Too big to prosecute, our bankers

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Postby admin » Mon Nov 03, 2008 6:32 pm


This morning over my coffee I read an article in the Toronto Star (one of the two papers to which I subscribe). It was an article about an Ex-CIBC managing director who had criminal charges dropped after CIBC agreed to pay $125 million to settle claims by Spitzer and the SEC.

This is $125 million of shareholder's money paid to cover up wrongdoing at the top. No "rogue broker" this one.

As a subscriber I did a search of thinking I could e-mail this intriguing article to others. But I could not find the article on the Star website, although another article on the same page D7 "Ex-broker barred, fined" about Octagon Securities broker Barry Leung appeared on the website.

I guess the Star believes the web readers are more interested to read about small fry being fined $100,000 and banned (this ensures the fine will not be collected) than reading about one of our prominent banks spending $125 million of shareholders money to cover up the criminal activities of the former managing director of CIBC.

However I did find an article on another website and append a copy. The following is an excerpt.

"Mr. Flynn was charged with five felonies, including two counts of grand larceny, for allegedly

bankrolling a pair of hedge funds that engaged in illegal late trading and "deceptive" market timing

of mutual funds. At the time, Mr. Spitzer's office accused him of stealing more than $1-million

from mutual fund investors. ...

CIBC, which struck a twin settlement with both Mr. Spitzer and the SEC, also declined to discuss

the matter. The bank promised to pay $100-million in restitution to investors, and an additional

$25-million in penalties, to settle allegations it knowingly financed hedge funds involved with

manipulative trading practices.

It reminds me of the time the major papers in Toronto seemed to believe that two small investors taking BMO Nesbitt to court over Bre-X (once touted as scam of the century) would not be of interest to Canadians most of whom suffered some degree of loss due to that fiasco. The two Ottawa evening papers covered the court case on the first day but then fell strangely silent the next day.


Stan I. Buell
Small Investor Protection Association
P.O.Box 325, Markham, ON, L3P 3J8
Tel: 905-471-2911
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Postby admin » Mon Nov 03, 2008 6:30 pm

Globe and Mail National, Editorial,
Thursday, August 4, 2005

How CIBC pays for its Enron file
CIBC has made its peace with Enron's investors. Now it has its own shareholders to answer to.
The country's fifth-largest bank agreed Tuesday to pay $2.4-billion (U.S.) to settle its part of a class-action lawsuit filed by investors in the energy-trading giant, which collapsed under a scandalous mountain of fraudulent accounting in 2001. The settlement allows the bank to avoid any outright admission of guilt, but the sheer size of it stands as silent acknowledgment of CIBC's complicity as one of the bankers that helped finance Enron's corporate web of deception.
The lead plaintiff in the lawsuit is the University of California, a stark reminder of who was really hurt by Enron's collapse. The university had invested funds earmarked for its employees' pensions. Many other pension funds, and mutual funds investing private investors' retirement savings, saw their money evaporate.
CIBC, too, counts the country's largest pension funds and mutual funds among its biggest shareholders. The bank, like all Canada's big banks, is considered a blue chip stock, the kind of strong, stable investment that any major portfolio would want to own. Yet CIBC went overboard in pursuing an aggressive, reckless investment strategy with Enron that exposed the bank to massive risks not in keeping with the kind of safe, reliable stock its shareholders reasonably believed they owned.
For a time" those shareholders benefited from the bank's approach. CIBC's stock price has doubled in the past three years, and its dividend payments have doubled since the end of2000. But the massive Enron settlement stands to undo all that. The cash drain will likely put a stop to dividend increases, and has cut the bank's growth prospects off at the knees. Shareholders are already paying. CIBC's stock lost almost 8 per cent yesterday, wiping out more than $2-billion (Canadian) of shareholder value in a single day.
And where is the man responsible? John Hunkin, who was at the helm when CIBC jumped into bed with Enron, announced his retirement five weeks ago; last Friday was his last day. Conveniently, he wasn't around to face the music when his successor, Gerry McCaughey, announced the settlement.
Mr. Hunkin has retired a very wealthy man, thanks in part to his aggressive business approach that has now cost the bank, and its investors, dearly. In his six years in charge, his average annual compensation was $7.3-million, including more than $13 - million last year. In 20QO and 2001, the two years in which CIBC was embroiled with Enron, Mr. Hunkin pulled down $6million in bonuses and another $5-million in CIBC stock awards.
It's unfortunate that Mr. Hunkin didn't stick around to face his shareholders and own up to the costly mistakes made on his watch. And it's unacceptable that he should profit so handsomely from a strategy that may have crippled the bank for years to come. He can't undo what has been done, but he can at least do the right thing: return the bonuses for the years when his leadership led the bank to its disastrous dance with Enron.
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Postby admin » Mon Nov 03, 2008 6:28 pm

I would expect that the Canadian banks will be more concerned about doing legal and ethical business, after today's record high settlement by the CIBC with the investors of Enron. CIBC's settlement works out to be approximately $2.92-billion (Canadian), almost 50 per cent more than the $1.99-billion in profit the bank earned in fiscal 2004. CIBC said the charge will lower its Tier 1 capital ratio to 7.5 per cent as of July 31, above the regulatory requirement of 7 per cent for a well-capitalized financial institution, but below the bank's goal of 8.5 per cent or higher. CIBC estimated that earnings will restore its Tier 1 capital ratio to 8.5 per cent or higher by mid-2006.

