Category: Miscellaneous News

We will all remember that Navinder Singh Sarao has been elected Official Flash Crash Scapegoat by the US Department of Justice.

But the case continues to bring more questions than it purports to answer – even Flash Boys’ author Michael Lewis shows a grudging admiration for the man:

The people at the CFTC who decided to come forth, five years after the fact, with this new and improved explanation for the flash crash, must have known they would be creating a controversy with themselves at the center of it. It’s actually sort of brave of them.

They’ve been ridiculed in the news media and will no doubt soon be hauled before various congressional committees. They’ll have annoyed their colleagues at the Securities and Exchange Commission, who now look like even greater fools than they did before, for not bothering to mention in their report on the crash the various nefarious activities of algorithmic traders, and instead offering up as the primary cause of the crash a stupid mistake made by a money manager in Kansas. The authors of the SEC report either consciously ignored or did not bother to acquire from the CFTC a lot of accessible, and damning, information about what was happening in the U.S. stock markets the day of the flash crash. The world will now want to know why they did this.
…
Then there is the biggest question of all: How can a guy working from his parents’ house in suburban England whose only actionable orders were to BUY stock market futures cause such a sensational collapse in U.S. stocks? On the day of the flash crash, Sarao never actually sold stocks. He was trying to trick the market into falling so that he could buy in more cheaply. But whom did he fool with his trick? Whose algorithms were so easily gamed that they responded to phony sell orders by creating a crash? Stupidity isn’t a crime. Still, it would be interesting to know who, at this particular poker table, on this particular day, was the fool.

It would also be interesting to know how it occurred to Sarao that his trick might work. There’s a fabulous yet-to-be-told story here, about a smart kid in the U.K. who somehow figures out that the machines that execute the stock market trades of others might be gamed — and so he games them.

Eric Hunsader of Nanex takes time to point out that a recent spoofing penalty cost $50,000:

Pursuant to an offer of settlement in which Jonathan Brims (“Brims”) neither admitted nor denied the rule violations upon which the penalty is based, on January 20, 2015, a Panel of the CBOT Business Conduct Committee (“BCC” or “Panel”) found that it had jurisdiction over Brims pursuant to CBOT Rules 400 and 402 as the conduct occurred while Brims was an employee of a CBOT member firm. The Panel also found that during the time period from September 2011 through December 2012, Brims, on multiple occasions, entered large orders in the 5-Year Note, 10-Year Note, Bond, and Ultra Bond futures contract markets without the intent to trade. The Panel specifically found that Brims placed a small order to sell (buy) in the futures contract market on the CME Globex electronic trading platform (“Globex”). Brims subsequently entered multiple large-lot buy (sell) orders at or near the best bid (offer) on Globex to create the appearance of an imbalance in buy/sell pressure. Once the small order began trading, Brims canceled the large orders. The Panel further found that Brims entered the large orders for the purpose of inducing other market participants to trade against the small orders resting on the other side of the order book. The Panel concluded that Brims thereby violated CBOT Rules 432.B.2. and 432.Q.

Interestingly, Sarao provided information about (some of!) his algorithms to UK regulators, including a fascinating allegation:

I have traded using a basic TT for numerous years. Due to the fact that there were some individuals in the emini S&P who quite remarkably seemed to know WHERE 100% OF MY ORDERS WERE RESTING, even if they were over 90% partially filled !!! and hence made a concentrated effort to manipulate around those orders so they would not get filled, I decided to pay Edge Financial to build a program for me that would help disguise my orders more effectively. Initially I was told that the reason these individuals knew where all my orders were was because I traded so big and was as such ‘the elephant In the room’. However, It Is worth noting that further examination showed that their special manipulative activity occurred exactly the same if I did a 20 lot order or a 200 lot order.

