Sunday, August 30, 2009

Quebec Appeal Court Cuts Norbourg Fraudster’s Jail Time

On August 21, the Quebec Court of Appeal released its decision in L'Autorité des marchés financiers c. Lacroix, 2009 QCCA 1559 (CanLII) reducing the total jail time to be served by the architect of the Norbourg Asset Management collapse to 5 years less a day. (The decision is only available in French). The AMF is considering whether to appeal the decision.


In December, 2007, Vincent Lacroix, the ex-CEO of Norbourg, was convicted under 50 counts of violating the Quebec Securities Act. 27 of the convictions were for violations of section 195.2 of the Act, which prohibits “influencing or attempting to influence the market price or the value of securities by means of unfair, improper or fraudulent practices.” 8 of the convictions were for making misrepresentations in documents filed with the AMF contrary to subsection 197(4) of the Act, and the remainder concerned misrepresentations in records kept contrary to subsection 197(5).

In addition to fines, the trial judge sentenced Lacroix to 5 years less a day for each of the convictions under section 195.2, to be served concurrently. Lacroix was sentenced to 42 months for each of the violations of subsections 197(4) and (5). The sentences for each subsection were to be served concurrently, but the 42 months for the subsection 197(4) violations was to begin after the sentence for the 195.2 violations had been served and the 42 months for the subsection 197(5) violations was to begin after the sentence for the 197(4) violations had been served. Thus, Lacroix was sentenced to a total of 12 years less a day in prison.

Lacroix appealed to the Superior Court. The Court ruled that all of the sentences for the section 197 violations were to be served concurrently, but following the sentence for the section 195.2 violations, reducing total time served to 8 ½ years. Both Lacroix and the AMF appealed to the Court of Appeal.

Issue 1: Could Lacroix raise the issue of the consecutive sentences on appeal?

In his appeal, Lacroix argued that the court did not have the ability to impose consecutive sentences under the Quebec Code of Penal Procedure. This argument had not been previously made. The Court of Appeal noted that at his trial, he was not represented by counsel. At the Superior Court, his counsel did not object to the consecutive sentences, but rather that his sentences were in each case the maximum allowable, and the result was a penalty that was disproportionate.

The Court ruled that it could entertain a new argument on appeal if it would be unjust not to do so. It also noted that the only issue raised was one of the correct interpretation of the Code, which did not require new facts to be proven.

Issue 2: Could consecutive sentences be imposed?

The Court reviewed the text of the Code. Section 239 provides that “a term of imprisonment is executory upon sentence.” Section 241 states that “subject to articles 350 and 351, where the defendant is already in detention, the judge, in sentencing him to a new term of imprisonment, may order that the terms be served consecutively.”

The Court did a review of the case law and noted that sections 350 and 351 dealt with mandatory consecutive sentences for defaulting on payments while imprisoned. It also reviewed the Code’s predecessor statutes. It interpreted the language of section 241 as meaning where the defendant is already in detention on an unrelated matter. For related matters, a court may only impose consecutive sentences if the legislation specifically allows it.

The Court’s reasoning can be questioned. Section 241 does not specifically require the detention to be for an unrelated matter. The 2 sections referred to (350 and 351) impose mandatory consecutive sentences. In other words, they take away the judge’s discretion to impose concurrent sentences. Given that “[m]ore than 9,000 investors were defrauded of a total of $115 million when Lacroix made a series of illegal transactions” through Norbourg, it’s the Court of Appeal decision that seems to impose a “disproportionate” sentence.

Wednesday, August 26, 2009

You Know We're Really in a Recession...

I was looking at the Securities and Exchange Commission website last week when I came across an item stating that the SEC had suspended trading in the securities of a company called Tasty Fries, Inc. for failure to file required reports. This is normally a sign that a company is in serious financial difficulty, if not out of business entirely. I thought we really must be in a recession if a company with a name like "Tasty Fries" can't make a go of it.

I thought I should dig deeper. It turns out that Tasty Fries hadn't made any filings for the previous four years. Four years! Cease trading delinquent filers is something Canadian securities commissions do much faster (i.e. the day after a filing deadline is missed), so scratch one up for our side. I did a Google search and came across an article stating that the Delaware Chancery Court determined it was little more than a "sham meant to defraud investors." In 2007, the SEC filed settled charges against the company, its CEO and two other officers "unlawfully issued Tasty Fries stock without proper authorization, issued and filed with the Commission false and misleading financial statements and made false and misleading statements in press releases and Commission filings." As is the practice for settlements in the United States, the defendants neither admitted nor denied the charges.

I was disillusioned. As Maxwell Smart, Agent 86, might say, "if only they had used their knowledge for goodness and deliciousness instead of greediness and rottenness." At least I had no personal experience with their product, unlike Chipwich, Inc., which was the subject of SEC administrative proceedings for accounting jiggery-pokery and went bankrupt in 1992. Cbipwiches were probably my favourite ice-cream snack. The company either came out of bankruptcy or sold the rights to make Chipwiches as I have seen them since, but rarely. If anyone knows where they are sold in the Toronto area, please e-mail me.

Monday, August 24, 2009

U.S. Senator Calls for "Comprehensive" Market Structure Review

It's always disheartening when politicians wade into market structure issues. Their motivation is, naturally, political, and they assume they know more than the regulators with day-to-day experience. The recent tirades against short selling are an example. I have not seen one study suggesting that short sales in any way contributed to the economic meltdown, yet regulators were threatened with a legislative response if they didn't "do something" (which they inevitably do). Senator Ted Kaufman (D, Delaware) has sent a letter to SEC Chairman Mary Schapiro calling on the SEC to mount a comprehensive, independent review of "questionable market structure issues" before "piecemeal changes to the current market structure make things worse."

Senator Kaufman is concerned that advances in electronic trading have created an unlevel playing field where "questionable practices threaten to further erode investor confidence in our financial markets." There is certainly an unlevel playing field, but it would be difficult if not impossible to level it without creating a highly inefficient market.

He raises concerns about the latent disparities in the market. In particular, high volume traders often co-locate their servers with a marketplace's in order to cut the latency in receiving and delivering order and trade information to a minimum. Their trading strategies depend on low latency, so they know immediately if an order has been filled.

Latency also raises other issues: is the national best bid and offer accurate in reflecting quotes from various venues? The short answer is no. No two users (be they traders, dealers or market data vendors) will get the same datum at exactly the same nanosecond. It will always take a bit longer to get to some parties.

This is not a new issue. Back in the days of trading floors, order and trade information was always more complete and up-to-date in the trading square than it was on the data feeds.

I will tackle some of the particular issues he raises in later posts (and I agree some need to be looked at) but want to make one general comment. His motivation, like many other politicians, is that retail investors are being disadvantaged. But are they? The high-speed traders are interested in shaving pennies as they buy and sell in different markets to take advantage of the market. An investor with a longer-term outlook shouldn't care about slight price variations. They know their price and it they get it, they are happy. Retail investors who take aggressive short-term positions and try to time the market are competing directly with the professionals and they simply don't have the information or computer algorithms to do it successfully. To level the playing field would mean that the markets are so inefficient and slow the professionals move on to something else.