It is estimated that individual investors suffer over $1 billion of investor losses due to fraud and unsuitable advice by financial advisors, a significant proportion of which work for the bank owned dealers. Finally, investors are getting some restitution for their losses caused by malfeasance, but it took a U.S. class action and the funding of huge American institutional investors to accomplish this. If Enron were a Canadian company, CIBC would not have been investigated by Canadian regulators and investor restitution would not likely have occurred.

The Canadian securities enforcement and justice systems governing white collar crime needs to be fixed. It is unlikely that the new heads of the OSC and ASC will be the catalysts for the dramatic restructuring required, since they are an investment banker and a securities lawyer with no record of actions taken to protect individual investors in their previous roles.

CIBC to pay $2.4-billion (U.S.) in Enron settlement

Tuesday, August 2, 2005 Updated at 4:41 PM EDT

Globe and Mail Update

Canadian Imperial Bank of Commerce has agreed to pay $2.4-billion (U.S.) to resolve allegations it aided the collapse of Enron Corp., a massive settlement that will cost the bank more than its entire profit last year.

The CIBC settlement represents the biggest win so far for former investors of the disgraced energy trader, who have filed a $25-billion class-action lawsuit against several of the most powerful financial institutions in the United States and Canada.

The bank said shortly after 4 p.m. that the settlement “does not include any admission of wrongdoing” by the bank. CIBC also said it “agreed to the settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation.”

The bank said it will take a pre-tax charge of around $2.8-billion (Canadian), or $2.5-billion on an after-tax basis, in the current quarter ended July 31 to cover this settlement and its remaining Enron-related legal matters.

Earlier this summer, J.P. Morgan Chase & Co. paid $2.2-billion (U.S.) to end its involvement in the lawsuit, while Citigroup Inc. paid $2-billion. A host of other banks and brokerages, including Toronto-Dominion Bank and Royal Bank of Canada, have yet to reach an agreement.

A spokesman for the University of California (UC), which is the lead plaintiff in the suit, declined to discuss the matter after first reported the settlement on Tuesday. It was formally announced later on Tuesday.

“With this CIBC settlement, UC has now recovered more than $7 billion for investors — more than any other securities case in history,” James Holst, the university's general counsel, said in a statement. “We are especially pleased with the amount of this latest settlement, which exceeds both the Citigroup and J.P. Morgan Chase settlements.”

For CIBC, the Enron settlement is a costly and painful culmination of various regulatory problems that have afflicted the bank in recent years. In late 2003, the bank paid $80-million to U.S. regulators to settle allegations it aided and abetted the accounting fraud at Enron. Two weeks ago, it struck a $125-million deal with the U.S. Securities and Exchange Commission and New York State Attorney General Eliot Spitzer to settle its alleged role in a mutual fund trading scandal.

This latest settlement is expected to wipe the slate clean for newly minted chief executive officer Gerry McCaughey, who officially replaced John Hunkin today.

“A key priority for us is to resolve this case and substantially reduce our litigation risk,” Mr. McCaughey said in a statement. “By settling this case and maintaining what we believe are adequate reserves for our remaining Enron related legal issues, we can better focus our energies on our other priorities.”

CIBC's settlement works out to be approximately $2.92-billion (Canadian), almost 50 per cent more than the $1.99-billion in profit the bank earned in fiscal 2004. The bank is still named in a separate suit filed by the company itself against several of its lenders and banking partners. RBC settled its part in this suit last week for $49-million. The bank will pay $25-million to Enron, and an additional $24-million to advance its bankruptcy claims against the company.

CIBC said the charge will lower its Tier 1 capital ratio to 7.5 per cent as of July 31, above the regulatory requirement of 7 per cent for a well-capitalized financial institution, but below the bank's goal of 8.5 per cent or higher. CIBC estimated that earnings will restore its Tier 1 capital ratio to 8.5 per cent or higher by mid-2006.

Barclays PLC, Credit Suisse First Boston, Merrill Lynch & Co., Deutsche Bank AG and the Royal Bank of Scotland have yet to settle the class action suit.
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Postby admin » Mon Nov 03, 2008 6:27 pm

CIBC pays US$125M in settlement
Satisfies regulators' claims of improper trading in funds

Barbara Shecter
Financial Post

Thursday, July 21, 2005

CREDIT: Peter Redman, National Post
(JOHN) HUNKIN: takes responsibility.

In one of his final acts as chief executive of Canadian Imperial bank of Commerce, John Hunkin yesterday presided over a US$125-million payout to settle claims by U.S. regulators that the bank helped hedge funds make improper mutual fund trades.

Mr. Hunkin will hand the reins of CIBC to his successor, Gerry McCaughey, next month. Observers said yesterday's joint settlement with the U.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer allows Mr. McCaughey to take the top job with a clean slate.

In an interview with the Financial Post last month, Mr. Hunkin took responsibility for a series of regulatory run-ins and other events that threatened to tarnish CIBC's reputation.

