Even Canada’s corporate crime cops are suddenly busy busting businessmen
It was a day for the record books. Never have so many high profile former insiders in so many companies been charged with fraud on both sides of the border. The RCMP, a frequent object of criticism for its slow pace in bringing white-collar criminals to justice, suddenly broke into a sprint and charged a whole slew of former executives in Nortel and Royal Group Technologies, including past CEOs of both firms. In the United States, justice department officials brought indictments against two former hedge fund managers at defunct Bear Stearns.
As an aside, you may have noticed the former Bear Stearns managers being taken away in handcuffs, escorted by armed federal agents. You will not see that picture in Canada. It’s just not considered the Canadian way -at least not when it comes to dealing with corporate fraud at this level. Some observers believe the contrast says a lot about the differences in how seriously the two jurisdictions treat white-collar crime.
Now that one-time executives at Nortel and Royal Group Technologies have been charged, the question is when will they be tried? Canada has a notoriously slow record in getting high profile white-collar cases into the courtroom. Garth Drabinsky and Myron Gottlieb, founders of the once highflying Livent, where charged with accounting fraud in 2002. Their trial got underway in Toronto just last month. We have been attending some of the proceedings and will be following up with a posting shortly. The charges involving Nortel’s former executives arise from events in 2002 and 2003, nearly six years ago. The fraud at Royal Technologies is alleged to have taken place some 10 years ago. By contrast, the U.S. justice system typically works much faster, as Conrad Black discovered to his dismay. The Bear Stearns fraud is said to have taken place in early 2007. The legal future of the pair charged there will likely long have been decided before even the first word is spoken in the Canadian corporate trials of the former stars of Nortel and Royal Technologies.
One more fact in common among these three companies is worth noting. They were a model of corporate governance failure. We broke news on Bear Stearns’s stunning board shortcomings even before its unceremonious end. Royal Technologies’ governance, and it’s being generous to call it that, was so bad it is hard to imagine that the lights were ever turned on in the boardroom. Did the CEO hide the switch from the directors? We shall see. Nortel, like Enron, was one of the boards that looked good on paper but in reality was giving management a blank check. It’s not surprising that some of the company’s former management may actually have taken that role a bit too seriously. To have had to restate its financial figures as often as Nortel has (four times in all and a record for a publicly traded company in such a period of time), and to admit the extent to which its internal financial controls had failed, are a testimony to how far and how long its big-name board slumbered.
Don’t be surprised if the issue of corporate governance, and what directors did and did not do, features prominently in some of these trials.
Last week, we received inquiries from the press asking for a comment on Eugene Melnyk’s plans to change the board of Biovail. The published versions omitted our most important point: the SEC’s probe into Mr. Melnyk and Biovail may be the biggest factor in determining any influence he has in the future of the company. The second shoe in the investigation dropped today with the SEC bringing civil charges of accounting fraud against Mr. Melnyk and several other parties. Similar proceedings were also brought in Toronto by the Ontario Securities Commission.
We expect Mr. Melnyk will be putting his plans for the company he founded on hold for a while. He was at the helm of Biovail when the alleged improprieties occurred and his griping about the state of the company now is a little like Conrad Black lambasting the board and management of Hollinger Inc., and its Sun-Times Media Group subsidiary, from his baronial power base at the Coleman federal prison complex in Florida.
The complaints also included proceedings against Biovail’s most senior financial officials: current Controller John Miszuk and current CFO Kenneth Howling. The company has announced that they have been reassigned to other positions in the organization. Biovail needs to be more specific about how close those roles are to financial functions in the company as the market does not generally respond well when so many past and current officials are the subject of regulatory proceedings, especially those involving fraud. (See Hollinger).
The company itself paid a $10 million penalty to the SEC for its role in the alleged accounting scheme.
There is an unseemly amount of gloating on Wall Street in the wake of the stunning disclosure yesterday that New York Governor Eliot Spitzer was a client of a major prostitution ring. Disgust is called for. Delight is not.
