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From: Leo [mailto:leo@askbiblitz.com]
Sent: Friday, March 18, 2011 1:24 PM
To: rich.coleman.mla@leg.bc.ca
To: enforcement@iiroc.ca
Subject: Risk of insider trading in B.C.'s newly beefed-up mining industry
March 18/11
Dear Minister Coleman,
I am writing today to relay my concerns to you as I have to our new Premier and to the earnest B.C. Securities Commission (BCSC) about gaps in our securities regulatory scheme that might very well precipitate an insider trading scandal of the same magnitude as Bre-X and just at a time when the province is doing its best to promote the mining industry.
According to the opening statement in your own Ministry of Forestry, Lands and Mines Service Plan, February, 2011:
B.C. is one of the world's top jurisdictions for mining. We have over half of Canada's exploration and mining companies based in the province, with one of the most competitive tax and regulatory systems around. We are ranked among the best internationally for the quality of our geological database, and have a growing inventory of more than 12,000 mineral finds.
The Province plays a leading role in exploration as the British Columbia Geological Survey makes its geoscience database accessible to global clients and investors through MapPlace.ca and the ministry's website. This includes all data produced by the British Columbia Geological Survey and Geoscience B.C.
Mining touches nearly every corner of the province. More than 28,000 people are employed in mining and mineral sector-related jobs in more than 50 communities in B.C. We continue to work with our federal counterparts to make the "one project, one process" approval system a reality. This will maintain the strong government regulations and review processes that protect the environment and miners, while speeding up the development of projects, create employment and attract even more investment into the province.
Mineral exploration activity in B.C. reached $322 million in 2010. This was the third-highest total for exploration spending in the past 20 years and a 109 per cent increase over 2009. ...
Inspiring words to the investment community on which the miners depend, particularly at the exploration stage of mine development when there is typically very little information available to investors, but where, Minister, are the rules to prevent what looks very much to me like insider trading by the mining analysts? Beyond a code of fuzzily-worded ethics and good faith guidelines created by the Investment Industry Regulatory Organization of Canada (IIROC), rules that are difficult at best to enforce and which only protect the analysts' actual clients - not the investing public or the market as a whole?
Under Canada's regulatory scheme, there are currently two streams of mining information available to investors - one directed by the miners and another by IIROC mining analysts. The first restricts the communication of mining data in technical reports following the National Instrument (NI) 43-101 Standards of Disclosure for Mineral Projects. The (NI) 43-101-compliant technical report is a formal document of some detail prepared and attested by an independent qualified expert and which must be filed as a matter of public record with SEDAR. The second information stream has no such requirements. Mining analysts representing banks or brokerage houses, who may be highly-qualified geologists, have few, if any, standards or obligations to ensure the accuracy or reasonableness of their opinions, and while their research is typically restricted to select clients, there is nothing to prevent the spread or use of that information or the devastating market consequences it may have.
There is nothing to prevent such an expert from distributing a competing resource estimate that may differ by as much as 95 per cent from a (NI) 43-101-compliant resource disclosure, and while a single error in the (NI) 43-101- compliant report may result in the issuer's permanent bar from the securities industry, even a gross error on the part of the analyst is of no consequence either to the analyst or her/his employer.
Why such a disparity when IIROC mining analysts are selling derivatives of those very same mines?
With little or no public disclosure of the analysts' opinions, neither miners nor investors are able respond to or even test competing claims. This is particularly damaging when contradictory data is coming from a qualified geologist and when her/his report may be very influential thanks to algorithmic trading, which now accounts for the bulk of all trading.
Even worse, with little or no disclosure of competing, unqualified information, neither investors nor securities regulators have any way to compare an analyst's opinion with the trading activity of the analyst's employer - no way to distinguish unusual trading patterns that might have been associated with the release of a contradictory resource estimate.
My concern is that an IIROC analyst might be tempted to misrepresent the facts however slightly, inserting a competing resource estimate to manipulate stock price for the benefit of select clients. There's no apparent penalty for doing so. On the contrary, if s/he's successful, the analyst's employer is most likely to provide some sort of reward. Why are there no regulations currently in place to prevent such an abuse?
A case in point: On Valentine's Day, Rubicon Minerals announced that BCSC had questioned the company's recent (NI) 43-101 concerning the Phoenix gold project. As an investor, I have no way of knowing the substance of that inquiry or its source. All I can do is read the stock boards which, in this case, indicated the recent publication of two negative opinions - one from BMO and another by Toll Cross Securities. Either might have prompted BCSC's inquiry. If so, in my view, BCSC should be obliged to inform investors of the nature of any query and the basis of such query, including the name of a complaining party. With respect, I disagree with BCSC's position that it should fall to Rubicon to explain itself - not when the company is so clearly compliant with our regulatory scheme. Like our adversarial court system, it should be incumbent on the accusing BCSC to at least explain its accusation. In this case, the uncertainty created by BCSC's inquiry, which, I might add, was not accompanied by a cease-trade or any other order, was sufficient to drive the stock price down 20 per cent and in a rising gold market! Investors still have no idea why.
Perhaps most disturbing is the question, what, if any, regulation(s) exists to prevent an analyst intent on manipulating stock price from using the BCSC to compel such an inquiry?
Unfortunately, the Rubicon experience has seriously impeded investor trust not only in Rubicon but in Canadian mines, analysts and our securities regulatory scheme generally. Foreign investors at the stock boards now wonder openly what we're playing at - especially when the U.S. is so aggressively prosecuting insider trading.
I shudder to think of the lawsuits the Rubicon experience alone may attract at such a crucial time for the mining industry, which your government has worked so hard recently to support.
On the other hand, if IIROC-member mining analysts were required to file at least their competing resource estimates, which might be revealed publicly sometime after their reports are published, investors would be able to track whether, in fact, an analyst was using influence in the market for personal gain. One would simply compare the trading patterns before and after the competing resource estimate was issued. If there's nothing to conceal, why not increase the availability/visibility of IIROC members' daily trades for all the world to see? If there is anything rotten in Denmark, the legions of stock bloggers would no doubt bring it to the attention of authorities.
Similarly, why not increase the availability/visibility of the nature and source of BCSC inquiries, which create tremendous market uncertainty, at least to prevent any assumption that certain analysts may be using the commission, exploiting its current policies of secrecy/confidentiality to cloak their true agenda, which is ultimately, inevitably personal gain?
Full and fair disclosure of information should be the basis of any regulatory scheme in the 21st century. Operations conducted in secrecy and by innuendo should be banished like dictators.
Thank-you for your kind attention.
Leo Biblitz