I asked Edge to design 3 more functions specifically to help try and hide my orders from these people. I do not know If this can be described as HFT, to me It Is just giving me the ability to have some extra functions that my base trading software (TT) does not give me and It should be noted that I only use these functions Intermittently
and sometimes not at all. It Is called Navtrader, but it could be called anything and I was the only one who helped design it, albeit my design Ideas were 100% generated from what I had already seen other traders using already in the emini SP. Please note I believe I have only had this NavTrader since the beginning of 2013 at the very earliest

I decided that the only way I could mask my orders, was to place them as the market changed price so that they may not be seen In the ‘chaos’ of a price change. So I would have my orders pending to be placed as the market went from bid to offer or offer to bid.

The 3 main functions are as follows:
JOIN : These are pending orders that will be joined anywhere requested along the order book and become active when the price changed, Remarkably, these orders were still subject to the Insider trading I describe above, even when they are as small as a 50 lot !

SNAP: These are orders that are the same as JOIN but at the market best price ao that they become traded almost Immediately. I also have a function that lets you put In a minimum quantity so that the buy/sell SNAP order only becomes active when there Is a minimum of that number of contracts on the offer/bid. This worked rather beautifully when the mass manipulator of the e-mini sp was doing his normal manipulative activity at price 1800.00 on Friday 24th January circa 12.23pm. The fake bids he had placed were being removed too quickly for me to hit. If I had put a snap for 700 with 0 as minimum volume , It would not have been filled because as soon the bid was more than 1 lot bid the 700 would have been active. With my 699 then resting the normal forms of manipulation that occur on 100% of my orders EXCLUSIVELY would then have preceded to follow. So I put a 700 lot SNAP with a minimum volume of 600, et voila I got my full 700.

ICE: The Iceberg function on the CME Isn’t adequate for me, I hardly ever use it because It puts me at the back of the queue all the time. Hence, 2,000 needs to trade to get me out of 800 lots for example. My iceberg function is placed at a price and as soon as It Is bid/offered at the price the iceberg will take all contracts at the price up to and Including the number of my order. Again, there Is a minimum volume box, so for example I can put 50 Into it and put a sell ICE of 1,000 and then at that price every time the bid Is more than 50, the ICE will take all contracts out until 1,000 Is traded. This Is a good way of catching spoofers, and et voila I can trade 1.000 lots at one price (following on from the above example).

The other orders I sometimes place during the day are slightly away from the market price and move up and down as the market moves with It This Is to catch any blips up/down In the market so that I can make a small profit as the market comes back Into line(almost Immediately). These orders are placed rarely and only when I believe the market Is excessively weak or strong. Again, this was Inspired by other traders I could see doing the exact same thing.

Well … Assiduous Readers will be sympathetic, I hope, to my readiness to believe that one guy working alone with some occasional contract help can make the big guys look like fools. But these three functions seem perfectly straightforward to me and it will be most interesting to learn whether Sarao did in fact develop and use them and if they did in fact work as well as claimed.

Hunsader has produced a chart showing the January 24 spoofing/counter-spoofing battle:

Click for Big

On the other hand, of course, there are some pretty damning affidavits; it seems clear that:

• Sarao was spoofing
• He was also engaged in anti-spoofing
• spoofing rules are unenforceable and should be scrapped

Assiduous Reader KB writes in and says:

I often have occasion to use your modified for resets spreadsheet on your site (ytc_resets).

I always have to remember to only use 25 years when I want a “Limit Maturity” of 30 years.

Anyway, it bothered me enough times that I modified it. I also added a couple fields for entering reset spread and GoC 5 year rate instead of having to modify the dividend formula each time.

Might be useful in place of the one you initially modified, or not. You can check it out, modify it, or throw it out. (it’s Excel 2007)

I’ve checked it out and everything is in order; so I have appropriated this development and it is now available for download.

Note that the new version is a .xlsx file and there may still be a few doddering old fogeys out there who haven’t upgraded since the last geological era, so the Old .xls version is still available.

There’s a detailed numerical example for the use of this calculator in the post What is the Yield of HSE.PR.A?. This explanation is based on the old version, but if you can’t figure out the layout difference then you don’t deserve to use nice things anyway.

A division of Manulife Financial Corp. announced on October 17:

the receipt of the required approvals from securityholders to proceed with certain of the previously announced proposed fund mergers. It is currently anticipated that the mergers will be implemented at the close of business on or about October 24, 2014 and on or about November 7, 2014, as detailed below.

