BCSC panel hears P.I. affair reads like a bad novel
2004-10-22 21:27 ET - Street Wire
Also Street Wire (C-NA) National Bank of Canada (The)
by Lee M. Webb
The British Columbia Securities Commission (BCSC) hearing into allegations against National Bank's Pacific International and several of its officers and directors continued as lawyer Mark Hilford moved further into his closing submissions on Oct. 20.
The BCSC lawyer picked up his review of the evidence of Pacific International vice-president Lawrence McQuid, a former RCMP officer and then head of the Vancouver Stock Exchange's (VSE) compliance department before joining the Vancouver-based brokerage firm in 1985.
Mr. Hilford's Oct. 20 presentation started at a section of his written submissions dealing with "red flags" and the flow of information to Pacific International's executive committee and directors.
The Ubiquity chain of events, as the BCSC lawyer has termed it, features prominently in Mr. Hilford's written submissions, as it did in his oral arguments.
To provide a brief overview, the Ubiquity group of accounts, opened in 1995, were handled by subsequently disgraced Pacific International broker Jean-Claude Hauchecorne.
It turned out that Phil Abramo, a reputed capo in the DeCavalcante crime family, and his associate Phil Gurian allegedly controlled the Ubiquity accounts.
Revelations regarding Pacific International's Ubiquity account began to surface in 1996 after $1.7-million was wired out of the account to an account in Hong Kong. Mr. Gurian accused Mr. Hauchecorne of looting the account.
Among other disturbing developments, Mr. Hauchecorne was reportedly roughed up in a New York hotel room by four men, one of them packing a gun and another wielding a lead pipe wrapped in a towel, who again accused him of stealing the $1.7-million. The Pacific International broker subsequently identified Mr. Abramo as one of his Drake Hotel visitors.
More disturbing revelations regarding the Pacific International Ubiquity accounts, alleged Mafia connections and Mr. Hauchecorne ensued.
In 1999, the VSE imposed on Mr. Hauchecorne a lifetime ban against acting as a broker, fined him $200,000 and ordered him to disgorge $95,000 in commissions. The BCSC subsequently booted him out of the industry entirely for 20 years.
A bad novel
Resuming his review of Mr. McQuid's evidence, Mr. Hilford said that the Pacific International director and former head of compliance had testified that he kept the executive committee apprised of matters he felt were important on a timely basis, but did not inform the committee of what he considered to be operational matters.
Mr. McQuid reportedly testified he did not typically inform the executive committee when the firm's clients were indicted and he did not have a policy in place to ensure that his fellow directors were informed when it was discovered that Pacific International clients had criminal or regulatory histories.
"That is, in staff's view, an extremely serious deficiency in the corporate governance structure at Pacific International," Mr. Hilford said. "When something happens like the New York hotel incident, when one of your top brokers is assaulted by the Mafia, that makes this type of information very important.
"Any other links between Pacific International and criminals becomes very important. And there should have been a system in place to pass on that information to the executive committee.
"There was not such a system. In fact, there was the exact opposite. There was a clearly defined policy that, in general, that type of information would not be passed on. It should have been."
The BCSC lawyer then reviewed the account opening documents for the Ubiquity group, which included the Ubiquity Holdings, First Nassau, Roddy Di Primo and Louis Metzer accounts opened in 1995.
All four accounts used a postal box in Nassau, Bahamas, for an address, the personal information forms for the authorized signatories were incomplete or blank and Mr. Gurian was the referral for three of the accounts.
By Jan. 16, 1996, Mr. McQuid had some concerns with respect to more $2-million that Pacific International was lending against Cellstar shares to the Ubiquity accounts.
According to Mr. Hilford, by March 20, 1996, there was an understanding at Pacific International that Mr. Gurian was acting as "some type of agent" for Ubiquity, as evidenced by a fax and a notation regarding a conversation with him with respect to account authorizations.
On March 21, Mr. McQuid faxed broker Mr. Hauchecorne to advise him that a $1.67-million loan against Cellstar shares and $825,360 outstanding short sales of Osicom shares in the Roddy Di Primo accounts should be reduced.
Less than a week later, the Pacific International compliance head informed the executive committee of concerns with the concentrations in the Ubiquity, Roddy Di Primo and Louis Metzer accounts.
On April 10 and 12, 1996, Pacific International sent wires of $500,000 each for a total of $1-million to a Ubiquity account in Hong Kong.
On April 15, Mr. McQuid received a telephone call from Mr. Gurian regarding certain Ubiquity transactions that raised the question as to whether orders on the account were being taken from him.