In late 2003, CIBC paid US$80-million to settle claims it aided disgraced energy trader Enron Corp., where a massive accounting scandal led to bankruptcy.

Yesterday's mutual fund settlement, which includes US$100-million in restitution to injured investors plus civil penalties, was not a complete surprise. In its most recent fiscal quarter, CIBC more than doubled an earlier $50-million provision set aside to deal with the probe by U.S. regulators into late and rapid trading. Such trading gives an advantage to some mutual fund investors over others.

But the investigation has been hanging over CIBC for more than a year. In February, 2004, criminal and civil charges were laid against a recently dismissed employee who stands accused of loaning money to known late and rapid traders, and helping them mask the activities.

A subsequent complaint against CIBC alleged that as much as US$1.3-billion was lent to hedge funds known to be late and rapid traders of mutual funds. Yesterday, Mr. Spitzer's office said CIBC is co-operating with "investigations of the conduct of former CIBC employees and various entities with which CIBC did business."

The bank -- which did not admit or deny wrongdoing in the settlement -- dismissed some employees and stopped providing the targeted financing to hedge funds "as soon as the company was made aware of the matter," Mr. Hunkin said.

"We have added policies and procedures to enhance our abilities to monitor and recognize such activities if they ever were to occur again."

Paul Flynn, who was a managing director at CIBC until his dismissal in December, 2003, is due in court next month in New York on matters related to the allegations against him.

One Toronto-based analyst called the settlement "embarrassing" for CIBC. But he said it is expected to have little impact on the share price because the amount is "insignificant," given the relative size of the balance sheet of Canada's fifth-largest bank.

The formal complaint against CIBC alleged the bank "engaged in various subterfuges and false pretenses to fraudulently disguise or conceal market timing transactions."

In one example, the complaint claimed, CIBC's brokerage approved issuing 50 registered representative numbers to a single CIBC broker, many of which were used to hide the broker's involvement in timing transactions.

The complaint claimed CIBC lent more than US$1-billion to known mutual fund timers, and channelled the money into hundreds of accounts it controlled, where trading activity was rotated to escape detection by mutual fund companies.

The complaint also alleged CIBC aided clients in illegal "late trading," which enables certain investors to profit from information released after the 4 p.m. close of the financial markets.

CIBC is the 13th firm to settle charges of improper mutual fund trading in the past two years, Mr. Spitzer's office said. The investigation has resulted in the return of US$3.2-billion to investors
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Postby admin » Mon Nov 03, 2008 6:02 pm

In the old days when a bank was involved in crime its reputation was sullied and sometimes as in the case of Salomon brothers they were forced to sell out. CIBC has been involved in the biggest corporate scandals to a greater extent it seems than the other Cdn banks. Here's a small sampling: ... =printable ... 82116.html (tax evasion)

CIBC World Markets admits to securities violations Reuters, February 27, 2003
CIBC World Markets admitted on Thursday it violated securities regulations when it failed to disclose in a series of research reports its brokerage and banking relationship with Shoppers Drug Mart. World Markets admitted it violated securities regulations when it recommended buying Shoppers stock in equity research reports between December 2001 and February 2002 that failed to disclose that it was the lead underwriter in Shoppers' initial public offering.
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Postby admin » Mon Nov 03, 2008 6:01 pm

"Canadian Imperial Bank of Commerce was fined $496,958 (U.S.) by the Securities and Exchange Commission Monday for breaking federal rules governing political contributions." (G&M)
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Postby admin » Mon Nov 03, 2008 5:55 pm


Alberta Treasure Branches fiddling the figures to pay executive bonus's of $26.1 million.

Despite having to write down ABCP investment losses, they included the imaginary interest from these investments to calculate their bonus.

Alberta auditor general report for 2008 includes two interesting pages about the ATB bonus scheme.
pages 125-126

The auditor found that ATB management included interest returns on frozen investment paper in their calculations towards meeting management bonus targets, despite knowing that interest in frozen investment paper has not been paid and it is not certain that interest will be collected.

The inclusion of this imaginary interest allowed $26.1 million worth of bonus to be paid despite ATB policy that states that "if net income was below 50% of target income, then no variable pay (bonus's) would be paid."
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Postby admin » Mon Nov 03, 2008 5:35 pm

Markarian c. Marchés mondiaux CIBC inc.

[2006] J.Q. no 5467

14 June 2006 ... 475F5C1C04

In a landmark case, Montreal Superior Court Judge Jean-Pierre Senecal awarded more than $3 million, including $1.5 million in punitive damages, to retirees Haroutioun and Alice Markarian, who had unwittingly guaranteed the trading losses of people they didn't know at the behest of their former CIBC Wood Gundy broker, Harry Migirdic. The brokerage invoked the guarantees to seize $1.4 million from the Markarians in 2001, leaving $2.54 in their accounts. Senecal called CIBC's conduct "reprehensible" and said it "cruelly failed" in its duty to protect its clients and supervise its employee. CIBC subsequently settled out of court with several other former clients of Migirdic, who was terminated in 2001.


He said the brokerage appropriated the money illegally, treated the Markarians in an arrogant and "degrading" manner and "cruelly failed" to control and supervise its employee.