Fund Mergers
For the mergers listed below, Manulife Investments has received the following approvals from securityholders to proceed with implementing the mergers on or about October 24, 2014:

Terminating Fund	Continuing Fund	Approval status
Manulife International Value Equity Class	Manulife International Value Equity Fund	Approved
Manulife Preferred Income Fund	Manulife Preferred Income Class	Approved

The inception date of the surviving fund was August 1, 2013 and accordingly performance reports date back only to then.

The last performance data I have for the non-surviving fund may provide a clue as to why the old fund was dropped, but only very nasty, cynical people would dream of a connection:

The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) has announced (back in August, actually, but I don’t spend a lot of time refreshing my knowledge of them):

the receipt of significant new funding from both the Ontario Securities Commission (OSC) and the Investment Industry Regulatory Organization of Canada (IIROC).

The OSC has provided a $2.5 million contribution toward FAIR Canada’s fundraising campaign. The OSC’s contribution comes from funds collected from monetary sanctions and settlements.

“We are thrilled that the OSC has again demonstrated its strong support of FAIR Canada’s work through a substantial funding contribution,” said Neil Gross, Executive Director of FAIR Canada. “FAIR Canada has developed an ambitious fundraising plan and we are grateful to lead donors like the OSC and Stephen Jarislowsky for getting our campaign off to a terrific start.”

Earlier this year, FAIR Canada announced that one of its long-standing directors, Stephen Jarislowsky, had made a $2 million contribution which challenged FAIR Canada to raise at least an additional $4 million to provide a $6 million endowment fund.

“The OSC’s contribution will go a long way to meeting this challenge and will help to provide a sustainable basis of funding for the organization going forward. FAIR Canada encourages like-minded individuals and organizations to contribute to our campaign,” said Gross.

From this one-time commitment of funds by the OSC, $500,000 will be allocated to cover day-to-day operating expenses and $2 million will be placed in trust with the FAIR Canada Jarislowsky Endowment Fund for long-term funding of the organization.

“On behalf of the board of directors of FAIR Canada, we would like to express our sincere thanks to the OSC for its generous financial support and its support of our activities,” said FAIR Canada board Chair Ellen Roseman. “FAIR Canada provides an important voice in the policy development process and we thank the OSC for recognizing the value of our work. With this new funding we will continue to be able to fulfill our mission.”

FAIR Canada also announced today that, with IIROC’s final payment under its second round of funding totaling $900,000, IIROC’s funding commitment has now been completed.

IIROC has played a pivotal role in supporting FAIR Canada since FAIR Canada’s inception in 2008. “FAIR Canada thanks IIROC for this grant and for the generous financial support they have provided throughout the past six years,” said Gross, noting that IIROC had supplied FAIR Canada with very substantial original funding and had made additional contributions pursuant to a 2012 agreement.

FAIR Canada was founded by ex-regulators and currently trumpets its staff of lawyers; they receive cash from the regulatory slush funds. Nice work, if you can get it.

Update, 2015-12-7: The OSC news release stated:

The Ontario Securities Commission (OSC) announced today the allocation of $2.5 million in funds collected from monetary sanctions and settlements to the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), a national charitable organization dedicated to advancing investor interests.

“We are pleased to provide funding to FAIR Canada to support the long-term continuation of their work on behalf of investors in Ontario and across the country,” said Howard Wetston, Q.C., Chair and CEO of the OSC. “The work conducted by FAIR Canada has been extremely valuable to the OSC as we look to further educate, engage and protect retail investors in Ontario.”

Providing protection to investors is central to the OSC’s mandate. The OSC’s support is consistent with its own investor focused initiatives such as the Office of the Investor, which leads the OSC’s efforts to identify and understand investor issues and concerns through investor engagement and research. The Office works closely with the OSC’s Investor Advisory Panel and the Investor Education Fund to support their mandates.

