Phil Gurian and Phil Abramo Soveriegn's secret owners pay a visit to their broker
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On May 25, 1996, Hauchecorne learned who some of them were. While he was staying at the upscale Drake hotel in Manhattan, four men burst into his room and accosted him. One was a client he knew by name as Louis Metzer, although the two had never personally met. When “Metzer,” whom he described as a “big muscular guy,” burst into the room, Hauchecorne recognized him from a BusinessWeek photo as Philip Abramo, a high-ranking member of the Mafia. With Abramo was Philip Gurian, another mob-connected figure who placed dozens of orders with Hauchecorne to buy and sell US stocks, many of which had been identified by BusinessWeek as mob-manipulated stocks. Hauchecorne described the other two as “little Italian-looking guys” who served as hit men. One had a gun in his belt and the other was brandishing a steel bar. They demanded that Hauchecorne return $1.75 million he had transferred to Switzerland on the instructions of another Mafia operative, Eric Wynn, who had had a falling out with Abramo and Gurian. Otherwise, they would kill him. “I was scared shitless,” the baby-faced broker admitted. “I do a lot of sport stuff, bungee jumping and #### like this, and I have enjoyed that. But this is the first time where I knew, this is it, you’re lucky if you walk out of here.”
Later, in a more civil attempt to recover the funds, Gurian filed a statement of claim in Alberta Court of Queen’s Bench. The matter was eventually settled out of court, but it came to the attention of officials working for the Vancouver Stock Exchange, who cited Hauchecorne for failing to learn “the essential facts” of the accounts he was operating. In June 1999, a VSE hearing panel ruled the Pacific International broker had failed to make necessary inquiries to determine whom he was dealing with. Noting that Hauchecorne had worked in the investment business for 10 years, the panel concluded “he was sufficiently experienced to know that offshore companies could be used for illegal activities.” The panel suspended his broker’s licence for life, fined him $200,000, ordered him to disgorge $95,000 in illicit commissions and pay investigation and hearing costs. In assessing these penalties, the panel said there was no question that Hauchecorne’s misconduct deserved serious sanctions, but noted there were no similar precedents to serve as guidelines. “This case seems to us to be a unique one and stands alone,” it noted.
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Troubled waters
Pacific International is under the microscope of the BC Securities Commission, which alleges some of its officers and directors turned a blind eye to mob-related transactions
Vancouver stockbroker Jean Claude Hauchecorne, who worked at Pacific International Securities Inc. until mid-1999, had a charming personality, and his boyish looks made him the picture of innocence. As one colleague said, “You would never suspect him of doing anything wrong. He had a good sense of humor; it was hard not to get along with him.”
Hauchecorne was, however, a risk taker. He liked flying small planes and was an avid hang glider and bungee jumper. But even more dangerously, he didn’t care whom he dealt with. Born in Switzerland and fluent in four languages, the 41-year-old broker worked as a functionary in the classic Swiss tradition. He didn’t try to analyze stocks, and rarely recommended them. He was simply an order taker, who bought and sold on clients’ instructions. He didn’t always know who his clients were, nor did he bother to find out. He didn’t think it was his business or duty.
On May 25, 1996, Hauchecorne learned who some of them were. While he was staying at the upscale Drake hotel in Manhattan, four men burst into his room and accosted him. One was a client he knew by name as Louis Metzer, although the two had never personally met. When “Metzer,” whom he described as a “big muscular guy,” burst into the room, Hauchecorne recognized him from a BusinessWeek photo as Philip Abramo, a high-ranking member of the Mafia. With Abramo was Philip Gurian, another mob-connected figure who placed dozens of orders with Hauchecorne to buy and sell US stocks, many of which had been identified by BusinessWeek as mob-manipulated stocks. Hauchecorne described the other two as “little Italian-looking guys” who served as hit men. One had a gun in his belt and the other was brandishing a steel bar. They demanded that Hauchecorne return $1.75 million he had transferred to Switzerland on the instructions of another Mafia operative, Eric Wynn, who had had a falling out with Abramo and Gurian. Otherwise, they would kill him. “I was scared shitless,” the baby-faced broker admitted. “I do a lot of sport stuff, bungee jumping and #### like this, and I have enjoyed that. But this is the first time where I knew, this is it, you’re lucky if you walk out of here.”
