{"id":20901,"date":"2013-01-17T18:13:23","date_gmt":"2013-01-17T22:13:23","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=20901"},"modified":"2013-01-17T18:13:23","modified_gmt":"2013-01-17T22:13:23","slug":"iiroc-ruling-on-david-berry-released","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=20901","title":{"rendered":"IIROC Ruling On David Berry Released"},"content":{"rendered":"

IIROC has announced<\/a> the release of the hearing panel’s decision<\/a> on the vindication of David Berry<\/a>.<\/p>\n

The decision is nine pages long; about half of it is interesting:<\/p>\n

\u00b6 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.<\/p>\n

\u00b6 39 What made him so successful? His counsel suggests that, in part, it was \u201cbecause he was willing to take more risks than his competitors, including by taking short positions.\u201d 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\u2019t. So he did it by himself in the 08 account.<\/p><\/blockquote>\n

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.<\/p>\n

But … shorting shares! Gasp! What does IIROC’s counsel have to say about that, I wonder?<\/p>\n

\u00b6 49 New issue shares can be shorted. This does not constitute, as enforcement counsel submitted, \u201ccreating shares out of the ether.\u201d 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<\/p>\n

\u2026 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<\/i>, at such prices as the syndicate manager may determine, and to overallot underwritten securities, and may liquidate any such position.
\n(Emphasis added.)
\nThe only caveat to this provision is that \u201cat any time such positions do not exceed 15% of the underwriting obligation.<\/p><\/blockquote>\n

\u00b6 50 The rule cited above clearly states that this type of overallotment may be done by the \u201csyndicate manager.\u201d 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.<\/p>\n

\u00b6 51 IIROC recognizes that shares could be sold short, but only when there is demand. In our view, Berry\u2019s 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 \u201cran his own parallel new issue book,\u201d as enforcement counsel suggests, we do not disagree with but, once again, he is not charged with violating syndication procedures.<\/p>\n

\u00b6 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.<\/p><\/blockquote>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

At a Canadian brokerage, such an idea goes to committee. It meets sometime next year, I think.<\/p>\n

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.<\/p>\n

As a parting note, there is this section in the ruling:<\/p>\n

\u00b6 56 But, as enforcement counsel pointed out in his opening statement, Berry sometimes \u201cengaged in trading for his institutional clients that bypassed the syndication process.\u201d We agree \u2013 and have already said so \u2013 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.<\/p>\n

\u00b6 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.<\/p><\/blockquote>\n

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.<\/p>\n","protected":false},"excerpt":{"rendered":"

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: \u00b6 38 Berry was a highly successful …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-20901","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/20901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=20901"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/20901\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=20901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=20901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=20901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}