Part 1 – Attempts to legislate securities Fraud in Canada
“Asking Questions About Canadian Capital Markets” is a series of articles about the capital markets in which we explore some Canadian public companies and ask questions. These questions may shed light on the now-defunct Canadian digital currency exchange called Voyager Digital.
One of the founders of Voyager Digital is a Canadian attorney named Stephen Dattels. To understand Voyager Digital, it may help to understand the journey of some of its founders.
Voyager Digital, the digital currency exchange, is a subsidiary of a British Columbia public company(1).
According to several media reports, some investors have filed a class action lawsuit in the US against Voyager Digital, alleging that it was a Ponzi scheme with US$5 billion allegedly missing(2).
When people talk about loses to investors, sometimes it’s not clear what they mean. In the case of digital currency exchanges, if they are public companies, there are two separate pools of investments – funds from investors who bought shares of the public company (e.g., shareholders), and funds from consumers taken in as a deposit-taking function and held in trust for consumers.
The billions of dollars allegedly missing according to the US class action lawsuit refers to the money that ordinary consumers deposited in trust to buy digital currencies, some of which are so-called “tokens” or so-called “stable coins” and most are a securities. This series of articles is not about that activity or consumers; it’s about the capital markets side.
In this Part 1, we explore historic attempts to federally legislate Canada’s capital markets and l’Affaire Uramin, also known as l’Affaire Areva.
Systemic securities fraud
There is a perception in Canada that legislators haven’t done much to address securities fraud in Canada. According to research we conducted in early 2021 (see Business in Vancouver here), while Canada represents only 12.5% of the US population, it often represents 40% of securities fraudulent activities in the US capital markets involving micro-capitalized public companies. In 2020, we researched US Court records and calculated that there was over US$4.5 billion in open securities fraud cases involving Canadians in the US.
When Covid-19 fraud started occurring in the capital markets with false representations by microcap public companies stating that they had magic Covid-19 drugs or cures, the US Securities and Exchange Commission (“SEC”) issued emergency orders to stop misrepresentative statements by suspending the trading of securities on more Canadian public companies than companies from anywhere else in the world. The SEC v. Frederick Sharp et. al. alleged securities fraud prong of cases with British Columbia actors adds another US$1 billion to the tally of open securities fraud cases involving Canadians.Canadian public companies cause more per capita harm to US investors and to the US capital markets than any other country.
The problem has been known to US lawmakers since at least the 1940s. In a New York Times article dated June 2, 1940, a reporter noted that the best suckers grow in the US, suckered by Canadian fraudsters who target the US investors because they want access to a wealthy, large investment pool they can’t get in Canada. The Washington Post, in 1952, wrote that the US Senate’s concern for American investors being defrauded by Canadians with phoney stock claims, including phoney uranium mining claims, was so heightened there was talk of a treaty just to ship fraudsters from Canada to the US where they could be prosecuted.
Fraud on the capital markets (called by its 1920s name, “public markets,” in the Criminal Code of Canada) is a predicate offence under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, so if there is a capital markets fraud problem, we also have a money laundering problem in the capital markets.
From time to time, Canadian federal legislators have tried to address Canadian securities fraud and to force a cultural change using the law. Unfortunately, to no avail.
Proposed federal securities legislation
In Canada in 2009, former Finance Minister Jim Flaherty set up a federal working group which drafted a federal securities act to replace provincial securities legislation. The legislation was designed to, among other things, address systemic fraud afflicting Canada’s capital markets, protect the Canadian financial system and investors, and enable the detection and prosecution of financial crimes arising from capital markets activities. Flaherty’s efforts were defeated by the Supreme Court of Canada which took a very provincial view and ruled in Reference re Securities Act, that capital markets had to remain provincial jurisdiction under The British North America Act, 1867.
The decision was rooted in a reality that existed in the last century when in Canada, capital markets were limited to Toronto and Montréal, and securities were evidenced on physical paper records and delivered to investors by horse and buggy.
The fact that the Canadian judiciary, in this day and age, thinks that the capital markets are like the 1890s is quite concerning.
