Faced with a string of investment scandals, Quebec’s financial services industry regulator is adding staff and working on improving its operations.

Jean St-Gelais, president of the Autorité des marchés financiers in Montreal, says the AMF is adding four or five professionals to its 40-person enforcement team, and will draw on expertise from the private sector as needed.

St-Gelais also recently hired Pierre Bernier, formerly vice president at Yellow Pages Group, as executive vice president. Bernier is focusing on reviewing and improving the organization’s operations. “He is in charge of reviewing all activities with me and saying: ‘What should we fix? At what pace? How?’” says St-Gelais. “And this will be an ongoing function.”

The organization has an annual budget of $60 million, St-Gelais adds, so it has the financial resources it needs to handle the many investigations now underway.

It’s been a tough year for the AMF — only its second since being formed in February 2004 from the consolidation of five provincial regulatory agencies overseeing the securities, mutual fund, insurance and deposit-taking industries.

The AMF has come under heavy criticism this year for not moving fast enough against companies at the centre of investment scandals in which investors stand to lose hundreds of millions of dollars.

Stephen Jarislowsky, of Montreal-based investment counsellor Jarislowsky Fraser & Co., is withering in his assessment of the AMF. “It can only do better because it can’t do much worse,” says Jarislowsky, who is a leading advocate of tougher regulation of Canada’s capital markets.

Others in the industry are more patient. Richard Ness, CEO of Penson Financial Services Canada Inc., believes part of the problem is high staff turnover and lack of resources at the AMF and other securities commissions. Like Jarislowsky, Ness is an advocate of a national securities commission that would attract top people and give them a prestigious career path, as occurs at the U.S. Securities and Exchange Commission.

“With constant turnover, you’re not going to get the guys who are in tune with everything that’s going on in the industry. And, for me, that’s the crux of the problem,” says Ness, whose firm provides back-office and other services to brokerage firms.

St-Gelais defends his organization’s performance: “Have we moved fast enough? Could we have done better? My profound belief is that with the information we had on the cases, the situation in which they happened, we did what we had to do.”

Here are the key investigations in which the AMF is involved:

> Norshield Financial Group used to be one of Canada’s largest hedge fund companies. The firm abruptly stopped redeeming units last May after damaging allegations emerged in a civil dispute with animation company Cinar Corp., Over nine months, unitholders pulled $375 million from its funds. The receiver reported in mid-November that institutional and 1,200 retail investors are owed a total of $482 million. The receiver will recover only a tiny fraction of the money. Norshield is under investigation by Quebec and Ontario securities regulators and the Quebec Provincial Police.

> Norbourg Asset Management Inc. is a bankrupt mutual fund manager and distributor formerly run by CEO Vincent Lacroix. The AMF alleges Lacroix misappropriated $84 million from the firm’s Norbourg- and Evolution-brand funds. In all, there is a discrepancy of $130 million between the amount that was supposed to be in the 29 funds and the actual amount found in them when they were frozen in August. About 9,200 small investors stand to lose some or all of their money. The RCMP is investigating but no charges have been laid.

> Mount Real Corp. and its associated companies are alleged to have sold $65 million in unregistered promissory notes to about 800 investors, principally through representatives of the closely related iForum group of companies. The AMF has frozen the assets and issued “cease trading” orders against Mount Real and its associated companies, iForum and several directors and executives. It alleges “many offences” have been committed and can’t say what value the promissory notes have. Norshield and Mount Real are affiliated companies.

The AMF has also taken action in several smaller cases this year including closing down fund companies Zenith Management and Research Corp. and Argentum Management and Research Corp., for regulatory violations.

Complaints about the AMF foot-dragging have focused on the Norbourg and Norshield cases. In the case of Norbourg, critics say, questions and suspicions about Lacroix’s lavish lifestyle and frenetic acquisition spree were bubbling in the Montreal fund industry for many months, if not years before the AMF finally moved against the firm in August. Indeed, Investment Executive’s French-language sister publication, Finance et Investissement, published an article raising questions about the firm in June 2004 under the headline “The Norbourg Mystery.”

@page_break@As for Norshield, its involvement with the Cinar scandal has been a long-standing source of controversy both in the industry and the press. Cinar, a Montreal-based animation house, was laid low in 2000 after it came to light that more than US$120 million of company money had been invested in the Bahamas without authorization from the board. The regulator — the Quebec Securities Commission at the time — opted not to investigate Norshield’s role in the transfers and later licensed Norshield to market hedge funds, even though press reports in 2000 clearly established a number of links between the firm and the Bahamian companies to which the Cinar money went. A forensic accountant hired by Cinar raised suspicions of wrongdoing in the Bahamas as early as the spring of 2000.

St-Gelais says rumours and press reports of wrongdoing are one thing; collecting enough hard evidence to justify moving against a firm and then presenting a strong court case is another. “As soon as we can go ahead with facts, we go ahead,” he said.

He insists fraud is no more prevalent in Quebec than elsewhere. He does concede, however, that the AMF is learning every day from its case load. IE