The opposition NDP party in British Columbia has again called on the Liberal government to review the B.C. Securities Commission after an epic case against Pacific International Securities Inc. and its most senior officers and directors ended in failure.

In a Sept. 12 split decision — the first in the commission’s 19-year history — panel members Roy Wares and John Graf found that BCSC enforcement staff did not prove Pacific International’s executives allowed the firm to be used as a vehicle for stock manipulation and money-laundering during the late 1990s.

“At the outset of this case, the executive director told us that Pacific International was a haven for unsavoury characters conducting illicit transactions, and the Pacific International directors, driven by greed, ‘hid their heads in the sand’,” Wares and Grad said in their majority decision. “The executive director proved none of this.”

MLA Leonard Krog, the Op-position critic for Attorney General Wally Oppal, the cabinet minister in charge of the commission, immediately renewed his call for a provincial review of the commission.

“Time and time again, the commission has failed in its obligation to protect investors in British Columbia,” Krog says. “There clearly needs to be a major shakeup, and the attorney general cannot continue to dither.” Krog notes the case took more than five years from the notice of hearing to the final decision. “After several years, 124 days of testimony and over 20,000 pages of evidence, it looks like the only thing the commission will be left with is the bill,” he says.

Krog initially called for a review on Aug. 17, citing what he termed “undue delays” in the investigation and adjudication of cases, the proliferation of companies that trade on the scurrilous OTC Bulletin Board, the removal of important disclosure documents from public view and excessive salaries and bonuses paid to senior staff.

Days later, news of another investment debacle, in which some 350 investors lost an estimated $11 million, broke in Krog’s home riding of Nanaimo.

Investors are fuming, because documents show BCSC investigators knew about the alleged scheme by Daryl Klein and his Insta-Cash Loans in December 2004, but took no formal action until this past May.

In a concurrent development, the BCSC announced that after almost four years of legal battles, it would abandon its prosecution of Global Securities Corp. chairman Arthur Smolensky on illegal trading charges. Once again, the commission will not recover its costs.

So far, Oppal has not agreed to a review. In an interview, however, he says he is “always concerned about the public pulse,” and had summoned BCSC chairman Doug Hyndman to Victoria for a meeting.

Pacific International is 35% owned by National Bank of Canada, Canada’s sixth-largest bank. It was founded almost 25 years ago by Max Meier, a well-known Vancouver broker and long-time governor of the former Vancouver Stock Exchange, and now has 140 employees in Vancouver, Victoria and Calgary.

Until the mid-1990s, the brokerage firm conducted most of its business on the VSE. In the wake of the Bre-X Minerals Ltd. debacle and the ensuing slump in exploration activity, the firm shifted its focus to the OTCBB, a loosely regulated U.S. trading forum.

In 1999, questions about the firm’s supervisory standards began to surface. The VSE permanently banned one of its big producers, Jean Claude Hauchecorne, for taking unauthorized instructions from disreputable U.S. clients reputed to be associated with the Mafia.

Later that year, the FBI arrested two other Pacific International brokers, Michael Patterson and Dirk Rachfall, for allegedly helping a U.S. promoter manipulate the share price of an OTCBB stock. They were convicted and jailed.

The brokerage firm was also named in several U.S. Securities and Exchange Com-mission complaints and U.S. grand jury indictments as a conduit for alleged OTCBB manipulators. It was not, however, accused of any wrongdoing.

When BCSC investigators took a closer look, they found what they alleged to be a whole host of unsavoury characters — some with alleged Mob connections — doing business through the firm.

In July 2001, Steve Wilson, the BCSC’s executive director at the time, cited the firm and its officers and directors for failing to adhere to the “know your client” rule and for failing to discharge their obligations as gatekeepers for the securities industry.

Along with Meier, he named as respondents:

@page_break@> Larry McQuid, the firm’s chief compliance officer and a former VSE governor and RCMP commercial crime officer;

> Jean-Paul Bachellerie, the firm’s president and chief operating officer, and a chartered accountant;

> John Eymann, the firm’s co-founder and vice chairman, and a former member of the ethics committee of the Canadian Securities Institute;

> Bert Quattrociocchi, executive vice president in charge of sales and research;

> Marty Reynolds, the firm’s chairman until October 1998 and a director until March 1999. Reynolds is a former VSE governor and chairman;

> Robert Blades, a vice president since 1990 and a former employee of TD Greenline Investor Services.

