Tuesday, January 17, 2006

Are Income Trusts A Ponzi Scheme

One has to worry about Income Trusts in Canada. The reason is that this country has such poor regulations around capital and investments, that it is literally the wild west for all sorts of get rich quick schemes. Bre-X was not an anomaly but business as usual.

Globeinvestor.com: Building Bay St.

The Toronto Stock Exchange was established in 1861, with 24 members (who paid $5 each to belong), trading 18 securities during half-hour daily sessions held at a local Masonic hall. But much of the action shifted to the cross-town Standard Stock and Mining Exchange, which was formed in 1901 and became the North American capital for mining shares and stock swindles. The Financial Post estimated that 400,000 investors were bilked out of $100 million, before the S&M was merged into the slightly more respectable TSE in 1934.

One of Bay Street's first major reforms was a crackdown on wash trading (a practice that created the appearance of activity through the manipulation of fictitious accounts) following the 1964 Windfall Scandal. Viola MacMillan, a doughty prospector, used the technique for fraudulent promotion of Consolidated Golden Arrow Mines. But it was Windfall Mines, another MacMillan company, that triggered the uproar after she drove up the price of its shares from 65 cents to $5.60 without any underlying value in the summer of 1964. She was later sentenced to nine months in jail in connection with Golden Arrow, but served just eight weeks. Windfall wasn't that much of a scandal because so many mine promoters followed her example, but the royal commission formed to investigate the case nevertheless recommended trading reforms. MacMillan died in 1993 at 90, fully pardoned and the holder of an Order of Canada. (Lenny Gaudet, please copy.)

Corporate crime in Canada is big business,it is actually business as usual, and it has had historic international or at least cross border connections with the United States.

Al Capone operated out of Moosejaw, the Bronfmans supplied Capone with booze and then operated on their own. Capone was indicted for income tax evasion, the Bronfmans are corporate big wigs in the international Entertainment business.

Corprate crime in Canada is still all wink, wink, nudge, nudge. And while corporate crime is big in Canada, in fact it is a major export, such as the boiler room swindle of British MP and author Jeffery Archer. The Canadain legal system is like Siberia when it comes to dealing with it, out in the cold and in the dark.

Welcome to the world of white-collar crime. It's always been there, but perhaps you didn't notice. A lot of criminologists like to refer to 1940 as the year when criminology first noticed, when Edwin Sutherland drew attention to it, and defined it as "crime committed by a person of respectability and high social status in the course of his occupation." Sutherland's (1949) pioneering study of legal action against the seventy largest U.S. corporations found that all seventy firms in the sample had at least one formal action against them, and that the average number of violations per company was fourteen. A full 60% of the firms had been convicted in criminal court. Goff & Reasons (1978) found similar white collar crime patterns in Canada, and Clinard & Yeager (1980) found that nearly two-thirds of Fortune 500 companies come under fire at least once a year for federal regulatory violations and/or violations of corporate/criminal law.


While over one-million charges were laid against street criminals in 1988, only 23 were laid against corporations in the first two years of the 1986 Competition Act. According to Holmes, the lenient treatment of non-violent crime has led to the growth of a "get-something-for-nothing attitude." Similarly, many corporations view the penalties for corporate crime as a Òmere cost of doing business."

Judges require better corporate crime education: Judicial training has historically keyed on blue-collar wrongdoing

Securities regulators should place greater emphasis on restitution for aggrieved investors and Canada should create specialized criminal courts specifically for white-collar crimes, according to a York-authored study cited in the National Post June 15. 2005

Not surprisingly, said the Post, her paper also reiterated the widely held view that when compared with their US counterparts, Canadian regulators do not engage in enough enforcement activity and are less effective when they do. To support her assertion, Puri cited statistics that showed Canadian securities regulators devote a smaller percentage of their total budget to enforcement than their US counterparts. As well, Puri found financial penalties are 10 times higher in the United States than the average Canadian fine.

Corporate and white-collar crime is not victimless. The harms caused by corporate misconduct can result in substantial injury to a broad range of stakeholders, as witnessed by recent accounting and corporate governance scandals at Enron and Worldcom. Shareholders can lose their retirement savings, employees their jobs, and creditors significant investments. Ernst & Young fraud investigator Don Holmes estimates that white-collar crime costs Canadians $20-billion a year. The Canadian judiciary needs to recognize not only the magnitude and impact of corporate misconduct on large segments of the population, but also the broader ramifications of corporate crime on the Canadian economy.

The judiciary has historically treated white-collar criminal offenders more leniently in sentencing than blue-collar offenders. Compare robbery and burglary to accounting fraud and embezzlement. Compare tax evasion under the Income Tax Act to fraud under the Unemployment Insurance Act. Compare traditional theft to misleading advertising. Existing studies reveal that white-collar offenders are less likely to be imprisoned and that they receive lower average sentences and serve less time.

