Acriminology professor
has prepared a post-mortem on the massive Eron Mortgage Corp. scandal — the biggest fraud in British Columbia history. The report reinforces my beliefs about the identity of securities fraud victims, why they invest and why they get into so much trouble.

For years, I have been battling the popular belief that victims of such scams are stupid, greedy and gullible. This description doesn’t fit with my observations and, in any event, is entirely unhelpful in understanding and preventing future Eron-type calamities.

Neil Boyd, associate director of the Simon Fraser University School of Criminology, has found that Eron investors were, in fact, average people, no better educated nor more affluent than the average British Columbian. Two-thirds had a household income of less than $75,000, and their average net worth (excluding any equity in their homes) was just $200,000.

Their average age — and this is the key point — was 55, which puts them squarely in the pre-retirement stage. This is a group that, as Boyd notes, “are heavily marketed [to] by the financial industry to build up huge retirement nest eggs to ensure their future security.”

Eron also hyped its projects as retirement-type investments. From 1992 to 1997, the firm raised about $240 million from more than 3,000 investors, most B.C. residents, to fund a variety of projects, mainly property developments. Investors were promised mortgage security and high rates of return. But the projects were not economical, mortgage security was not provided as promised and the company degenerated into a Ponzi scheme.

In October 1997, B.C. financial regulators shut down the firm and the projects were liquidated. Investors collectively lost $175 million, making it the biggest fraud in B.C history. Eron president Brian Slobogian and vice-president Frank Biller received prison terms of six and three years, respectively.

In the wake of the debacle, the B.C. Securities Commission hired Boyd to analyse what happened and why, and to consider the implications for investor education and regulation. The tab, slightly more than $100,000, is being paid by the commission’s Investor Education Fund.

Systematic analysis

Boyd and several assistants sent survey questionnaires to 2,285 Eron victims and received 559 responses. They also conducted telephone interviews with 180 of the respondents. Boyd says it is the “first systematic analysis of an investment fraud” and “represents an entirely novel approach to understanding the dynamics of victimization.”

According to the survey results, the majority of Eron victims — some 58% — invested in Eron to fund their future retirement. Only 19% said they were attempting to enhance their current lifestyle. So most weren’t, after all, investing in Eron to buy a fancy car or take an expensive vacation. They were simply trying to ensure they could look after themselves in their old age.

Boyd says this sort of pre-retirement anxiety — exacerbated by industry calculations that you need $1 million to retire comfortably — makes this group “highly vulnerable to dangerous investing, and thus urgently in need of investor protection.”

He notes that investor education in B.C., and in most provinces, focuses on the young (schoolchildren) and the old (seniors). “There’s nothing wrong with that. But they are not the critical groups,” he says. “It’s the people who are 55 and who need to invest for their retirement.”

Another of Boyd’s findings is that Eron investors mistakenly believed that Big Brother — the BCSC — was watching out for them. He says Eron investors were generally unaware that the commission has no legal responsibility to recover investors’ money,
approve offering documents, evaluate the risk of investments or check the qualifications of the principals.

There are serious implications for investor education. “Investors cannot protect themselves if they do not understand their own obligations and the corresponding obligations of regulators,” Boyd states in his report.

He also found that only 26% of respondents viewed the backgrounds of Slobogian and Biller as important. He argues that this information is critical and that many people might not have invested in Eron had they known Slobogian and Biller were prior bankrupts who had left behind a trail of failed business ventures. He recommends the principals of all private issuers be required to disclose prior bankruptcies, civil judgments and criminal convictions.

Boyd’s findings and recommendations make good sense. Regulators owe it to investors to give them careful consideration. IE