What he did as Attorney General to clean up abuses and improprieties in the mutual fund and investment industries, to name just two areas, was long overdue and entirely justified. The ordinary shareholder, who tends to view Wall Street as a playing field that is too often tilted toward the big teams, is better off as a result. Can anyone, with the possible exception of its former CEO Dick Grasso and one-time board member Ken Langone, seriously suggest that the governance of the New York Stock Exchange was not improved by the reforms in which Eliot Spitzer played a leading role?
Clearly, there is a temptation to rewrite history. Whatever Governor Spitzer has done in his personal life should not be taken as a vindication by companies and individuals of the wrongdoing and shortcomings he exposed as Attorney General. One wonders if Wall Street senses in this scandal the feeling that some of the ethical pressure will dissipate and allow it to get back to business as usual.
Spitzer’s actions, on a personal basis, were shameful and almost too bizarre to believe. But we have seen before how bright lawyers from Harvard and Yale have done inexplicably stupid things. Many it seems begin to believe their own press clippings and the flashy magazine profiles about their apparently superhuman qualities. President Bill Clinton’s reckless affair with a White House intern, and his lying about it to the world, ranks high in that category. And a British lord, also considered brilliant by all accounts and trained in the law as well, is currently sitting in a U.S. prison in Florida because he thought he was above the law.
The governor’s resignation is but days, if not hours, away. The sooner the better. The title governor and the description “client – 9” are incompatible, to put it mildly. And he may well face criminal charges. But Wall Street faces a crisis itself. And questions are being raised about the multi-billion dollar judgments of some of its top players. Now is not the time to rejoice in the personal failing of someone who at least had the courage to make sure the rules were being followed at a time when Wall Street itself was not exactly behaving as a paragon of virtue.
How strange it is that success can be such an impostor and only a warm-up for the main act of self-inflicted tragedy yet to arrive.
When Lord Kylsant of Carmarthen lost all hope of appeal in 1931, the wealthy titan was taken off and spent the next year in London’s bleak Wormwood Scrubs prison. Until Conrad Black, he was the only member of the British House of Lords ever to be convicted of fraud in the management of a publicly traded company. While prison was a stunning downturn for this Napoleon of the seas, as he was called for the formidable shipping empire he created, he had a private cell and was permitted to have his meals brought in from a first-class caterer.
Conrad Black, the first British peer to be incarcerated in the history of the United States, will not be so fortunate. There will be no privacy in his lodgings at the federal correctional complex at Coleman, Florida, and his meals are unlikely to be catered by his favorite Palm Beach restaurants.
He will doubtless persist in proclaiming his innocence on all charges and maintain that full acquittal on appeal is a virtual certainty. In reality, the man who often sounds like some character out of Charles Dickens, and not one of his more sympathetic protagonists at that, stands a greater chance of stringing all his prodigious and weighty words together and scaling down from his prison window past the unsuspecting eyes of his less than erudite guards.
There would have been many steps that could have been taken along the way to avoid the hard thud of the prison gates that swung closed behind him today and will remain so for most of the next 78 months. Much less brilliant men might have taken those other paths. One of the many mysteries that masks Conrad Black is why he did not.
He has spent considerable time over the past few years describing his role as a “freedom fighter” and threatening to take on the cause of prosecutorial overreaching. His friends claim that becoming an anti-corporate governance zealot remains a distinct possibility for this man of many talents. Whether anything will come from his newfound role as the Rubin “Hurricane” Carter of wrongly convicted corporate felons is yet to be seen. A predicate for such interest in the abuses of the criminal justice system or the plight of the less fortunate has never figured prominently in Conrad Black’s writings or those of the high profile friends that now rail at his injustice, for that matter. And it is a hard case to make that a man who has been able to spend tens of millions mounting the best legal defense possible -tens of millions of other people’s money via the shareholders of the former Hollinger International- was disadvantaged or the victim of abuse by the legal process.
