Follow the money

I usually try to stay away from issues at the provincial or federal level since my primary interest in this blog is on the goings on at the municipal level. But sometimes, they brush up against each other, or even overlap, and become difficult to ignore.

Such is the case with an article that appeared in the London Free Press this week dealing with a matter before the Ontario Securities Commission (OSC). That’s the provincial government body that is tasked with the responsibility of overseeing Ontario’s capital markets to protect investors from unfair, improper or fraudulent practices so that they don’t get fleeced by a smooth talking shyster who promises them fabulous profits if they just give him their life savings to put into a project that just can’t fail.

Normally, I don’t care too much about that kind of thing. After all, if something sounds to good to be true, it probably is; people who get taken in by that are just asking for it, driven by greed.

But all too often the victims of unethical practices turn out to be friends and relatives of the person who sucked them in. And when it comes to ordinary working people, the majority don't have the kind of pension plans that ensure them of a decent income after retirement. They are expected to invest their own savings, such as they are, in the private market with little or no training. Certainly the interest rates on savings at present are far too low to keep up with inflation so people are falling further and further behind. No wonder they look to alternative opportunities, especially when they are being promoted by persons with high status.

In any case, it was the respondent in the proceedings before the OSC that drew my attention when reports of the settlement appeared in the Globe and Mail and the London FreePress. He was none other than Vincent Ciccone, personal friend of our mayor, Joe Fontana, and the person who had founded the Trinity Global Support Foundation, a private charitable foundation which is currently headed up by none other than our mayor. Although the mayor had denied that he had any business dealings with Ciccone, the timing of events are curious.

Fontana was invited by Ciccone to join the board of directors in 2008 (see Guilt by association), at a time when Ciccone was raising money from investors without being registered. He was promising returns of 20%, but most of those who turned over their savings saw nothing, and when Ciccone declared bankruptcy in 2010, they realized they wouldn't get a cent. By then, $19M had been raised and disappeared.

In the meantime, Fontana took over the chairmanship of Trinity Global Support Foundation and his son, Ugo, also known as Joe Jr., took over the running of the charity as president.

So what was the relationship between the charity and the Ciccone Group which purported to invest in time shares in Mexico?

The charity did very well, going from tax receipted revenues of $72,000 in 2008 to $71M in 2010. Meanwhile, Ciccone, while still a member of the Trinity board, raised $19M over that period but declared bankruptcy in 2010. He also resigned from the board at that point.

If there was no connection, and Fontana was unaware of Ciccone's business dealings, how is it that when Ciccone left Trinity, $8M were transferred from the charity—which was supposed to feed hungry kids and deal with AIDS in Africa—to companies controlled by Ciccone, including the Ciccone Group which in short order would come to the attention of the OSC? Is it likely that the chairman of a board of directors, even if he was busy with an election campaign to become mayor of London, would be unaware of such a transfer of funds? (see Just friends or biz partners?)

And how is it that, if there was no connection between the charity and the Ciccone Group, Trinity is the largest unsecured creditor in the bankruptcy, being owed $6.5M?

There are other unsecured creditors as well, 173 to be exact. In total, they are owed $28.5M.

Ciccone himself identified Fontana as playing an important role as a paid advisor and consultant in encouraging investors. According to Ciccone in a statement to the official receiver in his bankruptcy, "We used Joe Sr.'s influence to provide credibility to our products." A small business investor who lost his savings in the venture, reported that Fontana promoted the Ciccone Group at dinners and seminars, and encouraged donors who received inflated tax receipts from the charity to reinvest in the Ciccone Group.

Once Ciccone declared bankruptcy, the OSC became interested. Here was someone trading in the capital market, taking investors' money, making promises of exorbitant profits, and not registered with the commission. That's problematic.

But the Commission is focussed on deterrence; it wants to have stability in the capital markets. So while it is interested in creating a statement of facts, it is more interested in getting a settlement than in punishment, especially the threat of a jail term. It does its investigation and, if criminal activity is suspected, it is likely to suggest that the RCMP deal with those aspects.

In the case of Ciccone, that's what happened. The OSC found that Ciccone had been trading in securities without being registered and hadn't filed a prospectus. He had issued false and misleading statements to get investors. Additionally he acted as an investment advisor without being registered with the OSC. Ciccone engaged in fraudulent practices, redirecting money from one company to another without the knowledge of the investors. Although he was ordered to desist in April 2010, he continued to trade and to engage in activity that artificially inflated prices. His actions were deemed to violate the public interest.

According to the settlement, Ciccone has agreed to these facts and to a sanction which includes an order to “disgorge” $15.5M to his creditors among whom are Joe Fontana, Junior and Senior. There is also a $750,000 penalty and a payment of $100,000 to the OSC which is self-funded. He has a life-time ban on trading in securities or working in the investment industry.

Obviously, some questions come to mind. If he is bankrupt, where will he get $15.5M to “disgorge”? Certainly the small business investor does not believe that he will ever see a dime of his $25,000. He thinks that, since the receiver was not able to find the money, it must have been distributed to Ciccone's friends and family.

The Commission itself acknowledges that it is difficult to achieve compliance. Although it states that “OSC staff make every reasonable effort to enforce sanction orders, collect monetary sanctions and, where appropriate, preserve assets related to an investigation or proceeding,” its ability to do so is “limited because respondents may have no assets or limited assets, may no longer reside in Ontario, or cannot be found. Some respondents may have hidden assets in the names of others.” So far this year only 13.08%, or $1,750,000, of the $13,383,761 in total assessments from settlements (not including Ciccone's) has been collected. Still, that's a damned sight better than the 0.0% collected from contested hearings. In previous years, the OSC was able to collect about 70% of its assessments on settlements, but only a little over 3% on contested assessments. But $15M is considerably less than the $28M outstanding according to the bankruptcy proceedings. So the little guys are not likely to see much of it, even if some moneys are repaid.

And how likely is Ciccone to desist from pulling a similar scam in another city? After all, he continued to trade even after he was ordered by the OSC not to do so.

As part of the settlement, there is no prejudice to any other proceedings in which he may be involved in this regard. Whether the RCMP will be investigating or laying charges remains to be seen.

But this case does serve to highlight the difference in the way we treat street crime—the petty every day thieves—from how we deal with those who defraud on the large scale. And it's not a small problem. The OSC website has a long list of corporate defrauders who have failed meet their disgorgement orders.

So they are focussed on getting the best bang for their buck, arranging for an agreement wherever they can in hopes that some of the money finds its way back to the victims.

And the OSC is moving in the direction of jail terms. Why, last year they managed to secure more than 14 years of jail time in total, up from 195 days in the previous year.

And can our jails can handle the additional admissions?