For decades, lawyers, accountants and geologists in Vancouver have been helping promoters take companies public and raise money from investors. Unfortunately, many of those companies have little chance of commercial success and are designed mainly to separate foolish investors from their money.
In recent years, Vancouver-based promoters, with the help of their professional facilitators, have been creating hundreds of these companies and listing their shares on the loosely regulated OTC Bulletin Board in the U.S. In many cases, these companies have sham businesses and rigged stocks, and are being set up simply as vehicles to rip off investors.
The problem has grown so large — there are now an estimated 800 Vancouver-connected companies trading on the U.S. over-the-counter markets — that the B.C. Securities Commission recently announced a five-point plan to curb their proliferation. One of those points relates to the professionals whose services are needed to take these companies public: the accountant who provides the audited statements, the lawyer who files the registration statements and, in the case of exploration issuers, the geologist who passes judgment on the merit of the property.
The BCSC’s concern is not that these people are engaging in any sort of malpractice, but rather that they are not stepping back to see what sort of creature they’re helping to create. In the BCSC’s view, these professionals must — like brokers — make whatever inquiries are necessary to know their clients and ensure they are dealing in good faith.
Clearly, this is a novel concept for some professionals, as illustrated by Andre Pauwels of Richmond, B.C., who serves as consulting geologist for Jasper Ventures Inc.
In January, Jasper filed a registration statement with the U.S. Securities and Exchange Com-mission. By all appearances, the company is a sham. It is ostensibly based in Moose Jaw, Sask., but the contact is an Ontario number that rings through to an answering machine. Neither of its two principals, who live in Moose Jaw, have any prior exploration experience. It is also not clear that they are running the company. Pauwels says he had not talked to either, but refuses to say with whom he had dealt.
Jasper acquired its prospective diamond property in Quebec for slightly less than $5,000, a price that puts it in the moose pasture category. Still, Pauwels filed a report declaring the property had exploration potential and recommending a first-phase work program of just $20,000, which is barely enough to dig a few trenches.
When it was suggested that Jasper is a sham, Pauwels did not deny it. In fact, he confirmed it is common practice for promoters to “put shells together and sell them to other people.” Asked whether this is happening in this case, he replied: “Yes, of course.” He then moderated his response to say: “That’s what I assume, but I don’t know that for a fact.”
Martin Eady, the BCSC’s director of corporate finance, is not impressed: “[This] appears to be a textbook example of the problem we are trying to address.”
In the BCSC’s five-point plan, it plans to report professionals who aid and abet sham companies to their professional organizations for disciplinary action. The Association of Professional Engineers and Geoscientists of B.C. would not say whether it is reviewing the Pauwels/Jasper case but did confirm it is working on the overall problem.
“We have met with the BCSC regarding the issue of OTC companies and the potential for market abuse by them,” the association said in a prepared statement. “Although there is nothing illegal or unprofessional, per se, about providing services to these companies, we are concerned about the effect it can have on the professions’ reputations and the public trust in the professions of engineering and geoscience.”
The association also says it is “looking at ways to encourage our members to be selective in whom they work for.”
To that end, it will publish an article in its magazine apprising members of their obligations regarding OTCBB companies, and will also be holding a professional-development seminar on the subject.
Certain accountants have also played key roles in these fraudulent Vancouver-associated companies that trade on the OTCBB. An example is Current Technology Corp.
Since CT went public in 1988, it has promised to sell millions of dollars worth of hair-growth devices through distributors in dozens of countries. The vast majority of these prospective sales have evaporated with no explanation.
@page_break@To date, CT has burned through $37 million of shareholders’ capital but has only $336,000 in assets to show for it. Its stock price has plunged to its current level of 13¢ a share from a high of $7.88 in 1990.
CT’s corporate strategy has gone from incredible to ridiculous. In addition to the hair-growth device, CT is now promoting a global positioning system tracking technology called LunarEye, an intruder-detection device called Spy-N-Tell and “an undertaking designed to facilitate the transfer of proprietary bitumen/heavy oil upgrading process to the oil industry in Venezuela.”
Since 1994, Edward Ma, a certified general accountant, has worked as the company’s controller. Until early January, Ma was also a governor of the Certified General Accountants Association of B.C., which is charged with maintaining the ethical standards of the province’s 13,000 CGAs and students.
Asked how he could reconcile being controller of such a dubious company and a governor of the CGA association, Ma replied: “I am responsible for the day-to-day financial and accounting operations of the company. This involves ensuring that its financial statements comply with generally accepted accounting principles and meet the requirements of regulatory bodies as well as external auditors. I am not involved in corporate and/or investor communications.”
He refused to say whether his personal responsibility, especially in view of his position with the CGA association, extended beyond GAAP to the conduct of the company.
On Jan. 5, when Ma’s dealings with CT were publicized, he resigned as a CGA governor; but even then, there was no admission of wrongdoing. “There has never been any suggestion that Mr. Ma has been involved in any wrongdoing or unethical conduct,” the association said in a release. “His employer’s performance and business practices have been called into question, which compromises his ability to represent the CGA [association] effectively.”
Ma continues to work as CT’s controller, as do several other professional accountants. One is George Chen, a chartered accountant, who serves as the company’s chief financial officer. Another is Cinnamon Jang Willoughby & Co., a Vancouver-based chartered accounting firm that serves as CT’s auditors.
According to the Canadian Institute of Chartered Accountants’ handbook, CICA members are required “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.”
With that sort of obligation, it’s not clear how Chen and CJW & Co. can continue to work for CT and remain onside with the CICA. IE
Five-point plan aims to tackle fraudulent schemes
BCSC’s plan to curb fraudulent Vancouver businesses registering in the U.S. puts the onus on professional services people
- By: David Baines
- February 20, 2008 February 20, 2008
- 10:04