The conventional wisdom is that enforcement in the Canadian securities industry is woeful. Part of that reputation is surely well deserved, but part of it is purely bad luck. The regulators’ defeats tend to come in high-profile cases that garner them negative attention, whereas the good work they do often flies below the radar.

The Ontario Securities Com-mission’s new boiler-room unit is one of those low-profile successes. Since it started up this past July, it has actually saved investors from investment frauds. By targeting organized, professional scams, the type regulators were stumbling across most often in the course of their regular investigations, the unit aims to shut the scams down at an early stage — before they can wreak damage on gullible investors.

If that sounds like an obvious approach, it’s easier said than done. This tack hasn’t been taken much in the past by either regulators or law enforcement. In taking this more assertive line of attack against boiler-room frauds, the OSC believes that it has saved potential victims plenty of money and heartache. By disrupting scams that are ongoing, regulators can both avoid the emergence of future victims and freeze any ill-gotten gains, with the hope that the victims may get some of their money back.

While regulators decline to talk about specific cases — charges have yet to be brought and convictions secured — Scott Boyle, assistant manager of investigations at the OSC and head of its new six-person anti-scam unit, reports that the unit has already saved inves-tors money in its first six months of operations.

So far, the OSC unit has managed to freeze about $500,000 in suspected ill-gotten gains, and has secured cease-trade orders against 17 companies and 36 individuals involved in apparent scams.

In the past, by the time the regulators heard about such frauds, both the money and the perpetrators were long gone. Typically, these operations have a lifespan of four to six months, Boyle says. Yet, regulators often wouldn’t catch wind of a boiler-room scheme until they started getting calls from investors wondering why their share certificates hadn’t been delivered or reporting that they couldn’t get in touch with the people who had sold them the stocks.

At that point, it was usually too late. The operation had been dismantled, the suspects had moved on to new ventures and regulators were left trying to piece things together.

Now, because regulators are jumping on these schemes while they are still operational, not only are regulators able to stop ongoing fraud and avert future losses, they can also catch some of the boiler-room employees in the act.

That means regulators can glean intelligence from these employees about the inner workings of the scams. More important, they can identify with whom they are dealing (typically, a victimized investor can only identify the person who sold them the stock using an alias), which enables the regulators to get cease-trade orders that preserve any ill-gotten gains before they disappear offshore or get laundered.

In one recent case, Boyle relates, his team disrupted ongoing boiler-room operations, seizing about $17,000 in victims’ cheques that had yet to be cashed, intercepted prepaid courier packages that held $16,500 that were on their way “into the hands of the bad guys” and froze $28,000 in the operation’s corporate account.

As a result of these new tactics, in the past six months, the OSC has managed to shut down two local boiler rooms, freezing their funds. It also has cease-trade orders in place as part of investigations with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

After the OSC freezes an account, a hearing is held before a court justice within seven days, to determine whether the accountholder can get the order lifted. So far, the OSC has been successful in maintaining these freezes. Now, it must convert these cases into actual charges against the alleged perpetrators.

Boiler-room scams aren’t new. They include the typical pump-and-dump schemes, in which companies sell unregistered securities without issuing a prospectus or securing an exemption, and private securities that are pitched with the promise of an imminent initial public offering. They prey on the greed and naïveté of investors.

What is new is that the regulators are moving in on boiler-room scammers much more quickly than in the past. In some cases, Boyle says, regulators have been able to jump on a suspected boiler room in a matter of days rather than the months it used to take, shuttering the scam within hours.

@page_break@What regulators are finding in these raids, Boyle reports, are slick operations using Web sites, e-mail, toll-free numbers, VoIP telecoms, virtual offices and prepaid courier packages to facilitate their operations. The scale of the scams that the unit has uncovered can be staggering. Boyle recounts one recent raid in which the OSC unit found the boiler room’s phone bill, which ran to 438 pages of long-distance calls for one month, representing thousands of dollars in calls.

One reason why the boiler-room unit is able to move faster than regulators have in the past is simply that it is a team focusing exclusively on this area. Along with Boyle, the unit comprises three investigators, an assistant investigator and a former Crown attorney as litigation counsel. Having a litigator on the team, Boyle notes, enables the unit to do things such as obtaining search warrants much faster, leaving the investigators to focus on compiling evidence.

