Monday 21 September 2015

Criminal trial or administration hearing—which would you prefer?               

Almost every day I read in the newspapers of investment counsellors being charged with crimes of corruption. They don’t defraud people of small sums of money—they defraud them of millions of dollars.

Now if you were an investment counsellor and you were caught defrauding your clients of a great amount of money, would you prefer to be tried in a criminal court or be tried at an administration hearing instead?   

I will explain to you what an administration hearing is.

An administration hearing is a hearing before any governmental agency.  Such hearings hear witnesses and arguments. There is no jury however, the adjudicator in charge of the hearing will make a ruling and award the punishment if the person tried is found guilty.  The addudicator cannot send anyone to prison but he or she can fine the perpetrator huge sums of money and award huge costs against him or her and order that the money obtained by fraud be returned to the victims if at all possible. The adjudicator can also suspend or cancel the licence of the investment counsellor to practice in his or her profession. 

Now I will tell you what advantages you would have and the consequences you would have to bear if you were tried by a judge or judge and jury in a criminal court instead of having an administrative hearing.     

First, if your trial is before a judge with no jury, the judge is required to give you the benefit of any doubt that he may have about your guilt when arriving at his verdict. If the trial includes a judge and jury and the jury does not believe your testimony or that of your defence witness, the testimony of both you and your witness may, when considered in the context of the evidence as a whole, raise a reasonable doubt of your guilt in the jury’s mind.  Further, the trial judge must instruct the jurors that if they believe the testimony of you or your defence witnesses, the jury must acquit and even if they do not believe your testimony or that of your  defence witnesses, if all the members of the jury have a reasonable doubt after considering the evidence as a whole, including your testimony and that of your defence witnesses, they must also find you not guilty if there is some doubt in their minds about your guilt.

Second, while being tried in a criminal court, you have the protection of the United States Constitution if tried in the United States and the Charter of Rights and Freedoms if tried in Canada. 

The downside of being tried in a criminal court is that you can be sent to prison if found guilty. I will give you two examples of two men who went to prison after they were found guilty.                                                                 

Earl Jones, (born June 24, 1942) is a Canadian and was an investment adviser who pleaded guilty to running a Ponzi scheme which CBC News has reported cost his victims a conservative estimate of about $51.3 million (Canadian money) that he took from his victims between 1982 and 2009.  

After pleading guilty to two charges of fraud in 2010, he was sentenced to 11 years in prison. After serving only 4 years of his sentence, this sleazebag was released on March 20, 2014. In Canada, a prisoner can be released from prison after serving one third of his sentence.  Now that doesn’t mean that anyone can be released that early. A convicted murderer would have to serve the full minimum of 25 years in prison before he could apply for parole.

On July 15, 2010, some of Jones' victims were authorized by a Quebec Superior Court judge to launch a class action suit against his banker, Royal Bank of Canada (RBC). They allege that RBC knew or should have known that Jones was misusing his RBC account and failed to take corrective measures. RBC claims not to know that Jones was misrepresenting its role in his affairs until his 2009 arrest. The suit was prompted by a Fifth Estate investigation which uncovered an internal memo dated November 7, 2001 showing that RBC knew Jones was passing off his personal account as an in-trust business account. RBC did not ask him to open a commercial account until 2008 just before the scandal. Jones wasn’t sued because it was the belief that he had no money left.  The suit sought to recover about $40 million, the amount deposited into the account between 1981 and 2008.[1] On March 6, 2012, CBC News reported that the class action lawsuit had been settled with investors getting about thirty cents on the dollar. Fortunately for the investors, this sleazebag didn’t deposit the money in some foreign bank. Naturally, he will never ever be permitted to work again in the financial industry.  

Back in the 1970s, I was asked to investigate a securities investment advisor who was fired after siphoning off a million dollars from his employer. I found the money and the proof that it was he who stole the money. He went to prison. Would you believe it, after he was released from prison, he applied for another licence to be an investment advisor and was given such a licence. He then ripped off his new clients to the tune of $9 million dollars. Again he went to prison.

His clients sued the government for giving that thief another licence to practice as an investment advisor. They refused to pay. The victims went to the provincial ombudsman and asked him to intercede on their behalf. I sent a copy of my report to the ombudsman and told him that the Ontario Provincial Police also had a copy of that report. The police didn’t pass it over to the official governmental regulatory agency that licences financial advisors. When the government learned of this, they paid off the victims for their losses.

Bernie Madoff  who was  born on April 29, 1938, is an American swindler convicted of fraud and a former stockbroker, investment advisor, and financier. He was also the former non-executive chairman of  the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S. history.
Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman.  

On December 10, 2008, Madoff's sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as describing it as “one big lie”. The following day, FBI agents arrested Madoff and charged him with one count of securities fraud. The U.S. Securities and Exchange Commission (SEC) had previously conducted investigations into Madoff's business practices, but had not uncovered the massive fraud.

On March 12, 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme. The Madoff investment scandal defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the mid-1980s and may have begun as far back as the 1970s.[17] Those charged with recovering the missing money believe the investment operation may never have been legitimate. The amount missing from client accounts, including fabricated gains, was estimated at between $10 and $17 billion. The SIPC trustee estimated actual losses to investors at being $18 billion. 

On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum prison term allowed. There is no parole available to federal prisoners.  Madoff's projected release date is November 14, 2139. The release date, is described as being academic in Madoff's case because he would have to live to the age of 201 which could be the result of a reduction for good behavior. Bernie Madoff suffered a heart attack in December 2013, and reportedly suffers from end-stage renal disease.  He is currently serving his time at the Federal Correctional Institution Butner Medium near Butner, North Carolina, that is about 45 miles (72 km) northwest of the city of Raleigh in North Carolina. His two sons are dead—one who was sentenced to 10 years in prison hanged himself and the other died from natural causes.

