I THINK MINING

A distant relative named Brendan Caldwell says that there have been laws against fraud for hundreds of years and piling on more checks and balances isn’t going to stop someone from making up something that isn’t true. He is right about the details, but in the bigger picture he is totally wrong. Let me explain.

I have never met this distant relative, and know nothing of where our paternal ancestrial lines merge, but I notice a common hard-line attitude. He is blunt about investing and risk–basically if they loose their money as a result of fraud, tough-s***. Actually he said “the goal of regulators should not be to make financial markets a place where bad things can’t happen.”

Seems logical that disciples of free enterprise should be free to fail or be hoodwinked by smarter free agents.

Somehow or other, I still have a lingering doubt about Brendan’s conclusions and my ready acquiescence in his views–must watch this tribal solidarity thing.

Of course the stock market can never be a place where you only make money. That would be nice, but then shares would become too expensive for the common man. And we would remove any incentive to excellence in industry. No, the threat of a crash in the price of your shares is a very good incentive to honesty and hard work–for most people.

Of course there will always be somebody who is turned off by honest hard work and who prefers a little bit of skullduggery and fraud as a way to make money on the stock market. The point at which I disagree with Brendan Caldwell is when he says “let ‘em be–it’s up to investors to search out the crooks, and if the common old investor fails, let ‘em take their lumps.”

Now I like the idea embedded in NI 43-101: a qualified person who is responsible and accountable. Seems as though in the Southwestern fraud the qualified persons were maybe neither qualified, nor responsible, nor accountable.

Let us grant Brendan his due: no more legislation is required. If he is correct, then we clearly need more-qualified, more-responsible, and more-accountable people producing NI 43-101 reports.

Or maybe Canada needs better scrutiny of the reports. My Canadian colleague tells me that fault in the Southwestern situation lies not with the consultants, but with the regulators who accepted the reports–he says they are probably not qualified enough. He even went so far as to suggest that the Canadian regulators should be as strict as the SEG folk down in the USA. (I will probably never again hear him say anything nice about the USA, so I savor this utterance.)

It really does not matter, for in the Southwestern case we see that the class action lawyers were faster off the mark than the investment advisors. Instead of defending the good-old-status-quo, the lawyers are off to court to protect the innocent and the hoodwinked. In this case it is impossible the lawyers will get $320 million from Southwestern Resources. I bet they are after the insurance companies that insured the “qualified persons” who wrote the reports that propped up the whole rotten edifice.

So in the absence of effective legislation, competent regulators, or able consultants, the only way the common man can protect him or herself against crooks is to sign up for class action law suites. The United States legal system has perfected the class action law suite, and I personally take the very unpopular view that we are all better off for this. I was told that Canadians do not go in for that sort of thing–stiff upper lip you know. But I see those who told me that are wrong.

I am delighted to see the class action lawyers hustling after Southwestern and all their henchmen. And as for the insurance companies–they have the risk well spread around Lloyds of London, so no tears need be shed. And maybe next time the qualified persons will be a bit more responsible and accountable. Although as a retired consultant, I still feel very sorry for them.