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More on closing arguments in Pacific International case
Internal Administrator
Posted: Friday, August 12, 2011
Joined: 10/12/2010
Posts: 5780


Posted: 11/20/2004 11:46:55 AM

By: Hunter

BCSC hears P.I. had leader's Swiss imprimatur



2004-11-10 20:39 ET - Street Wire

by Lee M. Webb

The British Columbia Securities Commission (BCSC) hearing into broad allegations against National Bank's Pacific International listened as Don Sorochan and co-counsel Catherine Esson shared duties as they moved into the second day of the closing arguments on behalf of the brokerage firm and six director respondents on Nov. 5.

Mr. Sorochan spent a good portion of the morning session sketching the background and qualifications of the directors assembled by Pacific International's Swiss-born co-founder and chief executive officer Max Meier, dove-tailing that into a review of the firm's corporate governance before handing off to Ms. Esson, who spent the remainder of the day discussing directors' duties.

Remarkable Swiss imprint

Mr. Sorochan told the panel that particular attention should be paid to both the background of Lawrence McQuid, who has his own legal representation, and Mr. Meier.

The lawyer remarked that accusations that Mr. Meier was "pulling the wool over people's eyes and things like that" do not stand up to the light of the facts.

"He's a remarkable man," Mr. Sorochan said.

Mr. Meier, who speaks English, German and French, was born in Switzerland where he obtained a business diploma and spent two years working in an accounting capacity in Geneva and two years with a Zurich bank before moving to Canada in 1970 at the age of 23.

"And it's, I suppose, stereotypical to think of the Swiss as being orderly and efficient and liking chocolate, but the chocolate part doesn't have anything to do with this," Mr. Sorochan remarked. "But I submit to you that you can see the imprint of Mr. Meier's Swiss background in the way that he set up the corporate governance in the firm, which is a good thing for Pacific International because if it hadn't had that imprint and the benefit of that background, we would not have had the strong foundation that Pacific International had.

"And as I said, even good people and well-motivated firms can have bad things happening to them. But when you don't have in place a structure, then those bad things can destroy the firm.

"And the fact that the firm was not destroyed is actually evidence of the good structure and the good intentions that Mr. Meier had."

After coming to Canada, Mr. Meier spent 10 years with the Canadian Imperial Bank of Commerce (CIBC) before he took the "courageous step" into the brokerage industry and subsequently co-founded Pacific International, serving as chief executive officer since 1983.

A retail broker, Mr. Meier has a small number of accounts, including 90 accounts over which he has complete discretion. He has not had a client complaint against him in his more than 22 years as a broker.

According to Mr. Sorochan, Mr. Meier did not trade actively for his clients on the OTC Bulletin Board. Euro Pacific, one of 20 or 30 European institutions serviced by Mr. Meier, was his only active OTC trader.

Mr. Sorochan told the panel that Mr. Meier spent about 30 per cent of his time on Pacific International management, 20 per cent of his time as an investment adviser, 30 per cent on industry activities and 20 per cent on community activities.

"This is a man who has broader interests than the selfishness that is ascribed to him by staff," Mr. Sorochan said. "To hear staff, you would think that this gentleman and others in the firm were motivated by the almighty dollar to the exclusion of all else."

Mr. Meier's industry involvement included 10 years as a governor of the Vancouver Stock Exchange (VSE) and four years as vice-chair of the exchange. He spent seven years on the executive committee of the VSE and seven years on the discipline committee, as well as chairing several other committees.

Among other things, Mr. Meier was a director of the Investment Dealers Association (IDA) and the Canadian Securities Institute and a trustee of the Canadian Investor Protection Fund for two years.

According to Mr. Sorochan, Mr. Meier not only provided valuable input to the industry, he also drew lessons from his association with organizations such as the Canadian Investor Protection Fund (CIPF).

"He saw the injury that's caused to the members of the public when there's neglect in the management structures and organization of a brokerage house or other financial institution that's covered by the Fund," Mr. Sorochan said. "And he found this experience to be useful in his management at Pacific International."

People person

According to Mr. Sorochan, Mr. Meier had a remarkable ability to spot talent in other than traditional settings. Such was the case with John Eymann, he said.

Mr. Eymann left school at the age of 15 to sweep floors at a heavy equipment business, quickly moving up to become a partsman. When he was 20 years old, he took over a financially troubled parts company, turned it around and acquired it by the time he was 27.

In addition to his experience dealing with loggers and contractors throughout B.C., Mr. Eymann travelled extensively to places like Britain, Southeast Asia and South Africa while in the heavy equipment business.

By the time Mr. Eymann sold his business in the late 1970s, the company had 65 employees.

