PrefBlog

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.
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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.
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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.

This entry was posted on Tuesday, January 15th, 2013 at 9:09 pm and is filed under Miscellaneous News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.