Later, in a more civil attempt to recover the funds, Gurian filed a statement of claim in Alberta Court of Queen’s Bench. The matter was eventually settled out of court, but it came to the attention of officials working for the Vancouver Stock Exchange, who cited Hauchecorne for failing to learn “the essential facts” of the accounts he was operating. In June 1999, a VSE hearing panel ruled the Pacific International broker had failed to make necessary inquiries to determine whom he was dealing with. Noting that Hauchecorne had worked in the investment business for 10 years, the panel concluded “he was sufficiently experienced to know that offshore companies could be used for illegal activities.” The panel suspended his broker’s licence for life, fined him $200,000, ordered him to disgorge $95,000 in illicit commissions and pay investigation and hearing costs. In assessing these penalties, the panel said there was no question that Hauchecorne’s misconduct deserved serious sanctions, but noted there were no similar precedents to serve as guidelines. “This case seems to us to be a unique one and stands alone,” it noted.
If the case did stand alone, it wouldn’t for long. In succeeding months, US authorities filed numerous complaints alleging that Pacific International accounts were being used as turnstiles for money-laundering activities and illicit stock activities in the US and offshore. In fact, the cases became so numerous that BC Securities Commission (BCSC) investigators began to look beyond Pacific International’s rank-and-file brokers to the people who were running the firm. That investigation culminated on July 10, 2001, when BCSC executive director Stephen Wilson issued a notice of hearing alleging that nine of Pacific International’s senior officers and directors had turned a blind eye to mob-related share dealings and money-laundering activities.
The notice cited the Hauchecorne case and named 14 other men “with criminal or regulatory histories” who had controlled, operated or were associated with accounts at Pacific International. It also referred to numerous indictments and complaints filed by the US Department of Justice and the Securities and Exchange Commission (SEC) that had cited instances where illicit transactions had occurred in Pacific International accounts. All these cases, the commission contended, should have prompted the firm to conduct internal reviews and “address the compliance deficiencies which those reviews should have revealed.”
The list of respondents reads like a who’s who of Howe Street. Among them:
Pacific International chairman and founder Max Meier, a 55-year-old Swiss native who served as a member of the VSE board of governors for 10 years, including a stint as vice-chairman from 1994 to 1997.
* Cofounder and vice-chairman John Eymann, who served as a member of the BCSC policy advisory committee, is a member of the Canadian Securities Institute’s ethics committee and a member of numerous VSE disciplinary panels.
* Former Pacific International chairman and director Marty Reynolds, a former Nesbitt Burns executive who served as VSE chairman from 1989 to 1991.
* Compliance head Larry McQuid, a former RCMP commercial crime officer and ex-VSE compliance manager who served on the VSE board of governors for several years.
* President and COO Jean-Paul Bachellerie, a BC chartered accountant.
But there was a much bigger fish caught in the commission’s net: Germain Carriؘ, president and COO of National Bank Financial Ltd., a wholly owned subsidiary of National Bank of Canada. Several years earlier, National Bank Financial had acquired a 35% stake in Pacific International and Carriؘ had joined the board to keep an eye on the bank’s investment. Now he found himself the subject of securities commission action. “We have named all the directors because they bear the ultimate responsibility for what happens at the firm,” Sasha Angus, BCSC director of enforcement, told reporters.
On Sept. 6, Carriؘ settled the allegations against him by admitting he had become aware of “certain deficiencies” in Pacific International’s compliance procedures, and some of the trading that had occurred had “harmed the reputation of the capital markets in British Columbia.” He agreed to pay a $1,000 penalty and $4,000 in investigation costs. (The settlement acknowledges Carriؘ had been a director only since May 1998, after most of the offending transactions had occurred, and that in June 1999 the firm, under his leadership, began a major effort to clean up its compliance procedures.)
