While the Chairmen of provincial securities regulators publicize their wonderful contributions to regulation, investors suffered badly. Billions of dollars were lost to unsuitable investments, excessive fees and leveraging, misleading marketing, fraudulent funds and crooked advisers and brokers. Here’s a small sampling of the rattraps retail investors had to endure in 2008.

Early in 2008, we starting to hear cases where investors were being charged a hefty fee for obtaining copies of their NAAF’s, KYC’s, account statements and the like. Shareholders of Crocus Investment Fund were half- cheering an agreement that is a first step to settling a $200-million class-action lawsuit, saying it should also clear the path for a receiver to begin distributing some funds to hapless investors. The scandal-ridden fund was created by the Manitoba government in 1992 as a labour-sponsored fund to invest in small Manitoba companies, but its securities were frozen in late 2004 when regulators became concerned the fund was overstating the value of its holdings. The availability of MFDA IPC investor protection fund coverage - up to $1 million for each of a client’s aggregated general and separate accounts depends on the form in which the securities are held. IPC coverage provides protection only to assets held in nominee or dealer name rather than client name- roughly 80% of client mutual funds assets at most fund dealers are actually held in client name, so they are not insured by IPC. (this restriction is not publicly disclosed to customers at point of mutual fund sale)

Marketing was the top significant deficiency among the investment fund managers that the OSC reviewed in the 2008 fiscal year. About 45% of the investment fund managers reviewed had significant deficiencies in this area. The issues were similar to those

of portfolio managers. They included:

• Inappropriate use of benchmarks. Some investment fund managers compared the returns of their funds to benchmarks that were inappropriate or not relevant. For example, they used benchmarks that differed significantly from the composition and investment strategy of the funds. They did not provide adequate disclosure to ensure that the

comparison was fair and not misleading. They presented fund returns in a different currency than the benchmark, and did not disclose the composition of blended benchmarks.

• Inappropriate or incorrect performance data. Some investment fund managers did not calculate performance data properly or presented performance data inappropriately. For example, performance data was not presented with all the required warning disclosures and/or all the required time periods. Hypothetical performance data was presented for

periods before the fund’s initial distribution.

• Exaggerated claims. Some investment fund managers made exaggerated claims about their performance, skills or services. For example, they made statements such as “superior results over the long term”, “outstanding performance”, and “[use of] superior portfolio managers” in marketing materials. They did not provide adequate information to support these claims and to ensure that clients were not misled.

On May 1, 2008, the Ontario Securities Commission issued a Temporary Cease Trade Order against Toronto-based ASL Direct Inc. registered with the Commission as a Mutual Fund Dealer and a Limited Market Dealer, and is a member of the MFDA The OSC said it is investigating the conduct of ASL and are concerned that it may have participated in the distribution of securities in the Future Growth Group of Funds without a prospectus and without an exemption to the requirement for a prospectus.

In an article entitled Thow hangs over MFDA, Berkshire David Baines asked the obvious question. How did Berkshire reconcile [Ian] Thow’s extravagant lifestyle with his relatively modest income as a branch manager? Baines points out that on Thow’s advice, many of his clients had liquidated their mutual fund accounts at Berkshire, incurring huge deferred service charges in the process .How indeed? Fund industry lobbyist IFIC responded negatively to OBSI’s Request for Comments on proposed changes to its Terms of Reference .An independent assessor had recommended that OBSI look at systemic issues, not merely individual cases in isolation. IFIC wants to derail this constructive pro-investor initiative claiming its their territory as a regulator .The 2007 OBSI Annual Report noted a 40%+ increase over 2006 in number of cases opened and a growing trend towards senior abuse.

