OT(?)
June 27, 2000
Bank suspends four at RT
Funds demand answers on pension scandal: Royal, OSC in settlement talks to decide penalties, disclosure
Theresa Tedesco, Chief Business Correspondent and Susan Heinrich, with files from Kim Hanson
National Post
Four senior employees of Royal Bank of Canada's pension investment arm under investigation for alleged stock manipulation were suspended by the bank yesterday as a handful of high-powered pension fund clients began demanding answers.
Peter Larkin, a senior vice-president and chief strategist at RT Capital Management Inc., Gary Baker, a vice-president, and Patrick Shea and Marion Gillespie, two senior equity traders at the pension and institutional asset investment arm, were removed from their duties with pay pending the outcome of an extensive probe by the Ontario Securities Commission and the Toronto Stock Exchange. Sources told the National Post the regulators are expected to take disciplinary action against a number of fund managers and traders as early as Thursday.
William M. Mercer, a management consulting firm in Toronto, is conducting "a formal review process" of RT Capital on behalf of a number of clients who have money managed by the Royal's pension investment arm. "We want to know how isolated or widespread the issue was, who was involved and what their plans are going forward in terms of the team and those issues," said Barry McInerney, the firm's head of the investment consulting practice.
An internal review by Royal's own lawyers and auditors concluded that "violations took place," said David Moorcroft, a spokesman for the bank. "However, until we get confirmation from the OSC that they agree with our evaluation and can confirm the same number of violations took place on the same day, by the same people and what the appropriate punishment should be for that, we're not going any further than the suspensions."
Sources say officials at the highest levels of Royal Bank, Canada's second largest by assets, are anxious to resolve the gathering controversy engulfing its wealth management business as quickly as possible. The bank's lawyers began settlement discussions with the OSC yesterday.
"We want to get the message out to the marketplace and to our clients that we have no tolerance for this type of behaviour," Mr. Moorcroft said.
Lawyers representing Messrs. Larkin, Baker, Shea and Ms. Gillespie have also been in settlement talks with the provincial watchdog. Yesterday, Mr. Larkin said only, "I cannot comment on anything."
Meanwhile, RT Capital and Royal Bank have been inundated with enquiries from pension customers, many of whom say they are considering taking their multimillion-dollar business elsewhere.
"We would like to see what stocks were involved, what volumes were involved, what type of price impact that had and the the performance impact overall," explained the administrator of a large RT Capital pension client who asked not to be named.
At the same time, the RT Capital scandal has prompted Mercer to re-examine the compliance practices at other pension managers. "We don't know how widespread this is in the industry. It's difficult to think it's an isolated case," Mr. McInerney said.
Another consulting firm, Frank Russell Co., confirmed it too is conducting a review of RT Capital. "We are definitely investigating this situation," said Tania Hrebicek, a spokeswoman for the Toronto-based company. "We certainly are concerned ...[because] this [RT Capital] has been a manager that we have dealt with for many years."
Last week, National Post first reported regulators are probing the trading practices of at least a dozen Bay Street traders in connection with trades by RT Capital for possible breaches of the province's securities laws and TSE bylaws.
RT Capital, which is the third-largest institutional money manager in Canada with $28-bilion in assets under management, is the main target of the probe. In a stunning admission late last week, Royal Bank confirmed the four employees artificially inflated the price of 26 stocks during an eight-day trading period between Oct. 30, 1998 and March 31, 1999.
As part of the same review, the OSC delivered letters to Reay Mackay, a vice-chairman of Royal Bank in charge of the bank's wealth management division; Michael Edwards, chairman of RT Capital and former governor of the TSE; Timothy Griffin president ofRT Capital; and Peter Rodriguez, a senior compliance officer at the money manager. The provincial watchdog is examining whether they properly supervised and monitored the activities of the fund managers and traders.
The provincial watchdog has been examining whether stock prices were manipulated to improve the performance of investment funds using a trading practice called "high closing." The technique attempts to artificially boost the closing price of a stock at the end of the trading day and is considered by securities regulators to be a form of stock manipulation.
If the OSC's allegations of high-close trading are borne out, thousands of Canadian investors may have overpaid for stocks, or may find their investments are overvalued.
If there is an admission to taking actions contrary to the public interest according to the provincial securities act, the four RT portfolio managers and traders could be stripped of their registration and their ability to trade securities in Ontario. Fines from the TSE range from $1,000 to $50,000 and suspensions from 30 days to six months.
Many RT Capital clients are looking to consultants and outside advisors who monitor pension managers, to help them assess the situation. So far, many say they are frustrated because Royal bank is handling their enquiries. "The responses are coming in from the Royal Bank," said Mr. McInerney. "We want to hear directly from RT Capital exactly what the situation is," he said.
Others are taking to informing their employees as they learned what impact the stock manipulation would have on their pension assets.
Canadian Airlines International Ltd. said yesterday it was sending a letter to all of its employees this week explaining that RT Capital had already reassured Canadian that the exposure of its pension plan to those trades was not an issue. In the case of Canadian, RT Capital manages only about $3-million of the company's $2.3-billion pension.
"We're in touch with RT Capital and that is our preliminary assessment, that those funds are not impacted by the investigation. But we intend to watch the investigation closely," said Renee Smith-Valade, a spokesperson for Canadian.
For now, Canadian is taking no other action she said.
Several other clients of RT Capital who were contacted yesterday would not discuss any action they might be considering in the wake of the allegations. IBM Canada Ltd., DaimlerChrysler Canada Inc., Carleton University and Nabisco Ltd. were among those that declined to comment.
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