The remaining respondents have been ordered to appear before a commission tribunal on Oct. 7 for a hearing that is expected to take months. If found to have failed to live up to their duties, they could be exiled from the market, fined up to $100,000 each and ordered to pay costs. “What we are trying to address is the necessity of proper compliance procedures not only being in place but also being followed,” said Angus. “You must know who your client is and why they are at your firm and what they are doing at your firm.” John Woods, editor of Canada Stockwatch, a Vancouver-based stock market information service, had a blunter description of what the notice was all about: “They are accusing the heart of the Howe Street brokerage fraternity of governing in the spirit of the three monkeys.”
This wasn’t the first time Pacific International had come to the attention of regulators. Over the years, the firm’s brokers had been involved in myriad misdealings. In July 1999—a month after Hauche-corne was exiled from Howe Street— The Vancouver Sun conducted a review of disciplinary actions the VSE had taken against the 18 securities firms under its audit jurisdiction. It found that, from January 1995 until then, Pacific International had amassed a league-leading $999,200 in fines and costs, and its brokers had been hit with a total of 75 years in suspensions, second only to Georgia Pacific Securities, another small Howe Street brokerage firm. (For the purpose of the study, Hauchecorne’s lifetime suspension counted for only 25 years.) Most of these actions stemmed from dealings in the US penny stock market, which had become Pacific International’s bread and butter after Michael Johnston was appointed VSE president in 1995 and drove most of the scurrilous promoters south to the loosely regulated OTC Bulletin Board. According to the BCSC, in 1993 the firm derived $2.3 million, or 14% of its commission revenue, from stocks traded or quoted in the US. By 1999, that figure had jumped to $19.2 million, or 67% of overall commission revenue. Of this amount, 82% was gener- ated by 15 of Pacific International’s 85 brokers, and 80% came from non-resident accounts. Meier made no secret of his firm’s predilection for risky business. “We go where our clients want to go and obviously in the last few years a lot of clients have gone to the Alberta Stock Exchange, Canadian Dealing Network and bulletin board,” he said in an interview in January 1999 (before the VSE merged with the ASE and CDN to form the Canadian Venture Exchange). “We don’t recommend stocks in those markets, but there seems to be a lot of people who want to be involved in them.”
Despite recurring regulatory problems, Pacific International had managed to remain a VSE member in good standing. Indeed, the firm’s status was high enough that in May 1998, Montreal-based LúBsque Beaubien Geoffrion Inc. acquired a 35% interest in it. At the time, LúBsque was 75% owned by National Bank Financial Ltd., which, in turn, was wholly owned by the National Bank of Canada, also based in Montreal. That meant National Bank had a 26% indirect interest in Pacific International. In August 1999, LúBsque acquired First Marathon Securities and renamed the merged entity National Bank Financial. At the same time, National Bank acquired the remaining 25% of LúBsque, increasing its interest in Pacific International to 35%.
The combined LúBsque/First Marathon operations, with 2,700 employees in 86 of-fices across the country, are now operating as National Bank Financial. Pacific International, with 155 employees in three offices in Vancouver, Victoria and Calgary, continues to operate separately under its own name. In Vancouver, both firms are located in the prestigious Park Place building on Burrard Street, albeit on different floors. Pacific International, however, proved to be one of the bank’s less prestigious affiliates. After the Hauchecorne incident, there was a flood of other cases citing Pacific International as a conduit for illicit activities. One in particular would capture headlines across the country.
The basic modus operandi of stock manipulators is to acquire big blocks of cheap shares in a shell company, stash the shares in offshore accounts, issue false information on the company’s commercial prospects, bribe brokers and newsletter writers to recommend the stock to their clients, then dump shares onto unsuspecting investors and run away with the cash. Woods of Stockwatch says Vancouver brokerage firms are favorite places to stash stock because their employees “wake up in the morning, put their noses into the air, smell manure and head straight to it.” As he sees it, the brokers are happy to take the business because it is easy and lucrative. “All you are is an order taker,” he says. “The commissions to the broker and the member firms are absolutely mind-boggling.” But he notes that some of the order takers have made a critical mistake. “They think because Vancouver brokerage firms are offshore, US authorities can’t get to the bottom of them. Well, oops.”