The International Monetary Fund Report, "Canada Financial Sector Assessment", dated Feb. 13, 2008 cited our securities enforcement as in real need of improvement. In that regard, former RBC DS investment banker Andrew Rankin negotiated a surprise reduced settlement agreement with the Ontario Securities Commission to resolve his outstanding legal matters on tipping. The OSC had lost on appeal and decided to cut their losses. There are those who do not cite Alan Rankin’s settlement leniency as a regulatory problem. Some critics argue that the OSC botched this case and it was patently unfair that Alan Rankin should go to jail, while his buddy Daniel Duic did not and Duic gets to keep most of his ill-gotten gains. In their opinion, Alan Rankin should have been the co-operating witness against Duic.

The Investment Dealers Association of Canada ( now IIROC) published controversial rule proposals for public comment that seek to implement the core principles of the so-called Client Relationship Model (CRM), a new way of governing the relationship between retail clients and their brokers. The CRM is a greatly watered down adaptation of the Fair Dealing Model, which was proposed in a now buried concept paper issued by the Ontario Securities Commission way back in January 2004.

Investor Brian Hunter, had to set up a Facebook community to identify individual holders of roughly $200-million of illiquid asset-backed commercial paper. About 1800 small investors, many seniors and retirees, are stuck with the frozen paper, unable to access their cash and likely facing losses if the restructuring process fails. The brokers had told them –Drop Dead when asked to make them whole-Brian wants to get their money back and regulators took no action.

The Ontario Securities Commission agreed to granted another six-month delay requested by Conrad Black and another former senior Hollinger executive, Jack Boultbee, to give them yet more time to appeal their criminal convictions in the U.S. Conrad Black appeal was lost on June 25, 2008. The OSC hearing had previously been scheduled for March 27 in Toronto. It was the latest delay since the OSC's enforcement branch filed allegations against Hollinger Inc. (TSX: HLG.C) and four of its top executives, including Black, Boultbee, Peter Atkinson and David Radler three years ago in March 2005.

Justice Colin Campbell wrestled with the general legal release that the perpetrators of the ABCP crisis insist upon –if accepted this would be a dangerous precedent. The ABCP CCAA Restructuring Plan Sanction Order and Decision on June 5, 2008 has a carve out in the legal release to ensure that there is no interference with any powers of remedies of Investment Industry Regulatory Organization of Canada and other regulatory or self-regulatory bodies having jurisdiction, except that these bodies cannot make any order or award to compensate or make restitution or to pay general or punitive damages to any aggrieved person or company.   While we believe the vast majority of Non- Bank ABCP retail owners by headcount and dollar value have or will receive full cash settlement plus accrued interest from the ABCP dealers who sold the product to them, there are about thirty families we can identify that are not getting full cash settlement plus accrued interest for their ABCP damages. So, point 19 of the Sanction Order hurts them. 

Also, Justice Colin Campbell's reasons for decision give a good review of arguments and court authorities on securities fraud.  His decision explains why he is carving out of the legal release for a very narrow definition of fraud, which is defined by an authorized representative of an ABCP providing verbal or written comments on the Non- Bank ABCP that he knew was false and so he intended to mislead the customer for the purpose of enticing him to make the purchase of Non Bank ABCP. Essentially his reasons are that the banks would not support the ABCP CCAA Restructuring Plan if he carved-out a broader definition of fraud from the legal release. In Point [127] Justice Campbell says, "if by some chance there is an organized fraudulent scheme, I leave it to others to deal with."   So, there can be no civil fraud cases to prove fraud beyond the brokers at the ABCP dealers in the Non Bank ABCP fiasco. However, the door is open for the RCMP’s “feared” Integrated Market Enforcement Team and the municipal and regional police fraud squads, or international securities authorities, to do their job of investigating criminal fraud in the Canadian Non- Bank ABCP market.