The OSC’s financial contribution to FAIR Canada will support its operation and ongoing pursuit to advance the education of the public, government and regulators about capital markets, savings, investments and investment practices. FAIR Canada, in addition to providing education through conferences, roundtables and symposia, conducts and publishes research and is a national voice for investors in securities regulation.

Of this one-time commitment of funds by the OSC, $500,000 will be provided to FAIR Canada to cover its day-to-day operating expenses and $2 million will be placed in trust with the FAIR Canada Jarislowsky Endowment Fund for long-term funding of the organization.

The OSC administers and enforces securities legislation in the province of Ontario. The OSC’s statutory mandate is to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.

The 2015-6-30 Financial Statements of FAIR observe:

Endowment Fund

In the 2014 fiscal year, the Foundation received $2,000,000 from the Jarislowsky Foundation (“JF”) to establish an Endowment Fund for the purpose of providing operating funds to the Foundation. Under the terms of the agreement, the Foundation must raise an additional $4,000,000 in matching contributions to add to the Endowment Fund, with the exact amount of the Matching Contribution required to be 200 percent of the market value of the original capital as of the Matching Gift Deadline. Should the required matching contributions not be received by the deadline, JF has the right to call for the return, within 10 days of the Matching Gift Deadline, of the original capital at its market value plus the net income earned from the Endowment Fund less any disbursements from the Endowment Fund, based on the disbursement policy set out in the agreement.

In the 2015 fiscal year, the Foundation received $2,000,000 of the required matching contributions from the Ontario Securities Commission (“OSC”) which is subject to the completion of the terms of the JF Endowment Fund. The OSC’s right to call for the return of the OSC’s endowment contribution is the same as stated in the JF endowment fund agreement except that the return of such funds to the OSC must be made within 40 days.

The Foundation has received an extension of the Matching Gift Deadline from both JF and the OSC until March 31, 2016 in order to raise the remaining $2,000,000 in funding.

The regulators have decided I don’t pay enough tax, so in accordance with CSA Staff Notice 31-338 Guidance on Dispute Resolution Services Client Disclosure for Registered Dealers and Advisers that are not members of a Self-Regulatory Organization I have joined the Ombudsman for Banking Services and Investments and, more importantly, paid my OBSI Portfolio Manager Membership Fee. Assiduous Readers will be relieved to learn that since this fee is not actually charged by a Securities Commission, I do not expect it to be included when the various commissions discuss the rate of increase in regulatory fees.

I haven’t had a single complaint in the fourteen years I’ve run my own shop, and none in the eight years before that during which I was with Greydanus, Boeckh & Associates, Inc., but who knows? Tomorrow there might be a flood.

Procedures for clients with complaints are detailed on the Hymas Investment Management Inc. website under the heading "Complaints".

PrefInfo has been updated to 2014-6-8.

As always, finding an error will win you a PrefLetter … just let me know about it and if I agree it’s an error, you’ll get a free copy!

I’m more of a portfolio manager than a financial planner, so it was only recently that I learned of Flaherty’s little-known legacy for a largely forgotten minority:

The RDSP is a cousin of the Registered Retirement Savings Plan (RRSP) but tweaked to fit the needs of those with physical, developmental and psychiatric disabilities.
…
Under the program, money can be set aside for a person with a disability (by family or the person him– or herself) and investments accrue tax-free; the RDSP is much like a RRSP, except withdrawals can begin at age 45. For example, the parent of a 15-year-old who puts $200 a month into the plan would provide her with an additional $2,500 a month by age 65. Also, the rules are such that her other income, such as disability benefits, would not be clawed back as a result.
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What distinguishes it from a RRSP is that the federal government also makes a contribution, like it does with the Registered Education Savings Plan, but far more generous. Those eligible for a RDSP can get a grant of up to $3,500 a year, and low-income parents can receive an additional Disability Savings Bond of up to $1,000 annually.
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The main knock on the program is that it takes a lot of paperwork – which is the reality with any program with eligibility. In this case, a person’s disability has to be so severe that they qualify for a Disability Tax Credit.

