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The Imperial SEC? - Foreign Policy and the Internationalization of the Securities Markets, 1934-1990

Canada: A Case Study

Cross-Border Securities Fraud: The Early Years

"Our geographical continuity with Canada and the advanced state of mail deliveries and telecommunications make it possible for offenders in Canada to operate all over the United States without ever setting foot in any state."

- March 30, 1955 Draft Confidential SEC Staff report on The Canadian Problem, Illegal Securities Offerings, 1933 – 1955 (courtesy of the National Archives and Records Administration)

We seldom now think of Canada as a threat to U.S. financial markets. Yet, from the 1930s well into the 1950s, it was Canada - not Switzerland or a remote Caribbean island - that the SEC believed functioned as a bastion of securities fraud. The SEC's strategies for dealing with Canadian securities fraud and the jurisdictional issues that arose would foreshadow some of the problems with other countries that the SEC would later confront.

Throughout the 1930s, the SEC received hundreds of complaints regarding securities frauds originating from Canada. Many of these frauds involved con artists who fled the Unites States and established their operations in Canada, often selling worthless securities in various mining and oil companies.(59) Between 1934 and 1936, a number of SEC officials traveled to Canada to meet with the Ontario Securities Commission and later Toronto and Quebec officials. At times, the SEC was able to obtain the cooperation of these provincial securities commissioners but cooperation was sporadic and depended upon which Canadian officials were in office. The SEC continually lamented that Canada did not have one federal securities commission but rather several provincial securities commissions.

In 1940, while the United States was negotiating a new extradition treaty with Canada, the SEC argued that violations of the 1933 and 1934 Act should be extraditable offenses. The SEC considered such an explicit provision crucial, as a number of Canadian courts had refused to extradite Americans convicted of securities violations who fled to Canada. Although a treaty containing such provisions was negotiated, the Canadian legislature did not pass it and the treaty was condemned by the Canadian press and industry as a blatant act of American power over another sovereign country and a violation of international law and the constitutional rights of Canadians.

As the SEC continually pressed Canadian officials for cooperation, these officials became increasingly critical of the SEC. In June 1945, Ontario Premier George Drew exclaimed, "Canada is a sovereign nation and we do not intend to permit officials from outside this country to apply their laws to our business . . . We have no intention of adopting laws in Ontario similar to the costly and restrictive provisions of the SEC . . . we have no intention of permitting officials from any other country to come here and interpret their own laws to suit themselves."(60) Others commented that the United States had been built on speculation and that Canadians had lost billions of dollars from investing in U.S. securities.

In 1945, despite such harsh criticisms, or perhaps egged on by them, the SEC initiated over 100 investigations into Canadian securities offerings. Investigations continued at this pace throughout the 1940s. By 1949, relations between Canadian provincial securities authorities had reached a new low. Ontario authorities and industry groups lodged complaints with the U.S. State Department against two SEC employees investigating alleged Canadian fraud. The Ontario Commission informed the State Department that it was "impercipient" for U.S. officials to be investigating on Canadian soil without permission. One official further complained that the U.S. was trying to bully Canada and that Canada would not be so intimidated.(61)

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