Vancouver Market Cleanup Falls Short in Execution

JAMES MATKIN says he knew from the outset that some would say he was only a patsy after he accepted the call last year to help clean up the scandal-ridden Vancouver Stock Exchange.

The squeaky-clean Mr. Matkin, a respected former law professor and former missionary, had no experience in the securities industry when he was appointed to find a fix for a system renowned for stock manipulation and investor swindles.

But Matkin met the challenge, producing in late January a hard-hitting 19-point report recommending changes on everything from the Vancouver Stock Exchange's (VSE) regulatory structure to the way it does business. The key recommendation: a new regulatory body modeled on the United States Securities and Exchange Commission and the London board of exchange.

There was the expected flurry of attacks on the report from Vancouver brokers, stock promoters, and even the government's own regulatory mechanism - the British Columbia Securities Commission.

Months have gone by with no apparent action from the government. Too many months, Matkin says. Some say the report covers too much for the government to handle.

``I know there's always going to be some difficulties, some wrinkles in implementing change,'' Matkin told the Monitor in a recent interview in his office overlooking downtown Vancouver. ``I don't mind that - I just want somebody to do anything about it.''

A Harvard Law School graduate and onetime clerk at the Supreme Court of Canada, Matkin has taught law and business at the University of British Columbia and Simon Fraser University here. Those who know him remark on his integrity and tough-mindedness.

Yet, long before the VSE was dubbed the ``scam capital of the world'' in a 1989 Forbes magazine article, bright, earnest people had been called on to propose fixes for the VSE - and then had them ignored. Since 1978, there have been at least three other major reports on problems at the exchange. Matkin now worries that his report could end up collecting dust with the others.

``This industry and those that are major players in it have managed to prevent other reports from coming to fruition,'' he acknowledges. ``They have, perhaps, within their ability to sink this one.''

The VSE is a place where investors' hopes and dreams often collide with the nature of the exchange itself - a risky arena in which fledgling companies offer a slice of equity for the promise of big returns.

Notorious ideas floated by VSE companies include: a breed of super rabbit whose body parts are all salable; plastic zip-on snow tires; a metal headset that runs electric currents through it to cure baldness; an archaeological company that says it found King Solomon's mines.

``It is a system that has become adroit at exploiting speculation,'' Matkin says. ``The dream can be nonsense, but the system will exploit that nonsense and make money out of it. That's the culture.''

``Buyer beware'' is the VSE's watchword. While many companies reward investors handsomely, many others do not.

A 1979 study by a prominent consulting firm found that the public, overall, was losing money in the exchange. The report said that the public put up 79 percent of funds raised by junior resource companies while promoters and vendors, who put up 10 percent, ended up with 69 percent of the equity.

While many companies are aboveboard, the methods used by unscrupulous stock promoters to fleece investors are ingenious and varied. A favorite tool is the shell company, used as a holding company to mask the real financial condition of companies it owns.

Until something is done about corrupt promoters, problems will continue, Matkin says. He would register promoters, restrict them from marketmaking activities in stocks, and require public companies to reveal any promoters pushing their securities.

Last month, rumors surfaced that the British Columbia government was planning action. A spokesman for the minister of finance told the Monitor that some action might emerge this summer.

``I think they are going to do something,'' Matkin says. ``But I'm not necessarily optimistic they're going to do enough to make a significant difference.'' Since the Matkin report was issued, the VSE has raised the upper limit on penalties for illegal transactions from $100,000 to $1 million (Canadian; US$72,280 to US$722,800).

Still, there has not been one criminal conviction for stock fraud on the VSE since 1986.

``That's quite staggering,'' Matkin says. ``After being called the `scam capital of the world,' surely there must be one person whose done something wrong.''

Not to clean up the exchange would represent a huge lost opportunity, Matkin says. The exchange is an important source of capital for small, high-risk companies. But many now avoid the stigma of raising capital on the VSE. There is also the hazard of ignoring a serious problem at the heart of society.

``If you have an apple, and it's got a rotten spot, it will spread to other parts of your society,'' Matkin says. ``I don't think you can just wink at it and say: `It's fine.' ''