Ex-Yorkton trader gets 15-year ban OSC decision seen as stern warning for brokerages
Sinclair Stewart
Financial Post
Friday, September 13, 2002
National Post
Piergiorgio Donnini, pictured at his Port Elgin, Ont., bar and grill on Wednesday, says he is "outraged and disgusted" by the OSC's decision.
The Ontario Securities Commission has effectively ended the Bay Street career of former Yorkton Securities Inc. head trader Piergiorgio Donnini, suspending him from the securities industry for 15 years in one of the stiffest rulings on illegal insider trading.
The decision, rendered yesterday by a three-member panel of the OSC, also includes a 15-year trading ban, and is expected to serve as a stern warning to brokerage firms about the hazards of conversing across the so-called Chinese wall separating investment banking executives from traders.
Mr. Donnini, who will be allowed to continue trading in his personal accounts, is also barred from serving as a director or officer of any registrant for 15 years and has been ordered to pay $186,000 in OSC costs.
Paul Moore, who chaired the panel, said the lengthy suspensions were necessary for "protective and preventive purposes," promising they would deter would-be offenders and provide a lift to investor confidence, which has plunged recently amidst numerous scandals in the United States.
"The 15-year period is appropriate to keep Donnini out of the securities industry and unable to repeat his conduct for most of his remaining years," he said, reading from a written decision.
Mr. Donnini, who has largely refused to speak about the case since hearings began in May, broke his lengthy silence after the verdict and accused the securities watchdog of "abusing its powers" to polish its image as an enforcer.
"I'm outraged and disgusted by the decision," he told a group of reporters, adding his career in the industry was finished. "I think they chose to ignore evidence and serve their own public relations goals on the back of a weak case, to say the least. I'm sorry that they decided this was the opportunity for them to make law on the basis of very little and I think this serves as a warning that the Commission is willing to abuse its powers."
He added it would be "dangerous" to expand the jurisdiction of the OSC, although he said he had no plans to contest the ruling in court.
Two of the three panel members, Mr. Moore and Kerry Adams, ruled in June that Mr. Donnini possessed confidential information when he traded more than 500,000 shares of Kasten Chase Applied Research Ltd. in February, 2000, following a brief discussion with his boss, former Yorkton chief executive Scott Paterson. Mr. Paterson agreed to pay $1-million and be suspended for two years as part of a settlement agreement with the OSC in December that he engaged in conduct contrary to the public interest.
A third commissioner, Harold Hands, said he was not convinced Mr. Donnini knew, or should have known, that his conversation with Mr. Paterson about a possible $10-million financing for the high-technology company was a material fact. In his written decision, Mr. Hands , who noted there should be a higher burden of proof on staff of the Commission to prove insider trading, said it was "not necessary" for him to determine what sanctions and penalties Mr. Donnini should have received for acting contrary to the public interest, since a majority of the panel already found the trader guilty of trading on privileged information.
In June, immediately after the OSC had ruled Mr. Donnini committed insider trading, enforcement staff of the Commission pronounced it would send a strong message to the brokerage business about the dangers of investment bankers discussing possible deals with traders. Mr. Donnini had testified it was common practice for Mr. Paterson to seek his opinion on the market's appetite for various financings -- so common, in fact, that he thought the Kasten Chase conversation was perfunctory.
The severity of yesterday's penalties, however, will send a chill down Bay Street, predicted Joseph Groia, a former enforcement executive at the OSC who now runs his own securities practice.
"What's happened to Donnini today is, from the standpoint of someone of his age, and from the standpoint of the street, a staggering result," he said, noting that in the past Mr. Donnini's conduct would likely have resulted in a 'short sharp' sentence. "I know from my review of that record that even if, as they concluded, he made a mistake, to give him what amounts to the death sentence seems excessive, and seems inordinate...to the Commission's cases in the past."
Yorkton and a handful of senior executives, including Mr. Paterson, paid a combined $2.6-million in costs and penalties to settle myriad allegations of improper dealings arising out of an 18-month investigation by regulators.
Lawyers for Mr. Donnini argued that penalties against Mr. Paterson should serve as a yardstick for the panel's decision, but Mr. Moore rejected that argument.