"Mr. Hauchecorne advised that Mr. Gurian, from time to time, has provided instructions on the account, however, those instructions are always verified with an authorized person prior to execution," Mr. McQuid wrote in a memo to file dated April 24.
Three days after Mr. McQuid received the telephone call from Mr. Gurian, Pacific International wired another $747,702 to a Honk Kong Ubiquity account, bringing the eight-day wire total to more than $1.7-million.
Mr. McQuid testified that he did not know whether he was aware of the April 18 wire prior to it being sent, but that he did not need to know about it, notwithstanding that he had received a call from Mr. Gurian regarding the account just three days earlier.
According to Mr. McQuid, his telephone conversation with Mr. Gurian had to do with trading, not money being improperly removed from the account.
"That is, in staff's view, typical of the attitude of Pacific International of rationalizing and drawing distinctions without merit so that one can then dismiss information -- the importance of information -- that you knew about, but didn't consider," Mr. Hilford argued.
In early May, Mr. Gurian called Pacific International again, speaking with someone identified as Mr. MacFarlane, and accused Mr. Hauchecorne of stealing $1.5-million from the Ubiquity account. Mr. Gurian called back the next day and told Mr. MacFarlane that a Canadian lawyer had been retained to prepare a lawsuit against the brokerage firm.
On May 23, Mr. McQuid fielded yet another call from Mr. Gurian, who again accused Mr. Hauchecorne of stealing $1.5-million from the Ubiquity account.
After receiving the call, Mr. McQuid reviewed the Ubiquity filed and noted discrepancies in the signature of Joy Cartwright, a signatory on the account.
"No further inquiries or actions will be taken unless requested by one or more of the clients or unless there are other facts to support making such inquiries," the Pacific International compliance head wrote in a June 20 memo to file about call from Mr. Gurian.
"And it's staff's submission that there were more than enough facts at this point for there to be additional inquiries," Mr. Hilford said. "You have a theft of $1.5-million. You have the changing signature.
"You have the general state of the account opening documents of the Ubiquity files, where there is missing information throughout the account opening documents. You have them all being P.O. boxes offshore in Nassau, no information as to what type of business any of these companies might do.
"So, there was a lot of questions at this point in time that should have been dealt with and should have been looked into and were not. And it's staff's view that Mr. McQuid was wrong when he did that."
On May 25, 1996, Mr. Hauchecorne was assaulted and threatened "by four Italian looking guys with weapons" in his room at the Drake Hotel in New York. The broker recognized two of his assailants as Mr. Gurian and a client that he knew as Mr. Metzer. (It was later discovered that Mr. Metzer was, in fact, Mr. Abramo.)
The assailants again accused Mr. Hauchecorne of stealing the money out of the Ubiquity accounts and threatened to kill him and his family if he did not return the money.
Mr. McQuid testified that Mr. Hauchecorne did not disclose this information to Pacific International until June 25 or 27, 1996.
Before the broker told Pacific International about the hotel incident, the firm received a June 22 fax demanding the return of the $1.7-million from lawyers representing Ubiquity.
At a June 25 executive committee meeting, it was decided that Calagary-based Mr. Hauchecorne should be summoned to Vancouver to discuss the matter.
Mr. McQuid testified that Mr. Hauchecorne met with Pacific International chief executive officer Max Meier on June 27 or 28 and for the first time related the New York hotel incident. The broker subsequently met with Mr. McQuid and told him the story.
When asked about his reaction to this news, Mr. McQuid testified that he was trying to be sympathetic to Mr. Hauchecorne, but at the same time he was "pretty darn annoyed at him" because he had been talking to him about Mr. Gurian since March and he felt that the broker was not providing the information that he needed to help him and protect Pacific International.
According to Mr. Hilford, Mr. Hauchecorne had been "actively concealing information" and the only reason he revealed it was that the letter the Ubiquity lawyers demanding the return of the $1.7-million forced him to "fess up."
On June 28, Pacific International lawyers interviewed Mr. Hauchecorne. That interview, summarized in a July 3 memorandum, revealed other information that the broker had not disclosed regarding Mr. Gurian.
Among other things, Mr. Hauchecorne reported that he had heard rumours from his New York contacts that the U.S. Securities and Exchange Commission (SEC) was investigating Mr. Gurian. He also heard that some New York brokers were being physically beaten up for shorting Cellstar and there were rumours that Osicom officials were being intimidated to sell cheap stock to unidentified individuals.
"Hauchecorne says he was of the opinion that where 'there is smoke there is fire' and that he had come to the conclusion that something was wrong; that this was no 'regular investment account,'" the summary noted.
