Investors Scrutinizing the Regulators

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RCMP team probes market fraud

Sunday, January 15, 2006

Insp. George Pemberton has been investigating nefarious activities in the financial markets for more than 10 years, but he is continually surprised at the kinds of people whose handiwork comes across his desk.

Pemberton's team is investigating the case of former Berkshire senior investment adviser Ian Thow. Thow has not been charged with any offences and Pemberton would not discuss his case. Pemberton did agree to talk in broad terms about how his team operates, and was quick to point out these investigations take a long time.

"The variety of people is amazing," said Pemberton, the officer in charge of the Vancouver RCMP's Integrated Market Enforcement Team. "If you look through the history of some of the securities fraud committed in Vancouver and you look at the people, you'd think some of them were Avon ladies right up to the slick and polished businessman."

But as different as they may look on the outside, Pemberton said they share one characteristic.

"The common thread with them all is they continue to commit the fraud on and on and over again," he said.

"Almost invariably if you look into the background, there will be something in their history. They will have been sanctioned by a regulatory organization, been sued or there may be allegations made against them by the [B.C. Securities Commission].

"Whatever it is in their personalities, they just don't stop."

Pemberton said it's a destructive personality that operates without a conscience and can break the victims of the fraud artist.

"When you look at people who are stealing retirement money from elderly victims, how can you describe it as anything but sociopathic? They obviously have no empathy with anyone else," he said.

Pemberton said dealing with that kind of personality is a tough part of the job, but the actual investigation of these cases is far more difficult.

The team is tight-lipped about specific cases it's working on, and Pemberton will not comment on any aspect of those cases.

Witnesses and victims tend to be reluctant to talk and tracking down the cash is often painfully difficult, not to mention the fact the action that may have triggered the investigation is completely legal.

"The first problem in all frauds is the underlying conduct is totally legal, there's nothing illegal about doing a securities trade," he said. "It's totally unlike drug-trafficking, where if you're caught with a kilo of cocaine, you're hard-pressed to find an excuse."

To define what constitutes fraud, the RCMP boil it down to its base elements: Dishonesty on the part of the perpetrator and deprivation on the part of the victims -- that is, an act of deceit or falsehood to take or receive assets.

The first hurdle the team faces: "Witnesses and victims not wanting to co-operate," Pemberton said.

When a case is referred to the RCMP's market-enforcement team from a local police force, the team starts by looking into all the publicly available information.

There are usually pages of trade orders, information packages and contracts to weed through -- all of which come with the territory of investigating a highly regulated industry -- before the attention is turned to the human element.

The team plumbs information from victims through correspondence they had with a suspect and what the suspect may have told them. It also canvasses witnesses -- coworkers, employees and others.

And that's where things slow down.

"Especially in securities fraud, witnesses just do not want to co- operate. People in the brokerage industry in particular, their livelihood depends on keeping their licence," Pemberton said.

"And typically, even though they may not have done something criminal, in hindsight they will have done something that violates an [Investment Dealers Association] rule or the Securities Act.

"So they just don't want to talk. It can often take months to negotiate to even talk to a witness."

The problem increases when it comes to victims, many of whom are hoping for a resolution that will see them get their money back.

There is also the chance the suspect still has contact with the victims, which can drive them further away from any kind of investigation.

"Often they are still being led to believe that they are going to get their money back and that the police are just harassing the suspects," Pemberton said.

And while getting the straight goods from witnesses can be like pulling teeth, Pemberton said finding the money is often as difficult.

"There is always a trail, but for anybody who puts their mind to it, the money can effectively disappear," he said.

"It's not easy to completely hide it, but they can make the effort to track down the money so onerous that it becomes effectively impossible," he said. "The process of setting up offshore accounts is so well-known among suspects and there are so many lawyers who specialize in helping people conceal their assets for whatever reason.

"Combine that with electronic banking and financial systems where you can wire money overnight between here and secrecy havens and it's hard to track."

The havens of choice these days are islands in the South Pacific, though he pointed out the Caymans have "cleaned up a lot."

"Other countries are more problematic -- islands where there are 300 residents and 500 chartered banks," he said.

Improved technology has been a double-edged sword for the RCMP. It has made tracking money and transactions easier but provides more avenues for criminals to manipulate the system.

"We are also able to process more information, but the flip side is there's a lot more information out there," he said.

And like many regulatory and enforcement agencies, the RCMP team is limited by its resources. Though it has cutting-edge technology and civilian-analyst support, there are only 15 members in the Vancouver branch, and it takes time to train and produce qualified staff to put together a second team.

"The biggest roadblock in our organization and all investigative agencies is finding qualified and experienced people," Pemberton said.

Colour Photo: CanWest News Service / Insp. George Pemberton: "The common thread with them all is they continue to commit the fraud on and on and over again." ;



Ian Thow takes flight