Senate attempts to amend Criminal Code
In 2016, the second federal attempt was undertaken by former Canadian Senator Céline Hervieux-Payette, who was the deputy chair of the Standing Senate Committee on Banking, Trade and Commerce. She introduced criminal legislation called the “Combating International Fraud Act”, to respond to fraud in the capital markets after a number of scandals involving public companies in Canada left investors (many of whom were elderly) destitute and which harmed Canada’s financial reputation internationally.
Senator Hervieux-Payette said she was motivated to introduce the legislation because of Stephen Dattels. Stephen Dattels appears to be the only Canadian attorney, perhaps the only attorney anywhere in the world, in respect of which deterrent legislation has been drafted.
In Parliament, the Senator stated that Dattels founded a company in Canada called Uramin Inc., which became a public company in Canada listed on the TSXV. A short time after listing, Uramin’s stock price rose 467% and it was sold for US$2.5 billion to Areva S.A., a state-owned nuclear energy corporation in France.
According to its filed securities disclosure and a book that Dattels participated in about the deal, some of the people involved in Uramin Inc. with Dattels included John Ian Stalker, Edwin L. Phelps, Samuel Jonah, Neil Herbert, James Pitman, Ian Watson, Graham Mascall, Michael Beck, Francis Daniels and the Brexiter James Mellon.
Why did a foreign government pay US$2.5 billion for a little public mining company in Canada? No one knows the answer. Literally. It may be because of representations Uramin made about the extent or value of its uranium resources. Its disclosure says its uranium resources totalled 262.6 million pounds in three African countries.
The Senator told Parliament “there was no uranium” and she stated that various audits, including one by the French Parliament found that “Dattels and his associates lied outright about their uranium reserves and deposits.” We have not been able to find an audit which says that.
No uranium? Some uranium?
In France it took a while for Areva S.A. management to comprehend its own uranium acquisition and it wasn’t until 2010, that it hired external investigators to find out about its own deal. What they and investigative journalists (see “Areva: les secrets dune faillite” here) say they learned was that: (a)Uramin Inc. had uranium deposits in Namibia that were not exploitable because they were below 100 ppm U (below 100 ppm is graded “very low” and means there is 0.01% U or less); (b) deposits in the Central African Republic were not exploitable in part because of mining land access issues; and (c) there were no uranium mining rights in South Africa (see “Affaire Areva Uramin: 3 milliards en fumée” here).
Uramin’s mining report, called a 43-101, states that the Uramin deposits in Namibia were, for the most part, above 100 ppm U and were “low” and not “very low”. Low grade is 1,000 ppm U or 0.1% U. After the deal closed, Areva was unable to access the mining site it bought from Uramin in the Central African Republic. It eventually agreed to pay an extortion of US$50 million to that government to access the mine site. The deal was negotiated by the Belgian George Forrest, a controversial figure who, according to the US government, was talking to the Iranian regime about buying uranium.
Some in France have called the Uramin deal a scam (une escroquerie) or a fiasco (see “Affaire Areva Uramin: révélations due un scandal d’état?” here).
There were other aspects of “l’affaire Areva” that involved Canada beyond accusations about exploitable reserves, and those were concerns involving money laundering. And although they involved allegations tied to Uramin Inc., they don’t originate from Uramin.
Money laundered here and there?
The first is that, according to TracFin, the French federal financial intelligence unit, the spouse of the CEO of Areva, Olivier Fric, had access to material undisclosed information about Uramin Inc. and was able to buy securities of Uramin for several weeks during its blackout period. He conducted those securities transactions using a BVI shell company called Amlon Limited and netted €300,000.
TracFin told the French prosecutor that the transactions buying and selling the securities of the Canadian public company were suspicious transactions for money laundering purposes for fraud.
And then there was another controversial figure with his own private jet, Saifee Durbar. He self-describes as a “bandit” and his role in the Uramin Affair has been described in The Times as one of a key player in a spy thriller.
He investigative journalists and the French prosecutor that allegedly, millions of dollars in proceeds of corruption were paid to a South African named Tokyo Sexwale at the closing of the Uramin deal, which originated from ScotiaBank in Toronto. The funds, he alleged, were laundered to Bermuda and then to South Africa for the benefit of Sexwale. In 2017, he gave more specific statements in respect of Sexwale and Uramin (see “Candidat à la Fifa, Tokyo Sexwale, éclaboussé par une affaire de corruption” here).
The French national financial prosecutor established two judicial inquiries to investigate Areva S.A., including aspects of the Uramin deal.