The main Revenue Canada web page which has links to Eligibility Requirements:

You can designate an individual as beneficiary if the individual:
•is eligible for the disability tax credit (DTC);
•has a valid social insurance number (SIN);
•is a resident in Canada when the plan is entered into; and
•is under the age of 60 (a plan can be opened for an individual until the end of the year in which they turn 59).The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.

… and links to grant information and savings bonds:

An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. A grant can be paid into an RDSP on contributions made to the beneficiary’s RDSP until December 31 of the year the beneficiary turns 49.

The amount of the grant is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation. The income thresholds for 2013 are as follows:

Amount of CDSG grant when family income is $87,123 or less:
•on the first $500 contribution—$3 grant for every dollar contributed, up to $1,500 a year.
•on the next $1,000 contribution—$2 grant for every dollar contributed, up to $2,000 a year.

Amount of CDSG grant when family income is more than $87,123:
•on the first $1,000 contribution—$1 grant for every dollar contributed, up to $1,000.

… and the savings bonds part …

A Canada disability savings bond (bond) is an amount paid by the Government of Canada directly into an RDSP. The Government will pay bonds of up to $1,000 a year to low-income Canadians with disabilities. No contributions have to be made to get the bond. The lifetime bond limit is $20,000. A bond can be paid into an RDSP until the year in which the beneficiary turns 49.

The amount of the bond is based on the beneficiary’s family income. The beneficiary family income thresholds are indexed each year to inflation. The income thresholds for 2013 are as follows:
•$25,356 or less (or if the holder is a public institution), the bond is $1,000;
•between $25,356 and $43,561, part of the $1,000 is based on the formula in the Canada Disability Savings Act;
•more than $43,561, no bond is paid.

This doesn’t really have a lot to do with preferred shares, I agree. But while I don’t consider myself to be a financial planning specialist, I do know more about financial matters than most people … and I’d never heard of this. Right off the top of my head, I knew of two families who might be eligible.

So … I decided this needed some more publicity, and this is it.

IIROC has announced the release of the hearing panel’s decision on the vindication of David Berry.

The decision is nine pages long; about half of it is interesting:

¶ 38 Berry was a highly successful trader of preferred shares. By the time of his termination in 2005, he commanded more than 60% of the preferred share market in Canada. His income had soared to $15 million a year. In fact, he was so successful that his supervisors asked Compliance to be particularly vigilant, and presumably they were.

¶ 39 What made him so successful? His counsel suggests that, in part, it was “because he was willing to take more risks than his competitors, including by taking short positions.” The evidence supports this view. Indeed, there were recurring arguments about this between him and the syndication desk. Berry would want to short some new issue and Syndication, perhaps being more risk-averse, didn’t. So he did it by himself in the 08 account.

That’s a nice “perhaps”. Perhaps more risk-averse, certainly. Perhaps being too dumb, or too disingenuous, to realize or admit that a particular new issue was grossly overpriced. That’s another perhaps.

But … shorting shares! Gasp! What does IIROC’s counsel have to say about that, I wonder?

¶ 49 New issue shares can be shorted. This does not constitute, as enforcement counsel submitted, “creating shares out of the ether.” Underwriters are generally allowed to over-allot new issue shares to satisfy demand, and that is accomplished by shorting the security: see, for instance, IDA Syndicate Practices Handbook, p. 10, which provides that in preferred and equity financing

… the syndicate manager is authorized, in its discretion, and in compliance with applicable laws and regulations, to purchase and sell securities of the issuer in the open market, for long or short account, at such prices as the syndicate manager may determine, and to overallot underwritten securities, and may liquidate any such position.
(Emphasis added.)
The only caveat to this provision is that “at any time such positions do not exceed 15% of the underwriting obligation.

¶ 50 The rule cited above clearly states that this type of overallotment may be done by the “syndicate manager.” This excludes Berry, but he is not charged with violating Syndicate policies, which he may well have, but on which we pass no judgment. We note, however, that prior to his dismissal, his employer had no written syndication process policies or procedures.