While the CSA sidesteps seniors issues, the U.S. authorities were moving to increase penalties for people who commit securities violations against seniors as noted in an Investment News article, "Legislation addresses fraud against seniors," dated June 27, 2008.The legislation that would increase penalties for people who commit securities violations against seniors was introduced in the [U.S.] Senate .As they turn to investments to bridge the gap, seniors need to know that they can trust the people who handle their money,” he said. The bill, titled the Senior Investor Protections Enhancement Act, would increase penalties for those who take advantage of investors 62 and older. Additional fines of up to $50,000 would be levied for violations, which could include selling unsuitable products to seniors or failing to disclose fees or lock-up periods for investments

The RCMP finally filed criminal charges against top three Nortel executives, Royal Group Technologies executives and Ian Thow, which are cases where the alleged crimes took place more than five years ago. Meanwhile, the U.S. Department of Justice is laying charges on the securities crimes of 2006 and 2007 in the U.S. subprime mortgage fiasco, that the Canadian securities authorities have not even begun to consider. As for IFRS accounting standards, we believe this will create more opportunity for creating misleading financial statements unless the CSA turbo-charges its enforcement activity.

During H1 we stumbled on the news that the Investor Advisory Committee was kaput: It was announced with great fanfare but has died with a whimper. The OSC’s Investor Advisory Committee was supposed to be a listening post for retail investor concerns. Apparently it ended its brief life at the end of 2007. One of its members publicly criticized it suggesting it was nothing more than PR. If it hadn’t been for an Investment Executive article we wouldn’t even have known of its demise. A new consultation regime has been implemented - the Joint Standing Committee on Retail Investor Issues –of course there no actual retail investors on the committee.

In Q3 the situation again was bleak for retail investors. We learned that ultra-risky SPAC’s have been given a greenlight by regulators. A Special-purpose Acquisition Company (SPAC) is an investment vehicle that allows unsophisticated retail investors to invest in areas sought by private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring companies with the proceeds of the SPAC's IPO. A Hearing Panel of the Central Regional Council of the Mutual Fund Dealers Association of Canada approved a Settlement Agreement with Altimum Mutuals Inc. Altimum admitted that it acted contrary to the public interest by contravening advertising and sales communications rules and by distributing misleading sales communications to clients wrt Portus funds.

The infamous Taub decision refers to a case filed by a Mr. Stephen Taub, a former Research Capital employee, challenging the IIROC’s right to discipline him after he ceased to be a member. On a 2:1 basis, an Ontario Court agreed with him, putting investor protection in Ontario in a uncomfortably weak position .It is pretty well known that the SRO’s seldom are able to collect on most of the well-publicized fines they announce regardless of the Court decision.

Ontario Securities Commission Staff notice 11-763 provides a summary of the review findings re fund valuation practices and expense allocations. By and large they claim to have found few problems but recommend some pretty significant and basic improvements. They did however recommend some improvements including, but not limited, to:

On July 17, 2008 the Supreme Court of Canada released its unanimous decision in Canada (Privacy Commissioner) v. Blood Tribe Department of Health. The Supreme Court upheld the Federal Court of Appeal's decision to vacate an order by the Privacy Commissioner compelling the production of purportedly privileged material so as to assess the privilege claim. More broadly, this ruling now represents a significant hurdle for administrative and regulatory bodies seeking to compel documentary production of privileged materials in the context of investigations or other administrative undertakings. This ruling came on the back of an Ontario court ruling that blocked IIROC’s attempt to discipline a former member which is now under appeal by the OSC. IIROC (www.iiroc.ca), the industry self-regulator that regulates investment dealers (“brokers”) and the trading of securities is proposing really minimum standards for stockbrokers who supposedly do financial planning. Also, we learned that the Joint Forum is considering watered down proposals for POS fund disclosures after extensive industry lobbying .The OSC presented its 2008/2009 Statement of Priorities – many hard to measure and retail/senior issues given token attention. What else is new?

Triglobal, an MFDA member, was regarded as a leading Quebec-based financial solutions provider. Now, it appears $86 million is missing and the AMF is investigating. Incredibly, after a three-year investigation of the Crocus LSIF’s fund's collapse, the RCMP assert that they have not found any evidence of fraudulent misconduct, deception or other criminal wrongdoing. This, despite demonstrably poor fund governance, a shockingly weak-investment management process, a fundamental lack of internal controls and deficient expense management and outright false asset valuation reports that overstated the fund's worth.

