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RCMP Supt. Craig Hannaford had been waiting more than four years for this day. On a cold October morning, Hannaford sat inside a cavernous courtroom in downtown Toronto waiting to hear how much jail time Alan and Elliot Benlolo would receive for their role in an elaborate stock swindle that stole millions of dollars from victims in Canada, the United States, Australia and more than a dozen other countries around the world. The brothers had pleaded guilty to the scam in July and agreed to jail time. But Hannaford was anxious to find out just how much time they were looking at and what fine they'd be forced to pay--if any. The Benlolos were also facing sentencing for their part in a phony telephone-invoice scam they ran with their younger brother, Simon, and another accomplice. They'd been convicted on that charge earlier this year, after a two-month trial. The scheme resulted in more than 4,400 complaints to the federal Competition Bureau.
Investigators dubbed the stock-swindle case Project Opulence--a fitting title since Alan Benlolo, 36, and his 38-year-old brother Elliot lived so lavishly off the proceeds of their scams. By the time they were arrested, in February 2001, the brothers and five accomplices (three of them pleaded guilty; one fled the country with one case still pending) had scammed more than 77 investors out of almost $3 million. When police searched the Benlolos' mansions in the Toronto suburb of Thornhill, they found more than $25,000 in cash stuffed into a cedar chest, and a fleet of leased luxury cars that included a Mercedes Benz SUV, a Ferrari 360 Spyder, a Lamborghini, a Jeep Cherokee and a Yukon Denali. To make matters worse, the Benlolos targeted their victims from a list of investors they had purchased from another gang who had already robbed the same people in a previous pump-and-dump scam.
This was not the first time the Benlolo brothers had run afoul of the law. In 1993, Elliot was sentenced to nearly two years in a Canadian prison for his part in a cocaine trafficking conspiracy. Alan got 18 months in a U.S. jail for mail fraud in 1998. He was returned to Canada in March 1999 and released shortly thereafter. Almost immediately upon his return, he joined his brother in the Canadian scam. The U.S. Securities and Exchange Commission is still trying to collect a US$1-million fine levied against him.
Given Canada's aversion to sending white-collar criminals to jail, would the fraudsters get as much jail time in Canada as they did in the States? For Hannaford, a 23-year veteran of the RCMP who is also a certified general accountant, seeing the Benlolo brothers behind bars would be more than just a reward for helping to unravel one of the most complex stock scams he's seen. It would hopefully be a sign of things to come. The case was cracked by a team of RCMP investigators working closely with agents from the Federal Bureau of Investigation and the Ontario Securities Commission. The team effort worked so well on the Benlolo case that it was used as a model for the RCMP's new Integrated Market Enforcement Team, an elite fraud squad made up of experienced RCMP investigators, forensic accountants and securities market experts. In the past year IMET has opened branches in Toronto and Vancouver, with offices in Calgary and Montreal currently hiring staff. Their mandate: to work with Canada's securities enforcement community to crack down on corporate crime and restore confidence in Canada's financial markets. "Whether you steal your money with a knife and a gun, or a pen and a cellphone," says Hannaford, who heads up IMET's Toronto branch, "you are still a criminal."
IMET agents are the new cops on the Street. But they're under a lot of pressure. Canada has developed a reputation as a haven for stock-market hucksters, money launderers and other corporate criminals. None of the Canadian executives behind such notorious flame-outs as Bre-X and YBM Magnex has ever been charged with a criminal offence. Even when criminal charges are laid, the process moves at what some observers consider a glacial pace. Just look at Livent, the theatre company founded by Toronto impresario Garth Drabinsky, which collapsed in 1998 under the weight of allegations of accounting fraud. Hannaford spent more than two years investigating Livent before charges were filed against Drabinsky and three other executives in 2002. It could be another year before the trial begins. Meanwhile, in the United States, New York state attorney general Eliot Spitzer has been working overtime to bust executives who ripped off shareholders and analysts that touted stocks they knew were worthless. And Spitzer's not alone. Courts across the U.S. have already convicted executives from Enron and Adelphia, along with the masterminds behind a host of other corporate scandals.