"CIBC must assume responsibility for the fraud of which (the Markarians) were victims," Judge Senecal said. "It was responsible not only indirectly, but directly."

"The brokerage's behaviour was both reprehensible and irresponsible."

-Superior Court Judge Jean-Pierre Senecal

Bank to pay $3 million to retired couple; Montreal Gazette, June 15, 2006


So why hasn't the Investment Dealers Association or L'Autorité des marchés financiers taken action against CIBC World Markets???

Why have the police not taken action in this fraud? Because our financial industry police's itself, that is why.
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Postby admin » Mon Nov 03, 2008 5:32 pm

Toronto Star

Canada's big banks like monopoly: Paper
Bank of Canada study shows Big Six hold 90% of assets despite entries

August 14, 2007

Canada's banking sector is "characterized by monopolistic competition" even though the number of banks has risen more than fivefold over the past 25 years, says new research by the Bank of Canada.

The discussion paper, entitled A Note on Contestability in the Canadian Banking Industry, takes a fresh look at whether market concentration has compromised competition in Canada.

"Canada has a highly concentrated banking market," the report says. "The Big Six banks account for more than 90 per cent of the assets in the banking system."

The six biggest banks are the Royal Bank of Canada, the Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and the National Bank of Canada.

While the industry remains concentrated, it has undergone significant changes over the past quarter century, the report says.

From 1920 to 1980, Canada had 11 banks. By May 2006, that number had increased to more than 60 in the wake of regulatory changes permitting the entry of foreign competitors.

However, "the entry of the foreign banks has not resulted in a significant loss of market share of the major banks or domestic banks, in general," the report says.

Nonetheless, foreign banks have brought "innovation and competitive pressure that may have influenced the way Canadian banks conduct business."

Bank of Canada analyst Jason Allen and Ying Liu, an economics expert at the Université de la Méditerranée, base their findings on a database of quarterly balance sheet and income statement information for 10 domestic and 15 foreign banks operating in Canada between the second quarter of 2000 to the first quarter of 2006. The assets of banks in that sample account for 97.8 per cent of the total Canadian dollar assets of the sector, the authors say.

The research begins in the second quarter of 2000 to reflect the impact of TD Bank's acquisition of Canada Trust earlier that year – called the last major consolidation in the financial services sector.

The report estimates the banks' competitive behaviour "on the basis of the comparative static properties of reduced-form revenue equations based on cross-section data."

While the authors do not offer an opinion on the controversial issue of mergers, they do suggest that consolidation has received "heightened interest" from researchers and policy-makers of late.

Earlier this summer, a report from the C.D. Howe Institute called on Ottawa to allow bank mergers and lift foreign ownership restrictions, claiming current regulations were hampering competition.

Reform Party founder Preston Manning and former premier Mike Harris have also called for foreign ownership restrictions to be dropped in protected sectors like banking – an issue currently being examined by a federal panel reviewing Canada's competition laws.
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Postby admin » Mon Nov 03, 2008 5:31 pm

From our files: CIBC gets brought down to earth

In a ruling hailed by their lawyer as "a great victory for investors,'' a Superior Court of Quebec judge ordered CIBC World Markets to pay a retired Montreal couple more than $3 million, including an unprecedented $1.5 million in punitive damages. Haroutioun and Alice Markarian sued CIBC after it seized $1.4 million from their accounts in 2001 to cover the trading losses of people they didn't know. They'd unknowingly guaranteed the accounts by signing documents misrepresented to them by their former CIBC Wood Gundy stockbroker, Harry Migirdic. During the 25-day trial, CIBC claimed the guarantees obtained by Migirdic were valid and the Markarians were the agents of their own misfortune by signing them. He ordered CIBC to return the $1.4 million seized, with interest since June of 2001. He granted the Markarians an additional $1.5 million in punitive damages, which their lawyer Serge Letourneau said is to his knowledge the largest amount ever levied in punitive damages against a brokerage in Canada.
CIBC was also ordered to pay $50,000 to each of the Markarians for moral damages, $94,560 of their legal fees and all trial-related expert costs. The judgment even included a clause ordering CIBC to turn over $1.5 million to the Markarians regardless of whether it appeals, because of their advanced ages. Source: ... 3b&k=68185 Paul Delean, June 15, 2006 If you want a copy of the 115 page judgment (in French) ... c_cibc.pdf or try ... e=23539145 .More on the story at
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Postby admin » Mon Nov 03, 2008 5:30 pm

Posted: 30 Jul 2007 05:21 pm Post subject: Banks Rob Client!! Film at Eleven.


Last updated at 6:26 AM on 11/07/07
Sentence pending for bank manager who didn't supervise corrupt employee


They lost their life savings: $500,000. "It ruined our lives," said a woman who didn't want to give her name.

The woman and her husband drove from Cape Breton yesterday to witness a sentencing hearing held by the Investment Dealers Association of Canada for bank manager Frank Youden.

He was charged and found guilty in January 2006 of failing to supervise employee Hugh Bagnell. About a dozen of Bagnell's clients at RBC Dominion Securities in Halifax lost significant amounts of money between 2000 and 2002.

Bagnell was fined $61,700 in 2003 for failing to attend a regulatory investigation, and barred by the IDA.