I am currently reading a great book on the 1960's mutual fund rip off done by Bernard Cornfeld, the book is called Do You Sincerely Want To Be Rich. Cornfeld and his company IOS were operated out of Europe and registered on the American Stock exchange via Ontario. They were underwritten by the Royal Bank of Canada. They sold mutual funds, and created a super fund of mutual funds which was really composed of lots of mini mutual funds that IOS created. When the market crashed in 1970 their swindle was revealed.
Bernie retired to Hollywood to live with Hedi Fleiss, the Hollywood Madame.

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Beautifully engraved Certificate from the Investors Overseas Services
issued in 1969. This historic document was printed by the Canadian Banknote Company and has an ornate border around it with a vignette of of a semi nude female sitting in front of an major industrial facility above the company's nototious logo. This item has the printed signatures of the company's officers including Bernard Cornfeld as President and is over 34 years old. There are 32 unused coupons attached to the bottom of this certificate not shown in the scan.

Robert Vesco

Another notrious crook took over IOS, Robert Vesco. Vesco ran a variety of financial black market operations including involvement with the U.S. Military and the spook (spy) community. He like Bernie also operated out of Canada for a while.

Robert Vesco

Sep. 19, 1983 The New Jersey financier fled the U.S. in 1972 after being indicted on charges that he looted $224 million from the Geneva-based Investors Overseas Services Ltd., and illegally donated $200,000 to Richard Nixon's re-election campaign. Since then Vesco has lolled in exile in the Caribbean, apparently in the Bahamas, safe from extradition efforts.

A Valhalla of the Vile/Here are the Felon Index rankings:

Scammer $mm (adjusted for inflation) years served in prison Felon Index Score
1. Bernie Cornfeld (1970) $2,305 0.92 2,514.5
2. Michael Milken (1986) $1,630 3 543.3
3. Tino De Angelis (1963) $1,170 7 167.1
4. Stanley Goldblum (1973) $1,209 8 151.1
5. Ivan Boesky (1986) $163 1.83 89.1
6. Barry Minkow (1989) $151 5 30.2
7. Charles Ponzi (1920) $ 17.9 5 3.6

The accounting firm Arthur Anderson, who also advised Mike Harris and his Ontario government about privatization schemes for work for welfare, was caught in the Enron scandal. But Wall Street knew about Andersons peccadillo for shady accounting. They had been Bernie Cornfelds IOS accounts back in the 1960's!

Enron and World Com were well connected with Bay Street and Canada's banking industry, CIBC the Royal Bank both had to bay out billions last year in fines for their involvement in the great dot.com swindle. And remember the Royal Bank underwrote Cornfelds IOS Fund of Funds back in the sixties.

Today CIBC is passing off its costs of fines for being a criminal onto its bond holders.
Bondholders warned to beware getting the short end of the stick

Then there are our own rip off artists, Nelson Skalbania and Peter Pocklington
who profited during the wild boom and bust of the 1980's, taking advantage of the unregulated Alberta and B.C. stock market. They swindled investors, screwed workers, ripped off governments, and in the case of Pocklington never went to jail. Skalbania spent some time in jail, certainly less than an average street criminal. And once out was allowed to continue trading on the stock market in Canada.

Alberta is home to the Income Trust business in Canada. It originated in the petro-towers of Calgary. The first Canadian income trust was a petro trust. Modeled on the American Trusts, they have managed to become a tax haven because of loose or non existant tax rules.

Marcel Tremblay, inventor of Canadian income-trust structure, dies at 64

A bold business leader with more than 40 years of experience in Canada's investment-management and energy industries, Tremblay is best known as the inventor of the income-trust structure in Canada.

Tremblay designed and created Canada's first income trust, Enerplus Resources Fund, in 1986, spearheading a sector of the Canadian economy that now represents over 15 per cent of the market capitalization of the Toronto Stock Exchange.

"Convincing the brokerage community that this idea made sense was an almost impossible task," Tremblay told The Canadian Press in 2004.

"My objective was always to give investors the best return possible, minimize the taxation issues, preserve capital as much as possible and make sure they participate in the upside."

The effect that income trusts have had on the Canadian business landscape is dramatic, to say the least.

Income trusts are now the fastest-growing sector of Canadian capital markets because of their sizable distributions of income to unitholders and their considerable tax advantages over a standard corporate structure.

It is finally after all the political debate this past year a business that is now under the scrutiny of Standard and Poors in the U.S.

Obscure income trust reports can mislead investors: S&P

The two analysts said income trust reports are so obscure, and so full of distortions, they can easily lead investors astray. To make it worse, key information is often missing.

"Coupled with insufficient and inconsistent disclosure by management, the information risks inherent in this area of the Canadian capital markets continue to be quite significant," S&P said.


This is far more important an investigation than who leaked the Income Trust announcement. Though the profiteering off that announcement is an iconic metaphor for the shady nature of Income Trusts. Just as their name says it all, hiding income from the tax man

Also see:
Income Trusts
Corporate Welfare Bums
Criminal Capitalism


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