Despite the fact that being prosecuted in criminal courts having advantages over administrative hearings, the consequences in the criminal courts can be devastating. 

As another example,  Lee Farkas who as the former Chairman of Taylor, Bean & Whitaker Mortgage Corporation was convicted in 2011 of  fraud  for having masterminded a $2.9 billion scheme that led to the 2009 collapse of the Colonial Bank. He was sentenced to 30 years in prison. His release date is 2037 if he is released for good behavior.  

And now I will tell you of the single advantage you would have and then consequences you would have to bear if you were subjected to an administrative hearing instead of a criminal trial.

The advantage is that unless you were also subjected to a criminal trial, you won’t be sent to prison. That is the only advantage of being subjected to an administrative hearing only. 

Canada’s Charter of Rights and Freedoms is a guarantee that Canadians and even non-Canadians will be treated fairly by the criminal justice system and people who are charged with a criminal offence, are entitled to numerous procedural safeguards, including a speedy public trial before an independent and impartial tribunal. They are also entitled to be presumed innocent until proven guilty beyond a reasonable doubt. Supreme Court decisions dating back decades confirm that some of these procedural safeguards also apply to corporations charged with offences, as well as individuals. Further they can be tried by a jury and to be convicted, every member of the jury must vote for a conviction.  These rights and freedoms are not available to those who are charged with an offence and are subjected only to an administrative hearing.

Canadian lawyer, Julie Guindon, wrote a legal opinion attesting to the legitimacy of a tax shelter program that turned out to be a sham. Section 163.2 of the Income Tax Act imposes a penalty on any person who makes false statements that could be used by others for tax purposes. In Guindon’s case, her penalty was a whopping $546,747.

Automatic penalties of this kind that are imposed by a regulator rather than a judge, without a trial and without any of the usual safeguards available to people facing criminal charges, have become known as “administrative monetary penalties” (AMPs)

As the Guindon case demonstrates, these penalties can be huge. Some AMPs run as high as $1 million per violation, and many millions for corporations. For most people, fines like this are financially devastating.

The problem with AMPs is that the misdeeds for which they can be imposed are not described in the various statutes as offences. Sometimes they are called violations or failures to comply, or contraventions of the Act.

The Supreme Court said, in effect, in last month’s Guindon decision is: yes, lawmakers can legally do an end-run around the Charter by enacting AMP-enforced violations that aren’t called offences. The court held that Guindon, although “liable to a penalty” for “culpable conduct” under the Income Tax Act, is nevertheless “…not a person ‘charged with an offence’ and accordingly the protections under section 11 of the Charter do not apply.” That section offers protections with respect to cases before criminal courts.

The court referred  to a 1987 case called Wigglesworth, saying there are two types of proceedings—those that are criminal in nature (aimed at promoting public order and welfare within a public sphere of activity); and those that are administrative in nature (primarily intended to maintain compliance or regulate conduct within a limited sphere of activity). The former proceedings attract Charter protection; the latter proceedings don’t.

It is not just individuals who are affected by the Guindon decision. Among the entities who might be exposed to AMPs under various federal laws are: corporations, companies, unincorporated organizations, partnerships, firms, trade unions, ships, vessels, municipal governments and road authorities.

Here is another case that was dealt with administratively. Canadian lawyer, Mitch Finkelstein had a role in an insider trading ring, This offence occurs when someone is trading (investing) in a  public company's  stock or other securities  (such as  bonds  or stock options) when they have access to nonpublic information about the company. In various countries, trading based on insider information is illegal. This is because it is seen as unfair to other investors who do not have access to the information as the investor with insider information could potentially make far larger profits that a typical investor could not make. He passed inside stock tips to a university buddy, Paul Azeff, who was at the time, a financial  adviser at Canadian Imperial Bank of Commerce. Azeff and others then traded on the information, which had had been illegally disclosed to them. Three other individuals, Korin Bobrow, Howard Jeffrey Miller and Francis Cheng, were also found to have used the information in violation of Ontario securities laws.

The Ontario Securities Commission ordered Finkelstein to pay $575,000 in sanctions and costs for his role in the insider trading ring.  Azeff must pay $750,000 in penalties, $175,000 in costs, and disgorge profits of $49,996. He’s been kicked out of the province’s securities business for 10 years. Bobrow was given a $300,000 penalty, $125,000 in costs, an order to disgorge $10,217 in profits, and a 10-year ban from the securities industry.

Miller was ordered to pay a penalty of $450,000, costs of $50,000, and disgorge (return) $24,485 he made as a profit. He is banned from the securities business for 10 years. Cheng was given a $200,000 penalty, a $25,000 cost order, and is banned from the industry for 10 years. In total, the OSC had issued penalties and costs of $2,859,698, made up of $2,150,000 in administrative monetary penalties, along with $625,000 in costs, and disgorgement orders of $84,698 (almost $3 million all told).

In 1990, Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. formed a number of companies as joint-ventures together with a fourth multinational engineering services provider for the purposes of bidding for engineering, procurement and construction services contracts for liquefied natural gas production plants on Bonny Island in Nigeria. From 1995 to 2004, the joint-venture companies made improper payments (bribery) totaling US $180 million in return for the award of these services contracts. The African Development Bank Group had contributed US $100 million in financing to the overall contract volume of US $6 billion

Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. agree to pay the equivalent of $17 million US in financial penalties as part of negotiated resolution agreements with the African Development Bank following admission of corrupt practices by their affiliated companies in relation to the award of services contracts for liquefied natural gas production plants on Bonny Island, Nigeria, from 1995 until 2004. As you can see, administrative  penalties can be extremely high.

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