Vancouver Exchange Aims To Reform Poor Record

SINCE going public on the Vancouver Stock Exchange, A&A Foods Ltd. has issued just under 8 million shares of stock. But early this year, company president Giovanni Camporese reported a disturbing finding: A survey at the company's annual meeting turned up 3 million unaccounted shares.

On the scandal-tainted Vancouver Stock Exchange (VSE), mysteries like this are too common and represent a threat to the interests of investors and entrepreneurs, critics say.

Next month, a special provincial-government commission is expected to issue a final report, including proposals on how to better regulate the exchange. The VSE and the Securities Regulation Commission, headed by lawyer James Matkin, issued an interim report in October citing a ``persistent lack of public confidence in the VSE and the BCSC,'' the British Columbia Securities Commission.

``Almost two-thirds of investors surveyed believed the VSE operates for the benefit of its members [brokers] rather than in the interests of investors,'' the Matkin Commission said. Shareholders complained about inadequate regulatory oversight, viewing the BCSC as underfunded and insufficiently independent.

``The VSE's market share has declined from 12 percent of the Canadian total in 1980 to 3.5 percent in 1992,'' the report noted. ``We believe that the public wants to invest in a fair market, in genuine companies, and with confidence that fraud and wrongdoing will be discovered and prevented.''

Founded in 1907, the VSE has historically been a source of financing for speculative start-up companies, such as mining ventures. The exchange is trying to diversify from natural-resource stocks (70 percent of its listings) to more industrial and high-tech companies.

The interim report found that many investors are aware of the risks in such an exchange, but hope to sell shares at high prices to ``a greater fool.''

``Eighty percent of the mines in Canada are found by junior mining companies,'' the sort of small outfits listed on the Vancouver exchange, says Robert Dickinson, who has founded five copper or gold ventures with colleague Robert Hunter. In the last five years, two of these have been sold to larger companies at a big profit for investors (values of 13 and 45 times initial capitalization, respectively). The other three companies are now listed on New York's NASDAQ market, as well as on the VSE.

But some firms have not had good experiences on the VSE.

A&A Foods, a cheesemaker based in Port Coquitlam, British Columbia, warned that the 3 million phantom shares might represent ``undeclared,'' and thus illegal, short positions taken by investors expecting the stock price to fall. (Undeclared short-selling is when it is not covered by specific shares held in a brokerage account.)

William Cate, a consultant who has worked with VSE-listed companies since 1980, says ``undeclared shorts'' have long been a rampant problem on the VSE, often perpetrated by brokerage houses trying to profit from the failure of companies.

For A&A, the phantom shares created an artificial glut of stock that keeps the company's share price low and makes it hard to obtain further financing by issuing more stock, Mr. Cate of Beowulf Investments says.

``There is certainly some undeclared shorting,'' acknowledges Clayton Shultz, executive vice president of the exchange. But he says this occurs in other North American stock markets and is ``not a particular problem for the VSE.''

VSE officials have been trying to clean up the exchange's image with tighter screening of listed companies, more monitoring of trade activity, and full computerization (the first North American exchange to do so), which has left the trading floor empty.

``The rules that are on the books are quite good,'' and similar to those of other exchanges, Mr. Shultz says. He adds that the prosecution of infractions must be improved.

Critics remain outspoken.

In testimony before the Matkin Commission, former exchange vice president William Pidruchney called for a ``complete overhaul'' of operations, including new leadership.

Cate doubts whether the Matkin Commission's reform proposals will be strong enough. He says too many people, including politically powerful brokers, accountants, and lawyers, reap a major share of trading-floor proceeds.