Thank you.
My background is in investigating many of the big frauds in Canada. If you went through the list of major situations, I think you'd find we were probably involved in two-thirds of them.
I'm not unsympathetic to the comments from the minister in New Brunswick, but I think we have to get realistic about what it's going to take to prevent many of these Ponzi frauds and pyramid schemes and so on.
I have a handout. For full disclosure, I come from two directions. One is that Accountability Research represents research done for investors, and they are subscribers to our newsletters and so forth. The other is that, having testified in court over 100 times on various types of these issues, it's quite different listening to what I've heard from the previous three speakers versus the actuality of Canada.
I want to give some context to what's happening here. If you go back to the Ponzi schemes of 1910, 1920, and if you look into the stock market and trace through what happened in the 1920s leading to the 1929 stock market crash, the U.S. moved in and put in some fairly interesting and tough legislation at the time, in 1933, 1934, with some in 1935. If you look at what Canada has done over the past 80 years, it's not very much; I think that would be the polite expression.
I want to summarize what I think has to seriously happen if we want to protect the average person.
The first thing we have to do is to have an independent body, a Canadian equivalent of the SEC. It's going to be more than a national regulator--it has to be--to look at the prosecutions, the investigations, and all those aspects. We don't have that in Canada now, and there's no sense pretending that we do. I'm being very blunt about this situation.
About two or three years ago, we sent major packages across Canada showing what the problems were. We got very little in the way of response. This was at our cost. We kept at it. I've been writing for more than ten years, especially in Canadian Business magazine, and done dozens of other articles. So having been involved in these cases, I see the situation far differently from what I've heard this afternoon.
A perfect example of where we have a major problem in this country is something called international financial reporting standards. This has been adopted in Canada without the legislatures debating it. It's been brought in by the auditors of Canada.
I am astounded that it's gotten this far. And yet, in spite of all the material, the speeches and so on, there it is. IFRS is extremely full of holes that are going to make securities regulation just about impossible in Canada. The reason for that is that management has choices. The rules were written for a country other than Canada. We've adopted them here in spite of the U.S. going in its particular direction, which is forcing the U.S. companies to use Canadian accounting and reporting.
We have had enough problems over the years. I've published long lists of the cases in Canada where the prosecutions have not occurred; many of them are civil, and the restitution is essentially zero. I think we have to gather considerable facts—and they are available—before we assume that Canada is safe.
Now, not having an independent body to go to in order to ascertain whether some of the legislation going through the system--Bill 198 in Ontario, for example, or this IFRS material--is devastating. Let me explain why.
In December 1996, the Supreme Court of Canada heard a case called Hercules Management. The arguments from the Canadian Institute of Chartered Accountants and from the particular large auditing firm being sued in this case were that annual audited financial statements were not to be used for investment decisions.
So on that particular basis, you say to yourself, “Well, just a minute. This destroys what's in companies acts, what's in securities acts. Why do we have financial statements if that's the conclusion?”
The Supreme Court agreed with them. I automatically thought that each of the provinces in Canada would come in with legislation that would correct that matter. But it didn't happen.
That's just one issue. But unlike most of the rest of the world, Canada has allowed the auditors to set the accounting and auditing rules. Here they have a declared statement that they are not acting on behalf of shareholders. The whole concept of shareholders' auditors has disappeared.
So we then have a number of cases...and I have and pages and so on that I could show. If you look just at this decade, we've had Bre-X, Nortel, literally hundreds of income trusts that weren't tax problems first and foremost, they were Ponzi frauds. We've seen very little prosecution of those. We've had the asset-backed commercial paper, and now we have this IFRS.
We're not seriously addressing what is causing Canadians to lose money. On that basis, then, how can we possibly de-regulate, which is what's happening with this IFRS? The U.S. has rejected that, and we're living next door to them. If we want to seriously protect the investors across Canada, we need a whole revamping of the system and not some tinkering in a minor bill.
Let me try to look at some aspects that are particularly important on this.
The Hercules decision has devastated the plaintiff lawyers across Canada—I think devastate is the right word—because they will not pursue these types of lawsuits where there's a director, officer, auditor, defendant. If you need names, there are plenty of them around.
In terms of the costs of the class actions, this is a major problem as well. Bill 198, in Ontario, and the changes in the Securities Act are such that the costs of running these cases can be $5 million, $10 million, $40 million. We're just out of context with what's happening.
There's a case in Toronto with huge dollars involved. There's another one in Montreal, Castor Holdings. They've gone on for 20 years.
We've lost the respect of the international community.
That's the nature of what I'm saying. I would assume it's not going over very well to those listening, but that's the reality. I think we have to cease pretending and we have to face the issues.