Yesterday, a three-man panel met in Halifax for a sentencing hearing. They heard from lawyers representing both sides, but they did not give a judgment yesterday. They will release a written decision at a later date.

The Cape Breton couple said they got "mixed up" with Bagnell in 1998.

"He was from Cape Breton and he came in like a friend, have-a-cup-of-tea kind of thing, sit at the table, and we trusted him."

Now they're working with several other former clients and have hired a lawyer to get their money back.

"I'm going to enjoy (the money) and share it with the children now for all the hell our family went through."

Kathryn Andrews, representing the IDA, suggested Youden receive a four-year suspension, a $50,000 fine and pay for $106,000 in costs.

She pointed out Youden didn't call the clients or check into Bagnell's activities even after red flags were raised.

"There were a number of times the respondent was directed to contact clients, but he did not."

One of the clients was a farmer with little investment knowledge and limited education. His account was drained to $2,000 from $173,000.

"We're seeking a serious penalty because serious issues are involved here," Andrews said.

Nigel Campbell, Youden's lawyer, asked for a reprimand.

"What you're really dealing with here is a judgment error," he said.

A reprimand makes sense because there were no findings of an absence of supervision, it was just insufficient, he said.

His client has a 38-year industry history which is discipline free, added Campbell. Plus Youden is close to retirement, which is an important time where consequences could be particularly impactful. Youden is still working as a bank manager in Halifax.

Campbell also pointed out that Bagnell, not Youden, was the primary actor in this incident.

"There's absolutely no evidence that a severe penalty is warranted to prevent something like this happening again," he said.

The incident was unique and not indicative of his usual behavior, Campbell added.

A penalty in this case is "totally wrong," he said.


For immediate release

For further information, please contact:

Alex Popovic Connie Craddock

Vice-President, Enforcement Vice-President, Public Affairs

(416) 943-6904 or (416) 943-5870 or

IDA Hearing Panel finds Frank Youden guilty of failure

to supervise

January 9, 2006 (Toronto, Ontario) – A Hearing Panel of the Investment Dealers Association of Canada (IDA), appointed pursuant to By-law 20, has found that Frank Youden, branch manager of RBC Dominion Securities (RBCDS) in Halifax, failed to supervise the trading activity in Approved Person Hugh Bagnell’s accounts, in particular, to ensure recommendations made by Mr. Bagnell were appropriate for his clients and in keeping with their investment objectives. The panel found that Frank Youden acted contrary to Policy 2 and Regulations

1300.1 (c) and 1300.2.

The main issue at the hearing was the reasonableness of the supervisory steps taken by Mr. Youden with respect to Mr. Bagnell’s client accounts. Between 2000 and 2002, Mr. Bagnell was the Approved Person for a number of client accounts, and Mr. Youden was the branch manager responsible for the supervision of Mr. Bagnell. In December 2003, the IDA’s Nova Scotia District Council disciplined Mr. Bagnell for failing to attend and give information in respect of an investigation being conducted by the IDA’s Enforcement Department. He was permanently prohibited from approval to act in any registered capacity with a Member of the IDA and fined costs of $61,700 (Bulletin #3231).

Following a disciplinary hearing held on April 5-8, 2005, and April 12-15, 2005, in Halifax, Nova Scotia, the Hearing Panel released its decision on January 3, 2006. The Panel found that Mr. Youden failed to:

• reasonably supervise Mr. Bagnell’s client accounts;

• adequately address the high turnover ratios in many of Mr. Bagnell’s client accounts, in that he either did not address them at all with Mr. Bagnell or he repeatedly accepted Mr. Bagnell’s explanations in spite of numerous red flags that called for action;

• adequately review a number of monthly statements that generated more than $1,000 commission per month; and

• contact Mr. Bagnell’s clients himself to confirm the suitability of the trading activity in the face of repeatedly high turnover ratios, high commissions, significant losses and trading activity that was inconsistent with the client objectives on file.

A date will be set for a penalty hearing on the above charges.

The Investment Dealers Association of Canada is the national self-regulatory organization and representative of the securities industry. The IDA’s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets. The IDA enforces rules and regulations regarding the sales, business and financial practices of its Member firms and its approved persons. Investigating complaints and disciplining Members and approved persons is part of the IDA’s regulatory role.
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Postby admin » Mon Nov 03, 2008 5:26 pm

Canada's Royal Bank sold Leveraged C.D.O.'s to U.S. School Boards !!


November 2, 2008
The Reckoning
From Midwest to M.T.A., Pain From Global Gamble
“People come up to me in the grocery store and say, ‘How did we get suckered into this?’ ”

— Marc Hujik, of the Kenosha, Wis., school board

On a snowy day two years ago, the school board in Whitefish Bay, Wis., gathered to discuss a looming problem: how to plug a gaping hole in the teachers’ retirement plan.

It turned to David W. Noack, a trusted local investment banker, who proposed that the district borrow from overseas and use the money for a complex investment that offered big profits.

“Every three months you’re going to get a payment,” he promised, according to a tape of the meeting. But would it be risky? “There would need to be 15 Enrons” for the district to lose money, he said.

