BCSC kicks off Pacific International hearing
2002-10-07 17:43 PT - Street Wire
by Brent Mudry
The British Columbia Securities Commission's landmark hearing into controversial Vancouver brokerage Pacific International Securities kicked off with several legal fireworks Monday: an ill-fated bid by brokerage lawyer Don Sorochan to blame the commission, not his client, for failing to stem the constant stream of dirty clients to the brokerage, and a bid by colleague Mark Skwarok, lawyer for Pacific International's officers and directors, to reject a late paper dump of 22-1/2 boxes of previously undisclosed evidence from commission staff.
The hearing kickoff was capped off with the BCSC's revelation that four years ago, a Pacific International director tipped off client Barry Bampton, a key target in a probe of stock manipulation which left Royal Bank of Canada with $2-million in rubber cheques, that he was under investigation by the BCSC. Mr. Sorochan responded by stressing that there was absolutely nothing illegal or improper with PI director Robert Herbert (Bob) Blades tipping Mr. Bampton off to the commission's secret and confidential production order.
In an application just before the hearing opened, Mr. Sorochan sought to interrogate the commission about its response actions to almost 600 investigative assistance requests it received from the United States Securities and Exchange Commission over a 10-year period, including 34 specific requests. Mr. Sorochan suggested he might want to call as witnesses former BCSC senior officials Michael Watson and Paul Bourque, now with the Ontario Securities Commission, or even current BCSC enforcement director Sasha Angus, the lead prosecutor in the hearing.
This "YBM Magnex defence" mirrors a high-profiled unrelated Ontario Securities Commission case, in which the officers and directors of YBM Magnex International, the only alleged pure play on Russian money laundering listed on the Toronto Stock Exchange, blame OSC officials for failing to shut down YBM earlier.
Hearing chairwoman Adrienne Salvail-Lopez dismissed Mr. Sorochan's bid as "irrelevant" to the Pacific International hearing. Ms. Salvail-Lopez similarly dismissed a 23-page document by Mr. Sorochan in which the brokerage unwittingly reveals far more unflattering details about its intriguing clients than currently exists on the public record.
After an extensive two-year investigation, the BCSC launched its prosecution against Pacific International on July 10, 2001, with a notice of hearing alleging the brokerage attracted far more than its Howe Street share of stock crooks, accommodated numerous securities violators and felons, including Sholam Weiss, recently extradited from Austria to Florida after fleeing an 845-year prison sentence, did too little to review their trading and failed to kick them out or take other reasonable steps to protect the public.
The respondents included nine officers or directors of Pacific International, led by chairman Max Meier, former compliance officer Larry McQuid and German Carriere, the president and chief operating officer of parent National Bank Financial.
Mr. Carriere settled with the BCSC on Sept. 6, agreeing to a $5,000 fine and several admissions. "Carrieere acknowledges that based on events that took place while he was a member of the executive committee, he became aware of certain deficiencies in Pacific International's compliance procedures with respect to trading which took place in the U.S. market for non-resident clients, specifically the Over-the-Counter Bulletin Board run by the National Association of Securities Dealers," states the settlement agreement. Carriere acknowledges that the deficiencies in the compliance procedures and some of the trading that took place at Pacific International harmed the reputation of the capital markets in British Columbia."
In a last-minute resolution reached Friday, the BCSC also dropped its case against Theresa Mary Sheehan, a broker at PI since 1991, a director since 1993 and a vice-president of the brokerage since August, 1997. The terms of her stay, which is a formal settlement, have not yet been publicized, but are believed to be dominated by a warning letter from the BCSC to Ms. Sheehan.
The opening fireworks dominated the entire first day of the hearing, effectively pre-empting Mr. Angus's opening submissions, which are now expected Tuesday.
Defence counsel Mr. Skwarok and Mr. Sorochan argued strenuously that an alleged pattern of disclosure deficiencies by commission staff has made it difficult, if not impossible, for them to properly prepare their defence strategy. (While the BCSC has not amended its original notice of hearing, discovery correspondence between both sides in the past years suggests the regulator's case is much broader than originally detailed.)
Mr. Skwarok takes particular issue with 22-1/2 additional boxes of commission documents suddenly discovered since July, the BCSC doubling its hearing evidence documents from 658 on Sept. 16 to 1,100 on Sept. 30, just one week before the hearing launch, and the commission's evolving and incomplete witness list, with too little disclosure of what the witnesses are expected to say. "The case has doubled in size two weeks before the commencement of the hearing. How can that possibly be considered fair?" Mr. Skwarok asked the panel.
The only notable witnesses discussed at the hearing so far are the commission's designated investigator, as David Zwarich was suddenly dropped from the witness list, a former Vancouver Stock Exchange official, who will testify about client background checks and other due diligence procedures, an expert industry witness, and an official of the National Association of Securities Dealers, expected to testify in November about short-selling matters, credit procedures and stock distribution.
Mr. Skwarok told the hearing that commission staff have expanded the case far beyond the original notice of hearing and he seeks an order that staff only be permitted to prove allegations particularized in a decision this spring, dated Feb. 1.
"Staff have been engaged in a protracted" disclosure process, resulting in "a complete denial of the respondents' rights," stated Mr. Skwarok. "I am not suggesting staff acted maliciously or with a specific motive, but motive is irrelevant."
Mr. Skwarok complained that since a Sept. 16 deadline, commission staff have continued with an "ongoing process of new disclosures and new documents." "As recently as yesterday staff was advising respondents of new evidence." The defence lawyer argued that the only way that fairness can be achieved is if recent BCSC staff disclosures are excluded from the hearing.
Mr. Skwarok also called for an order prohibiting BCSC staff from calling any witnesses to testify at the hearing. "I notice some eyebrows raised," stated the defence lawyer, who says the respondents have asked for witness lists and "what they will say" outlines for months, but these have been delayed until the respondents won an order compelling this disclosure on Sept. 16.
After Mr. Skwarok completed his application arguments, his colleague Mr. Sorochan picked up the torch.
"We have never ever had an acceptable explanation of how 22-1/2 boxes were missed," stated Mr. Sorochan. "What are they (commission staff) going to do at this hearing? I haven't the slightest idea." Mr. Sorochan argued that the BCSC cannot broaden its case, especially so close to the start of the hearing. "This is the most egregious type of ambush," he stated in an indignant tone.
"They were happy with those (original) allegations when they published them with great fanfare." Mr. Sorochan strongly implored the hearing panel to rein in commission staff and make them stick to their original notice of hearing and established disclosure requirements. "They think they can do what they want because you'll let them. You have to stop them." Mr. Sorochan also alleged that Mr. Angus and his staff are "playing fast and loose" with proper procedure. "You shouldn't let them get away with it," he argued.
bmudry@stockwatch.com |