On Sept. 19th, 2008 the Supreme Court of Canada decided to not hear the non-bank ABCP case that several corporations and individuals had filed regarding giving all the fiasco-creating parties immunity from lawsuits. The Federal and Provincial governments and provincial regulators were not helpful to retail investors in obtaining restitution. Indeed, many retail ABCP owners were shocked to learn that governments actually facilitated the sale of this toxic money market product into the unsophisticated retail marketplace through multiple law and regulation changes, enforcement blindness and exemptive relief decisions that allowed the securities dealers and banks to side-step investor protection laws that Canadians fought years to achieve. Many regard this decision as one that will provide safe harbour for future scoundrels unless the Companies Creditors Arrangement Act is changed to explicitly restrict the right of judges to approve debt restructuring plans that deny the right of creditors to sue solvent third parties who exposed Canadians to harm. Maybe they should look at rating agencies as well. And, we are still waiting for IIROC to deal with Canaccord and Credential for their false representations, aggressive sales and other alleged misdeeds on non-bank ABCP to unsuspecting retail investors.

IIROC (www.iiroc.ca), the industry self-regulator that regulates investment dealers (“brokers”) and the trading of securities is proposing to require really minimum standards for stock brokers who supposedly do financial planning. Brokerages that sell stocks, bonds and mutual funds would be expected to check whether representatives who provide financial plans have completed a course on financial planning from the Canadian Securities Institute, or have qualified for one of various financial planning designations such as the CFP. If approved, securities dealers will have their own self-serving national standard, recognizing that the sale of investments remains their core activity and something that can be pursued separate and apart from true financial planning. The proposals suggest that by simply completing the Canadian Securities Course and the Professional Financial Planning Course we have, voila, a financial planner.

The final quarter of 2008 was devastating for fund investors. Market turbulence took a hefty toll out of people's nest eggs.  Deficient investor protections also placed hundreds of thousands of investors in a cash crunch as they had taken RSP loans to finance fund purchases near market peaks.  Besides interest charges, those investors who were forced to redeem also were faced with stiff DSC early redemption penalties. 

October was the month that the Joint Forum revealed its despicable framework for POS disclosure.  Industry lobbyists had so mauled the initiative that the general view is that investor protection has actually regressed. The Fund Facts document is geared to a Grade 6 reader. Under the proposed framework, delivery of the Fund Facts before or at the point- of- sale is required for all initial purchases of mutual funds and segregated funds (except for money market funds) that are recommended by an adviser. This is surprising since money market funds have proven to be on of the most toxic of all during the global credit crisis. Risk is measured using fund industry lobbyist’s IFIC’s formulation which is based only on volatility (stnd deviation) - essentially it’s meaningless. Prospectuses will now only be delivered on request. Of course, no performance benchmark is required to be provided. We expect a major issue to develop regarding whether or not a fund purchase was driven by a salesperson or the investor.

The 2008 MFDA Annual Report revealed that 381 enforcement cases were opened up from 361 in 2007, only $525,500 of fines were collected out of $2,023,000 levied (One case, the Berkshire (Ian Thow) debacle accounted for $500,000 in fines) and 15% of investigations took longer than 1 year

On Nov. 20th, Com Dev International Ltd. said it improperly priced at least 1.1 million stock options granted in 1999 and 2006.It also said the Ontario Securities Commission had issued warning letters "admonishing" Com Dev and chair Keith Ainsworth for the company's past stock-options policies. But the OSC intends no further action against the company. Compare this wrist-slap to what happened to option backdaters in the U.S.

RBC banking pulled the plug on industry-funded OBSI moving instead to RBC –funded for-profit ADR Chambers for dispute resolution.  Unquestionably, complaint handling took a giant step backward.  BMO Nesbitt Burns was asked to pay a token $300,000 fine for misleading investors into buying toxic Norshield funds.  PPN investors also experienced a tough blow to the head. -a number of PPNs experienced so-called “protection events”, which basically means that on maturity they will pay only the principal back.  Effectively, this means investors will lose approximately 15-20% of purchasing power due to inflation, this after waiting five to seven years.

