The RCMP and the TSX Venture Exchange have branded the proliferation of Vancouver-based companies that trade on the lawless OTC Bulletin Board and “pink sheets” in the U.S. a menace to investors, a drag on the economy and a stain on Vancouver’s reputation.

Martin Eady, the B.C. Securities Commission’s director of corporate finance, revealed in a recent interview that there are now 630 companies with “solid B.C. connections” that trade on the bulletin board, and about 250 more that trade on the pink sheets.

Each company is directly linked to British Columbia in some material sense: the province is its base, or home to some or all directors, auditors and lawyers, or plays some other function.

The combined total of 880 companies represents a 30% increase since last July and almost equals the 1,002 B.C.-based companies that currently trade on the TSXV. At this rate, it will be a matter of only months before there are more bulletin-board and pink-sheet companies in B.C. than on the TSXV.

The BCSC is concerned because the bulletin board and the pink sheets are not real stock exchanges. They have no minimum listing requirements, trading is not monitored and news releases are not reviewed.

Bulletin-board companies are required to file financial statements, but companies can be totally insolvent and still trade. Pink-sheet companies don’t even have to file financial statements. The result is that almost any piece of junk can trade on either market.

Vancouver promoters have been drawn to the two trading forums. One reason is that TSXV officials have gone to great lengths to raise the quality of its listed companies and turf undesirable promoters. The exiled promoters have found refuge on the over-the-counter markets in the U.S.

Another reason is that the Vancouver Stock Exchange, which has since morphed into the TSXV, fostered an infrastructure of chicanery that is still intact and ready and willing to do business with OTC companies.

This network includes lawyers, accountants, geologists and investor-relations consultants who put on their blinders, issue whatever caveats are required to keep themselves out of trouble and then enthusiastically support junior companies that are obvious frauds.

The migration of promoters to U.S. OTC markets has created a strong demand for shell companies that can be used as vehicles for stock promotions. To meet the demand, promoters have established groups of locally based shareholders who will, for relatively modest remuneration, 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. Their activity is critical to the process. With a restricted supply of stock, only small demand will be required to boost the stock price.

In many respects, the vehicles are like loaded guns; all the promoter has to do is pull the trigger. Not surprising, promoters are willing to pay big money for the shells. In Vancouver, they command as much as $800,000.

Business is so good that Vancouver once again rivals Boca Raton, Fla., as the penny-stock fraud capital of North America.

“Whenever I see a Vancouver connection, it raises a huge red flag,” says Christopher Byron, a market columnist for the New York Post and author of Martha Inc., a book about Martha Stewart. “I have never encountered a good company out of Vancouver. There’s always an angle or a gimmick.”

TSXV officials voice similar concerns. John McCoach, vice president of listed issuer services, says the growth of B.C.-based OTC companies is hurting the TSXV’s image. He says he recently attended a small-cap conference in the U.S., where participants told him that all the problem bulletin-board companies come out of Vancouver and Florida.

“We have a very credible market here,” he says. “However, when the many great junior companies from Canada go to the U.S. to access capital, they are sometimes perceived as another person flogging penny stocks from Vancouver. It not only hurts the Canadian capital markets, it also hurts Vancouver’s reputation.”

The RCMP in Vancouver have identical concerns. “We recognize the [OTC] Bulletin Board and the pink sheets as a major problem in the Vancouver market,” says Insp. George Pemberton, head of the RCMP’s Vancouver integrated market enforcement team. “We see it as a drag on the economy and legitimate business people, and a stain on Canada’s reputation. We work closely with the FBI and U.S. regulators to grapple with the problem, but being a cross-border issue makes investigations exponentially more difficult.”

@page_break@BCSC chairman Doug Hyndman realizes he has a big problem on his hands. “We spent a long time and a lot of effort dealing with problems, real and perceived, and we do not want to lose all of the progress we have made,” he says.

The BCSC, under Eady’s supervision, created a special-enforcement unit last year to deal specifically with OTC companies, but it has been unable to curb the proliferation. So far, there have been only a handful of enforcement actions, with mixed results.

The increasing activity raises the question of whether the B.C. government should appoint an inquiry commissioner to review the problem and make recommendations on how to deal with it.

There is, after all, a successful precedent. In the mid-1990s, the B.C. government — concerned about its image abroad — ordered a commission of inquiry into regulation of the VSE. The review led to the cleanup of the exchange.

Unfortunately, exiled Vancouver promoters found an accessible alternative in the U.S. OTC markets. If nothing else, government intervention would shine a very public light on the facilitators — the accountants, lawyers and investor-relations people who are critical to the process and yet still manage to maintain their good standing in society. IE