He said the panel found the cases "very different in degree and nature," and said the OSC settlements struck with Mr. Paterson and Yorkton are "not of much relevance" for the ruling against Mr. Donnini.
sstewart@nationalpost.com
OSC decided that my career was over
Piergiorgio Donnini
Financial Post
Friday, September 13, 2002
National Post
Piergiorgio Donnini, in his bar in Port Elgin, Ont., says a 15-year securities industry ban the OSC was seeking against him is equivalent to a life-long prison sentence for letting the time expire on a parking meter.
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My year-and-a-half ordeal with the Ontario Securities Commission has finally come to an end. Now that the case against me has concluded -- and the commission has deprived me of the only profession I have ever known -- I feel compelled to write this article.
I want to warn the public and my friends and former colleagues in the securities business about how the industry is really being regulated. And more importantly, I want to leave a written, published record for my young daughters, so that one day, when they are old enough to understand, they can read this and realize their dad wasn't such a bad guy
I first came under the scrutiny of the OSC during its investigations of my former employer, Yorkton Securities Inc. The commission believed some improprieties had occurred on or about Feb. 29, 2000, relating to trading in Kasten Chase Applied Research Ltd. -- I only learned of the possible problem when I left Yorkton on April 5, 2001. I had been unhappy at Yorkton for quite some time and in early January of that year I began voicing my disapproval to Rod Sim, now Yorkton's chairman, as well as others at the firm.
I believed that the OSC's concerns with Scott Paterson, Yorkton's chief executive, could ultimately ruin our company, and that it was best for Scott to step aside and only return to Yorkton after his regulatory issues were resolved.
When it became clear that no one was going to act on my advice, I felt I had no choice but to protect what amounted to almost all my personal assets -- my shares in the company. Along with six others, I asked Yorkton to return to me a portion of my investment in the firm. In response, I was fired.
In July, 2001, I negotiated my return to Bay Street and agreed to a position at Canaccord Capital Corp, whose head office is in Vancouver. However, the Investment Dealers Association, on instructions from the OSC, would not transfer my registration pending an investigation into conduct at Yorkton. This stunned me, so I contacted the OSC to find out what was going on. They refused to answer any questions on the matter.
The following month, I had my first interview with commission staff about Kasten Chase. I answered all their questions about a financing deal that Yorkton had arranged for the technology company in March, 2000.
I steadfastly maintained that I had no prior knowledge that a financing deal had been struck. And, until then, it was the opinion of my counsel, Robert Staley, (provided for me by Yorkton), that I had nothing to worry about. This was affirmed by an internal report Mr. Staley prepared on the Kasten Chase matter, in which he interviewed myself, Mr. Paterson, and Mark McQueen, an investment banker at the firm.
But everything changed in October, 2001, when the OSC interviewed Mr. McQueen. In that interview, Mr. McQueen told staff at the OSC that he was present during a conversation between myself and Mr. Paterson, in which I received the details of the financing deal with Kasten Chase, a stock in which I was actively trading.
On Dec. 14, 2001, I was called to the OSC offices, along with my new lawyers, Alan Lenczner and Colin Stevenson. At that meeting, the commission's staff said I had acted contrary to the public good. They proposed a five-year suspension for this and asked if we could give them a response by Monday. We believed the charges were ludicrous and chose not to respond.
At the same time, commission staff were negotiating settlement deals with Mr. Paterson, Yorkton, and a few others at the firm. In fact, they cut deals with everyone except me. Soon after, I and my lawyers decided that, despite the fact I had not acted improperly and had no reason to settle on any penalty, the most pragmatic approach may have been to strike our own deal. So, for the sake of getting on with my life, we proposed a one-year suspension less time already "served." Our logic, believing in proportionality, was that if Mr. Paterson deserved the two-year suspension that had been handed down that month, it seemed more than fair that one year for myself was appropriate. However, the OSC was adamant that the suspension be at least two years, and they let me have a nice Christmas to think about it.