The board and four other nearby districts ultimately invested $200 million in the deal, most of it borrowed from an Irish bank. Without realizing it, the schools were imitating hedge funds.

Half a continent away, New York subway officials were also being wooed by bankers. Officials were told that just as home buyers had embraced adjustable-rate loans, New York could save money by borrowing at lower interest rates that changed every day.

For some of the deals, the officials were encouraged to rely on the same Irish bank as the Wisconsin schools.

During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays.

But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally.

The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs.

The bank at the center of the saga, named Depfa, is now in trouble, threatening the stability of its parent company in Munich and forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany’s economic system.

“I am really worried,” said Becky Velvikis, a first-grade teacher at Grewenow Elementary in Kenosha, Wis., one of the districts that invested in Mr. Noack’s deal. “If millions of dollars are gone, what happens to my retirement? Or the construction paper and pencils and supplies we need to teach?”

The trail through Wisconsin, New York and Europe illustrates how this financial crisis has moved around the world so fast, why it is so hard to tame, and why cities, schools and many other institutions will probably struggle for years.

Ashley Gilbertson for The New York Times
IN WISCONSIN “This is something I’ll regret until the day I die,”
said Shawn Yde of the Whitefish Bay schools.
“The local papers and radio shows call us idiots, and now when I go home, my kids ask me, ‘Dad, did you do something wrong?’ ” said Shawn Yde, the director of business services in the Whitefish Bay district. “This is something I’ll regret until the day I die.”

The Royal Bank of Canada Was Selling Risk

Whitefish Bay’s school district did not intend to become a hedge fund. It and four nearby districts were just trying to finance retirement obligations that were growing as health care costs rose.

Mr. Noack, the local representative of Stifel, Nicolaus & Company, a St. Louis investment bank, had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools.

Mr. Noack told the Whitefish Bay board that investing in the global economy carried few risks, according to the tape.

“What’s the best investment? It’s called a collateralized debt obligation,” or a C.D.O., Mr. Noack said. He described it as a collection of bonds from 105 of the most reputable companies that would pay the school board a small return every quarter.

“We’re being very conservative,” Mr. Noack told the board, composed of lawyers, salesmen and a homemaker who lived in the affluent Milwaukee suburb.

Soon, Whitefish Bay and the four other districts borrowed $165 million from Depfa and contributed $35 million of their own money to purchase three C.D.O.’s sold by the Royal Bank of Canada, which had a relationship with Mr. Noack’s company.

But Mr. Noack’s explanation of a C.D.O. was very wrong. Mr. Noack, who through his lawyer declined to comment, had attended only a two-hour training session on C.D.O.’s, he told a friend.

The schools’ $200 million was actually used as collateral for a complicated form of insurance guaranteeing about $20 billion of corporate bonds. That investment — known as a synthetic C.D.O. — committed the boards to paying off other bondholders if corporations failed to honor their debts.

If just 6 percent of the bonds insured went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt. By comparison, the C.D.O.’s offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk.

The boards, as part of their deal, received thick packets of documents.

“I’ve never read the prospectus,” said Marc Hujik, a local financial adviser and a member of the Kenosha school board who spent 13 years on Wall Street. “We had all our questions answered satisfactorily by Dave Noack, so I wasn’t worried.”

Wisconsin schools were not the only ones to jump into such complicated financial products. More than $1.2 trillion of C.D.O.’s have been sold to buyers of all kinds since 2005 — including many cities and government agencies — an increase of 270 percent from the four previous years combined, according to Thomson Reuters.

“Selling these products to municipalities was pretty widespread,” said Janet Tavakoli, a finance industry consultant in Chicago. “They tend to be less sophisticated. So bankers sell them products stuffed with junk.”

From the Wisconsin deal, the Royal Bank of Canada received promises of payments totaling about $11.2 million, according to documents. Stifel Nicolaus made about $1.2 million. Mr. Noack’s total salary was about $300,000 a year, according to someone with knowledge of his finances. And Depfa received interest on its loans.

In separate statements, the Royal Bank of Canada and Stifel Nicolaus said board members signed documents indicating they understood the investments’ risks. Both companies said they were not financial advisers to the boards but merely sold them products or services. Stifel Nicolaus said its relationship with the boards ended in 2007. Mr. Noack now works for a rival firm.

“Everyone knew New York guys were making tons of money on these kinds of deals,” said Mr. Hujik, of the school board. “It wasn’t implausible that we could make money, too.”

A Bank Goes Global

By the time Depfa financed the Wisconsin schools’ investment, it had already become an emblem of the new global economy. It was founded 86 years ago as a sleepy German lender, and for most of its history had focused on its home market.

But in 2002 a new chief executive, Gerhard Bruckermann, moved Depfa to the freewheeling financial center of Dublin to take advantage of low corporate taxes. He soon pushed the company into São Paulo, Mumbai, Warsaw, Hong Kong, Dallas, New York, Tokyo and elsewhere. Depfa became one of Europe’s most profitable banks and was famous for lavish events and large paychecks. In 2006, top executives took home the equivalent of $33 million at today’s exchange rates.

Mr. Bruckermann was a gregarious leader who joked that he hoped to make all employees into millionaires. He divided his time between a London home and a vast farm in Spain, where he grew exotic medicinal plants. And his success fueled an arrogance, former colleagues say.