Mr. McQuid testified that Mr. Hauchecorne had not previously advised him of any of that information. He also testified that he agreed with the broker's assessment that these were not regular investment accounts.
The summary of Mr. Hauchecorne's interview with Pacific International lawyers also contained some more information regarding the New York hotel incident. Among other things, Mr. Hauchecorne reported that one of four men who entered his hotel room had a gun visible under a nylon jacket and another carried a lead pipe wrapped in a towel.
Mr. Hilford then turned to Mr. McQuid's testimony regarding these matters.
"Now, Mr. McQuid, when you heard this, that someone had a gun, that there was a lead pipe wrapped in a towel, that they're accusing Hauchecorne of stealing the money, I assume it occurred to you that these fellows were members of organized crime," he was asked.
"Yes, it did," Mr. McQuid replied on April 29, 2003.
"And I'm sure you recall that question and answer," Mr. Hilford said to the panel. "There was no hesitation. Mr. McQuid didn't waffle around. He wasn't evasive. He didn't contort his face and have to think about it a long time. The answer was very forthright: Yes, it did."
The BCSC lawyer then turned to a follow up question he had posed on April 29, 2003.
"You knew, as soon as you heard it, as you have already said, that the people in the hotel room were members of the Mafia, correct," he had asked.
"Yes," Mr. McQuid replied.
Mr. Hilford offered his assessment of that testimony.
"No qualifications," Mr. Hilford said. "No waffling. 'Yes,' that was his answer. That's the evidence in this case.
"Contrast that evidence with the same type of questions when they were asked to Mr. Meier, who has exactly the same body of knowledge as Mr. McQuid in terms of what Hauchecorne revealed.
"It was like pulling teeth with Mr. Meier. Would not admit to the 'M' word. Wouldn't say 'Mafia.' Wouldn't admit to it. Got very frustrated with me with the questions I was asking him.
"Contrast that type of evidence to the forthright manner in which Mr. McQuid readily admitted: Yes, obviously I know this was organized crime and it was the Mafia.
"And in my submission, that is what any normal person would draw from what Mr. McQuid had heard. When you hear what happened to Hauchecorne in that hotel room, that is the obvious conclusion that any reasonable person would reach."
According to the evidence, both Mr. Hauchecorne and Mr. McQuid believed that Mr. Gurian received money from "mob" types.
"Okay; I mean, aren't you concerned that one of your top brokers apparently is mixed up with the Mafia," Mr. McQuid was asked on April 29, 2003.
"I, I am concerned about the allegation and I am concerned that he may have accounts that are effected -- connected with the Mafia," Mr. McQuid testified.
"Okay. And I take it upon hearing this news, and absorbing it, you must have been thinking in your mind, I have got to get to the bottom of this and figure out how one of my top brokers could have had clients, or at least people behind the scenes of the clients, who are mixed up with the Mafia?" the lawyer asked.
"Yes, I did," Mr. McQuid replied.
"Okay. I mean, you realized that it's a very dangerous situation to have Mafia individuals running accounts through your firm, correct?" Mr. Hilford asked.
"Of course," Mr. McQuid answered.
"Once again, Mr. McQuid giving very clear evidence on these points," Mr. Hilford told the panel on Oct. 20. "A lot clearer than some of the respondents who testified after him were on the same issues."
The BCSC lawyer then turned to some testimony regarding a July 11, 1996, executive committee meeting at which the major topic had been "getting information from Hauchecorne and dealing with the complaint," a reference to the demand from Ubiquity's lawyers for the return of $1.7-million.
"So, the majority of the conversation at this meeting is dealing with the issue, in my submission, of the potential $1.7-million lawsuit," Mr. Hilford said.
The BCSC lawyer moved to a discussion of a July 17, 1996, rush media, regulatory and CRD search on Mr. Gurian, partly because of the possibility that Pacific International would be facing a $1.7-million lawsuit.
"In other words, in my submission, Pacific International was doing a search on Gurian hoping that they would collect some dirt on a potential plaintiff who was going to sue them, perhaps, for $1.7-million," Mr. Hilford said. "The search was quite fruitful, as you know."
Indeed, the search indicated that Mr. Gurian had lost his licence under New Jersey consumer fraud law in 1977; was suspended by the National Association of Securities Dealers (NASD) in 1991; was the subject of a $25,000 arbitration award for manipulation and unauthorized trading in 1992; was a defendant in a lawsuit alleging various infractions of securities laws in 1993; was barred and fined $110,000 by NASD in 1995; and was linked to the collapse of Hanover Sterling and Adler Coleman in 1996.