On June 29, 1999, Pacific International brokers Michael Patterson and Dirk Rachfall crossed the US border at Blaine, Wash., just south of Vancouver, and drove to a restaurant near the Sea-Tac International Airport outside Seattle. There they met a client, David Hogue of New York, with whom they were ostensibly going to play a game of golf. They never got to hit any balls, though. As the brokers were chatting, several FBI agents burst onto the scene and arrested Patterson and Rachfall. Hogue was not arrested. He was, in fact, working with the feds. It had been a setup.
According to a complaint filed days earlier by an FBI agent in New York, Hogue had routinely bribed brokers to sell stocks to the public on the basis of false and misleading statements. One of the stocks was Orlando Supercard Inc., an OTC Bulletin Board stock that, according to the US Justice Department, was being manipulated through Hogue’s accounts at Pacific International by members of the New York-based Colombo crime family and a Russian organized crime group called Bor. By August 1997, however, the scheme had collapsed, leaving Patterson and Rachfall with a $300,000 debit for which they were personally responsible. To correct the debit, the brokers enlisted Hogue to help them corral the company’s shares, artificially inflate the share price and deal them off to the public. Unfortunately for the brokers, Hogue was caught and pleaded guilty to stock manipulation. In return for leniency, he agreed to become a co-operating witness. After their arrest, Rachfall and Patterson were placed in custody and indicted by a US federal grand jury in New York. Pacific International was not accused of any wrongdoing. Within several days, Rachfall was released on US$300,000 cash bail and Patterson on US$350,000 cash and property bail. Of those amounts, Pacific International kicked in $50,000 each from monies that they had available to them within their firm. “We did that out of compassion for their wives and children,” explained McQuid, the firm’s compliance officer.
In April 2000, the brokers pleaded guilty to one count of securities fraud in the US and were imprisoned for five months and fined US$130,000 each. Then they returned to Vancouver.
In July 1999, days after the Rachfall and Patterson case hit the news, Pacific International was broadsided by another indictment, this one filed in US District Court in New Jersey. A US Justice Department attorney alleged that promoter Philippe Hababou, who had been a fugitive from French justice since the mid-1990s, and several of his nominees acquired control of another OTC-listed company, Prime International Products, then arranged for the company to issue large blocks of stock to offshore companies that they also controlled. Some of this stock was allegedly deposited into accounts at Pacific International in the names of Hababou and several nominees, enabling them to control about two million free-trading shares without any disclosure to US regulators or prospective investors. They then made false statements about the company to induce investors to bid up the stock, enabling them to sell US$5.3 million worth. Of this amount, Hababou allegedly transferred US$2.2 million to accounts at Citibank in New York and US$580,000 to an account in his name at Caesar’s Atlantic City Casino in New Jersey. Although Pacific International was allegedly used as a conduit, there were no allegations of misconduct against the firm.
Hababou’s broker at Pacific International was Donald Bruce Stratton. He had worked at the firm since 1987, but had taken a leave of absence on May 26—just three weeks before Hababou was indicted for alleged stock manipulation and money-laundering. McQuid said Stratton was on a cross-country motor tour of Canada and was due back within three months. The indictment threw BCSC’s Angus into a high state of excitement. “This is a great concern for our market,” he said, convinced he was dealing with something more than a few errant accounts.
Even more concerned was his new boss, Stephen Wilson, former head of Hong Kong Bank of Canada’s mutual fund arm. Wilson had taken office as executive director of the BC Securities Commission in July 1999, and had been watching the parade of crooks that had been passing through Pacific International. In September 1999, during his inaugural interview with The Vancouver Sun, he made it clear that he was looking for a new ethical standard on Howe Street. Wilson said he wanted to change the mindset of “extreme entrepreneurialism” that pervaded the securities industry. “The profit motive is so strong it places the compliance motive into a distant second place,” he declared. “I want them [brokers and other registrants] to think about operating in a compliant way, rather than just a cost of doing business. Compliance is not a function, it’s a state of mind. Either the firm, from top to bottom, behaves in a compliant way or it doesn’t.” Wilson said brokerage firms must take more responsibility for the actions of their employees. “If a broker screws up, the broker gets shotgunned and the firm carries on,” he noted. “I find that extraordinary.”