By early January this year, commission staff were still not willing to budge, and my counsel were not even allowed to speak with the decision-makers. As a result, we asked for a hearing date. That was a decision I felt good about. I was certain a hearing to air all the facts would finally exonerate me and allow me to get my career back on track. Little did I know that the OSC didn't care about fairness and impartiality.
In fact, I believe the instant I chose to defend myself against the allegations, the OSC made the decision that my career was over.
A problem for the commission was that they had a very weak case against me. To try to bolster their case, they reinterviewed Michael Milligan, Kasten Chase's chief financial officer, as well as Mr. McQueen. Mr. Milligan repeated his previous testimony. He and I were alleged by the OSC to have talked about the deal twice on Feb. 29, but he definitively stated that we did not discuss any deal. Also, he was very clear in his testimony, as he was at my hearing, that at the close of business on Feb. 29, Kasten Chase did not have any of the elements of a deal negotiated with Yorkton.
Mr. McQueen repeated his testimony to staff about the three minute conversation between Mr. Paterson and myself, which he witnessed. In response to further questioning by OSC counsel, he added that during a debriefing with his boss, Brian Campbell, the following day, Mr. Campbell had expressed concerns about possible insider trading. Mr. McQueen told staff he had wondered about that, too.
Having collected their testimony, my five-day hearing finally took place in mid-May. Over a year after my ordeal began, I was relieved that I finally had the opportunity to tell my story to an unbiased panel of adjudicators in a public forum.
Unfortunately, only a few minutes into the hearing I realized how wrong my expectations were. OSC staff -- the prosecutors of my case -- began by reminding the OSC commissioners -- the judges of the case -- that even if they found no wrong doing, it was in the OSC's power to sanction me for conduct contrary to the public interest.
Reading their written decision dated June 12, 2002, I can only conclude that the OSC was determined to make an example of me.
They chose not to view events in context, lacking the perspective needed to allow the public to really understand what happened. They ignored many crucial facts that didn't fit with their agenda, and even allowed for factual errors to help them rationalize their decision. Consider the following:
- The commissioners state that Mr. Milligan told me about a financing on the morning of Feb. 29. That is contrary to Mr. Milligan's testimony. He called me, introduced himself, and then asked me about some generic definitions and some market info -- nothing about a financing deal.
- The commissioners state I knew the fundamentals of Kasten Chase as a company, also not true.
- They state that I was of the opinion that a financing could be done. I don't recall saying that, let alone thinking that.
Among other examples of how they misinterpreted and/or ignored facts and statements to suit their purposes:
- They did not take into account how Mr. Paterson was a pure deal maker who often made up the terms of deals and afterward tried to sell them to companies. The commission ignored my statements that I had heard investment bankers and Mr. Paterson in particular "fantasize" about potential deals thousands of times over the years, and that I rarely, if ever, gave those conversations any weight until I saw proof.
- It was never acknowledged by staff that if Mr. Milligan did not know the details of a deal on Feb. 29, it was impossible for Mr. Paterson to know. Obviously, it was also impossible for me to know.
The commission noted that "although the final size, price and other terms were not finalized until midday on March 1, the second financing discussions between senior reps of KCA [Kasten Chase] and Yorkton were sufficiently advanced that these discussions were material having heard the probability of the financing proceeding." However, anyone with any experience in a financing negotiation knows that there's no deal when there is no price, no size, no terms, no bought deal letter, no board meeting, and no bought deal committee meeting.
Furthermore, it was ignored that two investment bankers (Mr. Paterson and Mr. McQueen) present in the conversation did not think it necessary to put the stock on the restricted list, let alone the grey list, despite knowing I was an active trader in Kasten Chase at the time.
Quite simply, the totality of the evidence was not taken into account. But even still, I deep down believed that a sense of proportionality would ultimately determine my outcome. If they felt it was appropriate to settle with Mr. Paterson by giving him a two-year suspension and securing a $1-million "voluntary payment" from him, surely something significantly less than that was appropriate for me. After all, he had four allegations against him of which at least two could be considered to have personally benefited him, whereas staff acknowledged that my alleged offence benefited neither me nor the firm.