Mr. McQuid testified that the search provided quite a bit of negative information about Mr. Gurian that called his credibility into question and could be helpful in any lawsuit against Pacific International.
Mr. Hilford agreed, but suggested that information was significant for other reasons.
"It also showed that the connection between Pacific International and Mr. Gurian was a disturbing connection, or should have been a disturbing connection to Pacific International," Mr. Hilford said.
"They should have been worried about it not just because there was going to maybe be a $1.7-million lawsuit against us, but they also should have been worried about it because what's going on here with our firm?" the lawyer continued. "Why is one of our top brokers mixed up with someone like Gurian?"
On Aug. 12, 1996, Mr. McQuid learned that an individual named Ferdi Gerhardt had been paid $10,000 to open the Hong Kong Ubiquity account that received the $1.7-million in wire transfers from Pacific International. Mr. Gerhardt was subsequently arrested.
During the hearing, Mr. McQuid testified that it struck him as odd that someone would be paid $10,000 to open a bank account.
"I imagine it made you think that somehow this is, that this, this money is involved in organized crime?" he was asked on April 29, 2003.
"Well, I, I, think I knew by that time, and I think I testified to, to, to that, that by this time, I, I, I felt that from the information that I had learned that, that, that, that Gurian and, and the people around him were involved in organized crime," Mr. McQuid testified.
On Aug. 13, 1996, Mr. McQuid learned that the RCMP were looking for someone named Hans Jorg Schneeberger, who had paid Mr. Gerhardt $10,000 to open the Ubiquity bank account in Hong Kong.
Mr. McQuid subsequently discovered, to his concern, that Mr. Schneeberger had an account and two related corporate accounts at Pacific International. He updated the executive committee about the developments on the same day.
Mr. McQuid testified that the executive committee was interested in his progress in analyzing whether the firm had a problem with a broker taking money from an account as well as his progress in getting the money back.
"Did anybody seem to be interested in how extensive the Mafia infiltration was into accounts at Pacific International?" Mr. McQuid was asked on April 29, 2003.
"That, that was, that was not discussed," Mr. McQuid testified. "They were very interested and very concerned about this matter and, and what we were doing about it."
According to Mr. Hilford, the executive committee should also have been concerned about the connections to organized crime.
"Now, at this meeting, it's not even discussed, the Mafia, the growing, in my submission, growing connections between Pacific International and organized crime," Mr. Hilford said.
On Aug. 14, 1996, Mr. Gurian called Mr. Hauchecorne in the middle of the night at his home and again threatened him. Reportedly shaken by the incident, Mr. Hauchecorne called Mr. McQuid at 6 a.m. to tell him about it. Mr. McQuid relayed that information to Mr. Meier.
In mid August, Mr. McQuid flew to Calgary and had dinner with Mr. Hauchecorne. During the course of the emotional dinner in which the broker reportedly broke down and cried, Mr. McQuid questioned him about whether he had any other accounts that might be linked to organized crime.
Mr. McQuid was questioned about the dinner meeting during the hearing.
"Okay. The, you realize there is a, the four accounts you have mentioned have a connection to organized crime near the end of June of '96, correct?" he was asked on April 29, 2003.
"Yes," Mr. McQuid replied.
"And we're in roughly the middle of August of '96 and this is the first time that you are asking him whether there is any other similar accounts, correct?" the lawyer asked.
"I believe it is, yes," Mr. McQuid said.
"Okay; and he told you, no, he didn't think there were any other similar accounts, correct?" the lawyer queried.
"Words to that effect, yes," Mr. McQuid answered.
"Yes. And you accepted his word on that matter, correct?" the BCSC lawyer continued. "I did, yes," Mr. McQuid said.
"So, I take it you are agreeing with me that he has exercised some pretty poor judgment to get himself into that position where he is in a hotel room in New York being assaulted and threatened by the Mafia, correct?" he was later asked.
"I don't disagree with that," said Mr. McQuid.
Further into his review of the evidence, Mr. Hilford came to a discussion of the possibility that there would be a $400,000 shortfall in the recovery of the $1.7-million that had been wired from the Ubiquity account.
Mr. McQuid testified that it was is understanding that in addition to the $10,000 that had been paid to Mr. Gerhardt to open the Hong Kong account, Mr. Schneeberger had charged fees totalling $390,000 to move the money around. He also testified that he thought that was an exorbitant fee and suspected that Mr. Schneeberger was involved in something illegal.
