Thursday, October 27, 2005
By Mark Heinzl, The Wall Street Journal

TORONTO -- Canadian authorities say they want to clamp down on corporate crime. They seem to be having a hard time.

Take Livent Inc. In 1998 -- before Enron, WorldCom, Tyco International, Adelphia and other high-profile U.S. accounting scandals unfolded -- the Toronto-based producer of "Phantom of the Opera" and other Broadway shows went into a tailspin. Its U.S.-listed shares became worthless. The company, under new U.S. management, accused founder Garth Drabinsky and other executives of a fraud that disguised the company's financial problems for years.

When might Mr. Drabinsky go on trial? At this point, probably not until early 2007 -- nearly a decade after Livent fell apart.

Mr. Drabinsky has maintained his innocence. Staying in Canada, he has avoided trial on criminal charges brought in 1998 by federal prosecutors in New York, as U.S. authorities deferred to their Canadian counterparts on the case. Some four years after the U.S. charges, Canadian police charged Mr. Drabinsky and other Livent officials with various counts of fraud. Some of those charges were quietly dropped earlier this year; a trial on the remaining counts is slated to begin in March 2007.

The "right to mount a proper defense" can stretch out a "difficult, complex fraud" case, said a spokesman for the attorney general of Ontario.

About two years ago, Canadian authorities vowed to get tougher on alleged corporate wrongdoers. While some recent moves show stiffer resolve, critics say cases are still taking too long, if they are pursued at all, and penalties remain light by U.S. standards.

Action against corporate crime in Canada is "maybe a little bit better, but it's not very noticeable," said Stephen Jarislowsky, a veteran money manager in Montreal who is active in promoting better corporate governance. He said the country's splintered group of 13 securities regulators -- one for each province and territory -- is ineffective and should be consolidated into one national regulator.

Authorities haven't pressed hard enough in several high-profile scandals, he said, including Livent, the Bre-X Minerals gold scam and more recently, alleged fraud at Hollinger International Inc.

The Hollinger case is "a critical test for Canadian authorities as to the resolve for more aggressive enforcement," said Jacob Frenkel, formerly an assistant district attorney in New Orleans and senior counsel in the Securities and Exchange Commission's enforcement division.

Under pressure from U.S. shareholders, the Chicago-based publishing company nearly two years ago forced former top executives Conrad Black and David Radler to step down, amid allegations that they siphoned tens of millions of dollars from the company, often through entities they control in Canada, where they both live. The two face SEC civil charges, and Mr. Radler has pleaded guilty to a mail-fraud charge brought by federal prosecutors in Chicago. He has agreed to serve 29 months in prison.

Mr. Black denies wrongdoing. Prosecutors this month froze $8.9 million of his proceeds from a recent real-estate transaction, a move Mr. Black is challenging. The criminal investigation into Hollinger continues and could lead to more charges.

The Ontario Securities Commission, Canada's largest securities regulator, meanwhile, in March accused Mr. Black, Mr. Radler and others of improperly diverting funds. The two men face fines or securities-trading bans if they are found guilty of the civil charges at a hearing set to start next month. But Canada's Royal Canadian Mounted Police, who oversee criminal investigations, say their involvement in Hollinger is limited to offering to help U.S. officials.

It is typical for one country's law-enforcement officials to take the lead on an international case, said RCMP Superintendent Craig Hannaford, who heads the Toronto branch of the RCMP's corporate-crime operations. He said Canada has a "totally different legal system" compared with the U.S., which has a "robust plea-bargaining system," federal sentencing guidelines and other mechanisms that help put corporate criminals behind bars.

Even Canada's central bank has said the country has an image problem. Bank of Canada governor David Dodge last December said some international finance players see Canada as the "Wild West."

Canadian police haven't charged anyone in the Bre-X case. The Canadian company claimed a giant gold find in the Indonesian jungle. The find was exposed as an elaborate scam in 1997, and several billion dollars of market value evaporated.

The Ontario Securities Commission filed civil charges against Bre-X Chairman John Felderhof for insider trading in connection with his sale of 84 million Canadian dollars, or about US$71 million, in Bre-X stock in the mid-1990s.

Eight years after Bre-X was exposed, Mr. Felderhof's often-delayed trial plods on in Toronto, and after nearly five years a verdict is likely still a year away. Mr. Felderhof, who has made only a brief appearance in court, mainly spends his time at his seaside estate in the Cayman Islands or in Indonesia, his lawyer said.

The RCMP now is "working very hard" on some high-profile corporate cases, Mr. Hannaford said, citing previously reported investigations of accounting issues at Royal Group Technologies Ltd. and Nortel Networks Corp. Both companies said they are cooperating with the investigations.

Canada has moved to strengthen fraud laws, Mr. Hannaford added, citing a recent increase in the maximum prison sentence for fraud to 14 years from 10.

The OSC is seeking a jail term of three to five years for Andrew Rankin, a former RBC Dominion Securities managing director, after an Ontario court judge found him guilty of 10 counts of illegally tipping a friend about takeover deals. It would be an unusually harsh sentence. The longest jail term on record for insider trading in Canada is six months.