Calgary is the home of Canada's two largest securities frauds: Bre-X and Steve-X

David Dodge was correct in pointing out that Canada is the wild west of securities regulation. Mind you he did nothing about it, apart from enjoining himself in the execution of the larger of the two frauds, namely the Steve-X securities fraud. Evidently doing so is deserving of being named to the Order of Canada. More like the disorder of Canada.

To be successful, every securities fraud needs to have the air of truth about it. In the case of mining promoter David Walsh, the proposition was that junior mining company Bre-X had discovered a massive gold strike in the back waters of Indonesia. As proof of its discovery, Walsh provided drill core samples that were assayed to have contained very rich deposits of gold. On the basis of these claims, the value of Bre-X stock increased from a worthless penny stock to a company worth over $6 billion in the minds of the market. Every major Gold company and major mining company in the world was interested in getting in on the Bre-X action. Brian Mulroney as Director of Barrick Gold even arranged to have George H.W Bush intervene with President Suharto of Indonesia on Barrick’s behalf in order that they could bid on developing the property. IN the end the whole thing was a hoax, as the core samples had been “salted” with gold to falsify the assay results. The fact that the salted gold was “alluvial” gold that could only have come from a river deposit, and not from an underground deposit only showed how amateur an operation that Bre-X had been. The net result was that investors lost $6 billion as a result of the blatant act of securities fraud.

As bad as Bre-X was, Steve-X is much worse. Like Bre-X, Steve-X involved the luring of unsuspecting and trustworthy investors into a false promise. This false promise involved the Prime Minister of Canada making a solemn election promise that he would (i) not tax income trusts and (ii) he would not raid seniors nest eggs. This promise resulted in a large number of investors entering the income trust market for the first time. It gave those who were already in the market a sense of fiscal certainty that had been lacking before and which profoundly affected their sense of acting prudently by remaining fully invested in the market.

A short nine months after making this election promise that had been highly successful in garnering many voted for Steve Harper, he promptly and without any public consultation reversed his course, and broke both of his election promises of never taxing income trusts and never raiding seniors nest eggs. He could have done one without the need to have done the other, by simply grandfathering all existing trusts, which would have allowed him to have preserved seniors nest eggs. Steve Harper took the most draconian approach conceivable.

As disreputable as the broken promise is, worse yet is the false premise for the broken promise. The false premise for the broken promise was one of the most opportunistic of acts imaginable. By promising to never tax income trusts, Steve Harper not only brought certainty to the equation for investors, he did so as well for potential issuers. This would have been obvious to anyone with even the remotest competence in policy making. Obviously it was totally lost on Steve, since he immediately panicked when the obvious occurred, namely the continued conversion of corporations into trusts as a means to maximize shareholder value (and incidentally, maximizing Ottawa’s ongoing tax collection on corporate earnings).

Those who were intent on killing the income trust sector for their own narrow self interests used the announced conversions of Telus and BCE as their rallying call that “the sky is falling”, and that tax leakage will ensue. Steve Harper bought he whole story, hook line and sinker. The argument of tax leakage in the Steve-X scandal is as credible as the argument of gold deposits are in the Bre-X scandal. Tax leakage in the Steve-X scandal is created in the same way as gold deposits are created in the Bre-X scandal. Both are the product of “salting” the results. Just as alluvial gold was surreptitiously and fraudulently salted into the core samples taken from the Bre-X drilling program,, so too was tax leakage from the conversions of BCE and Telus were fraudulently derived.

This was the work, not of geologist Michael de Guzman at Bre-X, but rather Mark Carney of Steve-X. The Bre-X scandal was uncovered and made visibly apparent when the assay results were made available for third party review. The claims of tax leakage in the SteveX scandal have never been made available for public review, since the only proof of tax leakage advanced to date has been the 18 pages of blacked out documents that were curiously demanded be returned. However what the perpetrators of the Steve-X scandal failed to realize when they embarked on their fraud was that there exists a parallel model to the one they are using and which resides in the hands of HLB Decision Economics, who collaboratively developed the model with the Department of Finance during the Goodale consultative round of September 2005.

The Steve-X securities fraud shows all the amateur and clumsy handiwork of the Bre-X fraud. Rather than salting the tax leakage results with alluvial gold. Mark Carney salted the tax leakage analysis with the false assumption that RRSPs and Pension funds that hold income trusts are tax exempt, and as such NEVER pay taxes on their distributions. This is completely false and indefensible as an underlying assumption in the formulation of tax policy. Furthermore, having deluded themselves into this line of reasoning, they falsely exaggerated the percent of income trusts that are held in such “tax exempt” accounts, since to do so would help effect their desired end result, namely that income trusts cause tax leakage. Numbers as high as 38%-52% were used by Ottawa in their deliberate and clumsy efforts to drive the desired outcome, when in fact a more accurate number of 31% is thought to apply.

In the end, income trusts do not cause tax leakage, but rather the Department of Finance under the intellectually corrupt leadership of Mark Carney causes tax leakage.

The Steve-X fraud perpetrated by Steve Harper on the Canadian Capital markets has done irreparable harm to the 2.5 million Canadians who made “detrimental reliance” on his false promise, every tax paying Canadian who will be faced with making up the $7.5 billion funding shortfall that will be induced by this policy and the damage to Canada’s reputation as a stable and predictable marketplace in which to invest and which is premised on sound economic principles and not voodoo concepts of tax leakage, more deserving of the backwaters of Indonesia and not a G7 country........presently run by Hooligans and witch doctors in Finance.