A case can be made, however, that there was a greater transgression at work here than the one for which Conrad Black was convicted. For many years, hundreds of millions in fees and payments were siphoned from Hollinger and paid to Ravelston, the private holding company run by Black and Radler, which itself turned out to be a corporate felon. The outrage is that those payments were fully approved by Hollinger’s board without batting an eye. Yet most directors, according to company documents, didn’t understand why the payments were being made or even the purpose of Ravelston. Corporate governance at Hollinger was little more than a social club where directors partied and ate fine lunches and in the end seemed to have little energy left to do anything more than lift their Conrad Black-supplied rubber stamp with the word YES emblazoned on it in baronial font.
There were also the injustices of the $20 million bill that the internal investigation of Hollinger chalked up under Richard Breeden, and the subsequent corporate welfare program that the Hollinger group became for lawyers, management and directors who always had their hands outstretched for another check while in effect presiding over the disintegration of the company. The fact that no laws were broken by these actors in no way lessons the outrage their actions represent.
The greatest “crime”, however, is reserved for the man at the top. In that category, one looks not at a breach of securities laws or federal codes but at the larger offense of a person who squandered the rare opportunity to influence the course of events and make the world a better place for it. Law breaking by men and women whose lives were stacked against them from the start, while never excusable, is perhaps easier to understand. When all you have known is crime and criminal influences from an early age, the ability to find a better path is strewn with obstacles. But when there is the gift of affluence and privilege from birth and great wealth, fame and power amassed along the way, as there was for Lord Black of Crossharbour, the road taken to crime offends the senses of civilized men and women to the core.
So disconnected from the facts that led him to this latest step in a progressive march downward, Mr. Black writes in today’s National Post:
We have a Toronto court to thank for the massive and misleading exposure that the grainy security film that caused me to appear furtive, has caused. We have the same court to thank for a number of other unjust decisions.
So now it is the “graininess” of the security film that caught him removing the boxes from his Toronto Street office that is the culprit, along with a string of other players from investors to prosecutors. It is they who are responsible for his fate. Not him. Never him.
I am well aware of the capacity of courts, agencies and commissions to act incorrectly when it comes to the rights of individuals. Often it is out of a lack of competence. Sometimes it is the result of malice. I have strongly condemned such conduct in the past. I wish we had heard from Mr. Black and his newspapers on this subject in the past. It might have helped to avoid a number of lives being ruined. But as I have noted above, injustice rarely befalls those with vast resources to pursue their rights in the avenues of both the legal system and the court of public opinion. And if I believed for one moment that Mr. Black had been disadvantaged by a significant manifestation of bias in the legal system, I would be the first to come to his defense. To whom among the unjustly treated, other than himself, has Mr. Black ever come to the defense?
One also is prompted to wonder, if Mr. Black has so many important facts to marshal in his defense, which are voluminously detailed in his column today (and how many other convicted felons do the publishers and editors of the National Post permit to make their appeal case in an Op-Ed column?) why on earth did he refuse to take the stand at his trial?
His Palm Beach mansion has more bathrooms than the accommodation he must now share with in excess of 180 fellow inmates. His address, which from birth included the more prestigious names in Toronto, New York, Palm Beach and London, will now be among the most infamous: the U.S. federal prison complex at Coleman. How ironic it is that the man who boasted that the prosecution’s case was “hanging like a toilet seat around their necks” may well end up cleaning such fixtures as part of his life as Coleman’s newest inmate. His newly acquired dog will have more freedom and live a life of greater splendor than will Mr. Black for the next several years. A man who has known the rarest of luxuries on the grandest scale will soon discover that the simple act of opening a refrigerator door for a glass of milk or taking a stroll down the street on a warm summer evening are things to be envied in the lives of the most common of individuals.
It is not just the contrast from a world of mansions, limousines and privileged society to one of bars, starchy food and shared showers that is difficult to grasp here; it is the reality of what might have been that will not now be; the unfulfilled accomplishments and potential successes of a man of uncommon ability, but regrettably of rather common criminal persuasion. Gone is the Argus empire he effectively inherited. Little remains of the newspaper domain he once ruled. Discarded in a foolish fit of pique is the Canadian citizenship he exchanged for a title and an ermine-fringed robe from another land. However responsible Mr. Black is for his fate, one cannot but ponder how strange it is that success can be such an impostor and only a warm-up for the main act of self-inflicted tragedy yet to arrive.
