March is Fraud Prevention Month in Canada. Canadian law enforcement agencies, financial institutions, and nonprofit agencies are banding together to warn Canadians about different methods scammers use to part honest people from their hard-earned money.
— Surrey RCMP (@SurreyRCMP) March 1, 2016
The Better Business Bureau has compiled a list of the top 10 scams affecting Canadians.
- Auto Scams
- Emotional Scams
- Identity Theft
- Social Media Scams
- Romance Scams
- Utilities Scams
- Finance Scams
- Sales Scams
- Big Data Scams
- Ad Scams
This article focuses on finance scams. The Better Business Bureau advises that investors need to be aware of people selling investments that claim to carry no risk or that guarantee returns. While this is good advice, it seems quite generalized to be of much use.
The first thing investors need to understand is that, unless they are buying an investment that is protected by the Canadian Deposit Insurance Corporation (CDIC), they are exposing themselves to risk. [Author postscript: see the Inquisitr‘s examination of the CDIC’s financial position.] Even though it would be extraordinary, money market mutual funds and treasury bills can lose value in certain circumstances. Guaranteed Income Certificates (GICs) insured by the CDIC always guarantee principal, and in some cases guarantee returns and are the only place to park money that investors cannot afford to lose. Even with the CDIC, there are limits to how much capital is protected – typically $100,000, though there are ways to increase this – that investors must be aware of.
Most investors are aware that returns offered by interest-bearing GICs are currently quite low. One alternative is the index- or equity-linked GIC, which guarantees principal and pays returns based on the performance of an underlying stock index or basket of equity investments, as reported by MoneySense. However, even these investments put a ceiling on the amount investors can earn.
Most people understand that purchasing stock entails risk. Two methods investors use to protect themselves from risk in the stock market include stop-loss orders or levels, as explained by Investor’s Business Daily and diversification, as explained by Investopedia.
Investing directly in the stock market requires dedicated research and time to follow investments. Investors who do not possess the inclination or surplus of free time to commit should not be investing directly in stocks.
However, there are many, many shady operators who will push very poor quality/fraudulent penny stocks and thinly traded over the counter (OTC) stocks on unsuspecting investors by hinting at potentially huge future windfalls.
In the United States, Jordan Belfort, known as the Wolf of Wall Street, became famous for first offering legitimate stocks to his customers and then, once he had gained their trust, selling stocks in completely fraudulent businesses, as reported by The Inquisitr.
Canadians, and this is a tough pill to swallow, are at a huge disadvantage to their U.S. investing counterparts. While Canada has produced quality, investment grade, publicly traded companies, they invariably will be cross-listed on the New York Stock Exchange or the NASDAQ. Any stock that trades only on the Toronto Stock Exchange, TSX Venture Exchange, or Canadian Securities Exchange, should be treated with suspicion.
“Don’t buy cheap stocks. Buy Nasdaq stocks mainly selling between $15 and $300 a share and NYSE stocks from $20 to $300 a share. Avoid the junk pile.”
Internationally, Canada is known as haven for investment scammers. One of the most egregious stock frauds of all time, BRE-X, as reported by the Huffington Post, did not help to quell this image.
“Fundamentally, it seems nothing has really changed since the Vancouver Stock Exchange era where seemingly half the companies involved were just simply there to defraud investors,” Sacha Peter with Divestor writes with regard to current state of the TSX Venture Exchange.
One of the reasons experienced investors stick with stocks trading above $15 per share is that bid-ask spreads on TSX Venture Exchange penny stocks, and all low-priced investments, are horrendous.
TSX Venture Exchange-listed Mountain Boy Minerals Ltd. (TSXV: MTB) illustrates this point well. Currently, quotes for the stock show a bid of $0.01 and an ask of $0.02. This means that if an investor bought at the current best price of $0.02 and for whatever reason decided that they wanted their money back, the best price they could get is $0.01: a 50 percent loss! Since mid-2000, the earliest data available for Mountain Boy from Yahoo Finance, the shares are down more than 96 percent.
Traders using stop-losses of the order of 5 or 8 percent simply cannot trade stocks like this. There is almost no way for investors to protect themselves from downside risk.
Unfortunately, when dealing on the Toronto Stock Exchange, or even the NYSE, or NASDAQ, there is no way investors can protect themselves from the wide bid-ask spreads presented with low-priced stocks and is a good enough reason to avoid them.
While there is no shortage of examples of U.S. executives exhibiting reprehensible behavior in order to inflate the earnings, and further, the stock prices of their companies, from Enron, to Worldcom, to Tyco, as reported by Investopedia, at least these companies were profitable at one point.
Canadian companies like Mountain Boy Minerals and Toronto Stock Exchange-listed Kerr Mines Inc. (formerly Armistice Resources) (TSE: KER) have never been produced a single dime in profits.
Todd Morgan, former chief executive officer of Armistice, was quoted by the Toronto Star with regard to the production potential of a mine the company formerly owned, near Larder Lake, Ontario, as reported by Market Wired.
“The gold was always there. We all believed in it a long time ago.”
Additionally, Morgan is a member of the Kirkland Lake town council and the Armistice project was held up as an example of the area’s economic potential for years.
Even though he resigned from his CEO position with Armistice in October 2013, as reported by CNW, through the fall-2014 municipal elections, as reported by the Northern News, the Town of Kirkland Lake continued to hold Morgan up as the “President, Chief Executive Officer, and Chairman of the Board of Directors for Armistice Resources [sic],” as reported by Archive.org.
Further, the Northern News continuously reported that the mine, under Morgan’s direction, was “on target to start production” and that it had “marked another important milestone in… progress toward becoming a producer.”
While, to its credit, the Northern News did report on Morgan’s 2013 resignation, evidence of any sort of explanation of what happened with Armistice – from Morgan or anyone else – remains elusive.
Since early 2008, when the earliest trading data for Armistice/Kerr Mines shares is available with Yahoo Finance, the shares are down more than 99 percent.
Another company covered extensively by the Northern News, Orefinders Resources Inc. (TSXV: ORX) has seen its shares decline in value by more than 98 percent since early 2013, the earliest trading data available with Yahoo Finance.
Surely, any reasonable person understands that nothing (except, perhaps, death, taxes, and CDIC-insured investments) in life is certain. However, the fact that Orefinders has continued to issue more stock at lower prices is puzzling. Like Mountain Boy Minerals and Kerr Mines, Orefinders is not profitable and has provided no guidance on when it will ever be.
Unless a company is not only profitable, but is consistently growing its profits, now or in the near future, there’s no reason for stock market participants to compete with each other to bid share prices up. Unfortunately, this applies to a great number of stocks listed on Canadian exchanges.
Are these companies fraudulent? Fraud is a legal term that includes intent. Proving that Todd Morgan or the management teams of Mountain Boy Minerals or Orefinders intended to deliver 99, 96, or 98 percent losses is difficult and would require a court to be presented with documents like e-mails, other internal communications, or recorded conversations.
Are these companies rip-offs? The answer would appear to be clear, as well as providing a warning for investors presented with junior Canadian companies for investment.
[Photo by Malcolm Taylor/Getty Images]