Mr. Bruckermann once told a trade publication that Depfa, unlike German banks, understood how to benefit from the global economy. “With our efforts, we are like the one-eyed man who becomes king in the land of the blind,” he was quoted as saying.

Mr. Bruckermann, who left the bank earlier this year, did not respond to requests for an interview.

But as Depfa grew, other European banks began competing with the firm. So executives stretched into riskier deals — the sort that would eventually send shockwaves across Europe and the United States.

Some of Mr. Bruckermann’s employees grew concerned about deals like one struck in 2005 with the Metropolitan Transportation Authority of New York, the agency overseeing the city and suburban subways, buses and trains.

For years, municipal agencies like the M.T.A. had raised money by issuing plain-vanilla bonds with fixed interest rates. But then bankers began telling officials that there was a way to get cheaper financing.

Bankers said that cities, like home buyers, could save money with adjustable-rate loans, where the payments started low and changed over time. What they did not emphasize was that such payments could eventually skyrocket. Such borrowing — known as variable-rate bonds — also carried big fees for Wall Street.

The pitches were very successful. Municipalities issued twice as many variable-rate bonds last year as they did a decade earlier.

But variable-rate bonds had a hitch: many investors would purchase them only if a bank like Depfa was hired as a buyer of last resort, ready to acquire bonds from investors who could find no other buyers. Depfa collected fees for serving that role, but expected it would rarely have to honor such pledges.

Mr. Bruckermann’s salespeople traveled the world encouraging officials to sign up for variable-rate loans. And bureaucrats and politicians, including some in New York, jumped in.

By 2006 Depfa was the largest buyer of last resort in the world, standing behind $2.9 billion of bonds issued that year alone. It backed a $200 million bond issued by the M.T.A.

But as Depfa grew, it became more reliant on enormous short-term loans to finance its operations. Those loans cost less, and thus helped the bank achieve higher profits, but only when times were good. Indeed, some employees were worried about that debt.

But Mr. Bruckermann plowed ahead, and it paid off. In 2007, even as the global economy was softening, Mr. Bruckermann persuaded one of Germany’s biggest lenders, Hypo Real Estate, to purchase Depfa for $7.8 billion. Mr. Bruckermann’s cut was more than $150 million. He left the company to grow oranges on his Spanish estate.

The Risks Turn Bad

Last March the delicate web tying Wisconsin, Dublin and Manhattan became an anchor dragging everyone down.

Mr. Yde, the director of business services for the Whitefish Bay district, began receiving troubling messages indicating the district’s investments were declining. Worried, he started coming into his office at dawn, before the hallways of Whitefish Bay High School filled with students.

As the sun rose, Mr. Yde searched for explanations by the light of his computer screen. He Googled “C.D.O.’s.” He called bankers in London and New York. Each person referred him to someone else.

Then notices arrived saying that the bonds insured by Whitefish Bay’s C.D.O.’s were defaulting. It became increasingly likely that the district’s money would be seized to pay off other bondholders. Most, if not all, of the $200 million would probably be lost.

As other districts received similar notices, panic grew. For some boards, interest payments on borrowed money were now larger than revenue from the investments. Officials began quietly warning that they might have to dip into school funds.

“This is going to have a tremendous financial impact,” said Robert F. Kitchen, a member of the West Allis-West Milwaukee school board. Officials say some districts may have to cut courses like art and drama, curtail gym and classroom maintenance, or forgo replacing teachers who retire.

Problems were emerging elsewhere, as well.

Depfa’s executives were realizing that bonds all over the world were declining in value, exposing the company to the possibility they would have to make good on their pledges as a buyer of last resort. And Depfa was still borrowing billions each month to cover its short-term loans. By autumn, the short-term debt of the bank and its parent company, Hypo, totaled $81 billion.

Then, in mid-September, the American investment bank Lehman Brothers went bankrupt. Short-term lending markets froze up. Ratings agencies, including Standard & Poor’s, downgraded Depfa, citing the company’s difficulties borrowing at affordable rates.

That set off a crisis in Germany, where officials worried that Depfa’s sudden need for cash would drag down its parent company and set off a chain reaction at other banks. The German government and private banks extended $64 billion in credit to Hypo to stop it from imploding.

“We will not allow the distress of one financial institution to endanger the entire system,” Angela Merkel, the German chancellor, said at the time.

That crisis spread almost immediately to the M.T.A.

The transportation authority, guided by Gary Dellaverson, a rumpled, cigarillo-smoking chief financial officer, had $3.75 billion of variable-rate debt outstanding.

About $200 million of that debt was backed by Depfa. When the bank was downgraded, investors dumped those transportation bonds, because of worries they would get stuck with them if Depfa’s problems worsened. Depfa was forced to buy $150 million of them, and bonds worth billions of dollars issued by other municipalities.

Then came the twist: Depfa’s contracts said that if it bought back bonds, the municipalities had to pay a higher-than-average interest rate. The New York transportation authority’s repayment obligation could eventually balloon by about $12 million a year on the Depfa loans alone.