The Ontario Superior Court of Justice issued an endorsement on Nov. 14, approving the appointment of KPMG as receiver and manager of all the property and assets of ASL Direct Inc. (ASL). In May, the OSC had alleged that ASL and its principal Adrian Leemhuis distributed the Future Growth Group of Funds without a receipted prospectus and without an exemption from the requirement for one. As we expected, historically low-fee Phillips, Hager & North Investment Management Ltd. has upped the ante in its bid for advisor-driven mutfund sales. Subject to regulatory approval, the now wholly owned Royal Bank of Canada subsidiary will start selling a new Series C that will qualify for much higher trailer commissions than previous PH&N offerings.

Canada may have excessive MER’s but our funds don’t have excessive performance. The Standard & Poor's Mutual Fund Performance Persistence Scorecard periodically provides semi-annual results on the persistence of top performing funds in the current market. These reports show performances of actively- managed mutual funds within their capitalization peer groups and monitor the consistency of their performance results. One key finding: Very few funds manage to consistently repeat top half or top quartile performance. Over five years ending 2006, only 71 (13.2%) large-cap funds, 16 (9.9%) mid-cap funds, and 24 (10.0%) of small-cap funds maintained a top half ranking over five consecutive 12-month periods. A total of eight large cap funds (3.0%), two mid-cap funds (2.5%) and zero small-cap funds maintained a top-quartile ranking over the same period.

The year 2008 will be the year any vistages of OBSI’s independence evaporated. All of its key proposals for improved Terms of Reference were thrashed by industry participants, ignoring an independent assessor's recommendations and pleas from retail investor for changes. Most importantly, the issue of systemic assault was rewritten so as to basically transfer investigation responsibility to the firm that created the systemic issue! As we neared year-end, we also heard that the OSC has been without a director of enforcement for months. And we also learned that this desperate retail ABCP Investors wouldn’t be receiving any restitution as the November 30 deadline has come and gone.

Billions of dollars have moved to GIC’s and bank accounts as mutual funds/stocks have imploded. At the same time the financial health of banks has declined. As a result investors, consumer associations, seniors groups and even a couple of banks have asked that CDIC deposit insurance be increased to $250,00 from $100,000. The Government response: Silence.

Besides all the threats to nesteggs from corporate wrongdoing, deficient regulatory enforcement , flawed financial products, rogue brokers/advisers and fraudsters we also learned that organized crime is at work in our capital markets according to a new report from the RCMP's fraud squads. Major crime groups are recruiting investment professionals to help them move far beyond traditional activities - smuggling, extortion and counterfeiting - into the rarefied world of high finance and market manipulation, say the Mounties. "Using the markets requires a degree of knowledge and expertise," says the draft report from the RCMP's Integrated Market Enforcement Teams. Will regulators be able to protect retail investors ?

Finally, the Harper Government took a prorogue holiday leaving the National Securities regulator issue in the dustbin. When parliament resumes Jan. 26th, expect more corporate, banking and insurance bailouts Retail investors especially seniors can expect little assistance - their nest eggs in shatters.

While the impact of deficient investor protection is financially enormous, the collateral damage is often more devastating. Besides losing their life’s savings, victims of financial assault are affected in many ways:

In other cases we’ve also heard of marital breakdown, severe emotional distress, nervous breakdowns, heart attacks, drug over-dose and even suicide.

We thank all the contributors to this Report and regret we could only a tiny fraction of the debacles , scams , deceptions , fiascos and injustices submitted. Eight pages is enough to bring anyone to tears.

All in all, 2009 was a horrible year for investor protection, continuing, if not accelerating, the five-year trend. Virtually every entity charged with protecting investors capitulated under financial services inventory might or due to their own inertia. The end result could well be the decimation of the middle class in Canada. Let’s hope 2009 starts to reverse the trend before it’s too late.

Ken Kivenko December, 2008