¶ 51 IIROC recognizes that shares could be sold short, but only when there is demand. In our view, Berry’s sales to clients constituted demand. Berry represented to his clients the availability of a new issue and clients understood that they were buying a new issue. He therefore, on behalf of his firm, made a commitment to deliver new issue shares, and what he sold, long or short, were new issue shares. That he “ran his own parallel new issue book,” as enforcement counsel suggests, we do not disagree with but, once again, he is not charged with violating syndication procedures.

¶ 52 Finally, IIROC submits that clients did not know that they were purchasing against shorts. True, but clients never know that they are buying from a short seller, and there is no requirement to disclose this to a purchaser.

So there you have it. No case at all, just garbage hoked up by a pack of lawyers and regulators who have absolutely no clue about markets and care less.

The whole thing reflects very poorly on Scotia, and illustrates the reasons behind Canada’s productivity problems relative to the US. David Berry had a good idea: making markets – even poor ones – in preferred shares was a lot more profitable than acting as agent. Also, keep your clients happy. So he applied his idea.

I understand there is a very fundamental difference in atmosphere between Canadian and US brokerages. If you have a good idea at a US brokerage, you bring it up with your supervisor – maybe some others as well – and try to get some resources to develop it, whether that’s capital, or legal time, or whatever. The common organizational response to such an initiative is along the lines of: “OK – we’ll let you have the capital. If it all works out, you’ll get rich. If it really works out, you’ll get stupid-rich. If it doesn’t work out, you’re fired.” A lot of ideas don’t work out … but a lot of them do.

At a Canadian brokerage, such an idea goes to committee. It meets sometime next year, I think.

And at Scotia, apparently, if you do your job too well, a pack of useless jealous nonentities will attempt to destoy your career. It is outfits like Scotia who are responsible for the poor productivity in Canada relative to the US.

As a parting note, there is this section in the ruling:

¶ 56 But, as enforcement counsel pointed out in his opening statement, Berry sometimes “engaged in trading for his institutional clients that bypassed the syndication process.” We agree – and have already said so – that in so doing Berry ran a parallel book, an undertaking that may have been in contravention of syndication rules and practices. But, we repeat, that is not what he is charged with, and it would, therefore, be inappropriate to make any further comment on this aspect.

¶ 57 UMIR Rule 7.7(5) does not cover this behaviour. It refers to the solicitation of purchase orders for a distributed security. What Berry did, when using the 08 account, was identical with what he did when following the syndication rules: he solicited expressions of interest (tantamount to an order). Only here, some of the shares came from stock already in the account, while others were obtained later when the short position was covered. Clients did not suffer: the price they paid was the price fixed by the syndicate and no commission was charged.

I don’t know if there’s any ‘statute of limitations’ for charges of running a parallel book. If not, then we may see Scotia dragging out this idiotic process even further.

I am pleased to pass on the following notice of an Advocis event:

A Hard Look at Regulation – January 31, 2013
…
PD Days – $65 for Chapter members; $75 member late registration; $120 for non-members
…
Regulators control more and more of how you do business. This important PD Day will provide perspectives on: how Advocis is working to mitigate regulatory creep; an Ontario MPP’s perspective on financial regulation; the morality of self-regulation; a financial company executive’s view; and that of a national financial journalist. If you value your livelihood, come out to this Advocis PD Day.
…
Hampton Inn – 100 Coventry Road, Ottawa
…
1:15 PM – 2:15 PM The Regulatory Impact on Insurance Companies and the Products They Offer – James Hymas, CFA, BSc, President, Hymas Investment Management

James Hymas CFA BSc is President of Hymas Investment Management and specializes in the analysis of dividend paying companies. With many published articles, James writes for Advisor’s Edge and other publications. His talk will focus on dubious economic and investment assumptions behind rule changes.

A disciplinary panel has dismissed the IIROC charges against David Berry!

In a ruling Tuesday, a panel of the Investment Industry Regulatory Organization of Canada (IIROC) said the self-regulatory body “has failed to make out its case against the Respondent, and the charges, are, therefore dismissed.”
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IIROC has spent more than seven years on the matter and had already reached a $640,000 settlement with Scotia Capital in early 2007. After Scotia admitted liability, a panel approved the settlement.