The unit is also utilizing the OSC’s rarely used inspection powers to get a foot in the door while the boiler rooms are in full swing. And the unit is relying on new fraud provisions in the Securities Act to proceed more quickly.

George Gunn, manager of the surveillance team at the OSC, says the commission decided to dedicate a team to stamping out boiler rooms because they have been found to be “very pervasive in Ontario.”

Many of the leads on these cases come via the OSC’s surveillance team, which includes both ordinary market surveillance and the Joint Securities Intelligence Unit. The JSIU, which comprises OSC staff, investigators from the Investment Dealers Association of Canada and the RCMP, is designed to thwart organized crime from penetrating the capital markets. The boiler-room unit attacks a subset of that activity.

The JSIU was created to combine the market knowledge of the OSC, the investment industry expertise of the IDA and the RCMP’s intelligence on criminal activity. Like the OSC’s boiler-room unit, the JSIU, too, is meant to disrupt fraud proactively.

According to Gunn, the difference between these proactive and traditional securities enforcement investigations is that the former are obtaining cease-trade orders up front and freezing any proceeds of crime early on. Regulators haven’t found a magic formula that can simplify and speed up white-collar crime cases; the prosecutions will probably still take a long time to assemble. But the difference is that investor funds are being preserved as much as possible.

For example, Gunn says, about $2 million is on its way back to investors after an apparent scam was uncovered as a result of suspicious activity in a corporate bank account. A bank observed that one of its corporate clients in British Columbia was accumulating funds in increments of $5,000 to $15,000 from overseas investors, mainly in Britain. It sought information about the legitimacy of the firm from the regulators, which in turn inquired into the source of the funds.

The company in question denied that it owned the funds, Gunn says, as did the individual that opened the account. As a result, the OSC was able to reclaim the money for investors. The regulator sought a court order allowing it to return the money to the investors, who are recovering about 95¢ on the dollar, he reports.

Also, Boyle points out, the early use of cease-trade orders has other beneficial effects. For one, an order will pop up in Internet searches for the name of the company, which serves as a warning to potential victims. And the OSC is encouraging other provincial regulators to adopt reciprocal orders so that the fraud can be halted quickly in their jurisdictions, too.

Indeed, these scams aren’t usually confined to one province; they often reach across provincial and national borders. Nor are the tactics of the scam artists cast in stone; they adapt to the conditions of the day. In recent years, for example, oil and gas scams have been particularly popular, as that sector has boomed. Thriving conditions such as those recently enjoyed by the energy sector make easy backdrops for “get rich quick” schemes.

Conversely, regulators warn, fraudsters are preying on the fear of hardship created by recent market declines. The North American Securities Administrators Association and the Nova Scotia Securities Commission both have issued investor alerts, cautioning investors not to be sucked in by hucksters who promise to help them make up recent losses with low-risk, high-return investments.

While scam artists may change their tactics to suit the markets, it’s often the same people running these scams. Boyle says the OSC boiler-room unit is seeing serial offenders — the same names are popping up repeatedly in its investigations. Indeed, the unit has walked into suspected boiler rooms to find people working the phones that investigators know from previous boiler rooms.

The OSC hopes its efforts will change the calculus of these career criminals. In the past, Gunn says, the odds of detection were small, the risk of facing prosecution smaller and the chance of doing jail time even smaller. The OSC wants to tilt the prospective fraudsters’ cost/benefit analysis so that it isn’t worth taking a chance.

Do that, and not only are potential victims spared a lot of grief but legitimate investment firms benefit, too. “If you’re in the investment industry,” Boyle says, “there are thieves in your neighbourhood.”

In fact, he reports, boiler-room qualifiers target investors for their willingness to put money into the market. In effect, investment dealers aren’t just in competition with one another; they are also in competition with the scam artists. The bigger worry for the investment industry, he suggests, is that these scams turn people off investing entirely — undermining the potential client base — and this negative effect is multiplied well beyond the original victims by word of mouth.

If for no reason other than pure self-interest, the securities industry should keep a sharp eye out for suspicious activity and look a little more fondly upon regulators’ enforcement efforts. IE