"Right. Do you agree with this, it would appear from all the information that you are acquiring through your ongoing investigation that one group of criminals, and I'm going to use that word loosely, colloquially, one group of criminals, Schneeberger and Gerhardt and whoever else was involved in that group, may have stolen the money from another group of criminals, Gurian, Abramo and his group?" the BCSC lawyer asked on April 30, 2003.
"Yes," Mr. McQuid replied.
"That is tremendously disturbing," Mr. Hilford remarked on Oct. 20. "I mean, how can it get any more disturbing than this?
"If you are a director of a -- of a brokerage firm in a regulated industry with gatekeeper responsibilities -- first you have the horrible New York hotel incident, which is bad enough in and of itself, and then you look into it.
"And as you look into it, things get worse and worse and worse as you find out about other fellows, Gerhardt and Schneeberger and connections to your firm, and it appears that one group of clients or near clients has stolen money from another group of clients.
"I mean, this is really as big a red flag as one could dream up. I mean, if this isn't going to get the attention of a director of a brokerage firm, what is? This is serious stuff.
"It's -- it's practically unbelievable that this actually happened, that this isn't really a script from a, from a bad movie or a bad novel.
"But this is what happened. This is the information that came to light. The directors knew all about this and yet it didn't seem to take hold.
"Not a single one of them, after finding all of this stuff out, says to Mr. McQuid: You know, you better keep me informed of any future connections between my firm and organized crime or criminals because I'm really worried about this. This is very disturbing. Please keep me up to date. Not a single one of them does that.
"And there are more things that happen as time unfolds, and the very next entry here is yet another problem between Pacific International clients and criminality, but they all, all of the directors manage to remain ignorant of the information because none of them have taken enough interest in the connections between their firm and organized crime.
"They're very interested about the $1.7-million. Why aren't they also equally interested in these disturbing connections between their firm and organized crime?
"This -- that is the -- the biggest red flag one could ever dream up and yet it didn't take hold.
"They -- they didn't get it. It just didn't seem important enough. And because it didn't take hold, everything else unfolds the way it unfolded."
Mr. Hilford then turned to some of the events that subsequently unfolded.
On Oct. 9, 1996, a group identified as Badger, Langley and Larder were charged with criminal conspiracy to commit securities fraud. Mr. McQuid testified that Badger, Langley and Larder had five accounts and Pacific International and were all clients of Michael Patterson and Dirk Rachfall.
According to Mr. Hilford, this news was not passed on to the Pacific International directors.
"It didn't go to the directors because Mr. McQuid didn't think it was important enough, but also because the directors didn't think it was important enough," Mr. Hilford said. "You can't blame this all on Mr. McQuid."
In November of 1996, the FBI called Mr. McQuid enquiring whether Pacific International had traded a stock called Globus. He looked into the matter and found that four accounts -- Della, Kowalski, Leeward Cove and Virgo Bay -- had traded the stock. Leigh Ivancoe was the broker for all four accounts.
On Dec. 2, 1996, Mr. McQuid received a U.S. subpoena from the Assistant U.S. Attorney for Brooklyn in relation to Globus.
On Dec. 16, 1996, Mr. Hauchecorne called Mr. McQuid after reading a BusinessWeek article with a picture of alleged DeCavalcante capo Mr. Abramo. It was the same man Mr. Hauchecorne knew as his client Mr. Metzer.
According to Mr. Hilford, apart from Mr. McQuid, the executive committee showed no interest in the article, which dealt with Mafia infiltration into Wall Street and the securities industry.
"So, obviously Mr. McQuid did think this article was important," Mr. Hilford said. "Now, others on the executive committee obviously did not think this article was important."
Not all of the news was bad, however. On March 7, 1996, Pacific International received a $1.36-million wire with respect to the Ubiquity affair. Another $400,000 was received on April 15 and, upon returning the money, the Ubiquity litigation against Pacific International was dropped.
Mr. Hilford said that Mr. McQuid did a fantastic job in getting the money back, but little was done about other important matters.
"The money is missing; it's important," Mr. Hilford said. "P.I. should have taken steps to get it back and they did, and Mr. McQuid did a fantastic job in that regard.
"But there is another equally important issue and that is the connections between Pacific International and organized crime, and what's going to be done about that? What's going to be done about reducing this risk?
"And the fact is that nothing is done about that until they get all the money back."
A short time later, Mr. Hilford came to the end of his review of Mr. McQuid's evidence.
Stockwatch will cover Mr. Hilford's submissions regarding Mr. Meier's evidence in a following article.
The hearing continues.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding the closing arguments is available in Stockwatch articles dated Oct. 19, 20 and 21, 2004.) |