At that time IIROC said “we are pleased that Scotia Capital recognized in this settlement that, even though supervision was not an issue, it would not be appropriate to retain profits generated by the wrongdoing of its employees.”

The three person panel, chaired by the Hon. Fred Kaufman, determined this week that there was, in fact, no wrongdoing. And contrary to what was said in early 2007 about supervision not being an issue, the panel also determined that Mr. Berry’s supervisors were likely aware of the activities in question.

“The preponderance of evidence suggests that they did, although this is denied by James Mountain, the head of institutional equity,” said the panel.
…
The panel spent time discussing the “atmosphere” which existed at Scotia towards the end of Mr. Berry’s employment. “It is clear that serious issues, mostly relating to his compensation, had arisen.”

I’ve been following the Berry affair with great interest: see, for example, the post Toronto Life Article on David Berry. In a nutshell, Berry was a preferred share trader who recognized – and I mean, he really recognized – the value of liquidity. He was the only guy on the street who would call a market on preferreds and back that up to the extent that his capital permitted. The markets he called were pretty damn lousy … but the lack of exchange-based liquidity and the intense desire of the buy-side to get a $250,000 preferred share trade done in less than double the time of a $25,000,000 stock trade ensured that a lot of people accepted his lousy markets – and we’re talking like, occasionally $1.00 off the last price! But if you wanted to move 25,000 shares, and you wanted to move them NOW, there was only one place to do it.

So those trades made money for Scotia, and the more money he made the more capital he was allocated and the bigger the inventory he could carry and the more money he made.

Until Scotia – as far as I’m able to tell, and this is apparently backed up by an insider willing to testify – decided he was making too much money and, when he made difficulties about modifying his contract so he would make much less money, decided to get him.

An army of lawyers and accountants were put on the case, and his trades were subjected to such intense scrutiny that Jesus Christ Himself wouldn’t have passed muster.

And all they found was garbage. I’ve read the IIROC statement of allegations. Picayune t-crossing that nobody in their right mind would consider caring about. However, this didn’t stop Scotia management from weeping and wailing about the dreadful sins of their rogue employee and not only fired him, but attempted to destroy his career by going to IIROC for confirmation that terrible, terrible things had happened.

And now IIROC has confirmed that, in fact, nothing terrible happened at all.

I’ll post more when the IIROC decision is on-line. For now, there’s a Barry Critchley column from last October that I missed at the time:

But he may have been too successful: documents obtained by the Financial Post suggest that even as Mr. Berry was earning millions of dollars for the bank in 2004, it was seeking outside legal opinions on the ramifications of renegotiating his contract to stop paying him so much.
…
In the fall of 2004, Mr. Berry was head of the preferred share trading desk at Scotiabank’s securities division, then known as Scotia Capital. In each of the two prior years, he’d earned $15-million, when CEO Rick Waugh earned $7.37-million and $8.58-million. And he had much to be pleased about: his group had just completed another highly profitable year, meaning a healthy boost to the bonus pool of the firm’s institutional equities group. He was set to receive almost $10-million in compensation, thanks to a “direct-drive” contract that awarded him essentially 20% of the profits he earned for the bank, minus his $125,000 annual salary plus expenses, up to $15-million.
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Three months later, or in late April 2005, Berry still hadn’t signed the contract. In May 2005, RS (the regulatory precursor to IIROC) issued a warning letter to Mr. Berry (though no formal proceedings were commenced) and started a “routine, scheduled trade desk review at Scotia.”

By the end of June 2005, Berry had been terminated with his group having chalked up about $43-million in net income. One year later Mr. Berry filed a $100-million claim alleging constructive and wrongful dismissal. In turn, the bank has filed a statement of defence and counterclaim.

Let’s hope he soaks Scotia for every cent of that $100-million. Maybe give them a $50 discount if Rick Waugh delivers the cheque personally.

And, just to ensure that this post has something to do with the actual preferred share market, let me highlight some numbers: He made about $15-million annually, and his pay was (roughly) 20% of the desk’s profits. Liquidity has a value – as we were reminded yesterday.