Mr. Sorochan told the panel that during his time as the owner of a heavy equipment business, Mr. Eymann learned lessons that influenced his business approach to Pacific International, including respect for dealing with other people's money.

"He also learned the importance of hiring capable people," the lawyer said. "He testified that his philosophy for dealing with aspects of the business with which he was less familiar was to hire smart and knowledgeable people to look after those areas."

Mr. Meier urged Mr. Eymann to enter the brokerage business in 1980 and he went on to become a founding partner of Pacific International.

According to Mr. Sorochan, Mr. Eymann had great insights into the people of B.C. and elsewhere and a keen understanding of human nature. He enjoyed people and people were comfortable with him.

Mr. Eymann has been executive vice-president of Pacific International since 1984 and vice-chair since 2001. He has no specific responsibilities for the day-to-day management of the firm and no employees report directly to him.

Most of Mr. Eymann's time at the brokerage firm is spent servicing his client base of about 1,000 people, as many as 400 of whom may be active at one time. He did not trade on the OTC to any significant degree.

Mr. Eymann was also involved in industry associations, including IDA and VSE committees as well as the BCSC policy advisory board.

"He wanted a better understanding of the industry," Mr. Sorochan said. "He, like all of those that you have heard from, the respondents, wanted to be involved, wanted to make Pacific International as good as it could be."

Blue chip broker

Robert Blades joined Pacific International in 1987, serving as vice-president corporate finance until he resigned from his corporate finance responsibilities in 2000. He remains a vice-president and investment adviser at the brokerage firm.

Like Mr. Meier, Mr. Blades came from a banking background. He spent eight years with CIBC and another seven years with the Toronto Dominion Bank (TD). In 1986, he headed up TD's Greenline Investor Services, a discount brokerage, for Western Canada.

Mr. Sorochan paused in his discussion of Mr. Blades's background to offer some thoughts on the implications of the BCSC allegations against Pacific International for the directors of an organization like a bank.

According to Mr. Sorochan, it would not be practically possible for directors of a bank to meet the standards suggested by the BCSC. For example, bank directors could not be expected to read every media article about their clients, the lawyer said. He suggested that members of the board would be required to go through "a truck load" of material before every meeting.

"Now, they don't -- they shouldn't have to do that because they have set up appropriate structures within their firms," Mr. Sorochan said. "They have set up appropriate management checks and balances. And that is the logical way in which directors can carry on their business and it is indeed the way that is consistent with law, as Ms. Esson will tell you.

"The second aspect is quite apart from the broad duties that are suggested by staff, there is no requirement that directors be perfect."

Returning directly to Mr. Blades, Mr. Sorochan said that he quickly became involved in special projects at Pacific International, including establishing a representative in Hong Kong and opening an office in London.

Mr. Blades resigned from the executive committee and as a director in 2001, but remains a vice-president of the firm and continues to service his clients.

"For the most part, Mr. Blades's clients were and continue to be Canadian residents who trade primarily blue chip stocks," Mr. Sorochan told the panel, adding that some of his approximately 180 clients have small investments in speculative stocks.

Academically sound

Mr. Sorochan then turned to a review of the background and qualifications of Alberto Quattrociocchi.

"Now, once again let's look at the calibre of person that Mr. Meier is bringing into the firm," the lawyer said.

Mr. Quattrociocchi has a degree in economics, holds a chartered financial analyst designation and is a certified portfolio manager. He has taken a wide variety of courses in the securities industry, including courses on options, insurance, effective management, and sales management.

"So academically, he is a very sound person, and this again illustrates the desire of Pacific International and its leadership to get the best possible people into their firm," Mr. Sorochan said.

Mr. Quattrociocchi, who speaks English, Italian, Spanish and French, moved from CM Oliver to Pacific International in 1990.

"The purposes for which Mr. Quattrociocchi was brought in were to build the sales force and to diversify the organization," the lawyer continued. "His mandate was to build the asset gathering side of the business, research, corporate finance and institutional sales to make Pacific International a more full service firm."

Mr. Sorochan told the panel that Mr. Quattrociocchi only had "a small book" of 40 or 50 clients that only took a small amount of his time to service.

In addition to his industry involvement with the IDA and other organizations, Mr. Quattrociocchi served as a member of the VSE marketing committee, travelling to Europe and South America to increase awareness of the exchange.

"A lot of industry involvement, again, from a person with a sound background in education and experience," Mr. Sorochan said.

Big bank recruit

Martin Reynolds, who joined Pacific International in 1994, is another example of Mr. Meier and the leadership of the firm "going out and trying to get leaders," Mr. Sorochan told the panel.