Mr. Black once boasted in a BBC interview that if he had to go to prison, he would wear the sentence like “a badge of honor.” There was no award ceremony evident as he arrived at the Coleman prison facility at noon today in a Cadillac with darkened windows. My father used to counsel that one of the tests of a bright person was the ability to make a sensible point without sounding like an idiot. Mr. Black is a bright man. On too many occasions over the past number of years in the things he has written and said (the “renunciation of the rights of the French nobility;” comparing federal prosecutors to “Nazis,” etc.), Mr. Black has sounded a few points lower than his IQ has been rated.
The tribulations that lie ahead for him will be significant, and the distress imposed on his family and friends is truly unfortunate. But the fact remains that in too many ways when Mr. Black has been the focus of hope and great expectations, he has disappointed and left those who have looked up to him feeling empty.
Conrad Black has enjoyed many honors in his life, some of which have been attached to his name. What he might have done with them and what his legacy might otherwise have been, will be a mystery forever lost in the mists of history unwritten. Overshadowing all of this is the fact that Conrad M. Black, Baron Black of Crossharbour, PC, OC, KCSG, who once reigned over an empire that saw the doors of kings, presidents and world luminaries open wide to him, is inmate number 18330-424, lord now only of his own bunk bed.
If there could be a less predicted or more bewildering turn in the life of a man, imagination fails to conjure up what that might be.
As of 8 pm EST, the Bureau of Prisons information posting regarding its custody of Conrad Black (below) had not been updated.
When the reputation of a major securities regulator like the OSC begins to look more like the reality show The Biggest Loser, you know you have a problem that needs fixing.
The trial that began with criminal charges over the Bre-X fraud took six years and ended with the Ontario Securities Commission losing completely. The cost of the investigation and trial soared into seven figures. Charges involving another company, Atlas Cold Storage, resulted in the OSC’s abandoning its prosecution in mid-trial. More recently, the regulator’s nearly seven year stock tipping and insider trading case against Andrew Rankin, the former managing director of RBC Dominion Securities, after unraveling on appeal, yesterday came down to his paying $250,000 to settle the matter. No conviction will be recorded. The costs of that investigation and trial also mount into the millions. The OSC’s charges involving executives at Livent and Hollinger are still to be heard. They would probably move ahead faster if they were sitting on a glacier.
As The Centre for Corporate & Public Governance noted today in a statement about the Rankin settlement:
The regulator’s decision gives rise to troubling questions as to whether this is the proper outcome in light of the facts of the case and the high costs incurred by the OSC, and whether it will serve as an adequate deterrent to stock tipping and insider trading in the future. In addition, there are concerns being expressed widely within and outside Canada about the OSC’s judgment and overall competence in the enforcement field, given this and other events in the recent past.
As we have observed before on these pages and in this post more recently, the OSC’s problems fundamentally come down to an issue of governance: too many people are engaged in playing too many roles as policy makers, investigators and adjudicators with a level of oversight that lacks both transparency and efficacy.
You have to ask yourself how much more evidence and how many more embarrassments do Ontario’s lawmakers need before they get the message that the OSC is operating as a dysfunctional and underperforming institution? If they spent any time talking to investors, and especially those outside Ontario, they would have no doubt.
When the reputation of a major securities regulator begins to resemble the reality show The Biggest Loser, you know you have a problem that needs fixing.
Conrad Black’s freedom can now be measured in days -31 to be precise- as a result of U.S. federal court judge Amy St. Eve’s decision to deny the request of Mr. Black and his co-defendants to remain free while their appeals are considered. The judge found that no substantial questions existed which were likely to result in an acquittal or a new trial. Her ruling also noted that the defendants “knowingly and intentionally misused International for their very significant private gain,” and ordered them to report to prison on March 3rd.
Mr. Black’s trial was long and complex, and has culminated in a Shakespearean fall from the heights of privilege, reputation and wealth that is almost too dramatic to comprehend. As we have written before, there are indications from his own statements that Mr. Black still has not grasped the depth of the descent himself. (more…)