When the hearings began in January 2002, BCSC enforcement director Sasha Angus made some dramatic opening remarks.

“This case is a sorry example of what can happen when a firm and its directors care more about money than ethics,” he told the panel. “This is a case about greed creating a culture of non-compliance.”

Then he left commission counsel Mark Hilford with the more difficult task of actually proving the case. With Mark Skwarok, former head of the BCSC’s legal services, representing McQuid, and Vancouver lawyer Don Sorochan representing all the other respondents — fighting every step of the way — it wasn’t long before the hearing got bogged down.

Heading the panel was BSCS vice chairwoman Adrienne Salvail-Lopez. During the hearings, she encountered a serious eyesight problem, but was apparently unwilling to relinquish the case to the other two panel members.

Final submissions were made in November 2004, but it took another 22 months of deliberation before the outcome was announced.

In their 55-page majority decision, Wares and Graf say that, other than some “insignificant” offences, BCSC enforcement staff “did not prove any of the allegations in the notice of hearing” and so the panel would not impose any sanctions against the respondents.

Salvail-Lopez had a very different point of view. “I do not concur with their decision,” she says in her 120-page minority decision. She found the firm had contravened the know-your-client rule and had failed to apply prudent business procedures for dealing with clients. She also found the directors had failed to ensure the firm was properly managed. “Registrants are the gatekeepers of the capital market. They must be vigilant in identifying and preventing conduct that could threaten the integrity of that market,” she writes.

The fact that Salvail-Lopez, the commission’s vice chairwoman, was trumped by Wares and Graf, who are part-time commissioners, is a setback for the commission and, by extension, Hyndman, a former B.C. Finance Ministry colleague and her long-time mentor.

It was Hyndman who installed Salvail-Lopez as vice chairwoman and its second-highest paid official. She was paid $353,658 last year, second only to Hyndman’s $510,994.

Although not directly involved in the case, Hyndman made the unprecedented move of issuing his own press release after the decision was released. “Yes, this matter has taken a long time to be resolved, too long,” he said. He attributed the delay to the complexity of the case, and said the split decision illustrates the independence of the panel members.

The decision couldn’t have come at a worse time for the commission because, in August, the Smolensky case also ended in failure.

Smolensky was originally cited by the VSE in March 2000 for alleged manipulative trades in a VSE issuer named Trooper Technologies. In April 2001, he settled the matter by agreeing to pay a $115,000 fine and $10,000 in costs and submitting to a 30-day suspension and an independent audit of his firm’s policies and practices.

The BCSC’s Wilson didn’t think the penalty was sufficient and started an investigation. In September 2002, he issued a notice of hearing, essentially repeating the VSE’s allegations of illegal trading.

The notice triggered a series of legal objections. Smolensky’s lawyer, Howard Shapray, argued there had been inordinate delay in bringing the case forward and, as his client had already served his suspension and paid a fine, the BCSC’s prosecution amounted to a case of double jeopardy. He also noted that if BCSC enforcement staff didn’t like the VSE settlement, they should have appealed it to a commission panel rather than starting a whole new proceeding.

Shapray took his objections to B.C. Court of Appeal. He failed to get the case quashed, but the court did not reject his arguments; rather, it decided it would be better to review them in the factual context of a commission proceeding. That meant that, even if the commission won its case against Smolensky, Shapray would be back in court looking for redress.

A hearing has been set for August 2007. If it had gone ahead, that would have been 10 years from the date of the alleged infraction. Given the time frame and the fact that Smolensky has not had regulatory problems in the meantime, it is doubtful that BCSC enforcement staff would have obtained any meaningful additional sanctions. If they had, they would have had Shapray waiting in the wings, ready to open his legal can of worms.

Meanwhile, Wilson has retired as BCSC executive director and has been replaced by Brenda Leong. Last month, Leong decided to abandon the case on grounds that “staff resources are better deployed on other enforcement matters at this point.” IE