Mr. Reynolds served as a member and chairman of the executive committee from 1994 until September of 1998 and as a director of the firm from 1994 until 1999.

"He came from one of the big bank firms, as I call them, Nesbitt Burns," Mr. Sorochan said, though not in a denigrating fashion. "Well, I guess it wasn't a big bank firm initially, but..."

Mr. Reynolds spent 23 years at Nesbitt Burns where he served as a director and officer from the early 1980s until he left in 1994. During his time with Nesbitt Burns, the firm grew from a small national brokerage to one of the largest investment dealers in Canada.

"A lot of experience," Mr. Sorochan said. "A lot of respect in the community. Well, respect that he still has, notwithstanding the excessive statements that have been made about him as a respondent in this proceeding.

"He's still respected. Why? Because people know it ain't true. Those that know Mr. Reynolds know him by his character and his reputation and are not going to be dissuaded about his good character because of things that are inappropriately stated in this proceeding."

Mr. Sorochan segued into a discussion of how the board of directors operated at Nesbitt Burns, telling the panel that the firm was run by senior officers who reported to the board twice per year, noting that procedure did not change after the Bank of Montreal acquired 70 per cent of the brokerage firm.

"The Bank of Montreal is a respected financial institution that one would expect to have the finest corporate governance requirements in place," Mr. Sorochan said. "And yet, they had less meetings, less involvement with the directors or even the senior officers than did Pacific International."

Returning to Mr. Reynolds, the lawyer sketched his industry involvement, including various roles with the IDA, the CIPF and the VSE, where he served on the board of governors and spent a stint as chairman, among other things.

Extraordinary

Rounding out his review of the individual respondents, Mr. Sorochan turned to Jean Paul Bachellerie, who joined Pacific International in 1995, taking on the role of chief financial officer, and has been a director and member of the executive committee since 1997. He is currently president of the brokerage firm.

"And, again, I suggest to you that the recognition of the talents of Mr. Bachellerie is, again, an indication of the wisdom of Mr. Meier and of the others that are involved in the leadership of this firm," Mr. Sorochan said. "Because he's clearly a person that has extraordinary abilities. He is a younger person that is going to be able to carry on this firm and take it to new heights."

Mr. Bachellerie has a bachelor of commerce degree and is a chartered accountant. He worked at Ernst & Young from 1988 to 1995 and became one of the accounting firm's in-house experts on broker-dealer audits. In his capacity as an auditor in a specialized area, he had considerable contact with the VSE.

Mr. Bachellerie's primary responsibility as chief financial officer at Pacific International was to ensure that the capital of the firm was maintained and that the financial statements and monthly financial reports were fairly presented. He was also responsible for the accounting staff, information technology staff and tax and regulatory filings, among other things.

Mr. Sorochan also noted that Mr. Bachellerie was involved in a number of special projects that required considerable attention.

"Now, why are we mentioning this?" Mr. Sorochan asked rhetorically. "Because you would think from listening to the executive director, through staff of this hearing, that the only thing that should have occupied the minds of the directors were the compliance issues that are being raised in this hearing.

"That's not the real world. There were many other aspects of the management of the firm that were equally important to the public interest."

Dabbling inappropriate

Following a morning recess, Mr. Sorochan turned to a discussion of the corporate governance of Pacific International.

According to Mr. Sorochan, it is not in the public interest to have members of the executive committee dabbling in complex matters such as the firm's capital requirements or compliance issues, "matters that are appropriately left, in a principled governance system, to the staff that are hired."

"What you can do as a regulator or a tribunal, is look at what the firm did," Mr. Sorochan said. "Did they hire somebody that had absolutely no ability in these areas, which would show an indifference perhaps?

"If your compliance officer was on day parole, okay.

"I have to say this for Stockwatch, 'Don is being sarcastic now,' because they keep taking my quotes as if I'm being serious."

(Stockwatch apologizes for perhaps missing some of Mr. Sorochan's sarcasm and other examples of his fine wit. However, as Mr. Sorochan has frequently remarked, this is a serious proceeding and Stockwatch is mindful of the danger of inadvertently imputing humour to something intended as a serious statement.)

"Obviously nobody is going to hire a person on day parole," Mr. Sorochan continued. "But the point is this, that you can look and see whether, in their decisions, the structures that are set up indicate a desire to comply with the public interest. Here, everything you see says they have."

Mr. Sorochan sketched the structure of Pacific International, telling the panel that with respect to the day-to-day operations the firm was basically divided into three departments, operations, compliance and credit.

"Pacific International's employees were hardworking, knowledgeable, committed and capable," Mr. Sorochan said. "The departmental managers had discretion to manage their areas and were, like other employees, free to address issues directly with the executive committee members."