But it wasn’t. For years, many of Howe Street’s more dubious brokerage firms had been able to survive repeated scandals by tossing their brokers onto the regulatory altar. The VSE and its successor, the Canadian Venture Exchange (now the TSX Venture Exchange), had routinely suspended and fined rank-and-file brokers, but rarely penetrated the paneled boardrooms of the firms themselves. Making it clear that his comments were not philosophical musings, Wilson referred specifically to Pacific International, but added that the commission was not restricting inquiries to that firm. “We are also investigating the broader implications of the Pacific International affair,” he said.
Meanwhile, Pacific International was shifting into full damage control. On July 7, just as the Hababou case was surfacing, the brokerage issued a release noting that the indictment contained no allegation of wrongdoing against the firm or any of its employees. Furthermore, the release said, the indictment named not only Pacific International as an intermediary for illicit transactions, but also a “sizeable brokerage firm” and a New York bank. “Our compliance checks exceed industry requirements,” the release quoted McQuid as saying. “Nonetheless, we have launched a complete and independent review of all our compliance measures.”
Three days later, Pacific International announced it had hired a high-powered independent team to review its compliance procedures. The team consisted of Mark Skwarok, former chief counsel for the BC Securities Commission, Dean Holley, former executive director of the commission, and Norman Inkster, former RCMP commissioner and now president of KPMG Investigation and Security Inc. “We are obviously concerned about these incidences and the perceptions they leave with the investing public and securities regulators,” said Pacific International chairman Meier.
The following month, the firm an-nounced “bold new compliance initiatives” to reduce the possibility of it being used by US clients as a conduit for illegal purposes. According to Pacific International, it had already established “some of the most stringent account opening and identity verification procedures in the industry.” Henceforth it would not allow US residents to open accounts, or permit share certificates of companies quoted on the OTC Bulletin Board to be deposited into client accounts, or allow non-resident clients to transfer funds or securities to third parties. “Our goal is simple,” said Meier. “We want to minimize the risk that our firm could be used in the future as a conduit for questionable activities.” After Rachfall and Patterson returned to Vancouver, Wilson hauled them before a commission hearing panel. He wanted them banned from the stock market for the next 20 years, fined $50,000 each and assessed costs. However, the tribunal had different thoughts. “Considering the consequences that Rachfall and Patterson have suffered as a result of their conduct, it is unlikely they would pose a threat to the market were they to rejoin the securities industry,” the panel decided. “If anything, their experiences should make them unusually vigilant.” Woods of Canada Stockwatch thought the panel’s reasoning was “ridiculous.” Referring to the pair’s efforts to resolve their debit problem, he suggested they had “already demonstrated they will do anything to get out of a jam. They are convicted crooks. The very idea that a convicted crook is a rehabilitated crook is ludicrous.” Wilson wasn’t too thrilled with the verdict, either. “I’d be lying if I didn’t say I was disappointed with the gap between what we were asking for and what we were given,” he said. Throughout 2000 and 2001, US authorities issued more indictments and complaints against promoters who used Pacific International as a vehicle for their alleged frauds. By July 10, 2001, when the commission issued its notice of hearing, it was able to name 14 people with regulatory histories who directly or indirectly ran accounts there. The most serious offender was Shalom Weiss, who was indicted in Orlando, Fla., in April 1998 on racketeering and money-laundering charges. The following year, he was convicted and sentenced to 845 years in jail and ordered to pay more than US$100 million in restitution to his victims. Meier insists that nobody at Pacific International had any idea Weiss was involved in any accounts at the firm. In fact, he says they never heard of him until a year or so after the account was closed. More generally, Meier says that any suggestion the firm’s directors did not meet their corporate governance responsibilities is “unwarranted and unfair, particularly to those directors who did not have direct compliance responsibilities.” Indeed, it is clear from the lineup of lawyers that Meier and his fellow directors place themselves in a different category than McQuid, who had direct-line responsibility for compliance. (The directors are represented by well-known Vancouver securities lawyer Don Sorochan. McQuid has separate counsel, Skwarok.) Whether McQuid becomes the sacrificial lamb, or Wilson succeeds in establishing a new standard of corporate governance on Howe Street, remains to be seen. |
