The chartered accoun-tants Institute of British Columbia is concerned that its members may not be conducting adequate due diligence into corporate clients that trade on the loosely regulated OTC Bulletin Board in the U.S.

Chris Utley, the institute’s director of ethics, says his organization, which represents 9,200 chartered accountants in the province, will issue an advisory stating the importance of knowing the integrity and business reputation of publicly traded clients.

“We will be reminding members of their professional responsibilities when it comes to client acceptance and retention,” he says. The issue is critical because Vancouver promoters, many with questionable business backgrounds, have been skirting better-regulated Canadian exchanges and floating hundreds of dubious companies on the bulletin board.

Unlike conventional exchanges, the OTCBB has no minimum financial requirements, trading is not monitored and news releases are not reviewed. There is also no screening of officers and directors.

Since the late 1990s, when the now-defunct Vancouver Stock Exchange embarked on a cleanup campaign, many exiled promoters have fled to the OTCBB and its even poorer cousin, the so-called “pink sheets.” The shift has created a strong demand for shell companies that can be used as vehicles for stock promotions.

To meet demand, promoters have established groups of locally based shareholders who are willing, for relatively modest remuneration, to lend their names to meet share-distribution requirements.

The putative shareholders usually agree to sell their shares to whomever acquires the shell, thereby ensuring that the supply of stock is carefully controlled. This is critical to the process: with a restricted supply of stock, only a small demand will be required to boost the stock price. Promoters are willing to pay big money for the shells, which, in Vancouver, command as much as $800,000.

With the focus on promoting the stock rather than developing the underlying business, Vancouver-based OTCBB companies have caused serious investor losses and perpetuated Vancouver’s image as a penny-stock scam centre.

The B.C. Securities Com-mis-sion’s enforcement branch has formed a special unit to tackle the problem. So far, it has identified 880 OTCBB companies that have some material aspect of their business based in the province.

Before trading on the OTCBB, firms must file registration statements, including audited financial statements, with the U.S. Securities and Exchange Commission.

Utley says there is nothing to prohibit CA firms from taking on OTCBB companies as clients, but they must inquire into the bona fides of all their clients, regardless of where they trade. The Canadian Institute of Chartered Accountants’ handbook states that CA firms are required, among other things, “to identify management of the entity, those charged with governance of the entity, and those who control or exert significant influence over the entity, and consider their integrity and business reputation.”

Many Vancouver CA firms, however, have not been very discriminating when agreeing to take on OTCBB clients, many of which are infested with promoters with regulatory and even criminal records.

An example is Uranium Energy Corp. One of its directors is Stephen Jewett, a Vancouver CA who was barred by the CA institute from auditing any public companies after he mishandled the audit of an unrelated Vancouver junior company. Serving as a consultant is Brent Pierce, who was banned for 15 years by the BCSC after committing multiple offences in connection with a VSE firm.

Underlying Uranium Energy, as is the case with many OTCBB companies, are blocks of cheap stock held by offshore firms whose beneficial shareholders are unknown. If the usual pattern repeats itself, all the cheap paper will be dumped onto the market if the stock shows any signs of life.

Uranium’s auditor is Dale Matheson Carr-Hilton LaBonte, a Vancouver CA firm. OTCBB business is a large part of its work. A study conducted by SME Capital Markets, which does research on U.S. securities markets, states that Matheson acted as auditors for 19 companies that filed registration statements with the SEC in 2005. Most of the companies, if not all, went onto the OTCBB.

A representative of Matheson was asked what due diligence the firm conducts before taking on a client. He did not return calls.

Another Vancouver CA firm that does OTCBB business is Manning Elliott. It was the auditor for Tora Technologies Inc. and De Beira Goldfields Inc., both connected to Vancouver promoter Ralph Biggar.

Tora, a retailer of custom-embroidered clothing, made headlines when it was revealed it had a serv-ices contract with a Vancouver firm called LA Embroidery, owned by Hells Angels member Tony Pires.

@page_break@De Beira, an exploration company that is co-listed on the equally unruly Frankfurt Stock Exchange, experienced a spectacular stock price increase on relatively inconsequential news, raising questions of whether its share distribution had been collapsed.

After being named in newspaper reports, Manning Elliot resigned as auditor of both companies. Unless they can find replacement auditors, Tora and De Beira will no longer be able to trade on the OTCBB. IE