IMET has some catching up to do if it wants Canada to shed its reputation as a good place for fraudsters to do business. So far, the Toronto unit has made just one arrest: in May, charges of theft and money laundering were laid against Steve McRae, a 39-year-old former HSBC Canada employee who allegedly stole $370,000 worth of stock certificates from unclaimed client accounts at its Toronto brokerage. That's pretty small stuff for the new corporate flying squad, but Hannaford says the charges sent a message to the financial community that there's a new sheriff in town. "We wanted the Street to know that we are out there watching," says Hannaford, the son of a Montreal stockbroker. "And your chances of getting caught doing something wrong just went up."
It took two years of meticulous police work to unravel the Benlolo scam. The RCMP started sniffing around the brothers in July 1999, after TD Bank passed on complaints from scammed investors. According to court documents, the Benlolos preyed on victims who had already been duped into buying overpriced microcap stocks that turned out to be virtually worthless. The brothers enticed investors by offering to swap that stock for shares in blue-chip companies like Royal Bank and Compaq--they were trying to take the tiny companies private, they told their victims. But there was a catch: to complete the deal, investors would have to make up some of the difference in share price, wiring cash to Toronto mail drops or offshore banks. In some cases, that added up to $15 or $20 per share. One investor lost $675,000. Only when they tried to sell their phony stock did they realize they'd been taken again.
For more than a year, the RCMP followed the Benlolos' accomplices to and from mail drops and even searched the brothers' garbage for evidence. Their fingerprints showed up on the fake documents mailed to investors. The Mounties received vital assistance both from an FBI agent who was temporarily transferred to Canada to work on the case and from an OSC investigator who helped untangle the complex web of fraudulent stock transactions. "Without the strong team of investigators from the different agencies coming together and working so well," says Hannaford, "we would not have been able to make this case."
The Benlolos are just the tip of the corporate-crime iceberg. A much greater danger comes from the accounting fraud, earnings manipulations and outright theft from companies and shareholders in massive corporate scandals at Enron and WorldCom. When these companies imploded, they dragged down the entire stock market and proved that white-collar crime could jeopardize not just the pensions of individual investors, but the entire economy. "The Department of Finance came to us and asked, 'Could this happen in Canada? Is this a threat?'" says Superintendent John Sliter, who heads up the national IMET program, headquartered in Ottawa. "And the police said, 'Yes, it is a very real threat.'" In 2002, the feds agreed to set aside $120 million over four years to fund IMET. The program would radically alter how the RCMP investigates white-collar crime and how it manages its force nationwide.
Hannaford's Toronto IMET team is headquartered in a modern but non-descript office building in north Toronto. It looks less like a traditional cop shop and more like a boutique accounting firm. But make no mistake, the cops hope that any numbers crunched here will lead to criminal charges. And they've been busy so far. One of the office's three massive evidence rooms is already filled with documents related to a case. Affixed to the room's locked door is the note: "Project Nebula: Authorized Access Only." A bulletin board in the coffee room is filled with newspaper stories about recent corporate shenanigans involving Conrad Black, Nortel Networks' Frank Dunn and Martha Stewart. Just down the hall are two interview rooms. The "hard interview" room is a tiny windowless box furnished with a single Spartan table and hardback chairs; it's reserved for the grilling of suspects. The "soft interview" room is for co-operative witnesses and fraud victims--it's bright and airy, with a plush couch and comfortable chairs arranged around a coffee table. Both rooms are wired with tiny cameras and microphones. Hannaford's team might have only one minor arrest under its belt, but it is also investigating transactions between Toronto-based Royal Group Technologies (TSX: RYG) and a St. Kitts resort controlled by chairman Vic De Zen, as well as possible criminal behaviour at Nortel Networks (TSX: NT).
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