According to Mr. Sorochan, while the executive committee managed the firm at the highest level, its purpose was not to micromanage the business. The departments, staffed with well-qualified and experienced individuals, made important operational decisions.

Shortly before the lunch recess, Mr. Sorochan handed the baton to Ms. Esson, who presented the submissions with respect to the duties of directors.

Devil in the detail

Ms. Esson's closely argued and detailed analysis of directors' duties, which drew heavily on several BCSC decisions and a number of court decisions, took up the balance of the Nov. 5 session.

"Now, my friend, Mr. Hilford, said at the outset of directors duties that he didn't think there was great disagreement between us as to the principles to be applied, and I think that's generally correct," Ms. Esson told the panel. "The devil, though, is in the detail, and it is my submission that one really can't look at the principles without looking at the cases in which they have been articulated and applied to see what they really mean."

As often happens, such an analysis of the law and relevant cases does not easily lend itself to a lay report. Fortunately, Ms. Esson provided a succinct summary of her submissions at the outset.

"My submission to you, in summary, though is that what directors are required to do is to supervise the management of the firm in a reasonable, but not perfect, way," Ms. Esson told the panel. "That means that mistakes are allowed, risks are allowed to be taken, and bad things may happen.

"You will see this in the cases I come to where directors have been found not to have breached their duties. The directors made decisions or failed to take action and bad things happened, that's why it ended up before a tribunal or a court; risks materialized and in a couple of cases the companies involved breached the law.

"That did not mean, however, that the directors did not supervise the management of the company reasonably.

"What directors are not allowed to do is abdicate their responsibility."

Ms. Esson went on to say that deciding whether directors met their responsibilities is a fact-based inquiry.

"The case law makes clear that the facts must be viewed reasonably, as they would have been viewed reasonably in the context the directors were operating in," Ms. Esson said. "This is really just a corollary of the fact that the standard is the reasonably prudent and not the perfect person.

"It's clear from the case law that the reasonably prudent person can be busy, can forget things, is entitled to trust people unless there's a demonstrated reason not to, and is not expected to observe the implications of every fact in every piece of information that comes across their desk or is on the boardroom table, even if in hindsight the implications may appear to be obvious or suspicious.

"The reasonable person is entitled to take comfort from good audits and regulatory examinations, and to interpret correspondence with auditors and regulators in a straightforward, realistic way."

Ms. Esson went on to lead the panel carefully through her brief of authorities, including some of the BCSC's own relevant decisions. Among other things, Ms. Esson argued that the actions of directors should be judged in the context in which they occurred.

The lawyer said that the case law showed directors are not held to perfection and it is reasonable for directors to rely upon the expertise of others. She also argued that directors cannot be experts in all aspects of the company, nor does the law place that expectation on them.

As the afternoon was wearing on, Ms. Esson drew on a 1962 New York Supreme Court decision "for a statement of principle and a nice turn of phrase" with respect to directors' duties.

"Directors are not prophets and may only be compelled to act reasonably and prudently," that decision stated in part. "A wisdom developed after an event and having it and its consequences as a source is a standard no man should be charged with."

According to Ms. Esson, however, that was exactly what the BCSC was trying to impose on the directors of Pacific International.

"What drives this case is not that there was a requirement prior to June of 1999 for a board of a brokerage firm to decide whose trading it could supervise rather than relying on the qualified compliance department for that, or a duty not to engage in business which could result in bad publicity," Ms. Esson said. "What drives it is the events of June of 1999.

"In response to those events, the staff have fashioned a case based not on standards which actually existed at the time, but on standards which staff think maybe, if they had existed at the time, might have prevented the events of June of 1999. And that, in my submission, is exactly what this case says ought not be done."

After completing her review of the cases, Ms. Esson said that they made it clear that directors are not required to be perfect, only reasonable.

"Directors are responsible only for the supervision of the management of the firm," Ms. Esson said. "If they put in place appropriate people and systems, they're not responsible or not required to interfere in how those work."

"Directors can rely on managers to run the firm and they can take comfort from audits and regulatory examinations.

"The information a board of directors is to receive is a matter of business judgment, at least within reason.

"Directors are only required to investigate the affairs of the company if they observe something, or ought to observe it, which creates suspicion. And suspicion in the cases is something really quite substantial."

Stockwatch's coverage of the closing arguments will continue.

Comments regarding this article may be sent to lwebb@stockwatch.com.

(More information regarding the closing arguments is available in Stockwatch articles dated Oct. 19, 20, 21, 22, 25, 26, 27 and 28; and Nov. 1, 2, 4, 5 and 8, 2004.)




 

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