreds of billions from investors, in endless examples of the corporate farming of humans.
Last but not least
When VRX (formerly Valeant Pharmaceutical, now called Bausch Health) was growing exponentially, who knew it was benefiting from Government exemption from financial disclosure to the public (hiding key financials)? The company at one time was worth more money on markets than the Royal Bank of Canada, and the loss in market capitalization when this company collapsed was about $90 Billion. One executive was charged by US authorities, but nowhere were regulators held to account for aiding the company’s financial deceptions on investors. Imagine being able to do as much financial harm as all other crimes in the land, in one single trick, and never once fear a visit from police or prosecutors?
These examples and thousands more, form part of an invisible financial pandemic in our society. I believe the investing public deserves to be made aware of this.
Stan Buell, founder of the Small Investor Protection Association of Canada said this about Securities exemptions: It is like letting some people secretly buy exemptions to traffic laws, so that they can drive at 100 miles per hour. All other traffic is at risk, and no one is warned about those with special permission to exceed speed limits.
A few headlines and sources regarding the Valeant story are below:
May 28, 2018: Valeant, Distancing Itself From Its Past, Will Change Its Name to Bausch Health.
Jul 23, 2015: Valeant passes RBC as Canada’s largest company by market value.
March, 2016: A surefire made-in-Canada way to lose $650 billion.
Beyond the story of gaining quiet exemption from laws in Canada, industry-paid regulators also routinely ignore laws set into place to protect the public. A recent investigation by CBC news found that over 95 percent of investment-product sales agents are allowed by regulators to misrepresent their titles, their job roles and their registration and/or license categories, to mislead the public of their true role, registration and license.
The deceptions deceive millions of Canadians, leading them into a trust relationship with persons who hold neither the job requirements, nor the license/registration for the level of trust promised or implied. A fiduciary duty to protect investors, and a professional Adviser registration is implied, but a 90-day license-requirement salesperson is then delivered to most investors in what appears to be a classic “bait and switch”.
A copy of the CBC news story into this failure to protect the public, is found in a three minute video here.
My most recent search at the Alberta Provincial Commission website showed just over 5000 exemptions.
Oh Canada…finance affects everyone.
Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired after two decades inside Canada’s financial industry, and has spent many more years to understand how its hidden workings truly impact society. His second book released in 2020, is Farming Humans, Easy Money in paperback and Kindle available on Amazon.
Contact the author by email if you wish to be part of investor protection solutions at firstname.lastname@example.org.