On its own, that cost could be absorbed by the agency. But, as the economy declined, the M.T.A. had lost hundreds of millions because tax receipts — which finance part of its budget — were falling. And its ability to renew its variable-rate bonds at low interest rates was hurt by the trouble at Depfa and other banks. The transportation authority now faces a $900 million shortfall, according to officials. It is “fairly breathtaking,” Mr. Dellaverson told the M.T.A.’s finance committee. “This is not a tolerable long-term position for us to be in.”

In a recent interview, Mr. Dellaverson defended New York’s use of variable bonds.

“Variable-rate debt has helped M.T.A. save millions of dollars, and we’ve been conservative in issuing it,” he said. “But there are risks, which we work hard to mitigate. Usually it works. But what’s happening today is a total lack of marketplace rationality.”

In a statement, the transportation authority said that it was exploring options to reduce the cost of the Depfa-backed bonds, that its variable-rate bonds had delivered savings even during the current turmoil and that the agency had remained within its budget on debt payments this year.

However, the transportation authority has already announced it will raise subway and train fares next year because of various fiscal problems, and may be forced to shrink the work force and reduce some bus routes. Some analysts say fares will probably rise again in 2010.

The Depfa fallout doesn’t end there. Rating agencies have downgraded the bonds of more than 75 municipal agencies backed by Depfa, including in California, Connecticut, Illinois and South Dakota. Officials in Florida, Massachusetts and Montana have cut budgets because of C.D.O.’s or similar risky bets.

And Hypo, the German company that bought Depfa, last week asked the German government for financial help for the third time. Depfa has frozen much of its business, according to Wall Street bankers, and though it continues to honor its commitments, some wonder for how long.

The Wisconsin school districts have filed suit against the Royal Bank of Canada and Stifel Nicolaus alleging misrepresentations. Board members hope they will prevail and schools and retirement plans will emerge unscathed. The companies dispute the lawsuit’s claims. Mr. Noack is not named as a defendant and is cooperating with the school boards.

In Mrs. Velvikis’s classroom at Grewenow Elementary in Kenosha, students have recently completed a lesson in which each first grader contributed a vegetable to a common vat of “stone soup.” The project — based on a children’s book — teaches the benefits of working together. The schools have learned that when everyone works together, they can also all starve.

“Our funding is already so limited,” Mrs. Velvikis said. “We rely on parent donations for some supplies. You hear about all these millions of dollars that have been lost, and you think, that’s got to come out of somewhere.”

NPR will present reports on this topic throughout the week on “Morning Edition,” “All Things Considered” and “Weekend Edition Sunday” and on the Planet Money blog and podcast at
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Postby admin » Mon Nov 03, 2008 5:25 pm

Excerpt from Jim Willie's October Report -

◄ A summary of Canadian banks is required.

As preface, the World Economic Forum Competitiveness Report just gave #1 ranking to Canada globally, followed by Sweden, Luxembourg, Australia, and Denmark. Their criteria included executive opinion, solvency, and balance sheets. On a per capita basis, Canadian banks have 5% of the Credit Default Swap counter-party risk laden within its system. The US banks own $16 trillion in CDSwap exposure, a sizeable slice of the $60 trillion held by global financial institutions. The Canadian banks own only $832 billion in CDSwaps. Estimated exposure was provided by Andre Philippe Hardy of RBC Capital Markets. Given the Canuck population is one tenth of the US, on a per capita basis, Canadian banks are in possession of 5.2% of the US risk in CDSwaps. That is not to say some damage from failed counter-parties will not come to Canadian soil. CIBC is in ruins, awaiting the chop shop of liquidation, loss, and shame. They accepted a $1.05 billon loan from the vulture fund Cerberus Capital Mgmt that could rise to an extremely high 20% interest rate over three years. The deal only buys time, not to change the outcome.

The Royal Bank of Canada has the biggest CDSwap position with $300 billion.

Toronto Dominion possesses $197B,
Bank of Montreal has $118B,
Bank of Nova Scotia has $110B, and
CIBC has $86B. The CIBC death warrant comes from its enormous mortgage bond exposure. Its books have not yet made material writedowns on assets yet.
These banks refuse to reveal their counter-party identities.
Risks abound due to the death of Lehman Brothers and the precarious position of AIG under USGovt rootfop. AIG owned $441B in counter-party swaps, a big player. Lehman owned $730B in total credit derivatives, a sizeable portion surely being CDSwaps. The custodian USGovt is busy securing assumed counter-parties to undertake the Lehman guarantees. Here is where selection financial murder occurs. JPMorgan decides which counter-party to Lehman CDSwap exposure suffers deep losses, and which are given payouts!!! They will use this discretion as a weapon!!!
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Too big to prosecute, our bankers

Postby admin » Mon Nov 03, 2008 5:24 pm

this topic will cover a blend of bank stories which will hopefully awaken you to institutionalized abuse, institutionalized bullying, institutionalized crime. With only five major banks in Canada which do over 90% of the business in the country, they seem to have a greater degree of power and control than our own government. Check out some of the horror stories that made is past the slapp suits, the internal code of silence, and the confidentiality agreements of those they abuse with their power.
Last edited by admin on Wed Nov 26, 2008 2:06 pm, edited 3 times in total.
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