The commission now expects all the professionals in this industry to make accurate assessments each time they have brief exchanges with their colleagues. This was not the real world until after my hearing. Should I have "asked the question?" Well, with the benefit of hindsight yes, of course. But it's difficult for me to understand how anyone can believe my punishment fits my supposed "crime." It's the equivalent of sentencing someone to a lifetime in prison for having the time expire on a parking meter.
The most hurtful and offensive aspect of my experience was that Paul Moore, the lead commissioner on a three-member panel, found it necessary to state that I had shown no remorse for what I had done, and worse, that I was not a credible witness. On the matter of remorse, the OSC was supposed only to be determining whether I had acted contrary to the Securities Act, not whether I was remorseful. But more importantly, how could any reasonable person expect me to show contrition when I fiercely believe I have done nothing wrong? All I did was defend myself against ridiculous charges. What was I supposed to do, say to Mr. Moore: "I didn't do it but I'd better please you anyway and say I'm sorry?"
As for not being a credible witness, that boggles my mind. I have said all along that I don't recall the conversation at the heart of this case. Is it an offence to not remember conversations? The three-minute conversation in which I was supposedly involved would have been one of hundreds like it I used to have all the time. Unlike my brief exchange with Mr. Milligan, which stood out because I had never spoken to the man before, I had no reason to remember the other conversation because I had so many like that they lost their importance with me. And keep in mind the staff's trading evidence clearly shows that I did not change my pattern of trading after obtaining such supposedly valuable information.
I personally did not benefit from any supposed actions taken, nor did Yorkton. But who did benefit? The shareholders and employees of Kasten Chase benefited since the additional funds strengthened the company. In fact, the share price appreciated. The key insiders at Kasten Chase benefited since they were able to sell 3.5 million shares on the back of a stronger share price at least partly attributable to the additional funds the company received. Talk about public good.
What did I get? A ruined career and a valuable lesson in how the securities industry is regulated.
If the OSC believes material information was discussed with me, why have they not addressed the following questions:
- Why did Mr. McQueen, if he thought something was so material, not raise it in the 36 hours following Feb. 29, and indeed waited for intense questioning by commission staff? Anyone familiar with securities regulation knows if you witness a conversation where you think insider information is disclosed, you have an obligation to say something or do something about it, regardless of your position of seniority.
- Why did Mr. Paterson not put the stock on the restricted list and the grey list if he supposedly passed material non-disclosed information? If he or Mr. McQueen had put the stock on the grey list, my activities would have been noted and compliance would have told me to stop trading because something was up that I did not know.
The Securities Act states the task of the OSC is not to punish but to protect capital markets from future wrongdoing. Johanna Superina, the woman who headed the OSC case against me, clearly said it was important for the panel to "send a message." Unfortunately, I think that message is "if you choose to fight allegations against the OSC, we will ruin you." Do they really believe a 15-year suspension, is what is needed to prevent me from supposedly doing this again? Don't they think that what they have put me through has already made a lasting impression? With several people in positions to know so much more about any Kasten deal than myself, why does staff believe I deserve a penalty so much more severe than anyone else?
Illegal insider trading is a criminal offence. If, as Paul Moore stated, the commission takes it very seriously; if staff believes I deserve such a severe penalty; and if they believed they had such a strong case, why did they not lay criminal charges against me? Did they know that before a real court with real rules and real fairness and impartiality they would have lost?
I believe that the prime motivator for the OSC is public relations victories. The sad truth though is that since I now have nothing left to lose, I feel I can comment freely about the OSC. Many former colleagues and friends on Bay Street share my views but the resounding opinion is that if you speak out against the OSC, you become their target. They understand that if the Securities Act is interpreted very broadly and randomly, as it is by the OSC, then everyone on Bay Street may be guilty of some unknown infraction. It is unfortunate to say the least because the most qualified group to change and reform our regulator in Ontario is in fact Bay Street.
As a kid, I read a comic book called the Watchmen. It was about a group of vigilantes who fought crime. But because there were no real checks and balances against them, the Watchmen started to abuse their power and behave as though they were not accountable to anyone. The rallying cry against them came up through the streets and was often seen on alley walls, "Who watches the Watchmen?????"
I would welcome any feedback to my article. Feel free to e-mail me at pdonnini@rogers.com. |