At the end of the day, the prevailing theory among some people in Europe and Africa who were involved, and who spoke to investigative journalists, appears to be that the deal included a portion of the acquisition price going towards a black suitcase (see “Enquête Areva – Uramin, filouterie radioactive?” here). A black suitcase is an expression used in France and China, perhaps other places, that means a bag for black money. Black money is money for crime, most often to make corruption payments.
It was Areva’s black suitcase, though, not Uramin’s but the suitcase was in Canada, if it existed. And if it existed, when the suitcase needed to be opened, it was opened in Canada and the money it held was sent to intended recipients.
In France, “l’affaire Areva” was a massive story for years. Several books have been written about it.
Crickets in Canada
In Canada? Nothing.
Senator Hervieux-Payette said that no securities regulator in any province conducted an investigation into “l’affaire Areva.” The Senator told Parliament that she tried to get the RCMP to investigate but that went nowhere she said. The Senator then conducted her own investigation, which led to her proposed legislation to strengthen criminal enforcement of Canadian capital markets.
Her draft legislation included provisions for extraterritorial application of the Criminal Code insider trading and tipping offences. The latter provision, the Senator told Parliament, could have been used to investigate what she called the Dattels gang. She submitted her investigation report to Parliament.
Hervieux-Payette stated that as “federal legislators, it’s our duty to protect Canadians against capital markets fraudsters.”
But Parliament didn’t enact the Senator’s legislation. We asked a former investigator in France who investigated “l’affaire Areva” for France, why there was no investigation in Canada if there was a case to be made, as alleged. He told us it was because Canada’s mining lobby group lobbied the Canadian government to take no action.
But how do we explain the fact that the Canadian media never picked up on or followed l’affaire Areva even though it was so significant a story in France and Africa? The answer is language – most of the Areva and Uramin coverage, including about Dattels, is in French and from France and Africa. Unless one is French or follows mining, or financial crime news in Africa, one wouldn’t necessarily learn about Uramin, Areva or its collateral players.
And Areva? It apparently never survived doing a deal with Uramin Inc. It melted down and filed for insolvency protection. 6,000 people lost their jobs in France, across the EU and across Africa.
And Canadian attorney Stephen Dattels? He moved to the United States, built a mansion in Palm Beach, Florida, and kept a footprint in Ontario’s thoroughbred horse breeding country. But he also stayed involved in little Canadian public companies.
We found him connected to a little Vancouver microcap company named BetterLife Pharma Inc., where he is mentioned in a fascinating lawsuit filed by a man named Aly Ismail, battling over a finder’s fee.
In Part 2, we continue our journey to understand Voyager Digital and we explore BetterLife Pharma Inc. and the battle for a finder’s fee.
(1) There is sometimes confusion about jurisdiction in cases where a Canadian company decides to operate in other countries. A British Columbia company means its jurisdiction is British Columbia, and Canada. If it is a reporting issuer, the company makes a decision on which province it wishes to attorn to as a matter of jurisdiction for securities regulation and enforcement and in respect of investors. It also selects a principal regulator, and informs investors and securities regulators who that principal is. That provincial principal regulator has primary jurisdiction in Canada. A third prong in respect of jurisdiction is the jurisdiction of its directors. In the case of Voyager, it made the decision to report to all provinces and asked Ontario to be its principal regulator for investors. It has, perhaps had now, directors in Canada. That does not mean, however, that US securities and other regulators have no jurisdiction; they have jurisdiction in respect of US investors, financings and listing matters if a US exchange was used to list stock. The US also has jurisdiction by virtue of correspondent banking rules, which means that all of the financial transactions of Voyager Digital fall under US jurisdiction, and that brings in the US Wire Act and financial crime laws.
(2) A Ponzi scheme simply means to take new investor money and use it to return money to old investors. Before Charles Ponzi, it was called “robbing Peter to pay Paul.” It’s one of the easiest alleged frauds to investigate and confirm because directors of a Ponzi scheme direct the making of statements about how much money is invested and held in trust and one call by a regulator to the DTC, or in the case of crypto, a review of its cold wallet holdings instantly affirms (or not) the truth of representations made to investors. That’s one of the things that happened with the Bernie Madoff Ponzi scheme – no regulator picked up the phone and called the DTC.